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on Central Banking |
| By: | Liang, Pauline (Stanford U); Sampaio, Matheus (Northwestern U); Sarkisyan, Sergey (Ohio State U) |
| Abstract: | We examine the impact of digital payments on the transmission of monetary policy by leveraging administrative data on Brazil's Pix, a digital payment system. We find that Pix adoption diminished banks' market power, making them more responsive to changes in policy rates. We estimate a dynamic banking model in which digital payments amplify deposit demand elasticity. Our counterfactual results reveal that digital payments intensify the monetary transmission by reducing banks' market power-banks respond more to policy rate changes, and loans decrease more after monetary policy hikes. We find that digital payments impact monetary transmission primarily through the deposit channel. |
| JEL: | E42 E52 G21 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:ohidic:2024-14 |
| By: | Mistak, Jakub; Ozkan, F. Gulcin |
| Abstract: | This paper examines the asymmetry in global spillovers from Fed policy across tightening versus easing episodes several examples of which have been on display since the global financial crisis (GFC). We build a dynamic general equilibrium model featuring: (i) occasionally binding collateral constraints in the financial sector with significant cross-border exposure; and (ii) global supply chains, allowing us to match the asymmetry of spillovers across contractionary versus expansionary monetary policy shocks. We find clear asymmetries in the transmission of US monetary policy, with significantly larger spillovers during contractionary episodes under both conventional and unconventional monetary policy changes. Our results also reveal that the greater the size of international credit and supply chain networks and the policymakers’ aversion to exchange rate fluctuations in the rest of the world, the greater the spillover effects of US monetary policy shocks. JEL Classification: E52, F41, E44 |
| Keywords: | capital flows, emerging markets, monetary policy, spillovers, supply chains |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242995 |
| By: | Alfred Duncan; Joao Pedro De Camargo Mainente; Charles Nolan |
| Abstract: | We present a model with macroprudential externalities emerging from market allocation of aggregate risks. The model predicts a paradox of safety: an increase in household risk aversion increases the volatility of output and consumption. Optimal monetary and macroprudential policies are designed to stabilise the economy whilst not exacerbating moral hazard in future periods. There is typically a macroprudential role for monetary policy, sometimes a dominant role, even when macroprudential policies are set optimally. But there are limits too. A monetary policy that focuses overly on financial stability loses control of inflation. |
| Keywords: | Macroeconomics, Incomplete Markets, Monetary Policy. |
| JEL: | D52 E32 E52 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_12 |
| By: | Jan Toporowski (SOAS, University of London) |
| Abstract: | The discussion of financial stability, and the role of monetary policy, is incoherent because there is very little agreement on what constitutes financial stability (and, by implication, instability) - exchange rate stability, asset price stability, absence of debt default. By implication, there is a gap between the claims of various authors to the general applicability of their respective analyses, and the actual applicability of their conclusions, let alone the usefulness of some of their policy recommendations. The paper argues that the key issue is the regulation of the liquidity of all financial markets, and not just that of the banking system, through the markets for government securities. The paper examines the sources of this liquidity in the financial portfolios of the private sector, and how that liquidity may be managed through the open market operations of central banks and the debt management operations of governments. An implication of this approach is yield curve control and the use of (government) debt management to control the liquidity of the markets. These elements of monetary policy have been neglected in theory and policy since the 1950s. |
| Keywords: | monetary policy, liquidity, debt management, yield curve control. |
| JEL: | E50 G24 G29 H63 |
| Date: | 2024–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp218 |
| By: | Tatiana Kirsanova; Campbell Leith; Ding Liu |
| Abstract: | We develop a New Keynesian model augmented with a rich description of fiscal policy, including debt maturity structure, where two policymakers- an independent inflation-averse central bank and a (potentially) populist fiscal authority- interact strategically. Central bank independence initially improves inflation outcomes, but this results in reduced fiscal discipline and increased debt. Eventually this leads to inflation lying above pre-independence levels. Introducing a ‘flight-to-safety’ regime, which suppresses the interest rates households require to hold government debt, and a conventional regime, where their time preferences return to normal, allows us to explore how changes in the natural rate can dramatically affect debt dynamics and inflation outcomes. The model offers an explanation of the buildup of government debt since the financial crisis and the subsequent emergence of significant inflation |
| Keywords: | New Keynesian Model; Central Bank Independence; Government Debt; Monetary Policy; Fiscal Policy; Time Consistency. |
| JEL: | E31 E43 E62 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_10 |
| By: | Lukas Berend; Jan Pr\"user |
| Abstract: | We use a FAVAR model with proxy variables and sign restrictions to investigate the role of the euro area common output and inflation cycles in the transmission of monetary policy shocks. We find that common cycles explain most of the variation in output and inflation across member countries, while Southern European economies show larger deviations from the cycles in the aftermath of the financial crisis. Building on this evidence, we show that monetary policy is homogeneously propagated to member countries via the common cycles. In contrast, country-specific transmission channels lead to heterogeneous country responses to monetary policy shocks. Consequently, our empirical results suggest that the divergent effects of ECB monetary policy are due to heterogeneous country-specific exposures to financial markets and not due to dis-synchronized economies of the euro area. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.05741 |
| By: | Thomas Ferguson (Institute for New Economic Thinking); Servaas Storm (Delft University of Technology) |
| Abstract: | This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed's own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed's quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular. |
| Keywords: | Inflation; wage-price spiral; inflation expectations; effectiveness of monetary tightening; Phillips curve; central bank credibility; labor market tightness; real earnings growth; earnings uncertainty; the Beveridge ratio; wealth; wealth effect on consumption; affluent consumption; services inflation. |
| JEL: | E0 E5 E6 E62 O23 I12 J08 |
| Date: | 2024–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp227 |
| By: | Javier Bianchi; Alisdair McKay; Neil Mehrotra |
| Abstract: | A persistent rise in rents has kept inflation above target in many advanced economies. Optimal policy in the standard New Keynesian (NK) model requires policy to stabilize housing inflation. We argue that the basic architecture of the NK model—that excess demand is always satisfied by producers—is inappropriate for the housing market, and we develop a matching framework that allows for demand rationing. Our findings indicate that the optimal response to a housing demand shock is to stabilize inflation in the non-housing sector while disregarding housing inflation. Our results hold exactly in a version of the model with costless search and quantitatively in a version with housing search costs calibrated to match US data on housing tenure, vacancy rates, and the size of the real estate sector. |
| Keywords: | Housing; Monetary policy; Stabilization policy; Inflation |
| JEL: | E24 E30 E52 |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:99022 |
| By: | Jérôme Creel (OFCE); François Geerolf; Sandrine Levasseur; Xavier Ragot; Francesco Saraceno |
| Abstract: | During the recent inflation episode, the paradigm of separated objectives for monetary and fiscal policies has shown some limits. Fiscal policies have helped mitigate inflation. We advocate for the emergence of a new paradigm that gives equal consideration to fiscal and monetary policies and their interactions. These interactions and their respective spillover effects demand better political coordination and a good dose of pragmatism, in contrast with the binding rules embedded in the separation paradigm so present in the European governance framework. The latter should give more leeway to supply-driven fiscal policies and learn from the US experience. |
| Keywords: | fiscal policy, monetary policy, inflation, Tinbergen, coordination |
| JEL: | E50 E60 H12 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:agz:wpaper:2404 |
| By: | Mario Cerrato; Shengfeng Mei |
| Abstract: | Recently, Cooperman et al. (2023) show that the covariance of banks’ funding costs and credit lines draw-downs is debt overhang costs for the bank’s equity holders. In this paper, we empirically and theoretically study whether this cost can be mitigated by central banks’ quantitative easing. We focus on the COVID-19 shock. Based on Cooperman et al. (2023), we empirically f ind that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer that cost to the credit lines’ fees. However, our econometric analysis, event studies, and theory suggest and formalise why central banks’ quantitative easing (QE) can be crucial to mitigating that cost, thereby ensuring a cheaper supply of credit to the economy. Our f indings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), focusing on an important source of credit for firms: credit lines. |
| Keywords: | Quantitative Easing, Central Bank, Debt Overhang, Credit Line |
| JEL: | G01 G21 G28 G32 E44 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_05 |
| By: | Servaas Storm (Delft University of Technology) |
| Abstract: | Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that "we don't think that the recent experience justifies throwing out existing models of wage-price dynamics." This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses. |
| 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: | 2024–03–29 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp220 |
| By: | Lorenzo Carbonari (Dipartimento di Economia e Finanza, Università degli Studi di Roma “Tor Vergata”, Italy; CEIS); Alessio Farcomeni (Dipartimento di Economia e Finanza, Università degli Studi di Roma “Tor Vergata”, Italy); Cosimo Petracchi (Dipartimento di Economia e Finanza, Università degli Studi di Roma “Tor Vergata”, Italy); Giovanni Trovato (Dipartimento di Economia e Finanza, Università degli Studi di Roma “Tor Vergata”, Italy; CEIS) |
| Abstract: | e present a model for data reduction and provide time-fixed indicators for macroprudential policies. Using a panel of 119 countries from 2000 to 2015, we empirically assess the effectiveness of macroprudential policies in reducing volatility in private credit. Unobserved heterogeneity among countries is an important factor. We employ an econometric model that accounts for this heterogeneity and document that the impact of macroprudential policies on financial stability varies, leading to either deterioration or improvement, depending on the macroeconomic conditions of the country in which they are implemented. |
| Keywords: | Macroprudential policies, Financial cycles, unobserved heterogeneity, Generalized additive models for location, scale and shape |
| JEL: | E43 E58 G18 G28 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-16 |
| By: | Dominik Hecker; Hun Jang; Margarita Rubio; Fabio Verona |
| Abstract: | In this paper, we design countercyclical capital buffer rules that perform robustly across a wide range of Dynamic Stochastic General Equilibrium (DSGE) models. These rules offer valuable guidance for policymakers uncertain about the most appropriate model(s) for decision-making. Our results show that robust rules call for a relatively restrained response from macroprudential authorities. The cost of insuring against model uncertainty is moderate, emphasizing the practicality of following these robust countercyclical capital buffer rules in uncertain economic environments. Keywords: |
| Keywords: | countercyclical capital buffers, macroprudential policy, model comparison, structural models, model uncertainty, robust rule |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/04 |
| By: | García-Lembergman, Ezequiel; Hajdini, Ina; Leer, John; Pedemonte, Mathieu; Schoenle, Raphael |
| Abstract: | Using a novel dataset that integrates inflation expectations with information on social network connections, we show that inflation expectations within one's social network have a positive, causal relationship with individual inflation expectations. This relationship is stronger for groups that share common demographic characteristics such as gender, income, or political affiliation and when salient information disseminates through the network. In a monetary union New-Keynesian model, socially determined inflation expectations induce imperfect risk-sharing and can affect the inflation and real output propagation of local and aggregate shocks. To reduce welfare losses due to socially determined expectations, monetary policy should optimally put more weight on the inflation rate of socially more connected regions. |
| Keywords: | Inflation expectations;Social network;Monetary union |
| JEL: | E31 E71 C83 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13787 |
| By: | Fleischhacker, Jan |
| Abstract: | In this paper, I explore how fiscal policy decisions relate to the business cycle and, building on that, how the effects of policy interventions may vary depending on when policy is conducted in the business cycle. To assess this, I estimate a small to medium-sized DSGE model with expressive non-linear fiscal and monetary rules using a higher-order approximation. The estimation procedure employed in this paper combines several existing approaches developed by Herbst and Schorfheide (2016), Jasra et al. (2010), Buchholz, Chopin and Jacob (2021) and Amisano and Tristani (2010) to trade off computation time and inference quality. The model is estimated using Sequential Monte Carlo techniques to estimate the posterior parameter distribution and particle filter techniques to estimate the likelihood. Together, the estimation procedure reduces the estimation from weeks to days by up to 94%, depending on the comparison basis. To assess the behaviour of the effects of fiscal policy interventions, I sample impulse responses conducted along the historical data. The results present time-varying policy rules in which the effects of fiscal shocks go through deep cycles depending on the initial conditions of the economy. Among the set of fiscal instruments, government consumption goes through the most persistent cycles in its effectiveness in stimulating output. In particular, the effects of government consumption stimulus are estimated to be more effective during the financial crisis and, later, the Covid crisis, while being less effective in periods of above steady state output like the early 2000s. Relating the effects of specific stimulating shocks to the initial conditions using regression techniques, I show that fiscal policy is more effective at stimulating output if the interest rate and debt are low. Furthermore, the effects of government consumption are estimated to be increasing in output while tax cuts are decreasing. As a last contribution, I explore how the behaviour of the central bank and government varies depending on the business cycle by analysing sampled policy rule gradients constructed on historical data. For the central bank, the results show that in phases of high output growth, the central bank puts more emphasis on controlling inflation and less on output. As the economy shifts into crisis, the central bank reduces its focus on inflation and shifts towards bringing output growth back to target. For the fiscal side, the behaviour is heavily governed by the current debt level, and, for example, during the high debt periods of the 1990s, labour taxation became increasingly responsive to debt to stabilize the budget. |
| Keywords: | DSGE fiscal policy non-linear state-space business cycle particle filter bayes SMC MH RWMH Kalman state-dependend |
| JEL: | C1 C11 C4 C5 C6 E62 |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122497 |
| By: | Martine Warren; Bill Laur; Ted Garanzotis; Sebastian Hernandez |
| Abstract: | Research into a hypothetical Digital Canadian Dollar has largely focused on public policy, financial technology innovations and public opinion. In this study, we explore the consumer value proposition of a hypothetical Digital Canadian Dollar, considerations for its adoption and the users who would benefit most from this potential new payment method. We employ a design-thinking consultation methodology, allowing participants to interact with research prototypes of increasing complexity to reveal user preferences, constraints, and adoption influences. Qualitative insights are corroborated using quantitative, large-population surveys and contrasted with results from a Bank of Canada open online public consultation. We find that most participants would support the issuance of a hypothetical Digital Canadian Dollar, and we identify the segments most likely to be early adopters. However, broad early adoption is unlikely given that available payment methods meet the needs of most users. Financially vulnerable segments often have the most to gain from this new payment method but are most resistant to adoption. Important considerations for appeal and adoption potential include universal merchant acceptance, low costs, easy access, simplified online payments, shared payment features, budgeting tools, and customizable security and privacy settings. Participants cited these features far more often than offline functionality and the ability to make anonymous payments. Our results also show that cash remains an important method of payment and that certain groups may strongly resist a Digital Dollar if they conflate its launch with the end of cash issuance. We find a hypothetical Digital Canadian Dollar requires the support of an information campaign to be understood, valued and adopted. |
| Keywords: | Accessibility; Bank notes; Central bank research; Digital currencies and fintech |
| JEL: | C9 D12 E42 E58 O3 O33 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-16 |
| By: | Pei Kuang; Michael Weber; Shihan Xie |
| Abstract: | We conduct a survey experiment with a large, politically representative sample of U.S. consumers (5, 205 participants) to study how perceptions of the U.S. Federal Reserve’s (Fed) political stance shape macroeconomic expectations and trust in the Fed. The public is divided on the Fed’s political leaning: most Republican-leaning consumers believe the Fed favors Democrats, whereas most Democrat-leaning consumers perceive the Fed as favoring Republicans. Consumers who perceive the Fed as aligned with their political affiliations tend to (1) have a more positive outlook on current and future economic conditions and express higher trust in the institution, (2) show greater willingness to pay for and are more likely to receive Fed communications, and (3) assign significantly more weight to Fed communications when updating their inflation expectations. Strong in-group favoritism generally amplifies these effects. Finally, if Trump were elected U.S. president, consumers would overwhelmingly view the Fed as favoring Republicans. The proportion of consumers viewing the Fed as an in-group would remain stable, but its composition would shift: Democrat-leaning consumers would see the Fed as less of an in-group, whereas more Republican-leaning consumers would perceive it in this way. Likewise, overall public trust in the Fed would remain steady, but trust among Democrat-leaning consumers would decline significantly, whereas it would rise among Republican-leaning consumers. |
| JEL: | D72 D83 D84 E31 E7 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33071 |