nep-cba New Economics Papers
on Central Banking
Issue of 2023‒11‒06
twenty-two papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. Monetary policy spillovers and the role of prudential policies in the European Union By Coman, Andra
  2. BEAST: A model for the assessment of system-wide risks and macroprudential policies By Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
  3. Artificial Intelligence and Central Bank Communication: The Case of the ECB By Nicolas Fanta; Roman Horvath
  4. Is There a Portfolio Rebalancing Channel of QE in Latvia? By Andrejs Zlobins
  5. Deposit Convexity, Monetary Policy and Financial Stability By Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
  6. The Reserve Supply Channel of Unconventional Monetary Policy By William F. Diamond; Zhengyang Jiang; Yiming Ma
  7. Inflation Targeting and Private Domestic Investment in Developing Countries By Bao-We-Wal Bambe
  8. Replication Report: Market-Based Monetary Policy Uncertainty By Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
  9. The Labor Demand and Labor Supply Channels of Monetary Policy By Sebastian Graves; Christopher K. Huckfeldt; Eric T. Swanson
  10. One question at a time! A text mining analysis of the ECB Q&A session By Angino, Siria; Robitu, Robert
  11. Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework By Junko Koeda; Bin Wei
  12. Macroepidemics and unconventional monetary policy By Verónica Acurio Vásconez; Olivier Damette; David W Shanafelt
  13. A comment on Bauer, Lakdawala, Mueller: Market-Based Monetary Policy Uncertainty (2022) By Baxa, Jaromir; Buliskeria, Nino; Elminejad, Ali; Havranek, Tomas; Havrankova, Zuzana; Kundu, Suranjana
  14. Climate change and carbon policy: A story of optimal green macroprudential and capital flow management By Le, Anh H.
  15. Can Central Banks Be Heard Over the Sound of Gunfire? By Ge Gao; Alex Nikolsko-Rzhevskyy; Oleksandr Talavera
  16. Estimating systemic risk for non-listed euro-area banks By Engle, Robert F.; Emambakhsh, Tina; Manganelli, Simone; Parisi, Laura; Pizzeghello, Riccardo
  17. Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics By Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
  18. Is There Really an Inflation Tax? Not For the Middle Class and the Ultra-Wealthy By Edward N. Wolff
  19. Firms’ Cash Holdings and Monetary Policy Transmission By Falk Bräuning; José Fillat; Gustavo Joaquim
  20. Contagion Effects of the Silicon Valley Bank Run By Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer
  21. Who gets jobs matters: monetary policy and the labour market in HANK and SAM By Herman, Uroš; Lozej, Matija
  22. Uncertainty and the Term Structure of Interest Rates By Jamie L. Cross; Aubrey Poon; Dan Zhu

  1. By: Coman, Andra
    Abstract: This paper empirically examines the extent to which prudential policies can help to reduce the macro-financial spillover effects of foreign monetary policy for all 28 EU countries. Using local projection methods, I show that EU countries with tighter prudential policies face significantly smaller, and less negative spillovers to bank credit and house prices from US, UK and EA monetary policy tightening shocks. Measures of a macroprudential policy nature such as capital buffers, lending standards restrictions and limits to credit growth appear to be particularly effective at mitigating the spillover effects of US monetary policy, while measures of a microprudential nature as minimum capital requirements, risk weights and limits on large exposures prove effective in mitigating spillovers effects of UK monetary policy. Results indicate that domestic prudential policies can dampen EU countries’ exposure to foreign monetary policy and may be a useful tool in the face of spillovers coming from centre countries and within the EU. JEL Classification: E52, E58, E61, F42, F45
    Keywords: international spillovers, local projections, monetary policy, policy interactions, prudential policy
    Date: 2023–10
  2. By: Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large-scale semi-structural model developed to analyse the euro area banking system from a macroprudential perspective. The model combines the dynamics of approximately 90 of the largest euro area banks with those of individual euro area economies. It reflects the heterogeneity of banks by replicat-ing the structure of their balance sheets and profit and loss accounts. Additionally, it allows banks to adjust their assets, funding mix, pricing decisions, management buffers, and profit distribution along with individual bank conditions, including their capital and liquidity re-quirements, and other supervisory limits. The responses of banks impact credit supply con-ditions and have feedback effects on the macroeconomic environment. Stochastic solutions of the model provide a solid foundation for investigating multiple scenarios, deriving at-risk measures, and estimating model uncertainty. The model is regularly utilised to assess the resilience of the euro area banking sector, including in the biennial ECB macroprudential stress tests, as well as to analyse the effects of regulatory, macroprudential, and monetary policy changes. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2023–10
  3. By: Nicolas Fanta (Institute of Economic Studies, Charles University, Prague); Roman Horvath (Institute of Economic Studies, Charles University, Prague)
    Abstract: We examine whether artificial intelligence (AI) can decipher European Central Bank´s communication. Employing 1769 inter-meeting verbal communication events of the European Central Bank´s Governing Council members, we construct an AI-based indicator evaluating whether communication is leaning towards easing, tightening or maintaining the monetary policy stance. We find that our AI-based indicator replicates well similar indicators based on human expert judgment but at much higher speed and at much lower costs. Using our AI-based indicator and a number of robustness checks, our regression results show that ECB communication matters for the future monetary policy even after controlling for financial market expectations and lagged monetary policy decisions.
    Keywords: Artificial intelligence, central bank communication, monetary policy
    JEL: E52 E58
    Date: 2023–09
  4. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: Portfolio rebalancing is a key mechanism through which central bank asset purchases flatten the yield curve, thus providing additional monetary policy accommodation when conventional policy rate setting is constrained by the effective lower bound. Existing literature provides ample evidence that this channel has played a major role in compressing the long-term interest rates and provided a broad-based easing of financial conditions for firms and households in the euro area. However, this evidence originates from either aggregate euro area or its largest jurisdictions, leaving the effects of the Eurosystem's asset purchases on smaller member states, such as Latvia, unclear. Therefore, we employ a bilateral structural vector autoregression, featuring both aggregate euro area and Latvian blocks, as well as a panel structural vector autoregression with cross-sectional heterogeneity to obtain evidence from both macro-level and bank-level data in order to shed some light on the transmission of QE to the Latvian economy. Our findings suggest that QE led to a compression of sovereign borrowing costs in Latvia and boosted economic activity and prices. At the same time, we also document that the further pass-through to domestic financial conditions was weak owing to limited asset rebalancing by the domestic banking sector in response to the Eurosystem's QE. Instead, we show that Latvian yields were compressed due to direct intervention of the central bank in the bond markets and portfolio readjustment of foreign investors. Our study thus provides additional evidence that the transmission of common monetary policy to the Latvian economy is impaired via the domestic banking sector.
    Keywords: quantitative easing, portfolio rebalancing, monetary policy, euro area, Latvia
    JEL: C54 E50 E52 E58
    Date: 2023–10–23
  5. By: Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
    Abstract: In principle, bank deposits can be withdrawn on demand. In practice, depositors tend to maintain stable balances for long periods, allowing banks to fund long-dated assets. Nevertheless, the cost of deposit funding influences banks’ capacity for maturity transformation. Banks and researchers conventionally model the response of deposit interest rates to market interest rates as constant, implying that deposits have nearly constant duration. Contrary to this standard assumption, we show empirically that the “beta” of deposit rates to market rates increases as market rates rise, causing the duration of deposits to fall. The amount of duration risk delivered to bank balance sheets via this channel from March 2022 to September 2023 is comparable in magnitude to the amount of duration risk absorbed by each of the several large-scale asset purchase programs the Federal Reserve has undertaken since 2008. Dynamic betas present a significant challenge to bank portfolio hedgers by introducing large and dynamic risks that are difficult to model and impractical to replicate on the asset side of the balance sheet. As a result, deposit convexity amplifies monetary policy transmission and increases financial fragility, mechanisms that recent banking stresses have highlighted.
    Keywords: banks; Depository institutions; interest rates; bank run; financial markets; central bank; monetary policy; Policy Effects
    JEL: E43 E44 E52 G12 G21
    Date: 2023–10–10
  6. By: William F. Diamond; Zhengyang Jiang; Yiming Ma
    Abstract: We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.
    JEL: G20
    Date: 2023–09
  7. By: Bao-We-Wal Bambe (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne)
    Abstract: Does inflation targeting foster private domestic investment in developing countries? A few studies have attempted to examine this issue, with mixed results. Here we argue that by anchoring public expectations firmly, the inflation targeting framework should enhance monetary policy credibility and macroeconomic stability, thereby promoting investment incentives. Using data from 62 countries over the period 1990-2019 and applying propensity score matching methods, we find that inflation targeting significantly increases domestic investment. However, inflation deviations from the target reduce the favorable effect of inflation targeting on investment. Furthermore, the positive effect of inflation targeting on investment is amplified in emerging economies and in countries with sound fiscal discipline. Finally, we explore the underlying mechanisms and show that macroeconomic stability, i.e., the reduction in inflation and its volatility, interest rate, exchange rate, and output volatility, is the main channel through which the monetary framework promotes domestic investment.
    Keywords: Inflation targeting, Private domestic investment, Developing countries, Propensity score matching, Monetary policy credibility
    Date: 2023–08
  8. By: Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
    Abstract: This report replicates and examines Bauer et al.'s (2021) paper on monetary policy transmission to financial markets. The paper introduces novel measures of monetary policy uncertainty and analyses its drivers. It also investigates the impact of uncertainty changes on interest rates and financial asset prices. We assess reproducibility, consolidate market uncertainty measures using PCA and Factor Analysis, and rigorously test the reduction of uncertainty after Federal Market Open Committee (FOMC) announcements. Our findings support the paper's claim of reduced uncertainty on meeting days. Additionally, we explore the implications of the uncertainty channel on various financial assets, such as Gold, the Swiss Franc, European stock indexes, and Bitcoin.
    Date: 2023
  9. By: Sebastian Graves; Christopher K. Huckfeldt; Eric T. Swanson
    Abstract: Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches and find that, in contrast to the consensus view, a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to non-employment, while non-employed individuals increase their job-seeking behavior. Holding supply-driven labor market flows constant, the overall decline in employment from a contractionary monetary policy shock becomes twice as large.
    JEL: E32 E52 J22 J23 J64
    Date: 2023–10
  10. By: Angino, Siria; Robitu, Robert
    Abstract: News media play a fundamental role in the communication between central banks and the public. Besides stimulating institutional transparency, the reporting of the news media on a central bank’s activities is also the main source of information about the institution for most citizens. To better understand how this intermediation process works, this paper explores the Q&A session of the European Central Bank (ECB)’s press conferences, where journalists have an opportunity to set the discussion and inquire into the central bank’s thinking. Using a structural topic model on a novel dataset consisting of all questions asked at ECB press conferences since May 2012, we conduct a systematic examination of the topics the ECB is questioned about and uncover differences in the focus of outlets from different geographical areas and with different types of audiences. We find that international outlets devote more attention to technical topics, relevant for market participants, while domestic media in the European Union (EU) dedicate greater focus to national affairs and the more political dimensions of the ECB’s activities. JEL Classification: E52, E58, E59
    Keywords: Central bank communication, European Central Bank, media, Structural Topic Modelling
    Date: 2023–10
  11. By: Junko Koeda; Bin Wei
    Abstract: Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8 percent during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30 percent versus 0.15 percent).
    Keywords: forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors
    JEL: E43 E44 E52 E58
    Date: 2023–10–16
  12. By: Verónica Acurio Vásconez (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Olivier Damette (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); David W Shanafelt (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Although the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. This paper uses a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model with a traditional epidemiological model, we can evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (''epi loans''). To the best of our knowledge, our paper is one of the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the use of an unconventional monetary policy.
    Keywords: New-Keynesian model, Financial dsge, Covid-19, Epidemiology, Unconventional monetary policy
    Date: 2023–07–05
  13. By: Baxa, Jaromir; Buliskeria, Nino; Elminejad, Ali; Havranek, Tomas; Havrankova, Zuzana; Kundu, Suranjana
    Abstract: Bauer et al. (2022) derive market-based monetary policy uncertainty and uncover an 'FOMC uncertainty cycle' characterized by a fall of uncertainty after FOMC announcements and its subsequent built-up. Then, the authors show that the financial markets' response to monetary policy announcements depends on the level of short-rate uncertainty on the day before the FOMC announcement. First, we reproduced the paper's findings, though with Matlab version-specific issues. Second, we tested the robustness of the two main results of the paper. We show that the uncertainty cycle in the monetary policy uncertainty is confirmed when the crisis period is included in the sample or when the median instead of the average of changes in the monetary policy uncertainty is considered. However, the FOMC uncertainty cycle does not appear when the monetary policy uncertainty index (Husted et al. 2020) or the daily economic policy uncertainty index (Baker et al. 2016) are used as uncertainty proxies.
    Keywords: Uncertainty, Monetary policy, Replication
    JEL: E43 E52
    Date: 2023
  14. By: Le, Anh H.
    Abstract: This paper studies the macro-financial implications of using carbon prices to achieve ambitious greenhouse gas (GHG) emission reduction targets. My empirical evidence shows a 0.6% output loss and a rise of 0.3% in inflation in response to a 1% shock on carbon policy. Furthermore, I also observe financial instability and allocation effects between the clean and highly polluted energy sectors. To have a better prediction of medium and long-term impact, using a medium-large macro-financial DSGE model with environmental aspects, I show the recessionary effect of an ambitious carbon price implementation to achieve climate targets, a 40% reduction in GHG emission causes a 0.7% output loss while reaching a zero-emission economy in 30 years causes a 2.6% output loss. I document an amplified effect of the banking sector during the transition path. The paper also uncovers the beneficial role of pre-announcements of carbon policies in mitigating inflation volatility by 0.2% at its peak, and our results suggest well-communicated carbon policies from authorities and investing to expand the green sector. My findings also stress the use of optimal green monetary and financial policies in mitigating the effects of transition risk and assisting the transition to a zero-emission world. Utilizing a heterogeneous approach with macroprudential tools, I find that optimal macroprudential tools can mitigate the output loss by 0.1% and investment loss by 1%. Importantly, my work highlights the use of capital flow management in the green transition when a global cooperative solution is challenging.
    Keywords: Climate change, Environmental policy, Optimal policy, Transition risk
    JEL: Q58 E32 Q54 C11 E17 E52
    Date: 2023
  15. By: Ge Gao (Beijing Sport University); Alex Nikolsko-Rzhevskyy (Lehigh University); Oleksandr Talavera (University of Birmingham)
    Abstract: In this study, we examined the effectiveness of central bank communications during times of significant adverse shocks. Specifically, we examined how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russo-Ukrainian War in 2022. Data collected from both the black and authorized FX markets suggested that the content of the NBU’s announcements significantly impacted FX market agents. Announcements aimed at maintaining a fixed (floating) FX rate prompted an increase (decrease) in the black market premium in cash transactions. Moreover, the NBU's announcements influenced the sale side of foreign currency more than any other aspect, an area where the black market FX traders held near monopolistic power.
    Keywords: Russia-Ukraine war, central bank communications, black market premium, forex, ChatGPT
    JEL: D83 E44 E58 F31
    Date: 2023–10
  16. By: Engle, Robert F.; Emambakhsh, Tina; Manganelli, Simone; Parisi, Laura; Pizzeghello, Riccardo
    Abstract: The systemic risk measure (SRISK) by V-Lab provides a market view of the vulnerability of financial institutions to a sudden downturn in the economy. To overcome the shortcoming that it cannot be applied to non-listed banks, SRISK characteristics of listed banks are mapped on balance sheet information. Systemic risk tends to be higher for banks that are larger, less profitable and have lower equity funding. Balance sheet information provides a surprisingly good approximation of SRISK for non-listed banks, when compared with banks’ capital depletion from the EU-wide stress testing exercises in 2018 and 2021. The proposed methodology can usefully complement the more thorough overview provided by traditional stress tests, providing supervisors the option to evaluate the systemic risks of the banking system at a higher frequency and at a fraction of the costs. JEL Classification: G21, G28, G1
    Keywords: banks’ balance sheet information content, stress testing, systemic risk
    Date: 2023–10
  17. By: Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
    Abstract: We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.
    JEL: E0 F3 F31 F33
    Date: 2023–10
  18. By: Edward N. Wolff
    Abstract: One hallmark of U.S. monetary policy since the early 1980s has been moderation in inflation (at least, until recently). How has this affected household well-being? The paper first develops a new model to address this issue. The inflation tax on income is defined as the difference between the nominal and real growth in income. This term is always negative (as long as inflation is positive). The inflation gain on household wealth is the revaluation resulting from asset price changes directly linked to inflation. This term can be positive or negative. The net inflation gain is the difference between the two, which can also be positive or negative. The empirical analysis covers years 1983 to 2019 on the basis of the Federal Reserve Board’s Survey of Consumer Finances (SCF) and historical inflation rates. It also looks at the sensitivity of the results to alternative inflation rates, and considers the effects of inflation on real wealth growth, wealth inequality, and the racial wealth gap. The results show that inflation boosted the real income of the middle wealth quintile by a staggering two thirds. In contrast, the bottom two wealth quintiles got clobbered by inflation, losing almost half of their real income. Inflation also boosted mean and especially median real wealth growth, reduced wealth inequality, and lowered the racial and ethnic wealth gap. Both the income and wealth results are magnified at higher (simulated) rates of inflation.
    JEL: D31 H31 J15
    Date: 2023–10
  19. By: Falk Bräuning; José Fillat; Gustavo Joaquim
    Abstract: Liquidity, particularly cash holdings, may serve as an important cushion for firms to absorb macroeconomic shocks such as interest rate increases so that these shocks have only minimal effects on their operations, at least in the short term. For example, to finance their investments, firms with high levels of cash may not have to tap so deep into debt financing, the cost of which relates closely to interest rates. Understanding the role of corporate cash holdings is therefore paramount to formulating appropriate monetary policy in the current environment. This brief informs the ongoing policy debate by examining the effect of US nonfinancial corporate cash holdings on the transmission of monetary policy, both historically and in the present tightening cycle. This brief shows that in the current hiking cycle, firms have used the cash they accumulated in 2020 and 2021 to finance operations, growth, and payouts. Due to this depletion of the accumulated-cash buffer, the effects of interest rate increases to date on corporate investment will likely gain traction in the coming quarters.
    Keywords: monetary policy transmission; cash accumulation; investment
    JEL: E22 E52 G30
    Date: 2023–10–12
  20. By: Dong Beom Choi; Paul Goldsmith-Pinkham; Tanju Yorulmazer
    Abstract: This paper analyzes the contagion effects associated with the failure of Silicon Valley Bank (SVB) and identifies bank-specific vulnerabilities contributing to the subsequent declines in banks’ stock returns. We find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size, and cash holdings had a significant impact, while better-quality assets or holdings of liquid securities did not help mitigate the negative spillovers. Interestingly, banks whose stocks performed worse post-SVB also experienced lower returns in the previous year, following Federal Reserve interest rate hikes. Stock investors appeared to anticipate risks associated with uninsured deposit reliance, but did not foresee the realization of implied losses. While mid-sized banks experienced particular stress immediately after the SVB failure, over time negative spillovers became widespread except for the largest banks.
    JEL: G01 G21
    Date: 2023–10
  21. By: Herman, Uroš; Lozej, Matija
    Abstract: This paper first provides empirical evidence that labour market outcomes for the less educated, who also tend to be poorer, are substantially more volatile than labour market outcomes for the well-educated, who tend to be richer. We estimate job finding rates and separation rates by educational attainment for several European countries and find that job finding rates are smaller and separation rates larger at lower educational attainment levels. At cyclical frequencies, fluctuations of the job finding rate explain up to 80% of the unemployment fluctuations for the less educated. We then construct a stylised HANK model augmented with search and matching and ex-ante heterogeneity in terms of educational attainment. We show that monetary policy has stronger effects when the job market for the less educated and hence poorer is more volatile. The reason is that these workers have the most procyclical income coupled with the highest marginal propensity to consume. An expansionary monetary policy shock that increases labour demand disproportionally affects the labour market segment for the less educated, causing a strong increase in their consumption. This further amplifies labour demand and increases labour income of the poor even more, amplifying the initial effect. The same mechanism carries over to forward guidance. JEL Classification: E40, E52, J64
    Keywords: business cycles, employment, heterogeneous agents, monetary policy, search and matching
    Date: 2023–10
  22. By: Jamie L. Cross; Aubrey Poon; Dan Zhu
    Abstract: We present a new stylized fact about the link between uncertainty and the term structure of interest rates: Unexpectedly heightened uncertainty elicits a lower, steeper, and flatter yield curve. This result is established through a Yields-Macro model that includes dynamic Nelson-Siegel factors of U.S. Treasury yields, and accounts for endogenous feed back with observable measures of uncertainty, monetary policy, and macroeconomic aggregates. It is also robust to three distinct measures of uncertainty pertaining to the financial sector, the macroeconomy and economic policy. An efficient Bayesian algorithm for estimating the class of Yields-Macro models is also developed.
    Date: 2023–10

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