nep-cba New Economics Papers
on Central Banking
Issue of 2023‒09‒11
seventeen papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Digitalization: Implications for Monetary Policy By Vivian Chu; Tatjana Dahlhaus; Christopher Hajzler; Pierre-Yves Yanni
  2. Quantitative Easing and Safe Asset Scarcity: Evidence from International Bond Safety Premia By Jens H. E. Christensen; Nikola Mirkov; Xin Zhang
  3. Deposit market concentration and monetary transmission: evidence from the euro area By Stephen Kho
  4. Inflation stabilization and normal utilization By Michl, Thomas R.
  5. On the Unimportance of Commitment for Monetary Policy By Juan Paez-Farrell
  6. Integrated Monetary and Financial Policies for Small Open Economies By Mr. Suman S Basu; Ms. Emine Boz; Ms. Gita Gopinath; Mr. Francisco Roch; Ms. Filiz D Unsal
  7. The Investment Channel of Monetary Policy : Evidence from Norway By Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
  8. Optimal policy under dollar pricing By Egorov, Konstantin; Mukhin, Dmitry
  9. Passive Quantitative Easing: Bond Supply Effects through a Halt to Debt Issuance By Jens H. E. Christensen; Simon Thinggaard Hetland
  10. Theoretical analysis of the evolution of monetary policy strategies adopted by Bank Al-Maghrib By Mohamed Er-Rahmany; Fouad Ben Elhaj
  11. Modern Monetary Theory: Revising Money Demand and Supply from Umer Chapra's Perspective By Umam Khoirul; Muhammad Atha Mahdi; Alfarid Fedro
  12. Accessing U.S. Dollar Swap Lines: Macroeconomic Implications for a Small Open Economy By Dominguez, Begona; Gomis-Porqueras, Pedro
  13. The impact of financial shocks on the forecast distribution of output and inflation By Mario Forni; Luca Gambetti; Nicolò Maffei-Faccioli; Luca Sala
  14. A HANK² Model of Monetary Unions By Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
  15. A Behavioral New Keynesian Model of a Small Open Economy Under Limited Foresight By Seunghoon Na; Yinxi Xie
  16. Expected Macroeconomic Effects of Issuing a Retail CBDC By Constanza Martínez-Ventura; Julián A. Parra-Polania; Tatiana Mora-Arbeláez; Angélica Lizarazo-Cuéllar

  1. By: Vivian Chu; Tatjana Dahlhaus; Christopher Hajzler; Pierre-Yves Yanni
    Abstract: We explore the implications of digitalization for monetary policy, both in terms of how monetary policy affects the economy and in terms of data analysis and communication with the public.
    Keywords: Digitalization; Inflation and prices; Market structure and pricing; Monetary policy; Monetary policy transmission; Monetary policy communications
    JEL: E E32 E52 C4 C8
    Date: 2023–08
  2. By: Jens H. E. Christensen; Nikola Mirkov; Xin Zhang
    Abstract: Through large-scale asset purchases, widely known as quantitative easing (QE), central banks around the world have reduced the available supply of safe assets. We examine the effects of the European Central Bank’s asset purchases in the 2015-2021 period on an international panel of bond safety premia from four highly rated countries: Denmark, Germany, Sweden, and Switzerland. We find statistically significant negative effects for all four countries. This points to a novel and important international spillover channel of QE programs to bond safety premia that operates via changes in the perceived relative scarcity of safe assets across international bond markets.
    Keywords: term structures; convenience yields; Conventional and unconventional US monetary policy; European Central Bank (ECB)
    JEL: E43 E47 G12 G13
    Date: 2023–08–15
  3. By: Stephen Kho
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on the role of banking sector concentration. Using a local projections framework with 2003-2022 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to unexpected changes in monetary policy. However, more concentrated domestic banking sectors do pass on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy, which in turn may affect banking sector profitability as well as the macro-economic response to monetary policy.
    Keywords: Monetary transmission; deposit rates; market concentration
    JEL: E43 E52 D40
    Date: 2023–08
  4. By: Michl, Thomas R. (Department of Economics, Colgate University)
    Abstract: This paper presents a model of inflation and distribution that examines the relationship between the employment of labor and the utilization of capital. It features a structural difference between the wage Phillips curve and the price Phillips curve that gives rise to persistent changes in the real wage whenever the inflation-neutral level of activity fails to utilize the existing capital stock at its normal level. Assuming an inflation-targeting central bank that is obliged to run the system around its inflation-neutral level, these changes will reduce the gap between the inflation-neutral level and normal utilization by moving the system along a stable wage curve. In the end this implies that the inflation-neutral level of employment and full or normal utilization of capital will tendentially coincide, lending some support to the Duménil-Lévy thesis that monetary policy makes normal utilization a long-run center of gravity.
    JEL: E11 E12 E24 E31 E52
    Date: 2023–08–23
  5. By: Juan Paez-Farrell (Department of Economics, University of Sheffield, Sheffield S1 4DT, UK)
    Abstract: In a New Keynesian model where the trade-off between stabilising the aggregate inflation rate and the output gap arises from sectoral asymmetries, the gains from commitment are either zero or negligible. Thus, to the extent that economic fluctu- ations are caused by sectoral shocks, policies designed to overcome the stabilisation bias are aiming to correct an unimportant problem.
    Keywords: optimal monetary policy, stabilization bias, discretion, commitment, inflation target
    JEL: E52 E58
    Date: 2023–08
  6. By: Mr. Suman S Basu; Ms. Emine Boz; Ms. Gita Gopinath; Mr. Francisco Roch; Ms. Filiz D Unsal
    Abstract: We develop a tractable small-open-economy framework to characterize the constrained efficient use of the policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. The model features dominant currency pricing, shallow FX markets, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions for the “traditional prescription”—relying on the policy rate and exchange rate flexibility—to be sufficient, even if externalities persist. The conditions are satisfied for world interest rate shocks if FX markets are deep. By contrast, we show that to manage non-fundamental inflow surges and taper tantrums related to local currency debt, capital inflow taxes and FX intervention should be used instead of the policy rate and exchange rate flexibility. In the realistic case where countries face both shallow FX markets and external borrowing constraints, we establish that some kinds of FX mismatch regulations may reduce the external debt limit friction but worsen FX market depth. Finally, we show that capital controls and domestic macroprudential measures cease to be perfect substitutes if there is a risk that the domestic borrowing constraint binds as a result of the transmission of the global financial cycle.
    Keywords: integrated policy framework; monetary policy; capital controls; foreign exchange intervention; macroprudential policies
    Date: 2023–08–04
  7. By: Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
    Abstract: We investigate the transmission of monetary policy to investment using Norwegian administrative data. We have two main findings. First, financially constrained firms are more responsive to monetary policy, but the effect is modest; suggesting that firm heterogeneity plays a minor role in monetary transmission. Second, we disentangle the investment channel of monetary policy into direct effects from interest rate changes and indirect general equilibrium effects. We find that the investment channel of monetary policy is due almost exclusively to direct effects. The two results imply that a representative firm framework with investment adjustment frictions in most cases provides a sufficiently detailed description of the investment channel of monetary policy.
    Keywords: Monetary policy, Investment.
    JEL: E22 E52 D22 G31
    Date: 2023–05
  8. By: Egorov, Konstantin; Mukhin, Dmitry
    Abstract: Empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model with general preferences, technologies, asset markets, nominal rigidities, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-US economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. International cooperation benefits other economies, but is not in the self-interest of the United States.
    JEL: E31 E52 F14 F31 F41
    Date: 2023–07–01
  9. By: Jens H. E. Christensen; Simon Thinggaard Hetland
    Abstract: This article presents empirical evidence of a supply-induced transmission channel to longterm interest rates caused by a halt to government debt issuance. This is conceptually equivalent to a central bank operated asset purchase program, commonly known as quantitative easing (QE). However, as it involves neither asset purchases nor associated creation of central bank reserves, we refer to it as passive QE. For evidence, we analyze the response of Danish government bond risk premia to a temporary halt in government debt issuance announced by the Danish National Bank. The data suggest that declines in longterm yields during its enforcement reflected both reduced term premia, consistent with supply-induced portfolio balance effects, and increased safety premia, consistent with safe assets scarcity effects.
    Keywords: affine arbitrage-free term structure model; negative interest rates
    JEL: E43 E47 G12 G13
    Date: 2023–08–15
  10. By: Mohamed Er-Rahmany (LIREFIMO - Laboratoire Interdisciplinaire de Recherche en Economie, Finance et Management des Organisations - FSJES-Fès - Faculté des sciences Juridiques, Economiques et Sociales de Fès); Fouad Ben Elhaj
    Keywords: Faculté des sciences juridiques économiques et sociales BP 42 A Fès Maroc Monetary policy Central bank Exchange rate regimes . JEL Classification : E52 E58 E42. Paper type : Theoretical article, Faculté des sciences juridiques économiques et sociales BP 42 A Fès, Maroc Monetary policy, Central bank, Exchange rate regimes . JEL Classification : E52, E58, E42. Paper type : Theoretical article
    Date: 2023–05–30
  11. By: Umam Khoirul (UNIDA Gontor - University of Darussalam Gontor); Muhammad Atha Mahdi (UNIDA Gontor - University of Darussalam Gontor); Alfarid Fedro (UNIDA Gontor - Univerisity of Darussalam Gontor)
    Abstract: The global crisis and the COVID-19 pandemic have intensified the debate surrounding Modern Monetary Theory (MMT), particularly as nations resort to budget deficits. MMT economists argue that the central government, not constrained by fiscal limits, can maintain effective demand to achieve public goals like full employment and economic growth. However, economists remain skeptical about the permissiveness of MMT in generating new money. Extensive research is needed to explore the foundation of money supply and demand, examining if it truly achieves economic goals or leads to failure. Umer Chapra offers a profound monetary perspective, considering the demand and supply of money in the Islamic monetary system that aims for justice. This study aims to examine MMT's money demand and supply from Chapra's viewpoint, incorporating its economic goals. Employing a qualitative approach based on library research, this study finds that the endogenous MMT money demand model requires revision within Chapra's framework. To avoid misallocation and achieve economic objectives, the study suggests adopting Chapra's recommendations, such as eliminating bank interest in credit allocation and controlling unproductive and speculative money demand. This ensures that the MMT idea of endogenous money functions properly. However, further research is needed to address the techniques for avoiding money demand in the speculative sector, an area where Chapra's work lacks detail. Collaboration among Muslim economists can fill this gap and enrich the discussion. By bridging this gap, this study contributes to the ongoing discussion on monetary policy and provides valuable insights for policymakers and economists.
    Keywords: Modern Monetary Theory (MMT), Money Demand, Money Supply, Endogenous Money, Islamic Monetary System
    Date: 2023–12–12
  12. By: Dominguez, Begona; Gomis-Porqueras, Pedro
    Abstract: This paper proposes a framework to examine the macroeconomic impact of having U.S. dollar swap arrangements, where domestic and foreign currencies are valued and where agents also have access to domestic short and long-term bonds that have differential pledgeability. Within this environment, we investigate how U.S. dollar swap lines affect inflation and debt dynamics in the small open economy when domestic quantitative easing and standard interest rate management policies are also enacted. We show different combinations of U.S. dollar swap lines, and domestic quantitative easing as well as interest rate management policies can deliver the same steady state. We also find that such policies imply different short-run dynamics. Moreover, we find that traditional stabilization policies are not operative when agents do not consume the first best. When calibrated to Australia during the pandemic and under some conditions, we find that a more favorable swap line (agents in the small open economy can obtain U.S. dollar cheaper than in the forex market) would have allowed to cut back on long-term bond purchases from 35% to 24% of GDP. We also show that swaps and quantitative easing dampen the fiscal eigenvalue, changing the speed of adjustment towards the long run equilibria. Moreover, we find that the region of indeterminacy is enlarged when more liquid quantitative easing policies and more favorable swaps are pursued. Finally, we show that swap lines have a differential impact on domestic and foreign consumption.
    Keywords: swaps, quantitative easing, repos, interest rate management
    JEL: E4 E40 E44 F4 F42
    Date: 2023–08
  13. By: Mario Forni; Luca Gambetti; Nicolò Maffei-Faccioli; Luca Sala
    Abstract: Financial shocks represent a major driver of fluctuations in tail risk, defined as the 5th percentile of the forecast distributions of output and inflation. Since the variance and the asymmetry of the forecast distributions are largely driven by the left tail, financial shocks turn out to play a prominent role for distribution dynamics. Monetary policy shocks also play a role in shaping risk, although its effects are smaller than those of financial shocks. These findings are obtained using a novel econometric approach which combines quantile regressions and Structural VARs.
    Keywords: Tail Risk, Uncertainty, Skewness, Forecast Distribution, SVAR, Financial shocks, Monetary Policy Shocks, Quantile Regressions
    JEL: C32 E32
    Date: 2023–03
  14. By: Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
    Abstract: How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK2) and show in closed form that a monetary union shifts the adjustment to a shock horizontally—across countries—within the brackets of the union-wide wealth distribution rather than vertically—that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.
    Keywords: HANK2, OCA theory, Two-country model, monetary union, spillovers, monetary policy, heterogeneity, inequality, households
    JEL: F45 E52 D31
    Date: 2023–08
  15. By: Seunghoon Na; Yinxi Xie
    Abstract: This paper investigates exchange rate dynamics in open economies by incorporating bounded rationality. We develop a small open-economy New Keynesian model with an incomplete asset market, wherein decision-makers possess limited foresight and can plan for only a finite distance into the future. The equilibrium dynamics depend on the degree of foresight and the decision-makers’ belief-updating behaviors that approximate continuation values at the end of their planning horizons. This limited foresight leads to persistent, non-monotonic forecast errors in the real exchange rate across time horizons and distinguishes between short- and long-term expectations. This framework hence provides a micro-foundation for understanding time-horizon variability in uncovered interest parity puzzles.
    Keywords: Exchange rates; Monetary policy transmission; International topics; Business fluctuations and cycles
    JEL: E43 E70 F31 F41
    Date: 2023–08
  16. By: Constanza Martínez-Ventura; Julián A. Parra-Polania; Tatiana Mora-Arbeláez; Angélica Lizarazo-Cuéllar
    Abstract: This document reviews the potential macroeconomic effects of issuing a central bank digital currency (CBDC) for the use of individuals and businesses. A careful selection of the architecture, and the economic and technological design aspects of this digital form of central bank money that best suit the needs of Colombian economy is made to frame the analytical approach used to study these issues. The most salient results of the related literature are reviewed to establish the consequences of undertaking this initiative. For the set of selected assumptions, we find that the expected macroeconomic consequences are negligible. ******RESUMEN: Este documento revisa los potenciales efectos macroeconómicos de emitir una moneda digital de banco central (CBDC) para uso de las personas y negocios. Se realiza una selección cuidadosa de la arquitectura, y de los aspectos de diseño económico y tecnológico de esta forma de dinero digital que mejor se ajustarían a las necesidades de la economía colombiana, para enmarcar la aproximación analítica que se usa para estudiar estos temas. Se revisan los resultados más destacados de la literatura relacionada para establecer las consecuencias esperadas de adelantar esta iniciativa. Para el conjunto de supuestos seleccionados, encontramos que los efectos macroeconómicos esperados son muy pequeños.
    Keywords: CBDC, macroeconomic effects, digital money, financial intermediation, efectos macroeconómicos, dinero digital, intermediación financiera
    JEL: E42 E51 E44 E52 E41 G21
    Date: 2023–08
  17. By: triyawan, andi; latifah, hafizah
    Abstract: Sharia monetary instruments incorporate monetary control based on sharia principles to assist Bank Indonesia in developing and implementing monetary policy. That’s way, it is expected that sharia monetary policy will create economic stability in Indonesia, one of which is rupiah value stability or inflation control. The goal of this research was to look at the impact of sharia monetary instruments, specifically Sharia Bank Indonesia Certificates (SBIC), Bank Indonesia Sharia Deposit Facilities (BISDF), and Sharia Interbank Call Money (SICM), on Indonesian inflation from 2011 to 2020. This is a quantitative study that explains the relation between the independent and dependent variables. The inflation percentage is the dependent variable, whereas the number of SBIC, BISDF, and SICM is the independent variable. This study used time series data from 2011-2020. The Vector Autoregressive (VAR) or Vector Error Correction Model (VECM) method is used in the analysis. The VECM estimation results reveal that SBIC has no effect on inflation in the long or short term. In the meantime, the BISDF has a large favorable influence on inflation, but only in the short term. Finally, in the long term, SICM has a negative influence on inflation, although in the short term, SICM has no effect on inflation. Furthermore, according to the Granger causality test, only the SBIC and BISDF variables demonstrate bidirectional causality. Meanwhile, unidirectional causality exists between the BISDF and inflation, SBIC and SICM, so do BISDF and SICM.
    Date: 2023–07–24

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