nep-cba New Economics Papers
on Central Banking
Issue of 2023‒08‒21
23 papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Keep it Simple: Central Bank Communication and Asset Prices By Haroon Mumtaz; Jumana Saleheen; Roxane Spitznagel
  2. Between russian Invasions: The Monetary Policy Transmission Mechanism in Ukraine in 2015-2021 By Anton Grui; Nicolas Aragon; Oleksandr Faryna; Dmytro Krukovets; Kateryna Savolchuk; Oleksii Sulimenko; Artem Vdovychenko; Oleksandr Zholud
  3. Unwinding quantitative easing: state dependency and household heterogeneity By Cantore, Cristiano; Meichtry, Pascal
  4. Information Effects of Monetary Policy By Yusuke Tanahara; Kento Tango; Yoshiyuki Nakazono
  5. Inflation and energy price shocks: lessons from the 1970s By Francesco Corsello; Matteo Gomellini; Dario Pellegrino
  6. Systemically important banks - emerging risk and policy responses: An agent-based investigation By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  7. Mr Putin and the Chronicle of a Normalisation Foretold By Chadha, J. S.
  8. House Price Expectations and Inflation Expectations: Evidence from Survey Data By Vedanta Dhamija; Ricardo Nunes; Roshni Tara
  9. External Shocks, Policies, and Tail-Shifts in Real Exchange Rates By Mr. Nicolas E Magud; Samuel Pienknagura
  10. Some Lessons from Asian E-Money Schemes for the Adoption of Central Bank Digital Currency By Tao Sun; Ryan Rizaldy
  11. Effect of monetary policy shocks on the racial unemployment rates in the US By Hamza Bennani
  12. Is High Debt Constraining Monetary Policy? Evidence from Inflation Expectations By Mr. Luis Brandao Marques; Marco Casiraghi; Mr. R. G Gelos; Olamide Harrison; Gunes Kamber
  13. Approaching the terminal rate and the way forward: a model-based analysis By Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck; Alessandro Notarpietro; Andrea Papetti
  14. Quantitative easing, the repo market, and the term structure of interest rates By Jappelli, Ruggero; Pelizzon, Loriana; Subrahmanyam, Marti G.
  15. Some implications of micro price-setting evidence for inflation dynamics and monetary transmission By Dedola, Luca; Gautier, Erwan; Nakov, Anton; Santoro, Sergio; Henkel, Lukas; Fagandini, Bruno; De Veirman, Emanuel
  16. Measuring Fraud in Banking and its Impact on the Economy: A Quasi-Natural Experiment By Mikhail Mamonov
  17. Micro price heterogeneity and optimal inflation By Santoro, Sergio; Weber, Henning
  18. Is Money Essential? An Experimental Approach By Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
  19. Persistent Slumps: Innovation and the Credit Channel of Monetary Policy By Beqiraj, Elton; Cao, Qingqing; Minetti, Raoul; Tarquini, Giulio
  20. The market for inflation risk By Bahaj, Saleem; Czech, Robert; Ding, Sitong; Reis, Ricardo
  21. Robust Impulse Responses using External Instruments: the Role of Information By Davide Brignone; Alessandro Franconi; Marco Mazzali
  22. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Jan Pablo Burgard; Matthias Neuenkirch
  23. Central Bank Digital Currency Adoption: A Two-Sided Model By Brandon Tan

  1. By: Haroon Mumtaz (Queen Mary University of London); Jumana Saleheen (Vanguard Asset Management); Roxane Spitznagel
    Abstract: This paper studies the impact of different types and styles of Bank of England Monetary Policy Committee (MPC) communication on asset prices (stock prices, gilt yields and interest rate futures) from 1999-2023. We extend MPC communication to include MPC speeches and find MPC speeches to be an important driver of asset prices. We also show that complex and ambiguous communication leads to greater asset price volatility than simple and clear communication. Central banks that want to avoid generating volatility in financial markets should keep it simple. Our results suggest that by ignoring the type and style of monetary policy communication, the previous literature has disregarded an important source of variation in asset prices.
    Keywords: Monetary policy, central bank communication, high-frequency data
    JEL: E52 E58 G12
    Date: 2023–07–18
  2. By: Anton Grui (National Bank of Ukraine); Nicolas Aragon; Oleksandr Faryna (National Bank of Ukraine; National University of Kyiv-Mohyla Academy); Dmytro Krukovets (National Bank of Ukraine); Kateryna Savolchuk (National Bank of Ukraine); Oleksii Sulimenko; Artem Vdovychenko (National Bank of Ukraine); Oleksandr Zholud (National Bank of Ukraine)
    Abstract: This report evaluates the monetary policy transmission mechanism in Ukraine during the early years of inflation targeting. It assesses both the overall strength of the policy interest rate transmission, and its channels. Furthermore, it addresses the stabilizing role of forward guidance, foreign exchange interventions, and monetary policy credibility. The National Bank of Ukraine abandoned its fixed exchange rate regime in 2014 in response to an economic crisis ignited by the initial invasion by russia. Under inflation targeting, the short-term interest rate became the main monetary policy instrument, while the exchange rate remained floating. The full-scale russian invasion in 2022 forced the National Bank of Ukraine to temporarily shelve its policy interest rate, fix the exchange rate and impose administrative restrictions. However, it remains committed to returning to conventional inflation targeting when economic conditions normalize. This report could become a point of reference for future policy decisions by the Ukrainian central bank.
    Keywords: monetary policy transmission mechanism, inflation targeting, interest rate channel, exchange rate channel, expectations channel
    JEL: E37 E43 E52
    Date: 2023–07
  3. By: Cantore, Cristiano (Sapienza University of Rome); Meichtry, Pascal (University of Lausanne)
    Abstract: This paper studies the macroeconomic effect of the state dependency of central bank asset market operations and their interactions with household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We quantify the aggregate impact of an occasionally binding zero lower bound in determining an asymmetry between the effects of asset purchases and sales. When close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing minimises the economic costs of monetary policy normalisation. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not amplify the aggregate effects of asset market operations.
    Keywords: Unconventional monetary policy; quantitative tightening; quantitative easing; heterogeneous agents; zero lower bound.
    JEL: E21 E32 E52 E58
    Date: 2023–07–21
  4. By: Yusuke Tanahara; Kento Tango; Yoshiyuki Nakazono
    Abstract: This study assesses two central bank announcements about monetary policy and the central bank’s assessment of the economic outlook. We examine whether these two components influence macroeconomic and financial variables under the effective lower bound (ELB) of short-term nominal interest rates in Japan. We identify two shocks: a surprise policy tightening that raises interest rates and reduces stock prices and the complementary positive central bank information shock that raises both. We find that the two shocks have different effects on the Japanese economy. In fact, a contractionary monetary policy shock decreases inflation rates, whereas a positive central bank information shock increases inflation rates. The evidence suggests that announcements conveying the central bank’s assessment of the economic outlook play a certain role in the transmission mechanism of monetary policy under the ELB. However, our study shows that the two series of shocks do not induce changes in output. This suggests that they have a limited impact on the economy.
    Date: 2023–07
  5. By: Francesco Corsello (Bank of Italy); Matteo Gomellini (Bank of Italy); Dario Pellegrino (Bank of Italy)
    Abstract: The Yom Kippur war in 1973 and the Iranian revolution in 1979 triggered large oil-price increases that fuelled high and persistent inflation in advanced countries. There is a broad consensus that a weak monetary policy response, in the form of late tightening or early loosening, was one of the main causes for the failure to keep inflation under control after the 1973 shock. This failure is crucially tied to the end of the Bretton Woods era in 1971, when the fixed exchange rate regime and the currency peg to gold were abandoned, and monetary policy lost a consolidated frame of reference. A new framework – based on the commitment by independent and credible central banks to achieve clear quantitative inflation targets – would only be established in the subsequent two decades. Monetary policy conduct alone, however, does not fully explain the persistence and heterogeneity of inflation across advanced economies. Other institutional factors played a role ‒ most importantly, the lack of central bank independence, the structural features of the labour market, and fiscal policy rules which turned out to be at odds with price stability. A structural VAR-based analysis confirms and quantifies the role these factors played in shaping inflation. Nowadays, the institutional context has evolved considerably, mitigating the risk of inflation staying high for as long as they did in the 1970s. Ensuring that the current institutional context continues to support price stability remains key in limiting inflation persistence.
    Keywords: economic history, inflation, oil shocks, monetary policy, central bank independence, wage indexation, fiscal policy.
    JEL: N10 E31 E42 E58
    Date: 2023–07
  6. By: Lilit Popoyan; Mauro Napoletano; Andrea Roventini
    Abstract: We develop a macroeconomic agent-based model to study the role of systemically important banks (SIBs) in financial stability and the effectiveness of capital surcharges on SIBs as a risk management tool. The model is populated by heterogeneous firms, consumers, and banks interacting locally in different markets. In particular, banks provide credit to firms according to Basel III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to different types of Taylor rules. Our model endogenously generates banks with different balance sheet sizes, making some systemically important. The additional capital surcharges for SIBs prove to have a marginal effect on preventing the crisis since it points mainly to the ''too-big-to-fail'' problem with minimal importance for ''too-interconnected-to-fail'', ''too-many-to-fail'' and other issues. Moreover, we found that additional capital surcharges on SIBs do not account for the type and management strategy of the bank, leading to the ''one-size-fits-all'' problem. Finally, we found that additional loss-absorbing capacity needs to be increased to ensure total coverage of losses for failed SIBs.
    Keywords: Financial instability; monetary policy; macro-prudential policy; systemically important banks, additional loss-absorbing capacity, Basel III regulation; agent-based models.
    Date: 2023–07–28
  7. By: Chadha, J. S.
    Abstract: Major central banks have been caught in a low interest rate trap for over a decade. The temporary response to the financial crisis of 2008-9 has become something of a regime. The Federal Reserve, for example, attempted to ease quantitative easing in 2013 but this stalled following the “taper tantrum†and commenced a normalisation in the Federal Funds rate from 2015 but during Covid major central banks around the world rapidly returned policy rates to around zero. Low policy rates have been the response to tighter credit conditions, excessive global savings, low levels of investment and fiscal consolidation. But they have also played a role in propelling asset price growth and increasing levels of indebtedness. The accommodative stance in monetary policy, as well as the impetus from previous monetary and fiscal interventions seem like to have stoked inflation to a higher level that might otherwise have been the case following the shock of a war on the European continent. But may also have finally secured a normalisation in policy rates.
    Keywords: Monetary policy, Ukraine War, Normalisation, Liquidity Trap
    JEL: E43 E58 E61
    Date: 2023–07–31
  8. By: Vedanta Dhamija (University of Surrey); Ricardo Nunes (University of Surrey; Centre for International Macroeconomic Studies (CIMS); Centre for Macroeconomics (CFM)); Roshni Tara (University of Surrey)
    Abstract: We find that households tend to overweight house price expectations when forming their inflation expectations. The finding is robust across several specifications and two survey data sets for the United States. We also find that there is a significant effect of the cognitive abilities of households as more sophisticated households don’t overweight house price inflation as much. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and analytically derive a welfare loss function consistent with the micro-foundations of the model. In this setup, we show that to gauge the correct interest rate response, the central bank needs to be aware that some sectors are overweighted and that movements in expected inflation in such sectors are important for monetary policy.
    Keywords: Salience, Inflation Expectations, House Price Expectations, Monetary Policy
    JEL: D10 E12 E31 E52 E58
    Date: 2023–07
  9. By: Mr. Nicolas E Magud; Samuel Pienknagura
    Abstract: We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks.
    Keywords: Real exchange rates; external shocks; foreign exchange intervention; capital controls
    Date: 2023–06–23
  10. By: Tao Sun; Ryan Rizaldy
    Abstract: This paper synthesizes four lessons from the experiences of six Asian e-money schemes for central banks as they consider adopting central bank digital currency (CBDC): (i) CBDC should embody four attributes: trust, convenience, efficiency, and security; (ii) CBDC service providers can facilitate CBDC adoption through four channels: leveraging digital technology, targeting use cases, developing business models, and complying with legal and regulatory requirements; (iii) central banks could incentivize CBDC service providers to develop these four channels when considering CBDC adoption; and (iv) central banks may be able to establish data-sharing arrangements that preserve privacy while leaving room for CBDC service providers to explore the economic value of data.
    Keywords: E-money; central bank digital currency; service providers; e-money adoption; e-money scheme; e-money ecosystem; e-money development; e-money PSP; e-money transaction; Digital currencies; Central Bank digital currencies; Digital financial services; Social networks; Asia and Pacific; Southeast Asia
    Date: 2023–06–09
  11. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université)
    Abstract: This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed's monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.
    Keywords: monetary policy, unemployment, racial disparities.
    Date: 2023
  12. By: Mr. Luis Brandao Marques; Marco Casiraghi; Mr. R. G Gelos; Olamide Harrison; Gunes Kamber
    Abstract: This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks.
    Keywords: Inflation expectations; monetary policy; fiscal dominance; debt
    Date: 2023–06–30
  13. By: Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Andrea Papetti (Bank of Italy)
    Abstract: Using as a baseline a macroeconomic scenario consistent with the key interest rate path implied by market-based expectations, we evaluate the economic implications and risks of two alternative, illustrative tightening paths for the ECB policy rates that, as in the baseline, bring inflation toward 2 per cent by the end of 2025. We consider a prudent path (labelled 'persistent'), where policy rates are kept at current levels for a prolonged period and subsequently reduced more slowly, and a more pro-active approach ('peak') in which policy rates reach a higher terminal level, but decrease faster. Model-based simulations show that, relative to the baseline scenario, the persistent path would leave inflation and output unchanged in 2023-24, while the peak path would lower inflation at the cost of output losses. The persistent path would be preferable over the period 2023-25 according to a quadratic loss function penalizing inflation and output volatility. The risks of an excessive worsening of financing conditions and the amplification effects attached to the peak scenario are assessed to be greater than those of an upward de-anchoring of inflation expectations and of second-round effects associated with the persistent path.
    Keywords: Central banking. monetary policy
    JEL: E52 E58 E61
    Date: 2023–07
  14. By: Jappelli, Ruggero; Pelizzon, Loriana; Subrahmanyam, Marti G.
    Abstract: We develop a quantity-driven general equilibrium model that integrates the term structure of interest rates with the repurchase agreements (repo) market to shed light on the combined effects of quantitative easing (QE) on the bond and money markets. We characterize in closed form the endogenous dynamic interaction between bond prices and repo rates, and show (i) that repo specialness dampens the impact of any given quantity of asset purchases due to QE on the slope of the term structure and (ii) that bond scarcity resulting from QE increases repo specialness, thus strengthening the local supply channel of QE.
    Keywords: Term Structure of Interest Rates, Repo Specialness, Money Market, Quantitative Easing
    JEL: E43 E52 G12
    Date: 2023
  15. By: Dedola, Luca; Gautier, Erwan; Nakov, Anton; Santoro, Sergio; Henkel, Lukas; Fagandini, Bruno; De Veirman, Emanuel
    Abstract: This paper analyses the implications of the evidence on micro price setting gathered by Price-setting Microdata Analysis Network (PRISMA) for inflation dynamics and monetary policy, relying on calibrated models and direct empirical evidence. According to models calibrated to the euro area micro evidence in Gautier et al. (2022, 2023), infrequent price changes and moderate state dependence in price setting should result in a meaningful Phillips curve in the euro area. Empirical estimates of the Phillips curve during the low-inflation period confirm previous findings of a relatively flat but stable slope. This estimated flat slope reflects both infrequent and subdued price adjustment in response to aggregate shocks, i.e. the presence of nominal and real rigidities. Model-based simulations show that, due to non-linearities in price setting, changes in trend inflation above 5-6% would have significant effects on the euro area Phillips curve. Similarly, shocks to nominal costs larger than 15% would result in non-linear effects on inflation dynamics in calibrated models. In line with these simulations, recent micro evidence suggests that the return of higher and more volatile inflation seems to be associated with higher frequencies of price changes, mainly because the frequency of price increases rises with the level and volatility of inflation. JEL Classification: E3, E5
    Keywords: heterogeneity, price Phillips curve, real and nominal rigidities, state-dependent price setting and non-linearities
    Date: 2023–07
  16. By: Mikhail Mamonov
    Abstract: This paper suggests a novel approach to measuring fraud in banking and to evaluating its crosssectional and aggregate implications. I explore unique evidence of declining regulatory forbearance from the Russian banking system in the 2010s, when the central bank forcibly closed roughly twothirds of all operating banks for fraudulent activities. I first introduce an empirical model of the regulatory decision rule that determines whether a regulator is likely to run an unscheduled onsite inspection of a suspicious bank in the near future. I estimate the model using unique data on asset losses hidden by commercial banks and discovered by the Central Bank of Russia during unscheduled on-site inspections in the last two decades. I find that the average size of hidden asset losses detected by the rule equals 38% of the total assets of not-yet-closed fraudulent banks, and that the likelihood of fraud detection soared by a factor of 5 after 2013. With quarter-by-quarter predictions from the estimated rule, I form a “treatment” group of likely-to-be-inspected banks and then run a “fuzzy” difference-in-differences (FDID) regression to estimate the effects of the tightened regulation. FDID estimates show that likely-to-be-inspected banks substantially reduced credit to households and firms after the policy started in 2013, compared to similar untreated banks. Interpreting the FDID estimates of credit contraction as a credit supply shock and evaluating the macroeconomic implications of this shock using a VAR model of the Russian economy, I find that Russia’s GDP could have been larger by 7.3% cumulatively by the end of 2016 in the absence of the policy. This is the price the economy pays for reducing fraud in the banking system.
    Keywords: Bank misreporting, Regulatory forbearance, Bank closure, Credit Supply Shocks, Heckman selection model, Fuzzy difference-in-differences, VAR
    JEL: D22 G21 G28 G33 H11
    Date: 2023–06
  17. By: Santoro, Sergio; Weber, Henning
    Abstract: This paper discusses the normative implications of the micro evidence on heterogeneity in price setting gathered by the Price-setting Microdata Analysis Network (PRISMA) for the level of inflation that central banks should target. The micro price data underlying the consumer price index are used to estimate relative price trends over the product life cycle. Minimising the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate in France, Germany and Italy: the steady-state inflation rate, jointly maximising welfare in all three countries, ranges from 1.1% to 1.7%. Other considerations not taken into account in the present paper may push up optimal inflation targets further. The welfare costs of targeting an inflation rate of zero, as suggested by monetary models ignoring relative price trends, or of targeting 4%, turn out to be substantial. JEL Classification: E31, E52
    Keywords: optimal inflation target, relative price trends, welfare
    Date: 2023–07
  18. By: Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
    Abstract: Monetary exchange is deemed essential when better incentive-compatible outcomes can be achieved with money than without it. We study essentiality both theoretically and experimentally, using finite-horizon monetary models that are naturally suited to the lab. We also follow the mechanism design approach and study the effects of strategy recommendations, both when they are incentive-compatible and when they are not. Results show that output and welfare are significantly enhanced by fiat currency when monetary equilibrium exists. Also, recommendations help if they are incentive-compatible but not much otherwise. Sometimes money is used when it should not be and we investigate why, using surveys and measures of social preferences.
    Keywords: Central bank research; Economic models
    JEL: E4 E5 C92
    Date: 2023–07
  19. By: Beqiraj, Elton (University of Rome I); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Tarquini, Giulio (University of Rome I)
    Abstract: What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis.
    Keywords: Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy
    JEL: E22 E24 E32 E44 E52 G01
    Date: 2023–07–25
  20. By: Bahaj, Saleem (University College London and Bank of England); Czech, Robert (Bank of England); Ding, Sitong (London School of Economics); Reis, Ricardo (London School of Economics)
    Abstract: This paper uses transaction-level data on the universe of traded UK inflation swaps to characterise who buys and sells inflation risk, when, and with what price elasticity. This provides measures of expected inflation cleaned from liquidity frictions. We first show that this market is segmented: pension funds trade at long horizons while hedge funds trade at short horizons, with dealer banks as their counterparties in both markets. This segmentation suggests three identification strategies – sign restrictions, granular instrumental variables, and heteroskedasticity – for the demand and supply functions of each investor type. Across the three strategies, we find that (i) prices absorb new information within three days; (ii) the supply of long-horizon inflation protection is very elastic; and (iii) short-horizon price movements are unreliable measures of expected inflation as they primarily reflect liquidity shocks. Our counterfactual measure of long-horizon expected inflation in the absence of these shocks suggests that the risk of a deflation trap during the pandemic and of a persistent rise in inflation following the energy shocks were overstated, while since Autumn of 2022, expected inflation has been lower and falling more rapidly than conventional measures.
    Keywords: Asset demand system; monetary policy; anchored expectations; identification of demand and supply shocks.
    JEL: C30 E31 E44 G12
    Date: 2023–06–23
  21. By: Davide Brignone; Alessandro Franconi; Marco Mazzali
    Abstract: External-instrument identification leads to biased responses when the shock is not invertible and the measurement error is present. We propose to use this identification strategy in a structural Dynamic Factor Model, which we call Proxy DFM. In a simulation analysis, we show that the Proxy DFM always successfully retrieves the true impulse responses, while the Proxy SVAR systematically fails to do so when the model is either misspecified, does not include all relevant information, or the measurement error is present. In an application to US monetary policy, the Proxy DFM shows that a tightening shock is unequivocally contractionary, with deteriorations in domestic demand, labor, credit, housing, exchange, and financial markets. This holds true for all raw instruments available in the literature. The variance decomposition analysis highlights the importance of monetary policy shocks in explaining economic fluctuations, albeit at different horizons.
    Date: 2023–07
  22. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université); Jan Pablo Burgard (Trier University); Matthias Neuenkirch (Trier University)
    Abstract: We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.
    Keywords: Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission
    Date: 2023
  23. By: Brandon Tan
    Abstract: For central bank digital currencies (CBDCs) to accomplish their intended objectives, it is necessary for both consumers to use them and for merchants to accept them. This paper develops a dynamic two-sided payments model with both heterogeneous households and merchants/firms to study: (1) The adoption of CBDC by households and firms, and (2) The impact of CBDC issuance on financial inclusion, informality, and disintermediation. Our model shows that there is a feedback loop where more households will adopt CBDC if more firms accept CBDC and vice versa -- incentivizing both households and firms will result in greater levels of take-up. Households are more likely to adopt CBDC if it is low cost, provides an attractive savings vehicle, reduces the cost of remittances, improves the efficiency of government payments, and (if accepted by merchants) offers a valuable means of payment. Firms are more likely to accept CBDC if fees are low, if there are tax exemptions or subsidies for transactions made in CBDC, and if households who prefer to make payments with CBDC make up a large share of revenue. Upon CBDC issuance, an economy can get stuck at a steady state with low CBDC adoption and small welfare gains if the features of CBDC which do not rely on merchant acceptance (remuneration, efficiency of cross border and government payments) are not sufficiently attractive, or if the households benefiting from these features make up a small share of merchant revenue. Temporary subsidies and using CBDC for government payments can spur initial take-up to transition an economy to a welfare improving steady state with high(er) CBDC usage. Greater adoption of CBDC will result in greater financial inclusion and formalization, but potentially the disintermediation of banks and card payments. Thus, there is a trade-off in designing CBDC for greater adoption. However, the gains are more likely to outweigh the risks in lower income economies with larger unbanked populations and informal sectors.
    Keywords: Central bank digital currency; financial inclusion; informality; digital money; disintermediation; two-sided market; adoption; payments
    Date: 2023–06–16

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