nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒05‒25
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. US dollar funding markets during the Covid-19 crisis - the money market fund turmoil By Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
  2. Industry Heterogeneity in the Risk-Taking Channel By Delis, Manthos; Iosifidi, Maria; Mylonidis, Nikolaos
  3. The two demands: Why a demand for non-consumable money is different from a demand for consumable goods By Dmitry Levando
  4. The asymmetric effects of monetary policy on stock price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  5. How should Central Banks accumulate reserves? By Federico Sturzenegger
  6. The ruling of the Federal Constitutional Court concerning the public sector purchase program: A practical way forward By Siekmann, Helmut; Wieland, Volker
  7. COVID-19 uncertainty and monetary policy By PINSHI, Christian P.
  8. Public Liquidity Demand and Central Bank Independence By Jean Barthélemy; Eric Mengus; Guillaume Plantin
  9. The CCP-bank nexus in the time of Covid-19 By Wenqian Huang; Előd Takáts
  10. Monetary Policy when Preferences are Quasi-Hyperbolic By Richard Dennis; Oleg Kirsanov
  11. The Money Market Fund Liquidity Facility By Marco Cipriani; Gabriele La Spada; Reed Orchinik; Aaron Plesset
  12. Does monetary policy impact international market co-movements? By Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
  13. Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  14. US dollar funding markets during the Covid-19 crisis - the international dimension By Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
  15. Financial Conditions Index as a predictor in low-inflation environment By Oreste Napolitano; Salvatore Capasso; Ana Laura Viveros
  16. The Fiscal Theory of Price Level with a Bubble By Markus K. Brunnermeier; Sebastian A. Merkel; Yuliy Sannikov
  17. Eurozone prices: a tale of convergence and divergence By Alfredo García-Hiernaux; María T. González-Pérez; David E. Guerrero
  18. Trade Credit and the Transmission of Unconventional Monetary Policy By Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
  19. Monetary policy in DR. Congo : Learning about communication and expectations By Pinshi, Christian P.
  20. How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers By Katya Kartashova; Xiaoqing Zhou
  21. Winter is possibly not coming: Mitigating financial instability in an agent-based model with interbank market By Lilit Popoyan; Mauro Napoletano; Andrea Roventini

  1. By: Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
    Abstract: Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with funding diverted from unsecured funding markets as investors withdrew and switched to secured funding markets and government MMFs. Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-OIS spread, despite banks not being at the epicentre of the liquidity squeeze. The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary policy implementation, and the role of the central bank during stress.
    Date: 2020–05–12
  2. By: Delis, Manthos; Iosifidi, Maria; Mylonidis, Nikolaos
    Abstract: We examine the transmission of the risk-taking channel to different industries using syndicated loans to U.S. borrowers from 1984 to 2018. We find that a one percentage point decrease in the shadow rate increases loan spreads by more than 30 basis points in the mining & construction and manufacturing sectors. The equivalent effect is lower in the services and trade industries, whereas the effect on the transportation & utilities and finance industries is less pronounced. Our results survive in several sensitivity tests and are immune to time-varying demand-side explanations. The identified differences in the potency of the risk-taking channel explain a significant part of the inferior performance of highly affected sectors compared to less-affected sectors in the year after a loan origination.
    Keywords: Bank risk-taking; Monetary policy; U.S.; Syndicated loans; Different industries
    JEL: E43 E52 G01 G21
    Date: 2020–05–16
  3. By: Dmitry Levando (National Research University, Moscow, Russia)
    Abstract: The paper explicitly discusses the key differences between a demand for consumables and demand for (non-consumable) credit money; why this matters. For example, in contrast to consumables, money can not be demanded by only one agent; it is a stock variable; credit requires special arrangements to implement trust now to clear up a debt later; for a finite time period there is zero demand for non-consumable money (Hahn paradox). These issues are important for developing micro-foundations of monetary macroeconomics, including those for a liquidity trap and credit crunches, not well investigated in existing literature. Contemporary economic theory already has some answers, initiated by works of Martin Shubik. These micro-foundations are vitally important for understanding the 2020 credit crisis, and the concept of a credit cycle as a long-run interaction between real and financial sectors of economic systems.
    Keywords: Demand for goods, demand for money, Martin Shubik, micro-foundations of macroeconomics, monetary economics, liquidity trap
    JEL: E40 E41 E49 D11
    Date: 2020
  4. By: Christophe Blot (Sciences Po-OFCE, Université Paris Nanterre - EconomiX); Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté – CRESE, Sciences Po-OFCE)
    Abstract: Is the effect of US monetary policy on stock price bubbles asymmetric? We use a range of measures of excessive stock price variations that are unrelated to business cycle fluctuations. We find that the effects of monetary policy are asymmetric so responses to restrictive and expansionary shocks must be differentiated. The effects of restrictive monetary policy are more powerful than the effects of expansionary policies. We also find evidence that the asymmetric effect of monetary policy is state-contingent and depends on monetary, credit and business cycles as well as stock price boom -bust dynamics.
    Keywords: Non-linearity, Equity, Booms and busts, Federal Reserve.
    JEL: E44 G12 E52
    Date: 2020–05
  5. By: Federico Sturzenegger (Universidad de San Andres)
    Abstract: There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how to finance those reserves. Does it matter if reserves are accumulated through unsterilized purchases, by issuing domestic currency liabilities or by issuing foreign currency liabilities? This paper explores this question by looking at the impact of different ways to finance reserve accumulation on country spreads. The results suggest that the financing source is not irrelevant. Accumulating reserves through unsterilized interventions or by issuing domestic debt, do reduce country risk. On the contrary accumulating reserves by issuing foreign liabilities seems not to have a meaningful effect.
    Keywords: reserves, spreads, central banking
    JEL: F3 F4 E5
    Date: 2020–05
  6. By: Siekmann, Helmut; Wieland, Volker
    Abstract: This paper summarizes key elements of the German Federal Constitutional Court's decision on the European Central Bank's Public Sector Asset Purchase Programme. It briefly explains how it is possible for the German Court to disagree with the ruling of the Court of Justice of the European Union. Finally, it makes suggestions concerning a practical way forward for the Governing Council of the ECB in light of these developments.
    Date: 2020
  7. By: PINSHI, Christian P.
    Abstract: The uncertainty of COVID-19 seriously disrupts the Congolese economy through various macroeconomic channels. This pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. We use a Bayesian VAR framework (BVAR) to provide an analysis of the COVID uncertainty shock on the economy and the monetary policy response. The analysis shows important conclusions. The uncertainty effect of COVID-19 hits unprecedented aggregate demand and the economy. In addition, it undermines the action of monetary policy to soften this fall in aggregate demand and curb inflation impacted by the exchange rate effect. We suggest a development of unconventional devices for a gradual recovery of the economy.
    Keywords: Uncertainty, COVID-19, Monetary policy, Bayesian VAR
    JEL: C32 E32 E51 E52 E58
    Date: 2020–05
  8. By: Jean Barthélemy; Eric Mengus; Guillaume Plantin
    Abstract: This paper studies how private demand for public liquidity affects the independence of a central bank vis-à-vis the fiscal authority. Whereas supplying liquidity to the private sector creates degrees of freedom for fiscal and monetary authorities vis-à-vis each other, we show that the authority that is most able to attract private liquidity demand can ultimately impose its views to the other.
    Keywords: : Central Bank Independence, Low Rates, Game of Chicken, Demand for Liquidity.
    JEL: E50 E42 E63 C72
    Date: 2020
  9. By: Wenqian Huang; Előd Takáts
    Abstract: During the Covid-19-induced financial turbulence, central counterparties (CCPs) issued large margin calls, weighing on the liquidity of clearing member banks. In spite of the turbulence, CCPs remained resilient, as intended by the post-crisis reforms of financial market infrastructures. Higher margins should be expected during heightened turbulence, but the extent of the procyclicality of margining is the consequence of various design choices. Systemic considerations call to examine the nexus between banks and CCPs. Therefore, when thinking about margining, central banks need to assess banks and CCPs jointly rather than in isolation.
    Date: 2020–05–11
  10. By: Richard Dennis; Oleg Kirsanov
    Abstract: We study discretionary monetary policy in an economy where economic agents have quasi-hyperbolic discounting. We demonstrate that a benevolent central bank is able to keep inflation under control for a wide range of discount factors. If the central bank, however, does not adopt the household’s time preferences and tries to discourage early-consumption and delayed-saving, then a marginal increase in steady state output is achieved at the cost of a much higher average inflation rate. Indeed, we show that it is desirable from a welfare perspective for the central bank to quasi-hyperbolically discount by more than households do. Welfare is improved because this discount structure emphasizes the current-period cost of price changes and leads to lower average inflation. We contrast our results with those obtained when policy is conducted according to a Taylor-type rule.
    Keywords: Quasi-hyperbolic discounting, Monetary policy, Time-consistency
    JEL: E52 E61 C62 C73
    Date: 2020–02
  11. By: Marco Cipriani; Gabriele La Spada; Reed Orchinik; Aaron Plesset
    Abstract: Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.
    Keywords: Money Market Mutual Fund Liquidity Facility (MMLF); pandemic; COVID-19
    JEL: G2
    Date: 2020–05–08
  12. By: Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
    Abstract: We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED's put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone.
    Keywords: Unconventional Monetary policy,Quantitative easing,Mundellian trilemma,Comovements,Sovereign credit risk
    JEL: E58 G12 G15
    Date: 2020
  13. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: The COVID pandemic hit the US economy at a time in which the ability of policymakers to react to adverse shocks is greatly reduced. The current low interest rate environment limits the tools the central bank can use to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. Against this background, we study the implications of a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under the coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority tolerates a temporary increase in inflation to accommodate the emergency budget. The coordinated strategy enhances the efficacy of the fiscal stimulus planned in response to the COVID pandemic and allows the Federal Reserve to correct a prolonged period of below-target inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention.
    JEL: E30 E52 E62
    Date: 2020–05
  14. By: Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
    Abstract: Dislocations in domestic US dollar money markets reverberated globally. Non-US banks lost a substantial part of funding from money market funds and had to borrow at shorter maturities. Nevertheless, the severity of dollar funding strains varied substantially across banks, and eased for banks from jurisdictions with standing swap lines with the Federal Reserve. The impact of policy measures to quell the stress was felt unevenly across different funding markets. The divergence between key rates resulted in an unusual divergence of funding cost metrics, with some indicating a "dollar glut" while others a "dollar shortage".
    Date: 2020–05–12
  15. By: Oreste Napolitano (University of Naples Parthenope); Salvatore Capasso (University of Naples Parthenope); Ana Laura Viveros (Universidad Nacional Autónoma de México)
    Abstract: The nature of the ?nancial crisis in 2008 imposed new challenges for macroe-conomic theory and policy-makers. In this context, a ?nancial conditions index(FCI) could be a useful tool to identify the state of ?nancial conditions in acountry. We construct a FCI for Mexico to analyse the role of prices of ?nancialassets in the formulation of monetary policy under the in?ation-targeting regime.We estimate FCIs by two di?erent methodologies using monthly data from 1990to 2017. The variables are considered according to the mechanismof transmission of monetary policy and incorporating other important ?nancialvariables, those characterise developing countries. Our results show that FCI isa good predictor in a low/non-in?ation environment.
    Keywords: Financial Conditions, Monetary policy, Vector autoregressive models
    JEL: E52 E58 C01
    Date: 2020–02
  16. By: Markus K. Brunnermeier; Sebastian A. Merkel; Yuliy Sannikov
    Abstract: This paper incorporates a bubble term in the standard FTPL equation to explain why countries with persistently negative primary surpluses can have a positively valued currency and low inflation. It also provides an example with closed-form solutions in which idiosyncratic risk on capital returns depresses the interest rate on government bonds below the economy's growth rate.
    JEL: E44 E52 E63
    Date: 2020–05
  17. By: Alfredo García-Hiernaux (DANAE AND ICAE); María T. González-Pérez (Banco de España); David E. Guerrero (CUNEF)
    Abstract: This article provides a methodology to test absolute and relative price convergence (in mean and variance) based on a model of relative prices that includes a transition path, and offers a way to measure the speed of price convergence across countries. By applying this test to the European Monetary Union (EMU) price indices from 2001 to 2011, we find empirical evidence of different price level patterns and the lack of price level convergence in the long run for most countries. In terms of the price gap between countries, only when we compare the German with French and Italian prices, we do get zero-gap (absolute) price level convergence. A few other countries report relative price level convergence. These results underscore the existence of a “convergence cost” that EMU countries with lower price levels paid and that does not tend toward zero in the long-term in the absence of convergence. This finding might be of particular interest to European monetary policymakers as it implies that implemented monetary policy does not affect (benefit/harm) all EMU members equally. Monitoring the relative and absolute price level convergence is advised to understand the monetary policy efficiency in the long run.
    Keywords: price level convergence, mean convergence, variance convergence, inflation, monetary union, monetary policy
    JEL: C22 C32 N70 E3 E4 E5
    Date: 2020–05
  18. By: Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
    Abstract: We show that trade credit in production networks is important for the transmission of unconventional monetary policy. We find that firms with bonds eligible for purchase under the European Central Bank’s Corporate Sector Purchase Program act as financial intermediaries and extend more trade credit to their customers. The increase in trade credit flows is more pronounced from core countries to periphery countries and towards financially constrained customers. Customers increase investment and employment in response to the additional financing, while suppliers with eligible bonds increase their customer base, potentially favoring upstream industry concentration. Our findings suggest that the trade credit channel of monetary policy produces heterogeneous effects on regions, industries, and firms.
    JEL: E50 G30
    Date: 2020–05
  19. By: Pinshi, Christian P.
    Abstract: This article aims to consolidate strategic importance of communication in managing expectations and stabilizing the congolese economy. We propose a reinforcement in terms of communication, on the one hand by using not only french as a language, but also the national languages, such as Lingala, and on the other hand by using a maximum of television broadcasts on dedication from the congolese central bank to stabilize the economy. These instruments could restore confidence and allow the bank central of the Congo to better manage exchange rate and inflation expectations. In addition, there are reportedly no studies in the Democratic Republic of the Congo related to the influence of central bank communication on expectations. Thus, this analysis contributes to the Central bank theoretical literature. In prospect a development of a new communication index of the Bank central of the Congo is desirable in order to reinforce the effectiveness of the monetary policy.
    Keywords: Monetary policy, communication, expectation
    JEL: E52 E58
    Date: 2020–05
  20. By: Katya Kartashova; Xiaoqing Zhou
    Abstract: We study the causal effect of mortgage rate changes on consumer spending, debt repayment, and defaults during an expansionary and a contractionary monetary policy episode in Canada. Our identification takes advantage of the fact that the interest rates of short-term fixed-rate mortgages (the dominant product in Canada’s mortgage market) have to be reset according to the prevailing market interest rates at predetermined time intervals. Our empirical strategy exploits this exogenous variation in the timing of mortgage rate resets. We find asymmetric responses of consumer durable spending, deleveraging, and defaults. These results can be rationalized by the cash-flow effect in conjunction with changes in consumers’ expectations about future interest rates. Our findings help us to understand the responses of the household sector to changes in the interest rate, especially in countries where variable-rate, adjustable-rate, and short-term fixed-rate mortgages are prevalent.
    Keywords: Credit and credit aggregates; Interest rates; Monetary policy; Transmission of monetary policy
    JEL: D14 E52 G21 R31
    Date: 2020–05
  21. By: Lilit Popoyan (Institute of Economics (LEM), Scuola Superiore Sant’Anna, Pisa (Italy)); Mauro Napoletano (Sciences Po-OFCE, and SKEMA Business School); Andrea Roventini (EMbeDS and Institute of Economics (LEM))
    Abstract: We develop a macroeconomic agent-based model to study how financial instability can emerge from the co-evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy. The model is populated by heterogenous firms, consumers, and banks that locally interact in different markets. In particular, banks provide credit to firms according to a Basel II or III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to different types of Taylor rules. We find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies, banking crises and the emergence of deep downturns. This requires the timely intervention of the Central Bank as a liquidity lender of last resort. Moreover, we find that the joint adoption of a three mandate Taylor rule tackling credit growth and the Basel III macro-prudential frame-work is the best policy mix to stabilize financial and real economic dynamics. However, as the Liquidity Coverage Ratio spurs financial instability by increasing the pro-cyclicality of banks’ liquid reserves, a new counter-cyclical liquidity buffer should be added to Basel III to improve its performance further. Finally, we find that the Central Bank can also dampen financial in- stability by employing a new unconventional monetary-policy tool involving active management of the interest-rate corridor in the interbank market.
    Keywords: Financial instability; interbank market freezes; monetary policy; macro-prudential policy; Basel III regulation; Tinbergen principle; agent-based models.
    JEL: C63 E52 E6 G01 G21 G28
    Date: 2020–05

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