nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒08‒17
fifty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  2. Central Bank Bills and the Exchange Rate: The Case of Papua New Guinea By Constantine, Collin; Direye, Eli; Khemraj, Tarron
  3. Fluctuations in Economic Uncertainty and Transmission of Monetary Policy Shocks: Evidence Using Daily Surveys from Brazil By Burjack, Rafael; Qu, Ritong; Timmermann, Allan
  4. Hitting the Elusive Inflation Target By Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
  5. The Portfolio Channel of Capital Flows and Foreign Exchange Intervention in A Small Open Economy By Carlos Montoro; Marco Ortiz
  6. Raising the Inflation Target: How Much Extra Room Does It Really Give? By Lhuillier, Jean-Paul; Schoenle, Raphael
  7. Spillover Effects of Russian Monetary Policy Shocks on the Eurasian Economic Union By Vladislav Abramov
  8. The role of liquidity preference in a framework of endogenous money By Marco Missaglia; Alberto Botta
  9. Inequality in the Welfare Costs of Disinflation By Benjamin Pugsley; Hannah Rubinton
  10. The non-linear effects of the Fed's asset purchases By Alessio Anzuini
  11. Implementing Monetary Policy in an "Ample-Reserves" Regime: The Basics (Note 1 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  12. Monetary Policies and Destabilizing Carry Trades under Adaptive Learning By cyril Dell'Eva; Eric Girardin; Patrick Pintus
  13. Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data By Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
  14. The evolution of monetary policy in Latin American economies: Responsiveness to inflation under different degrees of credibility By Gießler, Stefan
  15. Compositional effects of O-SII capital buffers and the role of monetary policy By Cappelletti, Giuseppe; Reghezza, Alessio; d’Acri, Costanza Rodriguez; Spaggiari, Martina
  16. Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation By Kevin L. Kliesen; David C. Wheelock
  17. Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight By Michael Woodford; Yinxi Xie
  18. The Hidden Heterogeneity of Inflation Expectations and its Implications By Lena Drager; Michael J. Lamla; Damjan Pfajfar
  19. Building Credibility and Influencing Expectations- The Evolution of Central Bank Communication By Monique Reid; Pierre Siklos
  20. A central bank strategy for defending a currency peg By Eyal Neuman; Alexander Schied; Chengguo Weng; Xiaole Xue
  21. Covered Interest Parity Deviations: Macrofinancial Determinants By Eugenio M Cerutti; Maurice Obstfeld; Haonan Zhou
  22. Attributes needed for Japan's central bank digital currency By Hiroshi FUJIKI
  23. Central banks in parliaments: a text analysis of the parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois
  24. The potential effect of a central bank digital currency on deposit funding in Canada By Alejandro García; Bena Lands; Xuezhi Liu; Joshua Slive
  25. Output-Inflation Trade-offs and the Optimal Inflation Rate By Takushi Kurozumi; Willem Van Zandweghe
  26. Destabilizing the Global Monetary System: Germany’s Adoption of the Gold Standard in the Early 1870s By Johannes Wiegand
  27. Turnover liquidity and the transmission of monetary policy By Lagos, Ricardo; Zhang, Shengxing
  28. Mr. Taylor and the Central Bank: Two Inference Exercises By Francesco Luna
  29. Financial Dollarization of Households and Firms: Does It Differ? By Juan S Corrales; Patrick A. Imam
  30. TANK Models with Amplification and no Puzzles: the Magic of Output Stabilization and Capital By Maliar, Lilia; Naubert, Christopher
  31. CBDC adoption and usage: some insights from field and laboratory experiments By Janet Hua Jiang
  32. Financial shocks and inflation dynamics By Angela Abbate; Sandra Eickmeier; Esteban Prieto
  33. The Macroeconomics of Sticky Prices with Generalized Hazard Functions By Fernando E. Alvarez; Francesco Lippi; Aleksei Oskolkov
  34. Mind the Gap!—A Monetarist View of the Open-Economy Phillips Curve By Ayse Dur; Enrique Martínez-García
  35. Japan's Monetary Policy: A Literature Review and Empirical Assessment By Masahiko Shibamoto; Wataru Takahashi; Takashi Kamihigashi
  36. Peer Effects in Central Banking By Roman Horvath
  37. A quantitative easing experiment By Adrian Penalver; Nobuyuki Hanaki; Eizo Akiyama; Yukihiko Funaki
  38. An Analysis of Monetary Policy in a Monetary Search Model with Non-unitary Discounting By Daiki Maeda
  39. "The "Kansas City" Approach to Modern Money Theory" By L. Randall Wray
  40. Nonresident Capital Flows and Volatility: Evidence from Malaysia’s Local Currency Bond Market By David A. Grigorian
  41. Public Liquidity Demand and Central Bank Independence By Barthelemy, Jean; Mengus, Eric; Plantin, Guillaume
  42. Selective Attention in Exchange Rate Forecasting By Svatopluk Kapounek; Zuzana Kucerova; Evzen Kocenda
  43. Understanding Dollarization: a Keynesian/Kaleckian Perspective By Marco Missaglia
  44. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets* By Liu, Emily; Niepmann, Friederike; Schmidt-Eisenlohr, Tim
  45. Has Higher Household Indebtedness Weakened Monetary Policy Transmission? By R. G Gelos; Tommaso Mancini Griffoli; Machiko Narita; Federico Grinberg; Umang Rawat; Shujaat Khan
  46. Capital, Income Inequality, and Consumption: the Missing Link By Bilbiie, Florin Ovidiu; Känzig, Diego R; Surico, Paolo
  47. Monetary Policy in an Endogenous Growth Model with R&D and Human Capital Accumulation By Tiago Miguel Guterres Neves Sequeira
  48. The Federal Reserve’s Market Functioning Purchases: From Supporting to Sustaining By Lorie Logan
  49. Financial spillovers to emerging economies: the role of exchange rates and domestic fundamentals By Alessio Ciarlone; Daniela Marconi
  50. Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows By Ozge Akinci; Gianluca Benigno; Albert Queraltó
  51. An asymmetrical overshooting correction model for G20 nominal effective exchange rates By Frédérique Bec; Mélika Ben Salem

  1. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Shangshang Li (Department of Economics, University of Oxford (E-mail:; Sophocles Mavroeidis (Professor, Department of Economics, University of Oxford and INET (E-mail:; Francesco Zanetti (Associate Professor, Department of Economics, University of Oxford (E-mail:
    Abstract: The effective lower bound (ELB) on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this 'irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country.
    Keywords: Effective lower bound, unconventional monetary policy, structural VAR
    JEL: E52 E58
    Date: 2020–07
  2. By: Constantine, Collin; Direye, Eli; Khemraj, Tarron
    Abstract: This paper presents a simple model of how the sale of central bank bills (CBBs) serves as an effective tool of exchange rate management in the case of Papua New Guinea. We employ a VAR approach and find that the quantity of CBBs rather than the short-term interest rate elicits the largest movement in the exchange rate. Moreover, we find evidence that banks hold non-remunerated excess reserves at a non-zero lower bound rate of interest. This is indirect evidence that policymakers must sterilize excess reserves not for fear of losing control of interest rate but for exchange rate management. Our model and empirical results make a strong case that the sale of CBBs can simultaneously support exchange rate stability and money-financed fiscal deficits. The CBBs help to quarantine the excess reserves injected through monetary financing.
    Keywords: central bank bills; exchange rate; excess reserves; monetary policy
    JEL: E02 E5 E52 E58 F41
    Date: 2019–11
  3. By: Burjack, Rafael; Qu, Ritong; Timmermann, Allan
    Abstract: We use a unique Brazilian dataset on daily survey expectations to obtain direct measures of shocks to central bank target rates and changes in economic uncertainty. Using these measures, we gauge the effect of monetary policy shocks on economic uncertainty, term premia, inflation expectations, and bond yields in Brazil. We find strong evidence that inflation uncertainty is key to transmitting monetary policy shocks to the yield curve via time-varying term premia. Finally, Fed announcements have sizeable spillover effects on the Brazilian bond market, as positive shocks to US yields significantly raise term premia in Brazil through elevated exchange rate risk.
    Keywords: Inflation uncertainty; monetary policy shocks; term structure
    Date: 2019–11
  4. By: Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
    Abstract: Since the 2001 recession, average core inflation has been below the Federal Reserve's 2% target. This deflationary bias is a predictable consequence of the current symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals -- a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range.
    JEL: E31 E52
    Date: 2019–11
  5. By: Carlos Montoro (Banco Central de Reserva del Perú); Marco Ortiz (Universidad del Pacífico)
    Abstract: In this paper we extend a new Keynesian small open economy model to include risk-averse FX dealers and FX intervention by the monetary authority. The former ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the dealers add endogenously a time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We analyse the effectiveness of different strategies of FX intervention (e.g., unanticipated operations or via a pre-announced rule) to affect the volatility of the exchange rate and the transmission mechanism of the interest rate. Our findings are as follows: (i) FX intervention has a strong interaction with monetary policy in general equilibrium; (ii) FX intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel; (iii) there are some trade-offs in the use of FX intervention, since it can help to isolate the economy from external financial shocks, but it prevents some necessary adjustments on the exchange rate as a response to nominal and real external shocks; and (iv) the interaction between the portfolio balance channel and current account dynamics reduces the presence of a explosive response of exchange rate volatility, generating more stable equilibria.
    JEL: E4 E5 F3 G15
    Date: 2020–08
  6. By: Lhuillier, Jean-Paul; Schoenle, Raphael
    Abstract: Less than intended. Therefore, in order to get, say, 2 pp. of extra room for monetary policy, the target needs to be raised to more than 4%. In this paper, we investigate the constraints on a policy aimed at achieving more monetary policy room by raising the inflation target. A theoretical analysis shows that the actual effective room gained when raising the target is always smaller than the intended room. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We derive a simple formula for the effective gain expressed in terms of the potency of monetary policy. We then quantitatively investigate this channel across different models, based on a calibration using micro data. We find that, by raising the target to 4%, the monetary authority only gains between 0.51 and 1.60 percentage points (pp.) of policy room (not 2 pp. as intended). In order to achieve 2 pp. additional policy room, the target needs to be raised to approximately 5%. The quantitative models allow to derive the Bayesian distribution of the effective room under parameter uncertainty.
    Keywords: central bank design; Inflation targeting; liquidity traps; Lucas proof; price stability; Timidity trap; zero lower bound
    JEL: E31 E52 E58
    Date: 2019–11
  7. By: Vladislav Abramov (Bank of Russia, Russian Federation)
    Abstract: Russian monetary policy could translate on the countries of Eurasian Economic Union (EAEU) through different channels. However, there is still a lack of evidence of the significance of so called spillover effects of Russian monetary policy. This work investigates the influence of Russian monetary policy shocks, proxied by shocks of MIACR, on the EAEU countries. For that purpose, firstly, monetary policy shocks were identified via FAVAR model for the Russian economy, estimated on the monthly data of more than 50 indicators. Further, separately for each country of the union VAR models with previously extracted MP shocks were estimated and both impulse response functions (IRF) and forecast error variance decomposition (FEVD) were analysed. The main result of the work is that effects of shocks in MIACR on industrial production and inflation are not statistically significant. At the same time, such shocks have statistically significant effect on money supply, nominal exchange rates and money market rates in some union’s countries. However, obtained effects are mostly small and heterogeneous.
    Keywords: Transmission effects, monetary policy, Eurasian economic union
    JEL: E52 E58 E59
    Date: 2020–07
  8. By: Marco Missaglia (University of Pavia (IT)); Alberto Botta
    Abstract: In this paper we build a simple, almost pedagogical, Keynesian model about the role of liquidity preference in the determination of economic performance. We assume a world of endogenous money, where the banking system is able to fix the interest rate at a level of its own willing. Even in this framework, we show that the Keynesian theory of liquidity preference, while obviously not constituting anymore a theory for the determination of the interest rate, continues to be a fundamental piece of theory for the determination of the level and evolution of aggregate income over time, both in the short and in the medium run. However powerful, the banking system and monetary authorities are not the deus ex-machina of our economies and financial markets are likely to exert a permanent influence on our economic destiny.
    Keywords: Liquidity preference, endogenous money, finance dominance
    JEL: C62 E12 E44
    Date: 2020–07
  9. By: Benjamin Pugsley; Hannah Rubinton
    Abstract: We use an incomplete markets economy to quantify the distribution of welfare gains and losses of the US "Volcker" disinflation. In the long run households prefer low inflation, but disinflation requires a transition period and a redistribution from net nominal borrowers to net nominal savers. Even with perfectly flexible prices, welfare costs may be significant for households with nominal liabilities. When calibrated to match the micro and macro moments of the early 1980s high inflation environment, almost half of all borrowers (14 percent of all households) would prefer to avoid the redistribution and equilibrium effects of the disinflation. This share depends negatively on the liquidity value of money and positively on the average duration of nominal borrowing.
    Keywords: Monetary Policy; Inequality; Redistribution
    JEL: E31 E52
    Date: 2019–12–04
  10. By: Alessio Anzuini (Banca d’Italia)
    Abstract: The Federal Reserve responded to the global financial crisis of 2008 with the deployment of new monetary policy tools, the most notable of them being the expansion of its balance sheet. In a recent paper, Weale and Wiladeck (2016) show that the asset purchases were effective in stimulating economic activity, inflation and asset prices. In this paper, we show that the results of asset purchases are state-dependent: large scale purchases are effective only when financial markets are impaired. Using an estimated threshold vector autoregressive model conditional on the volatility regime, we show that an increase in the balance sheet has expansionary effects on GPD and inflation when volatility is high, but not when it is low (in which case its effects become mostly insignificant). We argue that high volatility can be interpreted as a proxy of market dysfunction, and therefore only when this transmission channel is active is unconventional monetary policy particularly effective. This suggest that models of transmission mechanisms of unconventional policies that are based on asset purchases should focus more on the market functioning channel and not only on the portfolio rebalance channel.
    Keywords: threshold vector autoregression, unconventional monetary policy.
    JEL: C32 E52
    Date: 2020–06
  11. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: The FOMC has stated that it intends to continue implementing monetary policy in a regime with an ample supply of reserves. This Note, the first in a three-part series, provides an introductory discussion of what it means to implement policy in such a regime and how the Fed ensures interest rate control in an environment with an ample supply of reserves in the banking system.
    Date: 2020–07–01
  12. By: cyril Dell'Eva (University of Pretoria, Department of Economics); Eric Girardin (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.); Patrick Pintus (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.)
    Abstract: This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.
    Keywords: capital inflows, carry trades, interest rate differential, vicious circle, inflation targeting
    JEL: E44 E52 E58 F31 G15
    Date: 2020–06
  13. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
    Abstract: We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
    Keywords: Bank credit;Reserve requirements;Interest rates on loans;Central banks;Bank liquidity;Negative interest rates,portfolio rebalancing,bank lending channel,liquidity management,Eurozone crisis,interbank,credit supply,ex-ante,rebalance,negative rate
    Date: 2019–02–28
  14. By: Gießler, Stefan
    Abstract: This paper investigates the forward-lookingness of monetary policy related to stabilising inflation over time under different degrees of central bank credibility in the four largest Latin American economies, which experienced a different transition path to the full-fledged inflation targeting regime. The analysis is based on an interest rate-based hybrid monetary policy rule with time-varying coefficients, which captures possible shifts from a backward-looking to a forward-looking monetary policy rule related to inflation stabilisation. The main results show that monetary policy is fully forward-looking and exclusively reacts to expected inflation under nearly perfect central bank credibility. Under a partially credible central bank, monetary policy is both backward-looking and forward-looking in terms of stabilising inflation. Moreover, monetary authorities put increasingly more priority on stabilising expected inflation relative to actual inflation if central bank credibility tends to improve over time.
    Keywords: forward-lookingness,central bank credibility,inflation targeting,hybrid monetary policy rule,time-varying coefficients
    JEL: C32 E42 E58
    Date: 2020
  15. By: Cappelletti, Giuseppe; Reghezza, Alessio; d’Acri, Costanza Rodriguez; Spaggiari, Martina
    Abstract: We investigate the impact of macroprudential capital requirements on bank lending behaviour across economic sectors, focusing on their potentially heterogenous effects and transmission channel. By employing confidential loan-level data for the euro area over 2015-18, we find that the reaction of banks to structural capital surcharges depends on the level of the required capital buffer and the economic sector of the borrowing counterpart. Although tighter buffer requirements correspond to stronger lending contractions, targeted banks curtail their lending towards credit institutions the most, while leaving loan supply to non-financial corporations almost unchanged. We find that this lending is mitigated when banks resort to central bank funding. These results have important policy implications as they provide evidence on the impact of macroprudential policy frameworks and their interaction with unconventional monetary policies. JEL Classification: E51, E58, E60, G21, G28
    Keywords: credit supply, large exposure, loan-level data, macroprudential policy, unconventional monetary policy
    Date: 2020–07
  16. By: Kevin L. Kliesen; David C. Wheelock
    Abstract: In October 1979, Federal Reserve Chairman Paul Volcker persuaded his FOMC colleagues to adopt a new policy framework that i) accepted responsibility for controlling inflation and ii) implemented new operating procedures to control the growth of monetary aggregates in an effort to restore price stability. These moves were strongly supported by monetarist-oriented economists, including the leadership and staff of the Federal Reserve Bank of St. Louis. The next three years saw inflation peak and then fall sharply, but also two recessions and considerable volatility in interest rates and money supply growth rates. This article reviews the episode through the lens of speeches and FOMC meeting statements of Volcker and St. Louis Fed president Lawrence Roos, and articles by Roos’ staff. The FOMC adopted monetarist principles to establish the Fed’s anti-inflation credibility but Volcker was willing to accept deviations of money growth from the FOMC’s targets, unlike Roos, who viewed the targets as sacrosanct. The FOMC abandoned monetary aggregates in October 1982, but preserved the Fed’s commitment to price stability. The episode illustrates how Volcker used a change in operating procedures to alter policy fundamentally, and later adapt the procedures to changed circumstances without abandoning the foundational features of the policy.
    Keywords: monetarism; inflation; money supply; Federal Open Market Committee; monetary policy; recession
    JEL: E42 E52 E58 N22
    Date: 2020–07–23
  17. By: Michael Woodford; Yinxi Xie
    Abstract: This paper reconsiders the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint on the effectiveness of conventional monetary policy, under an assumption of bounded rationality. In particular, we reconsider the potential role of countercyclical fiscal transfers as a tool of stabilization policy. Because Ricardian Equivalence no longer holds when planning horizons are finite (even when relatively long), we find that fiscal transfers can be a powerful tool to reduce the contractionary impact of an increased financial wedge during a crisis, and can even make possible complete stabilization of both aggregate output and inflation under certain circumstances, despite the binding lower bound on interest rates. However, the power of such policies depends on the degree of monetary policy accommodation. We also show that a higher level of welfare is generally possible if both monetary and fiscal authorities commit themselves to history-dependent policies in the period after the financial disturbance that causes the lower bound to bind has dissipated. Hence forward guidance continues to play an important role in increasing the effectiveness of stabilization policy.
    JEL: E52 E63
    Date: 2020–07
  18. By: Lena Drager; Michael J. Lamla; Damjan Pfajfar
    Abstract: Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.
    Keywords: Macroeconomic expectations; Monetary policy perceptions; Survey microdata
    JEL: D84 E31 E52 E58
    Date: 2020–07–10
  19. By: Monique Reid; Pierre Siklos
    Abstract: We provide a brief historical overview of the rise of central bank communication (CBC) limiting the analysis to the conduct of monetary policy but with a focus on emerging market economies which have been neglected somewhat. After the financial crisis a shift emerged- CBC evolved from being a complement to a substitute for monetary policy actions. We explore the implications of this shift. We conclude CBC must first and foremost always complement central bank decisions. Whether crisis conditions prevail plays an important role in CBC. We list various channels and devices central banks use to communicate. Next, we focus on the key characteristics of CBC, namely credibility, clarity and consistency. The choice is based on the extant literature’s views about the forms of CBC that move markets and expectations the most. Finally, we consider some of the challenges in seeking the best possible CBC strategy. These include- audience heterogeneity; the state of the economy; the volume of CBC. We are especially interested in the impact in emerging markets. Our approach draws on and provides evidence from the international experience but we aim to highlight differences between advanced and emerging market economies. We also speculate about the future of CBC as a result of the pandemic.
    Date: 2020–08–03
  20. By: Eyal Neuman; Alexander Schied; Chengguo Weng; Xiaole Xue
    Abstract: We consider a central bank strategy for maintaining a two-sided currency target zone, in which an exchange rate of two currencies is forced to stay between two thresholds. To keep the exchange rate from breaking the prescribed barriers, the central bank is generating permanent price impact and thereby accumulating inventory in the foreign currency. Historical examples of failed target zones illustrate that this inventory can become problematic, in particular when there is an adverse macroeconomic trend in the market. We model this situation through a continuous-time market impact model of Almgren--Chriss-type with drift, in which the exchange rate is a diffusion process controlled by the price impact of the central bank's intervention strategy. The objective of the central bank is to enforce the target zone through a strategy that minimizes the accumulated inventory. We formulate this objective as a stochastic control problem with random time horizon. It is solved by reduction to a singular boundary value problem that was solved by Lasry and Lions (1989). Finally, we provide numerical simulations of optimally controlled exchange rate processes and the corresponding evolution of the central bank inventory.
    Date: 2020–08
  21. By: Eugenio M Cerutti; Maurice Obstfeld; Haonan Zhou
    Abstract: For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
    Keywords: Interest parity;Foreign exchange markets;Interest rate differential;Monetary policy;Bank rates;Financial crises;Central banks;Interest rate parity;Covered Interest Parity,Interest Rate Differentials,Forward FX M,Forward FX Market,GFC,CIP,VIX,euro area,time-series
    Date: 2019–01–16
  22. By: Hiroshi FUJIKI
    Abstract: The issuance of central bank digital currency became a real policy issue after the announcement of Facebook's Libra. Which types of product attributes should a central bank digital currency have to be widely accepted? We answer this question by analyzing the consumers' acceptance of hypothetical payment instruments. We used Japanese data from the 2019 Financial Literacy Survey to estimate a model of consumers' ranking of the frequency of the use of five payment instruments. The estimates of the model showed that the respondents to the survey value payment instruments with shorter transaction times and mobile payment instruments. Based on the estimates of the model, we conducted counterfactual simulations for the introduction of the hypothetical mobile version of noncash payment methods that required a shorter transaction time. We found that these hypothetical products would be the most frequently used payment methods on average; however, respondents with old, low-income, and low-financial asset holdings, who were likely to be heavy cash users, would use them less frequently. The results suggest that if the Bank of Japan wanted to issue a central bank digital currency that would be used almost every day as a replacement for cash, policy tools should be utilized to encourage the use of it by these groups as well.
    Date: 2020–07
  23. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois
    Abstract: As the role of central banks expanded, demand for public scrutiny of their actions increased. This paper investigates whether parliamentary hearings, the main tool to hold central banks accountable, are fit for this purpose. Using text analysis, it detects the topics and sentiments in parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve from 1999 to 2019. It shows that, while central bank objectives play the most relevant role in determining the topic, unemployment is negatively associated with the focus of hearings on price stability. Sentiments are more negative when uncertainty is higher and when inflation is more distant from the central bank’s inflation aim. These findings suggest that parliamentarians use hearings to scrutinise the performance of central banks in line with their objectives and economic developments, but also that uncertainty is associated with a higher perceived risk of under-performance of central banks. JEL Classification: E02, E52, E58
    Keywords: central bank accountability, monetary policy, text analysis, uncertainty
    Date: 2020–07
  24. By: Alejandro García; Bena Lands; Xuezhi Liu; Joshua Slive
    Abstract: A retail central bank digital currency denominated in Canadian dollars could, in theory, create competition for bank deposit funding. We look at the potential implications increased competition for deposit funding could have on income and liquidity for the six largest Canadian banks, using regulatory data from 2018 and 2019.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E4 E41 E44 E5 G1 G10 G17 G2 G21 G3 G32 O
    Date: 2020–07
  25. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: In staggered price models, a non-CES aggregator of differentiated goods generates empirically plausible short- and long-run trade-offs between output and inflation: lower trend inflation flattens the Phillips curve and decreases steady-state output by increasing markups. We show that the aggregator reduces both the steady-state welfare cost of higher trend inflation and the inflation-related weight in a model-based welfare function for higher trend inflation. Consequently, optimal trend inflation is moderately positive even without considering the zero lower bound on nominal interest rates. Moreover, the welfare difference between 2 percent and 4 percent inflation targets is much smaller than in the CES aggregator case.
    Keywords: non-CES aggregator; output-inflation trade-off; optimal trend inflation
    JEL: E52 E58
    Date: 2020–07–02
  26. By: Johannes Wiegand
    Abstract: In 1871-73, newly unified Germany adopted the gold standard, replacing the silver-based currencies that had been prevalent in most German states until then. The reform sparked a series of steps in other countries that ultimately ended global bimetallism, i.e., a near-universal fixed exchange rate system in which (mostly) France stabilized the exchange value between gold and silver currencies. As a result, silver currencies depreciated sharply, and severe deflation ensued in the gold block. Why did Germany switch to gold and set the train of destructive events in motion? Both a review of the contemporaneous debate and statistical evidence suggest that it acted preemptively: the Australian and Californian gold discoveries of around 1850 had greatly increased the global supply of gold. By the mid-1860s, gold threatened to crowd out silver money in France, which would have severed the link between gold and silver currencies. Without reform, Germany would thus have risked exclusion from the fixed exchange rate system that tied together the major industrial economies. Reform required French accommodation, however. Victory in the Franco-Prussian war of 1870/71 allowed Germany to force accommodation, but only until France settled the war indemnity and regained sovereignty in late 1873. In this situation, switching to gold was superior to adopting bimetallism, as it prevented France from derailing Germany’s reform ex-post.
    Keywords: Currency reform;Fixed exchange rates;Exchange rate regimes;Currency question;Gold;Bimetallism,Gold Standard,France,Germany,Flandreau,specie,silver specie,gold currency
    Date: 2019–02–15
  27. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
    JEL: E44 E52 G12 G14 G35
    Date: 2020–06–01
  28. By: Francesco Luna
    Abstract: Many observers argue that the world has changed after the latest financial crisis. If that is the case, monetary policy and the process informing it will have to be reconsidered and “learned” anew by all stakeholders. Perhaps, a new Taylor rule will emerge. A “Taylor rule” is predicated upon two successful inference exercises: one by the researcher who is interested in identifying the Central Bank’s behavior and one by the Central Bank, which tries to infer how the economy works and interacts with its monetary policy interventions. Because of certain granularities imposed by institutional arrangements and the need for transparent communication in policy making, this paper proposes an analytical framework based on computability theory to model these inference exercises and to assess their general possibility of success. So, is it possible to infer/learn the central bank’s policy rule? The answer is a qualified positive and depends on the “complexity” of the economy and on the quality of information. As for policy implications, the results show that transparency and understandable “reaction functions” will go a long way in fostering learnability.
    Keywords: Central banks;Central banking;Monetary policy instruments;Monetary policy;Monetary authorities;Taylor Rule,learning,computability,computable economics,rational expectations,learnability,policy rule,central bank,time function
    Date: 2019–02–15
  29. By: Juan S Corrales; Patrick A. Imam
    Abstract: Using a newly complied and extended database from International Financial Statistics, and applying different panel-regression techniques, this paper documents the evolution of households’ and firms’ dollarization over the past decade. We assess the macroeconomic determinants of dollarization for households and firms and explore differences between high and low-income countries. We find that households’ and firms’ dollarization in loans and deposits are weakly explained by the currency substitution model, except in low income countries, where inflation plays a significant role. Instead, market development variables such as financial deepening, access to external debt and FX finance as well as other market considerations are key to explain the dynamics of deposits and loans dollarization, regardless of the level of income.These factors can account for a significant fraction of the dollarization, but using a variance decomposition model, there is evidence that a non-negligible portion has yet to be explained. This suggests that there are key determinants for household and firm dollarization that are not fully captured by traditional macroeconomic explanatory variables.
    Keywords: Dollarization;Foreign exchange;Monetary policy;Exchange rate policy;Central banks;Financial crises;Real interest rates;Interest rate differential;Household,Firm,Financial deepening,Monetary Policy (Targets,Instruments,and Effects),General,International Monetary Arrangements and Institutions,low income country,income country,high income country,deposit rate,p-value
    Date: 2019–01–22
  30. By: Maliar, Lilia; Naubert, Christopher
    Abstract: We show that the standard two-agent new Keynesian (TANK) model without capital is able to produce monetary policy amplification and no forward guidance puzzle. This finding contrasts with the previous literature that argued that both results cannot be achieved simultaneously. Our key ingredient is output stabilization in the Taylor rule, and we do not rely on the presence of idiosyncratic uncertainty. For both deterministic and stochastic versions, we derive novel closed form solutions for all conceivable cases of eigenvalues and analyze the effects of redistribution between participants and non-participants in asset markets. A stochastic version of the model predicts that positive productivity shocks always worsens consumption inequality, which is counterfactual. Finally, we built a version of the model with capital which realistically predicts that consumption inequality can either increase or decrease in response to shocks. Moreover, the forward guidance puzzle is resolved even without output stabilization in the Taylor rule.
    Keywords: forward guidance; New Keynesian Model; redistribution; TANK
    JEL: C61 C63 C68 E31 E52
    Date: 2019–11
  31. By: Janet Hua Jiang
    Abstract: This note discusses insights from historical launches of new payment methods and related laboratory experiments on the potential adoption and use of a central bank digital currency in the Canadian context.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: C9 E4 E5 E58
    Date: 2020–06
  32. By: Angela Abbate; Sandra Eickmeier; Esteban Prieto
    Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.
    Keywords: Financial shocks, inflation dynamics, monetary policy, financial frictions, cost channel, sign restrictions
    JEL: E31 E44 E58
    Date: 2020
  33. By: Fernando E. Alvarez; Francesco Lippi; Aleksei Oskolkov
    Abstract: We give a thorough analytic characterization of a large class of sticky-price models where the firm’s price setting behavior is described by a generalized hazard function. Such a function provides a tractable description of the firm’s price setting behavior and allows for a vast variety of empirical hazards to be fitted. This setup is microfounded by random menu costs as in Caballero and Engel (1993) or, alternatively, by information frictions as in Woodford (2009). We establish two main results. First, we show how to identify all the primitives of the model, including the distribution of the fundamental adjustment costs and the implied generalized hazard function, using the distribution of price changes or the distribution of spell durations. Second, we derive a sufficient statistic for the aggregate effect of a monetary shock: given an arbitrary generalized hazard function, the cumulative impulse response to a once-and-for-all monetary shock is given by the ratio of the kurtosis of the steady-state distribution of price changes over the frequency of price adjustment times six. We prove that Calvo’s model yields the upper bound and Golosov and Lucas’ model the lower bound on this measure within the class of random menu cost models.
    JEL: C41 C61 E31
    Date: 2020–06
  34. By: Ayse Dur; Enrique Martínez-García
    Abstract: In many countries, inflation has become less responsive to domestic factors and more responsive to global factors over the past decades. We introduce money and credit into the workhorse open-economy New Keynesian model. With this framework, we show that: (i) an efficient forecast of domestic inflation is based solely on domestic and foreign slack, and (ii) global liquidity (global money as well as global credit) is tied to global slack in equilibrium. Then, motivated by the theory, we evaluate empirically the performance of open-economy Phillips-curve-based forecasts constructed using global liquidity measures (such as G7 credit growth and G7 money supply growth) instead of global slack as predictive regressors. Using 50 years of quarterly U.S. data, we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly-measured indicators of global slack that global liquidity proxies for.
    Keywords: Open-Economy New Keynesian Model; Global Liquidity; New Open-Economy Phillips Curve; Forecasting; Global Slack
    JEL: C53 F41 F44 F47 F62
    Date: 2020–06–26
  35. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration, Kobe University, Japan); Wataru Takahashi (Faculty of Economics, Osaka University of Economics, Japan); Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University, Japan)
    Abstract: Although various studies examine how monetary policy affects the economy using real-world data, a consensus has yet to be reached. This study reviews and assesses the monetary policy implemented by the Bank of Japan, focusing on policies that employ short-term interest rate as the operational target. Our review of empirical studies on monetary policy that influenced the policy of the Bank of Japan prior to and during the 1980s reveals that the studies focused on (1) bank behavior, (2) the interest rate mechanism, (3) financial deregulation and monetary aggregates, and (4) the systematic reaction regarding the achievement of the ultimate goal. Our empirical results on the causal effect of monetary policy in the framework of a structural vector autoregressive model attest to the significant impact of Japan’s monetary policy on the financial market and macroeconomy from the 1980s onward. Our counterfactual simulations affirm that the central bank should consistently shift its policy stance to achieve macroeconomic stability. Moreover, even tiny policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery.
    Keywords: Japanese macroeconomy; Short-term interest rate; Causal effect of monetary policy; Counterfactual simulation; Vector autoregressive model
    Date: 2020–03
  36. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We provide a new explanation for why central banks have become transparent over the last three decades. We apply recently developed social interaction panel regression models for the observational data, which allow the identification of peer effects. The identification is based on variations in the past monetary policy régime exogenously determined with respect to transparency. Previous literature has argued that domestic factors such as macroeconomic stability were behind the trend toward greater transparency. In contrast, our results indicate that transparency primarily increased because of a favorable global environment and, importantly, because of the peer effects among central bankers. Central bankers thus learned from each other's experiences regarding transparency. To our knowledge, our paper is the first econometric analysis of peer effects among public institutions or in the macroeconomic literature. Despite being the best available, existing data is still imperfect, and we therefore call for better data in the form of MNCs’ unconsolidated, public country-by-country reporting data.
    Keywords: peer effects, central banks, transparency
    JEL: C31 D83 E58
    Date: 2020–08
  37. By: Adrian Penalver; Nobuyuki Hanaki; Eizo Akiyama; Yukihiko Funaki
    Abstract: We experimentally investigate the effect of a central bank buying bonds for cash in a quantitative easing (QE) operation. In our experiment, the bonds are perfect substitutes for cash and have a constant fundamental value which is not affected by QE in the rational expectations equilibrium. We find that QE raises bond prices above those in the benchmark treatment without QE. Subjects in the benchmark treatment learned to trade the bonds at their fundamental value but those in treatments with QE became more convinced after repeated exposure to the same treatment that QE boosts bond prices. This suggests the possibility of a behavioural channel for the observed effects of actual QE operations on bond yields.
    Date: 2020–07
  38. By: Daiki Maeda
    Abstract: Based on findings in the behavioral economics literature, I incorporate non-unitary discounting into a monetary search model to study optimal monetary policy. I apply non-unitary discounting, that is, discount rates that are different across goods. With this extension to the model, I find that there are cases where optimal monetary policy deviates from the Friedman rule.
    Date: 2019–09
  39. By: L. Randall Wray
    Abstract: Modern money theory (MMT) synthesizes several traditions from heterodox economics. Its focus is on describing monetary and fiscal operations in nations that issue a sovereign currency. As such, it applies Georg Friedrich Knapp's state money approach (chartalism), also adopted by John Maynard Keynes in his Treatise on Money. MMT emphasizes the difference between a sovereign currency issuer and a sovereign currency user with respect to issues such as fiscal and monetary policy space, ability to make all payments as they come due, credit worthiness, and insolvency. Following A. Mitchell Innes, however, MMT acknowledges some similarities between sovereign and nonsovereign issues of liabilities, and hence integrates a credit theory of money (or, "endogenous money theory," as it is usually termed by post-Keynesians) with state money theory. MMT uses this integration in policy analysis to address issues such as exchange rate regimes, full employment policy, financial and economic stability, and the current challenges facing modern economies: rising inequality, climate change, aging of the population, tendency toward secular stagnation, and uneven development. This paper will focus on the development of the "Kansas City" approach to MMT at the University of Missouri-Kansas City (UMKC) and the Levy Economics Institute of Bard College.
    Keywords: Modern Money Theory (MMT); Functional Finance; Chartalism; State Theory of Money; Sectoral Balances; Kansas City Approach; Job Guarantee; Sovereign Currency
    JEL: B1 B2 B52 E12 E5
  40. By: David A. Grigorian
    Abstract: Malaysia’s local currency debt market is one of the most liquid public debt markets in the world. In recent years, the growing share of nonresident holders of debt has been a source of concern for policymakers as a reason behind exchange rate volatility. The paper provides an overview of the recent developments in the conventional debt market. It builds an empirical two-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it uses a GARCH model to test the hypothesis that nonresident flows are behind the observed exchange rate volatility. The results suggest that the public debt market in Malaysia responds adequately to both pull and push factors and find no firm evidence that nonresident flows cause volatility in the onshore foreign exchange market.
    Keywords: Debt markets;Capital flows;Exchange rates;Foreign exchange market volatility;Bond markets;Asset prices;International financial markets;Currencies;Exchange markets;Supply and demand;Financial crises;Exchange risk;Economic growth;nonresident investors,volatility,Asset Pricing,MGS,debt market,market volatility,investor base
    Date: 2019–01–25
  41. By: Barthelemy, Jean; Mengus, Eric; Plantin, Guillaume
    Abstract: This paper studies how private demand for public liquidity affects the independence of a central bank vis-a-vis the fiscal authority. Whereas supplying liquidity to the private sector creates degrees of freedom for fiscal and monetary authorities vis-a-vis each other, we show that the authority that is most able to attract private liquidity demand can ultimately impose its views to the other.
    Date: 2019–11
  42. By: Svatopluk Kapounek (Mendel University in Brno, Faculty of Business and Economics); Zuzana Kucerova (Mendel University in Brno, Faculty of Business and Economics); Evzen Kocenda (Institute of Economic Studies, Charles University)
    Abstract: We analyze the exchange rate forecasting performance under the assumption of selective attention. Although currency markets react to a variety of different information, we hypothesize that market participants process only a limited amount of information. Our analysis includes more than 100,000 news articles relevant to the six most-traded foreign exchange currency pairs for the period of 1979-2016. We employ a dynamic model averaging approach to reduce model selection uncertainty and to identify time-varying probability to include regressors in our models. Our results show that considering selective attention improves forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the Euro/United States of America dollar currency pair following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.
    Keywords: exchange rate, selective attention, news, dynamic model averaging
    JEL: F33 C11
    Date: 2020–07
  43. By: Marco Missaglia (University of Pavia (IT))
    Abstract: What does “dollarization” mean in a world of endogenous money, i.e. a world where money is not (only) created by printing pieces of paper, but (mainly) by making loans? Is it true that dollarization only constitutes a limitation of sovereignty in the short run (making it harder to run standard stabilization macro policies) or can it slow the growth process of a country? The paper builds a theoretical, Keynesian-Kaleckian growth model for a dollarized economy in a framework of endogenous money to answer these questions. We will show that, ceteris paribus, the steady-state medium-term growth rate of a dollarized economy is lower than that of a country with its own currency. We will also show that a dollarized economy is more likely to be unstable than an economy with its own currency, in the specific sense that, everything else being equal, it is more likely for a dollarized economy to fall into a debt trap.
    Keywords: Dollarization, Keynesian Macro Models
    JEL: E12 F41
    Date: 2020–07
  44. By: Liu, Emily; Niepmann, Friederike; Schmidt-Eisenlohr, Tim
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks' capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: emerging markets; monetary policy spillovers; stress tests; U.S. bank lending
    JEL: E44 F31 G15 G21 G23
    Date: 2019–11
  45. By: R. G Gelos; Tommaso Mancini Griffoli; Machiko Narita; Federico Grinberg; Umang Rawat; Shujaat Khan
    Abstract: Has monetary policy in advanced economies been less effective since the global financial crisis because of deteriorating household balance sheets? This paper examines the question using household data from the United States. It compares the responsiveness of household consumption to monetary policy shocks in the pre- and post-crisis periods, relating changes in monetary transmission to changes in household indebtedness and liquidity. The results show that the responsiveness of household consumption has diminished since the crisis. However, household balance sheets are not the culprit. Households with higher debt levels and lower shares of liquid assets are the most responsive to monetary policy, and the share of these households in the population grew. Other factors, such as economic uncertainty, appear to have played a bigger role in the decline of households’ responsiveness to monetary policy.
    Keywords: Monetary policy;Household consumption;Monetary transmission mechanism;Balance sheets;Financial crises;Monetary policy instruments;Interest rate policy;Economic policy;transmission,households,real estate,leverage,Financial Markets and the Macroeconomy,Monetary Policy (Targets,Instruments,and Effects),Consumer Economics: Empirical Analysis,post-crisis,non-durable,consumption growth,indebtedness,liquid asset
    Date: 2019–01–15
  46. By: Bilbiie, Florin Ovidiu; Känzig, Diego R; Surico, Paolo
    Abstract: A novel complementarity between capital and income inequality leads to a significant amplification of the effects of monetary policy on consumption: a multiplier of the multiplier. We characterize this finding analytically, in a simple saver-spender model, and quantitatively, in a framework featuring nominal rigidities, capital investment, idiosyncratic risk and heterogeneity in household saving and income. A fiscal policy that redistributes profits dampens the monetary policy effects, whereas redistributing capital income yields further amplification. Our model's testable prediction that consumption inequality is more counter-cyclical than income inequality in response to an interest rate shock is consistent with the available empirical evidence.
    Keywords: aggregate demand; Capital; Complementarity; Heterogeneity; Income inequality; monetary policy; multiplier
    JEL: E21 E22 E32 E44 E52
    Date: 2019–11
  47. By: Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics Research, CeBER andFaculty of Economics)
    Abstract: Despite some recent evidence according to which different inflation rates have effects on long run growth, endogenous growth theory had advanced little on explaining the mechanics of monetary influence on economic growth. We follow the increasing interest in the issue offering a new explanation for the influence of monetary policy on growth in both long and short run: the cash requirements for households expenditures in education. Quantitatively, the model replicates both the small influence of monetary policy on growth while also highlighting the effects it can have on welfare and allocations of resources throughout different sectors in the economy.
    Keywords: endogenous economic growth, inflation, interest rate, monetary policy, cash-in-advance (CIA).
    JEL: O30 O40 E13 E17 E61
    Date: 2020–07
  48. By: Lorie Logan
    Abstract: Remarks at SIFMA Webinar.
    Keywords: markets; purchases; functioning; liquidity; Treasury; securities; spreads; pandemic; COVID-19; mortgage-backed securities (MBS); FOMC; open market operations; commitment; flexibility
    Date: 2020–07–15
  49. By: Alessio Ciarlone (Bank of Italy); Daniela Marconi (Bank of Italy)
    Abstract: Financial integration of emerging economies is on the rise and so are financial and monetary spillovers, especially those originating from US economic policy decisions and the (related) evolution of the US dollar. We revisit the “trilemma” vs. “dilemma” hypothesis and assess whether, and to what extent, exchange rate regimes and other relevant country fundamentals affect the sensitivity of domestic financial conditions to global risk aversion and US financial conditions. Results for a sample of 17 emerging economies over the period 1990-2018 suggest that the trilemma hypothesis appears to be still valid, as more flexible exchange rate regimes help in mitigating spillovers to stock market returns, sovereign spreads and real credit growth. However, other country fundamentals such as the current account, trade integration and US dollar debt exposure are also important factors.
    Keywords: trilemma, global financial cycle, financial conditions, emerging market economies, international policy transmission, spillovers
    JEL: E42 E44 E52 F31 F36 F41 G15
    Date: 2020–07
  50. By: Ozge Akinci; Gianluca Benigno; Albert Queraltó
    Abstract: The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as sudden stop episodes, and are typically followed by economic contractions.
    Date: 2020–07–02
  51. By: Frédérique Bec (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique); Mélika Ben Salem (AUF - Agence Universitaire de la Francophonie)
    Abstract: This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might react differently to under-evaluation or over-evaluation of their currency because of the trade-off between fostering their net exports and maintaining their international purchasing power. Our approach departs from existing works by considering explicitly both size and sign effects: the strength of the overshooting correction mechanism is indeed allowed to differ between large and small depreciations and appreciations. Evidence of overshooting correction is found in most G20 countries. Formal statistical tests confirm sign and/or size asymmetry of the overshooting correction mechanism in most countries. It turns out that the overshooting correction specification is heterogeneous among countries, even though most of Emerging Market and Developing Economies are found to adjust to over-depreciation whereas the Euro Area and the US are shown to adjust to over-appreciation only.
    Keywords: nominal exchange rate,asymmetrical overshooting correction
    Date: 2020–07–29

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