nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒01‒06
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model By Enrique Martinez-Garcia; Stephen J. Cole
  2. Mexico’s Monetary Policy Communication and Money Markets By Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez-Marmolejo
  3. Unconventional monetary policy and funding liquidity risk By d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
  4. Vehicle currency pricing and exchange rate pass-through By Novy, Dennis; Chen, Natalie; Chung, Wanyu
  5. SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies By Alex Carrasco; David Florian Hoyle; Rafael Nivin
  6. CBDC – in a whirlpool of discussion By Aiste Juskaite; Sigitas Siaudinis; Tomas Reichenbachas
  7. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Elizaveta Lukmanova; Katrin Rabitsch
  8. Euro area longer-term inflation expectations revisited By Byrne, David; Zekaite, Zivile
  9. Inflation in the euro area since the Global Financial Crisis By Dennis Bonam; Gabriele Galati; Irma Hindrayanto; Marco Hoeberichts; Anna Samarina; Irina Stanga
  10. Banking supervision, monetary policy and risk-taking: Big data evidence from 15 credit registers By Carlos Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
  11. "Don't know" Tells: Calculating Non-Response Bias in Firms' Inflation Expectations Using Machine Learning Techniques By Yosuke Uno; Ko Adachi
  12. The Economic Impact of Yield Curve Compression: Evidence from Euro Area Conventional and Unconventional Monetary Policy By Goodhead, Robert
  13. (Un)expected monetary policy shocks and term premia By Kliem, Martin; Meyer-Gohde, Alexander
  14. Asymmetric Transmission of the Monetary Policy: Empirical Evidence from the Consumer Credit Rates in Indonesia By Fitri Ami Handayani; Febrio Nathan Kacaribu
  15. Private news and monetary policy - Forward guidance as Bayesian persuasion By Ippei Fujiwara; Yuichiro Waki
  16. Sharia Banking Dynamics and the Macroeconomic Responses: Evidence from Indonesia By Mansur, Alfan
  17. A regime-switching model for the federal funds rate target By Andrei Sirchenko
  18. Coexistence of several currencies in presence of increasing returns to adoption By Alex Lamarche-Perrin; André Orléan; Pablo Jensen
  19. Janus Face of Inflation Targeting_Walter_PrePrint By Walter, Timo
  20. Risk endogeneity at the lender/investor-of-last-resort By Caballero, Diego; Lucas, Andr e; Schwaab, Bernd; Zhang, Xin
  21. Mortgage Cash-flows and Employment By Fergus Cumming
  22. The Natural Rate Puzzle: Global Macro Trends and the Market-Implied r* By Josh Davis; Cristian Fuenzalida; Alan M. Taylor
  23. A Tale of Two Countries: Cash Demand in Canada and Sweden By Engert, Walter; Fung, Ben; Segendorf, Björn
  24. How Central Bankers Learned to Love Financialization: The Fed, the Bank, and the Enlisting of Unfettered Markets in the Conduct of Monetary Policy By Walter, Timo; Wansleben, Leon
  25. U.S. Regulations and Approaches to Cryptocurrencies By Michael Held
  26. The role of global relative price changes in international comovement of inflation By Aleksei Kiselev; Aleksandra Zhivaykina
  27. Interaction of Monetary and Fiscal Policies in Turkey By Tayyar Buyukbasaran; Cem Cebi; Erdal Yilmaz

  1. By: Enrique Martinez-Garcia; Stephen J. Cole
    Abstract: This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. Forward guidance and the credibility of the central bank are uniquely modeled by utilizing a game-theoretic evolutionary framework. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. (2) If a central bank is perceived as less credible, anticipation effects are attenuated and, accordingly, output and inflation do not respond as favorably to forward guidance announcements. (3) Imperfect credibility and forward guidance are an important aspect to resolve the so-called “forward guidance puzzle,” which the literature shows arises from the unrealistically large responses of macroeconomic variables to forward guidance statements in structural models with perfect credibility. (4) Imperfect central bank credibility can also explain the evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, accounting for imperfect credibility is important to model the formation of expectations in the economy and to understand the transmission mechanism of forward guidance announcements.
    Keywords: Evolutionary Games; Expectations; Monetary Policy; Forward Guidance; Central Bank Credibility
    JEL: D84 E30 E50 E52 E58 E60
    Date: 2019–12–16
  2. By: Alicia Garcia-Herrero (Bruegel - affiliation inconnue, HKUST - Hong Kong University of Science and Technology); Eric Girardin (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Arnoldo Lopez-Marmolejo (Inter-American Development Bank - Inter-American Development Bank)
    Abstract: Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico's communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit. In this paper, we tackle this issue empirically by using our own index of the tone of communication based on Banco de Mexico's speeches and statements and find that Mexican money markets do not only listen but they also understand the stance of monetary policy conveyed in the central bank's words. Regarding the ability to listen we find that both the volatility and volume in the money market rates change right after communication from Banco de Mexico's governing body. As for the markets' understanding, we document a statistically significant rise in money market rates the more hawkish communication is. All in all, our results show strong evidence of effective oral and written communication from the Central Bank towards Mexico's money markets.
    Keywords: Mexico monetary policy communication,money market
    Date: 2019–02
  3. By: d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
    Abstract: This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities. JEL Classification: E43, E44, E52, G12
    Keywords: asset pricing, money markets, quantitative easing, shadow banks
    Date: 2020–01
  4. By: Novy, Dennis; Chen, Natalie; Chung, Wanyu
    Abstract: Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-thanexpected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.
    Keywords: CPI; dollar; euro; exchange rate pass-through; inflation; invoicing; sterling; UK; vehicle currency pricing
    JEL: F14 F31 F41
    Date: 2019–06
  5. By: Alex Carrasco (Central Reserve Bank of Peru); David Florian Hoyle (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru)
    Abstract: In this document, we study the role of sterilized foreign exchange (SFX) interventions as an additional monetary policy instrument for emerging market economies in response to external shocks. We develop a model in order to analyze SFX interventions as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and depositors. The severity of the bank’s agency problem depends directly on a measure of currency mismatch at the bank level. Moreover, credit and deposit dollarization coexists in equilibrium as endogenous variables. In this context, SFX interventions can lean against the response of the bank’s lending capacity and ultimately the response of real variables by moderating the response of the exchange rate. Furthermore, we take the model to data by calibrating it to replicate some financial steady-state targets for the Peruvian banking system as well as matching the impulse responses of the macroeconomic model to the impulse responses implied by an SVAR model. Our results indicate that SFX interventions successfully reduce GDP and investment volatility by about 6% and 14%, respectively, when compared to a flexible exchange rate regime. Moreover, SFX interventions reduce the response of GDP to foreign interest rate and commodity price shocks by around 11 and 22 percent, respectively. Hence, this policy produces significant welfare gains when responding to external shocks: if the Central Bank does not intervene in the Forex market in the face of external shocks, there would be a welfare loss of 1.1%.
    Keywords: Sterilized Forex Interventions, External Shocks, Financial Cycle, Dollarization, Monetary Policy
    Date: 2019–12
  6. By: Aiste Juskaite (Bank of Lithuania); Sigitas Siaudinis (Bank of Lithuania); Tomas Reichenbachas (Bank of Lithuania)
    Abstract: The topic of central bank digital currency (henceforth - CBDC) has recently gained significant share of attention among policy makers and academics. A wide range of CBDC setups are discussed from the universally accessible central bank accounts or digital tokens to less extreme suggestions of only partly broadening central bank balance sheet access by providing CBDC to wholesale consumers or getting private sector to mediate in the process by providing synthetic CBDC. This paper recalls the possible CBDC implementation types that are discussed in the current context; reviews some of the discussions among those researching the topic; gives a brief overview of the next-step initiatives taking place among central banks with a potential to lay ground for the practical CBDC implementation; and discusses the main policy implications from financial stability and monetary policy perspectives.
    Keywords: LBChain, LBCoin, central bank digital currency (CBDC)
    Date: 2019–12–10
  7. By: Elizaveta Lukmanova; Katrin Rabitsch
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Date: 2018–11–28
  8. By: Byrne, David (Central Bank of Ireland); Zekaite, Zivile (Central Bank of Ireland)
    Abstract: This Letter examines recent dynamics in ination expectations, which are an important determinant of actual ination, as they impact economic decisions, such as households’ spending decisions and rms’ pricing plans. It is therefore important that expectations are well-anchored and that longer-term expectations are at levels consistent with the Eurosystem’s ination objective and insensitive to shocks to the economy or prices. We show some evidence for weaker anchoring since 2013 through increased sensitivity to shocks. As both the ination risk premium and the expected level of ination have declined more recently, monetary policymakers should continue monitoring developments in ination expectations closely.
    Date: 2019–10
  9. By: Dennis Bonam; Gabriele Galati; Irma Hindrayanto; Marco Hoeberichts; Anna Samarina; Irina Stanga
    Abstract: This study analyzes the behavior of inflation observed in the euro area over the past decade from a broad perspective. We first document changes in the inflation process, i.e. the dynamics of inflation and its response to shocks. We then discuss whether the Phillips curve is still a useful analytical paradigm. Next, we present evidence based on an Unobserved Components Model that the Phillips curve is "alive and well", in the sense that estimates show a positive and significant relationship between slack in the economy and inflation. At the same time, there is evidence of a downward trend in inflation in a sample that covers the past decades (1985-2017). While this past trend can be associated with a decline over time in inflation expectations, other deeper factors may be also at work, including the ongoing globalization trend, the declining bargaining power of labor, technological progress and the rise of e-commerce, demographic changes and financial factors. The complex nature of these forces and their interaction underscores the uncertainty that characterizes the current macroeconomic environment, and future research is needed to analyze to what extent these forces are likely to persist. Finally, we discuss possible implications of our analysis for monetary policy.
    Date: 2019–09
  10. By: Carlos Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
    Keywords: Supervision, banking, AnaCredit, monetary policy, euro area crisis.
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2019–12
  11. By: Yosuke Uno (Bank of Japan); Ko Adachi (Bank of Japan)
    Abstract: This paper examines the "don't know" responses for questions concerning inflation expectations in the Tankan survey. Specifically, using machine learning techniques, we attempt to extract "don't know" responses where respondent firms are more likely to "know" in a sense. We then estimate the counterfactual inflation expectations of such respondents and examine the non-response bias based on the estimation results. Our findings can be summarized as follows. First, there is indeed a fraction of firms that respond "don't know" despite the fact that they seem to "know" something in a sense. Second, the number of such firms, however, is quite small. Third, the estimated counterfactual inflation expectations of such firms are not statistically significantly different from the corresponding official figures in the Tankan survey. Fourth and last, based on the above findings, the non-response bias in firms' inflation expectations likely is statistically negligible.
    Keywords: inflation expectations; PU classification; non-response bias
    JEL: C55 E31
    Date: 2019–12–25
  12. By: Goodhead, Robert (Central Bank of Ireland)
    Abstract: This Economic Letter studies the eects of conventional and unconventional monetary policy on nancial and macroeconomic variables using euro area data. I use market movements during meeting days of the ECB Governing Council as measures of policy surprises and then distinguish between conventional and unconventional surprises in a general way. Surprises that reduce rates and steepen the yield curve are understood to represent conventional policy, and surprises that reduce rates and atten the yield curve as unconventional policy. I study the eects of these surprises in an empirical model of the euro area macroeconomy. I provide conditional and unconditional forecasts of key euro area aggregates under dierent policy actions by the ECB Governing Council. Unconventional monetary policy surprises are found to have strong eects on macroeconomic variables, though they have a somewhat delayed eect relative to conventional policy.
    Date: 2019–11
  13. By: Kliem, Martin; Meyer-Gohde, Alexander
    Abstract: The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.
    Keywords: DSGE model,Bayesian estimation,Time-varying risk premia,Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2019
  14. By: Fitri Ami Handayani (Graduate School of Economic Science Faculty of Economics and Business Universitas Indonesia); Febrio Nathan Kacaribu (Institute for Economic and Social Research Faculty of Economics and Business Universitas Indonesia (LPEM FEB UI))
    Abstract: This paper empirically examines asymmetric transmissions from money market rates to various consumer rates throughout a sample period that comprises monetary policy shifting in Indonesia from 2011 to 2017. We adopt modification of Asymmetric Error Correction Models (AECM), which incorporate three-error correction term. This allows us to inspect the different adjustment when the disequilibria are: large-positive, large-negative, and small. Our findings shows that there are varying asymmetric adjustment in response to different shocks across products in lending market. Thus, the monetary authorities should notice that both easing and tightening monetary policy appear to have varying impact to different credit market.
    Keywords: monetary policy — asymmetric adjustment — Indonesia
    JEL: C22 E43 G21
    Date: 2019–09
  15. By: Ippei Fujiwara; Yuichiro Waki
    Abstract: When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? In a simple New Keynesian model, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. In other words, it cannot persuade private agents to change their actions in favor of the central bank. In more elaborate DSGE models, the welfare effect may be either positive or negative, depending on the type of shock as well as distortions and frictions. These results suggest that improving welfare by Delphic forward guidance may be particularly difficult under model uncertainty.
    Keywords: news shock, optimal monetary policy, private information, Bayesian persuasion, forward guidance, New Keynesian models
    JEL: E30 E40 E50
    Date: 2019–12
  16. By: Mansur, Alfan
    Abstract: Sharia banking industry in Indonesia has been established since early 1990s and growing remarkably after 1998. How the industry contributed to the Indonesian economy and what shocks drove the sharia banks' financing in Indonesia were investigated in this paper using a Structural Vector Auto-regression (SVAR) model with recursive short run restrictions as its identification strategy. The results showed that GDP growth, core inflation, and business activity responded to increase in sharia banks' financing positively, but with lags. Expanding sharia financing by 1 per cent boosted up GDP growth by 0.06 per cent. In the short-run, the contribution of sharia banks' financing to the macroeconomic variables was limited, but it then escalated in the long run with the main channel of transmission through its ability to drive people's purchasing power. Another result showed that sharia banks' financing had a negative relationship with the central bank's monetary policy. In order to improve the performance of sharia banking in Indonesia, the demands of domestic sharia financing have to be strengthened with regards to the large number of Moslems in Indonesia. At the same time, Islamic banks have to improve their business processes. Rather than capping their profit margins or murabahah-based financing, they should promote more profit sharing mudharabah-based financing with prioritizing principle of mutual help among Moslems.
    Keywords: Sharia banks' financing, Structural Vector Auto-regression (SVAR), macroeconomic variables, shock
    JEL: C13 C32 E51 F43 G21
    Date: 2019–02–02
  17. By: Andrei Sirchenko (University of Amsterdam)
    Abstract: This paper develops an ordered choice model for the federal funds rate target with endogenous switching among three latent regimes and possibly endogenous explanatory variables. Estimated for the Greenspan era (1987-2006), the new model detects recurring switches among three policy regimes (interpreted as loose, neutral and tight policy stances) in response to the state of economy, outperforms the Taylor rule and the existing discrete-choice models both in and out of sample, correctly predicts out of sample 90% of the Fed decisions during the next thirteen years, successfully handles the zero lower bound period by a prolonged switch to a loose policy regime with no-change to the target rate (while the Taylor rule and the conventional ordered probit model predict further cuts), and delivers markedly different inference. The empirical results suggest that the endogeneity of explanatory variables does matter in modelling monetary policy and can distort the inference: the marginal effects on the choice probabilities can differ by several times and even have the opposite signs.
    Date: 2019–12–18
  18. By: Alex Lamarche-Perrin (Phys-ENS - Laboratoire de Physique de l'ENS Lyon - ENS Lyon - École normale supérieure - Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); André Orléan (PSE - Paris School of Economics); Pablo Jensen (Phys-ENS - Laboratoire de Physique de l'ENS Lyon - ENS Lyon - École normale supérieure - Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We present a simplistic model of the competition between dierent currencies. Each individual is free to choose the currency that minimizes his transaction costs, which arise whenever his exchanging relations have chosen a dierent currency. We show that competition between currencies does not necessarily converge to the emergence of a single currency. For large systems, we prove that two distinct communities using dier-ent currencies in the initial state will remain forever in this fractionalized state.
    Date: 2018
  19. By: Walter, Timo
    Abstract: In the 1980s, central banks around the world stumbled upon a new method for conducting their monetary policy: instead of the heavy-handed, „hydraulic“ manipulation of monetary aggregates, they learned to „govern the future“ by managing the expectations of market actors directly. New and better indicators and forecasts would provide the basis for a new communicative coordination of markets expectations, permitting a more fine-grained and effective implementation of monetary policy, particular in controlling inflation. Focusing on the US Federal Reserve’s prototype development of inflation-targeting, this paper puts this storyline to the test. Against the recent trend in sociology to conceive of expectations and futurity as modes of coordination that thrive under conditions of (fundamental) uncertainty that defy rational calculation, I argue that futurity and the formation expectations inextricably depend on prior processes of formalization. Examining the transition to modern ‘inflation targeting’ monetary policy, I show how the effectiveness of coordination by expectation is achieved by extensive processes of proceduralization and standardization. While increasing the technical efficiency of fine-tuning expectations, these gains are only possible because of the procedural narrowing of the scope of communicative interaction, which may significantly affect the overall effectiveness of this mode of coordination. I conclude with a call to more closely examine how formal and informal modes of coordination are mutually interdependent – and how the nature of their entanglements affects their effectiveness.
    Date: 2019–07–23
  20. By: Caballero, Diego (European Central Bank); Lucas, Andr e (Vrije Universiteit Amsterdam and Tinbergen Institute); Schwaab, Bernd (European Central Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem's experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot's well-known assertion that occasionally "only the brave plan is the safe plan."
    Keywords: lender-of-last-resort; unconventional monetary policy; portfolio credit risk; longer-term operational framework; central bank communication.
    JEL: C33 G21
    Date: 2019–10–01
  21. By: Fergus Cumming (Centre for Macroeconomics (CFM); Bank of England)
    Abstract: This paper quantifies the impact of the cash-flow channel of monetary policy on employment by combining novel micro datasets with near-universal coverage. When policy interest rates fall, families with a mortgage spend the extra cash-flow in their local economy and this increases labor demand. Overall, a reduction in mortgage payments of £1,000 per household led to a 0.3 percentage point increase in locally non-tradable employment growth over three years of the Great Recession, with the most pronounced effects in the restaurant sector. Spatial variation in labor and mortgage market structures leads to regional heterogeneity in the traction of monetary policy.
    Keywords: Employment, Interest rates, Monetary policy, Mortgages
    JEL: E24 E52 G21
    Date: 2019–12
  22. By: Josh Davis; Cristian Fuenzalida; Alan M. Taylor
    Abstract: Benchmark finance models deliver estimates of bond risk premia based on components of Treasury bond yields. Benchmark macroeconomic models deliver estimates of the natural rate of interest based on growth, inflation, and other macro factors. But estimates of the natural rate implied by the former are wildly inconsistent with those of the latter; and estimates of risk premia implied by the latter are wildly inconsistent with those of the former. This is the natural rate puzzle, and we show that it applies not only in the United States but also across several advanced economies. A unified model should not fail such consistency tests. We estimate a unified macro-finance model with long-run trend factors which delivers paths for a market-implied natural rate r* consistent with inflation expectations π* and bond risk premia. These paths are plausible and our factors improve the explanatory power of yield and return regressions. Trading strategies based on signals incorporating both r* and π* trends outperform both yield- only strategies like level and slope and strategies which only add trend inflation. The estimates from our unified model satisfy consistency and deliver a resolution to the puzzle. They show that most of the variation in yields has come from shifts in r* and π*, not from bond risk premia. Our market-implied natural rate differs from consensus estimates, and is typically lower, intensifying concerns about secular stagnation and proximity to the effective lower-bound on monetary policy in advanced economies.
    JEL: C13 C32 E43 E44 E47 G12
    Date: 2019–12
  23. By: Engert, Walter (Bank of Canada); Fung, Ben (Bank of Canada); Segendorf, Björn (Financial Stability Department, Central Bank of Sweden)
    Abstract: Cash is being used less and less for making payments in many countries, including Canada and Sweden, which might suggest that cash will eventually disappear. However, cash in circulation in most countries, including Canada, has been stable for decades, and even rising in recent years. In contrast, aggregate cash demand in Sweden has been falling steadily. This paper explains these differences between Canada and Sweden by focusing separately on the transactions demand for cash and on the store-of-value demand. We find a long-term downward trend in small-denomination bank notes relative to gross domestic product in both Canada and Sweden. This reflects similar experiences in decreasing cash use for transactions over time due to the adoption of payment innovations. This means that payment innovations and diffusion are not sufficient to explain why aggregate cash demand has been declining rapidly in Sweden but not in Canada. Instead, the difference in the trends of cash demand between these two countries is due more to the behaviour of larger-denomination, store-of-value bank notes. Finally, we identify influences and frictions that help explain the persistent decline in the demand for larger bank notes in Sweden relative to Canada.
    Keywords: Bank notes; Digital currencies and fi ntech; Financial services; Payment clearing and settlement systems.
    JEL: E40 E41 E42 E50
    Date: 2019–08–01
  24. By: Walter, Timo; Wansleben, Leon (London School of Economics and Political Science)
    Abstract: Central banks’ role in financialization has received increasing attention in recent years. These debates have predominantly revolved around authorities’ “benign neglect” of asset bubbles, their de-regulatory policies, and the safety-nets they provide for speculative exuberance. Most analyses refer to the dominance of pro-market interests and ideas to explain these actions. The present article moves beyond these accounts by showing how an alignment between techniques of monetary governance and ‘unfettered’ financial markets can explain central banks’ endorsement of increasingly fragile structures of liquidity and their strategic ignorance towards growing amounts of debt. We analyze the processes of abstraction and formalization by which the “programmes” and “technologies” of monetary governance have been made compatible with the texture of contemporary finance; and we show how central banks’ attempts to make markets more amenable to their methods of policy implementation shaped new conduits for financial growth. As empirical cases, we discuss the Federal Reserve’s experiments with different policy frameworks in the 1980s and the Bank of England’s twisted path to inflation targeting from 1979 to 1997. These cases allow us to demonstrate that the infrastructural power of contemporary central banking is predicated on the same institutional foundations that have made financialization possible.
    Date: 2018–11–07
  25. By: Michael Held
    Abstract: Remarks at the BIS Central Bank Legal Experts’ Meeting, Basel, Switzerland
    Keywords: wildcat banks; Financial Stability Oversight Council (FSOC); regulation; Securities and Exchange Commission (SEC); regulatory schemes; private currencies; Jay Clayton; bank notes; My Big Coin; Commodity Futures Trading Commission (CFTC); National Bank Act; digital currencies; free banking law; Financial Crimes Enforcement Network (FinCEN); Office of the Comptroller of the Currency (OCC); history
    Date: 2019–12–03
  26. By: Aleksei Kiselev (Bank of Russia, Russian Federation); Aleksandra Zhivaykina (Bank of Russia, Russian Federation)
    Abstract: In this paper we investigate the impact of global relative price changes on domestic inflation. We use a dynamic hierarchical factor model (DHFM) to decompose consumer basket products’ inflation in a panel of countries into (i) a global factor, common to all price series and all countries, (ii) a price change shock at product group level, (iii) a price change shock at product subgroup level, and (iv) an idiosyncratic component. Using monthly data for 29 economies from 2003 to 2018 we find that product inflation rates demonstrate different sensitivity to common price shocks. For energy, some food and manufactured goods, global relative price changes may account for up to 49% of inflation variation which is quite high for this frequency and level of disaggregation. Moreover, common factors from the DHFM have significant explanatory power for overall CPI and its aggregate components across different countries.
    Keywords: Dynamic hierarchical factor model, global inflation, relative prices, Russia
    JEL: C38 E31 F42
    Date: 2019–12
  27. By: Tayyar Buyukbasaran; Cem Cebi; Erdal Yilmaz
    Abstract: This paper aims to investigate the interaction between monetary and fiscal policies in Turkey. For this purpose, a Bayesian Structural Vector Auto-Regression (SVAR) model with sign and zero restrictions is used. We particularly focus on how the fiscal and monetary policy variables respond to various macroeconomic shocks and whether the type of shocks matters. Our results confirm the importance of nature of shocks in terms of interaction between monetary and fiscal policies with the finding that both policy shocks are complementary in response to demand and supply shocks while they are substitute in response to shocks caused by the each other. Our main findings are robust to alternative variable definitions and identifying restrictions.
    Keywords: Monetary policy, Fiscal policy, Structural VAR, SVAR, Bayesian VAR, Sign and zero restrictions
    JEL: C11 C32 E52 E62
    Date: 2019

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