nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒06‒22
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The role of financial journalists in the expectations channel of the monetary transmission mechanism By Monique Reid; Pierre Siklos; Timothy Guetterman; Stan Du Plessis
  2. Does the Liquidity Trap Exist? By Stéphane Lhuissier; Benoît Mojon; Juan Rubio-Ramírez
  3. A Pitfall of Cautiousness in Monetary Policy By Stéphane Dupraz; Sophie Guilloux-Nefussi; Adrian Penalver
  4. Shotgun Wedding: Fiscal and Monetary Policy By Marco Bassetto; Thomas J. Sargent
  5. Corona Policy According to HANK By Hagedorn, Marcus; Mitman, Kurt
  6. Monetary Policy Independence and the Strength of the Global Financial Cycle By Christian Friedrich; Pierre Guérin; Danilo Leiva-Leon
  7. A Model of Asset Price Spirals and Aggregate Demand Amplification of a "Covid-19" Shock By Caballero, Ricardo; Simsek, Alp
  8. Unconventional Monetary Policies: A Stock-Taking Exercise By Christian Pfister; Jean-Guillaume Sahuc
  9. Unconventional Monetary Policy and Wealth Inequalities in Great Britain By Evgenidis, Anastasios; Fasianos, Apostolos
  10. Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength By Bianchi, Francesco; Faccini, Renato; Melosi, Leonardo
  11. Exchange rate pass-through in the euro area and EU countries By Eva Ortega; Chiara Osbat
  12. Monetary and Prudential Policy Coordination: impact on Bank's Risk-Taking By Olivier Bruno; Melchisedek Joslem Ngambou Djatche
  13. The Monetary Mystery of the last Decade By Mario Teijeiro
  14. Monetary Unions of Small Currencies and a Dominating Member: What Policies Work Best for Benefiting from the CMA? By Wörgötter, Andreas; Brixiova, Zuzana
  15. Deciphering the macroeconomic effects of internal devaluations in a monetary union By Javier Andrés; Óscar Arce; Samuel Hurtado; Jesús Fernández-Villaverde
  16. When the Fed sneezes, the whole world catches the cold, when the ECB - only Europe By Walerych, Małgorzata; Wesołowski, Grzegorz
  17. Stablecoins: A Brave New World? By Anastasia Melachrinos; Christian Pfister
  18. Macroeconomic factors for inflation in Argentine 2013-2019 By Manuel Lopez Galvan
  19. The role of exchange rate and monetary policy in the monetary approach to the balance of payments: Evidence from Malawi By Exley B.D. Silumbu
  20. A note on the impact of the inclusion of an anchor number in the inflation expectations survey question By Monique Reid; Hanjo Odendaal; Stan Du Plessis; Pierre Siklos
  21. Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles By Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
  22. Corporate Debt Maturity, Repayment Structure and Monetary Policy Transmission By Hatice Gokce Karasoy Can
  23. Monetary and Exchange Rate Policy in Kenya By Njunguna Ndung'u
  24. Fiscal multipliers with financial fragmentation risk and interactions with monetary policy By Darracq Pariès, Matthieu; Papadopoulou, Niki; Müller, Georg
  25. Sticky Capital Controls By Miguel Acosta-Henao; Laura Alfaro; Andrés Fernández
  26. The effectiveness of currency intervention in a commodity-exporter: Evidence from Mongolia By Victor Pontines; Davaajargal Luvsannyam; Enkhjin Atarbaatar; Ulziikhutag Munkhtsetseg
  27. Central Bank Digital Currency: Central Banking for All? By Jesus Fernandez-Villaverde; Daniel R. Sanches; Linda Schilling; Harald F. Uhlig
  28. The Global Disinflation Puzzle A Selective Review of the Theory and Evidence in an Historical Context By Emilio Ocampo
  29. Interoperable Payment Systems and the Role of Central Bank Digital Currencies By Duffie, Darrell
  30. Egalitarian and Just Digital Currency Networks By Gal Shahaf; Ehud Shapiro; Nimrod Talmon
  31. "An Empirical Analysis of Long-Term Brazilian Interest Rates" By Tanweer Akram; Syed Al-Helal Uddin
  32. Public Opinion on Central Banks when Economic Policy is Uncertain By Klodiana Istrefi; Anamaria Piloiu
  33. Monetary policy, productivity, and market concentration By Andrea Colciago; Riccardo Silvestrini
  34. Monetary policy with judgment By Gelain, Paolo; Manganelli, Simone
  35. Have the Fed Swap Lines Reduced Dollar Funding Strains during the COVID-19 Outbreak? By Nicola Cetorelli; Linda S. Goldberg; Fabiola Ravazzolo
  36. Monetary Policy Rules: Lessons Learned from ECOWAS Countries By Alain Siri
  37. The effectiveness of macroprudential policies and capital controls against volatile capital inflows By Jon Frost; Hiro Ito; René van Stralen
  38. The Determinants of Inflation in Sudan By Kabbashi M. Suliman
  39. Explaining Inflation and Unemployment By Farm, Ante
  40. Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending By Matthieu Bussière; Robert Hills; Simon Lloyd; Baptiste Meunier; Justine Pedrono; Dennis Reinhardt; Rhiannon Sowerbutts
  41. Institutional reforms and the management of exchange rate policy in Nigeria By Kassey Odubogun
  42. A Proposal for Asia Digital Common Currency By Taiji Inui; Wataru Takahashi; Mamoru Ishida
  43. Liquidity provision during a pandemic By Kahn, Charles M.; Wagner, Wolf

  1. By: Monique Reid; Pierre Siklos; Timothy Guetterman; Stan Du Plessis
    Abstract: Monetary policy relies on managing the inflation expectations of the public in order to influence prices (inflation). Relying on the South African experience we argue that most of the general public are only exposed to the communication of the South African Reserve Bank (SARB) via the media. This state of affairs is fairly typical around the globe. We explore the role and biases of the journalists in transmitting the SARB’s communication to the rationally inattentive general public. Our aim is to obtain insights about the factors that influence media articles that deal with monetary policy issues. Using interviews and qualitative content analysis, we explore the extent of the journalists’ knowledge about inflation and monetary policy, their views concerning the credibility of the SARB, the sources of information they use, and the constraints and incentives they face in writing the articles.
    Keywords: monetary policy, central bank communication, journalists
    JEL: E52 E58
    Date: 2020–04
  2. By: Stéphane Lhuissier; Benoît 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: E44 E52
    Date: 2020
  3. By: Stéphane Dupraz; Sophie Guilloux-Nefussi; Adrian Penalver
    Abstract: Central banks are often reluctant to take immediate or forceful actions in the face of new information on the economic outlook. To rationalize this cautious approach, Brainard’s attenuation principle is often invoked: when a policy-maker is unsure of the effects of his policies, he should react less than he would under certainty. We show that the Brainard principle, while a wise recommendation for policy-making in general, runs into a pitfall when it is applied to a central bank setting monetary policy. For a central bank, concerns over uncertainty create a cautiousness bias: acting less is justified when taking as given the private sector’s expectations of inflation, but acting less shifts these inflation expectations away from the central bank’s inflation target. In response to the de-anchoring of expectations, the central bank can easily end up acting as much as it is initially reluctant to do, but without succeeding in putting inflation back on target. This pattern is a feature of policy under discretion: the central bank would often be better off tying its hands not to listen to its concerns about uncertainty.
    Keywords: Uncertainty, Inflation Expectations, Discretion vs. Commitment.
    JEL: E31 E52 E58
    Date: 2020
  4. By: Marco Bassetto; Thomas J. Sargent
    Abstract: This paper describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflation, (b) optimal unanticipated inflation, and (c) conditions that secure a “nominal anchor” in the sense of a unique price level path. We contrast incomplete theories whose inputs are budget-feasible sequences of government issued bonds and money with complete theories whose inputs are bond-money strategies described as sequences of functions that map time t histories into time t government actions. We cite historical episodes that conform the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.
    Keywords: Government budget; Central Bank; Nominal anchor; Monetary-fiscal coordination
    JEL: E61 E62 E63 E52
    Date: 2020–04–08
  5. By: Hagedorn, Marcus; Mitman, Kurt
    Abstract: In this note, we analyze the role of the European Central Bank through the lens of the Heterogenous-agent New Keynesian Model (HANK), a new paradigm of fiscal and monetary policy that abandons the assumption of perfectly functioning financial markets. We emphasize three principles that emerge from this view: 1) the effect of fiscal and monetary financing on inflation; 2) the close interaction between fiscal and monetary policy in the determination of inflation; and 3) an economic perspective on Art.123(1) TFEU, the "prohibition of monetary financing."
    Keywords: Art.123(1) TFEU; Fiscal/monetary policy interaction; HANK; inflation; monetary financing
    JEL: D52 E31 E52 E62 E63
    Date: 2020–05
  6. By: Christian Friedrich; Pierre Guérin; Danilo Leiva-Leon
    Abstract: We propose a new strength measure of the global financial cycle by estimating a regime-switching factor model on cross-border equity flows for 61 countries. We then assess how the strength of the global financial cycle affects monetary policy independence, which is defined as the response of central banks' policy interest rates to exogenous changes in inflation. We show that central banks tighten their policy rates in response to an unanticipated increase in the inflation gap during times when global financial cycle strength is low. During times of high financial cycle strength, however, the responses of the same central banks to the same unanticipated changes in the inflation gap appear muted. Finally, by assessing the impact of different policy tools on countries' sensitivities to the global financial cycle, we show that using capital controls, macroprudential policies, and the presence of a flexible exchange rate regime can increase monetary policy independence.
    Keywords: Business fluctuations and cycles; Exchange rate regimes; Financial system regulation and policies; International financial markets; Monetary policy
    JEL: E4 E5 F3 F32 F4 F42 G1 G15 G18
    Date: 2020–06
  7. By: Caballero, Ricardo; Simsek, Alp
    Abstract: We provide a model of endogenous asset price spirals and severe aggregate demand contractions following a large supply shock. The key mechanism stems from the drop in the wealth share of the economy's risk-tolerant agents: as a recessionary supply shock hits the economy, their wealth declines and their leverage rises endogenously, causing them to offload some risky assets. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market's Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary supply shocks not only feed into reduced risk tolerance but also into further asset price and output drops, which feed the risk-off episode and trigger a downward loop. When pre-shock leverage ratios are high, multiple equilibria are possible, including one where risk-tolerant agents go bankrupt. A large-scale asset purchases (LSAPs) policy can be highly effective in this environment, as it reverses the downward asset price spiral. The Covid-19 shock and the large response by all the major central banks provide a vivid illustration of the environment we seek to capture.
    Keywords: aggregate supply and demand; asset price spirals; conventional and unconventional monetary policy; COVID-19; leverage; LSAPs; multiple equilibria; Recessions; the Fed put; volatility
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2020–04
  8. By: Christian Pfister; Jean-Guillaume Sahuc
    Abstract: This paper takes stock of the literature on the unconventional monetary policies, from their implementation to their effects on the economy. In particular, we discuss in detail the two main measures implemented in most developed economies, namely forward guidance and large-scale asset purchases. Overall, there is near consensus that these measures have been useful, although there are a few dissenting views. Because unconventional monetary policies have left their mark on economies and on the balance sheets of central banks, we offer insights into their legacy and ask whether they have led to a change in "the rules of the game" for setting interest rates and choosing the size and composition of central banks’ balance sheets. Finally, we discuss whether to modify the objectives and the instruments of monetary policy in the future, in comparison with the pre-crisis situation.
    Keywords: Unconventional Monetary Policies.
    JEL: E52 E58
    Date: 2020
  9. By: Evgenidis, Anastasios; Fasianos, Apostolos
    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. 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 and lingering effects on wealth inequality: the shock raises wealth inequality across households, as measured by their Gini coefficients, percentile shares, and other standard inequality indicators. Additionally, we explore the effects of different transmission channels simultaneously. We find that the portfolio rebalancing channel and house price effects widen the wealth gap, outweighing the counterbalancing impact of the savings redistribution and inflation channels. The findings of our analysis help to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.
    Keywords: Household portfolios; monetary policy; Quantitative easing; survey data; VAR; Wealth Inequality
    JEL: D31 E21 E52 H31
    Date: 2020–04
  10. By: Bianchi, Francesco; Faccini, Renato; Melosi, Leonardo
    Abstract: The COVID pandemic found policymakers facing constraints on their ability to react to an exceptionally large negative shock. 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 this 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. In our model 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.
    Keywords: COVID; emergency budget; Fiscal policy; monetary policy; shock specific rule
    JEL: E30 E50 E62
    Date: 2020–05
  11. By: Eva Ortega (Banco de España); Chiara Osbat (European Central Bank)
    Abstract: Aggregate exchange rate pass-through (ERPT) to import and consumer prices in the EU is currently lower than it was in the 1990s and is non-linear. Low estimated aggregate ERPT to consumer prices does not at all mean that exchange rate movements do not have an impact on inflation, as aggregate rules of thumb mask substantial heterogeneities across countries, industries and time periods owing to structural, cyclical and policy factors. Looking also at new micro evidence, four key structural characteristics explain ERPT across industries or sectors: (i) import content of consumption, (ii) share of imports invoiced in own currency or in a third dominant currency, (iii) integration of a country and its trading partners in global value chains, and (iv) market power. In the existing literature there is also a robust evidence across models showing that each shock which causes the exchange rate to move has a different price response, meaning that the combination of shocks that lies behind the cycle at any point in time has an impact on ERPT. Finally, monetary policy itself affects ERPT. Credible and aggressive monetary policy reduces the observed ex post ERPT, as agents expect monetary policy to counteract deviations of inflation from target, including those relating to exchange rate fluctuations. Moreover, under the effective lower bound, credible non-standard monetary policy actions result in greater ERPT to consumer prices. This paper recommends moving away from rule-of-thumb estimates and instead using structural models with sufficient feedback loops, taking into account the role of expectations and monetary policy reactions, to assess the impact of exchange rate changes when forecasting inflation.
    Keywords: exchange rates, import prices, consumer prices, inflation, pass-through, euro area, monetary policy
    JEL: C50 E31 E52 F31 F41
    Date: 2020–06
  12. By: Olivier Bruno (Université Côte d'Azur; GREDEG CNRS; Skema Business School); Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS)
    Abstract: This paper models monetary policy's transmission to bank risk in presence of a capital requirement ratio. We show that the impact of a change in monetary policy rate on bank's risk level is not independent from the strength of the capital requirement ratio. A monetary easing, as well as a monetary contraction, may lead bank to take more risk according to some effecs related to the risk sensitivity of its intermediation margin and risk sensitivity of the prudential tool. We show that the combination of monetary policy with prudential policy has different outcomes in terms of financial stability and expected cost of bank failure.
    Keywords: Monetary policy, prudential policy, financial stability, bank's risktaking, partial equilibrium model
    JEL: E43 E52 E61 G01 G21 G28
    Date: 2020–06
  13. By: Mario Teijeiro
    Abstract: There is a feeling that the wisdom of monetarism has vanished during the last decade. Exceptional interventions of the Federal Reserve (FED) and the European Central Bank (ECB) have barely avoided deflation and have achieved delayed and modest growth. The absence of a solid monetarist explanation has been notorious. Moreover, after the formidable impact of lockdowns, many economists are now predicting a prolonged recession followed by a protracted deflation Japanese style, even when a much larger FED intervention is underway. Where is monetary policy headed to? What is ahead, inflation or deflation? Are we simply witnessing the final demise of monetarism? Or something else is at stake?
    Date: 2020–06
  14. By: Wörgötter, Andreas (Vienna University of Technology); Brixiova, Zuzana (University of Economics Prague)
    Abstract: This policy paper underscores the importance of credible currency regimes and their macroeconomic underpinnings for stability in financial systems and long-term economic convergence of developing and emerging market economies. It suggests that for developing regions such as Sub-Saharan Africa, taking steps toward fixed exchange rate frameworks, as a milestone on the path to monetary union, could provide credibility that individual countries struggle to attain on their own. Specifically, fixed arrangements, can restrain unsustainable policies among small economies and enable them to achieve greater stability at lower costs. The paper provides successful examples in this area. Moreover, while it is well-understood that monetary unions and fixed exchange rate regimes among countries with heterogeneous economies are difficult to sustain, the paper notes that heterogeneity can be accommodated in regimes with one dominant member and diverse countries that enhance the flexibility of their labour and product markets and have flexible internal pricing systems. This opens up the question of what might work for African economies, which are heterogeneous and do not meet the optimal currency criteria. The paper examines the convergence performance of small current and past members of the Common Monetary Area (CMA) against the benchmark of South African provinces. The results confirm that a monetary union alone is no guarantee for good outcomes: Among the three small CMA members one (Namibia) is overperforming, one (Eswatini) is average and Lesotho is underperforming. The paper concludes with country-specific and CMA-wide policy recommendations for higher growth of the CMA member countries.
    Keywords: asymmetric monetary union, flexibility, regional convergence, Africa
    JEL: F02 F45 O11
    Date: 2020–06
  15. By: Javier Andrés (Universidad de Valencia); Óscar Arce (Banco de España); Samuel Hurtado (Banco de España); Jesús Fernández-Villaverde (University of Pennsylvania, NBER, and CEPR)
    Abstract: We study the macroeconomic effects of internal devaluations undertaken by a periphery of countries belonging to a monetary union. We find that internal devaluations have large and positive output effects in the long run. Through an expectations channel, most of these effects carry over to the short run. Internal devaluations focused on goods markets reforms are generally more powerful in stimulating growth than reforms aimed at moderating wages, but the latter are less deflationary. For a monetary union with a periphery the size of the euro area’s, the countries at the periphery benefit from internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate. Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that prioritizes labor policies over goods markets reforms.
    Keywords: monetary union, internal devaluation, structural reforms, zero lower bound, policy sequencing
    JEL: E44 E63 D42
    Date: 2020–06
  16. By: Walerych, Małgorzata; Wesołowski, Grzegorz
    Abstract: This paper presents evidence that the international spillovers of Fed's conventional monetary policy to emerging markets are global, while their ECB's counterparts are local. The result comes from panel Bayesian Vector Autoregressive model estimated separately for two groups of countries: Central Eastern Europe (CEE) and Latin America (LA). In this setup, we investigate the impact of unanticipated and anticipated Fed and ECB montetary policy shocks, showing that the former affect both regions, while the latter are important for CEE and insignificant for LA.
    Keywords: Monetary policy spillovers, international business cycles, emerging economies
    JEL: E32 E58 F44
    Date: 2020–06–05
  17. By: Anastasia Melachrinos; Christian Pfister
    Abstract: At the root of the notion of stablecoin (SC) lies a desire to reconcile two different worlds: that of legal currency, whose essential attributes are hierarchical order, the vocation to uniqueness and stability of the purchasing power, and that of crypto-assets, featuring decentralization, multiplicity and thus the possibility of choice, and the instability of value. Do SCs fulfill their promises? With regard to their volatile prices, limited number, small total amount, and concentrated market, SCs have so far met with a mixed success. They rather represent a complement to the crypto-assets market. However, the arrival of very large issuers, securing a higher degree of confidence to users, and apt to reach a wide public, could give their projects a potentially systemic impact. These global SCs would create risks, in particular for financial stability and monetary policy, and in lesser-developed economies. This paper reviews these risks and the way the private sector, regulators and central banks can address them.
    Keywords: Stablecoins, monetary policy, financial stability.
    JEL: E42 E52 E58
    Date: 2020
  18. By: Manuel Lopez Galvan
    Abstract: The aim of this paper is to investigate the use of the Factor Analysis in order to identify the role of the relevant macroeconomic variables in driving the inflation. The Macroeconomic predictors that usually affect the inflation are summarized using a small number of factors constructed by the principal components. This allows us to identify the crucial role of money growth, inflation expectation and exchange rate in driving the inflation. Then we use this factors to build econometric models to forecast inflation. Specifically, we use univariate and multivariate models such as classical autoregressive, Factor models and FAVAR models. Results of forecasting suggest that models which incorporate more economic information outperform the benchmark. Furthermore, causality test and impulse response are performed in order to examine the short-run dynamics of inflation to shocks in the principal factors.
    Date: 2020–05
  19. By: Exley B.D. Silumbu (University of Malawi)
  20. By: Monique Reid; Hanjo Odendaal; Stan Du Plessis; Pierre Siklos
    Abstract: Inflation expectations surveys are receiving increasing attention. There is no optimal approach and often limited discussion of key characteristics of individual surveys. We use a South African dataset to argue that survey design should be given far more attention as it may undermine our ability to use the data with confidence. Users of survey data need to understand existing differences in survey design and the extent to which survey data reflect decision-making shortcuts under uncertainty as opposed to a true belief about what the public more generally really thinks expected inflation will be.
    Date: 2020–04
  21. By: Rodrigo Barbone Gonzalez (Banco Central do Brasil and Bank for International Settlements); Dmitry Khametshin (Banco de España); José-Luis Peydró (ICREA-UPF, Imperial College, CREI, Barcelona GSE and CEPR); Andrea Polo (LUISS, UPF, EIEF, Barcelona GSE, CEPR and ECGI)
    Abstract: We show that local central bank policies attenuate global financial cycle (GFC)’s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (followed by strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, a large FX intervention program supplying derivatives against FX risks – hedger of last resort – halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local related policies confirm these results.
    Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging
    JEL: E5 F3 G01 G21 G28
    Date: 2020–06
  22. By: Hatice Gokce Karasoy Can
    Abstract: Taking a theoretical stand, this paper studies the role of corporate debt maturity and its repayment structure in monetary policy transmission mechanism. It builds on a stylized New Keynesian dynamic stochastic general equilibrium (NK-DSGE) model and discusses the transmission under various corporate debt structures. The results show that a given contractionary monetary policy is less effective in terms of stabilizing inflation when debt contracts are written on a floating rate basis. Moreover, increased corporate debt burden amplifies the real effects of the credit channel. Extending the maturity of floating rate debt aggravates these effects and makes firms even more vulnerable to adverse shocks.
    Keywords: Floating rate debt, Debt maturity, Monetary policy transmission, Credit channel
    JEL: E43 E44 E52 E58 G30
    Date: 2020
  23. By: Njunguna Ndung'u (University of Nairobi)
  24. By: Darracq Pariès, Matthieu; Papadopoulou, Niki; Müller, Georg
    Abstract: We quantify the size of fiscal multipliers under financial fragmentation risk and demonstrate how non-standard monetary policy can support the macroeconomic transmission of fiscal interventions. We employ a DSGE model with financial frictions whereby the interplay of corporate, banks and sovereign solvency risk affect the transmission of fiscal policy. The output multiplier of fiscal expansion is found to be significantly dampened by tighter financial conditions in case households are less certain about implicit and explicit state-guarantees for the banking system, or banks are weakly capitalized and highly exposed to the government sector. In this context, we show that central bank asset purchases or liquidity operations designed to ensure favourable bank funding conditions can restore fiscal multipliers. JEL Classification: E44, E52, E62
    Keywords: DSGE models, fiscal stabilization, sovereign-bank nexus, sovereign risk
    Date: 2020–06
  25. By: Miguel Acosta-Henao; Laura Alfaro; Andrés Fernández
    Abstract: There is much ongoing debate on the merits of capital controls as effective policy instruments. The differing perspectives are due in part to a lack of empirical studies that look at the intensive margin of controls, which in turn has prevented a quantitative assessment of optimal capital control models against the data. We contribute to this debate by addressing both positive and normative features of capital controls. On the positive side, we build a new dataset using textual analysis, from which we document a set of stylized facts of capital controls along their intensive and extensive margins for 21 emerging markets. We document that capital controls are "sticky"; that is, changes to capital controls do not occur frequently, and when they do, they remain in place for a long time. Overall, they have not been used systematically across countries or time, and there has been considerable heterogeneity across countries in terms of the intensity with which they have been used. Onthe normative side, we extend a model of capital controls relying on pecuniary externalities augmented by including an (S; s) cost of implementing such policies. We illustrate how this friction goes a long way toward bringing the model closer to the data. When the extended model is calibrated for each of the countries in the new dataset, we find that the size of these costs is large, thus substantially reducing the welfare-enhancing effects of capital controls compared with the frictionless Ramsey benchmark. We conclude with a discussion of the structural interpretations of such costs, which calls for a richer set of policy constraints when considering the use of capital controls in models of pecuniary externalities.
    Date: 2020–05
  26. By: Victor Pontines; Davaajargal Luvsannyam; Enkhjin Atarbaatar; Ulziikhutag Munkhtsetseg
    Abstract: Although EME central banks actively intervene in currency markets, there is a long-running debate as to its effectiveness in affecting exchange rates. In this study, we use unique daily data on currency interventions in Mongolia to analyze the impact of these interventions on the changes in the MNT/USD exchange rate. The results indicate that currency intervention is effective in Mongolia, although it differs in certain ways. Currency sales are effective in moving changes in the MNT/USD in the correct direction, especially when carried out in larger amounts and when implemented frequently. This effect can last from one to three weeks, although we find the magnitude of the daily effect to be relatively small. We do not find evidence, however, that currency purchases are effective. These findings are comparable to the existing literature on the effectiveness of intervention in EMEs.
    Keywords: Currency intervention, exchange rate, treatment effect, causal effect, local projection, Mongolia
    JEL: C14 C32 E58 F31
    Date: 2020–03
  27. By: Jesus Fernandez-Villaverde; Daniel R. Sanches; Linda Schilling; Harald F. Uhlig
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial interme-diaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. Dur-ing a panic, however, we show that the rigidity of the central bank’s contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endanger maturity transformation.
    Keywords: central bank digital currency; central banking; intermediation; maturity transformation; bank runs; lender of last resort.
    JEL: E58 G21
    Date: 2020–06–01
  28. By: Emilio Ocampo
    Abstract: In the last three decades average inflation rates have declined around the world. Since 1995 the number of countries with inflation rates below 10% a year increased from 98 (54% of the total) to an average of 178 in 2015-2019 (90% of the total). In the aftermath of the 2008 Global Financial Crisis (GFC), inflation in the US has averaged 1.8% a year despite an unprecedented monetary expansion, and more recently, a drop in the unemployment rate to historical lows. In the last decades, two of modern macroeconomic theory’s most important relationships appear to have broken down: the Quantity Theory of Money (QTM) and the Phillips Curve (PC). This paper i) presents evidence that confirms the global disinflationary trend of the last three decades, ii) identifies previous historical episodes during which the QTM appeared to break down in the US and the UK and the theoretical reassessment that it provoked, iii) examines experts’ reaction to the apparent current breakdown of the QTM and the PC and the alternative paradigms that have emerged, and iv) reviews the alternative hypotheses that have been proposed to explain global disinflation, focusing particularly on the effects of technological innovation and globalization.
    Date: 2020–06
  29. By: Duffie, Darrell (Stanford U)
    Abstract: I explain the meaning of an interoperable payment system and why interoperability is crucial for efficiency. I review some alternative approaches to interoperability, including central bank digital currencies (CBDCs), hybrid CBDCs, and two-ledger upgrades of bank-based payment systems.
    Date: 2020–05
  30. By: Gal Shahaf; Ehud Shapiro; Nimrod Talmon
    Abstract: Cryptocurrencies are a digital medium of exchange with decentralized control that renders the community operating the cryptocurrency its sovereign. Leading cryptocurrencies use proof-of-work or proof-of-stake to reach consensus, thus are inherently plutocratic. This plutocracy is reflected not only in control over execution, but also in the distribution of new wealth, giving rise to ``rich get richer'' phenomena. Here, we explore the possibility of an alternative digital currency that is egalitarian in control and just in the distribution of created wealth. Such currencies can form and grow in grassroots and sybil-resilient way. A single currency community can achieve distributive justice by egalitarian coin minting, where each member mints one coin at every time step. Egalitarian minting results, in the limit, in the dilution of any inherited assets and in each member having an equal share of the minted currency, adjusted by the relative productivity of the members. Our main theorem shows that a currency network, where agents can be members of more than one currency community, can achieve distributive justice globally across the network by \emph{joint egalitarian minting}, where each agent mints one coin in only one community at each timestep. Equality and distributive justice can be achieved among people that own the computational agents of a currency community provided that the agents are genuine (unique and singular). We show that currency networks are sybil-resilient, in the sense that sybils (fake or duplicate agents) affect only the communities that harbour them, and not hamper the ability of genuine (sybil-free)communities in a network to achieve distributed justice.
    Date: 2020–05
  31. By: Tanweer Akram; Syed Al-Helal Uddin
    Abstract: This paper empirically models the dynamics of Brazilian government bond (BGB) yields based on monthly macroeconomic data in the context of the evolution of Brazil’s key macroeconomic variables. The results show that the current short-term interest rate has a decisive influence on BGBs’ long-term interest rates after controlling for various key macroeconomic variables, such as inflation and industrial production or economic activity. These findings support John Maynard Keynes’s claim that the central bank’s actions influence the long-term interest rate on government bonds mainly through the short-term interest rate. These findings have important policy implications for Brazil. This paper relates the findings of the estimated models to ongoing debates in fiscal and monetary policies.
    Keywords: Brazilian Government Bonds; Long-Term Interest Rate; Bond Yields; Monetary Policy; Short-Term Interest Rate; Banco Central do Brasil (BCB)
    JEL: E43 E50 E58 E60 G10 G12
  32. By: Klodiana Istrefi; Anamaria Piloiu
    Abstract: This paper investigates whether uncertainty about economic policy plays a role in shaping the credibility and reputation of the central bank in the eyes of the public. In particular, we look at the effect of policy uncertainty for the dynamics of citizens’ opinion, being trust, satisfaction or confidence, in the European Central Bank, the Bank of England and the Bank of Japan. Estimating Bayesian VARs for the period 1999-2014, we find that shocks to economic policy uncertainty induce economic contractions and relatively sharp deterioration in trust or satisfaction measures, which in general take longer than economic growth to rebuild.
    Keywords: Policy Uncertainty; Central Banks; Public Opinion; Structural VAR.
    JEL: E02 E31 E58 E63 P16
    Date: 2020
  33. By: Andrea Colciago; Riccardo Silvestrini
    Abstract: This paper builds a New Keynesian industry dynamics model for the analysis of macroeconomic fluctuations and monetary policy. A continuum of heterogeneous firms populates the economy, markets are imperfectly competitive and nominal wages are sticky. An expansionary monetary policy shock triggers a response in labor productivity. By reducing borrowing costs, the shock initially attracts low productivity firms in the market. As a result, aggregate productivity decreases on impact. It then overshoots its initial level since, after the initial over-crowding, competition cleanses the market from low productivity firms. The overshooting amplifies the response of the main macroeconomic variables to the shock. A high ex-ante degree of market concentration partially impairs the transmission of monetary policy by disrupting the entry and exit mechanism.
    Keywords: Market Concentration; Monetary Policy; Competition; Productivity
    JEL: D42 E52 E58 L16
    Date: 2020–05
  34. By: Gelain, Paolo; Manganelli, Simone
    Abstract: Two approaches are considered to incorporate judgment in DSGE models. First, Bayesian estimation indirectly imposes judgment via priors on model parameters, which are then mapped into a judgmental interest rate decision. Standard priors are shown to be associated with highly unrealistic judgmental decisions. Second, judgmental interest rate decisions are directly provided by the decision maker, and incorporated into a formal statistical decision rule using frequentist procedures. When the observed interest rates are interpreted as judgmental decisions, they are found to be consistent with DSGE models for long stretches of time, but excessively tight in the 1980s and late 1990s and excessively loose in the late 1970s and early 2000s. JEL Classification: E50, E58, E47, C12, C13
    Keywords: DSGE, maximum likelihood, monetary policy, statistical decision theory
    Date: 2020–05
  35. By: Nicola Cetorelli; Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: In March 2020, the Federal Open Market Committee (FOMC) made changes to its swap line facilities with foreign central banks to enhance the provision of dollars to global funding markets. Because the dollar has important roles in international trade and financial markets, reducing these strains helps facilitate the supply of credit to households and businesses, both domestically and abroad. This post summarizes the changes made to central bank swap lines and shows when these changes were effective at bringing down dollar funding strains abroad.
    Keywords: dollar; swap; central bank; COVID-19
    JEL: E5 E51
    Date: 2020–05–22
  36. By: Alain Siri (CEDRES, University of Ouaga II, Burkina Faso)
  37. By: Jon Frost; Hiro Ito; René van Stralen
    Abstract: This paper compares the effectiveness of macroprudential policies (MaPs) and capital controls (CCs) in influencing the volume and composition of capital inflows, and the probability of banking and currency crises. We distinguish between foreign exchange (FX)-based MaPs, which may be similar to some types of CCs, and non-FX-based MaPs. Using a panel of 83 countries over the period 2000-17, and a propensity score matching model to control for selection bias, we find that capital inflow volumes are lower where FX-based MaPs have been activated. The imposition of CCs does not have a significant effect on the volume or composition of capital inflows. Further, we find that the activation of MaPs is associated with a lower probability of banking crises and surges in capital inflows in the following three years.
    Keywords: capital account openness; capital flows; capital controls; macroprudential policy; banking crises; currency crises
    JEL: F38 G01 G28
    Date: 2020–06
  38. By: Kabbashi M. Suliman (Department of Economics Faculty of Economic and Social Studies University of Khartoum Sudan)
  39. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: This paper explains inflation and unemployment starting from new baseline models of price formation and labor demand. Inflation is always and everywhere a pricing phenomenon. Unemployment is every year determined as a residual, as people in the labor force without employment. Employment is determined by production and labor productivity, while production is determined by spending (as measured by nominal GDP) at prices set by firms.
    Keywords: Inflation; employment; unemployment
    JEL: E24 E31
    Date: 2020–05–31
  40. By: Matthieu Bussière; Robert Hills; Simon Lloyd; Baptiste Meunier; Justine Pedrono; Dennis Reinhardt; Rhiannon Sowerbutts
    Abstract: We examine how euro area (EA) monetary policy and recipient-country prudential policy interact to influence cross-border lending of French banks. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities, specifically by bank size and location of the affiliate (French HQ vs. affiliates based in the UK). We find that the response of lending from French HQ to EA monetary policy is less sensitive to recipient-country prudential policy for systemic banks (GSIBs) than for non-GSIBs’. In contrast, the response of lending from GSIBs’ affiliates in the UK is sensitive to recipient-country prudential policy. French GSIBs’ crossborder lending from French HQ responds differently than lending from international financial centres. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner dampened by global prudential policy setting. These findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK depending on global prudential policies and, from there, lend to third-party countries according to local prudential policies. Finally, we have similar findings for all EA-owned banks UK affiliates, suggesting a broader relevance for the London Bridge.
    Keywords: : Monetary Policy, Prudential Policy, Policy Interactions, Spillovers, Financial Centre.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2020
  41. By: Kassey Odubogun (University of Ibadan, Nigeria)
  42. By: Taiji Inui (Chief Advisor, JICA CBM TC Project, Central Bank of Myanmar and ADB consultant for Cross-border Settlement Infrastructure Forum (CSIF)); Wataru Takahashi (Faculty of Economics, Osaka University of Economics and Research Fellow, RIEB, Kobe University); Mamoru Ishida (Advisor, Itochu Corporation and Former Professor, Hannan University)
    Abstract: This paper proposes to provide Asian common currency in the form of digital currency using technology such as blockchain by an international organization (eg AMRO) in East Asia. In this proposal, we assume that each present currency and the new digital common currency coexist in the respective economies for the time being. With the advent of digital currency, the common currency has become more technically feasible. Our proposal has the following three advantages; (1) merits as a digital currency, (2) merits as a common currency, and (3) a currency that is managed in a multilateral flamework. By the last point, it could prevent dominant control of an international currency by large countries, and political fairness can be secured. This proposal has a perspective to develop into a global digital currency in the future.
    Keywords: Digital currency; Asia common currency; Distributed ledger technology; Blockchain, Account-based, Token-based
    JEL: E42 F36
    Date: 2020–06
  43. By: Kahn, Charles M.; Wagner, Wolf
    Abstract: We examine how public liquidity should be distributed to firms when immediate production entails externalities, such as by spreading a virus. Direct provision of liquidity can address externalities, but traditional distribution of liquidity (through banks) has informational advantages. We show that which mode is preferred is determined by the variance (but not the level) of firm characteristics in the economy. Traditional provision is always part of the optimal policy when liquidity modes can be combined, and involves promising low interest rates for when the pandemic is over in order to incentivize temporary production shutdowns at firms.
    Keywords: banks; Covid-10; mothballing; public liquidity
    JEL: G20 G28 G31 I18
    Date: 2020–05

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