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on Central Banking |
| By: | Bruch, Jan; Seitz, Franz; Vollmer, Uwe |
| Abstract: | We assess the impact of macroprudential measures on macroeconomic stability using a DSGE model in which firms can access both direct and indirect financing. The model is calibrated with data from the euro area. We compare two different macroprudential rules (time-invariant and counter-cyclical) in the presence of a monetary policy shock and a macroprudential policy shock. We find that the macroprudential rule has little impact on the adjustment dynamics to a monetary and macroprudential shock. Direct financing increases the impact of monetary shocks on the volatility of financial variables but not on output and inflation. Simultaneous monetary policy and macroprudential policy shocks do not alter the reaction of inflation compared to a monetary policy shock but cause permanent output losses. |
| Abstract: | Wir untersuchen die Auswirkungen makroprudenzieller Maßnahmen auf die makroökonomische Stabilität mit Hilfe eines DSGE-Modells, in dem Unternehmen sowohl Zugang zu direkter als auch zu indirekter Finanzierung haben. Das Modell wird mit Daten des Euroraums kalibriert. Wir vergleichen zwei verschiedene makroprudenzielle Regeln (zeitinvariant und antizyklisch) in Gegenwart eines geldpolitischen Schocks und eines makroprudenziellen Schocks. Wir stellen fest, dass die makroprudenzielle Regel kaum Auswirkungen auf die Anpassungsdynamik bei einem geldpolitischen und makroprudenziellen Schock hat. Die direkte Finanzierung erhöht die Auswirkungen von monetären Schocks auf die Volatilität der Finanzvariablen, nicht aber der Produktion und Inflation. Gleichzeitige geldpolitische und makroprudenzielle Schocks verändern die Reaktion der Inflation im Vergleich zu einem geldpolitischen Schock nicht, verursachen aber dauerhafte Produktionsverluste. |
| Keywords: | Monetary Policy, Macruprudential Policy, Inflation, Business Cycle, DSGE |
| JEL: | E12 E31 E32 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:300658 |
| By: | Berger, Tino; Ochsner, Christian |
| Abstract: | The European Central Bank (ECB) strives to maintain inflation at a 2% target rate, yet the Euro area's diverse economies pose challenges to achieving this goal with a single nominal interest rate. Effective monetary policy transmission hinges on synchronizing the Natural Rate of Interest (NRI) across constituent economies. This note investigates NRI synchronization between Germany, the largest Euro area economy, and the entire Euro area. Utilizing Bayesian estimation of the Holston et al. (2017) model, we find robust synchronization between Germany's NRI and that of the entire Euro area, even amid level differences, supporting effective monetary policy coordination. |
| Keywords: | unobserved component model, natural rate of interest, HLW model, Euro area, Germany |
| JEL: | C32 E43 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:svrwwp:300653 |
| By: | Jérôme Deyris (UPN - Université Paris Nanterre) |
| Keywords: | European Central Bank climate change low-carbon transition monetary policy financial stability green central banking, European Central Bank, climate change, low-carbon transition, monetary policy, financial stability, green central banking |
| Date: | 2023–01–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04638404 |
| By: | António Afonso; Francisco Gomes-Pereira |
| Abstract: | This paper studies the impact of monetary policy on fiscal sustainability in the euro area. Our sample includes 12 euro area countries and covers the period from 2003:Q1 to 2022:Q4. We extend a fiscal reaction function (Bohn’s rule) by including the monetary policy stance as an interaction term. Our findings are as follows: First, a contractionary (expansionary) monetary stance tends to lead to an increase (decrease) in the primary balance. Second, the ECB’s monetary policy stance significantly influences the fiscal reaction function coefficient. In other words, contractionary monetary policy induces a larger increase in primary balances in response to an increase in the debt-to-GDP ratio than if monetary policy was neutral or expansionary. Our findings suggest that expansionary monetary policy has the potential to help fiscal sustainability, and potentially mitigate fiscal fatigue. Conversely, contractionary monetary policy can exacerbate the fiscal effort required to satisfy the government intertemporal budget constraint. |
| Keywords: | Monetary Policy Stance, Fiscal Sustainability, Debt Sustainability. |
| JEL: | E52 E58 E63 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03352024 |
| By: | Jagjit Chadha; Corrado Macchiarelli; Satyam Goel; Arno Hantzsche; Sathya Mellina |
| Abstract: | In response to the 2016 referendum on EU Membership and the ensuing uncertainty as to the eventual consequences of Brexit, the Bank of England (BoE) adopted various methods of influencing market rates, including conventional, unconventional monetary policy measures and communications on forward guidance. To investigate the effectiveness of BoE’s communication, we first decompose long-dated yields into a risk neutral and term premium component. Text-based analysis of Monetary Policy Committee minutes is then used to measure the stance of policy, attitudes to QE and Brexit. We show that the Bank’s communication strategy acted to complement the stance of monetary policy, which had responded by lowering Bank rate and expanding QE, and acted to lower the term premium that might otherwise have risen in response to Brexit uncertainty. |
| Keywords: | UK referendum; Brexit; risk premium; monetary policy; central bank communication; text mining |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/160 |
| By: | Forte, Antonio |
| Abstract: | This paper describes the transmission of the monetary policy impulses to banking interest rates in Italy from the late 1960s to the mid-1980s. The study introduces three main novelties: firstly, the use of a completely new database sourced from original papers of that period; secondly, an analysis of the monetary policy transmission for interest rates on eight different types of loans and on loans to sixteen productive sectors; thirdly, the study of monetary policy transmission to regional and provincial interest rates on loans. This comprehensive study provides further awareness into the monetary policy transmission during a period of high inflation and offers valuable insights for the present. |
| Keywords: | monetary policy, inflation, banks, interest rates |
| JEL: | E43 E58 N14 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121396 |
| By: | Dalloul, Ami |
| Abstract: | This paper investigates the effectiveness of the media transmission channel of the Federal Reserve (Fed) communication with the general public. Spanning a 20-year period (2003-2023), around 5, 400 Fed communication documents and 333, 000 articles from USA Today are analyzed. A positive and significant relationship between Fed communications and media coverage is found, particularly after the introduction of post-FOMC press conferences. Crisis-related topics strongly resonate with the media, while other topics such as inflation forecasts show varied effectiveness. Changes in the Fed's communication style has been effective for topics like inflation, however the effect is not uniform across all Fed communications topics. |
| Keywords: | monetary policy, central bank communication, topic modelling, media transmission channel |
| JEL: | E52 E58 C55 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-724 |
| By: | Jean-Marie Le Page (Université Paris-Panthéon-Assas) |
| Abstract: | Nordhaus's theory of the "destructive game" (1994) is a central analysis of the policy mix. His theory showed that a lack of cooperation between the central bank and the fiscal authorities would result in the budget deficit being higher and the inflation rate lower than either of the authorities would want. It explains indeed why Central Bank independence can lead to these suboptimal results even when the goals of monetary policy are set by the fiscal authority. But the construction of this model was based on the existence of a Phillips-type relationship between the inflation rate and the unemployment rate, which has lost its relevance in the contemporary economy. Today, the prospect of a rise in the inflation rate leads to an increase in interest rates and a subsequent rise in the unemployment rate. This paper intends to show that the main conclusions of the Nordhaus model are preserved, with a model based on an increasing relationship between the inflation rate and the unemployment rate. Moreover, as in traditional macroeconomic theory, according to this version of the model, the unemployment rate is the same in steady states for different strategic equilibria. |
| Keywords: | policy mix, Nordhaus's destructive game, monetary and fiscal policy, central banking, JEL classification: E10, E52, E58, E62, monetary and fiscal policy JEL classification: E10 |
| Date: | 2024–03–18 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04634043 |
| By: | Masek, Frantisek; Zemlicka, Jan |
| Abstract: | We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinitely long given a conventional degree of myopia. Finite yet long-lasting windows dominate for higher cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window may depend on the speed of return to the target path. We solve the model both locally and globally to disentangle the effects of uncertainty due to the ELB. The welfare loss difference between solution techniques is considerably decreasing in the degree of history dependence. JEL Classification: E31, E32, E52, E58, E71 |
| Keywords: | average inflation targeting, behavioral macroeconomics, heterogeneous agents, monetary policy |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242955 |
| By: | Carlos Alberto Piscarreta Pinto Ferreira |
| Abstract: | We use individual bank balance sheet data to investigate those bank-specific characteristics that are relevant to explain US banks’ demand of two groups of government securities: Agencies and Treasuries. We conclude that some drivers but not all are common. Higher holdings are associated with poorer loan portfolio quality in both cases. Agencies also respond positively to lower margins, a contracting economic cycle, sub-par regional dynamics and less clearly higher business cycle risk. Treasuries alone are positively impacted by the erosion of the capital position. Variables such as the loan rate spread, past profitability, or income diversification fail to be significant. We find no direct impact of unconventional monetary policy in Agencies and the impact on Treasuries seems time-bounded and bank entity specific. Our finding suggest that it will be mainly up to other investors than banks to replace the Fed as it reduces its balance sheet. |
| Keywords: | Sovereign Debt, Portfolio Choice, Banks, Monetary Policy, Panel data. |
| JEL: | C23 E58 G11 G21 H63 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03362024 |
| By: | Bobasu, Alina; Dobrew, Michael; Repele, Amalia |
| Abstract: | We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. Our model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income. JEL Classification: E52, F41, Q43 |
| Keywords: | energy prices, heterogeneous agents, monetary policy, non-homothetic preferences, open economy model |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242967 |
| By: | Oliver Hülsewig; Armin Steinbach |
| Abstract: | Banking regulation invites banks to gamble when buying government bonds that regulators consider to be risk-free. The adverse effects on financial stability are known. In turn, this study shows that governments have an incentive to use banking regulation in order to enhance their fiscal leeway. We examine an unintended side-effect of banking regulation, namely the zero-risk weighting of sovereign bonds, which leads to lower costs of borrowing, encourages over-borrowing, and undermines constitutional fiscal rules. Our empirical analysis, by estimating local projections, examines the reaction of the fiscal balance in euro area periphery countries to a restrictive macroprudential capital regulation shock. We find that, unlike in the US, euro area banks’ share of domestic government bond holdings increases after the shock. This feeds into cheaper and more government borrowing laying bare the undesired interaction between banking regulation and constitutional rules. By comparing the US with the European Union, there is plausibility that the US implemented regulatory treatment and fiscal constitutional rules in a fashion that is better able to minimize the negative spillovers from banking regulation on sovereign borrowing. By contrast, the EU would benefit from more risk-based macroprudential regulation and a more credible constitutional no-bailout regime for sub-federal entities. |
| Keywords: | banking regulation, constitutional fiscal rules, sovereign-bank nexus |
| JEL: | C33 G28 H63 K33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11190 |
| By: | Bence Bardóczy; Mateo Velásquez-Giraldo |
| Abstract: | We study the aggregate and distributional effects of monetary policy in a heterogeneous agent New Keynesian model that explicitly represents the life cycle of households. The model matches the age patterns in the level and dispersion of labor income and financial wealth in the U.S. despite the absence of preference heterogeneity and portfolio adjustment costs. Monetary policy affects the consumption of young households mainly through labor income and the consumption of old households mainly through asset returns. More than half of the aggregate consumption response to an expansionary monetary policy shock comes from those below the age of 40. The shock redistributes welfare from the wealthiest old to the poorest young and increases average welfare of most cohorts. |
| Keywords: | Life cycle; Heterogeneous agents new keynesian (hank) models; Monetary policy transmission |
| JEL: | E52 E21 E12 |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-52 |
| By: | Burban, Valentin; De Backer, Bruno; Vladu, Andreea Liliana |
| Abstract: | This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, π∗t , is applied to inflation-linked swap (ILS) rates, while taking into account survey-basedinflation forecasts. Estimates of π∗t have been close to 2% since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadlyanchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of π∗t are much above 2% in the early 1990s, but they convergence to levels below 2% by the end of the decade when the ECB was established. JEL Classification: E31, E43, E47, E58 |
| Keywords: | inflation-linked swap rates, inflation expectations, no-arbitrage, shifting endpoint, surveys |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242964 |
| By: | William D. Larson; Andrew B. Martinez |
| Abstract: | We examine the heterogeneous effects of mortgage interest rate shocks on house prices in a monthly panel of U.S. cities. Mortgage interest rate shocks, identified using Blue Chip forecast errors and monetary policy surprises, affect house prices more in cities where more borrowers have high debt burdens, consistent with a model with both price frictions and credit constraints. Responsiveness to interest rate shocks thus varies by location and time period, and is related to both borrower characteristics and underwriting rules. This has important implications for understanding monetary policy transmission, systemic risk, and the role of household finances in the macroeconomy. |
| Keywords: | Asset Pricing, Household Finance, House Price Bubbles |
| JEL: | G21 G51 E43 R30 C23 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2024-002 |
| By: | Couaillier, Cyril; Scalone, Valerio |
| Abstract: | In this paper, we propose a new framework to jointly calibrate cyclical and structural capital requirements. For this, we integrate a non-linear macroeconomic model and a stress test model. In the macroeconomic model, the severity of the scenarios depends on the level of cyclical risk. Risk-related scenarios are used as inputs for the stress test model. Banks’ capital losses derived from a scenario based on a reference level of risk are used to set the structural requirement. Additional losses associated with the current risk scenario are used to set the cyclical requirement. This approach provides a transparent method to strike the balance between cyclical and structural requirements. JEL Classification: C32, E51, E58, G01 |
| Keywords: | capital requirements, financial vulnerability, macroprudential policy, non-linear models |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242966 |
| By: | Sushant Acharya (CEPR - Center for Economic Policy Research); Edouard Challe (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | We study optimal monetary policy in an analytically tractable heterogeneous agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from a representative agent benchmark because monetary policy can affect consumption inequality, by stabilizing consumption risk arising from both idiosyncratic shocks and unequal exposures to aggregate shocks. The trade-off between consumption inequality, productive efficiency, and price stability is summarized in a simple linear-quadratic problem yielding interpretable target criteria. Stabilizing consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and price level relative to the representative agent benchmark. |
| Keywords: | New Keynesian Model, Incomplete Markets, Optimal Monetary Policy |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04645687 |
| By: | Adjemian, Stéphane; Bokan, Nikola; Darracq Pariès, Matthieu; Müller, Georg; Zimic, Srečko |
| Abstract: | This paper introduces ECB-(RE)BASE as the model-consistent, or rational expectation version of the ECB-BASE model. It brings new analytical capabilities to consider varying degrees of heterogeneity in expectation formation across the agents of the model. While the original version of ECB-BASE features VAR-based expectations, we examine two alternative versions either with full model-consistent expectations or with hybrid expectations. The paper provides a didactic exposition of the changes in the model properties brought by the various expectation settings. Furthermore, we conduct illustrative scenarios around the macroeconomic shocks experienced over the recent years. The simulations notably suggest that moving from VAR-based to model-consistent expectations would limit the pandemic-induced macroeconomic volatility but would exacerbate the price pressures during the inflation surge period. Overall, this model development extends the range of possibilities for risk and policy analysis which can enhance the contribution of ECB-(RE)BASE to monetary policy preparation. JEL Classification: C3, C5, E1, E2, E5 |
| Keywords: | euro area, model-consistent expectations, monetary policy, semi-structural model |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242965 |
| By: | Consolo, Agostino; Hänsel, Matthias |
| Abstract: | Since the advent of Heterogeneous Agent New Keynesian (HANK) models, countercyclical unemployment risk has been deemed an important amplification mechanism for business cycles shocks. Yet, the aggregate effects of such “unemployment fears” are hard to pin down. We thus revisit this issue in the context of a rich two-asset HANK model, proposing new ways to isolate their general equilibrium effects and tackle the long-standing challenge of modelling wage bargaining in this class of model. While unemployment fears can exert noticeable aggregate effects, we find their magnitude to depend importantly on the distribution of firm profits. Households’ ability to borrow stabilizes the economy. Our framework has also implications for policy: in the aftermath of an adverse energy price shock, fiscal policy can help reducing the hysteresis effects on unemployment and most households gain if the central bank accommodates an employment recovery at the cost of higher inflation. JEL Classification: D52, E24, E52, J64 |
| Keywords: | alternating offer bargaining, heterogeneous models, monetary and fiscal policy, search and matching models |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242953 |
| By: | William Allen |
| Abstract: | This paper aims to clarify aspects of official last-resort market making in government securities markets, namely that it is always an act of monetary policy and debt management, as well as of financial stability policy, and that its sole objective is to find a price at which two-way trading can re-start in a dysfunctional market. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrp:39 |
| By: | Krenz, Johanna; Tsiaras, Stylianos |
| Abstract: | We estimate the dynamic effects of a high-frequency identified unionwide quantitative easing (QE) shock on real GDP, inflation and unemployment in all euro area countries. We document that the effects of QE are very heterogenous across countries as regards size, significance and timing, especially with respect to GDP and unemployment. Exploiting the panel structure of our dataset, we show that the effect of QE on real GDP is amplified by a larger fraction of liquidity-constrained households in a country. The latter result seems to be driven by the general equilibrium impact of QE on unemployment. |
| Keywords: | Quantitative easing, inequality, LP-IV, DSGE, Household Finance and Consumption Survey (HFCS), Europe |
| JEL: | E52 E58 E24 C23 C26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:uhhwps:300655 |
| By: | Christina D. Romer; David H. Romer |
| Abstract: | Why do some attempts at disinflation lead to substantial reductions in inflation while others do not? We investigate this question in the context of the Federal Reserve’s attempts at disinflation since World War II. Our central finding is that a fundamental determinant of success in reducing inflation was the strength of the Federal Reserve’s commitment to disinflation at the start of its attempts. In episodes where its commitment was high, there were significant declines in inflation that were often long-lasting, while in ones where its commitment was low, falls in inflation were at most small and short-lived. We find that although the extent of the Federal Reserve’s commitment was often clear to the public, there is no evidence that stronger commitment to disinflation directly affected expected inflation. Rather, the main channel through which weak commitment led to unsuccessful disinflation was premature abandonment of the disinflationary policy. We conclude by discussing the implications for the Federal Reserve’s current effort at disinflation. |
| JEL: | E31 E52 E58 E65 N12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32666 |
| By: | Zhengyang Jiang; Jialu Sun |
| Abstract: | We document shifts in investor composition during quantitative tightening, which suggest that investors adjust their portfolios at different speeds. To understand its implications for bond valuation, we develop a general equilibrium model which highlights the dynamic interaction between heterogeneous investors. In the model, long-term investors have higher risk-taking capacity, but face a portfolio adjustment cost; liquidity traders have lower risk-taking capacity, but can trade freely. Our model predicts a novel overshooting pattern: when the central bank unwinds its bond purchase, slow adjustment by long-term investors requires liquidity traders to absorb the imbalance, who demand a higher risk premium that creates excessive bond price decline and volatility in the short run. As a result, quantitative tightening is not simply a symmetric reversal of quantitative easing. |
| JEL: | E5 G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32757 |
| By: | Beyer, Andreas; Schreiner, Lena |
| Abstract: | This paper provides a first empirical analysis of the impact of the European Central Bank’s (ECB’s) climate-risk-related supervisory efforts on (i) climate risk exposure and related risk management of banks; and (ii) on the induced shifts in banks’ portfolio choices with regard to additional green finance. From 2020 onwards, the ECB has introduced various measures to enhance climate-risk-related supervisory efforts. Our identification strategy exploits the fact that the ECB’s efforts on climate supervision has only been introduced for selected banks within the European Union i.e., the Significant Institutions under the Single Supervisory Mechanism. Other banks (i.e., the Less Significant Institutions) have remained unaffected. We set up a difference-in-difference setup based on a novel data set and find a significant impact on both improvements in climate risk exposure and management and on an increase in banks’ green finance activities. JEL Classification: D25, G21, G28 |
| Keywords: | banking supervision, climate stress test, green lending, sustainable finance |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242952 |
| By: | Akihito Yoneyama (Bank of Japan); Akitaka Tsuchiya (Bank of Japan); Noritaka Fukuma (Bank of Japan) |
| Abstract: | In this paper, we extract the implied probability distributions from daily option prices for the future levels of yen swap rates and the U.S. dollar/yen exchange rate, which came under upward pressure amid rate hikes by central banks in the United States and Europe from 2022 to 2023, using data through the end of 2023. The extracted implied probability distributions allow us to understand the overall picture of market participants' risk perceptions, which cannot be captured by other simpler indicators such as risk reversal. The results suggest that caution about a higher interest rate increased significantly in the yen interest rate swaps market toward the middle of 2022, as overseas interest rates rose. Such caution further heightened after the Bank of Japan decided to expand the range of 10-year Japanese government bond (JGB) yield fluctuations from the target level at the Monetary Policy Meeting (MPM) held in December 2022, but subsequently eased. In the U.S. dollar/yen market, caution about future yen depreciation heightened toward fall 2022 as the yen weakened. However, when the yen weakened against U.S. dollar again to around the same level in fall 2023, market participants did not become as cautious as in fall 2022 about the future yen depreciation. |
| Keywords: | implied probability distributions; Yen interest rates; U.S. dollar/yen exchange rate |
| JEL: | F31 G12 G13 G17 |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev24e08 |
| By: | Sindala, Elvin; Musonda, Gabriel; Mumba, Matrina; Basila, Moono |
| Abstract: | Inflation, exchange rate and gross domestic product (GDP) are critical variables to macroeconomic stability. For a small economy like Zambia, it is imperative for central authorities to establish the size and degree of the exchange rate pass-through (ERPT) to domestic prices and output as they formulate monetary policies. This paper examines the effect of ERPT to domestic prices and local production using the vector error correction model (VECM) for the period 1995Q1 to 2019Q4. The study utilizes the baseline and alternative models for intra study comparisons. Results show that the ERPT to domestic prices is high, persistent, and incomplete in the baseline model while the alternative model depicts a low, persistent, and incomplete ERPT in the long run. Furthermore, the long run ERPT to local production was found to be high, persistent, and complete. Policy implications are that monetary and fiscal policies should be geared towards exchange rate measures that would contribute to both internal and external balances and nurture macroeconomic stability. The measures would include management of exchange rate volatility, effective debt sustainability strategies and reviving as well as broadening the manufacturing sector in Zambia to nurture an export-oriented economy. |
| Keywords: | Price; exchange rate; local production; VECM |
| JEL: | E0 E00 E01 E02 E03 E4 E42 E44 F1 F14 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121533 |
| By: | Ray C. Fair (Yale University) |
| Abstract: | This paper makes three main contributions. First, inflation expectation equations are estimated using quarterly time series data. Second, a price equation in level form is estimated that is consistent with the data, unlike Phillips-curve equations. Third, the case is considered in which an expectation variable in an inflation or price equation is not causal. The results suggest that household inflation expectations are mostly affected by current and past inflation. The Fed through interest rates has a modest effect. In the estimated price equation a measure of the expected future price level is significant, although it may not be causal. Whether it is or not, the results show that the Fed’s ability to affect inflation is modest since its effect on expectations is modest. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2401 |