nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒07‒13
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy transmission mechanism in Poland What do we know in 2019? By Tomasz Chmielewski; Andrzej Kocięcki; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Małgorzata Walerych; Ewa Wróbel
  2. The monetary policy of the South African Reserve Bank- stance, communication and credibility By Alberto Coco; Nicola Viegi
  3. Macroprudential Policy and the Probability of a Banking Crisis By Nakatani, Ryota
  4. Estimating the effects of the Eurosystem's asset purchase programme at the country level By Mandler, Martin; Scharnagl, Michael
  5. The (ir)relevance of the nominal lower bound for real yield curve analysis By Schupp, Fabian
  6. The anchoring of long-term inflation expectations of consumers: insights from a new survey By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  7. Monetary policy, uncertainty and COVID-19 By Pinshi, Christian P.
  8. Tweeting on Monetary Policy and Market Sentiments: The Central Bank Surprise Index By Donato Masciandaro; Davide Romelli; Gaia Rubera
  9. Exchange Rate Pass-Through to Consumer Prices: The Increasing Role of Energy Prices By Hyeongwoo Kim; Ying Lin; Henry Thompson
  10. Seigniorage and central banks’ financial results in times of unconventional monetary policy By Zbigniew Polański; Mikołaj Szadkowski
  11. Monetary policy with weakened unions. By Amélie BARBIER-GAUCHARD; Francesco De PALMA; Thierry BETTI
  12. Optimal Policy under Dollar Pricing By Konstantin Egorov; Dmitry Mukhin
  13. Should central banks be forward-looking? By De Grauwe, Paul; Ji, Yuemei
  14. Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation By Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao
  15. Contagion of Fear By Mitchener, Kris James; Richardson, Gary
  16. Poland, the international monetary system and the Bank of England, 1921–1939 By William Anthony Allen
  17. Does Policy Communication during COVID-19 Work? By Coibion, Olivier; Gorodnichenko, Yuriy; Weber, Michael
  18. The market events of mid-September 2019 By Afonso, Gara; Cipriani, Marco; Copeland, Adam; Kovner, Anna; La Spada, Gabriele; Martin, Antoine
  20. Monetary Policy Rule and Taylor Principle in Emerging ASEAN Economies: GMM and DSGE Approaches By Taguchi, Hiroyuki
  21. Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk By Javier Bianchi; César Sosa-Padilla
  22. Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households By Michelacci, Claudio; Paciello, Luigi
  23. The fiscal arithmetic of a dual currency regime By Lippi, Francesco
  24. Monetary Policy Expectations, Fund Managers, and Fund Returns: Evidence from China By John Ammer; John Rogers; Gang Wang; Yang Yu
  25. The Evolution of Offshore Renminbi Trading: 2016 to 2019 By Yin-Wong Cheung; Louisa Grimm; Frank Westermann
  26. The Elusive Gains from Nationally-Oriented Monetary Policy By Bodenstein, M.; Corsetti, G.; Guerrieri, L.
  27. What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC By Philipp Baumann; Enzo Rossi; Alexander Volkmann
  28. The Economics of Helicopter Money By Benigno, Pierpaolo; Nisticò, Salvatore
  29. Dualism in Bitcoin Dynamics: existence of an Upper Bound in Poincaré Recurrence Theorem for Deterministic vs Stochastic Behavior By Grilli, Luca; Santoro, Domenico
  30. ECB Announcements and Stock Market Volatility By Frederik Neugebauer
  31. Financial disruptions and heightened uncertainty: a case for timely policy action By Valeriu Nalban; Andra Smadu
  32. Breaking Badly: The Currency Union Effect on Trade By Douglas L. Campbell; Aleksandr Chentsov
  33. Exchange Rates and Asset Prices in a Global Demand System By Ralph S. J. Koijen; Motohiro Yogo
  34. Climate change and its implications for central banks in emerging and developing economies By Channing Arndt; Chris Loewald; Konstantin Makrelov
  35. Taking up the climate change challenge: a new perspective on central banking By Paola D'Orazio; Lilit Popoyan
  36. Monetary Growth with Disequilibrium: a Non-Walrasian baseline model By Ogawa, Shogo
  37. The Global Transmission of U.S. Monetary Policy By Degasperi, Riccardo; Hong, Simon; Ricco, Giovanni
  38. Term premium and rate expectation estimates from the South African yield curve By Luchelle Soobyah; Daan Steenkamp
  39. Harry Johnson's "Case for Flexible Exchange Rates" - 50 Years Later By Obstfeld, Maurice

  1. By: Tomasz Chmielewski (Narodowy Bank Polski); Andrzej Kocięcki (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Jan Przystupa (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski); Małgorzata Walerych (Narodowy Bank Polski); Ewa Wróbel (Narodowy Bank Polski)
    Abstract: The monetary policy of Narodowy Bank Polski (NBP)—pursued in accordance with the assumptions of the inflation targeting strategy—remains conventional. The Polish central bank has the capacity to change the basic monetary policy instrument, i.e. the short-term interest rate, in both directions. Therefore, the aim of this report—similarly to its previous editions— is to analyse the transmission mechanism of the conventional monetary policy.1 However, this does not mean that the analysis of the monetary policy transmission mechanism faces no limitations. The main problem constraining modelling in this area is related to the lack of variability of the NBP reference rate, very low volatility of monetary policy shocks identified with various methods, full predictability of monetary policy decisions in recent years and wellestablished expectations of private sector concerning stability of the NBP reference rate in the near future. Under these circumstances, drawing conclusions on the strength and delays of the mechanism through which potential changes in the short-term interest rate would affect the economy is more difficult and more uncertain than before. Thus, the hypothesis seems likely that economic agents used to stable interest rates and expecting their maintenance at the current level, can respond to potential changes in monetary policy parameters in another way than in the past. This is illustrated by the high uncertainty of the current response functions of various variables to monetary policy shocks, obtained from models with time-varying parameters. For the above reasons, our view of the monetary policy transmission mechanism in Poland is multi-faceted in this report. Although we show the results of standard models estimated on long samples, we attach greater importance to models with time-varying coefficients and we extend studies of the transmission mechanism at the microeconomic level, taking into account the heterogeneity of entities and their response to monetary policy decisions. In addition, we analyse the importance of various forms of central bank communication, including the text content (tone) of decision-makers’ documents, enabling the central bank to influence the expectations of private sector entities even if short-term interest rates do not change.
    Date: 2020
  2. By: Alberto Coco; Nicola Viegi
    Abstract: This paper analyses the evolution of the monetary policy stance, communication and credibility of the South African Reserve Bank (SARB) since 2000, when it adopted a flexible Inflation Targeting (IT) regime to facilitate the achievement of its price stability mandate. Empirical results indicate that the stance became accommodative after the global financial crisis of 2009, with a tendency of the implicit inflation target to increase, while after 2014 it turned tighter and the implicit target started declining. In addition, after the crisis the monetary policy has become less active, with a lower response of policy rates to output and inflation gaps. At the same time, applying Natural Language Processing techniques to the SARB monetary policy statements shows a move towards a more ‘forward-looking’ and balanced communication strategy, complementing to some extent the less frequent changes of monetary policy rates. Finally, the behavior of market interest rates and inflation expectations shows that monetary policy has been gradually better at anchoring expectations, especially in the last few years. The analysis helps to understand the interaction between policy, communication and credibility by showing a consistent picture across all different aspects of monetary policy making.
    Date: 2020–06–19
  3. By: Nakatani, Ryota
    Abstract: The ultimate purpose of macroprudential policy is to avoid financial instability, such as banking crises, which have a long-lasting and devastating effect on the economy. Although a growing number of studies have examined the effects of macroprudential policy on credit growth, few empirical studies have analyzed its effect on the probability of a banking crisis. Does macroprudential policy actually affect the probability of a banking crisis? Do other macroeconomic policies matter for the effectiveness of macroprudential policy? To answer these questions, this paper empirically investigates the effect of macroprudential policy on the probability of a banking crisis and its relationship with other macroeconomic policies. Specifically, using data on 65 countries from 2000 to 2016, we employ a probit model to analyze the effect of changes in the loan-to-value (LTV) ratio on crisis probability. Our results show that macroprudential policy is effective in changing the probability of a banking crisis via a credit channel and that its effectiveness depends on other macroeconomic policies. Changes in the LTV ratio are found to be effective in influencing the probability of a banking crisis in countries that have inflation targeting frameworks, floating exchange rate regimes, and/or no capital controls. Our results underscore the importance of policy coordination among different government bodies to design an appropriate macroprudential policy, especially in the current context of the Covid-19 crisis.
    Keywords: macroprudential policy; loan-to-value (LTV) ratio; banking crisis; probit model; monetary policy; exchange rate regime; capital control
    JEL: E52 E61 F33 F38 G01 G28 R31 R38
    Date: 2020–06–15
  4. By: Mandler, Martin; Scharnagl, Michael
    Abstract: We assess the macroeconomic effects of the Eurosystem's asset purchases on the four largest euro area economies using simulation exercises that combine unconventional monetary policy shocks with a fixed policy rate for the duration of the purchase programme. We identify unconventional monetary policy shocks in a large Bayesian vector autoregressive (BVAR) model as shocks to the term structure of interest rates using zero and sign restrictions. We propose a multi-country model in which we impose identification assumptions mainly on euro area aggregate financial variables and on country averages of output and price responses. Furthermore, the multi-country structure allows testing for cross-country differences in the effects of the asset purchase programme in a statistically rigorous way using the posterior of the difference between the country-specific effects. We estimate positive output effects in all countries as well as positive effects on bank lending to firms. Effects on HICP inflation, generally, are much weaker. We find substantial cross-country heterogeneity with the largest price level effects in Spain while output effects were smallest in France and inflation effects were smallest in Italy.
    Keywords: asset purchase programme,unconventional monetary policy,euro area,Bayesian vector autoregression,regional effects of monetary policy
    JEL: C32 E47 E52 E58
    Date: 2020
  5. By: Schupp, Fabian
    Abstract: I propose a new term structure model for euro area real and nominal interest rates which explicitly incorporates a time-varying lower bound for nominal interest rates. Results suggest that the lower bound is of importance in structural analyses implying time-varying impulse responses of yield components. With short-term rate expectations at or close to the lower bound, premium components are less reactive to inflation shocks, while real rate responses change their sign from positive to negative. However, it is further shown that the lower bound is of only little relevance for decomposing yields into their expectations and premium components once survey information is incorporated. Overall, results support the conclusion that reaching the effective lower bound may change the way macroeconomic shocks propagate along the term structure of nominal as well as real interest rates.
    Keywords: Joint real-nominal term structure modelling,lower bound,inflation expectations,inflation risk premium,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E31 E43 E44 E52
    Date: 2020
  6. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible de-anchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
    Keywords: Inflation expectations
    JEL: E31 E58 F62
    Date: 2020–06
  7. By: Pinshi, Christian P.
    Abstract: The COVID-19 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-19 uncertainty shock on the economy and monetary policy response. This analysis shows important conclusions. The uncertainty effect of COVID-19 hits unprecedented aggregate demand and the economy. In addition, it undermines monetary policy action 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: Monetary policy, Uncertainty, COVID-19, Bayesian VAR
    JEL: C32 E32 E51 E52 E58
    Date: 2020–06–01
  8. By: Donato Masciandaro; Davide Romelli; Gaia Rubera
    Abstract: This paper explores the relationship between central bank communication and market sentiment, and proposes a new measure. Market sentiment is proxied using a Twitter-based metric: the Central Bank Surprise Index. The empirical study covers three cases: the Federal Reserve, the European Central Bank and the Bank of England.
    Keywords: monetary policy, central bank communication, financial market, social media, Twitter, Federal Reserve System, European Central Bank, Bank of England, Bank of Japan
    JEL: E44 E52 E58 G14 G15
    Date: 2020
  9. By: Hyeongwoo Kim; Ying Lin; Henry Thompson
    Abstract: A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a shrinking exchange rate effect on the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current floating exchange rate regime. Our VAR approach nests the conventional single equation method and reveals statistically significant evidence of ERPT to the CPI only during later observations, sharply contrasting with previous findings. After confirming structural breaks in ERPT via statistical tests by Hansen (2001) and Qu and Perron (2007), we seek the source with disaggregated level CPIs, and pin down a key role of energy prices. US energy imports increased from the 1990s until the recent recession. This market changes magnify the effects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via the energy price channel.
    Keywords: Exchange Rate Pass Through; Disaggregated CPI Inflation; Structural Break; Real Exchange Rate Shock
    JEL: E31 F31 F41
    Date: 2020–07
  10. By: Zbigniew Polański (SGH Warsaw School of Economics and Narodowy Bank Polski (NBP)); Mikołaj Szadkowski (Narodowy Bank Polski (NBP) and SGH Warsaw School of Economics)
    Abstract: In this paper, we estimate seigniorage and compare it with central banks’ financial results and the size of transfers to the government, adopting the view of seigniorage as the monetary authority’s net income from cash (currency) issuance. Based on the accounting data from the 2003-18 period, the paper analyzes seven monetary authorities: four of the larger economies (Bank of England, Bank of Japan, Eurosystem, Federal Reserve System), and three of the smaller ones (Narodowy Bank Polski, Swedish Riksbank, Swiss National Bank). With the exception of the Polish central bank, following the Global Financial Crisis and the euro area sovereign debt crisis, all of them have adopted unconventional monetary policy measures extensively. Since 2008 we have observed growing divergences between estimates of seigniorage (being typically well below 0.5 per cent of GDP) and financial results (reaching in some cases and years well above 0.5 per cent of GDP), and implied transfers to governments, the latter subject also to different rules of central banks’ profit distribution. We attribute these differences primarily to unconventional activities of central banks in the case of larger economies, and to strong volatility of exchange rates in the case of smaller ones (the Riksbank being an intermediate case). We close our analysis by showing that cash and the resulting seigniorage can play the role of a buffer during the monetary policy normalization process.
    Keywords: seigniorage, financial result, central bank finances, central bank profits, global financial crisis, great recession, euro area sovereign debt crisis, unconventional monetary policy, exit policies, normalization
    JEL: E52 E58 E65 G01 N20
    Date: 2020
  11. By: Amélie BARBIER-GAUCHARD; Francesco De PALMA; Thierry BETTI
    Abstract: We assess the impact of union bargaining power on inflation and employment in the case of efficiency bargaining following Mac Donald & Solow (1981). We consider a Stackelberg two-stage game between the Central Bank and social partners (firms and union). Firms and unions negotiate employment and nominal wage, the Central Bank sets the inflation rate. We show that a decrease in union bargaining power tends to reduce nominal wage and employment. In such a context, where the Central Bank is concerned with inflation and employment, the optimal monetary policy consists in a stronger stabilization of employment at the expense of inflation stabilization. We then employ a panel data model for 36 OECD countries to empirically assess the link between the bargaining power of unions and inflation. Our estimates confirm this theoretical result by showing that a low degree of union bargaining power is associated with higher inflation.
    Keywords: monetary policy, employment, inflation, wage setting, union bargaining power, efficiency bargaining, conservatism.
    JEL: E02 E24 E52 E58 J51
    Date: 2020
  12. By: Konstantin Egorov; Dmitry Mukhin
    Abstract: Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the optimal policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time-or state-dependent price setting, a rich set of shocks, and endogenous currency choice. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a “global monetary cycle” with other countries partially pegging their exchange rates to the dollar and importing the monetary stance of the U.S. In spite of the aggregate demand externality, capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. The optimal U.S. policy, on the other hand, deviates from inflation targeting to take advantage of its effects on global product and asset markets, generating negative spillovers on the rest of the world. International cooperation benefits other countries by improving global demand for dollar-invoiced goods, but may be hard to sustain because it is not in the self-interest of the U.S. At the same time, countries can still gain from local forms of policy coordination — such as forming a currency union like the Eurozone.
    Date: 2020
  13. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We show that in a world where agents have limited cognitive abilities and, as a result, are prevented from having rational expectations the answer to this question is negative. We find that in "tranquil periods" when market sentiments (animal spirits) are neutral a forward-looking Taylor rule produces similar results as current-looking Taylor rule in terms of output and inflation volatility. However, when the economy is in a regime of booms and bust produced by extreme values of animal spirits the forward-looking central bank will make many policy errors that have to be corrected afterwards. Thus in a regime of extreme uncertainty the use of a forward Taylor rule reduces the quality of policy-making, leading to greater variability of the output and inflation. It is then better for the central bank to use currently observed output and inflation to set the interest rate. The empirical evidence suggests that central banks are often not forward looking. Our model provides the theoretical justification for this.
    Keywords: animal spirits; behavioural macroeconomics; Taylor rule
    Date: 2020–03
  14. By: Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao
    Abstract: We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.
    JEL: E51 E52 G21 G28
    Date: 2020–05
  15. By: Mitchener, Kris James; Richardson, Gary
    Abstract: The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation after panics responded. We show that between 1929-32 banking panics reduced lending by 13%, relative to its 1929 value, and the money multiplier and money supply by 36%. The banking panics, in other words, caused about 41% of the decline in bank lending and about nine-tenths of the decline in the money multiplier during the Great Depression.
    Keywords: banking panics; contagion; Great Depression; monetary deflation
    JEL: E44 G01 G21 N22
    Date: 2020–03
  16. By: William Anthony Allen (National Institute of Economic and Social Research London, England, United Kingdom)
    Abstract: The paper uses archive material, mainly from the Bank of England, to give an account of the relationship between Poland and the international monetary system between 1921 and 1939, as seen from the United Kingdom. It describes the 1923 – 1924 Hilton Young mission of ‘money doctors’ and its role in the establishment of the Bank Polski and the introduction of the złoty in 1924; the abandonment of the złoty’s gold parity in 1925; the tortuous negotiations leading to the stabilisation programme and stabilisation loan of 1927, including the Bank of England’s unsuccessful efforts to induce Poland to accept the oversight of the League of Nations; Poland’s gold purchases after the stabilisation loan; the process of deflation during the Great Depression; the abortive discussions in 1934 – 1936 of the possibility of Danzig, Germany and Poland pegging their exchange rates to sterling; the imposition of exchange restrictions in 1936; debt default in 1937; and the approach of war. It also provides information about the management of Poland’s gold and foreign exchange reserves. The narrative makes clear that it is impossible to understand Poland’s international financial affairs without reference to the international political tensions of the period.
    Keywords: Poland, United Kingdom, international monetary system, Bank Polski, Bank of England, złoty, gold exchange standard, foreign exchange, sterling bloc, exchange restrictions, default, Genoa conference, money doctors, stabilisation, League of Nations, Polish Corridor, Federal Reserve, Bank of France, Reichsbank, J.P. Morgan, Council of Foreign Bondholders, Danzig, Germany, France, Norman, Hilton Young, Grabski, Karpiński, Młynarski, Barański, Koc, Strong, Harrison, Moreau, Niemeyer, Siepmann, Schacht, Kemmerer.
    JEL: E42 E58 F33 F34 F52 N34 N44
    Date: 2020
  17. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Weber, Michael (World Bank)
    Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households' expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
    Keywords: subjective expectations, fiscal policy, monetary policy, COVID-19, surveys
    JEL: E31 C83 D84 J26
    Date: 2020–06
  18. By: Afonso, Gara; Cipriani, Marco; Copeland, Adam; Kovner, Anna; La Spada, Gabriele; Martin, Antoine
    Abstract: This paper studies the mid-September 2019 stress in US money markets: on September 16 and-17, unsecured and secured funding rates spiked up and, on the 17, the effective federal funds rate broke the ceiling of the FOMC target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions' reserve holdings may have been close to, or lower than, their desired level. Moreover frictions in the interbank market may have prevented the efficient allocation of reserves across institutions, so that although aggregate reserves may have been higher than the sum of reserves demanded by each institution, they were still scarce given the market's inability to allocate reserves efficiently. Second, we provide evidence that some large domestic dealers likely experienced an increase in intermediation costs, which lead them to charge higher spreads to ultimate cash borrowers. This increase was due to a temporary reduction in lending from money market mutual funds, including through the Fixed Income Clearing Corporation's (FICC's) sponsored repo program.
    Keywords: central bank reserves; Federal funds market; Monetary policy implementation; regulation; repo market
    JEL: E42 E58 G14
    Date: 2020–03
  19. By: Donato Masciandaro
    Abstract: This article discusses a form of fiscal monetization that produces losses in the central bank’s balance sheet, without a permanent increase in the money base. If an independent central bank acts as a long-sighted policymaker, an optimal helicopter monetary policy can be identified. At the same time, if the government in charge is made up of career-concerned politicians and citizens are heterogenous, then the policy mix will produce distributional effects, and conflicts between politicians and central bankers will be likely. Political pressures will arise and the helicopter money option will be less likely. The framework is applied in a discussion of the economics and politics of issuing COVID-19 perpetual bonds with the European Central Bank as the buyer.
    Keywords: helicopter money, monetary policy, fiscal policy, political economy, central bank independence, modern monetary theory, populism, European Central Bank
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2020
  20. By: Taguchi, Hiroyuki
    Abstract: This paper aims to reassess the performances of inflation targeting adopted by emerging ASEAN countries, Indonesia, the Philippines and Thailand, by examining their monetary policy rules, both through generalized-method-of-moments (GMM) estimations of policy reaction functions and through Bayesian estimations of the New Keynesian dynamic-stochastic-general-equilibrium (DSGE) model. The main findings are summarized as follows. First, the GMM estimations identified inflation-responsive rules fulfilling the Taylor principle, with a forward-looking manner in Indonesia and Thailand and with a contemporaneous way in the Philippines. Second, the Bayesian estimations of the New Keynesian DSGE could reassure the GMM estimation results, as the former estimations produced consistent outcomes with the latter ones on the policy rate reactions to inflation with the Taylor principle.
    Keywords: Taylor principle; Inflation targeting; Emerging ASEAN; Generalized method of moments (GMM); New Keynesian dynamic stochastic general equilibrium (DSGE)
    JEL: E52 E58 O53
    Date: 2020–06
  21. By: Javier Bianchi; César Sosa-Padilla
    Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings suggest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
    JEL: F32 F34 F41
    Date: 2020–06
  22. By: Michelacci, Claudio; Paciello, Luigi
    Abstract: Using the Bank of England Inflation Attitudes Survey we find that households with preferences for higher inflation and higher interest rates have lower expected inflation. The wedge is mildly correlated with existing measures of uncertainty and increases after major economic events such as the failure of Lehman Brothers or the Brexit referendum. We interpret the wedge as due to Knightian uncertainty about future monetary policy and the underlying economic environment. If households had treated uncertainty as measurable risk, consumption and output would have been around 1 percent higher both during the Great Recession and in recent years.
    Date: 2020–04
  23. By: Lippi, Francesco
    Abstract: There are several real world examples of local governments that, faced with budget problems, circulate a fiat token in parallel to the official currency. A well known case is the Argentinian "Patacon", printed by the province of Buenos Aires during the crisis of 2001. We present a simple model to analyze the workings of monetary equilibria where the parallel currency is valued in equilibrium and discuss its consequence for real allocations in terms of an equivalent fiscal policy. We briefly discuss different model specifications and their fit to alternative historic experiences.
    Keywords: Chartalism; dual currency; monetary economy; Parallelcurrency; pure currency; scrip
    JEL: E3 E5
    Date: 2020–04
  24. By: John Ammer; John Rogers; Gang Wang; Yang Yu
    Abstract: Although many central banks in the 21st century have become more transparent, Chinese monetary policy communications have been relatively opaque, making it more difficult for financial market participants to make decisions that depend on the future path of interest rates. We conduct a novel systematic textual analysis of the discussion in the quarterly reports of China fund managers, from which we infer their near-term expectations for monetary policy. We construct an aggregate index of manager expectations and show that, as a forecast of Chinese monetary policy, it compares favorably with both market-based and model-based alternative projections. We find that expectations are more accurate for funds that commit more analytical resources, have higher management fees, and with stronger managerial educational background. We also show that fund managers act on these expectations, and that correctly anticipating shifts in Chinese monetary policy improves fund performance. Our results imply that manager skill is an important determinant of fund returns, providing the first evidence from China on a question for which studies of asset management in other countries have reached conflicting conclusions. economy.
    Keywords: Chinese monetary policy; Fund managers; Textual analysis
    JEL: E52 G23
    Date: 2020–06–25
  25. By: Yin-Wong Cheung (City University of Hong Kong, Department of Economics and Finance, Hong Kong); Louisa Grimm (Institute of Empirical Economic Research, Osnabrueck University, 49069 Osnabrueck, Germany); Frank Westermann (Institute of Empirical Economic Research, Osnabrueck University, 49069 Osnabrueck, Germany)
    Abstract: We study the evolution of offshore renminbi trading between 2016 and 2019. The diffusion behaviour of offshore renminbi trading during this period is different from the one between 2013 and 2016. The geographical diffusion process displayed in the 2016-2019 period, in addition to the previously reported convergence to the geographical trading pattern of all currencies, is affected by trade intensity, bilateral swap line arrangements, and has a regional bias. Further, it is possibly affected by disputes with China, and is different from the diffusion behaviours of the offshore US dollar, euro, British pound, and Japanese yen trading.
    Keywords: Global Currency; FX Turnover; Geographical Diffusion; Renminbi Internationalization; Trade Intensity
    JEL: C24 F31 F33 G15 G18
    Date: 2020–06–22
  26. By: Bodenstein, M.; Corsetti, G.; Guerrieri, L.
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: monetary policy cooperation, global imbalances, open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01–28
  27. By: Philipp Baumann; Enzo Rossi; Alexander Volkmann
    Abstract: We analyze which forces explain inflation and how in a large panel of 124 countries from 1997 to 2015. Models motivated by economic theory are compared to an approach based on model-based boosting and non-linearities are explicitly considered. We provide compelling evidence that the interaction of energy price and energy rents stand out among 40 explanatory variables. The output gap and globalization are also relevant drivers of inflation. Credit and money growth, a country's inflation history and demographic changes are comparably less important while central bank related variables as well as political variables turn out to have the least empirical relevance. In a subset of countries public debt denomination and exchange rate arrangements also play a noteworthy role in the inflation process. By contrast, other public-debt variables and an inflation targeting regime have weaker explanatory power. Finally, there is clear evidence of structural breaks in the effects since the financial crisis.
    Date: 2020–06
  28. By: Benigno, Pierpaolo; Nisticò, Salvatore
    Abstract: An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss helicopter money and other equivalent policies that can reflate the economy and boost consumption. In the framework analysed - where lump-sum transfers may be the only effective fiscal response, like in the current pandemic crisis - the central bank, and only the central bank, is the rescuer of last resort of the economy. Fiscal policy is bounded by solvency constraints unless the central bank backs treasury's debt.
    Date: 2020–04
  29. By: Grilli, Luca; Santoro, Domenico
    Abstract: In this paper we want to describe a model of the dynamics of the Bitcoin cryptocurrency system. We can define a duality in these dynamics: Bitcoin mostly behaves as a deterministic system and in some time intervals, much shorter, it enters a stochastic regime. In particular, using Poincaré’s recurrence theorem, it was possible to study when the transition from one regime to another occurs. Furthermore, by applying our hypothesis to real data it was possible to explain a reason why the Bitcoin system is affected by such a "high volatility".
    Keywords: Ergodic Theory, Bitcoin, Finance, Deterministic, Stochastic
    JEL: C44 E37 F17 G17
    Date: 2020–06–11
  30. By: Frederik Neugebauer
    Abstract: This paper documents that ECB announcements on monetary policy increase stock market volatility in the euro area (EA) using several volatility measures from January 1999 to December 2019. Employing event study methods, a more pronounced impact exists following the global financial crisis starting in 2007. All assets react similarly so that no national peculiarities arise. The effects also spill over to 12 non-EA markets analyzed. Stock markets are more sensitive to negative monetary policy news than to positive ones. Further weighting the announcements by financial market reactions, stock markets behave in a more heterogeneous way.
    Keywords: ECB announcements, asset price volatility, event study
    JEL: E52 E58 G12 G14
    Date: 2020–04–01
  31. By: Valeriu Nalban; Andra Smadu
    Abstract: We examine whether the response of the euro area economy to uncertainty shocks depends on the state of financial conditions. We find strong evidence that uncertainty shocks have much more powerful effects on key macroeconomic variables in episodes marked by financial distress than in normal times. We document that the recovery of economic activity is state-dependent following an adverse uncertainty shock. More precisely, it is gradual in normal times, but displays a more accelerated rebound when the shock hits during financial distress. These findings are based on a non-linear data-driven model that accounts for regime switching and time-varying volatility. Finally, from a policy perspective, we argue that whether financial markets are calm or distressed matters when it comes to the appropriate policy responses to uncertainty shocks.
    Keywords: Uncertainty; financial regime asymmetries; non-linear VAR; time-varying volatility
    JEL: C32 E32 E44 E52
    Date: 2020–06
  32. By: Douglas L. Campbell (New Economic School); Aleksandr Chentsov (New Economic School)
    Abstract: As several European countries debate entering, or exiting, the euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) estimated that CUs increase trade on average by 100%, and that the euro has increased trade by 50%. In this paper, we find that other major geopolitical events correlated with CU switches drive the large estimated impact of CUs on trade. We find that these estimates are sensitive to intuitive controls and to dynamic specifications. Overall, we estimate that the impact of CUs on trade is often indistinct from zero, depending on the specification and controls.
    Keywords: Euro, Currency Union Effect, Gravity Estimation
    JEL: F15 F33 F54
    Date: 2020–06
  33. By: Ralph S. J. Koijen; Motohiro Yogo
    Abstract: Using international holdings data, we estimate a demand system for financial assets across 36 countries. The demand system provides a unified framework for decomposing variation in exchange rates, long-term yields, and stock prices; interpreting major economic events such as the European sovereign debt crisis; and estimating the convenience yield on US assets. Macro variables and policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves) account for 55 percent of the variation in exchange rates, 57 percent of long-term yields, and 69 percent of stock prices. The average convenience yield is 2.15 percent on US long-term debt and 1.70 percent on US equity.
    JEL: E52 F31 G12
    Date: 2020–06
  34. By: Channing Arndt; Chris Loewald; Konstantin Makrelov
    Abstract: Climate change mitigation and adaptation will prove to be sources of significant structural change. The impacts will be far-reaching and often irreversible, with particularly large effects on emerging and developing economies. This paper assesses the implications of these changes for central banks in developing countries. They can best support adaptation and mitigation efforts by maintaining macroeconomic stability, lowering the cost of borrowing to support green investment, facilitating the development of green assets, and improving the sharing of information in the financial system, especially with respect to risks. Yet, emerging market central banks currently have limited capacity to assess climate risks and their effects on financial stability, growth, and inflation. As such, the paper also provides options for central banks to develop analytical frameworks useful for that purpose.
    Date: 2020–06–15
  35. By: Paola D'Orazio; Lilit Popoyan
    Abstract: The awareness about climate-related financial risks is gaining momentum both in the policy and academic debates. The role of countriesù institutional dimension and central bank governance structures in the adoption of green prudential regulation is, however, overlooked in the current discussion. The paper fills this gap by proposing an analysis of the state-of-the-art, challenges and perspectives, of ''green'' central banking. The study complements existing research that usually points to an ''extended'' monetary policy mandate, including, for example, sustainability objectives or green growth, as the primary motivation for a central bank to engage in ''green'' financial policymaking. According to our research, the decision to implement green regulations is not exclusively related to the mandate per se, but on the central bank's independence and on how the interaction between the monetary and prudential policy is structured. Moreover, the higher exposure to climate-related adverse events also plays a crucial role in the adoption of green prudential regulations. To avoid potential conflicts between monetary policy and green prudential regulation caused by existing intertwined transmission mechanisms, on the one hand, our analysis emphasizes the importance of having a central bank that hosts the green prudential regulation under its governance roof. On the other hand, when the ''green'' governance models studied in the paper are in place, the Tinbergen principle is safeguarded.
    Keywords: Central banking; Policy mandate; Macroprudential policy; Central bank governance; Climate change.
    Date: 2020–07–02
  36. By: Ogawa, Shogo
    Abstract: In this study, we present a baseline monetary growth model for disequilibrium macroeconomics. Our model is similar to the existing Keynes-Wicksell models, but we highlight a characteristic of disequilibrium (non-Walrasian) macroeconomics, that is, the regime dividing in the static model. In addition, since we synthesize demand-side factors (Keynesian) and supply-side factors (neo-classical), we find a new effect on dynamical feedback loops, that is, the dual-decision effect. This new effect stabilizes (resp. destabilizes) an unstable (resp. a stable) feedback loop when the regime switches from the demand-side to the supply-side. Moreover, this dual-decision effect partly works on the real wage adjustment process and it enhances the instability if the economy is in Keynesian regime. We implement numerical experiments to confirm these results, and find that Walrasian equilibrium itself is not always stable.
    Keywords: Disequilibrium macroeconomics; Non-Walrasian analysis; Keynes-Wicksell model; Economic growth
    JEL: E12 E40 O42
    Date: 2020–06–16
  37. By: Degasperi, Riccardo; Hong, Simon; Ricco, Giovanni
    Abstract: This paper studies the transmission of US monetary shocks across the globe by employing a high-frequency identification of policy shocks and large VAR techniques, in conjunction with a large macro-financial dataset of global and national indicators covering both advanced and emerging economies. Our identification controls for the information effects of monetary policy and allows for the separate analysis of tightenings and loosenings of the policy stance. First, we document that US policy shocks have large real and nominal spillover effects that affect both advanced economies and emerging markets. Policy actions cannot fully isolate national economies, even in the case of advanced economies with flexible exchange rates. Second, we investigate the channels of transmission and find that both trade and financial channels are activated and that there is an independent role for oil and commodity prices. Third, we show that effects are asymmetric and larger in the case of contractionary US monetary policy shocks. Finally, we contrast the transmission mechanisms of countries with different exchange rates, exposure to the dollar, and capital control regimes.
    Keywords: Exchange Rates; Foreign Spillovers; monetary policy; trilemma
    JEL: C3 E5 F3 F4
    Date: 2020–03
  38. By: Luchelle Soobyah; Daan Steenkamp
    Abstract: Long-term interest rates have two major drivers- expectations of future short term interest rates and the term premium. We show that the term premium embedded in South African long rates has risen over the last year and is significantly higher than in advanced economies like the United States. Our modelling results suggest that a higher term premium tends to have adverse impacts on domestic activity and the currency. Higher short rate expectations, on the other hand, tend to have the opposite effect on the economic slack, consistent with such expectations being informative about the outlook for domestic growth and inflation.
    Date: 2020–06–12
  39. By: Obstfeld, Maurice
    Abstract: Fifty years ago, Harry G. Johnson published "The Case for Flexible Exchange Rates, 1969," its title echoing Milton Friedman's earlier classic essay of the early 1950s. Though somewhat forgotten today, Johnson's reprise was an important element in the late 1960s debate over the future of the international monetary system. The present paper has three objectives. The first is to lay out the historical context in which Johnson's "Case" was written and read. The second is to examine Johnson's main points and see how they stand up to nearly five decades of experience with floating exchange rates since the end of the Bretton Woods system. The third is to review the most recent academic critiques of exchange-rate flexibility and ask how fatal they are to Johnson's basic argument. I conclude that the essential case for exchange rate flexibility still stands strong.
    Keywords: dominant currency pricing; effective lower bound; exchange rate regimes; Floating Exchange Rates; Global financial cycle; global value chains; international monetary system
    JEL: F31 F33 F41 F42 N20 N24
    Date: 2020–03

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