nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒08‒31
forty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Drivers of consumer prices and exchange rates in small open economies By Corbo, Vesna; Di Casola, Paola
  2. Banks, Money, and the Zero Lower Bound on Deposit Rates By Michael Kumhof; Xuan Wang
  3. Uncertain accommodative policies as tools for financial stability: recent developments By Ojo, Marianne; Roedl, Marianne
  4. Forward Guidance Matters: disentangling monetary policy shocks By Leonardo N. Ferreira
  5. A Quantitative Model for the Integrated Policy Framework By Tobias Adrian; Christopher J. Erceg; Jesper Lindé; Pawel Zabczyk; Jianping Zhou
  6. Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework By Luis Brandao-Marques; R. G Gelos; Machiko Narita; Erlend Nier
  7. The Impact of Quantitative Easing on Liquidity Creation By Supriya Kapoor; Oana Peia
  8. The Advantages of an Independent Currency for Mitigating the Economic Impact of External Shocks Using the Example of the Coronavirus Pandemic: A Comparison of the Czech Republic and Slovakia By Miroslav Sevcik; Adela Zubikova; Pavel Smolak
  9. Global Liquidity Traps By Kollmann, Robert
  10. Liquidity, the Mundell-Tobin Effect, and the Friedman Rule By Lukas Altermatt; Christian Wipf
  11. Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  12. The interaction of monetary and financial tasks in different central bank structures By Houben, Aerdt; Kakes, Jan; Petersen, Annelie
  13. Lower bound uncertainty and long-term interest rates By Christian Grisse
  14. Currency Democracy: The Theory of Organic Global Monetary - Summary By Rahman, Abdurrahman Arum
  15. Does Policy Communication During COVID Work? By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; Michael Weber
  16. "Are We All MMTers Now? Not so Fast" By Yeva Nersisyan; L. Randall Wray
  17. Patterns in invoicing currency in global trade By Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Casas, Camila; Boz, Emine; Nguyen, Tra; Gopinath, Gita
  18. Independent or lonely? Central banking in crisis By Mabbett, Deborah; Schelkle, Waltraud
  19. A Conceptual Model for the Integrated Policy Framework By Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
  20. CBDC: A systemic perspective By Bofinger, Peter; Haas, Thomas
  21. The simpler the better: measuring financial conditions for monetary policy and financial stability By Bobasu, Alina; Venditti, Fabrizio; Arrigoni, Simone
  22. Measuring the Effectiveness of US Monetary Policy during the COVID-19 Recession By Martin Feldkircher; Florian Huber; Michael Pfarrhofer
  23. It is Only Natural: Europe’s Low Interest Rates By Marco Arena; Gabriel Di Bella; Alfredo Cuevas; Borja Gracia; Vina Nguyen; Alex Pienkowski
  24. The interbank market, Keynes’s degree of confidence and the link between banks’ liquidity and solvency By Konstantinos Loizos
  25. Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts By Lutz Kilian; Xiaoqing Zhou
  26. The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency: Pre-Crisis Era Revisited By Asongu, Simplice; Nnanna, Joseph; Tchamyou, Vanessa
  27. Global Banks’ Dollar Funding: A Source of Financial Vulnerability By Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
  28. A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet By Gara Afonso; Marco Cipriani; Gabriele La Spada; Will Riordan
  29. The Evolution of Offshore Renminbi Trading: 2016 to 2019 By Yin-Wong Cheung; Louisa Grimm; Frank Westermann
  30. Towards a new index of mobile money inclusion and the role of the regulatory environment By Tetteh, Godsway Korku; Goedhuys, Micheline; Konte, Maty; Mohnen, Pierre
  31. Liquidity Traps in a Monetary Union By Kollmann, Robert
  32. Patent Puzzle, Inflation, and Internal Financial Constraint By Suzuki, Keishun
  33. Short and long-run determinants of inflation in Tunisia By Boukraine, Wissem
  34. Cross Currency Valuation and Hedging in the Multiple Curve Framework By Alessandro Gnoatto; Nicole Seiffert
  35. Money flow network among firms' accounts in a regional bank of Japan By Yoshi Fujiwara; Hiroyasu Inoue; Takayuki Yamaguchi; Hideaki Aoyama; Takuma Tanaka
  36. Capital flow deflection under the magnifying glass By Filippo Gori; Etienne Lepers; Caroline Mehigan
  37. Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows By Emter, Lorenz
  38. The Microstructure of Endogenous Liquidity Provision By F. Douglas Foster; Xue-Zhong He; Junqing Kang; Shen Lin
  39. Bank lending in Switzerland: Capturing cross-sectional heterogeneity and asymmetry over time By Toni Beutler; Matthias Gubler; Simona Hauri; Sylvia Kaufmann
  40. Importance of interest rates on the credit market in Slovakia By Adriana Novotná
  41. The intertwining of credit and banking fragility By Jérôme Creel; Paul Hubert; Fabien Labondance
  42. Exchange rate misalignments, growth, and institutions By Jaromir Baxa; Michal Paulus

  1. By: Corbo, Vesna (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We study the fluctuations of exchange rates and consumer prices in two small open economies, Sweden and Canada, using a structural Bayesian VAR. Four domestic and two global shocks are identified through zero and sign restrictions. For both economies, we find that the main driver of consumer price inflation is the global demand shock. A negative global demand shock is not only deflationary for the small open economy, but also depreciates its currency. Hence, the observed exchange rate pass-through following this shock is of opposite sign to what is usually expected. Finally, exogenous shocks to the Exchange rate are less important drivers of exchange rate movements than in many other structural models.
    Keywords: Exchange rate pass-through; consumer prices; import prices; monetary policy; global shocks; SVAR
    JEL: E31 E52 F31 F41
    Date: 2020–03–01
  2. By: Michael Kumhof (Bank of England); Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: We develop a New Keynesian model where all payments between agents require bank deposits through deposits-in-advance constraints, bank deposits are created through disbursement of bank loans, and banks face a convex lending cost. At the zero lower bound on deposit rates (ZLBD), changes in policy rates affect activity through both real interest rates and banks’ net interest margins (NIM). At estimated credit supply elasticities, the Phillips curve is very flat at the ZLBD, because inflationary pressures increase NIM. This strongly increases credit and thereby output, but it dampens inflation by relaxing price setters’ credit rationing constraint. At the ZLBD, monetary policy has far larger effects on output relative to inflation, and Taylor rules stabilize output less effectively than rules that also respond to credit. For post-COVID-19 policy, this suggests urgency in returning inflation to targets, avoidance of negative policy rates, and a strong influence of credit conditions on rate setting.
    Keywords: Banks, money creation, inside money, money demand, deposits-in-advance, Phillips curve, zero lower bound, monetary policy rules, Taylor rules, post-COVID-19 reforms
    JEL: E41 E44 E51 G21
    Date: 2020–08–20
  3. By: Ojo, Marianne; Roedl, Marianne
    Abstract: The need to address issues pertaining to legal uncertainty, sound governance, public policy considerations – as well as forecasting techniques as a means of mitigating uncertainties in an environment where confidence the inflation target is low, are amongst some of the objectives which this paper aims to address. Innovative possibilities and opportunities of e digital currencies are then considered – particularly growing considerations of certain central banks to issue their own central bank digital currencies. Questions which still need to be addressed relating to the interest rates to be attached to such currencies and whether or not such interest rates should apply. Further considerations relate to whether the inflation targets should be raised. These innovative possibilities are considered – with further recommendations for research – before a conclusion is drawn. This paper constitutes a chapter to the volume “Rethinking Regulation and Monetary Policies”.
    Keywords: Leaning Against the Wind Policy; financial stability; monetary policies; interest rates; inflation targeting; stable coins; central banks; regulation; crypto assets
    JEL: E43 E44 F6 K20
    Date: 2020–08–04
  4. By: Leonardo N. Ferreira
    Abstract: Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information –high frequency surprises and narrative evidence – with sign restrictions in a structural vector autoregressive (VAR) model to fully disentangle the effects of forward guidance shocks from the effects of conventional monetary policy shocks. Results show that conventional monetary policy has the expected effects even in a recent US sample, in contrast with the evidence reported by Barakchian and Crowe (2013) and Ramey (2016), and that forward guidance is an effective policy tool. In fact, it is at least as strong as conventional monetary policy.
    Date: 2020–08
  5. By: Tobias Adrian; Christopher J. Erceg; Jesper Lindé; Pawel Zabczyk; Jianping Zhou
    Abstract: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
    Date: 2020–07–07
  6. By: Luis Brandao-Marques; R. G Gelos; Machiko Narita; Erlend Nier
    Abstract: This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.
    Date: 2020–07–07
  7. By: Supriya Kapoor; Oana Peia
    Abstract: We study the effects of the US Federal Reserve's large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks' loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This points to a weaker impact of quantitative easing on the real economy during the first two rounds, when affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages.
    Keywords: Large-scale asset purchases; Quantitative easing; Liquidity creation; Bank lending
    JEL: E52 E58 G21
    Date: 2020–04
  8. By: Miroslav Sevcik (Faculty of Economics, University of Economics, Prague); Adela Zubikova (Faculty of Economics, University of Economics, Prague); Pavel Smolak (Faculty of Economics, University of Economics, Prague)
    Abstract: The content of the paper defines and characterizes five key arguments for why, given the absence of an optimal monetary area, it is advantageous for an economy to be able to dispose of its own currency during periods of crisis, such as the current coronavirus pandemic. The article bases its arguments on the optimal currency area theory and the Mundell-Fleming model. The analytical part of the article approaches the example of the Czech Republic and the Slovak Republic, a well-matched comparison given that they are both small open economies with a common history but also because they faced the coronavirus pandemic at the same time and were affected to a similar extent. Unlike its Czech neighbour, the Slovak Republic adopted a single currency, the Euro, in 2009 and therefore became a member of the eurozone. Therefore, the use of its own currency to mitigate the coronavirus pandemic effects can be approximated by comparing the two countries. The analysis in this article results in the identification of the following five arguments for the advantage of having an independent currency: 1) absence of an optimal monetary area in the eurozone, 2) an independent monetary policy, 3) foreign trade support, 4) mitigating the effects of the coronavirus pandemic on price level changes, 5) supporting domestic production and services. The coronavirus pandemic has deepened the already existing problems of the eurozone and has clearly demonstrated the benefits of maintaining an independent currency in the case of the Czech Republic.
    Keywords: Monetary union, Czech crown, Euro area, International trade, Czech Republic, Slovakia, COVID-19, pandemic crisis
    JEL: E42 E58 F40
  9. By: Kollmann, Robert
    Abstract: This paper studies fluctuations of interest rates, inflation and output in a two-country New Keynesian business cycle model with a zero lower bound (ZLB) constraint for nominal interest rates. The presence of the ZLB generates multiple equilibria driven by self-fulfilling changes in domestic and foreign inflation expectation. Each country randomly switches in and out of a liquidity trap. In a floating exchange rate regime, liquidity traps can either be synchronized or unsynchronized across countries. This is the case even if countries are perfectly financially integrated. By contrast, in a monetary union, self-fulfilling fluctuations in inflation expectations must be perfectly correlated across countries.
    Keywords: Zero lower bound, liquidity trap, global business cycles
    JEL: E3 E4 F2 F3 F4
    Date: 2020–04–15
  10. By: Lukas Altermatt; Christian Wipf
    Abstract: We investigate how the Mundell-Tobin effect, i.e., a positive relation between in flation and capital investment, changes the optimal monetary policy prescription in a framework that combines overlapping generations and new monetarist models. We find that the Friedman rule is optimal if and only if there is no Mundell-Tobin effect. A Mundell-Tobin effect is more likely to occur at the Friedman rule if capital is relatively liquid, and if the agents' risk aversion is relatively low. If the Friedman rule is not optimal, the optimal money growth rate lies between the Friedman rule and a constant money stock. We also show that it is more efficient to implement de flationary monetary policies by raising lump-sum taxes on old agents only.
    Keywords: New monetarism, overlapping generations, optimal monetary policy
    JEL: E4 E5
    Date: 2020–08
  11. By: Qazi Haque (University of Western Australia and CAMA); Nicolas Groshenny (University of Adelaide and CAMA); Mark Weder (Department of Economics and Business Economics, Aarhus University and CAMA)
    Abstract: The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era. However, had the Federal Reserve in the Seventies followed the policy rule of the Volcker-Greenspan-Bernanke period, inflation volatility would have been lower by one third.
    Keywords: Monetary policy, Trend inflation, Great Inflation, Cost-push shocks, Indeterminacy
    JEL: E32 E52 E58
    Date: 2020–08–14
  12. By: Houben, Aerdt; Kakes, Jan; Petersen, Annelie
    Abstract: This article describes how the institutional set-up of central bank tasls policies differs across Europe and discusses central bank involvement. In some jurisdictions (like Austria) the central bank continues to focus on its core monetary tasks, whereas in other jurisdictions (like the Netherlands) the central bank also plays a prominent role in non-monetary financial policy fields. The purpose of this article is to i) map out how traditional and new policy tools are organized across Europe, ii) discuss how these policy instruments interact, iii) review the pros and cons of central bank involvement, and iv) discuss how the organization of policies – particularly the role of the central bank – may be related to country-specific features (like the importance of large, systemic banks).
    Keywords: Central banks, monetary policy, lender of last resort, macroprudential policy, supervision, resolution
    JEL: E52 E58 G28 G38
    Date: 2020–08
  13. By: Christian Grisse
    Abstract: Nominal interest rates are constrained by an effective lower bound, but the level of the lower bound is uncertain. This paper uses a simple shadow rate term structure model to study how lower bound uncertainty affects long-term interest rates. The main result is that a decline in lower bound uncertainty, in the sense of a mean-preserving contraction of the lower bound distribution, is associated with a drop in expected future short rates. The effect on the variance of future short rates, and hence the term premium, is ambiguous. A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in long-term interest rates.
    Keywords: Monetary policy, negative interest rates, lower bound, uncertainty, term structure
    JEL: E43 E52
    Date: 2020
  14. By: Rahman, Abdurrahman Arum
    Abstract: We proposed a model of democratic and symmetrical international monetary without the need for economic integration. The model name is “organic global monetary” (OGM) or simply called “organic model”. The organic model is an international currency system developed jointly by all countries in the world, or member countries and is part of their respective national currencies. The organic model is natural, elegant, and very comprehensive, provides international currencies “free of charge” to all member countries, does not require foreign exchange reserves, eliminates exchange rate cost and fluctuations, makes “zero-depreciated” international currencies, eliminates foreign debt dependence, abolishing trade wars at all levels, releases countries from the middle-income trap (MIT); eliminates global imbalances, and completely eliminate currency crisis.
    Date: 2020–05–07
  15. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; Michael Weber
    Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households’ expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
    Keywords: subjective expectations, fiscal policy, monetary policy, COVID-19, surveys
    JEL: E31 C83 D84 J26
    Date: 2020
  16. By: Yeva Nersisyan; L. Randall Wray
    Abstract: As governments around the world explore ambitious approaches to fiscal and monetary policy in their responses to the COVID-19 crisis, Modern Money Theory (MMT) has been thrust into the spotlight once again. Unfortunately, many of those invoking the theory have misrepresented its central tenets, according Yeva Nersisyan and L. Randall Wray. MMT provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, nonconvertible currencies. In the context of articulating the elements of that analysis, Nersisyan and Wray draw out one of the lessons to be learned from the pandemic and its policy responses: that the government’s ability to run deficits is not limited to times of crisis; that we must build up our supplies, infrastructure, and institutions in normal times, and not wait for the next crisis to live up to our means.
    Date: 2020–04
  17. By: Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Casas, Camila; Boz, Emine; Nguyen, Tra; Gopinath, Gita
    Abstract: This paper presents the most comprehensive and up-to-date panel data set of invoicing currencies in global trade. It provides data on the shares of exports and imports invoiced in US dollars, euros, and other currencies for more than 100 countries since 1990. The evidence from these data confirms findings from earlier research regarding the globally dominant role of the US dollar in invoicing – despite the comparatively smaller role of the US in global trade – and the overall stability of invoicing currency patterns. But the evidence also points to several novel stylised facts. First, both the US dollar and the euro have been increasingly used for invoicing even as the share of global trade accounted for by the US and the euro area has declined. Second, the euro is used as a vehicle currency in parts of Africa, and some European countries have seen significant shifts toward euro invoicing. And third, as suggested by the dominant currency paradigm, countries invoicing more in US dollars (euros) tend to experience greater US dollar (euro) exchange rate pass-through to their import prices; also, their trade volumes are more sensitive to fluctuations in these exchange rates. JEL Classification: F14, F31, F44
    Keywords: dominant currency paradigm, exchange rate pass-through, invoicing currency of trade
    Date: 2020–08
  18. By: Mabbett, Deborah; Schelkle, Waltraud
    Abstract: The financial crisis has called our understanding of central bank independence (CBI) into question. Central banks were praised for bold interventions but simultaneously criticized for overreaching their mandates. Central bankers themselves have complained that they are ‘the only game in town’. We develop the second generation theory of CBI to understand how independence can turn into loneliness when a financial crisis calls for cooperation between fiscal authorities and the central bank. Central banks are protected from interference when there are multiple political veto-players, but the latter can also block cooperation. Furthermore, central banks in multi-veto-player systems operate under legal constraints on their financial stabilization actions. They can circumvent these constraints, but this invites criticism and retribution. More surprisingly, central banks have strategically invoked their constraints to gain cooperation from political authorities.
    Keywords: central bank independence; delegation; financial crisis; monetary policy; veto-players; strategic agents
    JEL: E58
    Date: 2019–01–28
  19. By: Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
    Abstract: In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.
    Date: 2020–07–07
  20. By: Bofinger, Peter; Haas, Thomas
    Abstract: In this study, we provide a systemic perspective on central bank digital currencies (CBDC). We separate existing proposals for CBDCs into the perspective of new payment objects, made available by central banks to a broader public, and new payment systems, operated by central banks. From a systemic perspective, CBDC proposals need to be examined to see how they would fit into the existing ecosystem of national, supra-regional, and international payment systems. To analyze the main implications of introducing CBDCs, we provide a price-theoretical banking model, which allows private non-banks to switch between holding bank deposits and CBDCs. In addition to the CBDC payment objects, we also present the option of a store-of-value CBDC. While most CBDC proposals incorporate new payment objects with new or existing payment systems, we discuss whether central banks could establish new payment systems without offering a new payment object.
    Keywords: central bank digital currency,central banks,payment systems
    JEL: E42 E52 E58 G21
    Date: 2020
  21. By: Bobasu, Alina; Venditti, Fabrizio; Arrigoni, Simone
    Abstract: In this paper we assess the merits of financial condition indices constructed using simple averages versus a more sophisticated alternative that uses factor models with time varying parameters. Our analysis is based on data for 18 advanced and emerging economies at a monthly frequency covering about 70% of the world’s GDP. We use four criteria to assess the performance of these indicators, namely quantile regressions, Structural Vector Autoregressions, the ability of the indices to predict banking crises and their response to US monetary policy shocks. We find that averaging across the indicators of interest, using judgemental but intuitive weights, produces financial condition indices that are not inferior to, and actually perform better than, those constructed with more sophisticated statistical methods. JEL Classification: E32, E44, C11, C55
    Keywords: banking crises, financial conditions, quantile regressions, spillovers, SVARs
    Date: 2020–08
  22. By: Martin Feldkircher; Florian Huber; Michael Pfarrhofer
    Abstract: The COVID-19 recession that started in March 2020 led to an unprecedented decline in economic activity across the globe. To fight this recession, policy makers in central banks engaged in expansionary monetary policy. This paper asks whether the measures adopted by the US Federal Reserve (Fed) have been effective in boosting real activity and calming financial markets. To measure these effects at high frequencies, we propose a novel mixed frequency vector autoregressive (MF-VAR) model. This model allows us to combine weekly and monthly information within an unified framework. Our model combines a set of macroeconomic aggregates such as industrial production, unemployment rates and inflation with high frequency information from financial markets such as stock prices, interest rate spreads and weekly information on the Feds balance sheet size. The latter set of high frequency time series is used to dynamically interpolate the monthly time series to obtain weekly macroeconomic measures. We use this setup to simulate counterfactuals in absence of monetary stimulus. The results show that the monetary expansion caused higher output growth and stock market returns, more favorable long-term financing conditions and a depreciation of the US dollar compared to a no-policy benchmark scenario.
    Date: 2020–07
  23. By: Marco Arena; Gabriel Di Bella; Alfredo Cuevas; Borja Gracia; Vina Nguyen; Alex Pienkowski
    Abstract: Estimates of the natural interest rate are often useful in the analysis of monetary and other macroeconomic policies. The topic gathered much attention following the great financial crisis and the Euro Area debt crisis due to the uncertainty regarding the timing of monetary policy normalization and the future path of interest rates. Using a sample of European countries (including several members of the Euro Area), this paper provides estimates of country-specific natural interest rates and some of their drivers between 2000 and 2019. In line with the literature, our findings suggest that natural interest rates declined during this period, and despite a rebound in the last few years of it, they have not recovered to their pre-crisis levels. The paper also discusses the implications of the decline in natural interest rates for monetary conditions and debt sustainability.
    Date: 2020–07–03
  24. By: Konstantinos Loizos (University of Athens (GR))
    Abstract: The link between banks’ liquidity and solvency is not adequately addressed in the literature, despite the central role of the interbank market in the spread of the recent crisis. This paper proposes a possible way by which the interbank rate and the required return on equity capital are determined, and are related to each other. Thereby, a link between liquidity and insolvency risk is derived on the grounds of Keynes's concept of ‘degree of confidence’ on held expectations about economic prospects. High degree of confidence and trust prevailing in the interbank market makes risk sharing possible at prices which render bank capital regulation ineffective in the rising phase of the cycle, and overly restricted in the downswing. Basel’s III higher capital, liquidity and leverage ratios might not be enough if measures, in the sense of Minsky’s Big Government-Big Bank, targeting overconfidence in booms and redressing the lack of confidence in the downturns are not taken into account.
    Keywords: Degree of confidence, Interbank market, Liquidity preference, Insolvency risk, Financial cycles
    JEL: E12 E32 G21
    Date: 2020–08
  25. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.
    Keywords: household survey; Inflation; anchor; oil price; missing disinflation; gasoline price; expectations
    JEL: E31 E52 Q43
    Date: 2020–08–18
  26. By: Asongu, Simplice; Nnanna, Joseph; Tchamyou, Vanessa
    Abstract: The study assesses the role of globalization-fuelled regionalization policies on financial allocation efficiency in four economic and monetary regions in Africa for the period 1980 to 2008. Banking system and financial system efficiency proxies are used as dependent variables whereas seven bundled and unbundled globalization variables are employed as independent indicators. The bundling exercise is achieved by means of principal component analysis while the empirical evidence is based on interactive Fixed Effects regressions. The following findings are established. First, financial allocation efficiency is more sensitive to financial openness compared to trade openness and most sensitive to globalization. The relationship between allocation efficiency and globalization-fuelled regionalization policies is: (i) Kuznets or inverted U-shape in the UEMOA and CEMAC zones (evidence of decreasing returns to allocation efficiency from globalization-fuelled regionalization) and (ii) U-shape overwhelmingly in the COMESA and scantily in the EAC (increasing returns to allocation efficiency from globalization-fuelled regionalization). Established shapes are relevant to specific globalization dynamics within regions. Economic and monetary regions are more prone to surplus liquidity than purely economic regions. Policy implications and measures of fighting surplus liquidity are discussed.
    Keywords: Globalization; Financial Development; Regional Integration; Panel; Africa
    JEL: A10 D60 E40 O10 P50
    Date: 2019–01
  27. By: Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
    Abstract: Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.
    Date: 2020–07–03
  28. By: Gara Afonso; Marco Cipriani; Gabriele La Spada; Will Riordan
    Abstract: Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve dramatically expanded its balance sheet, both directly, through outright purchases and repurchase agreements, and indirectly, as a consequence of the facilities to support market functioning and the flow of credit to the real economy. In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.
    Keywords: reserves; COVID-19; branches; foreign banking organizations (FBOs); global systemically important banks (GSIBs)
    JEL: E5 I18
    Date: 2020–07–07
  29. By: Yin-Wong Cheung; Louisa Grimm; Frank Westermann
    Abstract: We study the evolution of offshore renminbi trading between 2016 and 2019. The diffusion behaviour of offshore renminbi trading during this period is different from the one between 2013 and 2016. The geographical diffusion process displayed in the 2016-2019 period, in addition to the previously reported convergence to the geographical trading pattern of all currencies, is affected by trade intensity, bilateral swap line arrangements, and has a regional bias. Further, it is possibly affected by disputes with China, and is different from the diffusion behaviours of the offshore US dollar, euro, British pound, and Japanese yen trading.
    Keywords: global currency, FX turnover, geographical diffusion, renminbi internationalization, trade intensity
    JEL: C24 F31 F33 G15 G18
    Date: 2020
  30. By: Tetteh, Godsway Korku (Maastricht University, UNU-MERIT); Goedhuys, Micheline (Maastricht University, UNU-MERIT); Konte, Maty (Barnard College, Columbia University, and UNU-MERIT); Mohnen, Pierre (Maastricht University, UNU-MERIT)
    Abstract: It is an undeniable fact that financial inclusion has become a global policy priority. Despite its popularity in the policy sphere, the concept of financial inclusion lacks a comprehensive measure to monitor and evaluate inclusive financial systems across the globe. To fill this gap, we combine macro-level data from the Financial Access Survey of the International Monetary Fund and the World Bank’s Global Findex database to construct novel indices of financial inclusion. First, we compute new financial inclusion indices that incorporate access to financial services by groups prone to exclusion. Second, we account for the recent upsurge in mobile money adoption in the developing world by computing a novel mobile money inclusion index. We further relate the financial inclusion indices with legal origin to ascertain the role of initial conditions of the regulatory environment in countries’ financial inclusion achievements. We find that whereas developed countries continue to lead in banking inclusion, developing countries in sub-Saharan Africa are at the frontiers of mobile money inclusion. Also, we find evidence suggesting that the regulatory environment matters for financial inclusion.
    Keywords: Financial Inclusion, Banking Inclusion, Financial Innovation, Mobile Money Inclusion
    JEL: G21 O16 O35 O57
    Date: 2020–08–24
  31. By: Kollmann, Robert
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Zero lower bound, liquidity trap, monetary union, terms of trade, international fiscal spillovers, Euro Area.
    JEL: E3 E4 F2 F3 F4
    Date: 2020–08–08
  32. By: Suzuki, Keishun
    Abstract: Although Schumpeterian growth models typically predict that stronger patent protection enhances innovation-driven economic growth, the empirical evidence does not support this idea. We explore the unclear relationship at work by shedding light on the financing of R&D investment. Empirically, R&D-intensive firms preferentially rely on their internal cash flows rather than external funds. We develop a simple monetary Schumpeterian growth model in which R&D firms face an endogenous financing choice that is consistent with this evidence. In our model, the scale of R&D investment may be financially constrained by internal cash because external financing is costly. Our model shows that the relationship between patent protection and growth can be either N-shaped, inverted-U shaped, or positive depending on the inflation rate. Specifically, we find that the growth effect of the pro-patent policy is likely to be negative under a high inflation rate, while the growth effect is always positive under the Friedman rule.
    Keywords: Innovation, Patent Protection, Inflation, Financing of R&D
    JEL: E44 O31 O34
    Date: 2020–07
  33. By: Boukraine, Wissem
    Abstract: The depreciation of the national currency, the higher wage costs passed on to prices and the growing external debt, has characterized the Tunisian economy for almost a decade. In this context we investigate its inflation dynamics to understand which variables affects it in the short and the long run. We apply the Autoregressive Distributed-lagged model over quarterly data from 2010 to 2019 alongside the bound testing approach. Our results suggest a significant impact of external debt and loans on inflation in the short and long run, while GDP growth affects inflation only in the long run.
    Keywords: Inflation, ARDL, Tunisia
    JEL: C01 E31
    Date: 2020
  34. By: Alessandro Gnoatto (Department of Economics (University of Verona)); Nicole Seiffert (LMU Munich)
    Abstract: We generalize the results of Bielecki and Rutkowski (2015) on funding and collateraliza- tion to a multi-currency framework and link their results with those of Piterbarg (2012), Moreni and Pallavicini (2017), and Fujii et al. (2010b). In doing this, we provide a complete study of absence of arbitrage in a multi-currency market where, in each single monetary area, multiple interest rates coexist. We first characterize absence of arbitrage in the case without collateral. After that we study collateralization schemes in a very general situation: the cash flows of the contingent claim and those associated to the collateral agreement can be specified in any currency. We study both segregation and rehypothecation and allow for cash and risky collateral in arbitrary currency specifications. Absence of arbitrage and pricing in the presence of collateral are discussed under all possible combinations of conventions. Our work provides a reference for the analysis of wealth dynamics, we also provide valuation formulas that are a useful foundation for cross-currency curve construction techniques. Our framework provides also a solid foundation for the construction of multi-currency simulation models for the generation of exposure profiles in the context of xVA calculations.
    Keywords: FX, cross-currency basis, multiple curves, FVA, CollVA, Basel III, Collateral.
    Date: 2020–01
  35. By: Yoshi Fujiwara; Hiroyasu Inoue; Takayuki Yamaguchi; Hideaki Aoyama; Takuma Tanaka
    Abstract: In this study, we investigate the flow of money among bank accounts possessed by firms in a region by employing an exhaustive list of all the bank transfers in a regional bank in Japan, to clarify how the network of money flow is related to the economic activities of the firms. The network statistics and structures are examined and shown to be similar to those of a nationwide production network. Specifically, the bowtie analysis indicates what we refer to as a "walnut" structure with core and upstream/downstream components. To quantify the location of an individual account in the network, we used the Hodge decomposition method and found that the Hodge potential of the account has a significant correlation to its position in the bowtie structure as well as to its net flow of incoming and outgoing money and links, namely the net demand/supply of individual accounts. In addition, we used non-negative matrix factorization to identify important factors underlying the entire flow of money; it can be interpreted that these factors are associated with regional economic activities.One factor has a feature whereby the remittance source is localized to the largest city in the region, while the destination is scattered. The other factors correspond to the economic activities specific to different local places.This study serves as a basis for further investigation on the relationship between money flow and economic activities of firms.
    Date: 2020–07
  36. By: Filippo Gori; Etienne Lepers; Caroline Mehigan
    Abstract: In a financially interconnected world, individual countries’ policy choices affect other economies and can become a source of international shocks. Leveraging on a new quarterly dataset of capital control adjustments, we find renewed evidence that the introduction of capital controls in one economy increases capital inflows to other similar borrowing economies.
    Keywords: Bilateral capital flows, Capital controls, Emerging markets, Externalities, Spillovers
    JEL: F21 F32 F38 F42
    Date: 2020–09–02
  37. By: Emter, Lorenz (Central Bank of Ireland and Trinity College Dublin)
    Abstract: Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017, this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
    Keywords: international capital flows, sudden stops, financial stability.
    JEL: E32 F30 F32 F34 G15
    Date: 2020–07
  38. By: F. Douglas Foster; Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology Sydney); Junqing Kang; Shen Lin
    Abstract: We propose a nonlinear rational expectations equilibrium model of high-frequency endogenous liquidity provision to explore fragile liquidity. With fast trading speed and private information, high-frequency traders can either compete with designated market makers (DMMs) by providing liquidity or attempt to profit from speculative trades that consume liquidity. The risk from this endogenous liquidity provision, coupled with limits to participation by DMMs, intensifies the adverse selection faced by DMMs. This can generate a gap between liquidity supply from DMMs and liquidity demand by informed traders. As a result, endogenous liquidity provision produces fragile liquidity, with the possibility of market breaks when high-frequency traders switch from liquidity provision to liquidity consumption on the basis of unexpected information signals.
    Keywords: endogenous liquidity provision; fragile liquidity; machine learning
    JEL: G10 G14
    Date: 2019–11–01
  39. By: Toni Beutler (Swiss National Bank); Matthias Gubler (Swiss National Bank); Simona Hauri (University of Zurich); Sylvia Kaufmann (Study Center Gerzensee)
    Abstract: We study the bank lending channel in Switzerland over three decades using unbalanced quarterly bank-individual data spanning 1987 to 2016. In contrast to the usual empirical approach, we take an agnostic stance on which bank characteristic drives the heterogenous lending response to interest rate changes. In addition, our empirical model allows for a changing lending reaction occurring over time in a state-dependent manner. Our results are consistent with the existence of a bank lending channel, which is however muted in specific periods. Such episodes are characterized by increased economic uncertainty, which negatively impacts loan growth.
    Date: 2020–08
  40. By: Adriana Novotná (Technical University of Ko?ice, Faculty of Economics, Department of Banking and Investment)
    Abstract: One of the ways how monetary policy can affect the economy is through the interest rate channel. Interest rates have vital importance for economic decision making and recently, we can observe a rare phenomenon in European monetary policy, the negative interest rate. This situation can affect the volume of granted loans of every European area country. Slovakia is ranked among the fastest countries of retail lending increase in the European Union. The aim of this paper is to analyse the development of consumer loans and three interest rates which can affect the amount of granted loans by the Slovak banking market from 2009 to 2019 period, using monthly based data. The paper is concentrated on eight groups of loans, according to the division of the National Bank of Slovakia and it analyses the impact of three interest rates, the fixed rate set by the European Central Bank, the EONIA interest rate and the average interest rate for a specific group of loans in Slovakia. The paper also focuses on the analysis of the development of the credit market in Slovakia and the development of the loans and interest rates. The main analytical part of the paper uses the ordinary least squares regression method for linear models, which analyses the relationship between group of loans, as a dependent variable, and interest rates, represented as independent variables. The ANOVA method is performed, and it allows a comparison of more than two groups at the same time to determine whether a relationship exists between them.
    Keywords: Slovak credit market, interest rate, fixed rate, EONIA, OLS, ANOVA, Kruskal-Wallis test
    JEL: G21 C12 B40
  41. By: Jérôme Creel (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Fabien Labondance (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po, CRESE - Centre de REcherches sur les Stratégies Economiques (EA 3190) - UBFC - Université Bourgogne Franche-Comté [COMUE] - UFC - Université de Franche-Comté)
    Abstract: Although the literature has provided evidence of the predictive power of credit for financial and banking crises, this article aims to investigate the grounds of this link by assessing the interrelationships between credit and banking fragility. The main identification assumption represents credit and banking fragility as a system of simultaneous joint data generating processes whose error terms are correlated. We test the null hypotheses that credit positively affects banking fragility—a vulnerability effect—and that banking fragility has a negative effect on credit—a trauma effect. We use seemingly unrelated regressions and 3SLS on a panel of European Union (EU) countries from 1998 to 2012 and control for the financial and macroeconomic environment. We find a positive effect of credit on banking fragility in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of banking fragility on credit in all samples.
    Keywords: Banking fragility,Credit growth,Nonperforming loans,SUR model
    Date: 2019–12
  42. By: Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic); Michal Paulus (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In this paper, we revisit the relationship between economic growth and exchange rate misalignments, especially undervaluations. In particular, we ask which countries benefit from undervaluations at most, and whether the impact of undervaluations on growth depends on institutional quality as suggested in previous literature. First, we separate countries into groups according to their institutional quality using the cluster analysis. Then, we estimate the relationship between growth and exchange rate misalignment while allowing for variation in coefficients across these clusters. Our results confirm the positive relationship between undervaluation and growth, and this relationship is the highest for countries with the highest quality of institutions rather than with a poor level of institutional quality. Therefore, our results reconcile the importance of good institutions and do not support the hopes that the countries can compensate for the poor institutional quality via undervaluation of currencies successfully.
    Keywords: exchange rate misalignments, undervaluation, economic growth, institutions, corruption
    JEL: F43 F31
    Date: 2020–08

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