nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒02‒03
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The effects of conventional and unconventional monetary policy : identification through the yield curve By Kortela, Tomi; Nelimarkka, Jaakko
  2. Unconventional monetary policy and inflation expectations in the euro area By Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
  3. Monetary Policy and Reserve Requirements in a Small Open Economy By Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
  4. The Chair of the U.S. Federal Reserve and the Macroeconomic Causality Regimes By Yunus Aksoy; Rubens Morita; Zacharias PsaradakisAuthor-Workplace-Name: Birkbeck, University of London
  5. Financial frictions,the Phillips curve and monetary policy By Lieberknecht, Philipp
  6. Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model By Adrien Auclert; Matthew Rognlie; Ludwig Straub
  7. Dampened expectations in the Phillips Curve: a note By Dennery, Charles
  8. Social Learning and Monetary Policy at the Effective Lower Bound By Jasmina Arifovic; Alex Grimaud; Isabelle Salle; Gauthier Vermandel
  9. A Phillips curve for the euro area By Ball, Laurence; Mazumder, Sandeep
  10. Forward Guidance and Corporate Lending By Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
  11. Monetary Policy and Wealth Inequalities in Great Britain: Assessing the role of unconventional policies for a decade of household data By Anastasios Evgenidis; Apostolos Fasianos
  12. Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Smets, Frank
  13. Mastering Central Bank Communication Challenges via Twitter By Korhonen, Iikka; Newby, Elisa
  14. Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View By Saeidinezhad, Elham; Hovhannisyan, Tatev
  15. The Optimal Mix of Monetary and Climate Policy By Chen, Chuanqi; Pan, Dongyang
  16. Inflation targets and the zero lower bound in a behavioral macroeconomic model By de Grauwe, Paul; Yuemei, Ji
  17. Output Composition of Monetary Policy Transmission in Mongolia By Chuluunbayar, Delgerjargal
  18. The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers By Sang-yoon Song
  19. The predictive power of equilibrium exchange rate models By Mijakovic, Andrej; Rubaszek, Michał; Zorzi, Michele Ca’; Cap, Adam
  20. The 3 E’s of central bank communication with the public By Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
  21. The cost of using cash and checks in Uruguay By Marcelo Álvez; Rodrigo Lluberas; Jorge Ponce
  22. Rationally Inattentive savers and Monetary Policy Changes: A Laboratory Experiment By Andrea Civelli; Cary Deck; Antonella Tutino
  23. U.S. Monetary Policy: A Global View By Mary C. Daly
  24. Tiered CBDC and the financial system By Bindseil, Ulrich
  25. Japanese Foreign Exchange Interventions, 1971-2018: Estimating a Reaction Function Using the Best Proxy By Takatoshi Ito; Tomoyoshi Yabu
  26. Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area By Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
  27. Estimating the Optimal Inflation Target from Trends in Relative Prices By Klaus Adam; Henning Weber
  28. Bank funding costs and solvency By Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
  29. Quantum Prices By Diego Aparicio; Roberto Rigobon
  30. Exchange Rates and Consumer Prices: Evidence from Brexit By Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
  31. Credit growth, the yield curve and financial crisis prediction: evidence from a machine learning approach By Bluwstein, Kristina; Buckmann, Marcus; Joseph, Andreas; Kang, Miao; Kapadia, Sujit; Simsek, Özgür

  1. By: Kortela, Tomi; Nelimarkka, Jaakko
    Abstract: Since the Great Recession, the main evolution in monetary policy has been its attempts to affect the medium and the long-term interest rates with instruments other than the policy rate. Consequently, measuring the stance of monetary policy by a single interest rate becomes problematic. This study explores the macroeconomic effects of conventional and unconventional policy measures in the euro area in a unified framework. We identify simultaneously three monetary policy shocks that influence different parts of the yield curve. These shocks reflect various aspects of actions and communications of the European Central Bank in conventional and unconventional monetary policy periods. According to the results, conventional interest rate policy, forward guidance and quantitative easing have asymmetric output and price responses.
    JEL: C32 C36 E43 E52 C54
    Date: 2020–01–22
  2. By: Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
    Abstract: With the ECB's policy rate having reached the zero lower bound, traditional monetary policy tools became ineffective and the ECB was forced to adopt a set of unconventional monetary policy (UMP) measures. This paper examines the effects of the ECB's UMP on inflation expectations in the Euro area as inflation expectations play a key role for achieving the inflation target of below, but close to 2%. Quantifying the impact of UMP is not straightforward, as standard empirical tools such as VAR cannot be applied. Hence, we use the Qual VAR approach pioneered by Dueker (2005) to overcome this problem. We indeed find that UMP leads to a rise in inflation expectations in the short run but that this effect appears to evaporate in the medium term. Our results put some doubt on the common claim that UMP has consistently contributed to a re-anchoring and a stabilisation of inflation expectations at the zero lower bound. Nevertheless, they indicate a rise in medium-term real GDP growth triggered by UMP.
    Keywords: Bayesian VAR,Qual VAR,inflation expectations,euro area,quantitative easing,unconventional monetary policy
    JEL: C22 E31 E44 E52
    Date: 2020
  3. By: Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
    Abstract: This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy with financial frictions under alternative exogenous shocks. The proposed DSGE model incorporates macroprudential policy rules to the financial sector of an open economy. Exogenous shocks in productivity, domestic and foreign monetary policies are used to identify the roles of the macroprudential and monetary policies in stabilizing the economy. A welfare analysis compares the performance of alternative rules for reserve requirements. The model is calibrated for the Brazilian economy and results indicate the exchange rate plays a central role in the transmission of foreign shocks, but not of domestic shocks. Considering the volatility of the variables and convergence to steady state, the interest rate rule should target domestic inflation and not respond directly to the exchange rate. The reserve requirement rule, in its turn, should react countercyclically to the credit-gap and not have a fixed component. There is complementarity between monetary and macroprudential policies to stabilize the small open economy.
  4. By: Yunus Aksoy (Birkbeck, University of London); Rubens Morita (Birkbeck, University of London); Zacharias PsaradakisAuthor-Workplace-Name: Birkbeck, University of London
    Abstract: We investigate regime-dependent Granger causality between real output, in ation and monetary indicators and map with U.S. Fed Chairperson's tenure since 1965. While all monetary indicators have causal predictive content in certain time periods, we report that the Federal Funds rate (FFR) and Domestic Money (DM) are substitutes in their role as lead or feedback variables to explain variations in real output and in ation. We provide a comprehensive account of evolution of causal relationships associated with all US Fed Chairpersons we consider.
    Keywords: Causality Regimes, Domestic Money, Federal Reserve Chairperson, Markov Switching, Policy Instrument, Vector Autoregression
    JEL: C32 C54 C61 E52 E58
    Date: 2019–12
  5. By: Lieberknecht, Philipp
    Abstract: This paper proposes a tractable financial accelerator New Keynesian DSGE modelthat allows for closed-form solutions. In the presence of financial frictions, theNew Keynesian Phillips curve features a flat slope with respect to the output gapand is strongly forward-looking. All shocks cause endogenous cost-push effects inthe Phillips curve, leading to larger inflation responses and a breakdown of divinecoincidence. The central bank's contemporaneous trade-off between output gap andinflation stabilization is aggravated. Optimal monetary policy is strongly forward-looking and geared towards inflation stabilization.
    Keywords: financial frictions,financial accelerator,Phillips curve,optimal monetary policy
    JEL: E42 E44 E52 E58
    Date: 2019
  6. By: Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.
    JEL: E21 E22 E32 E43 E52
    Date: 2020–01
  7. By: Dennery, Charles
    Abstract: Dampened inflation expectations have a significant impact on the New Keynesian Phillips Curve. This dampening not only flattens the long run Phillips Curve, but it can also lead to a bias in the estimation of its short run slope. It also affects the response of a small NK model to demand shocks, and affects the optimal monetary policy: in particular, the price targeting result of the Ramsey policy is violated when there is dampening.
    Keywords: Anchored expectations, Phillips Curve, Ramsey policy
    JEL: E31 E52
    Date: 2019–08–21
  8. By: Jasmina Arifovic; Alex Grimaud; Isabelle Salle; Gauthier Vermandel
    Abstract: The first contribution of this paper is to develop a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchorage to the central bank (CB)’s target and coordinate on particularly persistent below-target paths. We jointly estimate the structural and the learning parameters of the model by matching moments from both macroeconomic and Survey of Professional Forecasters data. The welfare cost associated with those dynamics may be reduced if the CB communicates to the agents its target or its own inflation forecasts, as communication helps anchor expectations at the target. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation, for instance in the face of large and unexpected shocks.
    Keywords: Business fluctuations and cycles; Central bank research; Credibility; Economic models; Monetary Policy; Monetary policy communications
    JEL: C82 E32 E52
    Date: 2020–01
  9. By: Ball, Laurence; Mazumder, Sandeep
    Abstract: This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery. JEL Classification: E31, E32
    Keywords: core inflation, euro area, median inflation, missing disinflation, missing inflation, Phillips curve
    Date: 2020–01
  10. By: Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
    Abstract: We suggest that forward guidance, via “binding” the central bank’s actions and creating associated expectations, fundamentally affects bank-lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Moreover, banks more easily initiate new lending relationships with lower spreads, and the loan syndicates are less concentrated.
    Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships
    JEL: E43 E52 E58 G21
    Date: 2020–01–15
  11. By: Anastasios Evgenidis; Apostolos Fasianos
    Abstract: This paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched as the policy rate reached the zero lower bound (2006-2016). Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant long-lasting effects on wealth inequality: an expansionary monetary policy in the form of asset purchases raises wealth inequality across households, as measured by their Gini coefficients of net wealth, housing wealth, and financial wealth. The evidence of our analysis helps to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.
    Date: 2019–12
  12. By: Coenen, Günter; Montes-Galdón, Carlos; Smets, Frank
    Abstract: We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area-Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect. JEL Classification: E31, E32, E37, E52, E62
    Keywords: asset purchases, effective lower bound, euro area, fiscal policy, forward guidance, monetary policy
    Date: 2020–01
  13. By: Korhonen, Iikka; Newby, Elisa
    Abstract: This study examines the Twitter policies and use of European central banks. Almost every European central bank maintains an institutional Twitter account, but tweeting activity, tweet content and usage restrictions on Twitter use by individual staff members vary considerably. We further consider the evolution of Twitter use by European central banks in light of the growing importance of financial stability in central bank policy messaging. To study these issues, we create a database of tweets from European central banks and financial supervisors, as well as attempt to gauge how closely professional economists follow central banks on Twitter. Central banks’ Twitter activity has no relation to citizens’ online participation. We also find that central banks’ communication on financial stability with Twitter has increased over time, especially in comparison with monetary policy.
    Keywords: central bank communication,monetary policy,financial stability,Twitter
    JEL: E0 E5 E52 E58 G28
    Date: 2019
  14. By: Saeidinezhad, Elham; Hovhannisyan, Tatev
    Abstract: As the U.S. experience revealed after the Global Financial Crisis (GFC), zero lower bound (ZLB) limits the Fed's capacity to stimulate the economy through conventional methods of monetary policy. The GFC provided a chance to advance unconventional tools to strengthen economic growth and reclaim financial stability. One of the aims of the existing unconventional tools has been to provide liquidity to the banks. To account for the dynamic reality of the financial ecosystem, we propose two new instruments through which the Fed targets nonbank securities dealers and debt issuers explicitly. By design, these tools should be used as last resort options. The first tool called the "Dealer Option" and functions by opening the Fed's balance sheet to securities dealers to increases liquidity in the market. The second tool, "Elastic Legal Policy," suggests relaxing legal constraints in debt securities contracts during the financial crisis to reduce debt issuers' default risks. Given the interconnectedness of balance sheets and cash flows as well as the role of securities dealers as market makers, the elastic legal policy and dealer option help reduce debtors' defaults and liquidity risk during a financial crisis.
    Keywords: Financial Crisis, Financial Stability, Central Banking, Debt Securities
    JEL: E52 E58 G01 G21 G23 G24 K0 K22
    Date: 2019–12–19
  15. By: Chen, Chuanqi; Pan, Dongyang
    Abstract: Given central banks' recent interest in "greening the financial system", this research theoretically investigates the relationship between monetary and climate policy and tries to find their “optimal mix”. We build an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model with the consideration of illegal emission which is pervasive in many countries. According to the model, we find: First, the dynamic of monetary policy is influenced by the selection of regimes of climate policy and the effectiveness of enforcement of environmental regulation. Second, the coefficients in the traditional Taylor rule of monetary policy can be better set to enhance welfare when a certain regime of climate policy is given in the economy. This helps find the constrained optimums of a policy mix. Third, if the mitigation of climate change is augmented into the target of monetary policy, the economy’s welfare can be enhanced. However, under certain circumstances, a dilemma in such monetary policy makes it incompatible with the traditional mandate of central bank.
    Keywords: Optimal Mix, Monetary Policy, Climate Policy, E-DSGE
    JEL: E52 Q54 Q58
    Date: 2020
  16. By: de Grauwe, Paul; Yuemei, Ji
    Abstract: We analyse the relationship between the level of the inflation target and the zero lower bound imposed on the nominal interest rate in the framework of a behavioural New-Keynesian macroeconomic model in which agents, experiencing cognitive limitations, use adaptive learning forecasting rules. The model produces endogenous waves of optimism and pessimism (animal spirits) that lead to non-normal distributions of the output gap. We find that when the inflation target is too close to zero, the economy can get gripped by ‘chronic pessimism’ that leads to a dominance of negative output gaps and recessions, and in turn feeds back on expectations producing long waves of pessimism. Low inflation targets create the risk of persistence of recessions and low growth. In conclusion, our framework suggests that the 2% inflation target, now pursued by many central banks, is too low.
    Keywords: animal spirits; monetary policy; inflation target; behavioraleconomics; zero lower bound
    JEL: E31 E32
    Date: 2019–04–01
  17. By: Chuluunbayar, Delgerjargal
    Abstract: The transmission of monetary policy has been found to differ between countries in the empirical literature. Understanding the degree to which each gross domestic product (GDP) component - investment, consumption and net export - is affected by policy changes is essential to conducting monetary policy. This paper examines the output composition of monetary policy transmission in Mongolia based on data from 2005Q1 to 2019Q2 and three kinds of benchmark VAR models. It is also comparing the results with other countries, finding Mongolian monetary policy transmission is dominated by the investment channel and its response is quicker than comparator countries.
    Keywords: Monetary policy transmission, output composition, Vector Auto Regression
    JEL: C32 E52
    Date: 2019–10
  18. By: Sang-yoon Song (Economic Research Institute, Bank of Korea)
    Abstract: This paper investigates the relationships between consumption and mortgage interest reduction caused by an expansionary monetary policy, using comprehensive borrower-level information on mortgages and credit card purchases from a credit bureau company in South Korea. The main findings are as follows: (i) the significant and negative relationship between mortgagors¡¯ interest payments and consumption comes from borrowers with ARMs (Adjustable-Rate Mortgages), (ii) among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC (Marginal Propensity to Consume), (iii) the debt burdens of mortgagors have a weaker effect on the interest-induced MPC heterogeneity due to active deleveraging behavior of borrowers with a high debt burden, (iv) while unconstrained borrowers consistently show low and insignificant MPCs, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction, and (v) the MPC of those with low liquidity becomes lower as time goes by, indicating that windfall gains by mortgage interest reduction help to relax the liquidity constraints they face. These results imply that financial characteristics of mortgage borrowers can affect the magnitude and persistence of the cash flow channels of an expansionary monetary policy.
    Keywords: Mortgage, Consumption, Monetary Policy, Household Debt
    JEL: D14 E21 E52
    Date: 2019–07–29
  19. By: Mijakovic, Andrej; Rubaszek, Michał; Zorzi, Michele Ca’; Cap, Adam
    Abstract: In this paper we evaluate the predictive power of the three most popular equilibrium exchange rate concepts: Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and the Macroeconomic Balance (MB) approach. We show that there is a clear trade-off between storytelling and forecast accuracy. The PPP model offers little economic insights, but has good predictive power. The BEER framework, which links exchange rates to fundamentals, does not deliver forecasts of better quality than PPP. The MB approach has the most appealing economic interpretation, but performs poorly in forecasting terms. Sensitivity analysis confirms that changing the composition of fundamentals in the BEER model or modifying key underlying assumptions in the MB model does not generally enhance their predictive power. JEL Classification: C33, F31, F37, F41
    Keywords: equilibrium exchange rate models, forecasting, mean reversion, panel data
    Date: 2020–01
  20. By: Haldane, Andrew (Bank of England); Macaulay, Alistair (University of Oxford); McMahon, Michael (University of Oxford)
    Abstract: In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policymakers by highlighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E’s of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.
    Keywords: Monetary policy; communication; general public
    JEL: E52 E58
    Date: 2020–01–03
  21. By: Marcelo Álvez (Banco Central del Uruguay); Rodrigo Lluberas (Banco Central del Uruguay); Jorge Ponce (Banco Central del Uruguay)
    Abstract: The incorporation of new technologies to financial activities imply challenges and opportunities to financial authorities. They are reacting to the unavoidable trend towards digitalization of financial activities with the objective of preserving stable and efficient payment and financial systems. Uruguay, for instance, has promoted the use of electronic payment instruments and tested in the real economy a central bank digital currency called e-Peso. Digitalization of payment systems would reduce transaction costs by (partially) replacing less efficient means of payment, e.g. paper-cash and checks. In this paper we find that the cost of using cash in Uruguay is approximately 0.61% of GDP. Interestingly, 98.1% of this cost is borne by the private sector: banks and retailers 77.1% and households 21.0%. The cost of using checks is equivalent to 0.04% of GDP. Overall, replacing paper-cash and checks by other (electronic) means of payment would imply a transaction cost reduction for the private sector of the equivalent of up to 0.65% of GDP.
    Keywords: payment system, cost of cash, cost of checks, electronic payments; sistema de pagos, costo del dinero, costo del cheque, pagos electrónicos
    JEL: D12 D23 D24
    Date: 2019
  22. By: Andrea Civelli (University of Arkansas, Walton College of Business, Department of Economics); Cary Deck (University of Alabama; Economic Science Institute, Chapman University); Antonella Tutino (Federal Reserve Bank of Dallas)
    Abstract: We study the response of consumption and saving decisions of rationally inattentive individuals to changes in monetary policy in the laboratory. First, we theoretically characterize the choices of a rationally inattentive agent processing information about the interest rate. Then, we design an experiment with induced inattention to test for the predictions of the model, contrasting them to the full information case. Consistent with the predictions, experimental subjects (a) increase attention when utility gains exceed cognitive costs of tracking the policy rate and decrease savings when their perceived economic outlook deteriorates; (b) respond to Delphic, but not Odyssean, forms of forward guidance. These ?ndings agree with recent empirical evidence on monetary policy e?ects on consumption behavior in U.S. and internationally.
    Keywords: Rational Inattention; Experimental Evidence' Information Processing Capacity; Consumption
    JEL: C91 D11 D8 E20
    Date: 2020
  23. By: Mary C. Daly
    Abstract: These slides were presented at the ASSA 2020 meeting by President Daly during a panel session titled “Navigating the Crosscurrents: The Outlook for the Global Economy” hosted by the National Association for Business Economics (NABE).
    Keywords: monetary policy; inflation; unemployment
    Date: 2020–01–03
  24. By: Bindseil, Ulrich
    Abstract: IT progress and its application to the financial industry have inspired central banks and academics to analyse the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first reviews the advantages and risks of such CBDC. It then discusses two prominent arguments against CBDC, namely (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations. Two-tier remuneration of CBDC is proposed as solution to both issues, and a comparison is provided with a simple cap solution and the solution of Kumhof and Noone (2018). Finally, the paper compares the financial account implications of CBDC with the ones of crypto assets, Stablecoins, and narrow bank digital money, in a domestic and international context. JEL Classification: E3, E5, G1
    Keywords: central bank digital currencies, central banks, financial accounts, financial instability
    Date: 2020–01
  25. By: Takatoshi Ito; Tomoyoshi Yabu
    Abstract: We analyze the history of Japanese foreign exchange interventions from 1971 to 2018. First, we provide the best proxy for monthly interventions for the period from 1971 to 1990, when the intervention timings and amounts were not officially disclosed. The accuracy of the proxy is tested for the period when the statistics were disclosed after 1991. The proxy explains 99.8% of actual settlement-based interventions. Second, we examine conditions under which the Japanese monetary authorities are likely to intervene by estimating a policy reaction function, using the long-term data, spanning the period when intervention data have been officially disclosed and the period where our proxy is available. Third, we analyze intervention timings and amounts for Japan, the US, and Germany. Fourth, we present the episode of international coordination represented by the Plaza and Louvre agreements as a case study of notable interventions during the period.
    JEL: E52 E58 F31 G15
    Date: 2020–01
  26. By: Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
    Abstract: This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels—intertemporal substitution and net interest rate exposure—and indirect, general equilibrium channels—net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.
    JEL: E21 E52
    Date: 2020–01
  27. By: Klaus Adam; Henning Weber
    Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative- price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period.
    Keywords: optimal inflation, micro price data, U.K. inflation target
    JEL: E31
    Date: 2020–01
  28. By: Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
    Abstract: This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers. JEL Classification: G15, G21
    Keywords: banks, funding costs, solvency
    Date: 2020–01
  29. By: Diego Aparicio; Roberto Rigobon
    Abstract: This paper studies pricing in the fashion retail industry. Online data was collected for approximately 350,000 distinct products from over 65 retailers in the U.S. and the U.K. We present evidence that a fair fraction of retailers implement an extreme form of price stickiness that we describe as quantum prices: a large number of different products are priced using just a small number of sparse prices, with price changes occurring rarely and in large increments. Normalized price clustering measures are used to show that retailers use quantum prices within- and across- categories, and this clustering is not explained by popular prices, ranges of prices, assortment size, or digit endings. This pricing strategy is consistent with a behavioral model where fewer prices makes price advertising more effective. An implication of this model is that advertising is increasingly effective when the same prices are used across product lines, i.e. for new products. Finally, quantum prices affect product introductions and price adjustment strategies at the firm level, while it creates larger deviations of the law of one price and hinders the computation of inflation at the macro level.
    JEL: D2 D22 D83 E31 L81 M3
    Date: 2020–01
  30. By: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit, exchange rate pass-through, import costs, inflation
    JEL: E31 F15 F31
    Date: 2019
  31. By: Bluwstein, Kristina (Bank of England); Buckmann, Marcus (Bank of England); Joseph, Andreas (Bank of England and King’s College London); Kang, Miao (Bank of England); Kapadia, Sujit (European Central Bank); Simsek, Özgür (University of Bath)
    Abstract: We develop early warning models for financial crisis prediction using machine learning techniques on macrofinancial data for 17 countries over 1870–2016. Machine learning models mostly outperform logistic regression in out-of-sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering non-linear relationships between the predictors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high.
    Keywords: Machine learning; financial crisis; financial stability; credit growth; yield curve; Shapley values; out-of-sample prediction
    JEL: C40 C53 E44 F30 G01
    Date: 2020–01–03

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