nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒11‒16
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Understanding Trend Inflation Through the Lens of the Goods and Services Sectors By Yunjong Eo; Luis Uzeda; Benjamin Wong
  2. The International Consequences of Bretton Woods Capital Controls and the Value of Geopolitical Stability By Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L. J. Wright
  3. Better off without the Euro? A Structural VAR Assessment of European Monetary Policy By Jan Philipp Fritsche; Patrick Christian Harms
  4. The Exchange Rate Pass-Through to Inflation and its Implications for Monetary Policy in Cameroon and Kenya By Dongue Ndongo Patrick Revelli
  5. Assessing the Impact of Nigeria's Naira Depreciation on Output and Inflation By Akinlo, Anthony Enisan; Odusola, Ayodele
  6. More Stories of Unconventional Monetary Policy By Evan Karson; Christopher J. Neely
  7. Do Expert Experience and Characteristics Affect Inflation Forecasts? By Jonathan Benchimol; Makram El-Shagi; Yossi Saadon
  8. Disentangling the effects of multidimensional monetary policy on inflation and inflation expectations in the euro area By Martínez-Hernández, Catalina
  9. Corporate investment and monetary policy transmission in Canada By Min Jae Kim; Jonathan Witmer
  11. Hysteresis Effects and Macroeconomics Gains from Unconventional Monetary Policies Stabilization By Abdoulaye Millogo
  12. Impact of a policy rate cut on bank profitability and financial stability By Hwang, Sunjoo
  13. Euro-US Dollar Exchange Rate Dynamics at the Effective Lower Bound By Eric McCoy
  14. Have the driving forces of inflation changed in advanced and emerging market economies? By Güneş Kamber; Madhusudan Mohanty; James Morley
  15. Spheres of influence in monetary regimes: the experience of the Horn of Africa (1860-1950) By Moustapha Aman
  16. Liquidity, Interbank Network Topology and Bank Capital By Aref Ardekani
  17. The Slope of the Phillips Curve: Evidence from U.S. States By Jonathon Hazell; Juan Herreño; Emi Nakamura; Jón Steinsson
  18. Shadow of the Colossus: Euro Area Spillovers and Monetary Policy in Central and Eastern Europe By Makram El-Shagi; Kiril Tochkov
  19. Pass-through from short-horizon to long-horizon inflation expectations, and the anchoring of inflation expectations By James Yetman
  20. The scars of supply shocks By Luca Fornaro; Martin Wolf
  21. Sectoral Labor Mobility and Optimal Monetary Policy By Alessandro Cantelmo; Giovanni Melina
  22. Communication at the Zero Lower Bound: The Case for Forward Guidance By Viktor Marinkov
  23. Shadow Banking, Capital Requirements and Monetary Policy By Fatih Tuluk
  24. Taylor Rules and liquidity in financial markets By Emanuele Franceschi
  25. Fiscal Dominance By Fernando M. Martin
  26. Milton Friedman and Exchange Rates in Developing Countries By Sebastian Edwards
  27. Economics of Exchange Rate Management By Odusola, Ayodele
  28. Stock market spillovers via the global production network: Transmission of U.S. monetary policy By Julian di Giovanni; Galina Hale
  29. Monetary-fiscal interactions under price level targeting By Guido Ascari; Anna Florio; Alessandro Gobbi
  30. Inflation expectations of households: do they influence wage-price dynamics in India? By Pattanaik, Sitikantha; Muduli, Silu; Ray, Soumyajit
  31. The German Federal Constitutional Court ruling and the European Central Bank's strategy By Feld, Lars P.; Wieland, Volker
  32. A simple model of liquidity By Emanuele Franceschi
  33. Tracking Inflation on a Daily Basis By Alvarez, Santiago E.; Lein, Sarah M.
  34. Extracting Information from Different Expectations By Andrew B. Martinez
  35. Inflation, Innovation and Growth: A Survey By Chu, Angus C.

  1. By: Yunjong Eo; Luis Uzeda; Benjamin Wong
    Abstract: Monetary policy is largely concerned with managing the part of inflation that is persistent (or permanent), a quantity often referred to as trend inflation. For example, a casual reading of any monetary policy report from the Federal Reserve Board will make it clear that, in addition to total (or headline) inflation, the Federal Reserve also focuses on underlying (or core) measures of inflation that exclude more volatile components such as food and energy prices. This strategy is based on the belief that fluctuations in components such as food and energy prices are ultimately temporary and, consequently, should be excluded from monetary policy considerations about the long-run path of inflation. Trend inflation is thus closely related to the concept of core inflation, since both measures provide a reading on inflation without the transient “noise†that is expected to fade in the short run. A more recent development is that goods and services—the two main sectors used to measure inflation—have been experiencing considerably different dynamics over the past three decades. Our goal in this paper is to understand how such contrasting behaviors at the sectoral level affect the aggregate level of trend inflation dynamics. To do so, we develop an empirical framework that accounts for historical changes in the volatility and comovement of trend inflation in the goods and services sectors for the US. Our main finding is that, while both sectors used to contribute to the overall variation in aggregate trend inflation, since the 1990s variations in trend inflation have been almost entirely dominated by the services sector. Two changes in sector-specific inflation dynamics drive our key result: (i) a large fall in the variance of trend inflation in the goods sector; and (ii) the disappearance of comovement between the two sectors. We document similar findings when extending our analysis to Australia and Canada, suggesting our results are not US-specific.
    Keywords: Econometric and statistical methods; Inflation and prices; Monetary policy: transmission of
    JEL: C32 E52
    Date: 2020–11
  2. By: Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L. J. Wright
    Abstract: This paper quantifies the positive and normative effects of capital controls on international economic activity under The Bretton Woods international financial system. We develop a three region world economic model consisting of the U.S., Western Europe, and the Rest of the World. The model allows us to quantify the impact of these controls through an open economy general equilibrium capital flows accounting framework. We find these controls had large effects. Counterfactuals show that world output would have been 6% larger had the controls not been implemented. We show that the controls led to much higher welfare for the rest of the world, moderately higher welfare for Europe, but much lower welfare for the U.S. We interpret the large U.S. welfare loss as an estimate of the implicit value to the U.S. of preventing capital flight from other countries and thus promoting economic and political stability in ally and developing countries.
    Keywords: Bretton Woods; International Payments; Capital Flows
    JEL: E21 F21 F41 J20
    Date: 2020–10–21
  3. By: Jan Philipp Fritsche; Patrick Christian Harms
    Abstract: Modern OCA theory has developed different conclusions on when forming a currency union is beneficial. An important pragmatic question in this context is: Did delegating monetary policy to the ECB increase stress in the individual euro area countries? An SVAR analysis reveals that monetary stress has declined more in the euro area than in the euro areas’ doppelganger. The synthetic doppelganger is composed of other OECD countries. This result is independent of the identification strategy (sign restrictions/heteroskedasticity/Cholesky). The results can be rationalized by more formalized central banking and the euro becoming a dominant currency.
    Keywords: Economic and Monetary Union, ECB, euro area, structural vector autoregressions, monetary policy stress, sign restrictions, heteroskedasticity, dominant currency
    JEL: C32 E42 E52 F45
    Date: 2020
  4. By: Dongue Ndongo Patrick Revelli (University of Douala, Cameroon)
    Abstract: Understanding how domestic prices adjust to the exchange rate enables us to anticipate the effects on inflation and monetary policy responses. This study examines the extent of the exchange rate pass-through to the Consumer Price Index in Cameroon and Kenya over the 1991-2013 period. The results of its econometric analysis shows that the degree of the exchange rate pass-through is incomplete and varied between 0.18 and 0.58 over one year in Kenya, while it varied between 0.53 and 0.89 over the same period in Cameroon. For the long term, it was found to be equal to 1.06 in Kenya and to 0.28 in Cameroon. A structural VAR analysis using impulse-response functions supported the results for the short term but found a lower degree of pass-through for the exchange rate shocks: 0.3125 for Kenya and 0.4510 for Cameroon. It follows from these results that the exchange rate movements remain a potentially important source of inflation in the two countries. Variance decomposition shows that the contribution of the exchange rate shocks is modest in the case of Kenya but significant in that of Cameroon
    Date: 2020
  5. By: Akinlo, Anthony Enisan; Odusola, Ayodele
    Abstract: empirical evidence in support of the argument that keeping real exchange rate persistently devalued may lead to a permanent higher level of inflation have been provided (Kamin, 1985; Calvo et al. 1994). However, probably because of the relatively recent origin of serious exchange rate depreciation in sub-Saharan Africa countries especially Nigeria, when compared with other regions e.g. Latin America and Asia, not many studies have been reported on the subject. The existing studies on effect of persistent exchange-rate depreciation in Nigeria are based on either regression or simulation approach rather than VAR approach. This present study intends to fill these gaps by not only focusing the study on Nigeria but also adopting restricted vector Autoregressive model thereby providing basis for comparison with existing results obtained for other countries.
    Keywords: International Development
  6. By: Evan Karson; Christopher J. Neely
    Abstract: This article extends the work of Fawley and Neely (2013) to describe how major central banks have evolved unconventional monetary policies to encourage real activity and maintain stable inflation rates from 2013 through 2019. By 2013, central banks were moving from lump-sum asset purchase programs to continuing asset purchase programs, which are conditioned on economic conditions, careful communication strategies, bank lending programs with incentives and negative interest rates. This article reviews how central banks tailored their unconventional monetary methods to their various challenges and the structures of their respective economies.
    Keywords: monetary policy; quantitative easing; central bank; long-term yield
    JEL: E51 E58 E61 G12
    Date: 2020–10–29
  7. By: Jonathan Benchimol (Bank of Israel, Jerusalem, Israel); Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Yossi Saadon (Bank of Israel, Jerusalem, Israel)
    Abstract: Each person's characteristics may influence that person's behaviors and their outcomes. We build and use a new database to estimate experts' performance and boldness based on their experience and characteristics. We classify experts providing inflation forecasts based on their education, experience, gender, and environment. We provide alternative interpretations of factors affecting experts' inflation forecasting performance, boldness, and pessimism by linking behavioral economics, the economics of education, and forecasting literature. An expert with previous experience at a central bank appears to have a lower propensity for predicting deflation.
    Keywords: expert forecast, behavioral economics, survival analysis, panel estimation, global financial crisis
    JEL: C23 C81 C91 D91
    Date: 2020–10
  8. By: Martínez-Hernández, Catalina
    Abstract: The European Central Bank (ECB) has adopted a mixture of conventional and unconventional tools in order to achieve its mandate of price stability in the current low-inflation, low-interest-rate scenario. This paper contributes to the existing literature by providing a taxonomy of the ECB's policy toolkit and by evaluating its implications on price stability and the anchoring of inflation expectations. I carry out my analysis based on a high-frequency identification and the estimation of a large Bayesian Vector Autoregression. I find evidence of re-anchored expectations as response to quantitative easing and forward guidance, i.e. forecasters revise their long-run expectations upwards. Consequently, inflation increases, which stresses the crucial role of expectations for the transmission of monetary policy.
    Keywords: Inflation Expectations,Monetary Policy,Large BVAR,High-frequency identification
    JEL: E52 C55 C11 C32 E31
    Date: 2020
  9. By: Min Jae Kim; Jonathan Witmer
    Abstract: Unexpected changes in interest rates lead small firms to materially change their investment rate. Large firms, in contrast, show a smaller response. This suggests both that financial conditions are an important channel for transmitting monetary policy and that firm characteristics can help us better understand fluctuations in business investment.
    Keywords: Firm dynamics, Monetary policy, Monetary policy: transmission of
    JEL: D92 G32
    Date: 2020–11
  10. By: ODUSOLA, Ayodele; AKINLO, Anthony
    Abstract: The three major explanations of inflation include fiscal, monetary, and balance of payments aspects. While in the monetary aspect inflation is considered to be due to an increase in money supply, in the fiscal aspect, budget deficits are the fundamental cause of inflation in countries with prolonged high inflation. However, the fiscal aspect is closely linked to monetary explanations of inflation since government deficits are often financed by money creation in developing countries. In the balance of payments aspect, emphasis is placed on the exchange rate. Simply, the exchange rate collapses bring about inflation either through higher import prices and increase in inflationary expectations which are often accommodated or through an accelerated wage indexation mechanism.3 Several attempts have been made to conduct systematic econometric studies on the movements in output and inflation and their dynamics in Nigeria. However, many of these earlier studies were based on either simulation analysis or regression approach. Our study deviates from the previous ones in Nigeria by the adoption of vector autoregression (VAR) and its structural variant in which movements in inflation and output are driven by several fundamental disturbances—monetary, exchange rates (official and parallel), interest rate, and income
    Keywords: International Development
  11. By: Abdoulaye Millogo (Université de Sherbrooke)
    Abstract: Based on the Great Recession, this paper investigates the slow recovery-following recessions and the ability of unconventional monetary policies to dampen the adverse effects of shocks. The purpose is to elucidate one of the paradoxes of the business cycle—the slow pace of recovery of macroeconomic indicators and to evaluate the gains from monetary policies initiated by central banks following the financial crisis of 2008. Therefore, the article develops a model by integrating hysteresis mechanisms, modelled by the segmentation of the labour market between insiders and outsiders in the structure of a model with financial frictions to explain the paradox related to production and employment. Financial frictions are incorporated into the model by using a moral hazard problem between financial institutions and households. Calibrated on the U.S. economy, the simulations of the model show that the pace of recovery of output and employment takes more than 6 years to get back to the trend after the shocks. The cost in terms of the welfare of this slow recovery ranges between 0.30% to 5.82% according to the importance of the insiders-outsiders phenomenon. According to the baseline calibration of the model, the simulations also show that credit easing helps to strongly limit the effects and the costs in terms of welfare induced by these hysteresis mechanisms. Output and unemployment begin to converge towards their pre-shock simulations respectively 2.5 years, and 3 years when the central bank intervenes with credit easing. Welfare gains vary from 3.55% to 4.30%.
    Keywords: Great Recession, production, unemployment, financial frictions, hysteresis, insiders, outsiders, unconventional monetary policies, credit easing.
    JEL: E23 E24 E32 E58 G01
    Date: 2020–11
  12. By: Hwang, Sunjoo
    Abstract: Concerns prevail that a policy rate cut could weaken bank profitability and trigger financial instability. However, banks can sustain relatively high net interest margins with little fluctuation despite a rate cut owing to their dominant position in the deposit market and ability to adjust loan maturity. - By virtue of their market dominance, banks set their deposit rates below the base rate by a fixed percentage, and as such, the former falls within a narrower range than the latter. - Because deposit rates are little exposed to base rate fluctuations, banks are able to increase their share of long-term loans which are unaffected by short-term rate changes. This means that lending rates also fall by a smaller margin. - An empirical analysis found that a 1%p change in the call rate, which moves in line with the base rate, adjusts the deposit and lending rates by 0.53%p and 0.58%p, respectively, indicating that the fluctuation (0.05%p) in the net interest margin is statistically insignificant. Therefore, the possibility of financial instability due to a deterioration in bank profitability on a rate cut by the central bank should not be deemed as a constraint.
    Date: 2020
  13. By: Eric McCoy
    Abstract: In the aftermath of the Global Financial Crisis (GFC), central bank policy rates edged closer to their effective lower bound – the point beyond which central banks cannot or do not want to lower rates further due to economic reasons or institutional constraints. Central banks therefore had to move beyond conventional policy instruments and instead resort to using unconventional tools such as large-scale asset purchase programs. With policy rates stuck at their effective lower bound for an extended period of time, central bankers and academics started to investigate the channels linking central bank unconventional monetary policy decisions to exchange rate movements. As will be discussed in this paper, extracting the expected policy rate and the term premium components of interest rates using a term structure model contributes to a better understanding of the channels through which the introduction of unconventional monetary policy measures have affected the dynamics of the euro – US dollar (EUR/USD) exchange rate. Empirical evidence is presented showing that the term premium component started to play a predominant role in anchoring EUR/USD developments to unconventional monetary policy, which first began in the US with the US Federal Reserve’s (Fed) QE1 in 2008 and which was later followed in the euro area by the onset of the ECB’s large-scale asset purchase program (APP) in 2015. The ECB’s APP, by compressing the term premium component, has likely triggered portfolio rebalancing and the ensuing cross-border capital flows have exerted a downwards pressure on the EUR/USD. Last but not least, the paper also presents empirical evidence demonstrating that incorporating non-monetary policy variables (relative stock market performance, a measure of domestic sovereign credit risk, as well as relative long-term inflation expectations and oil prices) into the analytical framework enhances significantly the understanding and analysis of EUR/USD developments.
    Keywords: Monetary Policy, Term Premia, Financial Markets, Exchange Rates, McCoy.
    JEL: E43 E44 E52 E58 F31
    Date: 2020–07
  14. By: Güneş Kamber; Madhusudan Mohanty; James Morley
    Abstract: We construct a balanced panel dataset for 47 advanced and emerging market economies over a sample period from 1996 to 2018 to empirically investigate possible changes in the driving forces of inflation. Using an open economy hybrid Phillips curve model of inflation and formally testing for structural breaks, we find relatively little significant change in the underlying driving forces or their quantitative effects for most economies, even after the Great Financial Crisis. However, one notable change has been an increase in the average weight on expected future inflation, measured using professional forecasts, for both advanced and emerging market economies. We find very heterogeneous but significant effects of inflation expectations, domestic and foreign output gaps, exchange rate passthrough, and oil prices, with generally higher sensitivities to external driving forces for emerging market economies. Consistent with the model, the behavior of the various inflation drivers, especially what appear to be better anchored inflation expectations, can explain patterns of changes in the level and volatility of inflation across different economies.
    Keywords: open economy Phillips curve, structural breaks, inflation expectations, exchange rate passthrough, inflation volatility
    JEL: E31 F31 F41
    Date: 2020–10
  15. By: Moustapha Aman (ERUDITE, Université Paris-Est Créteil)
    Date: 2020–10–22
  16. 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
  17. By: Jonathon Hazell; Juan Herreño; Emi Nakamura; Jón Steinsson
    Abstract: We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. Our estimates indicate that the Phillips curve is very flat and was very flat even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multi-region model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation since the 1990s is mostly due to long-run inflationary expectations becoming more firmly anchored.
    JEL: E30
    Date: 2020–10
  18. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US)
    Abstract: Closer integration between Central and Eastern Europe (CEE) and the EUCloser integration between Central and Eastern Europe (CEE) and the EU has opened up channels facilitating the propagation of economic shocks from the core to the eastern periphery. This paper examines the effects of such shocks to economic activity and monetary conditions originating in the Euro area (EA) on output, prices, money, and interest rates in 10 CEE countries over the period 2005-2018 using a bilateral restricted VAR framework. In contrast to previous studies, we use Divisia monetary aggregates and compare the effects of EA spillovers to domestic shocks. The results indicate that EA shocks explain the majority of variation across all macroeconomic indicators, with money supply shocks playing the most prominent role. Despite some heterogeneity, the impulse response of monetary aggregates to domestic andEA monetary shocks is almost identical across countries. The impact of the EA shock increases over time and persists, while the domestic shock dies out relatively quickly. Accordingly, we find no meaningful monetary independence in the majority of CEE countries. This is likely to prove detrimental to the effectiveness of monetary policies in CEE.
    Keywords: Monetary policy, spillover, Divisia, Central and Eastern Europe
    JEL: E52 E43 E58
    Date: 2020–11
  19. By: James Yetman
    Abstract: We investigate pass-through from short-horizon to long-horizon inflation forecasts as a way to assess the anchoring of inflation expectations. We find an overall decline in the pass-through in our sample, with the share of economies having anchored expectations increasing over time. We then investigate what might explain the increase in anchoring. Inflation targeting plays an important role. Low policy rates and persistent deviations of inflation from target are correlated with a decline in expectations' pass-through. This suggests that longer-term expectations remain well anchored, despite recent low inflation out-turns in many economies.
    Keywords: consensus forecasts, inflation expectations anchoring
    JEL: E31 E58
    Date: 2020–10
  20. By: Luca Fornaro; Martin Wolf
    Abstract: We study the effects of supply disruptions - for instance caused by the emergence of a pandemic - in an economy with Keynesian unemployment and endogenous productivity growth. By negatively affecting investment, even purely transitory negative supply shocks generate permanent output losses. The associated negative wealth effect depresses consumers'demand, which may even fall below the exogenous fall in supply. In this case, the optimal monetary policy response flips relative to conventional wisdom, as monetary expansions are needed to fight negative output gaps. If monetary policy is not expansionary enough a supply-demand doom loop emerges, causing a recession characterized by unemployment and weak productivity growth. Innovation policies, by fostering firms'investment, can restore full employment and healthy growth.
    Keywords: Supply shocks, Covid-19, hysteresis, investment, endogenous growth, monetary policy, fiscal policy, zero lower bound, Keynesian growth.
    JEL: E22 E31 E32 E52 E62 O42
    Date: 2020–10
  21. 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 banks 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.
    Date: 2020–10
  22. By: Viktor Marinkov
    Abstract: The zero lower bound (ZLB) acts as an informational curtain for adaptively learning agents as they cannot observe the path of the interest rate. In a canonical New Keynesian model with no policy change it is shown that this results in a disagreement between the Central Bank and the agents about the lift-off date from the ZLB. Consistent with data from the Swedish Riksbank, the agents expect an earlier lift-off than the Central Bank when the ZLB is binding. The disagreement coupled with the learning of the agents results in explosive dynamics. Forward guidance is shown to restore stability at the ZLB by pre­venting spurious expectational drift. The paper calls for a necessary increase in transparency and communication by the Central Bank when constrained by the ZLB. Although such communication is welfare improving, the gains are modest and no forward guidance puzzle is present.
    Keywords: Forward Guidance; Adaptive Learning; Central Bank Communication; Zero Lower Bound
    JEL: E43 E52 E58 E61
    Date: 2020–11–03
  23. By: Fatih Tuluk (Department of Economics, Washington University in St. Louis, USA & Department of Economics, Middle East Technical University Northern Cyprus Campus, Turkey)
    Abstract: I construct a model of the ABCP market to capture the trade-offs between traditional and shadow banks. While traditional banks are better equipped in collecting private information, shadow banks can finance more entrepreneurs’ projects since the capital requirements for loans to shadow banks are laxer than those for regular loans. First, the credit risk diminishes the lending capacity of shadow banks, yet it does not activate traditional loans. An increase in the monitoring cost of shadow banks might shift credit from shadow to traditional banks; however, traditional banks cannot restore credit to a level consistent with that initially achieved by shadow banks. Second, the central bank’s private asset purchases transfer credit from traditional to shadow banks and increase the size of funded projects when frictions are moderate in the shadow banking sector. Third, in the case of highly information-sensitive shadow loans, a decrease in the interest rate on reserves improves the lending capacity of shadow banks more than that of traditional banks.
    Keywords: Shadow banking, asset-backed commercial paper, capital
    JEL: E
    Date: 2019
  24. By: Emanuele Franceschi (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - 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)
    Abstract: We study the parameter instability in the monetary policy rule followed by the US Federal Reserve Bank since WWII. We find evidence across a variety of econometric methods of fundamental instability, in particular on the parameter governing the reaction to inflation expectations-the Taylor Principle. We augment the monetary policy rule to account for liquidity conditions and find consistent violations of the Taylor Principle without sunspot inflation episodes. We study the presence of multiple regimes and find that when uncertainty and economic slowdown are looming the Fed reacts passively to expected inflation.
    Date: 2020–10
  25. By: Fernando M. Martin
    Abstract: Who prevails when fiscal and monetary authorities disagree about the value of public expenditure and how much to discount the future? When the fiscal authority sets debt as its main policy instrument it achieves fiscal dominance, rendering the preferences of the central bank, and thus its independence, irrelevant. When the central bank sets the nominal interest rate it renders fiscal impatience (its debt bias) irrelevant, but still faces its expenditure bias. I find that the expenditure bias is about an order of magnitude more severe than the debt bias and has a major impact on welfare through higher public spending, while the effect on other policies is relatively minor. I also find that the central bank can do little to overcome the negative impact of the fiscal authority's expenditure bias, though there are still gains from properly designing the central bank.
    Keywords: discretion; time-consistency; government debt; deficit; inflation; institutional design; political frictions
    JEL: E52 E58 E61 E62
    Date: 2020–10–29
  26. By: Sebastian Edwards
    Abstract: Milton Friedman’s famous 1953 essay, “The case for flexible exchange rates,” deals entirely with advanced nations. An interesting question is what Friedman thought about exchange rate and monetary regimes in emerging economies. In this paper I investigate how his views on the subject evolved through time. I analyze speeches, articles, and interviews. I examine his archives for correspondence and unpublished manuscripts. I show that for him flexible rates were a second best solution for middle income and poor nations. I also analyze Friedman’s role in Chile’s failed attempt, during the Pinochet regime, at using a fixed exchange rate to stabilize the economy and eliminate inflation.
    JEL: B2 B22 B3 F31 F32
    Date: 2020–10
  27. By: Odusola, Ayodele
    Abstract: The main objective of this paper therefore is to examine the economics of exchange rate management. To address the main focus of this paper therefore, it is structured into five main parts. Following the introduction is section two which examines the conceptual issues in exchange rate management. In the third section, types of exchange rate regimes are examined while s e c t i o n f o u r c o n t a i n s the significance of exchange rate management. Exchange rate management questions are reviewed in section five. Section six draws relevant lessons and concludes the paper.
    Keywords: International Development
  28. By: Julian di Giovanni; Galina Hale
    Abstract: We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of 54 sectors in 26 countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80% of the total impact of U.S. monetary policy shocks on average country-sector stock returns are due to the network effect of global production linkages. We further show that U.S. monetary policy shocks have a direct impact predominantly on U.S. sectors and then propagate to the rest of the world through the global production network. Our results are robust to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to changes in variable definitions and empirical specifications.
    Keywords: Global production network, asset prices, monetary policy shocks
    JEL: G15 F10 F36
    Date: 2020–10
  29. By: Guido Ascari; Anna Florio; Alessandro Gobbi
    Abstract: The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these ideas to study monetary-fiscal interactions under price level targeting. Under price level targeting and a fiscally-led regime, we find that following a deflationary demand shock: (i) the central bank increases (rather than decreases) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is generally welfare improving if compared to inflation targeting.
    Date: 2020–10
  30. By: Pattanaik, Sitikantha; Muduli, Silu; Ray, Soumyajit
    Abstract: This paper examines the usefulness of survey-based measures of inflation expectations to predict inflation using hybrid versions of New Keynesian Phillips Curve (NKPC). While both 3 months ahead and 1-year ahead inflation expectations of households emerge statistically significant in explaining and predicting inflation in India, effectively they work as substitutes of backward looking expectations given that household expectations are found to be largely adaptive. Unlike in other countries, this paper does not find much evidence on flattening of the Phillips curve. Also, no robust evidence is found on expectations induced wage pressures influen-cing CPI inflation.
    Keywords: Inflation expectations;Phillips curve; wage-pricedynamics
    JEL: E24 E31 E52 P24
    Date: 2020–02–06
  31. By: Feld, Lars P.; Wieland, Volker
    Abstract: The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. The authors shows how a regular proportionality check could be integrated in the ECB's strategy that is currently undergoing a systematic review. In particular, they propose to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided
    Keywords: central bank independence,monetary law,monetary institutions,monetary policy strategy,proportionality,policy rules,quantitative easing
    JEL: E52 E58 K10
    Date: 2020
  32. By: Emanuele Franceschi (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - 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)
    Abstract: We introduce liquidity motives in an otherwise standard monetary model. The Central Bank's policy rule is adapted to target the interest rate on liquid bonds. These deviations are sufficient to relax the requirement for active monetary policy and warrant determi-nacy in both passive and active policy regimes. We compare this model of liquidity with workhorse models and find that it can substantially replicate usual dynamics. By means of stochastic simulations, we also study how monetary policy stance affect inflation dynamics and find evidence of increased persistence for passive monetary policy.
    Date: 2020–10–26
  33. By: Alvarez, Santiago E.; Lein, Sarah M. (University of Basel)
    Abstract: Using online data for prices and real-time debit card transaction data on changes in expenditures for Switzerland allows us to track inflation on a daily basis. While the daily price index fluctuates around the official price index in normal times, it drops immediately after the lockdown related to the COVID19 pandemic. Official statistics reflect this drop only with a lag, specifically because data collection takes time and is impeded by lockdown conditions. Such daily real-time information can be useful to gauge the relative importance of demand and supply shocks and thus inform policymakers who need to determine appropriate policy measures.
    Keywords: Daily price index, scraped online price data, debit card expenditures, real-time information.
    Date: 2020–08
  34. By: Andrew B. Martinez (Office of Macroeconomic Analysis, US Department of the Treasury)
    Abstract: Long-term expectations are believed to play a crucial role in driving future inflation and guiding monetary policy responses. However, expectations are not directly observed and the available measures can present a wide range of results. To understand what drives these differences, we examine the evolution of alternative consumer price inflation expectations in the United States between 2003-2019. We show that inflation forecasts can be improved by incorporating the differential between survey and market-based measures of expectations. Next, we decompose and extract the differentials in rigidity and information between measures of expectations. While both information and rigidities play a role, the information differential is more important. Using machine learning methods, we find that up to half of the information differential is explained by real-time changes in measures of liquidity. This also explains some past forecast improvements and helps predict the divergence in long-term inflation expectations in 2020.
    Date: 2020–10
  35. By: Chu, Angus C.
    Abstract: In this survey, we provide a selective review of the literature on inflation, innovation and economic growth. The relationship between inflation and economic growth is a fundamental question in economics. Most studies in this literature explore this relationship in capital-based growth models. This survey reviews a recent branch of this literature on inflation and innovation-driven growth. Specifically, we develop a canonical monetary Schumpeterian growth model to demonstrate the effects of inflation on innovation and the macroeconomy via different channels. We find that the cash-in-advance constraints on consumption and R&D investment have drastically different implications on the macroeconomic effects of inflation.
    Keywords: inflation; innovation;, economic growth
    JEL: E31 O3 O4
    Date: 2020–10

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