nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒03‒18
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary financing with interest-bearing money By Harrison, Richard; Thomas, Ryland
  2. The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices By Stephanie Titzck; Jan Willem van den End
  3. Central Bank Digital Currency and Financial Stability By Young Sik Kim; Ohik Kwon
  4. Measuring Monetary Policy Surprises Using Text Mining: The Case of Korea By Youngjoon Lee; Soohyon Kim; Ki Young Park
  5. Understanding inflation in emerging and developing economies By Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge
  6. Monetary Policy Autonomy and International Monetary Spillovers By Demir, Ishak
  7. Population growth, the natural rate of interest, and inflation By Weiske, Sebastian
  8. Quantitative Easing and Excess Reserves By Valentin Jouvanceau
  9. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Christoph Görtz; Dimitris Korobilis; John Tsoukalas; Francesco Zanetti
  10. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  11. Government ideology and monetary policy in OECD countries By Dodge Cahan; Luisa Dörr; Niklas Potrafke
  12. Global growth on life support? The contributions of fiscal and monetary policy since the global financial crisis By Baumann, Ursel; Lodge, David; Miescu, Mirela S.
  13. Alchemy of Financial Innovation: Securitization, Liquidity and Optimal Monetary Policy By Jungu Yang
  14. The Cost of Banking Crises: Does the Policy Framework Matter? By Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
  15. Heterogeneity within the Euro Area: New Insights into an Old Story By Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
  16. A cointegration model of money and wealth By Assenmacher-Wesche, Katrin; Beyer, Andreas
  17. Greening monetary policy By Schoenmaker, Dirk
  18. 'Whatever it Takes' to Change Belief: Evidence from Twitter By Michael Stiefel; Rémi Vivès
  19. Inflation Expectations of Households: Do They Influence Wage-Price Dynamics in India? By Pattanaik, Sitikantha; Muduli, Silu; Ray, Soumyajit
  20. On the global Impact of risk-off shocks and policy-put frameworks By Ricardo Caballero; Güneş Kamber
  21. Target balances and financial crises By Krahnen, Jan Pieter
  22. Global inflation synchronization By Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge
  23. Central Bank digital currencies: features, options, pros and cons By Santiago Fernández de Lis; Olga Gouveia
  24. Behavioural economics is useful also in macroeconomics : the role of animal spirits By de Grauwe, Paul; Ji, Yuemei
  25. The euro exchange rate and Germany's trade surplus By Stefan Hohberger; Marco Ratto; Lukas Vogel
  26. Long-term business relationships, bargaining and monetary policy By Mirko Abbritti; Asier Aguilera-Bravo; TommasoTrani
  27. Interest Rates, Moneyness, and the Fisher Equation By Lucas Herrenbrueck

  1. By: Harrison, Richard (Bank of England); Thomas, Ryland (Bank of England)
    Abstract: Recent results suggesting that monetary financing is more expansionary than bond financing in standard New Keynesian models rely on a duality between policy rules for the rate of money growth and the short-term bond rate, rather than a special role for money. We incorporate two features into a simple sticky-price model to generalize these results. First, that money may earn a strictly positive rate of return, motivated by recent debates on the introduction of central bank digital currencies and the introduction of interest-bearing reserves. This allows money-financed transfers to be used as a policy instrument at the effective lower bound, without giving up the ability to use the short-term bond rate to stabilize the economy in normal times. Second, a simple financial friction generates a wealth effect on household spending from government liabilities. Though temporary money-financed transfers to households can stimulate spending and inflation when the short-term bond rate is constrained by a lower bound, similar effects could be achieved by bond-financed tax cuts. So our results do not provide compelling reasons to choose monetary financing rather than bond financing.
    Keywords: Monetary financing; zero lower bound; interest-bearing money; digital currency
    JEL: E43 E52 E62
    Date: 2019–03–08
  2. By: Stephanie Titzck; Jan Willem van den End
    Abstract: We analyse the effects of announcements of changes in the Eurosystem's balance sheet size, duration and composition on inflation expectations, the exchange rate and the 10-year euro area government bond yield, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission, as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.
    Keywords: central banks and their policies; monetary policy
    JEL: E58 E52
    Date: 2019–03
  3. By: Young Sik Kim (Department of Economics, Seoul National University); Ohik Kwon (Economic Research Institute, Bank of Korea)
    Abstract: We examine the implications of central bank digital currency (CBDC) for financial stability using a monetary general equilibrium model in which (i) banks provide liquidity in the form of fiat currency, and (ii) commercial bank deposits compete with the central bank deposits in CBDC account. CBDC is a national currency-denominated, interest-bearing and account-based claim on the central bank. People have access to CBDC via direct deposit at the central bank. Claims on specific agents cannot be traded across locations due to limited communication and hence in the event of relocation an agent needs to withdraw deposits in the form of universally verified paper currency. Claims on interest-bearing CBDC is not subject to limited communication problem in the sense that it is also universally verified across locations as an account-based legal tender. The introduction of deposits in CBDC account essentially decreases supply of private credit by commercial banks, which raises the nominal interest rate and hence lowers a commercial bank's reserve-deposit ratio. This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors. However, once the central bank can lend all the deposits in CBDC account to commercial banks, an increase in the quantity of CBDC which does not require reserve holdings can enhance financial stability by essentially increasing supply of private credit and hence lowering nominal interest rate.
    Keywords: banking, central bank, digital currency, liquidity
    JEL: E31 E42 F33
    Date: 2019–02–08
  4. By: Youngjoon Lee (School of Business, Yonsei University); Soohyon Kim (Economic Research Institute, Bank of Korea); Ki Young Park (School of Economics, Yonsei University)
    Abstract: We propose a novel approach to measure monetary policy shocks using sentiment analysis. We quantify the tones of 24,079 news articles around 152 dates of Monetary Policy Board (MPB) meetings of the Bank of Korea (BOK) from March 2005 to November 2017. We then measure monetary policy surprises using the changes of those tones following monetary policy announcements and estimate the impact of monetary policy surprises on asset prices. Our measure of monetary policy surprises better explains changes in long-term rates, while changes in the Bank of Korea's base rate are more closely associated with changes in short-term rates (maturity of one year less). Our results strongly suggest that using a text mining approach to measure monetary policy surprises sheds light on information related to forward guidance and market expectations on future monetary policy.
    Keywords: Monetary policy; Text mining; Central banking; Bank of Korea
    JEL: E43 E52 E58
    Date: 2019–03–06
  5. By: Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge
    Abstract: Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of our recent book, “Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies,” that analyzes this remarkable achievement. Our findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
    Keywords: Prices, Inflation, Monetary Systems, Monetary Policy, Globalization
    JEL: E31 E42 E52 E58
    Date: 2019–03
  6. By: Demir, Ishak
    Abstract: While Federal Reserve continues to normalize its monetary policy on the back of a strengthening U.S. economy, the possibility of mimicking U.S. policy actions and so the debate of monetary autonomy has been particularly heated in the most of developing countries, even in advanced economies. We analyse the role played by country-specific characteristics in domestic monetary policy autonomy to set short-term interest rates in the face of spillovers from of U.S. monetary policy as global external shocks. First, we extricate the non-systematic (non-autonomous) component of domestic interest rates which is related to business cycle synchronisation across countries. Then we employ an interacted panel VAR model, which allows impulse response functions to vary by country characteristics for a broad sample of countries. We find strong empirical evidence for the role of exchange rate flexibility, capital account openness in line with trilemma, but also a significant role for other country characteristics, such as dollarisation in the financial system, the presence of a global bank, use of macroprudential policies, and the credibility of fiscal and monetary policy.
    Keywords: monetary policy autonomy,global financial cycle,international spillovers,trilemma,country-specific characteristics,cross-country difference,dilemma
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  7. By: Weiske, Sebastian
    Abstract: Population growth rates have fallen considerably in most developed countries. An important question for monetary policy is whether this has led to a fall in the natural rate of interest. In representative agent models, the response of the natural rate to a fertility shock crucially depends on the preference parameter determining how households weight generations of different size. Estimating a medium-scale model of the US-economy featuring fertility shocks, I find that declining population growth has lowered both the natural rate and inflation by about 0.4 percentage points in recent decades.
    Keywords: inflation,business cycles,monetary policy,natural rate of interest,demographic transition
    JEL: D64 D91 E31 E32 E52 J11
    Date: 2019
  8. By: Valentin Jouvanceau (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: What are the impacts of a flush of interest-bearing excess reserves to the real economy? Surprisingly, the theoretical literature remains silent about this question. We address this issue in a new Keynesian model with various financial frictions and reserve requirements in the balance sheet of bankers. Modeling QE by the supply of excess reserves, allow for endogenous changes in the relative supply of financial assets. We find that this mechanism is crucial to identify and disentangle between the portfolio balance, the credit and the asset prices channels of QE. Further, we demonstrate that the macroeconomic effects of QE are rather weak and mainly transmitted through the asset prices channel.
    Keywords: Quantitative Easing,Excess Reserves,Transmission Channels,Securitization Crisis
    Date: 2019
  9. By: Luca Gambetti (Universita di Torino); Christoph Görtz (University of Birmingham); Dimitris Korobilis (University of Essex); John Tsoukalas (University of Glasgow); Francesco Zanetti (University of Oxford)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, business cycles, VAR models
    JEL: E20 E32 E43 E52
    Date: 2019–02
  10. By: Anna Samarina; Anh D.M. Nguyen
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999-2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality: monetary policy; euro area
    JEL: D63 E50 E52
    Date: 2019–03
  11. By: Dodge Cahan; Luisa Dörr; Niklas Potrafke
    Abstract: We examine the extent to which government ideology has influenced monetary policy in OECD countries since the 1970s. In line with important changes in the global econ-omy and differences across countries, regression results yield heterogeneous infer-ences depending on the time period and the exchange rate regime/central bank de-pendence of the countries in the sample. Over the 1972-2010 period, Taylor rule speci-fications do not suggest a relationship between government ideology and monetary policy as measured by the short-term nominal interest rate or the rate of monetary expansion minus GDP trend growth. Monetary policy was, however, associated with government ideology in the 1990s: short-term nominal interest rates were lower under leftwing than rightwing governments when central banks depended on the directives of the government and exchange rates were flexible. Very independent central banks, however, raised interest rates when leftwing governments were in office. We describe the historical evidence for several individual countries.
    Keywords: Government ideology, monetary policy, partisan politics, panel data
    JEL: D72 E52 E58 C23
    Date: 2019
  12. By: Baumann, Ursel; Lodge, David; Miescu, Mirela S.
    Abstract: This paper compares the role of monetary and fiscal policy shocks in advanced and emerging economies. Using a model with a hierarchical structure we capture the variability of GDP response to policy shocks both between and within the groups of advanced and emerging countries. Our results provide evidence that fiscal policy effects are heterogeneous across countries, with higher multipliers in advanced economies compared to emerging markets, while monetary policy is found to have more homogeneous effects on GDP. We then quantify the policy contribution on GDP growth in the last decade by means of a structural counterfactual analysis based on conditional forecasts. We find that global GDP growth benefited from substantial policy support during the global financial crisis but policy tightening thereafter, particularly fiscal consolidation, acted as a significant drag on the subsequent global recovery. In addition we show that the role of policy has differed across countries. Specifically, in advanced economies, highly accommodative monetary policy has been counteracted by strong fiscal consolidation. By contrast, in emerging economies, monetary policy has been less accommodative since the global recession. JEL Classification: C32, E42, E52
    Keywords: conditional forecast, fiscal policy, monetary policy, panel VAR
    Date: 2019–03
  13. By: Jungu Yang (Economic Research Institute, Bank of Korea)
    Abstract: This paper provides a theoretical model to explain how securitization affects the overall liquidity and welfare of an economy, an under-discussed area in the literature. By applying an overlapping generations model with random-relocation shocks, the effects of securitization are analyzed in three different hypothetical situations: 1. only one region of the economy issues securities, 2. all regions issue securities with the same capital productivity, and 3. all regions issue securities, but capital productivity is disparate across regions. Asset securitization plays a role in supplying alternative liquid assets (fiat money). As the economy can invest its resources more efficiently in high-yielding illiquid assets (capital) due to securitization, both consumption and welfare increase overall. Optimal monetary policy follows the Friedman rule in cases 1. and 2. However, the rule does not apply in case 3.
    Keywords: Securitization, Liquidity, Friedman Rule, Monetary Policy
    JEL: E52 G11 G12
    Date: 2019–02–20
  14. By: Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
    Abstract: This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.
    Keywords: Banking crises, Fiscal rules, Monetary policy, Exchange rate regime, Constrained discretion.
    JEL: E44 E58 E61 E62 G01
    Date: 2019
  15. By: Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.
    Keywords: Euro Area;Equilibrium Exchange Rates;Cluster Analysis;Factor Analysis;Macroeconomic Imbalances
    JEL: F33 C38 E5
    Date: 2019–03
  16. By: Assenmacher-Wesche, Katrin; Beyer, Andreas
    Abstract: Extending the data set used in Beyer (2009) to 2017, we estimate I(1) and I(2) money demand models for euro area M3. After including two broken trends and a few dummies to account for shifts in the variables following the global financial crisis and the ECB's non-standard monetary policy measures, we find that the money demand and the real wealth relations identified in Beyer (2009) have remained remarkably stable throughout the extended sample period. Testing for price homogeneity in the I(2) model we find that the nominal-to-real transformation is not rejected for the money relation whereas the wealth relation cannot be expressed in real terms.
    Keywords: money demand,wealth,cointegration,vector error correction model,I(2) analysis
    JEL: E41 C32 C22
    Date: 2019
  17. By: Schoenmaker, Dirk
    Abstract: Central banks look at climate related risks at the financial stability side. Should they also take carbon intensity of assets into account at the monetary policy side? After reviewing the central bank mandate, the paper proposes a tilting approach to steer the Eurosystem's asset and collateral framework towards low carbon assets. We find that a modest tilting approach could reduce carbon emissions in the Eurosystem's corporate and bank bond portfolio by over 40 per cent. It could also lower the cost of capital of low carbon companies in comparison with high carbon companies by 4 basis points. Our findings suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.
    Keywords: Assets; Carbon Emissions; Collateral; cost of capital; monetary policy
    JEL: E52 E58 Q01 Q52
    Date: 2019–03
  18. By: Michael Stiefel (Department of Economics, University of Zurich); Rémi Vivès (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: The sovereign debt literature emphasizes the possibility of avoiding a self-fulfilling default crisis if markets anticipate the central bank to act as lender of last resort. This paper investigates the extent to which changes in belief about an intervention of the European Central Bank (ECB) explain the sudden reduction of government bond spreads for the distressed countries in summer 2012. We study Twitter data and extract belief using machine learning techniques. We find evidence of strong increases in the perceived likelihood of ECB intervention and show that those increases explain subsequent decreases in the bond spreads of the distressed countries.
    Keywords: self-fulfilling default crisis, unconventional monetary policy, Twitter data
    JEL: E44 E58 D83 F34
    Date: 2019–02
  19. By: Pattanaik, Sitikantha; Muduli, Silu; Ray, Soumyajit
    Abstract: This paper examines the usefulness of survey-based information on inflation expectations of households in the analysis of inflation dynamics in India. As household inflation expectations do not satisfy the statistical properties of rationality and unbiasedness, hybrid versions of New Keynesian Phillips Curve (NKPC) are used to study whether survey-based measures of inflation expectations can be used as proxy for forward looking expectations to predict inflation in India. While both 3-months ahead and 1-year ahead household inflation expectations emerge statistically significant in explaining and predicting inflation, effectively they work as substitutes of backward looking expectations given that household expectations are found to be adaptive. When transmission of inflation expectations to inflation is assessed through wage dynamics, no robust evidence is found for expectations induced wage pressures influencing CPI inflation. Shortterm food and fuel shocks explain significant part of variations in inflation expectations of households. Notwithstanding limited evidence on spillover of inflation expectations of households to wages and prices, the high degree of observed inflation persistence and significant sensitivity of inflation expectations to food and fuel shocks warrant sustained emphasis of monetary policy on wellanchored inflation expectations.
    Keywords: Inflation Expectations,NKPC,Wage-Price Dynamics,Rationality,Unbiasedness
    JEL: E52
    Date: 2019
  20. By: Ricardo Caballero; Güneş Kamber
    Abstract: Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the GFC. We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise -we do not take a stand on this tradeoff).
    Keywords: risk-off, conventional and unconventional monetary policy, policy-puts, spillovers, macroeconomic fundamentals, developed and emerging markets, Asia-Pacific region
    JEL: E40 E44 E52 E58 F30 F41 F44 G01
    Date: 2019–03
  21. By: Krahnen, Jan Pieter
    Abstract: Recently, Fuest and Sinn (2018) have demanded a change of rules for the Eurozone's Target 2 payment system, claiming it would violate the Statutes of the European System of Central Banks and of the European Central Bank. The authors present a stylized model based on a set of macro-economic assumptions, and show that Target 2 may lead to loss sharing among national central banks (NCBs), thus violating the no risk-sharing requirement laid out by the Eurosystem Statutes. In this note, I present an augmented model that incorporates essential features of the micro- and macroprudential regulatory and supervisory regime that today is hard-wired into Europe's banking system. The model shows that the original no-risk-sharing principle is not necessarily violated during a financial crisis of a member state. Moreover, it shows that under a banking union regime, financial crisis asset value losses at or below the 99.9th percentile are borne by private investors, not by taxpayers, and particularly not by central banks. Therefore, policy conclusions from the micro-founded model differ significantly from those suggested by Fuest and Sinn (2018).
    Keywords: Target 2,payment system,central banks,Eurosystem
    Date: 2019
  22. By: Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge
    Abstract: We study the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. Our methodology allows us to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. We report three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods.
    Keywords: Global inflation, synchronization, dynamic factor model, advanced economies, emerging markets, developing economies.
    JEL: E31 E32 F42
    Date: 2019–03
  23. By: Santiago Fernández de Lis; Olga Gouveia
    Abstract: The emergence of cryptocurrencies is opening the way to Central Bank Digital Currencies (CBDCs). This paper highlights the pros and cons of issuing CBDCs under four different variants: from the more modest proposals where risk and reward are both relatively small, to the most ambitious ones where the ambitious aspiration of ending banking crises.
    Keywords: Working Paper , Central Banks , Financial regulation , Digital Regulation , Digital economy , Global
    Date: 2019–03
  24. By: de Grauwe, Paul; Ji, Yuemei
    Abstract: Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.
    Keywords: Animal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles
    JEL: E32 E58 F42
    Date: 2018–03–14
  25. By: Stefan Hohberger; Marco Ratto; Lukas Vogel
    Abstract: We estimate a three-region (DE-REA-RoW) structural macroeconomic model, and we provide a counterfactual on how nominal exchange rate flexibility would have affected the German trade balance (TB) by simulating the shocks of the estimated model under a counterfactual flexible exchange rate regime. The actual and counterfactual TB trajectories are similar overall. Results suggest an around 2 pp lower trade surplus during 2012-15 together with a stronger real effective exchange rate in the counterfactual. The latter shows a similar upward trend in the TB, however, and the 2012-15 gap between actual and counterfactual closes at the end of the sample.
    Keywords: Germany, euro, exchange rate, trade balance
    JEL: E44 E52 E53 F41
    Date: 2019
  26. By: Mirko Abbritti (University of Navarra); Asier Aguilera-Bravo (Public University of Navarra and INARBE); TommasoTrani (University of Navarra)
    Abstract: A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
    Keywords: Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
    JEL: E52 E3 D4 L11
    Date: 2019–03–06
  27. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: The Euler equation of a representative consumer is at the heart of modern macroeconomics. But in empirical applications, it is badly misapplied: it prices a bond that is short-term, perfectly safe, yet perfectly illiquid. Such a bond does not exist. Real-world safe assets are highly tradable or pledgeable as collateral, hence their prices reflect their moneyness as much as their dividends. Indeed, I estimate the return on a hypothetical illiquid bond, for the postwar United States, via inflation and consumption growth, and show that it behaves very differently from the return on safe and liquid assets. I also argue that this distinction helps resolve a great number of puzzles associated with the Euler equation (or its long-run counterpart, the Fisher equation), and points to a better way of understanding how monetary policy affects the economy.
    Keywords: Euler equation; liquid assets; monetary policy; Fisher interest rate
    JEL: E43 E44 E52
    Date: 2019–02

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