nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒07‒27
fifty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Measuring Macroeconomic Convergence and Divergence within EMU Using Long Memory By Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
  2. The Costs of Macroprudential Deleveraging in a Liquidity Trap By Jiaqian Chen; Daria Finocchiaro; Jesper Lindé; Karl Walentin
  3. How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices? By Chadi Abdallah; Kangni R Kpodar
  4. Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies By Ruy Lama; Juan Pablo Medina
  5. Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model By Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig
  6. The optimal monetary and macroprudential policies for the South African economy By Guangling Liu; Thabang Molisey
  7. Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies? By Massimo Guidolin; Alexei Orlov
  8. Measuring exchange rate risks during periods of uncertainty By Laurent Ferrara; Joseph Yapi
  9. Cash and COVID-19: The impact of the pandemic on demand for and use of cash By Heng Chen; Walter Engert; Kim Huynh; Gradon Nicholls; Mitchell Nicholson; Julia Zhu
  10. Monetary policy and the management of uncertainty: a narrative approach By Tuckett, David; Holmes, Douglas; Pearson, Alice; Chaplin, Graeme
  11. Features of monetary policy at low rates By Nesterova, Kristina (Нестерова, Кристина)
  12. Quantitative easing in the euro area and SMEs’ access to finance: Who benefits the most? By Anne Kathrin Funk
  13. The Role of ECB Communication in Guiding Markets By Marc Anderes; Alexander Rathke; Sina Streicher; Jan-Egbert Sturm
  14. REER Imbalances and Macroeconomic Adjustments: evidence from the CEMAC zone By Asongu, Simplice; Nnanna, Joseph
  15. Determinants of the credit cycle: a flow analysis of the extensive margin By Cuciniello, Vincenzo; di Iasio, Nicola
  16. The 3 E's of Central Bank Communication with the Public By Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
  17. Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks By Nils Mæhle
  18. Japan’s Experience with Yield Curve Control By Matthew Higgins; Thomas Klitgaard
  19. Share Buybacks, Monetary Policy and the Cost of Debt By Assia Elgouacem; Riccardo Zago
  20. Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union By Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
  21. Inflation volatility in small and large advanced open economies By Balatti, Mirco
  22. The Implications of Central Bank Transparency for Uncertainty and Disagreement By Boonlert Jitmaneeroj; Michael Lamla
  23. The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Spanish Influenza Pandemic By Haelim Anderson; Jin-Wook Chang; Adam Copeland
  24. International spillovers of forward guidance shocks By Callum Jones; Mariano Kulish; Daniel Rees
  25. The Elusive Gains from Nationally-Oriented Monetary Policy By Bodenstein, Martin; Corsetti, Giancarlo; Guerrieri, Luca
  26. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  27. Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence By Kyungmin Kim; Thomas Laubach; Min Wei
  28. Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area By Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
  29. Dominant Currencies and External Adjustment By Gustavo Adler; Camila Casas; Luis M. Cubeddu; Gita Gopinath; Nan Li; Sergii Meleshchuk; Carolina Osorio Buitron; Damien Puy; Yannick Timmer
  30. Bitcoin Is Not a New Type of Money By Michael Junho Lee; Antoine Martin
  31. The Global Transmission of U.S. Monetary Policy By Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco
  32. Shock-Dependent Exchange Rate Pass-Through in Russia By Ivan Khotulev
  33. Interest rate setting and communication at the ECB By Cour-Thimann, Philippine; Jung, Alexander
  34. The Non-U.S. Bank Demand for U.S. Dollar Assets By Tobias Adrian; Peichu Xie
  35. The Signalling Channel of Negative Interest Rates By de Groot, Oliver; Haas, Alexander
  36. Non-linearities, asymmetries and dollar currency pricing in exchange rate pass-through: evidence from the sectoral level By Hjortsoe, Ida; Lewis, John
  37. Inflation in the G7 Countries: Persistence and Structural Breaks By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  38. Firms’ asset holdings and inflation expectations By Saten Kumar
  39. Monetary Union and Financial Integration By Fornaro, Luca
  40. Gains from wage Flexibility and the Zero Lower Bound By Roberto M. Billi; Jordi Galí
  41. Making a Breach: The Incorporation of Agent-Based Models into the Bank of England's Toolkit By Romain Plassard
  42. Insider-Outsider Labor Markets, Hysteresis and Monetary Policy By Jordi Galí
  43. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  44. Thinking ahead of the next big crash: Clues from Athens in classical times By Bitros, George C.
  45. FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability By Damiano Sandri
  46. Reallocation effects of monetary policy By Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
  47. Estimating the Optimal Inflation Target from Trends in Relative Prices By Adam, Klaus; Weber, Henning
  48. The Natural Rate Puzzle: Global Macro Trends and the Market-Implied r* By Davis, Josh; Fuenzalida, Cristian; Taylor, Alan M.
  49. Inflation Dynamics: Dead, Dormant, or Determined Abroad? By Forbes, Kristin
  50. Do Monetary Policy Announcements Shift Household Expectations? By Lewis, Daniel; Makridis, Christos; Mertens, Karel
  51. Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation By Daiki Maeda; Yuki Saito
  52. Monetary policy and intangible investment By Döttling, Robin; Ratnovski, Lev
  53. Inflation expectations in euro area Phillips curves By Luis J. Álvarez; Mónica Correa-López
  54. International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme By Katharina Bergant; Michael Fidora; Martin Schmitz

  1. By: Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
    Abstract: This paper measures the convergence or divergence of EMU inflation rates and industrial production by testing for the existence of fractional cointegration relations. The notion of fractional cointegration allows for long-term equilibria with a higher degree of persistence than allowed for in the standard cointegration framework. We investigate both inflation and industrial production of EMU countries beginning with the introduction of the common currency and including the financial crisis and post-crisis period. Core as well as periphery countries are included in the study. By modelling possible breaks in the persistence structure we find evidence of fractional cointegration as well as a lower persistence before the crisis and a higher persistence by less evidence for fractional cointegration during the crisis. A second break which indicates the end of the crisis can be found as well. In addition, higher inflation persistence can be found for periphery than for core countries.
    Keywords: EMU inflation rates, industrial production, fractional cointegration, persistence breaks
    JEL: F15 F45 C32
    Date: 2020–07
  2. By: Jiaqian Chen; Daria Finocchiaro; Jesper Lindé; Karl Walentin
    Abstract: We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.
    Date: 2020–06–12
  3. By: Chadi Abdallah; Kangni R Kpodar
    Abstract: We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.
    Date: 2020–06–12
  4. By: Ruy Lama; Juan Pablo Medina
    Abstract: We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.
    Date: 2020–06–19
  5. By: Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume *and* macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.
    Keywords: estimation; HANK; investment
    JEL: E21 E22 E23 E32 E43 E52
    Date: 2020–01
  6. By: Guangling Liu; Thabang Molisey
    Abstract: We investigate the optimal design and e ectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to nancial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own.
    Keywords: Monetary policy, Macroprudential policy, Financial Stability, Capital requirement, Financial shock, DSGE model.
    JEL: E32 E44 E52 E58 G28
    Date: 2020–02
  7. By: Massimo Guidolin; Alexei Orlov
    Abstract: We test whether the unconventional monetary policy (UMP) announcements by the Federal Reserve and the European Central Bank represent a risk factor for the hedge fund industry as a whole and for ten commonly used strategies in particular. Using modified event studies and Markov switching models, we find that UMP announcements represent a risk factor for Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Fixed Income Arbitrage strategies as well as the Multi-Strategy type. We further test whether UMP announcements have an indirect effect on hedge funds’ performance through breaks in the parameters of the conventional risk factors. Using Chow and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most of the UMP announcements correspond to break dates for the traditional factor loadings.
    Keywords: Hedge fund strategies, unconventional monetary policy, risk factors, modified event studies, Markov switching models, breakpoint tests
    JEL: G12 G11 G17 C32 C53
    Date: 2020
  8. By: Laurent Ferrara; Joseph Yapi
    Abstract: In this paper, we empirically look at the effects of uncertainty on risk measures for exchange rates, by focusing on two recent specific periods: the Brexit and the outbreak of the Covid-19. Based on a Fama regression extended with uncertainty measures, we forecast exchange rate in the short run through a quantile regression approach. By fitting a Skewed-Student distribution to the quantile forecasts, we put forward measures of risks for appreciation and depreciation of the expected exchange rates. We point out two interesting results. First, we show that the increase in Brexit-related uncertainty is strongly associated to higher future depreciation risks of the British Pound vs the Euro, as a mistrust towards the British economy. Second, we get that the Covid-related uncertainty is perceived as a global risk, leading to a flight-to-safety move towards the US Dollar and associated high depreciation risks for emerging currencies.
    Keywords: Exchange rate, Risk measures, Fama regression, Uncertainty, Covid-19 crisis, Brexit
    JEL: C22 C53 F31
    Date: 2020–06
  9. By: Heng Chen; Walter Engert; Kim Huynh; Gradon Nicholls; Mitchell Nicholson; Julia Zhu
    Abstract: Consumer spending declined significantly during the recent COVID-19 pandemic. This negative shock likely reduced spending across all methods of payment (cash, debit, credit, etc.). The mix of payment methods consumers use could also be affected. We study how the pandemic has influenced the demand for and use of cash. We also offer insights into the use of other payment methods, such as debit and credit cards.
    Keywords: Bank notes, Central bank research, Digital currencies and fintech, Econometric and statistical methods
    JEL: C1 C12 C9 E4 O5 O54
    Date: 2020–07
  10. By: Tuckett, David (UCL Centre for the Study of Decision-Making Uncertainty, University College London); Holmes, Douglas (Binghamton University); Pearson, Alice (University of Cambridge); Chaplin, Graeme (Bank of England)
    Abstract: In this paper we explore how macroeconomic theory might be augmented, and the practice of monetary policy better understood, if approached through ideas from social and psychological science. A modern, inflation-targeting central bank faces ‘radical’ uncertainty both in understanding the economy and in knowing how best to communicate policy decisions to influence behaviour. We make use of narrative theory to explore these challenges, drawing on fieldwork with the Bank’s regional Agencies and conversations with staff and policy-makers. We find that the intelligence gathered from conversations with businesses is uniquely useful for both the analysis and communication of monetary policy. Such intelligence embodies knowledge about the plans which are making the future. It also provides insights into how economic agents understand the economy they are creating. These insights can help the Monetary Policy Committee to communicate its policy as a narrative the public understands and commits to. We propose further research to advance and test these ideas.
    Keywords: Monetary policy; narrative theory; uncertainty; inflation-targeting; central bank communication; macroeconomic theory; economic knowledge
    JEL: E52 E58
    Date: 2020–06–05
  11. By: Nesterova, Kristina (Нестерова, Кристина) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper analyses a number of monetary rules helping to decrease the probability of the nominal interest rate hitting the zero lower bound. Such measures include integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. Discretion such as sharp preventive drop in the interest rate and LSAP to “lower for longer” are also considered. According to up-to-date New-Keynesian general equilibrium models, the major advantage of rules such as NGDP and price level targeting is their capacity to prevent zero lower bound episodes mainly by managing expectations of the public efficiently, which is a drawback of discretionary policy.
    Keywords: monetary policy, zero lower bound, inflation targeting, price level targeting, NGDP targeting.
    Date: 2020–03
  12. By: Anne Kathrin Funk (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically bringing the economy close to a credit crunch. It was only after the start of the ECB’s quantitative easing programme in early 2015 that bank lending improved sustainably. The study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small and medium sized enterprises (SME) using firm-level data of the Survey on the Access to Finance of Enterprises (SAFE) and a fixed effects model. The analysis comprises several measures of financial access such as credit availability, financial constraints and interest rates. The micro level nature of the data allows to distinguish between aggregate and heterogeneous effects across firm size, age, sector and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries which need the most stimulus benefit the most from the Public Sector Purchase Programme.
    Keywords: Unconventional monetary policy, credit channel, bank lending, ECB,SME
    JEL: E44 E51 E52 E58
    Date: 2018–12
  13. By: Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are.
    Keywords: Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth
    JEL: E3 E43 E51 E52 E58
    Date: 2019–10
  14. By: Asongu, Simplice; Nnanna, Joseph
    Abstract: The EMU crisis holds special lessons for existing monetary unions. We assess the behavior of real effective exchange rates (REERs) of members of the Central African Economic and Monetary Community (CEMAC) zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected associations with the exchange rate fluctuations. The analysis also reveals that only the REER adjustments of Cameroon and Gabon are significant in restoring the long-term equilibrium in event of a shock. The Cameroonian economic fundamentals of terms of trade, government expenditure and openness have different long-term relations with the REER in comparison to those of other member states. There is no need for an adjustment in the level of the peg based on the present quantitative analysis of REER paths.
    Keywords: Exchange rate; Macroeconomic impact; CEMAC zone
    JEL: F31 F33 F42 F61 O55
    Date: 2019–01
  15. By: Cuciniello, Vincenzo; di Iasio, Nicola
    Abstract: We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (“inflows”) account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (“outflows”). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin. JEL Classification: E51, E32, E44
    Keywords: applicant, borrower, business cycle, credit cycle, gross flows
    Date: 2020–07
  16. By: Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
    Abstract: In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policy makers by high- lighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E's of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.
    Keywords: communication; General Public; monetary policy
    JEL: E52 E58
    Date: 2020–01
  17. By: Nils Mæhle
    Abstract: This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.
    Keywords: Central banking and monetary issues;Bank rates;Financial crises;Financial instruments;Central bank operations;monetary policy operations,monetary targeting,monetary policy transmission,liqudity management,interest rate determination,WP,interbank,operational framework,excess reserve,short-term interest rate,policy stance
    Date: 2020–02–07
  18. By: Matthew Higgins; Thomas Klitgaard
    Abstract: In September 2016, the Bank of Japan (BoJ) changed its policy framework to target the yield on ten-year government bonds at “around zero percent,” close to the prevailing rate at the time. The new framework was announced as a modification of the Bank's earlier policy of rapid monetary base expansion via large-scale asset purchases—a policy that market participants increasingly regarded as unsustainable. While the BoJ announced that the rapid pace of government bond purchases would not change, it turned out that the yield target approach allowed for a dramatic scaling back in purchases. In Japan’s case, the commitment to purchase whatever was needed to keep the ten-year rate near zero has meant that very little in the way of asset purchases have been required.
    Keywords: asset purchases; monetary policy; monetary base; Bank of Japan; yield curve control
    JEL: E52 F0
    Date: 2020–06–22
  19. By: Assia Elgouacem; Riccardo Zago
    Abstract: Share buybacks have become common practice across U.S corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt -due to innovations in monetary policy- is key in explaining managers' incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm-level.
    Keywords: Share Buybacks, Monetary Policy, Corporate Yield, EPS Targeting .
    JEL: E52 G11 G35 G32
    Date: 2020
  20. By: Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
    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.
    JEL: D42 E44 E63
    Date: 2020–06
  21. By: Balatti, Mirco
    Abstract: Inflation volatility is clearly important for structural analysis, forecasting and policy purposes, yet it is often overlooked in the literature. This paper compares inflation volatility among advanced open economies with inflation targeting monetary policy frameworks. The results of the empirical exercise using a panel dataset suggest that, over the last two decades, the volatility of inflation was similar among countries, even when controlling for monetary policy activity and other factors. In particular, there is only a weak and statistically not significant correlation between inflation volatility and country size. Also, point-targeting central banks (in contrast with range-targeters) and commodity exporters are only weakly associated with higher inflation swings. Equivalent conclusions are reached when decomposing inflation volatility in a transitory and a permanent component. I thus argue that small and large advanced open economies are exposed to global fluctuations to a comparable extent. A range of robustness tests confirm that the results are not sensitive to methodological choices and the relationship was not altered by the Great Recession or the low interest rate environment. JEL Classification: E31, E42, E50, F10, F41
    Keywords: globalisation, inflation targeting, prices, volatility
    Date: 2020–07
  22. By: Boonlert Jitmaneeroj (University of the Thai Chamber of Commerce); Michael Lamla (Leuphana Universität Lüneburg, Deutschland)
    Abstract: Using survey data from 25 economies we provide evidence that greater transparency surrounding monetary policy reduces uncertainty of interest rates and inflation, primarily by reducing uncertainty that is common to agents rather than disagreement between agents. This suggests that studies that focus on disagreement as a proxy for uncertainty understate the benefits of monetary policy transparency. The adoption of inflation targets and forward guidance are both associated with lower uncertainty, although inflation targets have a stronger impact on reducing uncertainty than forward guidance. Moreover, there are diminishing benefits from ever higher levels of transparency. Taken as a whole, our results support the contention that clarity of communication is as important as the magnitude of transparency.
    Keywords: Central bank transparency, Uncertainty, Disagreement, Monetary policy
    Date: 2018–11
  23. By: Haelim Anderson; Jin-Wook Chang; Adam Copeland
    Abstract: The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York, we investigate the effects of the 1918 Influenza Pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks which were members of the Federal Reserve were able to access central bank liquidity and so continue or even expand lending. Banks which were not members, however, did not borrow on the interbank market but rather curtailed lending, suggesting there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 Influenza, even banks with direct access to the discount window liquidated assets so as to meet large deposit withdrawals, suggesting limits to the effectiveness of the liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption on the financial sector. Over the long-term, deposits returned and banks restored their asset portfolios.
    Keywords: 1918 Spanish influenza; Pandemics; Financial stability; Bank lending; Economic recovery
    JEL: E32 G21 N22
    Date: 2020–06–24
  24. By: Callum Jones; Mariano Kulish; Daniel Rees
    Abstract: We estimate a two-country model of the US and Canada over the post 2009 sample to study the cross-country spillovers of forward guidance shocks. To do so, we propose a method to identify forward guidance shocks during the fixed interest rate regime. US forward guidance shocks have a larger impact than conventional monetary policy shocks. A 2 quarter expansionary forward guidance shock decreases Canadian output by about 0.2% to 0.4% on impact. The effect of US forward guidance shocks on Canadian output, unlike conventional policy shocks, depends crucially on the state of the US risk premium shock. The estimated forward guidance shocks coincide with significant US monetary policy announcements such as the introduction of calendar based guidance.
    Keywords: forward guidance shocks, identification, spillovers, zero lower bound
    JEL: E2 E4 E5 F4
    Date: 2020–07
  25. By: Bodenstein, Martin; Corsetti, Giancarlo; Guerrieri, Luca
    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: global imbalances; monetary policy cooperation; open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01
  26. By: Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply-and the real economy-through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB's NIRP and matched administrative datasets-including the credit register-from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms-without higher ex-post delinquencies-and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.
    Keywords: bank lending channel of monetary policy; eurozone crisis; Liquidity management; Negative Interest Rates; Portfolio rebalancing
    JEL: E52 E58 G01 G21 G28
    Date: 2019–12
  27. By: Kyungmin Kim; Thomas Laubach; Min Wei
    Abstract: We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had significant expansionary effects on the macroeconomy, with real activity and inflation rising and unemployment declining notably following the shock. The policy accommodation appears to be transmitted to the economy both through financial markets-including Treasury yields, credit spreads and equity prices-and through bank lending. The effects on Treasury yields and term premiums appear to be longer-lived than previously documented, while the effects on credit spreads and especially bank lending also appear persistent. These results appear fairly robust to alternative identification and econometric methodologies, alternative policy indicators and instruments, and controlling for any possible Federal Reserve information effect. A counterfactual analysis shows that absent the LSAP3 program implemented between late 2012 and 2014, CPI inflation would have been about 1 percentage point lower, while the unemployment rate would have been about 4 percentage points higher, by the end of 2015.
    Keywords: Unconventional monetary policy; Macro effects; Quantitative easing (QE); Primary dealer survey; Forward guidance; External instruments; Identification; Structural VAR
    JEL: E44 E52 E58
    Date: 2020–06–17
  28. By: Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
    Abstract: This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels-intertemporal substitution and net interest rate exposure-and indirect, general equilibrium channels-net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.
    Keywords: Consumption; Euro Area; Household Balance Sheets; marginal propensity to consume; monetary policy; wealth distribution
    JEL: D14 D31 E21 E52 E58
    Date: 2019–12
  29. By: Gustavo Adler; Camila Casas; Luis M. Cubeddu; Gita Gopinath; Nan Li; Sergii Meleshchuk; Carolina Osorio Buitron; Damien Puy; Yannick Timmer
    Abstract: The extensive use of the US dollar when firms set prices for international trade (dubbed dominant currency pricing) and in their funding (dominant currency financing) has come to the forefront of policy debate, raising questions about how exchange rates work and the benefits of exchange rate flexibility. This Staff Discussion Note documents these features of international trade and finance and explores their implications for how exchange rates can help external rebalancing and buffer macroeconomic shocks.
    Keywords: Currency exchange rates;External trade;trade pricing;trade invoicing;exchange rate;external adjustment
    Date: 2020–07–20
  30. By: Michael Junho Lee; Antoine Martin
    Abstract: Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
    Keywords: exchange mechanism; cryptocurrencies; crypto assets; payments; bitcoin; classification; money
    JEL: E42 E5 G21
    Date: 2020–06–18
  31. By: Riccardo Degasperi; Seokki Simon Hong; Giovanni Ricco
    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 exible 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: Monetary policy, Trilemma, exchange rates, Foreign Spillovers
    JEL: E5 F3 F4 C3
    Date: 2020–03
  32. By: Ivan Khotulev (Bank of Russia, Russian Federation)
    Abstract: In this note, we study shock-dependent exchange rate pass-through (ERPT) to consumer prices in Russia. First, we estimate a traditional "shock-independent" ERPT on aggregate quarterly time series of the exchange rate, CPI, and control variables. Estimated coefficients confirm previous studies and official statements by the Bank of Russia. Rolling regression in different periods shows that the ERPT becomes more stable and more precisely estimated after 2014-2015 when the Bank of Russia switched to inflation targeting. We compare results with the ERPT from an estimated structural model. We obtain a forecast of macroeconomic time series from a DSGE model conditional on foreign variables observed. We run the same regression on forecasted data and obtain estimates of the "shock-independent" ERPT from the structural model. We compute shock-dependent ERPT from model impulse responses. The magnitude of the ERPT varies for different shocks with the highest value attributed to domestic monetary policy shocks. When estimating the pass-through of the exchange rate to prices, care must be taken of which shock caused changes in the exchange rate. Since monetary policy shocks appear to be associated with the highest ERPT, and the ERPT becomes more stable after 2014-2015, the Russian economy may be reaping an additional benefit of inflation targeting in the form of reduced monetary policy shocks and a more stable ERPT.
    Keywords: exchange rate pass-through, monetary policy, Russia
    Date: 2020–06
  33. By: Cour-Thimann, Philippine; Jung, Alexander
    Abstract: Based on ordered Probit models and twenty years of euro area data, we estimate empirical reaction functions for the ECB´s monetary policy and augment them with communication indicators. First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the account of post-meeting communications about risks to price stability and to growth significantly enhances the modelling of its reaction function. Second, we detect that the ECB also responded to the evolution of the federal funds rate, thereby confirming the importance of international interest rate linkages or the global cycle that it reflects. Third, while confirming Gerlach’s (2007) finding on the relevance of M3 growth for explaining future interest rate changes, we show that this result only holds for the period before the global financial crisis. JEL Classification: E43, E52, C22, C25
    Keywords: communication indicators, monetary policy reaction function, Probit model, staff projections, Survey of Professional Forecasters
    Date: 2020–07
  34. By: Tobias Adrian; Peichu Xie
    Abstract: The USD asset share of non-U.S. banks captures the demand for dollars by these investors. An instrumental variable strategy identifies a causal link from the USD asset share to the USD exchange rate. Cross-sectional asset pricing tests show that the USD asset share is a highly significant pricing factor for carry trade strategies. The USD asset share forecasts the dollar with economically large magnitude, high statistical significance, and large explanatory power, both in sample and out of sample, pointing towards time varying risk premia. It takes 2-5 years for exchange rate risk premia to normalize in response to demand shocks.
    Date: 2020–06–19
  35. By: de Groot, Oliver; Haas, Alexander
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplied model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: forward guidance; liquidity trap; monetary policy; Taylor rule
    JEL: E44 E52 E61
    Date: 2020–01
  36. By: Hjortsoe, Ida (Bank of England); Lewis, John (Bank of England)
    Abstract: We investigate pass-through of exchange rate changes into UK import prices for 55 sectors using sector-specific exchange rate indices. Estimating a separate error correction model for each sector, we document substantial sectoral variation in pass-through, but find that compositional effects have not generated much variation in aggregate pass-through over time. Aggregating our sectoral results, we find that 74% of exchange rate changes are passed through to aggregate import prices in the long run. Pass-through is faster for larger exchange rate changes than smaller ones; and for movements driven by the US dollar than for broader based exchange rate changes. This greater sensitivity to the dollar exchange rate changes suggests the US dollar is used as a vehicle currency for invoicing some imports from non-US countries. We find no evidence of a comparable role for the euro nor for asymmetries in pass-through at the aggregate level.
    Keywords: Exchange rate pass-through; import prices; vehicle currencies; non-linearities
    JEL: E31 E44
    Date: 2020–06–05
  37. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper examines long-range dependence in the inflation rates of the G7 countries by estimating their (fractional) order of integration d over the sample period January 1973 - March 2020. The results indicate that the series are very persistent, the estimated value of d being equal to or higher than 1 in all cases. Possible non-linearities in the form of Chebyshev polynomials in time are ruled out. Endogenous break tests are then carried out, and the degree of integration is estimated for each of the subsamples corresponding to the detected break dates. Significant differences are found between subsamples and countries in terms of the estimated degree of integration of the series.
    Keywords: inflation rates, G7, persistence, long memory, long-range dependence
    JEL: C22 E31
    Date: 2020
  38. By: Saten Kumar
    Abstract: This paper investigates the relationship between firms’ inflation expectations and their holdings of liquid assets. We implement a new quantitative survey of firms’ expectations about inflation in New Zealand. We find that firms that hold more shares of liquid assets systematically report lower inflation expectations. Moreover, we implement an experiment by providing firms new exogenous information about recent inflation dynamics. This experiment allows us to assess how firms respond to new information in terms of belief revisions and firm-level decisions.
    Keywords: liquid assets, illiquid assets, expectations, survey, inattention
    JEL: E2 E3
    Date: 2020–06
  39. By: Fornaro, Luca
    Abstract: Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
    Keywords: capital flights; Euro Area; Exchange Rates; International financial integration; monetary union; Optimal Currency Area
    JEL: E44 E52 F33 F34 F36 F41 F45
    Date: 2019–12
  40. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.
    JEL: E24 E32 E52
    Date: 2020–06
  41. By: Romain Plassard (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: After the financial crisis of 2008, several central banks incorporated agent-based models (ABMs) into their toolkit. The Bank of England (BoE) is a case in point. Since 2008, it has developed four ABMs. Under which conditions could ABMs breach the walls of the BoE? Then, there is the issue of the size of the breach. In which divisions economists used ABMs? Was agent-based modeling used to inform a wide range of policies? Last but not least, there is the issue of the fate of ABMs at the BoE. Is the breach going to narrow or, on the contrary, to widen? What are the forces underlying the deployment of ABMs at the BoE? My article aims to address these issues. I show that institutional reforms were central to the use of ABMs at the BoE. I also show that so far, ABMs have been a marginal tool at the BoE. They were not used to inform monetary policy. Neither were they used to coordinate the BoE's microprudential, macroprudential, and monetary policies. ABMs were only used to inform the BoE's macroprudential policy. I conclude the article by examining the conditions for a broader use of ABMs at the BoE.
    Keywords: Bank of England, agent-based models, macroprudential policy, monetary policy, DSGE models
    Date: 2020–06
  42. By: Jordi Galí
    Abstract: I develop a version of the New Keynesian model with insider-outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targetiing rules are shown to approximate well the optimal policy. The properties of the model and effects of different policies are analyzed through the lens of the labor wedge and its components.
    JEL: E24 E31 E32
    Date: 2020–06
  43. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Keywords: Financial and Monetary Sector;Central bank independence;Nominal effective exchange rate;Monetary policy instruments;Exchange rate policy;Monetary Policy,Emerging markets,Exchange rate channel,Inflation targeting,Financial structure,WP,financial development,monetary policy framework,policy framework,Taylor rule,projection method
    Date: 2020–02–21
  44. By: Bitros, George C.
    Abstract: Credible analyses and evidence submitted by experts from universities, international organizations and independent think tanks show that the trends which led to the 2008 worldwide financial crisis remain intact. As a result, central for responsible leaderships should be the concern how to forestall the next big one which might prove uncontrollable. Given the world dominance of the U.S. dollar, in a 2015 paper I discussed two paths of possible reforms: One bold but gradual, which would entail altering the present institutional setup of the U.S. Federal Open Market Committee (“the Fed”), provided that it maintains control over the Federal Funds Rate (FFR); and, if not, a radical one, which would entail replacing the Fed with a monetary regime based on free banking. In this paper I go a step further in the latter direction by drawing on the model of free banking that emerged in Athens in classical times and enabled the Athenian “empire” to turn the Attic drachma into the dollar of today, throughout the eastern Mediterranean and beyond, without causing major financial crises for over two centuries. More specifically, I argue that, even if the said model had not proved its potential as a highly successful historical precedent, as banker of the world, the U.S. ought to consider it as a benchmark for reference and adaptation, before an unexpected international financial crisis and/or the revolutionary technological developments in the front of gold-like digital currencies, precipitate a monetary regime change.
    Keywords: Classical Athens, Democracy, Central banks, Free banking, Athenian model of money and banking.
    JEL: D7 E4 E5 E6 G2 N4
    Date: 2020–06–16
  45. By: Damiano Sandri
    Abstract: We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.
    Date: 2020–06–12
  46. By: Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
    Abstract: Responding to the increased attention on the distributional aspects of monetary policy, we investigate the reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms invest more in R&D and grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into R&D-driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms because menu-cost burdens are relatively heavier for less innovative firms. This reallocation effect yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity. Moreover, the presence of menu costs can improve welfare.
    Keywords: Reallocation, firm dynamics, creative destruction, menu cost, optimal inflation rate
    JEL: E5 O3 O4
    Date: 2020–06
  47. By: Adam, Klaus; Weber, Henning
    Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period.
    Keywords: Micro price data; optimal inflation; U.K. inflation target
    JEL: E31
    Date: 2020–01
  48. By: Davis, Josh; Fuenzalida, Cristian; Taylor, Alan M.
    Abstract: Benchmark finance models deliver estimates of bond risk premia based on components of Treasury bond yields. Benchmark macroeconomic models deliver estimates of the natural rate of interest based on growth, inflation, and other macro factors. But estimates of the natural rate implied by the former are wildly inconsistent with those of the latter; and estimates of risk premia implied by the latter are wildly inconsistent with those of the former. This is the natural rate puzzle, and we show that it applies not only in the United States but also across several advanced economies. A unified model should not fail such consistency tests. We estimate a unified macro-finance model with long-run trend factors which delivers paths for a market-implied natural rate r* consistent with inflation expectations Ï?* and bond risk premia. These paths are plausible and our factors improve the explanatory power of yield and return regressions. Trading strategies based on signals incorporating both r* and Ï?* trends outperform both yield- only strategies like level and slope and strategies which only add trend inflation. The estimates from our unified model satisfy consistency and deliver a resolution to the puzzle. They show that most of the variation in yields has come from shifts in r* and Ï?*, not from bond risk premia. Our market-implied natural rate differs from consensus estimates, and is typically lower, intensifying concerns about secular stagnation and proximity to the effective lower-bound on monetary policy in advanced economies.
    Keywords: affine models; Bond risk premia; Inflation expectations; Natural rate of interest; term structure
    JEL: C13 C32 E43 E44 E47 G12
    Date: 2019–12
  49. By: Forbes, Kristin
    Abstract: Inflation dynamics have been difficult to explain over the last decade. This paper explores if a more comprehensive treatment of globalization can help. CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some "flattening" of this relationship, especially for CPI inflation. Although CPI inflation is increasingly "determined abroad", core and wage inflation is still largely a domestic process.
    Keywords: commodity prices; Globalization; inflation; Phillips curve; price dynamics; trend-cycle
    JEL: E31 E37 E52 E58 F62
    Date: 2019–12
  50. By: Lewis, Daniel; Makridis, Christos; Mertens, Karel
    Abstract: We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings that suggest consumers are largely inattentive to economic developments. Monetary policy news about forward guidance and asset purchases does not have similarly clear and robust immediate effects on household beliefs. We document heterogeneity across demographics in the responsiveness of macroeconomic beliefs to aggregate news, and we relate our findings to existing evidence on informational rigidities.
    Keywords: central bank communication; consumer con dence; high frequency identi cation; informational rigidities; monetary policy shocks
    Date: 2020–01
  51. By: Daiki Maeda; Yuki Saito
    Abstract: To examine the effect of monetary policy on economic growth, we formulate an endogenous growth model with cash-in-advance constraints on R&D and capital accumulation as endogenous growth engines. Within this framework, we show that the relationship between economic growth and the nominal interest rate can be an inverted-U shape. Moreover, we demonstrate that the welfare-maximizing level of the nominal interest rate is larger than the growth-rate-maximizing level of the nominal interest rate.
    Date: 2020–02
  52. By: Döttling, Robin; Ratnovski, Lev
    Abstract: We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less. JEL Classification: E22, E52, G32
    Keywords: heterogeneity, intangible investment, monetary policy, stock returns
    Date: 2020–07
  53. By: Luis J. Álvarez (Banco de España); Mónica Correa-López (Banco de España)
    Abstract: We analyze the information content of alternative inflation expectations measures, including those from consumers, firms, experts and financial markets, in the context of open economy Phillips curves. We adopt a thick modeling approach with rolling regressions and we assess the results of an out-of sample conditional forecasting exercise by means of meta regressions. The information content varies substantially across inflation expectations measures. In particular, we find that those from consumers and firms are better at predicting inflation if compared to those from experts and, especially, those from financial markets.
    Keywords: inflation dynamics, inflation expectations, Phillips curve, euro area, thick modeling, meta regressions
    JEL: E31 E37 E52
    Date: 2020–07
  54. By: Katharina Bergant; Michael Fidora; Martin Schmitz
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Our empirical analysis shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Keywords: Financial and Monetary Sector;Financial crises;Debt securities;Mutual funds;Economic policy;International investment patterns,capital flows,sovereign debt,investor heterogeneity,quantitative easing,WP,PSPP,euro area,debt security,rebalance,MFIs
    Date: 2020–02–28

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