nep-cba New Economics Papers
on Central Banking
Issue of 2023‒07‒17
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Macroprudential Policy and Bank Systemic Risk: Does Inflation Targeting Matter? By Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
  2. Quantitative easing, accounting and prudential frameworks, and bank lending By Andrea Orame; Rodney Ramcharan; Roberto Robatto
  3. Enhancing climate resilience of monetary policy implementation in the euro area By Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
  4. Time-Varying Parameters in Monetary Policy Rules: A GMM Approach By Christina Anderl; Guglielmo Maria Caporale
  5. Monetary Policy, HTM Securities, and Uninsured Deposit Withdrawals By Özlem Dursun-de Neef; Steven Ongena; Alexander Schandlbauer
  6. Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis By Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
  7. Getting up from the floor By Claudio Borio
  8. Trade Wars, Nominal Rigidities and Monetary Policy By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  9. Euro Area Monetary Policy Effects. Does the Shape of the Yield Curve Matter? By Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
  10. Bank profitability and central bank digital currency By Bellia, Mario; Calès, Ludovic
  11. Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach By Jessica Reale
  12. Housing Market Connectedness and Transmission of Monetary Policy By Woo Suk Lee; Eunseong Ma
  13. US Monetary Policy Spillovers to Emerging Markets: the Trade Credit Channel By Mélina London; Maéva Silvestrini
  14. Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model By Mark A. Aguiar; Manuel Amador; Cristina Arellano
  15. The drivers of market-based inflation expectations in the euro area and in the US By Christian Hoynck; Luca Rossi
  16. Recent advances in the literature on capital flow management By Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
  17. Quasi-Fiscal Implications of Central Bank Crisis Interventions: Case Studies By John Hooley; Claney Lattie; Mr. Peter Stella
  18. Gross bond issuance by Italian banks: key trends in times of crisis and unconventional monetary policy By Donato Ceci; Alessandro Montino; Sara Pinoli; Andrea Silvestrini
  19. Monetary Policy and Labor Income Inequality: the Role of Extensive and Intensive Margins By Paul Hubert; Frédérique Savignac
  20. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  21. Consumer Inflation Expectations: Daily Dynamics By Conces Binder, Carola; Campbell, Jeffrey; Ryngaert, Jane
  22. Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data By Kodjovi M. Eklou
  23. Analysis of the Amplification Mechanisms in the Process of Debt Deleveraging By Nimrod Cohen
  24. Regulation with Externalities and Misallocation in General Equilibrium By Clayton, Christopher; Schaab, Andreas
  25. Monetary policy rules and the inequality-augmented Phillips Curve By Lilian Rolim; Laura Carvalho, Dany Lang
  26. Towards a macroprudential regulatory framework for mutual funds? By Christos Argyropoulos; Bertrand Candelon; Jean-Baptiste Hasse; Ekaterini Panopoulou
  27. Innovation, Public Debt and Monetization: an Empirical Analysis By D'Andrea, Sara
  28. Towards a climate just financial system By Yannis Dafermos

  1. By: Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
    Abstract: This paper investigates macroprudential policy effects on bank systemic risk and the role of inflation targeting in such effects. Using bank-level data for 45 countries comprising various monetary and exchange rate regimes, our regime-dependent dynamic panel regression results point to complementarities between monetary and macroprudential policies. We find that the tightening of most macroprudential tools—including DSTI and LTV limits, and capital requirements—reduces bank systemic risk further under inflation targeting. Our findings lend credence to the view that inflation targeting strengthens macroprudential policy roles in mitigating financial stability risks.
    Keywords: Macroprudential Policies; Banks; Systemic Risk; Monetary Policy; Inflation Targeting
    Date: 2023–06–02
  2. By: Andrea Orame (Bank of Italy); Rodney Ramcharan (University of Southern California); Roberto Robatto (University of Wisconsin-Madison)
    Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks' net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks' balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms' credit constraints through the bank lending channel.
    Keywords: unconventional monetary policy, bank lending channel, sovereign default premia, regulatory capital, historical cost accounting
    JEL: G28 E52 M48
    Date: 2023–06
  3. By: Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
    Abstract: Central banks around the world are increasingly monitoring climate change risks and how these affect their balance sheets and their monetary policy transmission. The European Central Bank (ECB) extensively reviewed its monetary policy implementation framework in 2020-21 to better account also for climate change risks. This paper describes these considerations in detail to provide a holistic perspective of one central bank’s climate-related work in relation to its monetary policy implementation framework. The paper starts by characterising the strategic reflections behind the principles of the enhanced framework and their relationship with the ECB monetary policy strategy review. Climate-related disclosures, improvements in risk assessment, a strengthened collateral framework and tilting of corporate bond purchases are the main pillars of the framework enhancements. The paper sheds light on the key motivations behind these enhancements, including the aspects that were reviewed but left unchanged. It also takes stock of the different challenges involved in the identification and estimation of climate change-related risk, how these can be partially overcome, and when they cannot be overcome, how they can constrain the ability of financial institutions, including central banks, to take further action. The integration of climate change considerations into the monetary policy implementation framework is at its inception. As data availability and quality improve, and risk methodologies develop, central banks will be able to deepen their approach. This paper also examines possible future avenues that central banks, including the ECB, might take to further refine their monetary policy implementation using an assessment framework for climate change-related adjustments. JEL Classification: E52, E58, Q54, D53
    Keywords: climate change, monetary policy implementation
    Date: 2023–06
  4. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper assesses time variation in monetary policy rules by applying a Time-Varying Parameter Generalised Methods of Moments (TVP-GMM) framework. Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.
    Keywords: Taylor rules, monetary policy rules, Generalised Methods of Moments, Time-varying parameters
    JEL: C14 C52 E52 E58
    Date: 2023
  5. By: Özlem Dursun-de Neef (Goethe University); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR); Alexander Schandlbauer (University of Southern Denmark ; Danish Finance Institute)
    Abstract: This paper shows that an increase in the Fed funds rate is associated with an increase in banks' unrealized losses due to their held-to-maturity (HTM) portfolios. This exposes banks to large uninsured deposit withdrawals as the depositors seek a flight-to-safety and, at the same time, to a reduction in their stock prices as the investors become concerned about possible losses. This relationship is more pronounced for banks with less hedging against the interest rate risk and for banks with lower capital ratios. Our results highlight the importance of banks' HTM securities on how monetary policy affects their uninsured deposits and stock prices.
    Keywords: Interest rate risk; HTM securities; Uninsured deposits; Monetary policy
    JEL: G21 E52 E58
    Date: 2023–04
  6. By: Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
    Abstract: We bring together the largest meta-analysis ever conducted in the macroeconomic literature to investigate the effects of central bank credibility on monetary policy. With nearly 1, 200 surveyed effects, we first confirm that: (i) conventional policy significantly affects inflation and output, and (ii) unconventional policy significantly affects capital flows and the exchange rate. We next evaluate if different measures of credibility amplify these effects. Our findings indicate that central bank transparency has the largest payoff, as it increases policy effectiveness by 69% when dealing with foreign exchange intervention, by 59% when dealing with capital inflows, and by 14% when dealing with conventional policy. An alternative measure, medium and long-term anchoring in inflation expectations, is the runner up, increasing effectiveness by 31%, 9%, and 10%, respectively. Other measures, such as central bank independence and short-term anchoring in inflation expectations have lower and in some cases null effects. **** RESUMEN: Reunimos el primer meta-análisis sobre el impacto que tiene la credibilidad de los bancos centrales en la política monetaria. Con cerca de 1.200 efectos reportados, primero confirmamos que: (i) la política convencional significativamente afecta la inflación y el crecimiento económico y (ii) la política no convencional afecta significativamente los flujos de capital y tasa de cambio. Segundo, evaluamos si diferentes medidas de credibilidad amplifican estos efectos. Nuestros hallazgos indican que la transparencia del banco central tiene el mayor impacto, ya que aumenta la efectividad en un 69% cuando se trata de intervención cambiaria, en un 59% cuando se trata de flujos de capital, y en un 14% cuando se trata de la política convencional. Otras medidas de credibilidad, como el anclaje de expectativas de inflación y la independencia del banco, también magnifican la política monetaria, pero en menor proporción.
    Keywords: Meta-Analysis, Central bank credibility, Conventional policy, Unconventional policy, Capital Flows, Foreign exchange intervention, Meta-Análisis, Credibilidad Monetaria, Política Convencional, Política No Convencional, Flujos de Capital, Intervención Cambiaria
    JEL: C83 E52 E58
    Date: 2023–06
  7. By: Claudio Borio
    Abstract: Since the Great Financial Crisis, a growing number of central banks have adopted abundant reserves systems ("floors") to set the interest rate. However, there are good grounds to return to scarce reserve systems ("corridors"). First, the costs of floor systems take considerable time to appear, are likely to grow and tend to be less visible. They can be attributed to independent features of the environment which, in fact, are to a significant extent a consequence of the systems themselves. Second, for much the same reasons, there is a risk of grossly overestimating the implementation difficulties of corridor systems, in particular the instability of the demand for reserves. Third, there is no need to wait for the central bank balance sheet to shrink before moving in that direction: for a given size, the central bank can adjust the composition of its liabilities. Ultimately, the design of the implementation system should follow from a strategic view of the central bank's balance sheet. A useful guiding principle is that its size should be as small as possible, and its composition as riskless as possible, in a way that is compatible with the central bank fulfilling its mandate effectively.
    Keywords: monetary policy operating procedures, central bank balance sheets, abundant vs scarce reserves systems
    JEL: E42 E43 E52 E58
    Date: 2023–05
  8. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.
    JEL: F30 F40 F41
    Date: 2023–06
  9. By: Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
    Abstract: This paper investigates the effects of monetary policy in the euro area. We make three main contributions to the literature. First, we use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. Second, we construct a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Third, we show that the way conventional and unconventional monetary policy announcements shape expectations inherent in the term structure influences the response of key macroeconomic variables.
    Keywords: Monetary Policy, Euro Area, Quantitative Easing
    JEL: E50 E20 E37
    Date: 2023
  10. By: Bellia, Mario (European Commission); Calès, Ludovic
    Abstract: This paper analyzes the potential effect of a European Central Bank Digital Currency (CBDC) on banks’ profitability. We use a large sample of EU banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regression, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for small banks, that mostly rely on deposits as a source of funding.
    Keywords: Central Bank Digital Currency, CBDC, ECB, bank deposits
    JEL: G18 G28 G32
    Date: 2023–05
  11. By: Jessica Reale
    Abstract: This study investigates the functioning of modern payment systems through the lens of banks' maturity mismatch practices, and it examines the effects of banks' refusal to roll over short-term interbank liabilities on financial stability. Within an agent-based stock-flow consistent framework, banks can engage in two segments of the interbank market that differ in maturity, overnight and term. We compare two interbank matching scenarios to assess how bank-specific maturity targets, dependent on the dictates of the Net Stable Funding Ratio, impact the dynamics of the interbank market and the effectiveness of conventional monetary policies. The findings reveal that maturity misalignment between deficit and surplus banks compromises the interbank market's efficiency and increases reliance on the central bank's standing facilities. Monetary policy interest-rate steering practices also become less effective. The study also uncovers a dual stability-based configuration in the banking sector, resembling the segmented European interbank structure. This paper suggests that heterogeneous maturity mismatches between surplus and deficit banks may result in asymmetric funding frictions that might precede credit- and sovereign-risk explanations of interbank tensions. Also, a combined examination of macroprudential tools and rollover-based interbank dynamics can enhance our understanding of how regulatory changes impact the stability of heterogeneous banking sectors.
    Date: 2023–06
  12. By: Woo Suk Lee (Dong-A University); Eunseong Ma (Yonsei University)
    Abstract: This paper examines whether the degree of interconnectivity among local housing markets affects the effectiveness of the monetary transmission mechanism in the U.S. economy. We construct measures of housing market connectedness and use a state-dependent local projection method to estimate nonlinear empirical impulse responses of macroeconomic variables to a monetary policy shock. The primary finding is that monetary policy has a greater impact when regional housing markets are more synchronized. This implies that a spillover effect among local housing markets may magnify the effectiveness of monetary policy. Moreover, analyses reveal two additional findings: monetary policy is more effective i) during high-connectedness periods with expansions, and ii) when house price fluctuations are predominantly driven by a national factor rather than regional factors.
    Keywords: Housing market, connectedness; monetary policy
    JEL: R31 E52 E32
    Date: 2023–05
  13. By: Mélina London; Maéva Silvestrini
    Abstract: We analyze the effects of exogenous US monetary policy shocks on trade credit towards emerging markets, using a proprietary database on trade credit amounts. We show that a US monetary tightening leads to an increase in foreign-supplied trade credit in Mexico. Thanks to the granularity of our database, we are able to identify a stronger effect for trade credit in USD and trade credit to sectors with low export orientation. This effect is even larger for low-quality buyers, subject to larger financial constraints. In this latter case, distinguishing between the intensive and extensive margins, we show that the use of trade credit as a substitute only holds in a context of pre-existing relationships. This emphasizes the substitution role of trade credit when global financial conditions tighten due to US monetary policy shocks.
    Keywords: US Monetary Policy, Spillovers, Capital Flows, Emerging Market, Trade Credit
    JEL: E52 F14 F40 F44 L14
    Date: 2023
  14. By: Mark A. Aguiar; Manuel Amador; Cristina Arellano
    Abstract: This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation.
    JEL: E4 E60
    Date: 2023–06
  15. By: Christian Hoynck (Bank of Italy); Luca Rossi (Bank of Italy)
    Abstract: In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.
    Keywords: inflation expectations, international transmission, monetary policy, high-frequency identification.
    JEL: C32 C54 E31 E44 E52
    Date: 2023–06
  16. By: Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
    Abstract: Large swings in cross-border capital flows can have consequences for domestic stability and open a channel for the transmission of shocks and spillovers across economies, including the euro area. Against this backdrop, the present paper reviews new evidence for the effectiveness of capital flow management policies in achieving macroeconomic and financial stability. Particular attention is paid to literature that has been used by the International Monetary Fund (IMF) to underpin its so-called Integrated Policy Framework, in which the roles of monetary, exchange rate, macroprudential and capital flow management policies are considered jointly. The literature published since the global financial crisis continues to affirm the effectiveness of capital flow management measures (CFMs) in addressing financial stability risks resulting from capital flow reversals; at the same time, however, it also continues to underscore that such policies should not substitute for warranted economic adjustments and structural reforms. Even so, recent literature also provides a case for considering, under certain circumstances, “precautionary” CFMs which could be applied to capital inflows to prevent a boom-and-bust cycle from being set in motion. This paper also highlights the need for further work on the long-term effects of such precautionary instruments, as well as their joint use with monetary policy instruments. Regarding capital flow management policies within the domain of central banks, the literature points to the usefulness of foreign exchange interventions (FXIs) in mitigating financial stability risks in countries with specific characteristics such as currency mismatches, borrowing constraints and shallow foreign exchange markets that are common to emerging market and developing economies alike. However, the literature also warns that such measures may reduce economic agents’ incentives to hedge against currency risks, with the result that unfavourable initial conditions beco JEL Classification: F32, F38
    Keywords: capital controls, short-term capital movements
    Date: 2023–06
  17. By: John Hooley; Claney Lattie; Mr. Peter Stella
    Abstract: This paper presents case studies of central bank crisis interventions during the Covid-19 and the Global Financial Crises in four jurisdictions (Canada, Chile, the United Kingdom, and the United States). The paper serves as an Annex to the main IMF Working Paper WP/23/114 ‘Quasi-Fiscal Implications of Central Bank Crisis Interventions.’
    Keywords: Central bank; quasi-fiscal; fiscal risks; monetary policy; fiscal policy; sovereign debt management; policy coordination
    Date: 2023–06–02
  18. By: Donato Ceci (Bank of Italy); Alessandro Montino (Bank of Italy); Sara Pinoli (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: This paper examines the issuance of bonds by Italian banks from the onset of the global financial crisis in 2007-08 to the end of 2022, in light of the macroeconomic environment and the unconventional monetary policy measures adopted in the euro area. The sovereign debt crisis was followed by a progressive reduction in the gross issuance of bank bonds, together with an increase in retail deposits and refinancing operations with the Eurosystem. Disaggregated data show that Italian banks have partially replaced bond issues with alternative sources of funding. This has mitigated the transmission of financial shocks to the cost of funding but, on the other hand, has increased the reliance of the banking system on quantitative measures of monetary policy. In the ongoing phase of monetary policy normalization, banks may once again have to increase bond financing to replace their maturing funds. This could lead to a significant tightening of funding conditions for the private sector in a context of slowing economic activity. The overall cost of bank funding should be constantly monitored in order to prevent unexpected shocks arising within the banking system.
    Keywords: bank bonds, bond issuance, crisis, unconventional monetary policy, cost of funding
    JEL: G12 G21 G32
    Date: 2023–06
  19. By: Paul Hubert; Frédérique Savignac
    Abstract: Using French matched administrative-survey data, we quantify the distributional effects of monetary policy on labor income and decompose the extensive and intensive margins of these effects. We find that the effects of ECB monetary policy shocks on labor income are U-shaped along the labor income distribution. These effects are driven by the extensive margin (transitions out or to unemployment) at the bottom of the distribution and by the intensive margin (labor income changes for individuals continuously employed) at the top. We document that sectoral heterogeneity, especially related to the labor force composition, is crucial in explaining these heterogeneous effects.
    Keywords: Distributional Effects, Household Heterogeneity, Labor Market
    JEL: E52 E58
    Date: 2023
  20. By: Linda S. Goldberg
    Abstract: Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions.
    Keywords: global liquidity; global dollar cycle; trilemma; exchange market pressure; risk sensitivity; safe haven; capital flows; non-bank financial intermediaries; risk migration
    JEL: E44 F30 G15 G18 G23
    Date: 2023–06–01
  21. By: Conces Binder, Carola; Campbell, Jeffrey; Ryngaert, Jane
    Abstract: We use high frequency identification methods to study the response of consumer inflation expectations to many different types of events. We use data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations. We identify the response of expectations to a large set of shocks, including FOMC announcements, macroeconomic data releases, and news related to the Covid-19 pandemic. The majority of FOMC meetings have no detectable effects on consumer inflation expectations, though certain especially salient announcements have short-lived effects. Good news about the pandemic tends to reduce inflation expectations.
    Keywords: inflation expectations, monetary policy, consumer surveys
    JEL: E31
    Date: 2022–12–15
  22. By: Kodjovi M. Eklou
    Abstract: This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.
    Keywords: Dollar exchange rate; volatility; Productivity growth; Investment; Firm heterogeneity and spillovers; dollar exchange rate volatility; exchange rate volatility; firm Level data; dollar invoicing; volatility shock com; Exchange rates; Productivity; Financial sector development; Total factor productivity; Employment protection; Global
    Date: 2023–05–26
  23. By: Nimrod Cohen (Bank of Israel)
    Abstract: This research examines a model of an economic-financial crisis caused by a sudden debt deleveraging in the economy. In this type of a crisis, demand is contracted, and the monetary interest rate may drop to its effective lower bound – a phenomenon called the "liquidity trap" – in such a way, that the monetary policy is restricted in its response (Eggertsson and Woodford, 2003). At the same time, there are other mechanisms that may intensify the crisis, such as the mechanism of the "financial accelerator" (Bernanke et al., 1999), and the mechanism of the "debt deflation" (Eggertsson and Krugman, 2012). Therefore, we are induced to question, what is the "contribution" of those various mechanisms to this crisis, and in particular - what is the interaction between those mechanisms. For this purpose, a general equilibrium model has been built in a Neo- Keynesian framework with two types of representative agents – a borrower and a saver – where the financial spread of the borrower depends on his or her level of leverage (the ratio of debt to the value of assets). The model is solved without linearization, emphasizing the monetary policy rule, which includes an effective lower bound on the interest rate. This is to enable an analysis of the interactions between the various mechanisms. From the analysis of the reaction of the economy to the debt deleveraging in the various situations, it was found that the interaction of the various mechanisms is extremely significant. For example, when the economy enters the "liquidity trap", the effect of the "financial accelerator" is intensifying the crisis to a great extent, much more than it occurs in a situation where the interest rate is not subject to the effective lower bound. In fact, the analysis illustrates the importance of an effective monetary policy in the course of a financial crisis, because monetary expansion is critical in this situation and prevents a crisis which is much more acute.
    Keywords: liquidity trap; the effective lower bound (ELB); financial friction; monetary policy; financial crisis; financial crisis; debt deleveraging; credit market; financial accelerator, debt deflation
    Date: 2022–09
  24. By: Clayton, Christopher; Schaab, Andreas
    Abstract: We study allocative efficiency and optimal regulation in inefficient economies with misalloca-tion and pecuniary externalities. We characterize the allocative value of a market based on its price, cross-sectional misallocation among participants, and pecuniary externalities. With both complete and incomplete regulation, a social planner equalizes prices faced by fully regulated agents with the allocative value of markets. With incomplete regulation, the planner uses regu-lation of fully regulated agents to trade off correcting externalities against misallocation from regulatory arbitrage by unregulated agents. The planner uses partial regulation of unregulated agents to reduce misallocation from regulatory arbitrage. We leverage our framework to answer relevant policy questions, including: (i) the social value of a new unregulated agent is its profits plus a simple measure of social value of its activities; (ii) the social value of new regulation is summarized by its reduction in misallocation. We apply our theory to shadow bank institution regulation and capital flow management in a small open economy. We extend our theory to environments with multiple regulators and common agency.
    Keywords: Misallocation; regulatory arbitrage; unregulated finance; macroprudential regulation; capital flows; capital controls; pecuniary externalities
    JEL: F38 G28 D62
    Date: 2023–06–08
  25. By: Lilian Rolim; Laura Carvalho, Dany Lang
    Abstract: We explore the relationship between inequality, unemployment, and inflation by considering the evidence that low-wage workers are more exposed to business cycle fluctuations. The analysis is undertaken in an extended version of the stock-and-flow consistent agent-based model by Rolim et al. (2023), in which inflation and inequality result from the social conflict over income distribution. The inflation-unemployment-inequality nexus leads to the inequality-augmented Phillips curve relating higher levels of unemployment to lower inflation rates and more inequality. We then perform two sets of experiments to investigate the implications of this nexus further. The first experiment shows that the decrease in low-wage workers’ bargaining power could explain the flattening of the Phillips curve and the increase in income and wage inequalities. The second experiment contrasts different monetary policy rules and compares the implications for inequality dynamics. In line with the inequality-augmented Phillips curve, the rules have important implications for wage and income inequalities: a monetary policy rule that prioritizes low inflation rates is associated with higher unemployment and higher inequality levels.
    Keywords: Phillips curve; inflation; unemployment; inequality; monetary policy; bargaining power
    JEL: C63 D3 E2 E3 E4
    Date: 2023–06–27
  26. By: Christos Argyropoulos (Essex Business School - University of Essex); Bertrand Candelon (UCL - Université Catholique de Louvain = Catholic University of Louvain); Jean-Baptiste Hasse (UCL - Université Catholique de Louvain = Catholic University of Louvain, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Ekaterini Panopoulou (Essex Business School - University of Essex)
    Abstract: This paper highlights the procyclical and unstable behaviour of mutual funds, characterized by a varying sensitivity on common asset pricing factors. It proposes a novel factor model that allows for regime changes associated with macroeconomic and financial state variables. Estimated on a panel covering 825 US equity mutual funds over a period of 30 years, it appears that the yield curve, the dividend yield, short term interest rates and the industrial production coincide with regimes switches in the Fama-French factors. Furthermore, the estimated regimes coincide with financial crises and economic downturns, thus confirming the procyclical behaviour of mutual funds' returns. These findings, coupled with the emerging systemic role of mutual funds, promote the consideration for a specific macroprudential regulatory framework targeted at the mutual fund industry.
    Keywords: financial stability, macroprudential framework, mutual fund industry, regulation
    Date: 2023–04–25
  27. By: D'Andrea, Sara
    Abstract: This paper explores the relationship between public debt and technological innovation through panel threshold regressions on a sample of 15 industrialized countries from 2000 to 2019. It also asks what impact debt monetization (expressed as the amount of debt held at the central bank) has on this nexus. Our results show strong nonlinearities in the sense that an increase in debt above a certain threshold negatively impacts the rate of innovation, while below it has positive effects. Monetizing debt contributes positively to innovation if it is below the "debt turning point", while this becomes detrimental for debt-to-GDP ratios above the threshold. The same inverted-U-shaped relationship is found between the monetization rate and innovation rate.
    Keywords: Public debt, Innovation, Debt monetization, Panel threshold regression
    JEL: C23 E58 H60 O47
    Date: 2023–06–03
  28. By: Yannis Dafermos (Department of Economics, SOAS University of London)
    Abstract: In recent years, private and public financial institutions have increasingly focused on addressing the implications of the climate crisis. However, existing efforts to align the financial system with climate change suffer from a significant limitation: they exacerbate global climate injustice. In this paper, I identify several climate finance injustice channels and explain how these can be addressed via the development of a 'climate just financial system'. I define the latter as a system whereby climate justice criteria are incorporated into the policies governing public and private financial institutions, and the financing of private and public climate spending is in line with the principle of common but differentiated responsibilities and respective capabilities. A climate just financial system has three key elements: (i) differentiated climate responsibilities for global North and global South financial institutions, with the latter primarily focusing on climate adaptation and the former prioritising climate mitigation; (ii) climate justice stabilising mechanisms that establish a permanent commitment by global North countries to provide climate financing support to global South countries without making the latter more financially vulnerable; and (iii) the incorporation of climate justice criteria in the design and use of climate mitigation tools by global North financial institutions. Creating a climate just financial system requires significant transformations in multilateral financial mechanisms, public banking, central banking, financial regulation and private financial institutions. Although these transformations would face political and technical challenges, they can potentially be overcome if climate justice gets centre stage in the climate policy agenda.
    Keywords: climate justice, climate-aligned development, central banking, public banking, climate finance, global financial architecture
    JEL: D63 E50 Q01 Q54
    Date: 2023–06

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