nep-mac New Economics Papers
on Macroeconomics
Issue of 2023‒06‒26
thirteen papers chosen by
Daniela Cialfi
Universita' di Teramo

  2. MONEY VELOCITY, DIGITAL CURRENCY, AND INFLATION DYNAMICS By Danny Hermawan Adiwibowo; Aryo Sasongko; Denny Lie
  3. The monetary and macroprudential policy framework in Colombia in the last 30 years: the lessons learnt and the challenges for the future By Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
  4. Stability and determinants of the public debt-to-GDP ratio: a Stock-Flow Consistent investigation By Lorenzo Di Domenico
  5. Media Treatment of Monetary Policy Surprises and Their Impact on Firms’ and Consumers’ Expectations By Julien Pinter; Evžen Kocenda
  6. The Federal Reserve's Response to the Global Financial Crisis and Its Long-Term Impact: An Interrupted Time-Series Natural Experimental Analysis By Arnaud Cedric Kamkoum
  7. Guatemala: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Guatemala By International Monetary Fund
  8. Cognitive constraints and economic incentives By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  9. Long-term debt propagation and real reversals By Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
  10. Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis By Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
  11. Towards High-Value Datasets determination for data-driven development: a systematic literature review By Anastasija Nikiforova; Nina Rizun; Magdalena Ciesielska; Charalampos Alexopoulos; Andrea Mileti\v{c}
  12. Global PeaceTech: Unlocking the Better Angels of our Techne By Kalypso Nicolaidis; Michele Giovanardi
  13. Does Principal Component Analysis Preserve the Sparsity in Sparse Weak Factor Models? By Jie Wei; Yonghui Zhang

  1. By: Solikin M. Juhro (Bank Indonesia); Denny Lie (University of Sydney); Atet Rizki Wijoseno (University of North Carolina); Mohammad Aly Fikry (Bank Indonesia)
    Abstract: This paper seeks to answer the following policy-relevant questions: (i) does the complementarity between monetary and macroprudential policies depend on the monetary and fiscal policy stances, and (ii) what is the likely aggregate effect of a central bank digital currency (CBDC) issuance on the existing central bank policy mix (CBPM) framework. We analyze these questions within a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model for Indonesia with a non-trivial fiscal policy and a parsimonious CBDC effect. On the first question, we find that monetaryfiscal policy stances do matter for whether a macroprudential policy rule stabilizes business cycle fluctuations and is welfare-improving. It is still the case, however, a passive monetary, active fiscal regime (PMAF) is sub-optimal compared to the active monetary, passive fiscal (AMPF) regime counterpart. On the second question, we find that a CBDC issuance lowers the transaction costs and its effects on aggregate economic variables are similar to the effects of a permanent technological progress.
    Keywords: integrated policy framework, central bank policy mix, DSGE model for Indonesia, monetary-fiscal policy coordination, macroprudential-fiscal policy coordination, central bank digital currency (CBDC)
    JEL: E12 E32 E58 E61 E63 F41
    Date: 2022
  2. By: Danny Hermawan Adiwibowo (Bank Indonesia); Aryo Sasongko (Bank Indonesia); Denny Lie (University of Sydney)
    Abstract: This paper empirically investigates the impact of transaction cost-induced varia- tions in the velocity of money on infation dynamics in Indonesia, based on a struc- tural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. This money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction cost and facilitating purchases of goods and services. We fnd a signifcant aggregate impact: our preferred estimates suggest that a 10% reduction in money velocity, which may be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the infation rate by 1%, all else equal. Using the estimates and within a small-scale, structural New Keynesian model, we investigate the likely implications of a CBDC issuance on aggregate nominal and real fuctua- tions. A CBDC issuance that (conservatively) lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0.8% and lower the infation rate by 0.8%. Both nominal and real interest rates are also permanently lower. Shocks to the velocity of money are an important driver of aggregate fuctuations.
    Keywords: inflation dynamics, transaction cost, velocity of money, digital money, digital currency, digital payments, central bank digital currency (CBDC).
    JEL: E31 E32 E42 E52 E58
    Date: 2022
  3. By: Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
    Abstract: Over the past 30 years, monetary and macroprudential policy in Colombia evolved towards the pursuit of a low and credible inflation target and a stable financial system. The protracted inflation that began in the early seventies was defeated at the turn of the century with the help of the new framework for monetary policy formulation, inflation targeting. In the field of macroprudential policy, the financial crisis of the late nineties led to important institutional developments in the formulation and coordination of macroprudential policy, as well as in the assessment of systemic risk. Along with these developments, important lessons have been learnt. One is that, to preserve macroeconomic stability, the price stability objective must be complemented with the financial stability objective, as well as with macroprudential policy. Another lesson is that the new institutional framework for monetary policy formulation helped Banco de la República overcome 25 years of inflation, then called moderate inflation. The challenges for the future include to continue preserving price and financial stability, strengthening the role of the Banco de la República in macroprudential policy, and to continue strengthening the channels of international coordination and cooperation in macroprudential policy. **** RESUMEN: En los últimos 30 años la política monetaria y macroprudencial de Colombia transitó hacia la búsqueda de un objetivo de inflación bajo y creíble, así como de un sistema financiero estable. La prolongada inflación que comenzó a comienzo de los años setenta fue superada a comienzo del nuevo siglo con la ayuda del nuevo régimen para la formulación de la política monetaria, de meta de inflación. En el ámbito de la política macroprudencial, la crisis financiera de finales de los años noventa llevó a importantes avances institucionales para la coordinación de la política macroprudencial y para la evaluación del riesgo sistémico. A lo largo de estos desarrollos importantes lecciones han sido aprendidas. Una de ellas es que, para preservar la estabilidad macroeconómica, el objetivo de estabilidad de precios debe ser complementado con el de estabilidad financiera, así como con la política macroprudencial. Otra lección es que el nuevo marco institucional para la formulación de la política monetaria ayudó al Banco de la República a superar 25 años de inflación, entonces llamada inflación moderada. Entre los retos están continuar preservando la estabilidad de precios y la estabilidad financiera, reforzar el papel del Banco de la República en la política macroprudencial y continuar fortaleciendo los canales de coordinación y cooperación internacional en la política macroprudencial.
    Keywords: Macroprudential policy, Monetary policy, Inflation targeting, Foreign exchange market intervention, Financial stability, Política macroprudencial, Política monetaria, Régimen de meta de inflación, Intervención en el mercado cambiario, Estabilidad financiera
    JEL: E5 E52 E44 E58 E61 G01 G18 G21 G28
    Date: 2023–06
  4. By: Lorenzo Di Domenico
    Abstract: This paper aims to outline the stability conditions and the determinants of the public debt-to-GDP ratio within a theoretical framework representing the main features of a monetary economy of production. To this end, we develop two macro – Stock Flow Consistent (SFC) models that, unlike traditional ones that are studied through simulations, are solved analytically. In detail, we firstly derive such conditions from a SFC model of a dynamic version of the traditional income-expenditure scheme with endogenous public debt service and only fiat money. Secondly, we extend the model to include investments and bank loans, thus considering both fiat and private money creation. Thereby, we develop an analytically solvable SFC model based on the Supermultiplier approach. Our main findings outline that: i) The steady-state value of the public debt-to-GDP ratio is determined by the saving rate, the growth rate of primary public spending, the tax rate, the capital intensity of the production process and the interest rate. Given these values, there exists a “natural” level of the public debt-to-GDP ratio towards which the system converges in the long-run. In particular, the public debt-to-GDP ratio depends positively on the saving rate and negatively on the tax rate and growth rate of autonomous spending, while the interest rate has a non-linear effect. This result calls into question the idea of imposing exogenously given thresholds for targeting budgetary rules independently from the very specific features of each economic system; ii) The necessary condition for the stability of the public debt-tp-GDP ratio is the absence of fiscal rules jointly to no full-hoarding of income from interest on public bonds. It becomes sufficient when one of the following is fulfilled: the growth rate of primary public expenditure or the interest rate or the propensity to consume out-of-wealth is higher than zero. Finally, we highlight that permanent expansions in the level of public expenditure have only a transitory effect on the public debt-to-GDP ratio, in the long-run its value goes back to the level determined by the above-mentioned parameters. The only fiscal manoeuvres that Government has at its disposal to lower the ratio are: a persistent increase in the growth rate of public spending or an increase in the tax rate.
    Keywords: Public debt-to-GDP ratio, Stability, Fiscal policy, Stock-Flow Consistent models
    JEL: E12 E17 E42 E43 E52 E62
    Date: 2022–08
  5. By: Julien Pinter; Evžen Kocenda
    Abstract: Do firms’ and consumers’ expectations react to central bank announcements? Past literature has come to divergent conclusions, but it has systematically ignored how media treat the announcements. This paper investigates the link between monetary policy announcements and expectations by taking into account their media treatment. We initially rely on the standard monetary policy surprise measures in the euro area to identify exogenous changes in monetary policy stances. We then analyze how the main general newspapers in France report on announcements. 85 % of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign that is inconsistent with the media report. Only when we consider media-consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. We then build our own measure of media monetary policy surprises and confirm that these matter. Further analysis reveals that the tonality of the media reports on the economy drives the sign of consumers’ response.
    Keywords: firm expectations, consumer expectations, monetary policy surprises, European Central Bank, information effect
    JEL: D84 E02 E52 E31
    Date: 2023
  6. By: Arnaud Cedric Kamkoum
    Abstract: This paper examines the monetary policies the Federal Reserve implemented in response to the Global Financial Crisis. More specifically, it analyzes the Federal Reserve's quantitative easing (QE) programs, liquidity facilities, and forward guidance operations conducted from 2007 to 2018. The essay's detailed examination of these policies culminates in an interrupted time-series (ITS) analysis of the long-term causal effects of the QE programs on U.S. inflation and real GDP. The results of this formal design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the QE programs, real GDP per capita in the U.S. was 14% higher relative to what it would have been during that quarter had there not been the QE programs. These findings contradict Williamson's (2017) informal natural experimental evidence and confirm the conclusions of VARs and new Keynesian DSGE models that the Federal Reserve's QE policies positively affected U.S. real GDP. The results suggest that the current U.S. and worldwide high inflation rates are likely not because of the QE programs implemented in response to the financial crisis that accompanied the COVID-19 pandemic. They are likely due to the unprecedentedly large fiscal stimulus packages used, the peculiar nature of the financial downturn itself, the negative supply shocks from the war in Ukraine, or a combination of these factors. This paper is the first study to measure the macroeconomic effects of QE using a design-based natural experimental approach.
    Date: 2023–05
  7. By: International Monetary Fund
    Abstract: Guatemala has weathered many crises well. Its ’s economy has proved resilient, building on a solid track-record of prudent policies—low fiscal deficits and debt-to-GDP ratio, and high international reserves—and strong remittance inflows. After a strong rebound in 2021, Guatemala’s economy has been slowing down—with GDP growth halving to a solid 4.1 percent in 2022. Inflation increased in 2022 but peaked in February 2023 (9.9 percent, year-on-year) to drop to 8.71 percent in March 2023. At the same time, public investment tends to be under-executed, poverty remains high, and tax revenue is weak, while substantial institutional, investment, and social gaps and governance weaknesses hinder progress. Addressing these requires higher broad-based and inclusive growth and further progress in the reform agenda. The authorities’ goal to attain investment grade and attract foreign investment could unlock opportunities. General elections are due June 25, 2023 (the second round on August 20, if needed).
    Date: 2023–05–24
  8. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Abstract: Unique administrative data on a representative population's cognitive abilities, spending, and financials reveal that consumers at or below median cognitive abilities barely react when their incentives to spend or borrow change, even if they earn high incomes and are financially unconstrained and conditional on formal education, personal and macroeconomic expectations, and rich demographics. Matched survey-based data on this population show that non-responsive consumers fail to grasp how the incentives to consume, save, and borrow change over time. Cognitive constraints limit the effectiveness of policies targeting household consumption and debt and might lead to regressive redistribution from low- to high-cognitive-ability consumers.
    Keywords: Behavioral Economics, Limited Cognition, Consumption, Borrowing, Heterogeneous Agents, Redistribution, Inequality
    JEL: D12 D91 E21 E52 G41 G51
    Date: 2023
  9. By: Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
    Abstract: We examine a propagation mechanism that arises from households' long-term borrowing and show empirically that it has sizable real effects. The mechanism recognises that when there is long-term debt, an impulse to new borrowing generates a predictable hump-shaped path of future debt service. We confirm this pattern using a novel multi-country dataset of debt flows. Whereas new borrowing boosts output contemporaneously, debt service depresses output. Credit booms thus lead to predictable reversals in real economic activity several years later. This long-term debt propagation channel is the main reason for why indicators of credit cycles have predictive power for future economic activity.
    Keywords: new borrowing, debt service, financial cycle, financial flows and real effects
    JEL: E17 E44 G01 D14
    Date: 2023
  10. By: Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
    Abstract: The economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020-2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include in particular a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply-chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the United States, including demand-pull, cost-push, and profit-driven factors. Our main results are four-fold: (i)~without appropriate policy, the shocked economy can take years to recover, or even tip over into a deep recession; (ii)~the response to policy is non-monotonic, leading to a narrow window of ``optimal'' policy responses due to the trade-off between inflation and unemployment; (iii)~the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to direct impact of interest rate hikes; (iv)~the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offers an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.
    Date: 2023–06
  11. By: Anastasija Nikiforova; Nina Rizun; Magdalena Ciesielska; Charalampos Alexopoulos; Andrea Mileti\v{c}
    Abstract: The OGD is seen as a political and socio-economic phenomenon that promises to promote civic engagement and stimulate public sector innovations in various areas of public life. To bring the expected benefits, data must be reused and transformed into value-added products or services. This, in turn, sets another precondition for data that are expected to not only be available and comply with open data principles, but also be of value, i.e., of interest for reuse by the end-user. This refers to the notion of 'high-value dataset' (HVD), recognized by the European Data Portal as a key trend in the OGD area in 2022. While there is a progress in this direction, e.g., the Open Data Directive, incl. identifying 6 key categories, a list of HVDs and arrangements for their publication and re-use, they can be seen as 'core' / 'base' datasets aimed at increasing interoperability of public sector data with a high priority, contributing to the development of a more mature OGD initiative. Depending on the specifics of a region and country - geographical location, social, environmental, economic issues, cultural characteristics, (under)developed sectors and market specificities, more datasets can be recognized as of high value for a particular country. However, there is no standardized approach to assist chief data officers in this. In this paper, we present a systematic review of existing literature on the HVD determination, which is expected to form an initial knowledge base for this process, incl. used approaches and indicators to determine them, data, stakeholders.
    Date: 2023–05
  12. By: Kalypso Nicolaidis; Michele Giovanardi
    Abstract: The double-edged nature of technology pervades human history. Today, the potential for peace offered by the internet, social networks, mobile devices, digital identities, AI, blockchain, big data, geospatial information, is matched by the risks of disinformation, polarisation, online violence, surveillance, data privacy, cyber-attacks, and power concentration. Faced with this knife-edge between the bright and dark sides of disruptive technologies, how do we conjure up the better angels of our nature? Many agents for change around the world have sought to employ and regulate new technologies to foster peaceful processes under the aegis of “PeaceTech” initiatives. This paper introduces “Global PeaceTech” as a new field of social inquiry in the context of International Relations and Global Affairs, with the aim of analysing the global context in which these initiatives are embedded and interconnected, in order to draw prescriptive lessons. The deployment of technology for peace entails legal, political, economic, and ethical dilemmas that transcend national borders and require new models of transnational governance. By bringing together the world of “tech-for-good” and the field of international studies broadly defined as the study of patterns of global change, “Global PeaceTech” fills a gap at the intersection between peace studies and global governance and promotes policy innovation at the transnational level. The paper offers an overview of this agenda in four parts: Part I starts from the IR literature and explores the relationship between technology, peace and war. Part II defines the main differences between PeaceTech and Global PeaceTech. Part III sets out a new research agenda in Global PeaceTech, introducing core analytical concepts and research methods, and discussing its potential political and societal impact. In Part IV, we conclude by presenting a series of example of relevant research areas as a reference for further research in Global PeaceTech.
    Keywords: PeaceTech, Peacebuilding, Transnational Governance
    Date: 2022–11
  13. By: Jie Wei; Yonghui Zhang
    Abstract: This paper studies the principal component (PC) method-based estimation of weak factor models with sparse loadings. We uncover an intrinsic near-sparsity preservation property for the PC estimators of loadings, which comes from the approximately upper triangular (block) structure of the rotation matrix. It implies an asymmetric relationship among factors: the rotated loadings for a stronger factor can be contaminated by those from a weaker one, but the loadings for a weaker factor is almost free of the impact of those from a stronger one. More importantly, the finding implies that there is no need to use complicated penalties to sparsify the loading estimators. Instead, we adopt a simple screening method to recover the sparsity and construct estimators for various factor strengths. In addition, for sparse weak factor models, we provide a singular value thresholding-based approach to determine the number of factors and establish uniform convergence rates for PC estimators, which complement Bai and Ng (2023). The accuracy and efficiency of the proposed estimators are investigated via Monte Carlo simulations. The application to the FRED-QD dataset reveals the underlying factor strengths and loading sparsity as well as their dynamic features.
    Date: 2023–05

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