nep-cba New Economics Papers
on Central Banking
Issue of 2024‒02‒19
23 papers chosen by
Sergey E. Pekarski, Higher School of Economics

  1. A Field Guide to Monetary Policy Implementation Issues in a New World with CBDC, Stablecoin, and Narrow Banks By James A. Clouse
  2. Measuring monetary policy in the UK: the UK Monetary Policy Event‑Study Database By Braun, Robin; Miranda-Agrippino, Silvia; Saha, Tuli
  3. Impact of the central bank's communication on macro financial outcomes By Tetiana Yukhymenko; Oleh Sorochan
  4. Monetary policy invariance, hysteresis, and optimal inflation. By Mikro Abbritti
  5. Monetary Policy Tightening and Bank Lending Standards: Evidence from the Chilean Bank Loan Survey By Helmut Franken; Alejandro Jara
  6. Assessing the Effects of the Global Financial Cycle on Eurozone’s Financial Stress: Does the Quantitative Easing Matter? By Costas Karfakis; Ioannis Karfakis
  7. Why The Monetary Policy Framework in Advanced Countries Needs Fundamental Reform By William White
  8. The Heterogeneous Effect of Monetary Policy Shocks: Evidence for US Households By Tomás Opazo
  9. Corporate Debt Structure and Heterogeneous Monetary Policy Transmission By Marie Alder; Nuno Coimbra; Urszula Szczerbowicz
  10. Effects of Monetary Policy Frameworks on Stock Market Volatilities: An Empirical Study of Global Economies By Lee, King Fuei
  11. U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations By Giovanni Ugazio; Weining Xin
  12. Projecting Banks’ Net Interest Income: an Asset-Liability Approach, Applied to the Euro Area By Thibaut Gentil; Sébastien Ray; Oana Toader
  13. Leverage ratio and risk-taking: theory and practice By Fatouh, Mahmoud; Giansante, Simone; Ongena, Steven
  14. Getting through: communicating complex information By McMahon, Michael; Naylor, Matthew
  15. Recent Developments in Financial Stability, Macroprudential Arrangements, and Shadow Banking By Ojo, Marianne
  16. Price stability and debt sustainability under endogenous trend growth By Schmöller, Michaela; McClung, Nigel
  17. Precedents, Instruments and Targets that the Fed Has Used to Create and Support a Postcrisis Global Safety Net By Edward J Kane
  18. Monetary Policy Pass-Through to Interest Rates: Stylized Facts from 30 European Countries By Robert C. M. Beyer; Ms. Ruo Chen; Florian Misch; Claire Li; Ezgi O. Ozturk; Mr. Lev Ratnovski
  19. Forward Guidance: Estimating a Behavioral DSGE Model with System Priors By Agustín Arias; Benjamín García; Ignacio Rojas
  20. Understanding the Joint Dynamics of Inflation and Wage Growth in the Euro Area By Galstyan, Vahagn
  21. Macroeconomic Effects of Carbon Transition Policies: An Assessment Based on the ECB’s New Area-Wide Model with a Disaggregated Energy Sector By Coenen, Günter; Lozej, Matija; Priftis, Romanos
  22. Assessing the Effectiveness of the Fiscal-Monetary Policy Mix: Evidence from Morocco, Egypt and Saudi Arabia By Younes El Khattab; Rachida El Yamani; Ahmed Hefnaoui
  23. The Art of Paradigm Maintenance: How the 'Science of Monetary Policy' tries to deal with the inflation of 2021-2023 By Servaas Storm

  1. By: James A. Clouse
    Abstract: This paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission. The basic model builds on that developed in Chen et. al. (2014) which, in turn, draws inspiration from the pioneering work of Tobin (1969) and Gurley and Shaw (1960). The paper focuses, in particular, on the implications of introducing new types of fixed-rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, and deposits issued by narrow banks. The analysis also provides a crude way of capturing some of the effects of bank capital and liquidity regulation on financial intermediation and monetary policy implementation. Perhaps the most important conclusion is that the introduction of new fixed-rate assets by the Federal Reserve or by other financial intermediaries can have significant effects on equilibrium interest rates and patterns of financial intermediation and may also affect the potency of monetary policy tools. These effects are most pronounced when new financial assets are close substitutes for existing financial assets.
    Keywords: Bank Regulation; Financial Innovation; Monetary Policy Implementation; Monetary policy
    JEL: E40 E42 E43 E44 E50 E52
    Date: 2024–01–16
  2. By: Braun, Robin (Federal Reserve Board of Governors); Miranda-Agrippino, Silvia (Bank of England); Saha, Tuli (Bank of England)
    Abstract: This paper introduces the UK Monetary Policy Event-Study Database (UKMPD), a new and rich dataset of high-frequency monetary policy surprises for the United Kingdom. Intraday surprises are computed around the Bank of England’s Monetary Policy Committee’s announcements, as well as around the press conference that accompanies the publication of the quarterly Monetary Policy Report. The dataset also includes factors that allow to disentangle the different dimensions of UK monetary policy. We use the data to provide updated estimates of the causal effects of rate decisions and forward guidance on financial markets and macroeconomic aggregates in the UK, and provide novel insights on how markets have responded to the changes in the communication strategy of the Bank of England.
    Keywords: UK monetary policy surprises; event-study; intraday; monetary policy transmission; dataset
    JEL: E43 E44 E52 E58 G14
    Date: 2023–11–03
  3. By: Tetiana Yukhymenko (National Bank of Ukraine); Oleh Sorochan (National Bank of Ukraine)
    Abstract: The study explores the impact of central bank communications on a range of macro-financial indicators. Specifically, we examine whether information posted on the National Bank of Ukraine (NBU) website influences foreign exchange (FX) markets and the inflation expectations of experts. Our main results suggest that the NBU's statements and press releases on monetary policy issues matter. For instance, we find that exchange rate movements and volatility are negatively correlated with the volumes of publications of the NBU on its official website. However, this effect is noticeably bigger for volatility than for exchange rate changes. The impact of communication on FX developments is the strongest a week after the news release, and it persists further. Furthermore, inflation expectations of financial experts, though indifferent to all NBU updates, turn out to be sensitive to monetary policy announcements. The letter reduces the level of expectations and interest rates.
    Keywords: central bank communications ; monetary policy ; FX market ; text analysis
    JEL: E58 E71 C55
    Date: 2024–02–05
  4. By: Mikro Abbritti
    Keywords: Endogenous Growth, Monetary Policy, Optimal Inflation Target, Downward Wage Rigidity, Monetary Policy Invariance, Zero Lower Bound.
    JEL: E24 E3 E5 O41 J64
    Date: 2023–11
  5. By: Helmut Franken; Alejandro Jara
    Abstract: Our paper studies the banking channel as an amplification mechanism of monetary policy shocks in an Emerging Market Economy. We analyze the aggregated responses to the Chilean Bank Loan Survey, focusing on the average response of lending standards across different credit segments. Our results show that a positive monetary policy shock tightenslending standards in all credit segments, with corporate and mortgage loans being less sensitive than SMEs and consumer loans. We also examine the impact of monetary policy shocks on lending standards during periods of highly contractionary monetary policystance and periods when banks’ capital position becomes a constraint. We find statistically significant amplification effects within these periods, affecting different credit segments heterogeneously. Overall, our results support the notion that the banking channel operates as an effective amplification mechanism, providing evidence consistent with a self-reinforcing operation of the bank-lending, risk-taking, and balance-sheet channels.
    Date: 2023–10
  6. By: Costas Karfakis (Department of Economics, University of Macedonia); Ioannis Karfakis (Business Discipline, London School of Science and Technology, Memo House, London, England, W3 0XA, UK)
    Abstract: This paper examines whether the expanded Quantitative Easing policies of the European Central Bank during the period 2015-2022 have influenced the impact of the Global Financial Cycle (GFC) on the Eurozone’s financial stress. The threshold regression reveals that these policies implementation has reduced the impact of GFC on financial stress in the post-2015 period, and thus contributed to lower systemic risk. The impulse responses of the quantile regression show that a global risk aversion shock does not have persistent effects on the financial stress distribution, and thus the GFC would not “set the tone†of Eurozone’s financial conditions.
    Keywords: Quantitative easing; financial stress, global financial cycle, systemic risk; balance sheet; threshold regression; quantile regression analysis
    JEL: E52 E58 G15
    Date: 2024–01
  7. By: William White
    Abstract: The objective pursued by most central banks in recent decades has been a low level of inflation. Since inflation was believed to respond to changes in unemployment, this implied a primary focus on labor markets and output gaps in the "real" economy when setting monetary policy. In contrast, "financial" sector developments were thought to be of no great importance. It is argued in this paper that monetary policy should be guided much more by financial sector developments (credit and debt) and much less by near term targets for inflation. This argument is first supported by an empirical review of the negative outcomes produced by the current policy framework; in particular, financial bubbles have created ever larger bubbles which threaten future growth prospects. A second level of support is provided through questioning the need for and the effectiveness of easy money, and through pointing out its many unintended and dangerous consequences. An alternative monetary policy framework would begin with the observation that an economy is a complex, adaptive system like many others in nature and society. From this perspective, arguments for introducing a "narrow money" regime need more attention.
    Keywords: inflation, monetary policy, financial system, complexity, bubbles
    JEL: N10 E31 E42 E52 E58
    Date: 2023–08–03
  8. By: Tomás Opazo
    Abstract: This paper contributes to the growing research on the heterogeneous effects of monetary policy. Using smooth local projections, we estimate the response of consumption expenditure to monetary policy shocks across different groups of households. Our findings show that the expenditures of older households are more responsive to monetary policy shocks than those of young households, indicating the existence of a life-cycle wealth effect. Moreover, households with a mortgage show larger adjustments compared to outright homeowners, reflecting the influence of their balance sheet composition. Additionally, lower-skilled households exhibit larger consumption responses in comparison to high-skilled households. These findings suggest the relevant influence of the income composition channel, earnings heterogeneity, and balance sheet composition channel in the transmission of monetary policy.
    Date: 2023–09
  9. By: Marie Alder; Nuno Coimbra; Urszula Szczerbowicz
    Abstract: Using French firms’ balance sheet data, we show that corporate debt structure plays a significant role in ECB monetary policy transmission. In addition to interest rate policy, we analyse the impact of a novel ECB-induced bond liquidity shock. While both types of policy tightening diminish French firms’ investment, the transmission of conventional monetary policy shocks is stronger for firms with a higher share of bank debt. Conversely, contractionary bond liquidity shocks lower investment more for firms with higher bond shares of total debt. We further investigate the transmission channels and show that bond liquidity tightening reduces French sovereign bond market liquidity and leads to higher bond-bank loan interest rate spreads and lower bond issuance.
    Keywords: Monetary Policy Transmission, Corporate Debt Structure, Investment
    JEL: E22 E43 E44 E52
    Date: 2023
  10. By: Lee, King Fuei
    Abstract: This study investigates the relationship between monetary policy frameworks and stock market volatilities across countries. Using a novel classification framework by Cobham (2021), we study 84 countries across the world over the period of 1984 to 2017. We find that countries that maintain a fixed exchange rate peg tend to experience higher levels of stock market volatility, while countries adopting flexible inflation-targeting policies tend to exhibit lower levels of stock market volatilities. Additionally, the stock markets of countries operating under monetary policies characterized by unstructured discretion tend to be more volatile, while those operating with well-structured discretion tend to be more stable. Our results also suggest that while the choice of monetary policy framework is an important determinant of stock market volatility, it is not the only factor driving it. As such, policymakers should carefully consider the implications of different monetary policy frameworks when designing monetary policy, and take a holistic approach to financial stability that incorporates a range of factors beyond just monetary policy frameworks.
    Keywords: Monetary Policy Frameworks, Stock Market Volatility, Exchange Regimes, Inflation-Targeting
    JEL: E42 G10
    Date: 2023–12
  11. By: Giovanni Ugazio; Weining Xin
    Abstract: We empirically examine U.S. monetary policy spillovers to the Middle East and Central Asia (ME & CA) region by decomposing U.S. interest rates changes into two orthogonal shocks: the pure monetary policy shock and the information news shock. Using a sample of 16 ME & CA countries, we find that when interest rates increase, the two shocks have opposite spillovers on the region. Tightening driven by contractionary monetary policy shocks hinders growth, while tightening driven by positive information news shocks boosts growth despite higher interest rates. Countries with weaker fundamentals face more negative spillovers from contractionary monetary policy shocks but may sometimes benefit more from positive information news shocks. Moreover, high oil prices mitigate both spillovers for oil exporters while global risk appetite amplifies both spillovers. Finally, we estimate a large degree of heterogeneity in the impact of the 2022 U.S. tightening cycle on ME & CA countries, with oil exporters with stronger fundamentals withstanding well the shock and oil importers with weaker fundamentals being hit the most.
    Keywords: U.S. monetary policy; spillovers; fundamentals; oil prices
    Date: 2024–01–19
  12. By: Thibaut Gentil; Sébastien Ray; Oana Toader
    Abstract: In a context of volatile interest rates, the impact of monetary policy decisions on banks’ net interest income is a key question for financial stability, since changes in profitability may affect their capacity to absorb losses and to accumulate capital through retained earnings. This paper presents an ALM-like model developed to project the evolution of the aggregate balance sheet and the interest income and expense of a banking sector under various scenarios. Based on balance sheet structure data, the model simulates the expiration of maturing instruments and the progressive accumulation of new issuances. Using conservation laws valid at the aggregate level, the model provides a consistent accounting-based framework, where bank reserve holdings depend on central bank actions, and the volume of customer deposits results from net payments between the banking sector and the rest of the economy. A combination of financial data sources makes it possible to build a simplified balance sheet of the aggregate euro area banking sector, on which the model can be run. Its total net interest income turns out to be, on the whole, positively sensitive to changes in interest rates. The model can also quantify sensitivities to other factors, such as central bank operations on securities or changes in the cost structure of customer deposits. Back-testing results on 2016–23 confirm the model’s ability to account for observed interest margins.
    Keywords: Interest Rates, Banking Sector, Net Interest Income, Monetary Policies, Asset-liability, Projection Model
    JEL: G21 E43 E44 E47 E58
    Date: 2023
  13. By: Fatouh, Mahmoud (Bank of England); Giansante, Simone (Department of Economics, Business and Statistics, University of Palermo); Ongena, Steven (University of Zurich, Swiss Finance Institute, KU Leuven, NTNU Business School and CEPR)
    Abstract: We assess the impact of the leverage ratio capital requirements on the risk‑taking behaviour of banks both theoretically and empirically. We use a difference‑in‑differences (DiD) setup to compare the behaviour of UK banks subject to the leverage ratio requirements (LR banks) to otherwise similar banks (non‑LR banks). Conceptually, introducing binding leverage ratio requirements into a regulatory framework with risk-based capital requirements induces banks to reoptimise, shifting from safer to riskier assets (higher asset risk). Yet, this shift would not be one‑for‑one due to risk‑weight differences, meaning the shift would be associated with a lower level of leverage (lower insolvency risk). The interaction of these two changes determines the impact on the aggregate level of risk. Empirically, we show that LR banks did not increase asset risk, and slightly reduced leverage levels, compared to the control group after the introduction of leverage ratio in the UK. As expected, these two changes lead to a lower aggregate level of risk. Our results show that credit default swap spreads on the five‑year subordinated debt of LR banks dropped relative to non‑LR banks post leverage ratio introduction.
    Keywords: Finance; capital regulation; risk-taking; leverage ratio; risk‑based requirements
    JEL: G01 G21 G28
    Date: 2023–10–01
  14. By: McMahon, Michael (University of Oxford, CEPR and CfM (LSE)); Naylor, Matthew (Bank of England)
    Abstract: Policymakers communicate complex messages to multiple audiences; we investigate how complexity impacts messages ‘getting through’ effectively. We distinguish ‘semantic’ complexity – the focus of existing empirical studies – from ‘conceptual’ complexity, which better reflects information‑processing costs identified by theory. We conduct an information‑provision experiment using central bank communications; conceptual complexity – captured by a novel quantitative measure we construct – matters more for getting through. This is true even for technically trained individuals. Bank of England efforts to simplify language have reduced traditional semantic measures, but conceptual complexity has actually increased. Our findings can direct efforts for effective policy communication design.
    Keywords: Information transmission; central bank communications; linguistic complexity; rational inattention
    JEL: C83 E58 E61 E70
    Date: 2023–10–01
  15. By: Ojo, Marianne
    Abstract: On the 20th December 2023, the Financial Stability Board published revised policy recommendations to address structural vulnerabilities from liquidity mismatch in open ended funds (OEFs). Main points which were highlighted in relation to new recommendations include the following: - Revised FSB recommendations and IOSCO Guidance on Anti Dilution Liquidity Management Tools (LMTs), which are aimed at achieving significant strengthening of liquidity management by open ended funds (OEFs), compared to current practices. Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules? Apart from Basel III reforms which are geared toward greater facilitation of financial stability on a macroprudential basis, further efforts and initiatives aimed at mitigating systemic risks, hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the ESRB, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.” This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macroprudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level as regards efforts to address systemic risks on a macroprudential basis. This being the case in spite of significant efforts and steps that have been taken to address the macroprudential framework. In so doing, the paper will also attempt to address how coordination within the macroprudential framework as well as between microprudential and macroprudential supervision could be enhanced.
    Keywords: Macroprudential arrangements; financial stability; interest rates; liquidity management tools; open ended funds
    JEL: E43 E60 G2 G20 G28
    Date: 2024
  16. By: Schmöller, Michaela; McClung, Nigel
    Abstract: This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Under debt-stabilizing ("passive") fiscal policy the Taylor principle is not sufficient for determinacy. Instead, monetary policy should at least aim to raise r − g with persistent inflation in order to stabilize the expectations of households, firms and innovators. Endogenous growth provides a self-financing mechanism for deficits under active fiscal policy; growth provides some backing for the public debt, which reduces the need for debt-stabilizing inflation when current fiscal deficits are not backed by future fiscal surpluses. Because growth creates some fiscal space, a monetary policy that adheres to the Taylor principle combined with active fiscal policy can yield a unique stable equilibrium, provided that the policy permits r−g to fall with inflation.
    Keywords: Public Debt, Inflation, Monetary-Fiscal Interaction, Fiscal Theory of the Price Level, Endogenous Growth
    JEL: E31 E52 E62 E24 O42
    Date: 2024
  17. By: Edward J Kane
    Abstract: Much has been made of the Global Safety Net that has been put into place since the Great Financial Crisis but the distributional effects of some of the Fed's strategies are still shrouded in mystery. In supplying bailout funds at below-market terms to uninsured creditors of firms and governments that were economically insolvent, the Fed reinforced the implicit expectation that megabanks are free to take on high levels of risk and benefit from the upside while being protected from any serious downside. An important example of this is the role of currency swaps. By extending its "temporary" dollar swap lines with other central banks, including the European Central Bank, "until further notice" the Fed broadcasted its intention to act as the financial world's "liquidity provider" of last resort. The "liquidity" support provided by the Fed to megabanks through cross-border lending in fact acted as subsidies, the costs of which were borne for by ordinary US citizens. This is just one piece of an unacknowledged game plan of building global strategies of crisis prevention and crisis management on misdirection and piles of bullsh*t.
    Keywords: capital requirements, too big to fail, loss recognition, income-distribution effect
    JEL: E58 G21 G32
    Date: 2023–09–09
  18. By: Robert C. M. Beyer; Ms. Ruo Chen; Florian Misch; Claire Li; Ezgi O. Ozturk; Mr. Lev Ratnovski
    Abstract: The extent to which changes in monetary policy rates lead to changes in loan and deposit rates for households and firms, referred to as ‘pass-through’, is an important ingredient of monetary policy transmission to output and prices. Using data on seven different bank interest rates in 30 European countries, different approaches, and the full sample as well as a subsample of euro area countries, we show that a) the pass-through in the post-pandemic hiking cycle has been heterogenous across countries and types of interest rates; b) the pass-through has generally been weaker and slower, except for rates of non-financial corporation loans and time deposits in euro area countries; c) differences in pass-through over time and across countries for most deposit rates are correlated with financial sector concentration, liquidity, and loan opportunities, and d) the effects of pass-through to outstanding mortgage rates on monetary transmission on prices and output are heterogenous across countries.
    Keywords: Monetary Policy Transmission; Monetary Policy Pass-Through
    Date: 2024–01–12
  19. By: Agustín Arias; Benjamín García; Ignacio Rojas
    Abstract: We introduce cognitive discounting into a full fledged monetary DSGE model to cope with the forward guidance puzzle and propose an estimation strategy that relies on system priors to guide the model into delivering data-consistent IRFs for monetary policy and forward guidance shocks. We find that the successful implementation of this behavioral hypothesis crucially hinges on allowing agents to entertain a cognitive discount factor specific for future monetary policy announcements. The estimated model attains a significantly better fit to the data than its rational expectations counterpart, while relying on only slightly modified estimates of structural parameters and substantial degrees of forward guidance discounting. Cognitive discounting of future events triggered by non-forward guidance shocks in our model is limited, and so is its contribution to the improvement of the marginal data density. We further find that professional forecasts are consistent with rational expectations and, thus, not appropriate for the estimation of forward guidance cognitive discounting.
    Date: 2023–10
  20. By: Galstyan, Vahagn (Central Bank of Ireland)
    Abstract: This paper presents an empirical framework and analysis of the interactions among inflation, wages, employment, and output in the euro area. Results identify price shocks and demand shocks as the primary exogenous factors explaining historical variance. The wage gap emerges as a key determinant of wage dynamics in the aftermath of a price shock. In contrast, the output gap becomes dominant following demand shocks. The real wage gap acts as a corrective mechanism, ensuring that prices and wages in particular align with the broader economic landscape. Forecasts for the period starting 2023Q3 emphasise the enduring significance of the real wage gap, projecting its ongoing impact on nominal wages in tight labour markets. As for inflation expectations, the estimates emphasise their stickiness. In this context, the significant and persistent price shock that has occurred suggests a gradual decline in expectations, potentially leading to an extended period of elevated inflation.
    Keywords: Inflation, Wages, Central Banking.
    JEL: E00 E12 E30 E31 E32 E37
    Date: 2023–12
  21. By: Coenen, Günter (European Central Bank); Lozej, Matija (Central Bank of Ireland); Priftis, Romanos (European Central Bank)
    Abstract: In this paper, we use scenario analysis to assess the macroeconomic effects of carbon transition policies aimed at mitigating climate change. To this end, we employ a version of the ECB’s New Area-Wide Model (NAWM) augmented with a framework of disaggregated energy production and use, which distinguishes between “dirty” and “clean” energy. Our central transition scenario is that of a permanent increase in carbon taxes, which are levied as a surcharge on the price of dirty energy. Our findings suggest that increasing euro area carbon taxes to an interim target level consistent with the transition to a net-zero economy entails a transitory rise in inflation and a lasting, albeit moderate decline in GDP. We show that the short and medium-term effects depend on the monetary policy reaction, the path of the carbon tax increase and its credibility, while expanding clean energy supply is key for containing the decline in GDP. Undesirable distributional effects can be addressed by redistributing the fiscal revenues from the carbon tax increase across households.
    Keywords: Climate change, carbon taxation, DSGE model, monetary policy, fiscal policy, euro area.
    JEL: C54 E52 E62 H23 Q43
    Date: 2023–08
  22. By: Younes El Khattab (Hassan II University of Casablanca); Rachida El Yamani (University of Casablanca Morocco); Ahmed Hefnaoui (University of Casablanca Morocco)
    Abstract: The macroeconomic effects of the policy mix have been the subject of a rich array of theoretical literature. Our research paper further enriches the empirical literature and goes beyond a single open economy analysis by proposing a multi-country assessment of the policy mix in the Middle East and North Africa (MENA) region, under the two hypotheses of monetary and fiscal dominance. We base our study on a structural vector autoregression (SVAR) approach performed on secondary data over the period 1977-2021 for three MENA countries: Morocco, Egypt, and Saudi Arabia. Our data is sourced from World Development Indicators and includes five variables: Current account balance (percent of GDP) (CA), inflation rate (INF), GDP growth (annual percent) (GDP), money supply (M3), and government expenditure (GEXP). The results show that the coordination scheme choice has no significant effect on the policy mix effectiveness in the three countries. The policy mix in Morocco is more effective in preserving price stability whereas stabilization policies in Egypt are more effective in boosting economic activity. Because of its limited exposure to energy price risk (i.e., imported inflation), Saudi Arabia has a wider margin of maneuver in implementing growth-oriented policies without imperiling price stability. Considering that previous studies gave different views on whether monetary or fiscal policies are more effective in a single open economy analysis, to our knowledge, no relevant studies have performed a multi-country assessment of the policy mix in the MENA region. This research provides an empirical framework for analyzing the macroeconomic implications of monetary and fiscal policies in the MENA region, allowing us to draw interesting conclusions about the effectiveness of the policy mix in the sample countries.
    Date: 2023–12–20
  23. By: Servaas Storm (Delft University of Technology)
    Abstract: The macroeconomic models used by major institutions including the Federal Reserve and the International Monetary Fund (IMF) failed to predict the inflation surge during 2021-2023. The output gap, the unemployment gap, the New Keynesian Phillips curve and inflation expectations did not give timely and relevant signals. The re-emergence of inflation thus threw the 'science of monetary policy' off the rails. Faced with the choice between changing their paradigm and proving that there is no need to do so, the 'scientists of monetary policy' got busy on the proof. As a result, a number of ad-hoc epicycles have been added to the New Keynesian analytical core, with the help of which one can claim to be able to explain the sudden acceleration of inflation post-factum. This paper critically reviews the theoretical and empirical merits of three recent tweaks to the New Keynesian core: using the vacancy ratio as the appropriate measure of real economic activity; hammering on the considerable risk of an imminent wage-price spiral; and the resurrection of the non-linear Phillips curve. The paper concludes by drawing out sobering lessons concerning the art of paradigm maintenance as practiced by the 'scientists of monetary policy'.
    Keywords: Inflation; science of monetary policy; output gap; unemployment gap; vacancy ratio; inflation expectations; wage-price spiral; non-linear Phillips curve.
    JEL: E0 E5 E6 E62 O23 I12 J08
    Date: 2023–10–04

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