nep-cba New Economics Papers
on Central Banking
Issue of 2023‒07‒10
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy and financial markets: evidence from Twitter traffic By Donato Masciandaro; Davide Romelli; Gaia Rubera
  2. Semi-Structural Model with Household Debt for Israel By Alex Ilek; Nimrod Cohen
  3. Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance By Amina Enkhbold
  4. Inflation of objectives instead of focus on inflation? Evidence on the ECB objective function from a textual analysis By Heinemann, Friedrich; Kemper, Jan
  5. Women and Governance: Monetary policy decisions taken by central banks affect the economy, society and politics worldwide. Does the presence of women matter in these decisions? We construct a new and unique dataset on the presence of women on central bank monetary policy committees for a large sample of countries, over the period 2001-2017 and document an increasing share of women on central bank boards. We investigate how the presence of women correlates with the conduct of monetary policy by estimating Taylor rules augmented to include the share of women on monetary policy committees. We show that central bank boards with a higher proportion of women are more responsive to inflation. This suggests that central banks whose boards are characterised by a higher presence of women are associated with a more conservative approach to monetary policy when inflation is higher. We confirm this result by analysing the voting behaviour of members of the executive board of the Swedish Central Bank during the period 2000-2017. By Donato Masciandaro; Paola Profeta; Davide Romelli
  6. Inequality and the Zero Lower Bound By Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño; Omar Rachedi
  8. International Spillovers of ECB Interest Rates Monetary Policy & Information Effects By Santiago Camara
  9. Monetary Policy & Stock Market By Kian Tehranian
  10. What we know on Central Bank Digital Currencies (so far) By Shalva Mkhatrishvili; Wim Boonstra
  11. Differential Effects of Unconventional Monetary Policy By Eiblmeier, Sebastian
  12. Policy Packages and Policy Space: Lessons from COVID-19 By Katharina Bergant; Kristin Forbes
  13. The demand for government debt By Egemen Eren; Andreas Schrimpf; Dora Xia
  14. A Systematic Review of the Association between Fiscal Policy and Monetary Policy: Interactions, Challenges, and Implications By Yeboah, Samuel
  15. Interactions of fiscal and monetary policies under waves of optimism and pessimism By De Grauwe, Paul; Foresti, Pasquale
  16. MPC heterogeneity and the dynamic response of consumption to monetary policy By Miguel Ampudia; Russell Cooper; Julia Le Blanc; Guozhong Zhu
  17. What People Believe About Monetary Finance and What We Can(’t) Do About It: Evidence from a Large-Scale, Multi-Country Survey Experiment By Cars Hommes; Julien Pinter; Isabelle Salle
  18. The Impact of the Basel III banking regulation on Moroccan banks By Mohammed Mikou
  19. Changes to Bank Capital Ratios and their Drivers Prior and During COVID-19 Pandemic: Evidence from EU By Pavel Jankulár; Zdeněk Tůma
  20. Where do they care? The ECB in the media and inflation expectations By Vegard Høghaug Larsen; Nicolò Maffei-Faccioli; Laura Pagenhardt
  21. A Framework to Interpret Macroprudential Policies in an Era of Financialization By Vernengo, Matías
  22. Quantitative Easing, Bank Lending, and Aggregate Fluctuations By Matthew Schaffer; Nimrod Segev
  23. The Macroeconomic Consequences of Exchange Rate Depreciations By Masao Fukui; Emi Nakamura; Jón Steinsson
  24. Gambling to Preserve Price (and Fiscal) Stability By Giancarlo Corsetti; Bartosz Maćkowiak
  25. Macroprudential policies in Asia: A consideration of some Asian experiences By Ghosh, Jayati
  26. Optimal Climate and Monetary-Fiscal Policy in a Climate-DSGE Framework By Lorenzo Forni; Mehrab Kiarsi

  1. By: Donato Masciandaro (Department of Economics, Bocconi University); Davide Romelli (Department of Economics, Trinity College Dublin); Gaia Rubera (Department of Marketing, Bocconi University)
    Abstract: Monetary policy announcements of major central banks trigger substantial discussions about the policy on social media. In this paper, we use machine learning tools to identify Twitter messages related to monetary policy in a short-time window around the release of policy decisions of three major central banks, namely the ECB, the US Fed and the Bank of England. We then build an hourly measure of similarity between the tweets about monetary policy and the text of policy announcements that can be used to evaluate both the ex-ante predictability and the ex-post credibility of the announcement. We show that large differences in similarity are associated with a higher stock market and sovereign yield volatility, particularly around ECB press conferences. Our results also show a strong link between changes in similarity and asset price returns for the ECB, but less so for the Fed or the Bank of England.
    Keywords: monetarypolicy, centralbankcommunication, financialmarkets, socialmedia, Twitter, USFederalReserve, EuropeanCentralBank, BankofEngland.
    JEL: E44 E52 E58 G14 G15 G41
    Date: 2023–06
  2. By: Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel)
    Abstract: We propose a semi-structural DSGE model for the Israeli economy, as a small open economy, which contains a financial friction in the household sector credit market. Such a friction is reflected in a positive relationship between households’ leverage ratio and their interest rate (credit spread) on debt, as evident in the Israeli data. Our main purpose is to evaluate the implications of such a friction on the implementation of monetary policy and macroprudential policy. Our two main findings are: First, it is important that the monetary policy will react also to developments in the credit market, such as credit spread widening, to increase effectiveness in achieving its main goals of stabilizing inflation and real activity. Second, macroprudential policy may increase the sensitivity of households’ credit spread to their leverage. Thus, this policy can mitigate or even prevent over-borrowing and reduce the risk of a debt deleveraging crisis. Moreover, in a case of demand weakness and debt deleveraging, in addition to accommodative monetary policy, the macroprudential policy may contribute to stimulating demand due to a corresponding reduction in credit spread.
    Keywords: Monetary Policy, Household Finance, Financial Friction, Macroprudential Policy, Leaning Against the Wind (LAW)
    JEL: E44 E52 G21 G51
    Date: 2023–02
  3. By: Amina Enkhbold
    Abstract: I study the impact of banking market concentration and wholesale funding reliance on the transmission of monetary policy shocks to mortgage rates. I empirically demonstrate that in the United States, banks with higher reliance on wholesale funding in concentrated (competitive) deposit markets transmit monetary policy shocks less (more) to mortgage rates. I study this imperfect transmission through the lens of a New Keynesian model with monopolistically competitive banks and costly access to wholesale funding. I find that high market power banks with greater wholesale funding transmit monetary policy less to deposit rates, generating lower liability. This leads to lower mortgage lending, house prices, and borrower consumption. If monetary policy shocks become persistent, this negative effect is amplified with banks shifting away from deposits more towards wholesale funding.
    Keywords: Financial institutions; Inflation targets; Monetary policy transmission; Wholesale funding
    JEL: E44 E52 G21
    Date: 2023–06
  4. By: Heinemann, Friedrich; Kemper, Jan
    Abstract: In this analysis, we investigate ECB communication by analyzing more than 3, 800 speeches from 1999 until 2022. The study measures the attention which ECB Council members pay to various implicit and explicit monetary policy objectives. While price stability, according to the Maastricht Treaty, is the primary objective, other societal objectives can play a role for monetary policy reflections and decisions as well. A changing emphasis on alternative objectives over time but also cross-sectional differences between ECB Council members are an insightful source for current monetary policy debates. In these debates it is discussed to which extent central bank decisions may increasingly be constrained by objectives other than price stability. In addition to price stability, our analysis considers the following dimensions of a possible central bank objective function: financial stability, sovereign bond market stability, public debt, climate protection, and distribution.
    Date: 2022
  5. By: Donato Masciandaro (Department of Economics, Bocconi University); Paola Profeta (Department of Social and Political Sciences, Bocconi University); Davide Romelli (Department of Economics, Trinity College Dublin)
    Keywords: governance, genderdiversity, centralbanks, monetarypolicy.
    JEL: K23 J16 J16
    Date: 2023–06
  6. By: Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño; Omar Rachedi
    Abstract: This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households' precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.
    JEL: D31 E12 E21 E31 E43 E52 E58
    Date: 2023–05
  7. By: Solikin M. Juhro (Bank Indonesia)
    Abstract: This paper elaborates the theoretical and practical perspectives of future central bank policy in emerging market economies (EMEs). With salient thoughts presented to expand broader horizons, a special overview is presented on the experiences and practices of central bank policies in EMEs. For EME central banks, complex challenges are inevitable considering the current state of economic progress, economic endowments, and institutional capacity. Several theoretical assumptions that underlie policy thinking are also substantively not the case for EMEs. These conditions, however, provide broad opportunities and space for central banks in EME countries to deliver policy innovations and breakthroughs, not only from a practical level, but also a theoretical perspective. The implementation of flexible inflation targeting framework (ITF) and the central bank policy mix, as well as the policy trilemma management of an open economy are among many examples of how central bank policy has evolved towards a more integrated framework. Eventually, to become a relevant regulator, the central bank must put extra effort into strengthening policy coordination and institutional arrangements, fostering new sources of growth to support a broader scope of welfare amelioration, while reinforcing the central bank policy mix in the new era
    Keywords: central bank policy mix, integrated policy framework, inflation targeting, central bank in emerging markets
    JEL: E02 E31 E52 E58 E61 F62 G01
    Date: 2023
  8. By: Santiago Camara (Northwestern University)
    Abstract: This paper shows that disregarding the information effects around the European Central Bank monetary policy decision announcements biases its international spillovers. Using data from 23 economies, both Emerging and Advanced, I show that following an identification strategy that disentangles pure monetary policy shocks from information effects lead to international spillovers on industrial production, exchange rates and equity indexes which are between 2 to 3 times larger in magnitude than those arising from following the standard high frequency identification strategy. This bias is driven by pure monetary policy and information effects having intuitively opposite international spillovers. Results are present for a battery of robustness checks: for a sub-sample of “close” and “further away” countries, for both Emerging and Advanced economies, using local projection techniques and for alternative methods that control for “information effects”. I argue that this biases may have led a previous literature to disregard or find little international spillovers of ECBrates
    Keywords: ECB monetary policy; Information Effects; International Spillovers; Emerging Markets; Advanced Economies.
    JEL: F1 F4 G32
    Date: 2023–06
  9. By: Kian Tehranian
    Abstract: This paper assesses the link between central bank's policy rate, inflation rate and output gap through Taylor rule equation in both United States and United Kingdom from 1990 to 2020. Also, it analyses the relationship between monetary policy and asset price volatility using an augmented Taylor rule. According to the literature, there has been a discussion about the utility of using asset prices to evaluate central bank monetary policy decisions. First, I derive the equation coefficients and examine the stability of the relationship over the shocking period. Test the model with actual data to see its robustness. I add asset price to the equation in the next step, and then test the relationship by Normality, Newey-West, and GMM estimator tests. Lastly, I conduct comparison between USA and UK results to find out which country's policy decisions can be explained better through Taylor rule.
    Date: 2023–05
  10. By: Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Wim Boonstra (Special Economic Advisor at Rabobank, Endowed Professor at Vrije Universiteit Amsterdam)
    Abstract: A central bank digital currency (CBDC) is a topic that is only going to gain importance as a couple of nations have recently went line with a retail CBDC system, dozens of them are piloting it and there are even more who actively research the topic. In the process, many studies have already identified several important potential benefits of a CBDC as well as potential risks and costs. As is already well understood, a CBDC introduction can have a profound impact on all three monetary policy, financial stability and payment systems. This paper, trying to be a go-to starting point for those just exposed to the topic, thoroughly reviews all the benefits and risks/costs associated with a CBDC in the current literature as well as underlines key areas of this topic that need more research. In addition, we try to lay some ground for systematizing three-dimensional linkages between benefits, costs/risks and design choices by (i) discussing probable design choices needed for each item in the list of benefits and costs/risks to-be-mitigated and (ii) overviewing what other benefits and cost/risk-mitigation aims these design choices may be in conflict with.
    Keywords: Central bank digital currencies, monetary policy, financial stability, payment systems
    JEL: E42 E50 G20
    Date: 2022–09
  11. By: Eiblmeier, Sebastian
    Abstract: Did the Eurosystem's quantitative easing from 2015 to 2018 have differential effects regarding the bank lending volume to different institutional sectors, industry sectors, or types of loans? To investigate this question, this paper employs linked microdata of the German banking system. These allow for computing the volume of bond redemptions at bank level as a measure of banks' exposure to QE. Because when a bond matures, the bank is faced with the decision of whether to reinvest the proceeds into bonds or whether to rebalance into another asset such as loans. When the central bank squeezes bond yields through large-scale purchases, banks with more redemptions have a stronger incentive to rebalance. However, a fixed effects model reveals no significant difference between banks with a high exposure compared to the control group regarding their overall loan growth. Neither can any of the mentioned differential effects be observed. While these findings are at odds with some of the previous empirical literature, they are in line with theories that argue that lending is purely demand-led and any central bank action geared towards the supply side of the loan market merely constitutes 'pushing the string'.
    Keywords: Unconventional monetary policy; portfolio rebalance; differential effects; panel regression
    JEL: C23 E51 E52 G11 G21
    Date: 2023–06
  12. By: Katharina Bergant; Kristin Forbes
    Abstract: This paper uses the onset of COVID-19 to examine how countries construct their policy packages in response to a severe negative shock. We use several new datasets to track the use of a large variety of policy tools: announced fiscal stimulus (both above- and below-the-line), monetary policy (through interest rates, asset purchases, liquidity support and swap lines), foreign currency intervention, adjustments to macroprudential regulations (including the countercyclical capital buffer) and changes in capital controls (on inflows and outflows). The results suggest that pre-existing policy space was usually more important than other country characteristics and the extent of “stress” (in economic, financial, and health measures) in determining how a country responded to COVID-19. The notable exception is for fiscal stimulus, for which existing policy space did not act as a significant constraint in advanced economies. This is a sharp contrast to results for earlier episodes—although advanced economies with higher debt levels may have been constrained in how they provided stimulus (with more below-the-line commitments). Moreover, the use of (and space available) for each policy tool usually did not affect a country’s use of other policies. This suggests that countries are not coordinating their tools optimally in an integrated framework, especially when policy space is limited for certain tools.
    JEL: E5 E6 F3 H5 H6
    Date: 2023–05
  13. By: Egemen Eren; Andreas Schrimpf; Dora Xia
    Abstract: We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and have evolved significantly over time. Focusing on the United States, we estimate the yield elasticity of demand across sectors using instrumental variables constructed from monetary policy surprises. Our estimates point to a 11% increase in the demand by non-central-bank players for a 1 percentage point increase in long-term yields. Hence, a hypothetical reduction in the central bank balance sheet of around $215 billion increases longterm yields by 10 basis points. We find commercial banks, foreign private investors, pension funds, investment funds, and insurance companies to be the sectors whose demand is most sensitive to changes in long-term yields, but to varying degrees. Heterogeneous elasticities imply compositional shifts in the holders of government debt as central banks normalize balance sheets, which has policy implications.
    Keywords: government debt, demand, yield elasticity, quantitative easing, quantitative tightening
    JEL: E58 G11 G21 G23 H63
    Date: 2023–06
  14. By: Yeboah, Samuel
    Abstract: This systematic review examines the association between fiscal policy and monetary policy, focusing on their interactions, channels of influence, policy coordination challenges, and the macroeconomic effects of their interactions. The review highlights the importance of time lags, policy mix, policy independence, international interactions, and political economy considerations in shaping the association between fiscal and monetary policies. It also explores the implications of fiscal and monetary policy interactions for financial stability, sectoral effects, public debt management, and the transmission of monetary policy. Furthermore, the review emphasizes the role of institutional frameworks and rules-based policy frameworks in enhancing the effectiveness and credibility of fiscal and monetary policies. Overall, a comprehensive understanding of the association between fiscal and monetary policies is crucial for policymakers to design coordinated and effective policy frameworks that promote macroeconomic stability and sustainable growth.
    Keywords: fiscal policy, monetary policy, policy coordination, time lags, policy mix, policy independence, international interactions, financial stability, sectoral effects, public debt management, the transmission of monetary policy, institutional frameworks
    JEL: E52 E61 E62 E63 H50 H62 H63
    Date: 2022–10–10
  15. By: De Grauwe, Paul; Foresti, Pasquale
    Abstract: In this article we study fiscal and monetary policies interaction under the assumption that agents have limited cognitive capabilities. To this aim, we employ a behavioral New Keynesian model in which agents’ beliefs generate endogenous waves of optimism and pessimism. The role of such waves is studied under three alternative policy setups: fiscal dominance, monetary dominance and no dominance. Output, inflation, government spending and public debt result to be strongly linked to the agents’ beliefs irrespectively of the policy regime. However, under fiscal dominance the system is characterized by more persistent waves of optimism and pessimism. The consequent higher volatility of the system under fiscal dominance also undermines the central bank’s credibility. We show that in order to minimize these negative effects of fiscal dominance, under such a regime governments should focus on public debt stabilization and leave the stabilization of output and inflation to the monetary authority.
    Keywords: monetary policy; fiscal policy; beliefs; heuristics; animal spirits; Elsevier deal
    JEL: E52 E61 F33 F36
    Date: 2023–06–13
  16. By: Miguel Ampudia; Russell Cooper; Julia Le Blanc; Guozhong Zhu
    Abstract: This paper studies how household financial choices affect the impact of monetary policy on consumption. Based on micro data from four major euro area countries, we estimate structural parameters to match moments related to asset market participation rates, portfolio shares and wealth-to-income ratios by education and country. The country specific distributions of the marginal propensity to consume out of income and financial wealth are not degenerate, reflecting, among other factors, costs to both asset market participation and portfolio adjustment. Due to the heterogeneity in consumption responses, monetary policy, operating through its effects on household income and asset market returns, has a differential impact on individuals within and across countries. Generally, poor households respond more to the income variations produced by monetary policy innovations while rich households respond more to policy-induced variations in stock returns. Monetary policy has a larger impact on consumption in Italy and Spain compared to France and Germany. An extension of the model linking mortgage payments to monetary policy strengthens these findings.
    Keywords: heterogeneity, marginal propensity to consume, monetary policy
    JEL: E21 E52
    Date: 2023–05
  17. By: Cars Hommes; Julien Pinter; Isabelle Salle
    Abstract: We conduct an experiment within a large-scale household survey on public finance in France, the Netherlands and Italy. We elicit prior beliefs via open-ended questions and introduce a measure of macroeconomic policy literacy. An educational blog post from a central bank (CB) that opposes monetary-financed policies preceded by a short video on public finance can induce less support for monetary-financed proposals and more support for fiscal discipline and CB independence, no matter the respondent’s level of literacy. However, prior beliefs matter, and contradictory information may be polarizing. Information affects the respondents’ views by shifting their inflation and tax expectations associated to these policies.
    Keywords: Central bank research; Fiscal policy; Monetary policy
    JEL: E70 E60 E62 E58 G53 H31 C83
    Date: 2023–06
  18. By: Mohammed Mikou
    Abstract: This paper estimates the social costs and benefits of the Basel III banking regulation application to Moroccan banks, which, inter alia, imposed higher capital requirements. The paper quantifies the impact of higher capital requirements on (i) lending rates, (ii) bank refinancing costs, and (iii) banking system resilience. Our findings indicate that the increase in capital requirements for Moroccan banks has a limited impact on lending and refinancing costs. The benefit of greater banking system resilience in terms of systemic risk appears to be more significant in expectations.
    Date: 2023–06–21
  19. By: Pavel Jankulár; Zdeněk Tůma
    Abstract: We contribute to literature on banks´ strategies to increasing capital requirements in the period of 2017-2021. We analyze a sample of 85 European banks and differentiate between subgroups according to bank's size, capitalization and riskiness. We examine their responses to higher capital requirements following the issuance of finalized Basel III reforms and increased regulatory and supervisory scrutiny after the COVID-19 outbreak. We found evidence that banks´ adjustments in the direction of higher capital ratio were more pronounced and faster in the COVID-19 period, and that they depended on banks´ specific characteristics and positions. Identified variances between banks and periods resulted mainly from different treatment of risk on banks' books. In particular, higher capitalization and lower risk profile enabled banks to take on the risk regardless of period, while banks with increased risk rather limited their balance sheets to manage their capital ratios.
    Keywords: capital ratio, Basel capital requirements, COVID-19 pandemic, global financial crisis
    JEL: C33 G21 G28
    Date: 2023–05–02
  20. By: Vegard Høghaug Larsen; Nicolò Maffei-Faccioli; Laura Pagenhardt
    Abstract: This paper examines how news coverage of the European Central Bank (ECB) affects consumer inflation expectations in the four largest euro area countries. Utilizing a unique dataset of multilingual European news articles, we measure the impact of ECB-related inflation news on inflation expectations. Our results indicate that German and Italian consumers are more attentive to this news, whereas in Spain and France, we observe no significant response. The research underscores the role of national media in disseminating ECB messages and the diverse reactions among consumers in different euro area countries.
    Date: 2023–05
  21. By: Vernengo, Matías
    Date: 2023–01–27
  22. By: Matthew Schaffer (Department of Economics, University of North Carolina at Greensboro); Nimrod Segev (Bank of Israel)
    Abstract: This paper suggests a new channel through which central bank Quantitative Easing (QE) policies can amplify aggregate fluctuations. By significantly increasing excess reserve holdings in the banking sector, QE policies reduce liquidity risk and increase banks’ lending potential. Thus, disturbances that increase credit demand generate a stronger increase in lending, further amplifying the shock’s impact. We offer empirical evidence supporting this mechanism by utilizing two sources of variation in the US during the COVID-19 pandemic. First, we use cross-bank variation in mortgage-backed security (MBS) holdings to measure banks’ exposure to QE policies. Second, we use cross-state variation in the per capita Economic Impact Payments (EIP) to quantify the local aggregate demand shock stemming from pandemic-related fiscal relief. Bank-level analysis reveals that while QE is associated with an overall increase in reserves, its impact on credit expansion depends on the magnitude of the EIP-related demand shock. Additionally, state-level evidence suggests increases in credit expansion and house prices following the shock were larger in states with greater banking sector exposure to QE. The results, therefore, suggest that QE amplified the impact of government stimulus programs during COVID-19.
    Date: 2023–02
  23. By: Masao Fukui; Emi Nakamura; Jón Steinsson
    Abstract: We study the consequences of "regime-induced" exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.
    JEL: F31 F41
    Date: 2023–05
  24. By: Giancarlo Corsetti; Bartosz Maćkowiak
    Abstract: We study a model in which policy aims at aggregate price stability. A fiscal imbalance materializes that, if uncorrected, must cause inflation, but the imbalance may get corrected in the future with some probability. By maintaining price stability in the near term, monetary policy can buy time for a correction to take place. The policy gamble may succeed, with price stability preserved indefinitely, or fail, leading to a delayed, possibly large jump in the price level. The resulting dynamics resemble the models of a currency crisis following Krugman (1979) and Obstfeld (1986). Like in Obstfeld’s work, multiple equilibria arise naturally: whether or not price stability is preserved may depend on private agents’ expectations. The model can be reinterpreted as a model of partial default on public debt, in which case it is reminiscent of Calvo (1988).
    Keywords: multiple equilibria, self-fulfilling beliefs, fiscal theory of the price level, inflation expectations, currency crisis, sovereign default
    Date: 2023–11
  25. By: Ghosh, Jayati
    Date: 2023–01–27
  26. By: Lorenzo Forni (University of Padova); Mehrab Kiarsi (Henan University)
    Abstract: This paper points to the welfare enhancing effect of policies to regulate emissions in the face of climate shock. Fiscal and monetary policies alone would achieve suboptimal outcomes. We consider the Ramsey-optimal long-run and dynamic policy interactions between climate and fiscal-monetary policies in a climate-monetary DSGE model under sticky prices. In the model, the planner – on top of a fiscal and a monetary instrument – controls also a carbon tax (or, equivalently, an emission abatement technology) to manage emissions, and therefore temperatures and climate damages. In this setup, the presence of carbon taxation sharply reduces the fall in key macroeconomic variables such as output, consumption, and welfare, to a shock to emissions compared with the case without carbon taxation in place. We also show that it is essential to consider climate-specific shocks to appreciate the importance of carbon policies; the Ramsey optimal solution to typical TFP or government spending shocks is not very different whether or not the planner has access to carbon taxation. In the face of climate shocks, the optimal monetary is very similar to the one under no climate policy, while the optimal fiscal policy set distortionary labor income taxation at a lower rate, as the planner now raises revenue also through carbon taxes. Finally, in an extension of the model, we show that the optimal environmental implications can significantly change as we explicitly include climate fiscal outlays in the government budget constraint. As climate change becomes more costly for the government, the optimal abatement increases and the magnitude of carbon emissions and thus output damages decreases.
    Keywords: Climate change; Climate-specific shocks; Optimal environmental and fiscal- monetary policy; Carbon taxation; Fiscal finance; New Keynesian model
    Date: 2023–04

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