nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒04‒20
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Average inflation targeting and the interest rate lower bound By Flora Budianto; Taisuke Nakata; Sebastian Schmidt
  2. Does the liquidity trap exist? By Stéphane Lhuissier; Benoit Mojon; Juan Rubio-Ramírez
  3. Central Bank Communication during Economic Recessions: Evidence from Nigeria By Omotosho, Babatunde S.
  4. The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries By Claudiu Tiberiu Albulescu; Dominique Pépin; Stephen Miller
  5. Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation By Anand, Abhishek; Chakraborty, Lekha S
  6. Multi-Product Pricing: Theory and Evidence from Large Retailers in Israel By Marco Bonomo; Carlos Carvalho; Oleksiy Kryvtsov; Sigal Ribon; Rodolfo Rigato
  7. Unconventional Monetary Policy Shocks in the Euro Area and the Sovereign-Bank Nexus By Nikolay Hristov; Oliver Hülsewig; Johann Scharler
  8. Theoretically proposed policy instrument to resolve the negative effect of inflation flow into a positive macroeconomic growth: the case of Sierra Leone economy By Tweneboah Senzu, Emmanuel
  9. Monetary policy, financial regulation and financial stability: A comparison between the Fed and the ECB By Schnabl, Gunther; Sonnenberg, Nils
  10. The Loan Puzzle. A Study of Loans to Different Groups in the USA. By Gianluca Cafiso
  11. Price setting frequency and the Phillips Curve By Gasteiger, Emanuel; Grimaud, Alex
  12. Heterogeneous Credit Constraints and Optimal Monetary Policy By Marco Ortiz; Gerardo Herrera
  13. Measuring the effects of U.S. uncertainty and monetary conditions on EMEs' macroeconomic dynamics By Rivolta, Giulia; Trecroci, Carmine
  14. Adopting the Euro: a synthetic control approach By Gabriel, Ricardo Duque; Pessoa, Ana Sofia
  15. Does Inflation Targeting Always Matter for the ERPT? A robust approach By Antonia Lopez Villavicencio; Marc Pourroy
  16. Forecasting exchange rates of major currencies with long maturity forward rates By Zsolt Darvas; Zoltán Schepp
  17. The next generation of digital currencies- in search of stability By Grégory Claeys; Maria Demertzis
  18. International Monetary Cooperation Under Tariff Threats By G. Basevi; F. Delbono; V. Denicolo
  19. The Impact of Monetary Policy on Leading Variables for Financial Stability in Norway By Helene Olsen; Harald Wieslander
  20. While Stability Lasts: A Stochastic Model of Stablecoins By Ariah Klages-Mundt; Andreea Minca
  21. Is Bitcoin Money? An Economic-Historical Analysis of Money, Its Functions and Its Prerequisites By Umlauft, Thomas
  22. Interest Rate Uncertainty as a Policy Tool By Fabio Ghironi; Galip Kemal Ozhan
  23. Lead-lag and relationship between money growth and inflation in Turkey: New evidence from a wavelet analysis By Tursoy, Turgut; Mar'i, Muhammad
  24. Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters By Giancarlo Corsetti; Meredith Crowley; Lu Han
  25. Home sweet host: Prudential and monetary policy spillovers through global banks By Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
  26. Monetary Models Evaluation of Exchange Rate Determination in the Non-WAEMU Anglophone West Africa and Guinea By Mogaji, Peter Kehinde
  27. Banking Crises without Panics By Matthew Baron; Emil Verner; Wei Xiong
  28. The Economics of the Fed Put By Anna Cieslak; Annette Vissing-Jorgensen
  29. From code to market: Network of developers and correlated returns of cryptocurrencies By Lorenzo Lucchini; Laura Alessandretti; Bruno Lepri; Angela Gallo; Andrea Baronchelli

  1. By: Flora Budianto; Taisuke Nakata; Sebastian Schmidt
    Abstract: Assigning a discretionary central bank a mandate to stabilize an average inflation rate - rather than a period-by-period inflation rate - increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expectations, the welfare-maximizing averaging window is infinitely long, which means that optimal average inflation targeting (AIT) is equivalent to price level targeting (PLT). However, AIT with a finite, but sufficiently long, averaging window can attain most of the welfare gain from PLT. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small.
    Keywords: monetary policy objectives, makeup strategies, liquidity trap, deflationary bias, expectations
    JEL: E31 E52 E58 E61
    Date: 2020–04
  2. By: Stéphane Lhuissier; Benoit Mojon; Juan Rubio-Ramírez
    Abstract: The liquidity trap is synonymous with ineffective monetary policy. The common wisdom is that, as the short-term interest rate nears its effective lower bound, monetary policy cannot do much to stimulate the economy. However, central banks have resorted to alternative instruments, such as QE, credit easing and forward guidance. Using state-of- the-art estimates of the effects of monetary policy, we show that monetary easing stimulates output and inflation, also during the period when short-term interest rates are near their lower bound. These results are consistent across the United States, the euro area and Japan.
    Keywords: liquidity trap, effective lower bound, monetary transmission
    JEL: E32 E44 E52
    Date: 2020–04
  3. By: Omotosho, Babatunde S.
    Abstract: This paper analyses the communication strategy of the Central Bank of Nigeria (CBN) during the 2016 economic recession. Applying text mining techniques, useful insights are derived regarding the linguistic intensity, readability, tone, and topics of published monetary policy communiques. Our results provide evidence of increased central bank communication during the recession. However, the ease of reading the published policy communiques declined, especially at the outset of the recession. In terms of tone, we find that negative policy sentiments were expressed during the 2015-2017 period; reflecting the economic uncertainties that trailed the oil price slump of 2014 and its implications for the domestic economy. The negativity of the policy sentiment score reached its trough in July 2016 and recorded an inflexion; signalling the economy’s turning point towards recovery. Based on the results of the estimated topic model, issues relating to “oil price shocks”, “external reserves”, and “inflation” were of concern to the Monetary Policy Committee (MPC) a few quarters preceding the recession while the topics relating to “exchange rate management” as well as “output growth and market stability” were dominant during the recession. Expectedly, the topic proportion for “prices and macroeconomic policies” remain relatively sizeable across the sample period, reflecting the MPC’s commitment to the CBN’s primary mandate of maintaining price stability.
    Keywords: Monetary policy, central bank communication, economic recession, text mining
    JEL: E32 E52 E58 E61 E65
    Date: 2020
  4. By: Claudiu Tiberiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Stephen Miller (WGU Nevada - University of Nevada [Las Vegas])
    Abstract: This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Keywords: currency substitution,cointegration,money demand,open economy model,CEE countries
    Date: 2019–06
  5. By: Anand, Abhishek; Chakraborty, Lekha S
    Abstract: In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia) and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia Key words: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.
    Keywords: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.
    JEL: E52 E58
    Date: 2019
  6. By: Marco Bonomo; Carlos Carvalho; Oleksiy Kryvtsov; Sigal Ribon; Rodolfo Rigato
    Abstract: Standard theories of price adjustment are based on the problem of a single-product firm, and therefore they may not be well suited to analyze price dynamics in the economy with multiproduct firms. To guide new theory, we study a unique dataset with comprehensive coverage of daily prices in large multi-product food retailers in Israel. We find that a typical retail store synchronizes its regular price changes around occasional “peak" days when, once or twice a month, it reprices around 10% of its products. To assess the implications of partial price synchronization for inflation dynamics, we develop a new price-setting model in which a firm sells a continuum of products and faces economies of scope in price adjustment. The model generates the partial synchronization pattern with peaks of re-pricing activity observed in the data. We show analytically and numerically that synchronization of price changes attenuates the average price response to a monetary shock; however, only high degrees of synchronization can materially strengthen monetary non-neutrality. Hence, the synchronization of price changes observed in the data is consistent with considerable aggregate price flexibility.
    Keywords: Inflation and prices; Market structure and pricing; Monetary Policy
    JEL: D21 D22 E31 E52 L11
    Date: 2020–04
  7. By: Nikolay Hristov; Oliver Hülsewig; Johann Scharler
    Abstract: We explore the effects of the ECB’s unconventional monetary policy on the banks’ sovereign debt portfolios. In particular, using panel vector autoregressive (VAR) models we analyze whether banks increased their domestic government bond holdings in response to non-standard monetary policy shocks, thereby possibly promoting the sovereign-bank nexus, i.e. the exposure of banks to the debt issued by the national government. Our results suggest that euro area crisis countries’ banks enlarged their exposure to domestic sovereign debt after innovations related to unconventional monetary policy. Moreover, the restructuring of sovereign debt portfolios was characterized by a home bias.
    Keywords: European Central Bank, unconventional monetary policy, panel vector autoregressive model, sovereign-bank nexus
    JEL: C32 E30 E52 E58 G21 H63
    Date: 2020
  8. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper empirically examines the predictive factor of the inflation rate observed to be the vector force of macroeconomic growth decline or rise in the Sierra Leone economy. Thereby adopting a statistical tool of an exogenous univariate auto-regression integrated moving average to build a forecasting model between the open-market-exchange rate and the inflation rate to establish the degree of correlation effect as a basis to theoretically prescribe a policy instrument, a means to maximize economic benefit for sustainable macroeconomic growth. This leads to an established finding that an average price shift of +/- 0.032 of the leone currency price with the US dollar at the open market will always cause a percentage point change of inflation to the endogenous economy when all other factors remain constant.
    Keywords: Inflation, Exchange rate, policy instrument, regression models, monetary policy
    JEL: E17 E5 E52 E58
    Date: 2020–04–01
  9. By: Schnabl, Gunther; Sonnenberg, Nils
    Abstract: The paper analyses in light of Austrian and Keynesian economic theory the impact of conventional and unconventional monetary policies as therapies for financial crises. It compares the financial market stabilization measures of the Federal Reserve System and the European System of Central Banks in response to the US subprime crisis and the European financial and debt crisis. It is shown that the Federal Reserve System's crisis measures were more directed towards stabilizing the banking system, whereas the European Central Bank had a stronger focus on the stabilization of the debt affordability of euro area crisis countries. In both cases, household credit growth remained under control despite renewed monetary expansion, while new imbalances emerged in the corporate sector. In the euro area, loose monetary policy had a destabilizing impact on the financial sector.
    Keywords: Financial cycles,financial crisis,financial stability,Hayek,Keynes,monetarypolicy
    JEL: B53 E12 E14 E30 E44 E58 G10 G20 H30 H50
    Date: 2020
  10. By: Gianluca Cafiso
    Abstract: We study loans from banking and non-banking lenders to different groups of borrowers in order to unveil significant differences on how those respond to a shock and evaluate possible alternative explanations for such differences. The objective is to gain insights useful to explain the loan puzzle: the unexpected increase of loans to firms in case of a monetary tightening. The analysis is based on a vector autoregression, estimated using Bayesian techniques, and has as object the US economy.
    Keywords: loan puzzle, households, corporate businesses, non-corporate businesses, VAR, Bayesian estimation
    JEL: E44 E51 G20 G21 C11
    Date: 2020
  11. By: Gasteiger, Emanuel; Grimaud, Alex
    Abstract: We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modelled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: is consistent with micro data on price setting frequency; gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities.
    Keywords: Price setting,inflation dynamics,monetary policy,Phillips curve
    JEL: E31 E32 E52
    Date: 2020
  12. By: Marco Ortiz (Universidad del Pacífico); Gerardo Herrera (Universidad del Pacífico)
    Abstract: The optimal response to adverse external shocks in an economy involves the choice of a exchange rate policy. While the traditional Mundell-Flemming inspired theories support a floating exchange rate, evidence shows that central banks intervene in foreign exchange markets regularly. One of the reasons for these interventions relies on the consequences of large depreciations triggering negative balance sheet effects in economies with dollarized liabilities as shown by Benigno et al. (2013) and Devereux and Poon (2011). This paper extends this literature by introducing heterogeneity in credit constraints across sectors. Our findings support that "leaning against the wind" policy responses are optimal even when only a sector of the economy is affected by the credit constraints. Thus, relative price distortions provide an additional justification for these policies. We show that the vulnerability of the economy to large negative external shocks depends not only on the overall unhedged foreign debt, but also on its distribution across sectors.
    JEL: E5 F3 G15
    Date: 2020–02
  13. By: Rivolta, Giulia; Trecroci, Carmine
    Abstract: We explore empirically the transmission of U.S. financial and macroeconomic uncertainty to emerging market economies (EMEs). We start by assuming that there are crucial differences between volatility and uncertainty, and between the latter and its shocks. With the help of Bayesian vector autoregressions, we first identify two measures of U.S. uncertainty shocks, which appear to explain the dynamics of output developments better than conventional volatility measures. Next, we find evidence that adverse shocks to U.S. aggregate uncertainty are associated with marked contractions in some EMEs’ business cycles. However, we detect significant cross-country heterogeneity in the responses of EMEs’ business cycles to U.S uncertainty shocks. We also find generalized declines in stock market values, which supports the so-called Global Financial Cycle hypothesis.
    Keywords: Uncertainty, Monetary policy, Asset prices, Emerging markets.
    JEL: C11 C31 E44 E52 E58 F36
    Date: 2020–04–01
  14. By: Gabriel, Ricardo Duque; Pessoa, Ana Sofia
    Abstract: We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of 12 Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the Euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-Euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a GDP decomposition analysis suggests that the drivers of the economic gains and losses are heterogeneous.
    Keywords: Monetary union, Eurozone, Macroeconomic performance, Synthetic control method, GDP decomposition
    JEL: C32 E02 E30 E60 E65
    Date: 2020–03
  15. By: Antonia Lopez Villavicencio (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); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence.
    Keywords: inflation targeting,exchange rate pass-through,propensity score matching,state-space model
    Date: 2019–06
  16. By: Zsolt Darvas; Zoltán Schepp
    Abstract: The theoretical derivation of our forecasting equation is consistent with the monetary model of exchange rates. Our model outperforms the random walk in out-of-sample forecasting of twelve major currency pairs in both short and long horizons forecasts for the 1990-2020 period. The results are robust for all sub-periods with the exception of years around the collapse of Lehman Brothers in September 2008. Our results are robust to alternative model specifications,...
    Date: 2020–04
  17. By: Grégory Claeys; Maria Demertzis
    Abstract: This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 2 December 2019 between ECON and the President of the European Central Bank. The original paper is available on the European Parliament’s webpage (here). Copyright remains with the European Parliament at all times. Four major developments have challenged the status quo and reopened the debate on...
    Date: 2019–12
  18. By: G. Basevi; F. Delbono; V. Denicolo
    Abstract: We analyze games between two countries that use the tariff as a threat to induce each other to follow monetary policies equivalent to those that would obtain under a cooperative game. The analysis shows that under certain assumptions concerning the shares of tariff revenues that the countries spend on imports, the punishment structure, and the discount factors, the outcome of the games converges to a monetary policies. It is suggested that the model could be applaied to current relations between the US, Germany and Japan.
  19. By: Helene Olsen; Harald Wieslander
    Abstract: We search for leading determinants of financial instability in Norway using a signaling approach, and examine how these respond to a monetary policy shock with the use of structural VAR models. We find that the wholesale funding ratio and gap, credit-to-GDP gap, house price-to-income ratio and gap, and credit growth provide good signals of future financial instability. Following a contractionary monetary policy shock, the credit-to-GDP gap and house price-to-income ratio decrease significantly. The implication of our findings is that the central bank can respond to an increase in these indicators by increasing the interest rate, which in turn will decrease the indicators and thereby the probability of financial distress.
    Keywords: Financial stability, Monetary policy, Structural VAR, Signaling Approach
    Date: 2020–03
  20. By: Ariah Klages-Mundt; Andreea Minca
    Abstract: The `Black Thursday' crisis in cryptocurrency markets demonstrated deleveraging risks in over-collateralized lending and stablecoins. We develop a stochastic model of over-collateralized stablecoins that helps explain such crises. In our model, the stablecoin supply is decided by speculators who optimize the profitability of a leveraged position while incorporating the forward-looking cost of collateral liquidations, which involves the endogenous price of the stablecoin. We formally characterize stable and unstable domains for the stablecoin. We prove bounds on the probabilities of large deviations and quadratic variation in the stable domain and distinctly greater price variance in the unstable domain. The unstable domain can be triggered by large deviations, collapsed expectations, and liquidity problems from deleveraging. We formally characterize a deflationary deleveraging spiral as a submartingale that can cause such liquidity problems in a crisis. We also demonstrate `perfect' stability results in idealized settings and discuss mechanisms which could bring realistic settings closer to the idealized stable settings.
    Date: 2020–04
  21. By: Umlauft, Thomas
    Abstract: Bitcoin and other cryptocurrencies’ spectacular rise over the past years has attracted considerable public and academic interest. The important question arising in this context is whether cryptocurrencies can legitimately be regarded as money. This paper contributes to the current discourse by evaluating cryptocurrencies’ monetary merits based on (1) the orthodox, or Metallist, school of money and (2) the heterodox, or Chartalist, approach. The theoretical as well as empirical findings advanced in this paper serve to illustrate that cryptocurrencies cannot legitimately be regarded as money owing to their lack of essential characteristics universally shared by other monetary systems. By cryptocurrencies’ lack of intrinsic value as well as government support, virtual currencies fail according to the orthodox as well as the heterodox school of money, respectively. In addition, the inelasticity of the bitcoin stock due to the fixed maximum amount of 21 million units stands in sharp contrast to that of other monetary systems – including gold and other depletable resources –, further reducing bitcoin’s suitability as a medium of exchange, and thus as money. In an attempt to explain the apparent discrepancy between the current value the market attaches to cryptocurrencies and their monetary deficiencies, we advance that market participants are misled by what we term the input fallacy of value (IFV). Similar to the labour theory of value, which posits that value is a function of the labour required to produce a good or service, market participants appear to be misled into believing that the value of cryptocurrencies is the product of the input costs required in the “mining” process. In this context, it is overlooked that value, far from merely being a function of labour and capital deployed, is solely determined by the resultant utility. Since, however – as detailed in this paper –, bitcoin lacks the essential characteristics associated with money, cryptocurrencies’ utility, and hence price, should tend towards zero over time.
    Keywords: Bitcoin, Cryptocurrencies, Economic Bubbles, Nature of Money, Origin of Money, Theories of Money, Money, Medium of Exchange, Orthodox School of Money, Heterodox School of Money, Chartalist School, Metallist School, Labour Theory of Value, Input Fallacy of Value, Stone Currency of Yap
    JEL: B12 B13 B15 B25 B59 E31 E41 E42 E51 E58 N10 N20
    Date: 2018–06
  22. By: Fabio Ghironi; Galip Kemal Ozhan
    Abstract: We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate passthrough. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.
    Keywords: International financial markets; Monetary policy framework; Uncertainty and monetary policy
    JEL: E32 F32 F38 G15
    Date: 2020–04
  23. By: Tursoy, Turgut; Mar'i, Muhammad
    Abstract: The study investigates the relationship between money supply and inflation and Turkey by employing wavelet analysis, mainly continuous wavelet analysis, cross wavelet transforms and wavelet coherence and phase-difference, for the period from 1987 to 2019. Our main finding confirms the modern quantity theory of money about the existence of a relationship between inflation and money supply in the short-run and long-run, and also confirms the traditional quantity theory of money about the existence of a relationship in the long run. The phase difference confirms the existence of a bidirectional relationship between money supply and inflation. The result is consistent with both the traditional quantity theory of money in the long run and the modern quantity theory of money in the short-run and long-run in terms of the existence of a relationship between money supply and inflation.
    Keywords: Money supply, inflation, wavelet analysis, Turkey, the quantity theory of money.
    JEL: E4 E5
    Date: 2020–04–12
  24. By: Giancarlo Corsetti; Meredith Crowley; Lu Han
    Abstract: Using administrative data on export transactions, we show that UK firms invoice in multiple currencies — even when shipping the same product to the same destination — and switch invoicing currencies over time. We then provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in exchange rate pass-through and destination-specific markup adjustment, at the granular level of firm-productdestination and time. Based on an event study around the 2016 Brexit depreciation and econometric analysis of a longer period (2010-2017), we examine the export price elasticity to the exchange rate measured in sterling to find that this is low for transactions invoiced in producer currency and comparably high for sales invoiced either in a vehicle or in the destination market currency. However, our analysis of markup elasticities reveals that firms price-to-market only when they invoice sales in the destination market currency. Altogether, our findings imply that currency movements may cause significant short-run deviations from the law of one price not only across but also within borders; these are systematically linked to the firm’s choice of invoicing currencies. Dynamically, we find that the stark differences in price changes across invoicing currencies that emerged in the aftermath of the Brexit depreciation atrophied within six quarters, as all prices came to align broadly with the weaker pound. These findings enrich our understanding of the ‘international price system’ underpinning the international transmission of shocks (Gopinath (2015)), with crucial implications for open macro modelling and policy design.
    Keywords: exchange rates, pass through, law of one price, markup elasticity, vehicle currency, dominant currency, firm level data
    JEL: F31 F41
    Date: 2020–03
  25. By: Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
    Abstract: Prudential regulation of banks is multi-layered: policy changes by home-country authorities affect banks' global operations across many jurisdictions; changes by host-country authorities shape banks' operations in the host jurisdiction regardless of the nationality of the parent bank. Which layer matters most? Do these policies create cross-border spillovers? And how does monetary policy alter these spillovers? This paper examines the effect that changes in home- and hostcountry prudential measures have on cross-border credit, and how these interact with monetary policy. We use a novel approach to decompose growth in cross-border bank lending into separate home, host and common components, and then match each with the home or host policies that affect this component. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross-border US dollar lending than host policies, primarily through substitution effects. We also find that a tightening of US monetary policy can compound the spillovers of certain prudential measures.
    Keywords: international banking, prudential policy, international policy coordination and transmission, currencies, international spillovers
    JEL: F42 G21 L51
    Date: 2020–04
  26. By: Mogaji, Peter Kehinde
    Abstract: This paper assessed exchange rate determination and the associated macroeconomic fundamentals across the non-West African Economic and Monetary Union (WAEMU) Anglophone countries (The Gambia, Ghana, Liberia, Nigeria and Sierra Leone) and Guinea. These six countries were known the West African Monetary Zone (WAMZ). Further steps were taken to check for similarities in the determination of exchange rates by the fundamentals as well as the uniformity of macroeconomic determinants of exchange rates and their associated explanatory powers towards justifying the appropriateness (or otherwise) of a single fixed exchange rate regime across these WAMZ countries in the event of monetary integration of West Africa which would be characterised by common currency and common central bank. This study applied two variants of the monetary models of exchange rate determination: (i) the flexible-price monetary model (FPMM) and (ii) the real interest differential monetary model (RIDMM). These monetary theories and models of exchange rates determination are very useful tools in explaining the behaviour of exchange rates in any given economy. Annual, quarterly and monthly data, averagely spanning between 1980 and 2015 were employed. Cross-rate conversions were estimated by the author in order to generate bilateral exchange rates among the WAMZ countries. The monetary models constructed incorporated the extent of informal economies within these WAMZ countries. The two monetary models were estimated with the Canonical Cointegrating Regression (CCR), Dynamic Ordinary Least Square (DOLS) regression and Markov Switching Dynamic (MSD) regression approaches for country estimations while Random Effect (Generalised Least Square) estimation of panel data of the six WAMZ countries was applied in the evaluation of homogeneity of exchange rate behaviours. Furthermore, the relationships in the FPMM and RIDMM were examined with three residual-based cointegration tests on the residuals of the estimates of Fully Modified Ordinary Least Square (FMOLS) cointegrating regressions (Phillips-Oualiaris, Engle-Granger and Park’s Added Variable). The US dollar based exchange rates estimated yielded evidence towards the conclusion that The Gambian dalasi, the Nigerian naira and the Sierra Leonean leone are the three WAMZ currencies well-suited for a single exchange rate regime. Estimations of the Nigerian naira-based exchange rates revealed that Sierra Leonean leone, the Guinea franc and the Ghanaian cedi are also suitable for the single foreign exchange market. What is significant here is that Nigeria (the lead economy in West Africa) is evidently suited for the single exchange rate regime. Evidently, Liberia was not reported as being suitable in any of the estimations.
    Keywords: Monetary Models of Exchange Rates Determination, Flexible-Price Monetary Model, Sticky Price Monetary Model, Real Interest Differential Monetary Model, Non-WAEMU) Anglophone countries, the WAMZ
    JEL: F31 F36 F45 P52
    Date: 2018–11
  27. By: Matthew Baron; Emil Verner; Wei Xiong
    Abstract: We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics can be an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics.
    JEL: G01 G21
    Date: 2020–03
  28. By: Anna Cieslak; Annette Vissing-Jorgensen
    Abstract: Since the mid-1990s, low stock returns predict accommodating policy by the Federal Reserve. This fact emerges because, over this period, negative stock returns comove with downgrades to the Fed’s growth expectations. Textual analysis of the FOMC documents reveals that policymakers pay attention to the stock market, and their negative stock-market mentions predict federal funds rate cuts. The primary mechanism why policymakers find the stock market informative is via its effect on consumption, with a smaller role for the market viewed as predicting the economy.
    JEL: E44 E52 E58
    Date: 2020–03
  29. By: Lorenzo Lucchini; Laura Alessandretti; Bruno Lepri; Angela Gallo; Andrea Baronchelli
    Abstract: "Code is law" is the funding principle of cryptocurrencies. The security, transferability, availability and other properties of a crypto-asset are determined by the code through which it is created. If code is open source, as it happens for most cryptocurrencies, this principle would prevent manipulations and grant transparency to users and traders. However, this approach considers cryptocurrencies as isolated entities thus neglecting possible connections between them. Here, we show that 4% of developers contribute to the code of more than one cryptocurrency and that the market reflects these cross-asset dependencies. In particular, we reveal that the first coding event linking two cryptocurrencies through a common developer leads to the synchronisation of their returns in the following months. Our results identify a clear link between the collaborative development of cryptocurrencies and their market behaviour. More broadly, our work reveals a so-far overlooked systemic dimension for the transparency of code-based ecosystems and we anticipate it will be of interest to researchers, investors and regulators.
    Date: 2020–04

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