nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒09‒14
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Power of Helicopter Money Revisited: A New Keynesian Perspective By Thomas J. Carter; Rhys R. Mendes; Kim Huynh; Gradon Nicholls; Mitchell Nicholson
  2. Medium-Term Money Neutrality and the Effective Lower Bound By Gauti B. Eggertsson; Marc Giannoni
  3. The macroeconomic effects of forward communication By Brubakk, Leif; ter Ellen, Saskia; Robstad, Ørjan; Xu, Hong
  4. The interaction between macroprudential and monetary policies: The cases of Norway and Sweden By Cao, Jin; Dinger, Valeriya; Grodecka, Anna; Juelsrud, Ragnar; Zhang, Xin
  5. Trade Wars, Currency Wars By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  6. New Evidence on the Anchoring of Inflation Expectations in the Euro Area By Sascha Möhrle
  7. After 25 years as faithful members of the EU. Public support for the euro and trust in the ECB in Austria, Finland and Sweden By Roth, Felix; Jonung, Lars
  8. Explaining the Puzzling Behavior of Short-Term Money Market Rates By Antoine Martin; James J. McAndrews; Ali Palida; David R. Skeie
  9. Money, inflation and the financial crisis: the case of Switzerland By Peter Kugler; Samuel Reynard
  10. The Role of Money in Monetary Policy at the Lower Bound By Billi, Roberto M.; Söderström, Ulf; Walsh, Carl E.
  11. Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions By Robert Amano; Thomas J. Carter; Lawrence L. Schembri
  12. The (conflict-augmented) Phillips Curve is alive and well By Ricardo Summa; Julia Braga
  13. Is monetary policy always effective? Incomplete interest rate pass-through in a DSGE model By Binning, Andrew; Bjørnland, Hilde C.; Maih, Junior
  14. Predicting monetary policy using artificial neural networks By Hinterlang, Natascha
  15. Does communication influence executives' opinion of central bank policy? By In Do Hwang; Thomas Lustenberger; Enzo Rossi
  16. Capital-constrained loan creation, stock markets and monetary policy in a behavioral new Keynesian model By Kotb, Naira; Proaño Acosta, Christian
  17. Should Banks Create Money? By Christian Wipf
  18. Negative nominal interest rates and the bank lending channel By Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
  19. Market Function Purchases by the Federal Reserve By Kenneth D. Garbade; Frank M. Keane
  20. Dollar Safety and the Global Financial Cycle By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
  21. Negative monetary policy rates and systemic banks' risk-taking: Evidence from the euro area securities register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
  22. “Leaning against the wind”, macroprudential policy and the financial cycle By Thore Kockerols; Christoffer Kok
  23. Gold rush: The political economy of gold standard adoption in the Kingdom of Yugoslavia By Jevtic, Aleksandar R.
  24. Uncertainty and Monetary Policy during Extreme Events By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  25. Comparing Means of Payment: What Role for a Central Bank Digital Currency? By Jesse Leigh Maniff; Paul Wong
  26. The costs of macroprudential deleveraging in a liquidity trap By Chen, Jiaqian; Finocchiaro, Daria; Lindé, Jesper; Walentin, Karl
  27. Capital flows-at-risk: push, pull and the role of policy By Eguren-Martin, Fernando; O'Neill, Cian; Sokol, Andrej; von dem Berge, Lukas
  28. Substitutability of Monetary Policy Instruments By Cynthia L. Doniger; James Hebden; Luke Pettit; Arsenios Skaperdas
  29. U.S. Banks and Global Liquidity By Ricardo Correa; Wenxin Du; Gordon Y. Liao
  30. State dependence of monetary policy across business, credit and interest rate cycles By Alpanda, Sami; Granziera, Eleonora; Zubairy, Sarah
  31. Central bank funding and credit risk-taking By Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja
  32. The Determinants of Fiscal and Monetary Policies During the Covid-19 Crisis By Efraim Benmelech; Nitzan Tzur-Ilan
  33. Trade, Unemployment, and Monetary Policy By Matteo Cacciatore; Fabio Ghironi
  34. Liquidity Traps in a Monetary Union By Robert Kollmann
  35. Persistence-Dependent Optimal Policy Rules Persistence-Dependent Optimal Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  36. Optimal Monetary Policy in Production Networks By Jennifer La'O; Alireza Tahbaz-Salehi
  37. News-driven inflation expectations and information rigidities By Vegard H. Larsen; Leif Anders Thorsrud; Julia Zhulanova
  38. Withering Cash: Is Sweden ahead of the curve or just special? By Armelius, Hanna; Claussen, Carl Andreas; Reslow, André
  39. The Riddle of the Natural Rate of Interest By Razzak, Weshah

  1. By: Thomas J. Carter; Rhys R. Mendes; Kim Huynh; Gradon Nicholls; Mitchell Nicholson
    Abstract: We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook†model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies.
    Abstract: The role of cash in Canadians’ lives has evolved over the past decade. During this period, two diverging trends have emerged in Canada: the use of cash for transactions at the point of sale has declined, but overall demand for cash has increased. The 2019 Cash Alternative Survey was designed to study these trends and update the Bank of Canada’s understanding of Canadians’ use of cash. We asked Canadians about their cash holdings, planned future use of cash and views on how they would be affected if cash were to disappear. In addition to declining cash use, the emergence of privately issued digital currencies has motivated many central banks to conduct research into central bank digital currencies (CBDCs). We contribute to the Bank of Canada’s research on CBDC by monitoring Canadians’ use of cash and their adoption of digital payment methods. We find that Canadians’ cash holdings are stable and the adoption of cryptocurrencies remains limited and concentrated in a few sub-demographics. Moreover, we find that few Canadians plan to stop using cash entirely and that a considerable share of them would find the disappearance of cash problematic.
    Keywords: Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy; Bank notes, Central bank research, Digital currencies and fintech, Econometric and statistical methods
    JEL: E12 E41 E43 E51 E52 E58 E61 E63 C1 C12 C9 E4 O5 O51
    Date: 2020–02
  2. By: Gauti B. Eggertsson; Marc Giannoni
    Abstract: Conventional wisdom suggests that medium-term money neutrality imposes strong limitations on the effects of monetary policy. The point of this paper is that models with medium- and long-term money neutrality are prone to generate non-existence of equilibria at the effective lower bound (ELB) on interest rates. Non-existence is suggestive of sharp output contractions --- so-called contractionary black holes --- at the ELB. Paradoxically, the case for expansionary monetary policy at the ELB is even stronger in models that feature near money neutrality. The results highlight the benefits of a monetary policy regime in which the central bank temporarily overshoots its inflation target once confronted by the ELB.
    JEL: E0 E13 E40 E58
    Date: 2020–08
  3. By: Brubakk, Leif; ter Ellen, Saskia; Robstad, Ørjan; Xu, Hong
    Abstract: This paper provides an empirical assessment of the power of forward guidance at different horizons, shedding new light on the strength of the “forward guidance puzzle”. Our identification strategy allows us to disentangle the change in future interest rates stemming from deviations from the systematic part of monetary policy (“target” and “forward guidance” shocks) and changes in future interest rates that are due to unanticipated revisions in the central bank’s economic outlook (“information” shocks). This enables us to make a qualitative assessment of the relative importance of forward guidance. We investigate to what extent the horizon of guidance matters for its macroeconomic effects, and find that the more forward the shock is, the weaker is its impact on output and inflation. This runs contrary to the prediction from standard New Keynesian models that the power of forward guidance increases with its horizon.
    Keywords: monetary policy, forward guidance puzzle, high-frequency identification, structural VAR, central bank information
    JEL: E43 E44 E52 E58
    Date: 2019–11–04
  4. By: Cao, Jin (Norges Bank); Dinger, Valeriya (University of Osnarbruck and and Leeds University Business School); Grodecka, Anna (Department of Economics, Lund University and Knut Wicksell Centre for Financial Studies); Juelsrud, Ragnar (Norges Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: To shed light on the interaction between macroprudential and monetary policies, we study the inward transmission of foreign monetary policy in conjunction with domestic macroprudential and monetary policies in Norway and Sweden. Using detailed bank-level data we show how Norwegian and Swedish banks' lending reacts to monetary policy surprises arising abroad, controlling for the domestic macroprudential stance and the interaction between monetary and macroprudential policies. In both countries, the domestic macroprudential policy helps mitigate the effects arising after foreign monetary surprises.
    Keywords: monetary policy; macroprudential policy; policy interactions; bank lending; inward transmission; international bank lending channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2020–07–01
  5. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates.
    JEL: F30 F40 F41
    Date: 2020–07
  6. By: Sascha Möhrle
    Abstract: This paper examines the anchoring of inflation expectations in the euro area based on data from the Survey of Professional Forecasters (SPF). The analysis shows that the overall distribution of medium- and long-term inflation forecasts has changed considerably following the global financial crisis. Moreover, micro level expectations of professional forecasters are found to be sensitive to short-term economic developments. These patterns suggest that euro area inflation expectations are significantly less anchored to the ECB’s definition of price stability in recent years compared to the pre-crisis period.
    Keywords: Inflation expectations, anchoring, euro area, ECB, financial crisis
    JEL: E31 E58
    Date: 2020
  7. By: Roth, Felix; Jonung, Lars
    Abstract: Austria, Finland and Sweden became members of the EU in 1995. This paper examines how support for the euro and trust in the European Central Bank (ECB) have evolved in these three countries since their introduction at the turn of the century. Support for the euro in the two euroarea members Austria and Finland has remained high and relatively stable since the physical introduction of the new currency nearly 20 years ago, while the euro crisis significantly reduced support for the euro in Sweden. Since the start of the crisis, trust in the ECB was strongly influenced by the pronounced increase in unemployment in the euro area, demonstrating that the ECB was held accountable for macroeconomic developments. Our results indicate that citizens in the EU, both within and outside the euro area, judge the euro and the ECB based on the economic performance of the euro area. Thus, the best way to foster support for the euro and trust in the ECB is to pursue policies aimed at achieving low unemployment and high growth.
    Keywords: euro,trust,ECB,EU,monetary union,Austria,Finland,Sweden
    JEL: E42 E52 E58 F33 F45
    Date: 2020
  8. By: Antoine Martin; James J. McAndrews; Ali Palida; David R. Skeie
    Abstract: Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.
    Keywords: Fed Funds; Treasury; Federal Reserve; liquidity
    JEL: E5 E4 G12
    Date: 2020–08–24
  9. By: Peter Kugler; Samuel Reynard
    Abstract: Unconventional monetary policies have sometimes raised inflation-related fears that have not materialized. Switzerland presents an interesting case, as the central bank reacted to an appreciating currency by injecting Swiss francs through foreign exchange interventions, and bank lending increased considerably throughout the financial crisis. The low inflation that occurred after the crisis can be reconciled with the substantial money growth during the crisis by accounting for the effects of the lower equilibrium velocity and portfolio shifts associated with the Swiss National Bank's foreign exchange interventions.
    Keywords: Monetary policy, monetary aggregates, inflation, equilibrium velocity, foreign exchange interventions
    JEL: E52 E58 E41 E30
    Date: 2020
  10. By: Billi, Roberto M. (Research Department, Central Bank of Sweden); Söderström, Ulf (Research Department, Central Bank of Sweden); Walsh, Carl E. (University of California, Santa Cruz)
    Abstract: In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional ination targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the scal authority to engage alongside the central bank in ghting recessions. To illustrate this scal bene t of MGT, we introduce a simple rule for the scal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society.
    Keywords: Friedmans k-percent rule; ZLB constraint; scal policy; automatic stabilizers
    JEL: E31 E42 E52
    Date: 2020–06–01
  11. By: Robert Amano; Thomas J. Carter; Lawrence L. Schembri
    Abstract: A growing number of advanced economies with monetary policy frameworks that involve inflation targeting have adopted formal processes of review and renewal. These allow policy-makers and other stakeholders to assess the current framework’s performance to date, explore the merits of potential alternative frameworks and reach decisions about how best to enhance design and implementation. In this paper, we argue that well-governed review and renewal processes can contribute importantly to the success of a monetary policy framework: (1) they help to adjust the framework in response to experience, theoretical developments and changes in the economy; and (2) they enhance the legitimacy and credibility of changes made to the framework. However, as these processes involve inputs from the government or legislature, they also create potential for tensions regarding central bank independence. We use an international comparison to show that these considerations have been balanced in different ways across countries and time, with a spectrum running from relatively technocratic processes to ones more closely linked to the political cycle. We also highlight several unique aspects of the modern review and renewal experience in Canada, where renewals of the Bank of Canada’s joint inflation-control agreement with the government have regularly been preceded by in-depth framework reviews, each involving a large amount of original research and significant levels of transparency.
    Keywords: Central bank research; Inflation targets; Monetary policy framework
    JEL: E E5 E52 E58
    Date: 2020–08
  12. By: Ricardo Summa; Julia Braga
    Abstract: Blanchard recently stated that the old Phillips curve - a relation between the level of inflation and the level of the unemployment rate - is alive and well. In this paper we will argue that there are two routes to this old Phillips curve. We will compare and contrast them. The mainstream route assumes demand-pull inflation and full incorporation of inflation expectations into money wage increases, leading to an accelerationist behavior of inflation. Followers of this approach propose amendments to avoid this accelerationist relation between demand shocks and inflation without discarding the two crucial assumptions, based on introducing imperfections and anchored expectations. After a critical evaluation of these amendments in the accelerationist curve, we will argue in favor of an alternative route to the old Phillips curve that rejects any neoclassical assumptions. This alternative approach assumes that there is no labour scarcity and that inflation depends on conflicting claims over income. Therefore, expectations are not necessarily always fully passed on to nominal wages. Our general conflict-augmented Phillips curve is different from the conflicting-claims Heterodox NAIRU models as it is compatible both with the old Phillips curve but also with accelerating inflation, depending on the bargaining power of the workers.
    Keywords: Phillips curve, distributive conflict, natural rate of unemployment
    JEL: B51 E31 E13
    Date: 2020–08
  13. By: Binning, Andrew; Bjørnland, Hilde C.; Maih, Junior
    Abstract: We estimate a regime-switching DSGE model with a banking sector to explain incomplete and asymmetric interest rate pass-through, especially in the presence of a binding zero lower bound (ZLB) constraint. The model is estimated using Bayesian techniques on US data between 1985 and 2016. The framework allows us to explain the time-varying interest rate spreads and pass-through observed in the data. We find that pass-through tends to be delayed in the short run, and incomplete in the long run. All this impacts the dynamics of the other macroeconomic variables in the model. In particular, we find monetary policy to be less effective under incomplete pass-through. Furthermore, the behavior of pass-through in the loan rate is different from that of the deposit rate shocks. This creates asymmetric dynamics at the zero lower bound, and incomplete pass-through exacerbates that asymmetry.
    Keywords: Banking sector, incomplete or asymmetric interest rate pass-through, DSGE
    JEL: C68 E52 F41
    Date: 2019–12–27
  14. By: Hinterlang, Natascha
    Abstract: This paper analyses the forecasting performance of monetary policy reaction functions using U.S. Federal Reserve's Greenbook real-time data. The results indicate that artificial neural networks are able to predict the nominal interest rate better than linear and nonlinearTaylor rule models as well as univariate processes. While in-sample measures usually imply a forward-looking behaviour of the central bank, using nowcasts of the explanatory variables seems to be better suited for forecasting purposes. Overall, evidence suggests that U.S. monetary policy behaviour between1987-2012 is nonlinear.
    Keywords: Forecasting,Monetary Policy,Artificial Neural Network,Taylor Rule,Reaction Function
    JEL: C45 E47 E52
    Date: 2020
  15. By: In Do Hwang; Thomas Lustenberger; Enzo Rossi
    Abstract: We analyze the economic impact of central banks sensed by business executives in a sample of 61 countries from 1998 to 2016. Based on a survey conducted by the Institute for Management Development (IMD), we find compelling evidence that intensive central bank communication worsens the perceived impact. During the global financial crisis (GFC), this effect became even stronger. In contrast, economic growth and a positive output gap improve the opinion executives have of their central bank's impact on the economy. Moreover, although less robustly, higher unemployment, and higher short-term interest rates worsen executives' opinion, while market uncertainty improves it. The level of inflation and an inflation targeting regime, central bank independence and transparency, financial crises, the zero lower bound constraint, forward guidance, the performance of the stock exchange, and the volatility of the exchange rate seem to be unimportant in this regard.
    Keywords: Central bank communication, economic impact, perceived competence and trust in central banks, panel data, executive survey
    JEL: E58 E52 D83 D80
    Date: 2020
  16. By: Kotb, Naira; Proaño Acosta, Christian
    Abstract: In this paper we incorporate a stock market and a banking sector in a behavioral macro-finance model with heterogenous and boundedly rational expectations. Households' savings are diversified among bank deposits and stock purchases, and banks' lending to firms is subject to capital-related costs. We find that households' participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the transmission of monetary policy to the economy significantly, and that households' deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against-the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability.
    Keywords: Behavioral Macroeconomics,Banking,Stock Markets,Monetary Policy
    JEL: E44 E52 G21
    Date: 2020
  17. By: Christian Wipf
    Abstract: The paper compares the welfare properties of two competing organi- zations of the monetary system: The current fractional reserve banking system versus a narrow banking system where inside money is fully backed by outside money issued by the central bank. Using a New Monetarist model, the analysis shows that fractional reserve banking is bene cial because of the interest payments on inside money. Since inside money funds loans, it pays interest, compensating the agents for the in ation tax and thus reducing the welfare costs of in ation. Since narrow banking provides no such compensation fractional reserve banking typically domi- nates narrow banking in terms of welfare. This also holds if outside money pays interest. Only if fractional reserve banking is suciently constrained, narrow banking can yield higher welfare.
    JEL: E42 E51 G21
    Date: 2020–08
  18. By: Gauti B. Eggertsson (Brown University); Ragnar E. Juelsrud (Norges Bank); Lawrence H. Summers (Harvard University); Ella Getz Wold (Brown University)
    Abstract: Following the crisis of 2008, several central banks engaged in a new experiment by setting negative policy rates. Using aggregate and bank level data, we document that deposit rates stopped responding to policy rates once they went negative and that bank lending rates in some cases increased rather than decreased in response to policy rate cuts. Based on the empirical evidence, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rate turns negative, the usual transmission mechanism of monetary policy through the bank sector breaks down. Moreover, because a negative policy rate reduces bank profits, the total effect on aggregate output can be contractionary. A calibration which matches Swedish bank level data suggests that a policy rate of - 0.50 percent increases borrowing rates by 15 basis points and reduces output by 7 basis points.
    Date: 2019–01–18
  19. By: Kenneth D. Garbade; Frank M. Keane
    Abstract: In response to disorderly market conditions in mid-March 2020, the Federal Reserve began an asset purchase program designed to improve market functioning in the Treasury and agency mortgage-backed securities (MBS) markets. The 2020 purchases have no parallel, but there are several instances of large SOMA purchases undertaken to support Treasury market functions in earlier decades. This post recaps three such episodes, one in 1939 at the start of World War II, one in 1958 in connection with a poorly received Treasury financing, and a third in 1970, also in connection with a Treasury financing. The three episodes, together with the more recent intervention, demonstrate the Fed’s long-standing and continuing commitment to the maintenance of orderly market functioning in markets where it conducts monetary policy operations—formerly limited to the Treasury market, but now also including the agency MBS market.
    Keywords: market function purchases; market liquidity; COVID-19; pandemic
    JEL: G1 E5
    Date: 2020–08–20
  20. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
    Abstract: We build a model of the global financial cycle with one key ingredient: the demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, low U.S. interest rates and exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy.
    JEL: E4 F3 G15
    Date: 2020–08
  21. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: Negative Rates,Non-Standard Monetary Policy,Reach-for-Yield,Securities,Banks
    JEL: E43 E52 E58 G01 G21
    Date: 2020
  22. By: Thore Kockerols (Norges Bank); Christoffer Kok (European Central Bank)
    Abstract: Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”.
    Keywords: leaning against the wind, macroprudential policy, financial cycle
    JEL: E58 G01
    Date: 2019–01–10
  23. By: Jevtic, Aleksandar R.
    Abstract: This paper provides a political economy perspective on gold standard adoption in the Kingdom of Yugoslavia which joined the monetary system in midst of the Great Depression in June 1931. The analysis proceeds in three stages. First, the high relative costs faced by a peripheral country like Yugoslavia for maintaining a gold standard, stemming from a fluctuating balance-of-payments and lacking institutional structures, are analysed. Against this background, the economic and political reasons why policy elites nevertheless endeavoured to adopt the gold standard are examined by looking at debates in Yugoslavia's central bank, correspondence between governmental institutions and various economic newspapers. Subsequently, the paper analyses how the convictions of policymakers were formed by looking at pressures exerted by foreign lenders such as the Bank for International Settlements and the state of economic knowledge in the country, as well as the ideological and cultural convictions of policy-makers. The third part analyses interest group pressures in bringing about the the gold standard, revealing that Serbian economic elites played a crucial role for its adoption while policy makers from Croatian regions, as well as lower layers of the Yugoslavian society opposed the monetary system and the deflationary policies it required.
    Keywords: gold standard,exchange rate history,Balkan economic history
    JEL: N24 N20 F55
    Date: 2020
  24. By: Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University); Efrem Castelnuovo (University of Padova and University of Melbourne); Giovanni Caggiano (Monash University and University of Padova)
    Abstract: How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession, ii) aggressive monetary policy moves could reduce such loss by about 50%.
    Keywords: Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession, Covid-19
    JEL: C22 E32 E52
    Date: 2020–08–31
  25. By: Jesse Leigh Maniff; Paul Wong
    Abstract: This paper looks at the potential benefit that a central bank digital currency (CBDC) could provide in the context of existing payment mechanisms. Central banks today provide the primary payment mechanisms for trade and commerce: cash, used by the public, and electronic payment services, used by eligible financial institutions.
    Date: 2020–08–13
  26. By: Chen, Jiaqian (IMF); Finocchiaro, Daria (Research Department, Central Bank of Sweden); Lindé, Jesper (IMF and CEPR); Walentin, Karl (Research Department, Central Bank of Sweden)
    Abstract: We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate.
    Keywords: Household debt; Zero lower bound; New Keynesian model; Collateral and borrowing constraints; Mortgage interest deductibility; Housing prices
    JEL: E52 E58
    Date: 2020–06–01
  27. By: Eguren-Martin, Fernando (Bank of England); O'Neill, Cian (Bank of England); Sokol, Andrej (European Central Bank); von dem Berge, Lukas (Bank of England)
    Abstract: We characterise the probability distribution of capital flows for a panel of emerging market economies conditional on information contained in financial asset prices, with a focus on ‘tail’ events. Our framework, based on the quantile regression methodology, allows for a separate role of push and pull-type factors, and offers insights into the term-structure of these effects. We find that both push and pull factors have heterogeneous effects across the distribution of capital flows, with the strongest reactions in the left tail. Also, the effect of changes in pull factors is more persistent than that of push factors. Finally, we explore the role of policy, and find that macroprudential and capital flow management measures are associated with changes in the distribution of capital flows.
    Keywords: Capital flows; sudden stops; capital flight; retrenchment; capital flow surges; push versus pull; capital controls; macroprudential policy; financial conditions indices; quantile regression
    JEL: F32 F34 G15
    Date: 2020–08–07
  28. By: Cynthia L. Doniger; James Hebden; Luke Pettit; Arsenios Skaperdas
    Abstract: This note presents an approach to infer the magnitude of changes to the level of the policy target rate--a more commonly used metric of monetary policy actions--that would lead to approximately the same macroeconomic outcomes as induced through changes in the central bank's balance sheet.
    Date: 2019–07–19
  29. By: Ricardo Correa; Wenxin Du; Gordon Y. Liao
    Abstract: We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.
    JEL: E4 F3 G2
    Date: 2020–07
  30. By: Alpanda, Sami; Granziera, Eleonora; Zubairy, Sarah
    Abstract: We investigate how the business, credit and interest rate cycles affect the monetary transmission mechanism, using state-dependent local projection methods and data from 18 advanced economies. We exploit the time-series variation within countries, as well as cross-sectional variation across countries, to investigate this issue. We find that the impact of monetary policy shocks on output and most other macroeconomic and financial variables is smaller during periods of economic downturns, high household debt, and high interest rates. We then build a small-scale theoretical model to rationalize these facts. The model highlights the presence of collateral and debt-service constraints on household borrowing and refinancing as a potential cause for state dependence in monetary policy with respect to the business, credit, and interest rate cycles.
    Keywords: Monetary Policy, Household Debt, Local Projections
    JEL: E21 E32 E52
    Date: 2019–11–12
  31. By: Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja
    Abstract: This paper examines the relationship between central bank funding and credit risk-taking. Employing comprehensive bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that borrowing from the central bank is associated with rebalancing of bank portfolios towards ex-ante riskier firms. We further establish that this relationship is associated with the ECB's maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we highlight that these shifts in bank lending might lead to an ex-post deterioration of bank balance sheets, but increase firm-level investment and employment.
    Keywords: Monetary Policy,LTRO,Bank Lending,Credit Risk-Taking,Real Effects,TFP Growth
    JEL: E44 E52 G21 O40
    Date: 2020
  32. By: Efraim Benmelech; Nitzan Tzur-Ilan
    Abstract: As countries around the world grapple with Covid-19, their economies are grinding to a halt. For the first time since the Great Depression both advanced economies and developing economies are in recession. Governments and central banks have responded to the pandemic and the economic crisis using both fiscal and monetary tools on a scale that the world has not witnessed before. This paper analyzes the determinants of fiscal and monetary policies during the Covid-19 crisis. We find that high-income countries announced larger fiscal policies than lower-income countries. We also find that a country’s credit rating is the most important determinant of its fiscal spending during the pandemic. High-income countries entered the crisis with historically low interest rates and as a result were more likely to use nonconventional monetary policy tools. These findings raise the concern that countries with poor credit histories – those with lower credit ratings and, in particular, lower-income countries – will not be able to deploy fiscal policy tools effectively during economic crises.
    JEL: E43 E44 E52 E62 E63 G01 G28
    Date: 2020–07
  33. By: Matteo Cacciatore; Fabio Ghironi
    Abstract: We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.
    JEL: E24 E32 E52 F16 F41 J64
    Date: 2020–07
  34. 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 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 results 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: 2020–08–25
  35. 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
  36. By: Jennifer La'O; Alireza Tahbaz-Salehi
    Abstract: This paper studies the optimal conduct of monetary policy in a multi-sector economy in which firms buy and sell intermediate goods over a production network. We first provide a necessary and sufficient condition for the monetary policy’s ability to implement flexible-price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first-best allocation. We then characterize the constrained-efficient policy in terms of the economy’s production network and the extent and nature of nominal rigidities. Our characterization result yields general principles for the optimal conduct of monetary policy in the presence of input output linkages: it establishes that optimal policy stabilizes a price index with higher weights assigned to larger, stickier, and more upstream industries, as well as industries with less sticky upstream suppliers but stickier downstream customers. In a calibrated version of the model, we find that implementing the optimal policy can result in quantitatively meaningful welfare gains.
    JEL: C67 E5
    Date: 2020–07
  37. By: Vegard H. Larsen (Norges Bank and Centre for Applied Macroeconomics and Commodity Prices, BI Norwegian Business School); Leif Anders Thorsrud (Norges Bank and Centre for Applied Macroeconomics and Commodity Prices, BI Norwegian Business School); Julia Zhulanova (Centre for Applied Macroeconomics and Commodity Prices, BI Norwegian Business School)
    Abstract: We investigate the role played by the media in the expectations formation process of households. Using a novel news-topic-based approach we show that news types the media choose to report on, e.g., fiscal policy, health, and politics, are good predictors of households' stated inflation expectations. In turn, in a noisy information model setting, augmented with a simple media channel, we document that the underlying time series properties of relevant news topics explain the time-varying information rigidity among households. As such, we not only provide a novel estimate showing the degree to which information rigidities among households varies across time, but also provide, using a large news corpus and machine learning algorithms, robust and new evidence highlighting the role of the media for understanding inflation expectations and information rigidities.
    Keywords: expectations, media, machine learning, inflation
    JEL: C11 C53 D83 D84 E13 E31 E37
    Date: 2019–02–20
  38. By: Armelius, Hanna (Payments Department); Claussen, Carl Andreas (Payments Department); Reslow, André (Payments Department, Sveriges Riksbank; Uppsala University and Uppsala Centre for Fiscal Studies (UCFS))
    Abstract: There is much in our increasingly digitized economies to suggest that the use of cash should fall. However, in almost all countries, it is constant or rising with a few notable excep- tions. Sweden, in particular, displays a divergent development. In this paper, we explore the drivers behind this development. We use a data set consisting of 129 developed and de- veloping countries and an extensive set of possible explanatory variables to estimate panel regressions for cash demand. In line with earlier studies, we find that economic develop- ment, demography, and the interest rate are important factors. A new finding is that our estimations point to a negative relationship between cash and corruption, and between cash and trust in government and financial institutions. However, this is not enough to fully explain the divergent development in Sweden. We therefore also discuss some recent events and policy measures in Sweden that seem to have accelerated the decline in cash during the last decade.
    Keywords: Cash Demand; Currency in Circulation; Money
    JEL: E41 E42 E51
    Date: 2020–08–01
  39. By: Razzak, Weshah
    Abstract: We rely on microeconomics theory to compute the natural rate of interest for the G7 countries from 2001 to 2017. The equilibrium natural rate of interest is determined by a parsimonious equation that is easily computed from readily observable data, hence no estimation errors. The model predicts that the natural rate of interest is equal to the consumption-leisure growth rate less the capital-labor growth rate, which is zero in the steady state, no growth. It is positive (negative) when the consumption-leisure growth gap is greater (smaller) than the capital-labor growth gap. The model predicts that fiscal expansion is an expensive policy to stimulate the economy when the Zero Lower Bound (ZLB) constraint is binding.
    Keywords: Natural rate of interest, Monetary policy
    JEL: C68 E43 E52
    Date: 2020–04

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