nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒11‒09
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Russia’s Monetary Policy in 2018 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander
  2. Bargaining Power and Outside Options in the Interbank Lending Market By Puriya Abbassi; Falk Bräuning; Niels Schulze
  3. Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model By Christian R. Proaño; Benjamin Lojak
  4. Even Keel and the Great Inflation By Victoria Consolvo; Owen F. Humpage; Sanchita Mukherjee
  5. Setting New Priorities for the ECB's Mandate By Christophe Blot; Jérôme Creel; Emmanuelle Faure; Paul Hubert
  6. Central banks at the heart of ecological reconstruction By Étienne Espagne, AFD -; Antoine Godin, AFD -; Thomas Mélonio, AFD
  7. Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest By Enrique Martinez-Garcia
  8. Is Price Level Targeting a Robust Monetary Rule? By Szabolcs Deak; Paul Levine; Afrasiab Mirza; Joseph Pearlman
  9. Monetary policy effects in times of negative interest rates: What do bank stock prices tell us? By Joost Bats; Massimo Giuliodori; Aerdt Houben
  10. Fire Sales, the LOLR and Bank Runs with Continuous Asset Liquidity By Ulrich Bindseil; Edoardo Lanari
  11. Information Acquisition and Price Setting under Uncertainty: New Survey Evidence By CHEN Cheng; SENGA Tatsuro; SUN Chang; ZHANG Hongyong
  12. Monetary Policy and Speculative Asset Markets By Gregor Boehl
  13. Sectoral Labor Mobility and Optimal Monetary Policy By Alessandro Cantelmo; Giovanni Melina
  14. Countercyclical Liquidity Policy and Credit Cycles: evidence from macroprudential and monetary policy in Brazil By João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
  15. The neutral rate in Canada: 2020 update By Dmitry Matveev; Julien McDonald-Guimond; Rodrigo Sekkel
  16. Owner Occupied Housing, Inflation and Monetary Policy By Robert J. Hill; Miriam Steurer; Sofie R. Waltl
  17. Money markets, central bank balance sheet and regulation By Corradin, Stefano; Eisenschmidt, Jens; Hoerova, Marie; Linzert, Tobias; Schepens, Glenn; Sigaux, Jean-David
  18. PCCI – a data-rich measure of underlying inflation in the euro area By Bańbura, Marta; Bobeica, Elena
  19. Monetary Policy, Prudential Policy, and Bank's Risk-Taking: A Literature Review By Melchisedek Joslem Ngambou Djatche
  20. Forecasting Consumer Price Index Inflation in India: Vector Error Correction Mechanism Vs. Dynamic Factor Model Approach for Non-Stationary Time Series. By Bhattacharya, Rudrani; Kapoor, Mrigankshi
  21. The wage-price pass-through in the euro area: does the growth regime matter? By Hahn, Elke
  22. Corporate Debt Maturity and Monetary Policy By Falk Bräuning; Jose Fillat; J. Christina Wang
  23. Liquidity, Interbank Network Topology and Bank Capital By Aref Ardekani
  24. Raiders of the Lost High-Frequency Forecasts: New Data and Evidence on the Efficiency of the Fed's Forecasting By Andrew C. Chang; Trace J. Levinson
  25. One Country - Two Monetary Policies: Evidence from a new indicator of the PBoC¡äs monetary policy support for poor regions By Makram El-Shagi; Jiang Lunan
  26. Deciphering Federal Reserve Communication via Text Analysis of Alternative FOMC Statements By Taeyoung Doh; Dongho Song; Shu-Kuei X. Yang
  27. Money Demand: A Pseudo-Metastudy By Makram El-Shagi; Yizhuang Zheng
  28. Selective Attention in Exchange Rate Forecasting By Svatopluk Kapounek; Zuzana Kucerova; Evzen Kocenda
  29. Let's Close the Gap: Revising Teaching Materials to Reflect How the Federal Reserve Implements Monetary Policy By Jane E. Ihrig; Scott A. Wolla
  30. Why MMT can’t work: A Keynesian Perspective By Biagio Bossone
  31. Synchronization analysis between exchange rates based on purchasing power parity using the Hilbert transform By Makoto Muto; Yoshitaka Saiki
  32. How Did Depositors Respond to COVID-19? By Ross Levine; Chen Lin; Mingzhu Tai; Wensi Xie
  33. Inflation, ECB and short-term interest rates: A new model, with calibration to market data By F. Antonacci; C. Costantini; F. D'Ippoliti; M. Papi
  34. How Shocks Affect International Reserves? A Quasi-Experiment of Earthquakes By Yothin Jinjarak; Ilan Noy; Quy Ta

  1. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy)
    Abstract: In 2019, a sharp and largely unexpected slowdown in inflation led to a significant easing of monetary policy. Over the course of that year, the Bank of Russia reduced its key rate five times: four times by 0.25 percentage points on June 14, July 26, September 6, and December 13; and by 0.5 percentage points at a meeting of its Board of Directors on October 25. As a result, the key rate declined from 7.75% to 6.25% per annum, thus approaching, according to the estimates of the RF Central Bank,[1] its neutral level.[2] Over the course of 2019, the movement pattern of the key rate was shaped, on the one hand, by the rising inflation risks in the H2 2018 and early 2019 caused by the raise of the VAT rate at the beginning of 2019, a decline of the world market for energy prices, and an increase in inflationary expectations. As a result, in January-May 2019, the regulator did not ease its monetary policy, keeping the key rate unchanged. At the same time, the RF Central Bank’s rhetoric regarding future decisions began to somewhat relax in March-April 2019, as the inflation index passed a local peak (5.3% in March 2019 compared to March 2018). It was only in June 2019 that the Bank of Russia switched over to actually reducing the key rate.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2020
  2. By: Puriya Abbassi; Falk Bräuning; Niels Schulze
    Abstract: We study the role of bargaining power and outside options with respect to the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model, and we test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders lowers bilateral interest rates. Moreover, we find that when lenders that are not eligible to earn interest on excess reserves (IOER) lend funds to borrowers with access to the IOER facility, they do so at rates that are below the IOER rate; in turn, these borrowers put the funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not merely a result of the lack of alternative outside options for some lenders, but rather it crucially depends on lenders’ limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro-area interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.
    Keywords: bargaining power; over-the-counter market; monetary policy; money market segmentation
    JEL: E4 E58 G21
    Date: 2020–06–01
  3. By: Christian R. Proaño; Benjamin Lojak
    Abstract: In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.
    Keywords: Monetary Policy, Monetary Unions, Zero Lower Bound, Inflation Targets, Behavioral Macroeconomics
    JEL: E52 F02
    Date: 2020–10
  4. By: Victoria Consolvo; Owen F. Humpage; Sanchita Mukherjee
    Abstract: During the early part of the Great Inflation (1965-1975), the Federal Reserve undertook even-keel operations to assist the US Treasury’s coupon security sales. Accordingly, the central bank delayed any tightening of monetary policy and permanently injected reserves into the banking system. Using real-time Taylor-type and McCallum-like reaction functions, we show that the Fed routinely undertook these operations only when it was otherwise tightening monetary policy. Using a quantity-equation framework, we show that the Federal Reserve’s even-keel actions added approximately one percentage point to the overall 5.1 percent average annual inflation rate over these years.
    Keywords: Even Keel; Great Inflation; Federal Reserve; US Treasury
    JEL: E5 N1 F3
    Date: 2020–10–23
  5. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Emmanuelle Faure; Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: In a statement announcing the review of its monetary policy strategy, the Euro-pean Central Bank (ECB) stated that it will, in addition to price stability, also take into account how “other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB's mandate”. The key question is which precise objectives shall be taken into account and how the ECB might reach them, keeping in mind that some trade-offs vis-à-vis the primary objective may arise. [First paragraph]
    Keywords: Priorities; ECB's mandate
    Date: 2020–06–08
  6. By: Étienne Espagne, AFD -; Antoine Godin, AFD -; Thomas Mélonio, AFD
    Abstract: Faced with the pandemic crisis and its economic and financial consequences in the short and medium term, central banks found themselves in the position of guardians of chaos. They thus acted quickly and massively to avoid the potentially dramatic consequences of a sudden shutdown of a large number of Western and Asian economies. Faced with the reversal of capital flows out of developing and emerging countries, many of which found themselves in a foreign exchange crisis and in urgent need of liquidity. The US Federal Reserve (Fed) had to respond to a sudden demand for dollars and treasury bills.
    JEL: Q
    Date: 2020–10–23
  7. By: Enrique Martinez-Garcia
    Abstract: Much consideration has been given among scholars and policymakers to the decline in the U.S. natural rate of interest since the 2007 – 09 global financial crisis. In this paper, I investigate its determinants and drivers through the lens of the workhorse two-country New Keynesian model that captures the trade and technological interconnectedness of the U.S. with the rest of the world economy. Using Bayesian techniques, I bring the set of binding log-linearized equilibrium conditions from this model to the data, but augmented with survey-based forecasts in order to align the solution with observed expectations incorporating the macro effects of the zero-lower bound constraint. With this structural framework, I recover a novel open-economy estimate of the U.S. natural rate. The paper’s main results are: (a) the decline in the U.S. natural rate largely follows the slide of the long-run real interest rate in the forecast data, but is partly cushioned in the short run by the contribution of domestic and to a significant extent also foreign productivity shocks; (b) the fall of U.S. measured labor productivity during this time contributed to a concomitant fall in U.S. output potential; (c) the past decade is also characterized by the compression of markups (negative cost-push shocks) which accounts for much of the cyclical upswing in U.S. output in spite of the fall in its potential; and (d) monetary policy has shown its efficacy boosting U.S. output and sustaining U.S. inflation close to its 2 percent target against the drag on inflation from the negative cost-push shocks during this time. Finally, I also argue that ignoring the international linkages may result in biased estimates and can distort the empirical inferences on U.S. monetary policy in important ways.
    Keywords: Open Economy Model; New Keynesian; Monetary Policy; Wicksellian Natural Rate; Bayesian Estimation
    JEL: F41 F42 E12 E52 C11
    Date: 2020–10–22
  8. By: Szabolcs Deak (University of Exeter); Paul Levine (University of Surrey); Afrasiab Mirza (University of Birmingham); Joseph Pearlman (City University London)
    Abstract: We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions outperforms all models on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions.
    Keywords: Bayesian estimation, DSGE models, Financial frictions, Forecasting, Prediction Pools, Optimal Simple Rules.
    JEL: D52 D53 E44 G18 G23
    Date: 2020–10
  9. By: Joost Bats; Massimo Giuliodori; Aerdt Houben
    Abstract: Do negative interest rates matter for bank performance? This paper investigates whether monetary policy surprises impact bank stock prices differently in times of positive and negative interest rates. The analysis controls for broad stock market movements and finds that an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve resulting from monetary policy announcements reduce bank stock prices in a low and especially negative interest rate environment. The effects persist in the days after the monetary policy announcement and are larger for banks relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in a negative interest rate environment. The results indicate that when market interest rates are negative but deposit rates stuck at zero, monetary policy instruments that target the longer-end of the yield curve are less detrimental to bank performance than those that target the shorter-end of the yield curve.
    Keywords: Monetary policy; bank stock prices; negative interest rates
    JEL: E43 E44 E52 G12 G21
    Date: 2020–10
  10. By: Ulrich Bindseil; Edoardo Lanari
    Abstract: Bank's asset fire sales and recourse to central bank credit are modelled with continuous asset liquidity, allowing to derive the liability structure of a bank. Both asset sales liquidity and the central bank collateral framework are modeled as power functions within the unit interval. Funding stability is captured as a strategic bank run game in pure strategies between depositors. Fire sale liquidity and the central bank collateral framework determine jointly the ability of the banking system to deliver maturity transformation without endangering financial stability. The model also explains why banks tend to use the least liquid eligible collateral with the central bank and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can trigger a bank run. The model also shows that the collateral framework can be understood, beyond its aim to protect the central bank, as financial stability and non-conventional monetary policy instrument.
    Date: 2020–10
  11. By: CHEN Cheng; SENGA Tatsuro; SUN Chang; ZHANG Hongyong
    Abstract: What makes prices sticky? While it is commonly understood that prices adjust only sluggishly to changes in economic conditions, the cause of sluggish price adjustment is underexplored empirically. In this paper, we argue that sluggish updating of information drives price stickiness. To this end, we use a panel dataset that contains information on both firm-level expectations and price adjustments and document the following facts: (1) there is a positive correlation between whether a firm updates its expectations and whether it adjusts prices; (2) firms update expectations more frequently and make less correlated forecast errors in downturns; and (3) firms adjust prices more frequently in downturns. We then extend an Ss price-setting model with second moment shocks to allow for endogenous information acquisition by the firm. The model predicts that firms acquire information more intensively during periods of high volatility, also adjusting expectations and prices more often. Countercyclical volatility, interacting with menu costs and information rigidity, is what drives our results. This implies that the flexibility of the aggregate price level is counter-cyclical, making monetary policy less effective in recessions.
    Date: 2020–10
  12. By: Gregor Boehl
    Abstract: I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, potentially causing endogenous, nonfundamental bubbles. These features greatly improve the power of the model to replicate empirical-key moments. I find that monetary policy can indeed dampen financial cycles by carefully leaning against asset prices, but at the cost of amplifying their transmission to the macroeconomy, and of causing undesirable responses to movements in fundamentals.
    Keywords: Monetary policy, nonlinear dynamics, heterogeneous expectations, credit constraints, bifurcation analysis
    JEL: E44 E52 E03 C63
    Date: 2020–10
  13. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: How should central banks optimally aggregate sectoral inflation rates in the presence of imperfect labor mobility across sectors? We study this issue in a two-sector New-Keynesian model and show that a lower degree of sectoral labor mobility, ceteris paribus, increases the optimal weight on inflation in a sector that would otherwise receive a lower weight. We analytically and numerically find that, with limited labor mobility, adjustment to asymmetric shocks cannot fully occur through the reallocation of labor, thus putting more pressure on wages, causing inefficient movements in relative prices, and creating scope for central bank’s intervention. These findings challenge standard central banks’ practice of computing sectoral inflation weights based solely on sector size, and unveil a significant role for the degree of sectoral labor mobility to play in the optimal computation. In an extended estimated model of the U.S. economy, featuring customary frictions and shocks, the estimated inflation weights imply a decrease in welfare up to 10 percent relative to the case of optimal weights.
    Keywords: optimal monetary policy, durable goods, labor mobility
    JEL: E52 E58
    Date: 2020
  14. By: João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
    Abstract: We analyze how countercyclical liquidity policy – via reserve requirements (RRs) – affects the credit cycle. For identification, we exploit supervisory credit register data and changes in RRs in Brazil motivated by monetary and prudential purposes. Credit supply effects are binding for firms and twice as large when policy is eased during credit crunches – crisis – than when policy is tightened during credit booms. Effects are stronger for larger domestic banks. During crunches, more affected banks increase the supply of credit volume due to policy easing, but increase collateral requirements, while more financially constrained banks retrench. During booms, foreign banks bypass policy tightening.
    Date: 2020–10
  15. By: Dmitry Matveev; Julien McDonald-Guimond; Rodrigo Sekkel
    Abstract: The neutral rate of interest is important for central banks because it helps measure the stance of monetary policy. We present updated estimates of the neutral rate in Canada using the most recent data. We expect the COVID-19 pandemic to significantly affect the fundamental drivers of the Canadian neutral rate.
    Keywords: Economic models; Interest rates; Monetary policy
    JEL: E40 E43 E50 E52 E58 F41
    Date: 2020–10
  16. By: Robert J. Hill (University of Graz, Austria); Miriam Steurer (University of Graz, Austria); Sofie R. Waltl (Luxembourg Institute of Socio-Economic Research, Luxembourg)
    Abstract: The ECB and Eurostat have been trying to bring owner-occupied housing (OOH) into the Harmonized Index of Consumer Prices (HICP) for two decades without success. OOH is now back on the agenda as part of the ECB's new monetary-policy strategy. A fresh perspective is needed. We argue that a viable way forward is using a simplified version of the user-cost method. This would improve the harmonization of the HICP, help close the credibility gap between measured in inflation and the public's perception of it, and make it easier for the ECB to achieve its inflation target.
    Keywords: Measurement of inflation; Owner occupied housing; User cost; Rental equivalence; Hedonic quantile regression; Housing booms and busts; Inflation targeting; Disinflation puzzle; Leaning against the wind; Secular stagnation.
    JEL: C31 C43 E01 E31 E52 R31
    Date: 2020–10
  17. By: Corradin, Stefano; Eisenschmidt, Jens; Hoerova, Marie; Linzert, Tobias; Schepens, Glenn; Sigaux, Jean-David
    Abstract: This paper analyses money market developments since 2005, and examines factors that have affected money market functioning. We consider several metrics of activity in both secured and unsecured euro area money markets, and study interactions with new Basel III regulations and with central bank policies (liquidity provision, asset purchases and the Securities Lending Programme). Using aggregate data, we document that, prior to 2015, heightened financial market volatility coincided with worsening money market conditions, while higher central bank liquidity provision was associated with reduced money market stress. After 2015, the evidence is consistent with central bank asset purchases inducing scarcity effects in some money market segments, and with active securities lending supporting money market functioning. Using transactions-level money market data combined with supervisory data, we further document that the leverage ratio regulation impacts money markets at quarter-ends due to “window-dressing” effects, reducing money market volumes and rates. We also consider the macroeconomic impact of changing money market conditions, finding that the impact depends on whether frictions originate in secured or unsecured markets and on central bank policies in place. JEL Classification: E44, E58, G12, G20, G28
    Keywords: E44, E58, G12, G20, G28
    Date: 2020–10
  18. By: Bańbura, Marta; Bobeica, Elena
    Abstract: This paper details the rationale and methodology behind the construction of the Persistent and Common Component of Inflation (PCCI), a measure of underlying inflation in the euro area. The PCCI reflects the view that underlying inflation captures widespread developments across the Harmonised Index of Consumer Prices (HICP) basket and that it is the persistent component of inflation. Methodologically, it relies on a generalised dynamic factor model estimated on a large set of disaggregated HICP inflation rates for 12 euro area countries. For each individual inflation rate, we estimate a low-frequency common component, i.e. a component driven by shocks or factors that are relevant for all inflation series and capturing cycles longer than three years. The PCCI is a weighted average of these common components. It is an alternative to the typical exclusion-based measures used to gauge underlying inflation (e.g. HICP excluding food and energy), as it does not a priori exclude any HICP items. It exhibits a set of desirable properties as a measure of underlying inflation, and it is a good tracker of more lasting inflationary developments (judging by smoothness and bias). Furthermore, it is timely and signals turning points with some lead, while acting as an attractor for headline inflation. JEL Classification: C32, E31, E32, E52
    Keywords: dynamic factor model, frequency domain, Underlying (core) inflation
    Date: 2020–10
  19. By: Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS)
    Abstract: The pre-crisis low interest rates environment is raising concerns among researchers and policymakers about its impact on the triangle prudential policy - monetary policy - bank's risk-taking. While interest rates is set at low level for inflationary and economic growth reasons, they may lead banks to take more risk, jeopardizing the financial system and impeding the recovery. This paper provides a literature review, on the one hand, on the interaction of monetary and prudential policies through their impacts on bank's risk-taking, and on the other hand, on the issues of their coordination. Monetary policy appears to have ambiguous effects on banks' profitability, and then, on banks' risk-taking behaviour. Despite monetary and prudential policies pursue different objectives, they inevitably interact, raising challenges that face policymakers. Albeit it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability, and that it should be coordinated with prudential policy, the form of this coordination is not clear-cut.
    Keywords: Monetary policy, prudential policy, financial stability, bank's risk-taking
    Date: 2020–10
  20. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Kapoor, Mrigankshi (Birla Institute of Technology and Science)
    Abstract: Short to medium term forecasting of inflation rate is important for economic decision making by economic agents and timely implementation of monetary policy. In this study, we develop two alternative forecasting models for Year-on-Year (YOY) inflation in Consumer Price Index (CPI) in India using a large number of macroeconomic indicators. The YOY CPI inflation and its predictive indicators are found to be non-stationary and cointegrated. To address this issue, we employ Vector Error Correction Model (VECM) and Dynamic Factor Model (DFM) modified for non-stationary time series to forecast CPI inflation. We find that in terms of Root Mean Square Error (RMSE), the VECM model performs marginally better than the DFM model. However, both models are found to have the same predictive accuracy using Diebold-Mariano test.
    Keywords: CPI Inflation ; India ; Forecasting ; Vector Error Correction Model ; Dynamic Factor Model
    JEL: C32 C53
    Date: 2020–10
  21. By: Hahn, Elke
    Abstract: This paper explores whether the transmission mechanism between wages and prices in the euro area is affected by the growth regime. Since the great financial crisis inflation developments have posed major puzzles to economists as inflation declined by less than was widely expected during the past recessions and rose by less during the subsequent recoveries. This paper analyses whether the wage-price pass-through may have contributed to these inflation puzzles. Applying the Threshold VAR model proposed by Alessandri and Mumtaz (2017) to the analysis of the wage-price pass-through, the paper examines whether the transmission mechanim of different types of shocks differs between recessions and expansions. The results point to differences in the wage-price pass-through between growth regimes for demand shocks but not for wage mark-up shocks. They show a much smaller response of prices relative to wages, i.e. a smaller wage-price pass-through, for demand shocks in recessions than in expansions. This is accounted for by a smaller relative response of profit margins. More generally, the results suggest that the slope of the price Phillips curve flattens in recessions on account of the lower wage-price pass-through, while the wage Phillips curve appears to be broadly stable across growth regimes. Overall, the results contribute to solve or diminish the puzzle of the missing disinflation of the past two recessions suggesting that inflation should be expected to recede by less during recessions than indicated by standard linear models. JEL Classification: C32, E31, J30
    Keywords: euro area inflation, growth regimes, threshold VAR, wage-price pass-through
    Date: 2020–10
  22. By: Falk Bräuning; Jose Fillat; J. Christina Wang
    Abstract: Do firms lengthen the maturity of their borrowing following a flattening of the Treasury yield curve that results from monetary policy operations? We explore this question separately for the years before and during the zero lower bound (ZLB) period, recognizing that the same change in the yield curve slope signifies different states of the economy and monetary policy over the two regimes. We find that the answer is robustly yes for the pre-ZLB period: Firms extended the maturity of their bond issuance by nearly three years in response to a policy-induced reduction of 1 percentage point in the maturity-matched Treasury term spread between the current and previous bond issuance. By comparison, the answer is more nuanced for the ZLB period: The magnitude and significance of the maturity response were even more pronounced during the peak quarter of the financial crisis (the fourth quarter of 2008), but they were much more muted afterward. In addition, we find that the corporate bond credit spread declined consistently following a policy-induced flattening of the yield curve, albeit not significantly after 2008:Q4. Most of these effects are due to the lower term premium, not due to the expected short-term rate. Taken together, these findings indicate that firms tend to adjust the maturity and composition of their debt issuance in order to benefit from changes in the term spread induced by monetary policy. Our analysis illustrates one channel through which unconventional policy operations can affect economic activity, especially when markets are under distress. This can help us understand the transmission of unconventional monetary policy, which has become a vital issue in the low-interest, low-inflation environment that has prevailed since the financial crisis.
    Keywords: monetary policy; yield curve; corporate finance
    JEL: G32 E43 E58
    Date: 2020–10–22
  23. By: Aref Ardekani (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UNILIM - Université de Limoges)
    Abstract: By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banks' interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital rations when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks.
    Keywords: Interbank network topology,Bank regulatory capital,Liquidity risk,Basel III
    Date: 2020–10
  24. By: Andrew C. Chang; Trace J. Levinson
    Abstract: We introduce a new dataset of real gross domestic product (GDP) growth and core personal consumption expenditures (PCE) inflation forecasts produced by the staff of the Board of Governors of the Federal Reserve System. In contrast to the eight Greenbook forecasts a year the staff produces for Federal Open Market Committee (FOMC) meetings, our dataset has roughly weekly forecasts. We use these new data to study whether the staff forecasts efficiently and whether efficiency, or lack thereof, is time-varying. Prespecified regressions of forecast errors on forecast revisions show that the staff's GDP forecast errors correlate with its GDP forecast revisions, particularly for forecasts made more than two weeks from the start of a FOMC meeting, implying GDP forecasts exhibit time-varying inefficiency between FOMC meetings. We find some weaker evidence for inefficient inflation forecasts.
    Keywords: Federal Reserve; Forecast efficiency; Information Rigidities; High frequency forecasts; Preanalysis plan; Preregistration plan; Real-time data
    JEL: C53 C82 D79 E27 E37 E58
    Date: 2020–10–23
  25. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Jiang Lunan (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan; Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: In recent years, one of the PBoC¡äs major issues was to avoid a generally conservative monetary policy that would jeopardize the central government¡äs poverty-alleviation strategy by limiting credit supply in rural areas where it is already scarce. We develop a range of new indicators to measure those aspects of the PBoC¡äs policy and demonstrate that the PBoC has successfully implemented policies targeted at poor counties. That is, we show that a central bank has the general potential to address regional diversity and distributional issues.
    Keywords: China, fuzzy regression discontinuity, regional, monetary policy
    JEL: E5 C2 I3
    Date: 2020–10
  26. By: Taeyoung Doh; Dongho Song; Shu-Kuei X. Yang
    Abstract: We apply a natural language processing algorithm to FOMC statements to construct a new measure of monetary policy stance, including the tone and novelty of a policy statement. We exploit cross-sectional variations across alternative FOMC statements to identify the tone (for example, dovish or hawkish), and contrast the current and previous FOMC statements released after Committee meetings to identify the novelty of the announcement. We then use high-frequency bond prices to compute the surprise component of the monetary policy stance. Our text-based estimates of monetary policy surprises are not sensitive to the choice of bond maturities used in estimation, are highly correlated with forward guidance shocks in the literature, and are associated with lower stock returns after unexpected policy tightening. The key advantage of our approach is that we are able to conduct a counterfactual policy evaluation by replacing the released statement with an alternative statement, allowing us to perform a more detailed investigation at the sentence and paragraph level.
    Keywords: FOMC; Alternative FOMC statements; Counterfactual policy evaluation; Monetary policy stance; Text analysis; Natural language processing
    JEL: E30 E40 E50 G12
    Date: 2020–10–06
  27. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Yizhuang Zheng (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: In this paper, we provide conclusive evidence on the role of measurement and estimation techniques in money demand estimation. Over the past few decades, there have been 100s of papers assessing money demand in the main economies of the globe. We develop a pseudo-metastudy framework where, based on modeling choices found in the literature, we estimate thousands of different specifications for the US, China, the UK and the Euro area, allowing us to assess what has driven the diverging results in the previous literature.
    Keywords: US, China, UK, Euro area, money demand
    JEL: E41
    Date: 2020–10
  28. By: Svatopluk Kapounek (Mendel University in Brno, Faculty of Business and Economics, Brno, Czech Republic); Zuzana Kucerova (Mendel University in Brno, Faculty of Business and Economics); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic; CESifo, Munich, IOS, Regensburg)
    Abstract: We analyze the exchange rate forecasting performance under the assumption of selective attention. Although currency markets react to a variety of different information, we hypothesize that market participants process only a limited amount of information. Our analysis includes more than 100,000 news articles relevant to the six most-traded foreign exchange currency pairs for the period of 1979–2016. We employ a dynamic model averaging approach to reduce model selection uncertainty and to identify time-varying probability to include regressors in our models. Our results show that smaller sizes models accounting for the presence of selective attention offer improved fitting and forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the euro/dollar exchange rate following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.
    Keywords: exchange rate; selective attention; news; forecasting; dynamic model averaging
    JEL: F33 C11
    Date: 2020–10
  29. By: Jane E. Ihrig; Scott A. Wolla
    Abstract: The topic of the Federal Reserve’s (the Fed’s) implementation of monetary policy has a significant presence in economics textbooks as well as standards and guidelines for economics instruction. This presence likely reflects the fact that it is the implementation framework that helps ensure that the Fed’s desired level of its policy interest rate is transmitted to financial markets, which helps it steer the economy toward the Congressional dual mandate of maximum employment and price stability. Over the past decade or so, the Fed has purposefully shifted the way it implements monetary policy to an environment with ample reserves in the banking system, and it has introduced new policy tools along the way. This paper shows that, unfortunately, many teaching resources are not in sync with the Fed’s current framework. We review six, 2020 or 2021 edition, principles of economics textbooks, and we find they vary greatly in their coverage of the concepts associated with the way the Fed implements policy today and in the longer run. We provide recommendations on how the authors can improve the next editions of their textbooks. We also review standards and guidelines used by secondaryschool educators. All of these are out of date, and we provide proposals for how these materials can be updated.
    Keywords: Federal Reserve; Monetary policy; Economic education; Introductory economics; Macroeconomics
    JEL: E52 E43 A22 E58
    Date: 2020–10–23
  30. By: Biagio Bossone (World Bank (US))
    Abstract: Using an ISLM open-economy model based on Keynes’ liquidity preference theory, this article shows that, unless very specific country circumstances hold, Modern Money Theory (MMT) cannot work as an effective and sustainable macroeconomic policy program aimed to achieve and maintain full-employment output through persistent money-financed fiscal deficits in economies suffering from Keynesian unemployment or underemployment. Specific country circumstances include cases where the economy enjoys very high policy credibility in the eyes of the international financial markets or issues an international reserve currency; under such circumstances, the adverse outcomes of MMT policy can be prevented and expansionary demand shocks can be effective. Short of such features, an open and internationally highly financially integrated economy that implements MMT policy persistently would either see its money stock grow unsustainably large or would have to set domestic interest rates to levels that would be inconsistent with the policy objective of resource full employment and that would cause instead economic and financial instability.
    Keywords: Aggregate demand and output; Equilibrium prices; Fiscal deficits; Interest rate; Liquidity Preference Theory, Money; Policy credibility; Stocks and flows.
    JEL: E12 E20 E40 E52 E62
    Date: 2020–10
  31. By: Makoto Muto; Yoshitaka Saiki
    Abstract: Synchronization is a phenomenon when a pair of fluctuations adjust their rhythms when they interact with each other. We measure the degree of synchronization between the exchange rates of the U.S. dollar (USD) and the euro, and between those of the USD and the Japanese yen based on purchasing power parity (PPP) over time. We employ a method of synchronization analysis using the Hilbert transform which is common in the field of nonlinear science. We find that the synchronization degree is high most of the time, suggesting a PPP establishment. The synchronization degree does not remain high across periods containing economic events with asymmetric effects, such as the U.S. real estate bubble.
    Date: 2020–10
  32. By: Ross Levine; Chen Lin; Mingzhu Tai; Wensi Xie
    Abstract: Why did banks experience massive deposit inflows during the first months of the pandemic? Using weekly branch-level data on interest rates and county-level data on COVID-19 cases, we discover that interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at other branches—even branches of the same bank in different counties. When differentiating weeks by the degree of stock market distress and counties by the likely impact of COVID-19 cases on economic anxiety, the evidence suggests that the deposit inflows were triggered by a surge in the supply of precautionary savings.
    JEL: D14 G21
    Date: 2020–10
  33. By: F. Antonacci; C. Costantini; F. D'Ippoliti; M. Papi
    Abstract: We propose a new model for the joint evolution of the European inflation rate, the European Central Bank official interest rate and the short-term interest rate, in a stochastic, continuous time setting. We derive the valuation equation for a contingent claim and show that it has a unique solution. The contingent claim payoff may depend on all three economic factors of the model and the discount factor is allowed to include inflation. Taking as a benchmark the model of Ho, H.W., Huang, H.H. and Yildirim, Y., Affine model of inflation-indexed derivatives and inflation risk premium, (European Journal of Operational Researc, 2014), we show that our model performs better on market data from 2008 to 2015. Our model is not an affine model. Although in some special cases the solution of the valuation equation might admit a closed form, in general it has to be solved numerically. This can be done efficiently by the algorithm that we provide. Our model uses many fewer parameters than the benchmark model, which partly compensates the higher complexity of the numerical procedure and also suggests that our model describes the behaviour of the economic factors more closely.
    Date: 2020–10
  34. By: Yothin Jinjarak; Ilan Noy; Quy Ta
    Abstract: We evaluate the change in international reserves in the aftermath of significant external shocks. We examine the response of international reserves to shocks by using a quasi-experimental setup and focusing on earthquakes. The estimation is done on a panel of 103 countries over the period 1979–2016. We find that in the five years following a large earthquake (i) countries exposed accumulate reserves, for precautionary reasons, (ii) trade openness is positively associated with the post-earthquake reserves accumulation, (iii) episodes of reserves depletion are observed in countries under the fixed exchange rate and/or inflation targeting regimes, and (iv) the patterns of reserves holding post-earthquake vary with a country’s income level.
    Keywords: disasters, earthquakes, international reserves, foreign exchange holding
    JEL: F31 F41 Q54
    Date: 2020

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