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on Central Banking |
| By: | Marc Burri and Daniel Kaufmann |
| Abstract: | We propose a two-step approach to estimate multi-dimensional monetary policy shocks and their causal effects requiring only daily financial market data and policy events. First, we combine a heteroscedasticity-based identification scheme with recursive zero restrictions along the term structure of interest rates to disentangle multi-dimensional monetary policy shocks and derive an instrumental variables estimator to estimate dynamic causal effects. Second, we propose to use the Kalman filter to compute the linear minimum mean-square-error prediction of the unobserved monetary policy shocks. We apply the approach to examine the causal effects of US monetary policy on the exchange rate. The heteroscedasticity-based monetary policy shocks display a relevant correlation with existing high-frequency surprises. In addition, their dynamic causal effects on the exchange rate are similar. This suggests the approach is a valid alternative if high-frequency identification schemes are not applicable. |
| Keywords: | Monetary policy shocks, forward guidance, large-scale asset purchases, identification through heteroscedasticity, instrumental variables, term structure of interest rates, exchange rate |
| JEL: | C3 E3 E4 E5 F3 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:irn:wpaper:24-03 |
| By: | Philipp Engler; Gianluigi Ferrucci; Pawel Zabczyk; Tianxiao Zheng |
| Abstract: | We provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies, using a combination of empirical methods and model-based simulations and focusing on spillovers from interest rate and balance sheet policies implemented by the ECB. We consider an event study set around the ECB policy announcement in June 2022 and also use local projections to estimate regional spillovers in a panel of 16 Emerging European countries spanning 1999 to 2022. Identifying ECB monetary policy shocks as the unexplained component of changes in the three-month Euribor futures rate, we find that ECB monetary policy tightening induces more than one-for-one changes in government bond yields in Emerging Europe, as well as sizable increases in sovereign spreads, domestic currency depreciations, and significantly lower output. Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors reveal that a conventional tightening, achieved through interest rate increases, provides a more favorable inflation-output trade-off compared to balance sheet tightenings. The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction, and it is larger under a fixed exchange rate regime. |
| Keywords: | Monetary Policy; Quantitative Easing; International Spillovers |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/170 |
| By: | Andres Escayola, Erik; McQuade, Peter; Schroeder, Christofer; Tirpák, Marcel |
| Abstract: | Monetary policy decisions by the Federal Reserve System in the US are widely recognised to have spillover effects on the rest of the world. In this paper, we focus on the asymmetric effects of US monetary policy shocks on macro-financial outcomes in emerging market economies (EMEs). We shed light on how domestic factors shape external monetary policy spillover effects using indicators on the macro-financial vulnerabilities and monetary policy stances of EMEs. We find that a surprise tightening of monetary policy in the US leads to an immediate tightening of financial conditions which leads to a decline in activity and prices in EMEs over one year. Importantly, these effects are amplified in periods of high vulnerabilities and attenuated when EMEs follow a prudent monetary policy stance. Our findings help explain the greater resilience of many EMEs to the Fed’s post-COVID-19 tightening cycle, and highlight the benefits of the broad improvements of monetary policy frameworks in these countries. JEL Classification: F42, E58, E52, C32 |
| Keywords: | emerging markets, monetary policy, spillovers |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242973 |
| By: | Herr, Hansjörg |
| Abstract: | Today all countries have fiat money issued by a central bank. There is no obligation by a central bank to exchange its money for gold or any other good. Central banks have the monopoly to issue central bank money and have the power to create their money out of nothing. Creating such a monetary system is functional for a capitalist economy and must be regarded as a major feat of civilization, which could only be completed after around 200 years of capitalist development. This article traces the painful farewell from gold from the Classical Gold Standard in the early 19th century up to the end of the Bretton Woods system in the mid-20th century. |
| Keywords: | money, gold standard, currency systems |
| JEL: | E40 N20 P20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:300844 |
| By: | Marijn A. Bolhuis; Jakree Koosakul; Mr. Neil Shenai |
| Abstract: | Since the Global Financial Crisis, fiscal policy in advanced economies has become more “active” – that is, increasingly unresponsive to rising debt levels. This paper explores tensions between active fiscal and monetary policies by introducing the concept of “fiscal r-star, ” which is the real interest rate required to stabilize debt levels when the primary balance is set exogenously, output is growing at potential, and inflation is at target. It is proposed that the difference between monetary r-star and fiscal r-star—referred to as the “fiscal monetary gap”—is a proxy for fiscal-monetary policy tensions. An analysis of over 140 years of data from 16 advanced economies shows that larger fiscal-monetary gaps are associated with rising debt levels, higher inflation, financial repression, lower real returns on bonds and cash, with elevated risks of future debt, inflation, currency, housing, and systemic crises. Current estimates indicate that fiscal-monetary tensions are at historic highs. Given the tepid growth outlook, growth-enhancing reforms and fiscal consolidation, among other policy adjustments, may be needed to attenuate fiscal-monetary tensions over time. |
| Keywords: | Fiscal r-star; fiscal-monetary gap; fiscal-monetary interactions; fiscal dominance; inflation; fiscal consolidation; monetary policy; fiscal policy; policy space; financial repression; debt liquidation |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/174 |
| By: | Ahmet Degerli; Phillip J. Monin |
| Abstract: | In this note, we examine the recent growth of private credit markets and its effects on monetary policy transmission. We find that private credit has grown by competing with or substituting other forms of credit and by lending to a set of borrowers that have difficulty obtaining credit otherwise. |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-08-02-1 |
| By: | Mr. Ales Bulir; Mr. Jan Vlcek |
| Abstract: | Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or have we observed a long sequence of shocks that have pushed market rates below the equilibrium level? In this paper we show on a sample of 12 open economies that once we account for equilibrium real exchange rate appreciation/depreciation, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero. The explicit inclusion of equilibrium real exchange rate appreciation in the identification of the natural rate is the main deviation from the Laubach-Williams approach. On top of that, we use a full-blown semi-structural model with a monetary policy rule and expectations. Bayesian estimation is used to obtain parameter values for individual countries. |
| Keywords: | r-star; zero lower bound; equilibrium real appreciation; Penn effect |
| Date: | 2024–07–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/161 |
| By: | Glas, Alexander; Schölkopf, Julius |
| Abstract: | On 6 June 2024, the European Central Bank (ECB) lowered the main refinancing operations (MRO) rate from 4.5% to 4.25%. This decision followed a period of elevated interest rates intended to combat high inflation in the euro area, which peaked at 10.6% in October 2022 in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine. Although inflation levels are now closer to the ECB's medium-term target of 2%, some doubt remains on whether the inflationary pressure has truly abated, since the last mile of the inflation cycle is often perceived as challenging. Indeed, inflation increased again in May 2024 to 2.6%, from 2.4% in April, and the ECB has not committed itself to a certain interest rate path. Instead, it follows a data-dependent meeting-by-meeting approach for further interest rate decisions. In this policy brief, we analyse whether and how much professional forecasters and market analysts disagree on the nature and speed of future interest rate decisions by the ECB. We also consider the role of uncertain dynamics of future inflation and the economic recovery in the euro area to explain the dispersion of interest rate expectations. For this purpose, we asked the participants in the June 2024 wave of the ZEW's Financial Market Survey for their expectations regarding interest rate decisions at upcoming Governing Council meetings. We condition the individual responses on the respondents' short- and medium-term inflation and GDP growth expectations and supplement our findings with similar evidence for the US. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewpbs:300832 |
| By: | Flavio Abanto Salcedo (Central Reserve Bank of Peru (BCRP)) |
| Abstract: | This paper presents an empirical analysis of the effectiveness of foreign exchange (FX) intervention in Peru, with emphasis on the intervention carried out through derivative instruments. I use two different but related approaches to estimate the impact of these kind of interventions between 2014 and 2023. First, I estimate a proxy SVAR with daily data which uses an instrument constructed with intraday data. Results show that FX interventions have an impact on the level of the exchange rate in the expected direction: an FX sale intervention of between USD 60 and USD 120 million generates an appreciation of between 0.02 and 0.04 percent of the currency in the same day. On the other hand, spot intervention is found to be slightly more effective. The estimations, however, do not provide sufficient evidence to conclude on the impact on the exchange rate volatility in the short run. Second, I estimate event study regressions with intraday data, which allowed to confirm that these interventions have the expected effect after around 10 minutes. However, no evidence of the existence of an information channel is found since the announcement of these interventions does not significantly impact the exchange rate. |
| Keywords: | foreign exchange intervention; currency; derivatives; derivate instruments; Peru; exchange rate |
| JEL: | F31 G11 G14 G15 |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2024 |
| By: | Leon Kempen; Johan Pouwelse |
| Abstract: | Current digital payment solutions are fragile and offer less privacy than traditional cash. Their critical dependency on an online service used to perform and validate transactions makes them void if this service is unreachable. Moreover, no transaction can be executed during server malfunctions or power outages. Due to climate change, the likelihood of extreme weather increases. As extreme weather is a major cause of power outages, the frequency of power outages is expected to increase. The lack of privacy is an inherent result of their account-based design or the use of a public ledger. The critical dependency and lack of privacy can be resolved with a Central Bank Digital Currency that can be used offline. This thesis proposes a design and a first implementation for an offline-first digital euro. The protocol offers complete privacy during transactions using zero-knowledge proofs. Furthermore, transactions can be executed offline without third parties and retroactive double-spending detection is facilitated. To protect the users' privacy, but also guard against money laundering, we have added the following privacy-guarding mechanism. The bank and trusted third parties for law enforcement must collaborate to decrypt transactions, revealing the digital pseudonym used in the transaction. Importantly, the transaction can be decrypted without decrypting prior transactions attached to the digital euro. The protocol has a working initial implementation showcasing its usability and demonstrating functionality. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.13776 |