nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒09‒07
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Systems By Julia M. Puaschunder
  2. Understanding the German Criticism of the Target System and the Role of Central Bank capital By Roberto Perotti
  3. On the Effects of Monetary Policy in Vietnam: Evidence from a Trilemma Analysis By Hoang, Viet-Ngu; Nguyen, Duc Khuong; Pham, Tuan Anh
  4. Strategic Interactions in U.S. Monetary and Fiscal Policies By Xiaoshan Chen; Eric M. Leeper; Campbell B. Leith
  5. Domestic Price Dollarization in Emerging Economies By Andres Drenik; Diego Perez
  6. Increasing the International Role of the Euro: A Long Way to Go By Marek Dabrowski
  7. Monetary Policy and Economic Performance since the Financial Crisis By Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
  8. The Macroeconomic Effects of Macroprudential Policy: Evidence from a Narrative Approach By Diego Rojas; Carlos A. Vegh; Guillermo Vuletin
  9. Rise of the central bank digital currencies: drivers, approaches and technologies By Raphael Auer; Giulio Cornelli; Jon Frost
  10. Fading the effects of coronavirus with monetary policy By Alain Malata; Christian Pinshi
  11. Rethinking Communication in Monetary Policy: Towards a Strategic leaning for the BCC By Plante Kibadhi; Christian Pinshi
  12. Inflation dynamics in Tunisia: a smooth transition autoregressive approach By Boukraine, Wissem
  13. One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area By Giancarlo Corsetti; Joao B. Duarte; Samuel Mann
  14. Staggered Price Indexation By Martín Uribe
  15. The International Aspects of Macroprudential Policy By Kristin J. Forbes
  16. Uncertainty and monetary policy in good and bad times: A Replication of the VAR investigation by Bloom (2009) By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  17. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
  18. Macroprudential institutions in Europe - what are the blind spots? By Nettekoven, Zeynep Mualla
  19. Design Choices for Central Bank Digital Currency: Policy and Technical Considerations By Allen, Sarah; Capkun, Srdjan; Eyal, Ittay; Fanti, Giulia; Ford, Bryan; Grimmelmann, James; Juels, Ari; Kostiainen, Kari; Meiklejohn, Sarah; Miller, Andrew; Prasad, Eswar; Wüst, Karl; Zhang, Fan
  20. Moving to Inflation Targeting. By Patnaik, Ila; Pandey, Radhika
  21. A Quantity-Driven Theory of Term Premia and Exchange Rates By Robin Greenwood; Samuel G. Hanson; Jeremy C. Stein; Adi Sunderam
  22. Global Liquidity Challenges of the International Monetary System By Azar R. Hasanli
  23. Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK By Giansante, Simone; Fatouh, Mahmoud; Ongena, Steven
  24. The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia By Calixte Ahokpossi; Agnes Isnawangsih; Md. Shah Naoaj; Ting Yan
  25. A Minting Mold for the eFranc: A Policy Paper By Hans Gersbach; Roger Wattenhofer
  26. How does international capital flow? By Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
  27. The effect of macroprudential policies on credit developments in Europe 1995-2017 By Budnik, Katarzyna
  28. Token- or Account-Based? A Digital Currency Can Be Both By Rod Garratt; Michael Junho Lee; Brendan Malone; Antoine Martin
  30. A Survey of Research on Retail Central Bank Digital Currency By John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
  31. Liquidity traps in a monetary union By Robert Kollmann
  32. Persistence-Dependent Optimal Policy Rules Persistence-Dependent Optimal Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  33. Public Debt, Policy Mix and European Stability By François Langot
  34. Climate hysteresis and monetary policy By Augustus J. Panton
  35. Back testing fan charts of activity and inflation: the Chilean case By Jorge Fornero; Andrés Gatty

  1. By: Julia M. Puaschunder (The New School, Department of Economics, Schwartz Center for Economic Policy Analysis, New York, USA)
    Abstract: Throughout modern international finance, different monetary regimes existed. International monetary arrangements initially arose from the need to provide international trade with easy means of settling trans-border payments (Semmler 2019). For centuries, both domestic and international trade was carried out using gold and silver (Semmler 2019). The Gold standard during the Interwar Period since 1870, the Bretton Woods system and the following Euro currency introduction. This essay summarizing the differences between the three Monetary and currency systems: Gold standard, Bretton Woods and Euro-System and highlights the success and failures of the different approaches to guide monetary matters throughout history.
    Keywords: Bretton Woods System, Central Banks, Currency System, Economic Stability, Euro Currency, Finance, Fiscal Policy, Gold standard, History, International Trade, Monetary Policy
    Date: 2020–04
  2. By: Roberto Perotti
    Abstract: Criticism of the Target system by a group of central European scholars has become a widespread argument against the policies of the European Central Bank and even the integrity of the monetary union, and even standard fare in the media and in the political debate in Germany. Most academics and practitioners that have participated in the debate have been dismissive of the German preoccupations. In this paper, I first try and clarify the many remaining misunderstandings about the workings and implications of the Target system. I propose a unified, systematic and simple approach to the study of the workings of the Target system in response to different shocks and in comparison with different alternative regimes. I then argue that the German criticism of the Target system is not so unfounded after all, and should be taken seriously, both on theoretical grounds and for its political implications.
    JEL: E58 E63 F33
    Date: 2020–07
  3. By: Hoang, Viet-Ngu; Nguyen, Duc Khuong; Pham, Tuan Anh
    Abstract: During and after the 2008-2009 global financial crisis, the growth cycle of Vietnam’s economy has shifted from an average annual growth rate of 7%-8% to an average annual growth rate of 5%-6% with a high level of macroeconomic instability and uncertainty from 2009 till 2016. Related studies have speculated that the operations of monetary policies during this period were not effective in recovering the economic growth and stabilizing the overall price level and total output level. This paper provides the first empirical examination of this speculation using the Trilemma framework. Our empirical results show that the State Bank of Vietnam has had adopted a set of policies aiming at maintaining exchange rate stability and interest rate independence while easing the restrictions on capital inflows. The combination of these three monetary policy approaches is found to violate the rule of Trilemma. Consequently, exchange rate and interest rate policies became less effective and failed to stabilize the economy in response to the global economic recession.
    Keywords: Vietnamese economy; Trilemma; monetary policy; economic recession; macroeconomic conditions.
    JEL: F31 F33 F36
    Date: 2019–11
  4. By: Xiaoshan Chen; Eric M. Leeper; Campbell B. Leith
    Abstract: We estimate a model in which fiscal and monetary policy behavior arise from the optimizing behavior of distinct policy authorities, with potentially different welfare functions. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policies often do not conform to the conventional mix of conservative monetary policy and debt-stabilizing fiscal policy. Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not act to stabilize debt until the mid 1990s. A credible conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Had that strategic policy mix been in place, American might have avoided the Great Inflation. Enhancing cooperation between policy makers without an ability to commit may be detrimental to welfare.
    JEL: E31 E32 E52 E61 E62 E63
    Date: 2020–07
  5. By: Andres Drenik; Diego Perez
    Abstract: This paper studies the dollarization of prices in retail markets of emerging economies. We develop a model of the firm’s optimal currency choice in retail markets in inflationary economies. We derive theoretical predictions regarding the optimality of dollar pricing, and test them using data from the largest e-trade platform in Latin America. Across countries, price dollarization is positively correlated with asset dollarization and inflation, and negatively correlated with exchange rate volatility. At the micro level, larger sellers are more likely to price in dollars, and more tradeable goods are more likely to be posted in dollars. We then show that prices are sticky, and hence the currency of prices determines the short-run reaction of both prices and quantities to a nominal exchange rate shock.
    JEL: E31 F41
    Date: 2020–08
  6. By: Marek Dabrowski
    Abstract: The euro is the second most important global currency after the US dollar. However, its inter-national role has not increased since its inception in 1999. The private sector prefers using the US dollar rather than the euro because the financial market for US dollar-denominated assets is larger and deeper; network externalities and inertia also play a role. Increasing the attractive-ness of the euro outside the euro area requires, among others, a proactive role for the European Central Bank and completing the Banking Union and Capital Market Union.
    Keywords: global currency, dominant currency, euro, US dollar, international monetary system, European Union, euro area, network externalities, power of incumbency
    JEL: E42 E58 F33
    Date: 2020
  7. By: Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
    Abstract: We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
    Keywords: Global Financial Crisis 2007–09; monetary policy; effective lower bound; structural changes; forward guidance; balance sheet policies
    JEL: E31 E32 E52 E58
    Date: 2020–08
  8. By: Diego Rojas; Carlos A. Vegh; Guillermo Vuletin
    Abstract: We analyze the macroeconomic effects of macroprudential policy – in the form of legal reserve requirements – in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identify innovations in changes in legal reserve requirements, we develop a narrative approach – based on contemporaneous reports from the IMF and Central Banks in the spirit of Romer and Romer (2010) – that classifies each change into endogenous or exogenous to the business cycle. We show that this distinction is critical in understanding the macroeconomic effects of reserve requirements. In particular, we show that output falls in response to exogenous increases in legal reserve requirements but would seem not to be affected (or could even increase!) when using all changes and relying on traditional time-identifying strategies. This bias reflects the practical relevance of the misidentification of endogenous countercyclical changes in reserve requirements. We also push the empirical frontier along two important dimensions. First, in measuring legal reserve requirements, we take into account both the different types of legal reserve requirements in terms of maturity and currency of denomination as well as the structure of deposits. Second, since in practice reserve requirement policy is tightly linked to monetary policy, we also jointly analyze the macroeconomic effects of changes in central bank interest rates. To properly identify exogenous central bank interest rate shocks, we follow Romer and Romer (2004).
    JEL: E32 E52 E58 F31 F41
    Date: 2020–08
  9. By: Raphael Auer; Giulio Cornelli; Jon Frost
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: central bank digital currency, CBDC, central banking, digital currency, digital money, distributed ledger technology, blockchain
    JEL: E58 G21
    Date: 2020–08
  10. By: Alain Malata; Christian Pinshi (UNIKIN - University of Kinshasa)
    Abstract: The Central Bank of Congo (BCC) reduced the policy rate in response to the uncertain effects of the coronavirus. The impact of the pandemic on the economy is still uncertain and depends on many factors. Using the Bayesian technique of the VAR model we notice that cutting the policy rate would not help the economy to cope with the consequences of COVID-19, we should rethink other tactics and strategies, such as a good communication strategy and / or try unconventional monetary policy measures. However, coordination with fiscal policy is a driver key in blurring the effects of the coronavirus crisis.
    Keywords: Monetary policy,coronavirus,coordination
    Date: 2020–07–03
  11. By: Plante Kibadhi; Christian Pinshi (UNIKIN - University of Kinshasa)
    Abstract: The ability of a central bank to influence the economy depends on its ability to manage the expectations of the general public and the financial system regarding the future development of macroeconomic indicators. The communication strategy (in this time of crisis and uncertainty) increases transparency, improves public understanding and support for the monetary policy and democratic accountability of the Central Bank of Congo (BCC), serving to convergence towards the balance of expectations. This paper agrees that a strategic direction of communication, focused on coherent messages, can help break down pessimistic expectations, maintain confidence, reduce the cost of the crisis and stabilize the economy. In conclusion, the article suggests a dozen recommendations, to be able to strengthen and redirect the BCC's communication strategy and contribute to the effectiveness of monetary policy.
    Date: 2020–07–07
  12. By: Boukraine, Wissem
    Abstract: The fact that inflation is still on the rise, despite measures undertaken by the Tunisian central bank, prompts questions as to whether or not inflation dynamics has changed, exhibiting higher levels of persistence and volatility. This paper employs the smooth transition autoregressive model (STAR) to analyze Tunisian inflation dynamics on monthly data over the last three decades. We distinguish three periods based on monetary reforms. The non-linearity tests suggest that the ESTAR specification describes better the behavior of inflation. Our results suggest changes in persistence and important shifts in volatility, which confirm the effectiveness of the monetary reforms to a certain extent given the past political instability and the democratic transition in Tunisia.
    Keywords: Inflation, persistence, volatility, Smooth Transition Autoregressive, Tunisia
    JEL: C1 E31
    Date: 2020
  13. By: Giancarlo Corsetti; Joao B. Duarte; Samuel Mann
    Abstract: We study the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. We develop a methodology to assess the degree of heterogeneity, which we find to be low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets. Building a small open economy model featuring a housing sector and calibrating it to Spain, we show that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the responses of output and private consumption.
    Date: 2020–06–26
  14. By: Martín Uribe
    Abstract: Empirical studies using micro data find that about two thirds of all product prices do not change in a given quarter. This evidence has been interpreted as indicating the absence of price indexation. Further, models of staggered price setting without indexation interpret all price changes as optimal. However, the empirical evidence is mute with regard to whether price changes are optimal or not. To reconcile the possibility of price indexation with the micro evidence on the frequency of price changes, I modify the Calvo sticky price model by allowing each period a fraction of randomly picked prices to change optimally, another fraction of randomly picked prices to change due to indexation, and the remaining prices to be constant. The paper presents five main findings: (1) with staggered price indexation the Phillips curve includes a state variable that carries information about all past inflation rates; (2) as the degree of staggered price indexation increases, the Phillips curve becomes flatter; (3) staggered indexation dampens the short-run effect of monetary policy on inflation and amplifies its effect on output; (4) fixing the probability of a price change to 33% per quarter (in accordance with the empirical evidence), a small-scale new-Keynesian model estimated on U.S. data yields a probability of indexation of 19\% per quarter (and therefore a probability of an optimal price change of 14% per quarter); and (5) according to the estimated model, staggered indexation explains more than half of the observed persistence of inflation in the United States.
    JEL: E1 E3 E5
    Date: 2020–08
  15. By: Kristin J. Forbes
    Abstract: Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The “Corona Crisis” provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and can help achieve certain macroeconomic goals, but they have limitations and expectations of what they can accomplish must be realistic.
    JEL: E44 E5 F33 F36 F38 G21 G23 G28
    Date: 2020–08
  16. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: This paper revisits the well-known VAR evidence on the real effects of uncertainty shocks by Bloom (Econometrica 2009(3): 623-685. doi: 10.3982/ECTA6248). We replicate the results in a narrow sense using Eviews. In a wide sense, we extend his study by working with a smooth transition-VAR framework that allows for business cycle-dependent macroeconomic responses to an uncertainty shock. We find a significantly stronger response of real activity in recessions. Counterfactual simulations point to a greater effectiveness of systematic monetary policy in stabilizing real activity in expansions.
    Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2020–08
  17. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Date: 2020–06–26
  18. By: Nettekoven, Zeynep Mualla
    Abstract: After the Great Financial Crisis of 2007-2008, macroprudential policy has increasingly become the mainstream. New institutions and regulations were introduced for macroprudential supervision in the EU Member States as well as at the supranational level. This leads us to the research question: what are the blind spots of this new macroprudential institutional design in the EU? This question gained even more in substance due to the repercussions of Covid-19 pandemic. Based on desk research and talks with experts, we group the blind spots into three categories: shadow banking system, institutional power hierarchies, and monetary and macroprudential policy interactions. In this paper, we discuss these blind spots and some policy recommendations for a functional macroprudential institutional design.
    Keywords: macroprudential policy,institutions,Great Financial Crisis,shadow banking system
    JEL: E52 E58 G28
    Date: 2020
  19. By: Allen, Sarah (Initiative for CryptoCurrencies and Contracts (IC3)); Capkun, Srdjan (Initiative for CryptoCurrencies and Contracts (IC3)); Eyal, Ittay (Initiative for CryptoCurrencies and Contracts (IC3)); Fanti, Giulia (Initiative for CryptoCurrencies and Contracts (IC3)); Ford, Bryan (Initiative for CryptoCurrencies and Contracts (IC3)); Grimmelmann, James (Initiative for CryptoCurrencies and Contracts (IC3)); Juels, Ari (Initiative for CryptoCurrencies and Contracts (IC3)); Kostiainen, Kari (Initiative for CryptoCurrencies and Contracts (IC3)); Meiklejohn, Sarah (Initiative for CryptoCurrencies and Contracts (IC3)); Miller, Andrew (Initiative for CryptoCurrencies and Contracts (IC3)); Prasad, Eswar (Cornell University); Wüst, Karl (Initiative for CryptoCurrencies and Contracts (IC3)); Zhang, Fan (affiliation not available)
    Abstract: Central banks around the world are exploring and in some cases even piloting Central Bank Digital Currencies (CBDCs). CBDCs promise to realize a broad range of new capabilities, including direct government disbursements to citizens, frictionless consumer payment and money-transfer systems, and a range of new financial instruments and monetary policy levers. CBDCs also give rise, however, to a host of challenging technical goals and design questions that are qualitatively and quantitatively different from those in existing government and consumer payment systems. A well-functioning CBDC will require an extremely resilient, secure, and performant new infrastructure, with the ability to onboard, authenticate, and support users on a massive scale. It will necessitate an architecture simple enough to support modular design and rigorous security analysis, but flexible enough to accommodate current and future functional requirements and use cases. A CBDC will also in some way need to address an innate tension between privacy and transparency, protecting user data from abuse while selectively permitting data mining for end-user services, policymakers, and law enforcement investigations and interventions. In this paper, we enumerate the fundamental technical design challenges facing CBDC designers, with a particular focus on performance, privacy, and security. Through a survey of relevant academic and industry research and deployed systems, we discuss the state of the art in technologies that can address the challenges involved in successful CBDC deployment. We also present a vision of the rich range of functionalities and use cases that a well-designed CBDC platform could ultimately offer users.
    Keywords: new financial technologies, digital money, cryptocurrencies, payment systems
    JEL: E42 E52 E58
    Date: 2020–07
  20. By: Patnaik, Ila (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy)
    Abstract: India adopted a flexible inflation targeting framework as a formal legal mandate of the RBI in March 2016. The preamble to the RBI Act, as well as relevant sections in the Act were amended to enable this change. The frame- work entailed many details such as on the rate of inflation to be targeted, the band, the measure, the composition of the Monetary Policy Committee and the objective. One of these sections require that the rate of inflation to be targeted needs to be reviewed every five years. In March 2021, the central government along with the RBI is required to review the target. This paper presents the logic and rationale of the various elements of India's inflation targeting framework.
    Date: 2020–08
  21. By: Robin Greenwood; Samuel G. Hanson; Jeremy C. Stein; Adi Sunderam
    Abstract: We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and term premia, as well as the finding that central banks' quantitative easing policies impact exchange rates. An extension of our model sheds light on the persistent deviations from covered interest rate parity that have emerged since 2008.
    JEL: F31 G12
    Date: 2020–07
  22. By: Azar R. Hasanli (Institute for Scientific Research on Economic Reforms Ministry of Economy of the Republic of Azerbaijan, Baku, Azerbaijan,)
    Abstract: International Monetary System (IMS) has been in the center of the heated debates over 70 years. Severe exchange rate mismatches and global liquidity problems not only led to global crises but also necessitated systemic changes. Notwithstanding several initiatives, setting proper exchange rate mechanisms has not been able to be realized. After the demise of the Bretton Woods system, an amorphous arrangement mechanism of exchange rates was established that led to further severe challenges globally. Moreover, rapid financial globalization and capital liberalization made exchange rates more vulnerable to external shocks. On the other hand, design flaws in global liquidity and reserve system seem hardly to be solved in the absence of the global lender of last resort and sustainable pro-cyclical liquidity provision. In this regard, the increasing scope of various components of the global financial safety nets raises serious concerns in terms of predicting their impact on global economic cycles. Additionally, major challenges associated with the global reserve system reveal that numerous economies still prefer to rely on national and regional-level frameworks rather than multilateral ones. The escalating tendency of such polarization within the global reserve system imposes serious sustainability challenges for the global economy. It should be emphasized that reforming the IMS is a dynamic process in which providing universal and ultimate solutions are far from reality. This study indicates that it would not be a smooth process to eliminate all these challenges that mostly stem from deep contradictions among nation-states' interests and multilateral frameworks.
    Keywords: global liquidity, global financial safety nets, exchange rate imbalances, swap arrangements, Special Drawing Rights, political stigma
    Date: 2020–06
  23. By: Giansante, Simone (School of Management, University of Bath); Fatouh, Mahmoud (Bank of England); Ongena, Steven (University of Zurich, Swiss Finance Institute)
    Abstract: We investigate the impact of the asset purchase program (APP) introduced by the Bank of England (BOE) in 2009 on the composition of assets of UK banks, and the implications for bank lending to the real economy, using a unique database on the program. Knowing the identity of the banks that receive reserves injections through the BOE’s APP (QE banks) provides us with an ideal empirical design for a difference-in-differences exercise. The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy, even when controlling fully for demand-side effects. The overall reduction of retail lending is more pronounced for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk-weighted investments, such as government securities, as suggested by the increased sensitivity of their equity returns to peripheral EU bond returns. Overall, our findings suggest that, if banks are not adequately capitalised, risk-based capital constraints can limit the transmission of expansionary unconventional monetary policies via the bank lending channel, and provide incentives for carry trade activities.
    Keywords: Monetary policy; quantitative easing; bank lending
    JEL: E51 G21
    Date: 2020–08–14
  24. By: Calixte Ahokpossi; Agnes Isnawangsih; Md. Shah Naoaj; Ting Yan
    Abstract: Since the adoption of the inflation targeting framework by Bank Indonesia (BI), monetary policy communication has played an increasingly important role in BI’s policy toolkit. This paper assesses BI’s monetary policy communication from three perspectives: i) its transparency and clarity, ii) its ability to align market expectation and BI’s policy decisions (predictability), and iii) its impact on financial markets. In particular, we assess the impact of BI’s monetary policy practices by focusing on its monetary policy press releases and monetary policy reports. The results show that Bank Indonesia has made significant progress in the transparency of its communication as well as in the institutional framework to support this. Nonetheless, the results also suggest ways in which the impact of communication can be further improved, including by strengthening the clarity of policy messages, its consistency with the policy framework and the depth of the money market.
    Date: 2020–06–26
  25. By: Hans Gersbach (CER-ETH –- Center of Economic Research and CEPR, ETH Zurich, Switzerland); Roger Wattenhofer (Distributed Computing Group, ETH Zurich, Switzerland)
    Abstract: We suggest a blueprint for an eFranc as a possible complement for the Swiss monetary system to ensure the long-term stability of its money. An eFranc is a non-interest-bearing digital form of the legal tender available to the public. The public can convert banknotes or part of its bank deposits into eFrancs, subject to the banks’ ability to obtain the corresponding amount of eFrancs from the central bank. There is free conversion of eFrancs into bank deposits (and into banknotes). For the technical implementation of the eFranc, we suggest a two-layer system combining a permissioned asynchronous blockchain without consensus which provides a secure environment for validating transactions (base layer) plus a peer-to-peer payment network (top layer).
    Keywords: eFranc, Swiss Monetary System, Financial Stability, Swiss National Bank, Proof-of-stake Blockchains
    Date: 2020–08
  26. By: Kumhof, Michael (Bank of England); Rungcharoenkitkul, Phurichai (Bank for International Settlements); Sokol, Andrej (European Central Bank)
    Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a two-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalise the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis, creditors stop financing debt rather than current accounts, and because following a crisis, current accounts are not the primary channel through which balance sheets adjust. Second, we reinterpret the global saving glut hypothesis by arguing that US households do not finance current account deficits with foreigners’ physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin’s current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by US and non-US banks rather than US current account deficits. Finally, we demonstrate that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate sets of economic decisions.
    Keywords: Bank lending; money creation; money demand; uncovered interest parity; exchange rate determination; international capital flows; gross capital flows
    JEL: E44 E51 F41 F44
    Date: 2020–08–21
  27. By: Budnik, Katarzyna
    Abstract: The paper inspects the credit impact of policy instruments that are commonly applied to contain systemic risk. It employs detailed information on the use of capital-based, borrower-based and liquidity-based instruments in 28 European Union countries in 1995—2017 and a macroeconomic panel setup. The paper finds a significant impact of capital buffers, profit distribution restrictions, specific and general loan-loss provisioning regulations, sectoral risk weights and exposure limits, borrower-based measures, caps on long-term maturity and exchange rate mismatch, and asset-based capital requirements on credit to the non-financial private sector. Furthermore, the business cycle and monetary policy influence the effectiveness of most of the macroprudential instruments. Therein, capital buffers and sectoral risk weights act countercyclically irrespectively of the prevailing monetary policy stance, while a far richer set of policy instruments can act countercyclically in combination with the appropriate monetary policy stance. JEL Classification: E51, E52, G21
    Keywords: borrower-based instruments, capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2020–08
  28. By: Rod Garratt; Michael Junho Lee; Brendan Malone; Antoine Martin
    Abstract: Digital currencies, including potential central bank digital currencies (CBDC), have generated a lot of interest over the past decade, since the emergence of Bitcoin. The interest has only grown in recent months because of a desire for contactless payment methods, stemming from the coronavirus pandemic. In this post, we discuss a common distinction made between “token-based” and “account-based” digital currencies. We show that this distinction is problematic because Bitcoin and many other digital currencies satisfy both definitions.
    Keywords: account; token; cryptocurrency; bitcoin
    JEL: E42
    Date: 2020–08–12
  29. By: Nelly Popova (Department of Finance, University of National and World Economy, Sofia)
    Abstract: The economic, debt and banking crises had strongly asymmetric effects on euro area countries and revealed the vulnerabilities in the institutional setting of the EMU and created significant risks to the single currency. In the aftermath of the crises there were significant changes in EMU aimed at increased risk sharing but they did involve the introduction of supra-national macroeconomic stabilization function. It is suggested in the paper that deeper fiscal integration is necessary to complement the currency union and strengthen the economic integration in the EU. The paper outlines the theoretical background of risk sharing and examines the main alternatives for a common fiscal capacity in the euro area.
    Keywords: Fiscal Policy, Economic Integration, Fiscal Federalism
    JEL: E62 F15 H77
  30. By: John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
    Abstract: This paper examines key considerations around central bank digital currency (CBDC) for use by the general public, based on a comprehensive review of recent research, central bank experiments, and ongoing discussions among stakeholders. It looks at the reasons why central banks are exploring retail CBDC issuance, policy and design considerations; legal, governance and regulatory perspectives; plus cybersecurity and other risk considerations. This paper makes a contribution to the CBDC literature by suggesting a structured framework to organize discussions on whether or not to issue CBDC, with an operational focus and a project management perspective.
    Date: 2020–06–26
  31. By: Robert Kollmann
    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 countryspecific 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
  32. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: A policy target (for example inflation) may depend on the persistent component of exogenous shocks, such as the cost-push shock of oil, energy or imported prices. The larger the persistence of these exogenous shocks, the larger the welfare losses and the larger the response of policy instrument to this exogenous shock in a feedback rule, in order to decrease the sensitivity of the policy target to this shock.
    Keywords: Core inflation,Imported inflation,Optimal Policy,Welfare,Policy rule
    Date: 2020–08
  33. By: François Langot (IZA - Institute for the Study of Labor, Gains - Groupe d’Analyse des Itinéraires et Niveaux Salariaux, PSE - Paris School of Economics)
    Abstract: This paper highlights the specics of a monetary union, such as the Euro area, regarding the possible choices of monetary and scal policies. As the dynamics of public debt are specic to the choices made by each government, I show that the dynamic stability of the area requires coordination of scal policies, particularly in the case of a liquidity trap situation. My results suggest that a scal union, taking the form of a common debt, guarantees the dynamic stability of the area, notwithstanding the monetary policy, chosen or constrainedthus improving institutional robustness of the European Union.
    Keywords: Euro area,Taylor rule,Fiscal rule,public debt,NK model,Fiscal theory of price level
    Date: 2020–07–09
  34. By: Augustus J. Panton
    Abstract: Since the birth of the natural rate hypothesis, the conventional notion that short-term output simply fluctuates around a relatively stable long-term trend became the norm in modern macroeconomics, including in the standard New Keynesian DSGE model. However, the global financial crisis (GFC) led to a serious rethinking of this norm, giving rise to the re-emergence of the Blanchard-Summers’ hysteresis debate and a new business cycle paradigm in which the short-term output effects of financial crises permanently feed into long-term growth trends. Using a Bayesian-estimated structural multivariate filtering model calibrated to data for Australia and the United States, the innovation of this paper is the incorporation of climate hysteresis into the estimation of potential output and the output and unemployment gaps. The results suggest non-trivia implications for monetary policy in a carbon-constrained world. Not only are the model-based estimates of potential output and NAIRU more volatile with climate shock persistence, the climate-neutral output and unemployment gap estimates are much smaller than conventional estimates, with different implications for inflation signals during the upturn or downturn of the business cycle. For economies that are more susceptible to disruptive climate shocks, especially in the developing world, an environment in which both demand conditions and the underlying supply potential are rapidly changing will severely complicate the conduct of forward-looking macroeconomic policy.
    Keywords: Potential output, output gaps, NAIRU, physical climate risks
    JEL: C51 C52 E32 E52 Q51
    Date: 2020–08
  35. By: Jorge Fornero; Andrés Gatty
    Abstract: Any forecast has associated a measure of predictive uncertainty. The Central Bank of Chile (CBoC) communicates with fan charts the projections’ uncertainty of inflation and GDP growth in the Monetary Policy Report (MPR). This work aims at evaluating ex post their properties with empirical techniques. In general, we find that fan charts have been a relatively accurate in illustrating the true density generated by the conditional mean within forecasting horizons of up to one year. While inflation forecasts are unbiased, forecasts of GDP growth have been optimistic on average. The analysis of a recent sub-sample in which risks for GDP growth was made explicit, we graphically examine whether asymmetric fan charts are more accurate ex –post than symmetric fan charts. For these cases, the median projection seem to have provided a better guide than the mode.
    Date: 2020–06

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