nep-cba New Economics Papers
on Central Banking
Issue of 2023‒08‒14
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Optimal Disinflation with Delegation and Limited Credibility By Mridula Duggal; Luis Rojas
  2. The Anatomy of Monetary Policy Transmission in an Emerging Market By Kodjovi M. Eklou
  3. Gibson’s Paradox and the Natural Rate of Interest By Luca Benati; Pierpaolo Benigno
  4. Central bank digital currency and European banks’ balance sheets By Marco Petracco Giudici; Francesca Di Girolamo
  5. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou
  6. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
  7. Density forecasts of inflation: a quantile regression forest approach By Lenza, Michele; Moutachaker, Inès; Paredes, Joan
  8. Monetary Policy across the Wealth Distribution By Franconi, Alessandro; Rella, Giacomo
  9. Analysis of cashless economy, demand for money and price determination : A possibility for implementation in Nigeria By EKPEYONG, PAUL
  10. Towards acceptance criteria for a digital euro By Krüger, Nicolai; Busche, Jan
  11. Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications By Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
  12. Uncertainty, politics, and crises: The case for cash By Rösl, Gerhard; Seitz, Franz
  13. The state-dependent impact of changes in bank capital requirements By Lang, Jan Hannes; Menno, Dominik
  14. Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications By Deniz Erdemlioglu; Christopher J. Neely; Xiye Yang
  15. Green monetary and fiscal policies: The role of consumer preferences By Mohamed Tahar Benkhodja; Xiaofei Ma; Tovonony Razafindrabe
  16. Oligopolistic Competition, Price Rigidity, and Monetary Policy By Kozo Ueda; Kota Watanabe

  1. By: Mridula Duggal; Luis Rojas
    Abstract: We examine the challenge faced by a government aiming to implement a gradual reduction in inflation by entrusting monetary policy to an independent central bank with limited credibility. Expanding upon the framework established by Barro and Gordon (1983b) , we demonstrate that an optimal policy for minimizing the sacrifice ratio of disinflation involves a gradual disinflationary process coupled with the announcement of intermediate targets. The speed at which disinflation occurs strikes a balance between the objective of enhancing credibility and the associated costs of unexpected inflation. Our theoretical framework provides an explanation for the disinflationary experiences observed in Chile and Colombia during the 1990s, wherein these countries established new monetary institutions and steadily achieved single-digit inflation levels through the annual announcement of decreasing inflation targets. We argue that the use of intermediate targets played a pivotal role in their design, facilitating the establishment of credibility with lower output costs.
    Keywords: disinflation, credibility, inflation, inflation expectations
    JEL: D83 E17 E31 E52 E58
    Date: 2023–07
  2. By: Kodjovi M. Eklou
    Abstract: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.
    Keywords: Monetary Policy; Emerging markets; Exchange rate; Credit; Inflation; Economic activity; Global monetary policy
    Date: 2023–07–07
  3. By: Luca Benati; Pierpaolo Benigno
    Abstract: We argue that Gibson’s paradox has nothing to do with the Gold Standard per se, and it rather originates from low-frequency variation in the natural rate of interest under certain types of monetary regimes that make inflation I(0) and (approximately) zero-mean. Although the Gold Standard is the only historical example of such a regime, Gibson’s paradox is a feature of a potentially wide array of monetary arrangements. In fact, once removing the deterministic component of the drift in the price level, the paradox can be recovered from the data generated under inflation-targeting regimes. By the same token, the paradox could arise under a regime targeting the level of the money stock, whereas it would not appear under arrangements targeting the levels of either prices or nominal GDP. We show that the mechanism underlying Gibson’s paradox hinges on the interaction between the Fisher equation and an asset pricing condition determining the current value of money. Our interpretation points towards inefficiencies in the actual implementation of monetary policies.
    Keywords: Gibson’s Paradox; monetary regimes; natural rate of interest; Fisher equation; Gold Standard; inflation targeting; optimal monetary policy
    JEL: E2 E3
    Date: 2023–03
  4. By: Marco Petracco Giudici (European Commission - JRC); Francesca Di Girolamo (European Commission - JRC)
    Abstract: The aim of this paper is to look at possible scenarios of demand for a retail-only euro central bank digital currency and assess their impact on bank’s balance sheets, to explore potential effects on bank’s intermediation capacity and financial stability. The European Central Bank, in the context of the Eurosystem investigative exercise, has tackled this issue by proposing a set of illustrative scenarios for the adoption of a Euro CBDC (see Adalid et al., 2022 and discussion therein). We expand their analysis to include more detailed results at country level by making use of individual banks data. For each demand scenario, we estimate the potential shock on deposits making use of MS-level data. We then apply these shocks at individual bank level and compare them to a set of alternative adjustment channels, including free reserves, wholesale funding and assets (deleveraging) to obtain a distribution of the ratio of shocks to different channels. Results show that per capita demand scenarios around 3 thousand euro do not seem to present risks for financial stability in the aggregate, though they present asymmetric impacts and could give raise to shifts in the structure of balance sheets and interbank markets.
    Keywords: finance, financial stability, central bank digital currency, digital euro, banks, banking, deposits
    Date: 2023–06
  5. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023
  6. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30
  7. By: Lenza, Michele; Moutachaker, Inès; Paredes, Joan
    Abstract: Density forecasts of euro area inflation are a fundamental input for a medium-term oriented central bank, such as the European Central Bank (ECB). We show that a quantile regression forest, capturing a general non-linear relationship between euro area (headline and core) inflation and a large set of determinants, is competitive with state-of-the-art linear benchmarks and judgemental survey forecasts. The median forecasts of the quantile regression forest are very collinear with the ECB point inflation forecasts, displaying similar deviations from “linearity”. Given that the ECB modelling toolbox is overwhelmingly linear, this finding suggests that the expert judgement embedded in the ECB forecast may be characterized by some mild non-linearity. JEL Classification: C52, C53, E31, E37
    Keywords: Inflation, Non-linearity, Quantile Regression Forest
    Date: 2023–07
  8. By: Franconi, Alessandro; Rella, Giacomo
    Abstract: Using vector autoregression and the Distributional Financial Accounts of the United States, we show that monetary policy has unequal effects across the wealth distribution. The direction and persistence of these effects depend on the policy instrument and the wealth group. Interest rate cuts initially reduce wealth inequality but increase it in the medium run. Asset purchases, instead, increase wealth inequality but only temporarily. Housing is the main channel through which monetary policy affects wealth at the bottom. The effects of monetary policy on capital gains are larger at the top due to heterogeneous portfolios. (Stone Center on Socio-Economic Inequality Working Paper)
    Date: 2023–07–06
    Abstract: This study explores the feasibility of implementing a cashless policy in Nigeria and its impact on money demand and price determination. Drawing from renowned scholars such as Keynes, Friedman, and Woodford, the analysis delves into the dynamics of monetary policy, the role of money in trade and financial markets, and factors influencing price levels. The study investigates the relationship between money demand and the implementation of a cashless policy. It emphasizes the behavior of real balances, transaction velocity, and the effects of monetary policy on trading activity and asset prices. The findings indicate that as an economy moves towards a cashless system, various factors come into play. Transaction velocity, a measure of cash efficiency, becomes critical, increasing as cash usage diminishes and the economy becomes more cashless. Additionally, the study reveals that implementing a cashless policy affects price determination. Contrary to conventional belief, even as real balances approach zero in a cashless economy, asset prices remain responsive to monetary policy. This implies that monetary equilibrium prices do not necessarily converge to their nonmonetary equilibrium counterparts when real balances vanish. Based on these findings, a viable policy recommendation emerges: the monetary authority should carefully manage the money supply per investor to control and stabilize the price level in a cashless economy. Adjusting the money supply allows the authority to achieve and maintain a desired price level, even in a cashless environment. However, the study acknowledges limitations and calls for further research. Specifically, exploring the implications and challenges of implementing a cashless policy in Nigeria is necessary. Factors such as financial inclusion, technological infrastructure, and public acceptance should be examined to assess the feasibility and potential impacts of a cashless economy on different segments of society. Overall, this study contributes valuable insights into the possibility of implementing a cashless policy, its effects on money demand and price determination, and its implications for economic stability and efficiency in Nigeria.
    Keywords: price, cashless policy, monetary policy, price determination, efficiency
    JEL: E4 E41 E42 E44
    Date: 2023–07–13
  10. By: Krüger, Nicolai; Busche, Jan
    Abstract: Alongside other central banks, the European Central Bank (ECB) is currently exploring the potential of a Central Bank Digital Currency (CBDC). Such a significant payment innovation requires compliance with the ECB's mandate based on the Treaties of the European Union, in addition to socio-technical and socioeconomic considerations. Thus, Information Systems (IS) researchers might witness and actively participate in one of the most important changes associated to currency-related fundamental rights in our time in the euro area. IS research can provide useful insights into technology acceptance criteria of a CBDC, which is a novel and unfamiliar technology for most people, and help identify requirements. Our paper provides an overview of the current state of development. Furthermore, we present a Technology Acceptance Model - based vignette study (N = 207) and derive design principles for a prospective digital euro (PDE). The results of the study show that acceptance by the German population can be assumed. However, there are significant differences depending on the final design choices.
    Keywords: Central Bank Digital Currency, European Central Bank, Digital Euro, Technology Acceptance Model, Intention to use, Cryptocurrencies
    Date: 2023
  11. By: Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
    Abstract: The Eurosystem, having purposefully expanded its footprint in recent years, confronts a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly. This paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable. The policy conclusions are fourfold. First, the temporary and recoupable nature of the loss-making obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. Second, it must nonetheless be communicated that fiscal impacts will be material, with annual taxes and transfers of 0.1−0.2 percent of GDP giving way to potentially long interruptions in some cases. Third, more-conservative profit distribution policies in the future steady state could help mitigate the on-off pattern of dividends. Finally and most vitally, loss-making must remain orthogonal to monetary policy decision-making, as indeed it is at the ECB. Ultimately, credibility will rest on performance in delivering on the price stability mandate.
    Keywords: Eurosystem; balance sheet; monetary policy; profit distribution; seigniorage; central bank independence
    Date: 2023–07–07
  12. By: Rösl, Gerhard; Seitz, Franz
    Abstract: We analyze the repercussions of different kinds of uncertainty on cash demand, including uncertainty of the digital infrastructures, confidence crises of the financial system, natural disasters, political uncertainties, and inflationary crises. Based on a comprehensive literature survey, theoretical considerations and complemented by case studies, we derive a classification scheme how cash holdings typically evolve in each of these types of uncertainty by separating between demand for domestic and international cash as well as between transaction and store of value balances. Hereby, we focus on the stabilizing macroeconomic properties of cash and recommend guidelines for cash supply by central banks and the banking system. Finally, we exemplify our analysis with five case studies from the developing world, namely Venezuela, Zimbabwe, Afghanistan, Iraq, and Libya.
    Keywords: Cash, banknotes, money, crises, stabilization, uncertainty
    JEL: E41 E51 E58 O57
    Date: 2023
  13. By: Lang, Jan Hannes; Menno, Dominik
    Abstract: Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments. JEL Classification: D21, E44, E51, G21, G28
    Keywords: Bank capital requirements, dynamic stochastic equilibrium model, financial accelerator, global solution methods, loan supply
    Date: 2023–07
  14. By: Deniz Erdemlioglu; Christopher J. Neely; Xiye Yang
    Abstract: We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies over the business cycle, peaks during the global financial crisis and remains high over different phases of unconventional monetary policy. We use our approach to construct a Fed-induced systemic tail risk (STR) indicator. STR helps explain the pre-FOMC announcement drift and significantly increases variance risk premia, particularly for the meetings without press conferences.
    Keywords: time-varying tail risk; high-frequency data; Federal Open Market Committee (FOMC) news; monetary policy announcements; cojumps; systemic risk; jump intensity
    JEL: C12 C14 C22 C32 C58 G12 G14
    Date: 2023–07–20
  15. By: Mohamed Tahar Benkhodja (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Xiaofei Ma (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Tovonony Razafindrabe (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers' awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.
    Keywords: Consumers’ preferences, E-DSGE, Economic recovery, Elasticity of substitution, Environmental policies, Stimulus policy
    Date: 2023
  16. By: Kozo Ueda (Waseda University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo)
    Abstract: This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling's model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
    Date: 2023–07

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