nep-cba New Economics Papers
on Central Banking
Issue of 2023‒04‒03
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The macroeconomic effects of different CBDC regimes in an economy with a heterogeneous household sector By Magin, Jana Anjali; Neyer, Ulrike; Stempel, Daniel
  2. Did interest rate guidance in emerging markets work? By Julián Caballero; Blaise Gadanecz
  3. Inflation: Thruway of ECB's monetary policy By Seidl, Christian
  4. Disclosing Dissent in Monetary Policy Committees By Jan Filacek; Lucie Kokesova Matejkova
  5. Smooth versus Harsh Regulatory Interventions and Policy Equivalence By Schilling, Linda
  6. Monetary Policy and Economic Growth in Developing Countries: A Literature Review By Marouane Daoui
  7. Inflation Targets and Policy Horizons By Graham Voss
  8. Macroprudential policy tightening, loan loss provisioning and income smoothing: Empirical evidence from European Economic Area banks By Malgorzata OLSZAK; Christophe J. GODLEWSKI; Sylwia ROSZKOWSKA; Dorota SKALA
  9. Understanding post-Covid inflation dynamics By Martín Harding; Jesper Lindé; Mathias Trabandt
  10. Differential Effects of Macroprudential Policy By Sophia Chen; Nina Biljanovska
  11. The more the merrier? Macroprudential instrument interactions and effective policy implementation By Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
  12. Macroprudential Policy and Income Inequality: The Trade-off Between Crisis Prevention and Credit Redistribution By Simona Malovana; Jan Janku; Martin Hodula
  13. Stock Market Responses to Monetary Policy Shocks: Universal Firm-Level Evidence By Samuel Federico Kaplan; Arin Kerim Peren Kaplan; Polyzos Efstathios Kaplan; Spagnolo Nicola Kaplan
  14. Quantitative Tightening and Capital Flows to Emerging Markets By Otaviano Canuto
  15. Financial fragilities and risk-taking of corporate bond funds in the aftermath of central bank policy interventions By Nicola Branzoli; Raffaele Gallo; Antonio Ilari; Dario Portioli
  16. Public debt and household inflation expectations By Francesco Grigoli; Damiano Sandri
  17. Bank Diversity and Financial Contagion By Emmanuel Caiazzo; Alberto Zazzaro
  18. The Global Financial Cycle and the Effects of Fed Unconventional Monetary Policies on Foreign Portfolio Flows in Colombia By Nathali Cardozo-Alvarado; David Castañeda-Arévalo; Fredy Gamboa-Estrada; Javier Miguelez-Márquez
  19. Global Supply Chain Disruptions: Challenges for Inflation and Monetary Policy in Sub-Saharan Africa By Marijn A. Bolhuis; Shushanik Hakobyan; Zo Andriantomanga
  20. The impact of bank regulation on bank lending: A review of international literature By Thamae, Retselisitsoe I; Odhiambo, Nicholas M
  21. Interest Rates and Inflation: Knives Out By Fix, Blair
  22. A Theory of Intrinsic Inflation Persistence By Takushi Kurozumi; Willem Van Zandweghe
  23. Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate By Decker, Frank; Goodhart, Charles A. E.
  24. Short and Variable Lags By Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Ortiz, A.; Ortiz, A.
  25. Bank regulation in the selected sub-Saharan African countries: Dynamics and trends By Thamae, Retselisitsoe I; Odhiambo, Nicholas M
  26. What happens to EMEs when US yields go up? By Julián Caballero; Christian Upper
  27. Nonlinear effects of bank regulation stringency on bank lending in selected sub-Saharan African countries By Thamae, Retselisitsoe I; Odhiambo, Nicholas M
  28. Geopolitical Risk and Inflation Spillovers across European and North American Economies By Elie Bouri; David Gabauer; Rangan Gupta; Harald Kinateder

  1. By: Magin, Jana Anjali; Neyer, Ulrike; Stempel, Daniel
    Abstract: Many central banks discuss the introduction of a Central Bank Digital Currency (CBDC). Empirical evidence suggests that households may differ in their willingness to hold CBDC. Against this background, this paper investigates the macroeconomic effects of different CBDC regimes in a New Keynesian model with a heterogeneous household sector. We consider that a CBDC may facilitate transactions. In particular, households will face additional transaction costs if they do not hold their optimal mix of conventional forms of money and CBDC. We analyze the impact of four different CBDC regimes: (i) no CBDC, (ii) each household may hold an unlimited amount of CBDC, (iii) the central bank sets a maximum amount of CBDC each household is allowed to hold, (iv) the central bank uses the CBDC as a monetary policy instrument by adjusting the maximum amount of CBDC each household is allowed to hold. Generally, we find that the introduction of a CBDC increases economy-wide utility as it allows higher consumption. Moreover, the shock absorption capability increases in an economy with CBDC. This particularly applies to the case when the central bank uses the CBDC as a monetary policy instrument. By adjusting the maximum amount of CBDC, the central bank can stabilize prices more effectively after adverse shocks. However, this stabilization implies distributional effects between households.
    Keywords: Central bank digital currency, monetary policy, household heterogeneity, central banks, New Keynesian model
    JEL: E52 E42 E58 E41 E51
    Date: 2023
  2. By: Julián Caballero; Blaise Gadanecz
    Abstract: This paper studies the experience of emerging markets with explicit interest rate guidance during 2020-2021. Despite some heterogeneity, interest rate guidance generally provided additional monetary stimulus, as reflected in lower medium-termyields and lower termspreads. The magnitude of the reduction in 10-year yields ranged between five and twenty basis points, and these effects are found when the policy rate was at its historical minima. Outcome-based guidance appears to have had the largest effects. In the immediate aftermath of the guidance, we do not observe a systematic negative market reaction of the kind that would be associated with a loss of central bank credibility or with concerns about fiscal dominance, such as a de-anchoring of inflation expectations, currency depreciation pressures, or increased sovereign credit risk.
    Keywords: monetary policy; forward guidance; central bank communication; emerging markets
    JEL: E52 E58
    Date: 2023–03
  3. By: Seidl, Christian
    Abstract: Part of the present inflation is caused by the breakdown of globalization, in particular supply chains, part is caused by the Corona Pandemic, in particular lockdowns, part is caused by the Ukrainian War, part is caused by European sanctions, and part - and not the smallest one - is caused by the European Central Bank's printing money by hook or by crook in the past and in the presence. This paper attributes inflation decisively to the overwhelming money creation by the European Central Bank.
    Keywords: Inflation, Monetary Unions, Central Bank Policy, Money Supply, InterestRates, Financial Markets
    JEL: E31 E42 E43 E44 E51 E52 E58 E63 F34 F36 F38 F45
    Date: 2023
  4. By: Jan Filacek; Lucie Kokesova Matejkova
    Abstract: Dissenting opinions in monetary policy meetings are a common phenomenon and an integral part of committee decisions, but not every central bank discloses them to the same degree. This paper discusses the pros and cons of the various degrees of transparency of 14 central banks in disclosing differences of opinion among committee members. It focuses on the experience of the Swedish Riksbank and the Czech National Bank, both of which publish attributed minutes of their boards' monetary policy meetings. We argue that attributed minutes, which the Czech National Bank started to publish in February 2020, have provided market participants and the public with an opportunity to better understand the board members' individual opinions and behaviour. It can also be argued that attributed minutes have benefited the board members themselves, as they give them more room to present and explain their arguments.
    Keywords: Central bank communication, dissent, minutes, monetary policy committees, transparency
    JEL: D71 D83 E52 E58
    Date: 2022–12
  5. By: Schilling, Linda
    Abstract: Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.
    Keywords: financial regulation, bank runs, global games, policy effectiveness, bank resolution, withdrawal fees, emergency liquidity assistance, lender of last resort policies, money market mutual fund gates, suspension of convertibility
    JEL: D81 D82 E61 G21 G28 G33 G38
    Date: 2023–03–08
  6. By: Marouane Daoui
    Abstract: This article conducts a literature review on the topic of monetary policy in developing countries and focuses on the effectiveness of monetary policy in promoting economic growth and the relationship between monetary policy and economic growth. The literature review finds that the activities of central banks in developing countries are often overlooked by economic models, but recent studies have shown that there are many factors that can affect the effectiveness of monetary policy in these countries. These factors include the profitability of central banks and monetary unions, the independence of central banks in their operations, and lags, rigidities, and disequilibrium analysis. The literature review also finds that studies on the topic have produced mixed results, with some studies finding that monetary policy has a limited or non-existent impact on economic growth and others finding that it plays a crucial role. The article aims to provide a comprehensive understanding of the current state of research in this field and to identify areas for future study.
    Date: 2023–03
  7. By: Graham Voss (Department of Economics, University of Victoria)
    Abstract: We use conditional forecasts from Canadian inflation over the inflation targeting period to estimate monetary policy horizons, defined as the period required for conditional forecasts of inflation to return to target. The conditional forecasts generate a set of policy horizons that tend to have median lengths longer than the typical two-year horizon identified by central banks. Further, the distribution of these forecasts is not unimodal, with policy horizons massed on shorter lengths of about one year and longer lengths of three or more years. The variation in the policy horizons, which are conditional on current economic conditions, is evidence of a form of flexibility in monetary policy. We also provide evidence of some instability in the underlying inflation models and associated policy horizons.
    Date: 2022–12–20
  8. By: Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Sylwia ROSZKOWSKA (Uniwersytet Warszawski); Dorota SKALA (WNEiZ, University of Szczecin)
    Abstract: In this study, we provide evidence of the effects of macroprudential policy tightening on loan loss provisions (LLP) and income smoothing of European Economic Area (EEA) banks. Overall, we find that tightening actions of macroprudential policy reduce LLP, but the results depend on the period of analysis: the effect is positive in the pre-Basel III period (1996-2010), and it turns negative after 2010. Policy tightening increases (respectively decreases) income smoothing in the pre-Basel period (respectively Basel III period). We also find that our results depend on the category of macroprudential instruments. In particular, tools relating to LLP policy and taxes are associated with increased LLP and income smoothing in the pre-Basel III period. This outcome changes direction under the Basel III regulatory regime. We also show that the heterogeneity of the effects of the policy on LLP and income smoothing depends on the tool, on the type of the policy change (an activation of a new tool versus a recalibration of existing tools) and on market significance of a bank.
    Keywords: Loan loss provisions, macroprudential policy actions, income smoothing, policy tightening, EEA
    JEL: E44 E58 G21 G28
    Date: 2023
  9. By: Martín Harding; Jesper Lindé; Mathias Trabandt
    Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-COVID period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.
    Keywords: inflation dynamics, inflation risk, monetary policy, linearized model, nonlinear model, real rigidities.
    JEL: E30 E31 E32 E37 E44 E52
    Date: 2023–02
  10. By: Sophia Chen; Nina Biljanovska
    Abstract: We explore the differential effects of lender-based macroprudential policies on new mortgage borrowing for households of different income using a comprehensive dataset that links macroprudential policy actions with household survey data for European Union countries. The main results suggest that higher-income households on average experience a larger reduction in mortgage loan size than lower-income households when regulation targeting total lenders’ assets tightens. In contrast, lower-income households on average experience a larger reduction in mortgage loan size than higher-income households when regulation targeting lenders’ capital requirements tightens. We also provide evidence of the different channels through which the differential effects operate.
    Keywords: Household borrowing; macroprudential policy; income distribution
    Date: 2023–02–24
  11. By: Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
    Abstract: Macroprudential policies since the global financial crisis have been central to safeguarding financial stability. Despite the increasing use of multiple policy instruments, a detailed understanding of interactions among them is still needed to assess how instrument combinations can enhance the effectiveness of macroprudential action. This paper proposes a conceptual framework for informing the choice of combinations of macroprudential instruments, looking at the role of micro and macroeconomic transmission channels, interactions across policy objectives, the importance of country specificities and linkages with other macroeconomic or supervisory policies. It also reviews considerations related to circumvention, leakages, time of activation and communication of policies, all of which may affect the desirability of different combinations of macroprudential instruments. The paper also discusses a possible operational use of combinations of macroprudential instruments to address selected risks and provides a rich analysis of instrument interactions within the categories of borrower-based and, respectively, capital-based measures. The paper concludes that the combinations of capital and borrower-based instruments ensures a comprehensive coverage of different systemic risks and entail important synergies. JEL Classification: G21, G28
    Keywords: banks, financial stability, macroprudential policy
    Date: 2023–03
  12. By: Simona Malovana; Jan Janku; Martin Hodula
    Abstract: We estimate the impact of macroprudential policy on income inequality for a panel of 105 countries over the 1990-2019 period. We document that macroprudential tightening can have both upward and downward effects on income distribution, with the direction of the effect depending on the type of instrument used and a broader set of macro-financial conditions. We identify and empirically verify two channels - the crisis mitigation and prevention channel and the credit redistribution channel. Through the first one, tighter regulation ahead of the crisis reduces income inequality and mitigates the redistributive effects of financial crises, reflecting the increased resilience of the financial sector. Through the second one, it contributes to greater inequality due to its negative effect on credit and house price growth. This has an important policy implication: the timely implementation of macroprudential regulation has preventive effects and can contribute to a more equal distribution of society's income.
    Keywords: Credit redistribution, crisis prevention, income inequality, local projections, macroprudential policy
    JEL: G01 G28 O15
    Date: 2023–03
  13. By: Samuel Federico Kaplan; Arin Kerim Peren Kaplan; Polyzos Efstathios Kaplan; Spagnolo Nicola Kaplan
    Abstract: Using a universal firm-level data set for the U.S., we investigate the stock price responses to unanticipated and unconventional monetary policy shocks. Our results show that indebtedness/ leverage is more important than size or age in explaining the cross-firm variation in responses to monetary policy. We also show that the magnitude of the indebtedness is important while the debt structure is not, and our results are driven by the third quartile of firms in terms of their leverage. Finally, our results are robust to the use of different measures of monetary policy shocks.
    JEL: E5 G1 C4
    Date: 2022–11
  14. By: Otaviano Canuto
    Abstract: In its May 15th meeting, the Federal Open Market Committee of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the biggest increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year. In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening". How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?
    Date: 2022–06
  15. By: Nicola Branzoli (Bank of Italy); Raffaele Gallo (Bank of Italy); Antonio Ilari (Bank of Italy); Dario Portioli (Bank of Italy)
    Abstract: This paper provides evidence that, by restoring market functioning, central banks' pandemic-related asset purchase programmes lowered payoff complementarities among investors in corporate bond funds, reinforcing asset managers' willingness to hold riskier assets to increase funds' returns. Controlling for potentially confounding factors, we show that funds more exposed to these interventions – i.e. those which immediately prior to the pandemic crisis held a high share of securities eligible for inclusion in purchase programmes – took on more credit and liquidity risks than less exposed ones. Risk-taking was stronger when more exposed funds under-performed their peers or held less liquid assets. We discuss the implications for the design of policy interventions in the aftermath of market stress and the regulation of the investment fund sector.
    Keywords: corporate bond funds, market stress, asset purchase programmes, risk-taking
    JEL: E50 G01 G11 G23
    Date: 2023–03
  16. By: Francesco Grigoli; Damiano Sandri
    Abstract: We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.
    Keywords: public debt, inflation expectations, monetary finance, fiscal dominance
    JEL: E31 E52 E58
    Date: 2023–03
  17. By: Emmanuel Caiazzo (Università di Napoli Federico II); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.)
    Abstract: This paper analyzes financial contagion in a banking system where banks are linked by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the most resilient structure is the complete interbank network in which each bank borrows evenly from all the others. However, when the bank most exposed to the defaulting bank is not the one whose portfolio is most similar to it, incomplete interbank networks are more resilient than complete. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.
    Keywords: Banking crisis; financial contagion; interbank network; asset commonality.
    JEL: G01 G21 G28
    Date: 2023–02–13
  18. By: Nathali Cardozo-Alvarado; David Castañeda-Arévalo; Fredy Gamboa-Estrada; Javier Miguelez-Márquez
    Abstract: Assessing the effects of U.S. monetary policies on portfolio flows is important for policymakers as they could pose risks to the effectiveness of domestic monetary policy. This paper analyzes the effects of the Global Financial Cycle (GFC) and Federal Reserve (Fed) unconventional monetary policy announcements on foreign portfolio investment flows in Colombia between 2010 and 2018. Using an ordinary least squares model with corrected serial correlation, we find that Fed unconventional monetary policy announcements affected portfolio flows in Colombia, especially those related to Tapering, Operation Twist and Forward Guidance. These announcements reinforced the effects of the GFC during the period analyzed. The results by type of flow indicate that public bonds flows are more sensitive to Fed announcements than private bond and equity flows. **** RESUMEN: Evaluar los efectos de la política monetaria de EE. UU. en los flujos de portafolio es importante para los hacedores de política, ya que podría afectar la eficacia de la política monetaria local. Este artículo analiza los efectos del Ciclo Financiero Global (CFG) y los anuncios de política monetaria no convencional de la Reserva Federal (Fed) sobre los flujos de inversión extranjera de portafolio en Colombia entre 2010 y 2018. Usando un modelo de mínimos cuadrados ordinarios con correlación serial corregida, encontramos que los anuncios de política monetaria no convencional de la Fed afectaron los flujos de portafolio en Colombia, especialmente los relacionados con Tapering, Operación Twist y Forward Guidance. Estos anuncios reforzaron los efectos del CFG durante el período analizado. Los resultados por tipo de flujo indican que los flujos de deuda soberana son más sensibles a los anuncios de la Fed que los flujos de bonos y acciones privados.
    Keywords: Foreign investors, Federal Reserve, global financial cycle, unconventional monetary policies, Colombian portfolio flows, Inversionistas extranjeros, Reserva Federal, ciclo financiero global, política monetaria no convencional, flujos de portafolio en Colombia
    JEL: C22 E52 F3
    Date: 2023–03
  19. By: Marijn A. Bolhuis; Shushanik Hakobyan; Zo Andriantomanga
    Abstract: The Covid-19 pandemic has led to a large disruption of global supply chains. This paper studies the implications of supply chain disruptions for inflation and monetary policy in sub-Saharan Africa. Increases in supply chain pressures have had a sizeable impact on headline, food, and tradable inflation for a panel of 29 sub-Saharan African countries from 2000 to 2022. Our findings suggest that central banks can stabilize inflation and output more efficiently by monitoring global supply chains and adjusting the monetary policy stance before the disruptions have fully passed through into all inflation components. The gains from monitoring supply chain disruptions are particularly large for open economies which tend to experience outsized second-round effects on the prices of non-tradable goods and services.
    Keywords: Inflation; global supply chains; sub-Saharan Africa; shipping costs; monetary policy; core inflation; food prices; oil price
    Date: 2023–02–24
  20. By: Thamae, Retselisitsoe I; Odhiambo, Nicholas M
    Abstract: This paper reviews the theoretical and empirical literature on the impact of bank regulation on bank lending. It also structures the empirical evidence according to the impact of various bank regulatory measures on bank lending. The surveyed theoretical literature generally indicates that the impact of bank regulation on lending could be asymmetric, depending on the trade-off between the costs and benefits of bank regulation. The evidence from the empirical studies also shows that the impact of bank regulatory measures on lending is ambiguous. Although many studies found the impact to be negative, some established that it was positive while others found it to be insignificant or inconclusive. However, most empirical studies only assumed first-round effects using static and/or dynamic models, whereas the ones incorporating second-round effects using general equilibrium models were limited. Therefore, this systematic review of the literature indicates that policy recommendations regarding the appropriateness and efficacy of bank regulatory measures in influencing bank lending cannot be implemented uniformly across different regions or countries.
    Keywords: Bank regulation, bank lending, bank regulatory measures, bank credit
    Date: 2022–12
  21. By: Fix, Blair
    Abstract: If you’re just tuning in, I’ve spent the last few months debunking some common misconceptions about inflation: Is inflation a uniform increase in prices? No. Inflation is wildly differential. Is inflation driven by an ‘over-heated’ economy? No. Inflation tends to come with economic stagnation. Do higher interest rates reduce inflation? No. Higher interest rates are associated with higher inflation. As expected, the last claim put mainstream economists into war mode. You see, the belief that interest rates down-regulate inflation has come to be sacred. So by scrutinizing this idea with evidence, I was effectively torching an effigy of the pope. (Novelist Cory Doctorow helped fan the flames by writing an incendiary essay about my research.) And so I spent a ‘fun’ week on Twitter being bombarded by econo-scorn. Now back to science. When I published ‘A Test of Monetary Faith’, I had more evidence in the pipelines — evidence that debunks the idea that interest rates down-regulate inflation. In this post, I’ll wade through the data. The take-home message is clear: when we look at the World Bank database, there is no evidence that higher interest rates down-regulate inflation. If anything, the evidence suggests that rate hikes make inflation worse. But before we get to the data, I’ll respond to some of the more cogent criticisms that economist hurled my way.
    Keywords: interest rates, inflation, monetarism, monetary policy
    JEL: E31 E43 F4 E52
    Date: 2023
  22. By: Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and Kimball (1995)-type aggregators of individual differentiated goods and labor in a model with staggered price- and wage-setting. Under nonzero trend inflation, the non-CES aggregator of goods and staggered price-setting give rise to a variable real marginal cost of goods aggregation, which becomes a driver of inflation. This marginal cost consists of an aggregate of the goods' relative prices, which depends on past inflation, thereby generating intrinsic inertia in inflation. Likewise, the non-CES aggregator of labor and staggered wage-setting lead to intrinsic inertia in wage inflation, which enhances the persistence of price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to monetary policy shocks. We also demonstrate that lower trend inflation reduces inflation persistence and that a credible disinflation leads to a gradual decline in inflation and a fall in output.
    Keywords: Trend inflation; Non-CES aggregator; Credible disinflation
    JEL: E31 E52
    Date: 2023–03–13
  23. By: Decker, Frank; Goodhart, Charles A. E.
    Abstract: This article assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behaviour of non-banks and non-borrowing bank creditors. With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be re-established.
    Keywords: bank credit creation; money supply theory; credit and balances mechanics; borrowers' collateral
    JEL: E40 E41 E50 E51
    Date: 2022–03–04
  24. By: Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Ortiz, A.; Ortiz, A.
    Abstract: We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies.
    Keywords: Economic Activity, Event-study, High-frequency data, Local projections, Monetary Policy
    JEL: E31 E43 E44 E52 E58
    Date: 2023–03–02
  25. By: Thamae, Retselisitsoe I; Odhiambo, Nicholas M
    Abstract: This paper discusses the dynamics of bank regulation in the Sub-Saharan African (SSA) region during the period before the 1990s and post 1990s and describes the trends in bank regulatory measures between 1995 and 2017 using the updated databases of the World Bank?s Bank Regulation and Supervision Surveys. Before the 1990s, bank regulation in the majority of SSA countries was inadequate and that led to multiple occurrences of banking crises. As a result, many countries introduced the financial sector reforms from the late 1980s that included major adjustments in the banking regulatory and supervisory frameworks. In both low-income and middle-income SSA economies, bank regulatory environment became more stringent over time, driven by increased restrictions on bank entry barriers and ownership structure, as well as the introduction of macroprudential policies in the case of the former, while in the case of the latter, it was influenced by more restrictions on bank ownership structure and capital regulation requirements, as well as the adoption of macroprudential policies. Overall, the bank regulatory environment was slightly more stringent in middle-income than in low-income SSA countries over the period under review.
    Keywords: Bank regulation; dynamics; trends; Sub-Saharan Africa
    Date: 2022–12
  26. By: Julián Caballero; Christian Upper
    Abstract: This paper explores why some episodes of US yield increases result in investor retrenchment from emerging markets and others do not. To answer this, we identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with negative outcomes in emerging markets. We focus on four outcome variables: local currency yields, exchange rates, equity prices, and portfolio fund flows. We find that increases in US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium, (ii) coincide with dollar appreciation, and (iii) rising inflation expectations in the US and in EMEs. The effects of these variables are highly non-linear and economically significant as well as robust to a variety of sensitivity checks.
    Keywords: monetary policy, international spillovers, term premium, US dollar
    JEL: F30 F36 F42 F65
    Date: 2023–03
  27. By: Thamae, Retselisitsoe I; Odhiambo, Nicholas M
    Abstract: This paper investigates the nonlinear effects of bank regulation stringency on bank lending in 23 sub-Saharan African (SSA) countries over the period 1997-2017. It employs the dynamic panel threshold regression (PTR) model, which addresses endogeneity and heterogeneity problems within a nonlinear framework. It also uses indices of entry barriers, mixing of banking and commerce restrictions, activity restrictions, and capital regulatory requirements from the updated databases of the World Bank?s Bank Regulation and Supervision Surveys as measures of bank regulation. The linearity test results support the existence of nonlinear effects in the relationship between bank lending and entry barriers or capital regulations in the selected SSA economies. The dynamic PTR estimation results reveal that bank lending responds positively when the stringency of entry barriers is below the threshold of 62.8%. However, once the stringency of entry barriers exceeds that threshold level, bank credit reacts negatively and significantly. By contrast, changes in capital regulation stringency do not affect bank lending, either below or above the obtained threshold value of 76.5%. These results can help policymakers design bank regulatory measures that will promote the resilience and safety of the banking system but at the same time not bring unintended effects to bank lending.
    Keywords: Bank regulation; bank lending; nonlinear effects; dynamic panel threshold regression; sub-Saharan Africa
    Date: 2022–12
  28. By: Elie Bouri (School of Business, Lebanese American University, Beirut, Lebanon); David Gabauer (Software Competence Center Hagenberg, Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Harald Kinateder (School of Business, Economics and Information Systems, University of Passau, Germany)
    Abstract: In this paper, we examine the spillover across the monthly inflation rates (measured by the CPI) covering the USA, Canada, UK, Germany, France, Netherlands, Belgium, Italy, Spain, Portugal, and Greece. Using data covering the period from May 1963 to November 2022 within a time-varying spillover approach, we show that the total spillover index across the inflation rates spiked during the war in Ukraine period, exceeding its previous peak shown during the 1970s energy crisis. Notably, we apply a quantile-on-quantile regression and reveal that the total spillover index is positively associated with the level of global geopolitical risk (GPR) index. Levels of GPR are positively influencing high levels of the inflation spillover index, whereas the GPR Acts index is positively associated with all levels of inflation spillover index. Given that rising levels of inflation are posing risks to the financial system and economic growth, these findings should matter to the central banks and policymakers in advanced economies. They suggest that the policy response should go beyond conventional monetary tools by considering the political actions necessary to solve the Russia-Ukraine war and ease the global geopolitical tensions.
    Keywords: Inflation spillovers; geopolitical risk; TVP-VAR; dynamic connectedness
    JEL: C32 C5 G15
    Date: 2023–03

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