nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒11‒23
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Financial Stability and the Fed: Evidence from Congressional Hearings By Wischnewsky, Arina; Jansen, David-Jan; Neuenkirch, Matthias
  2. Macroeconomic Surprises and the Demand for Information about Monetary Policy By Tillmann, Peter
  3. COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion? By Aymeric Ortmans; Fabien Tripier
  4. Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies By Raphael A. Auer; Giulio Cornelli; Jon Frost
  5. Taylor Rules and liquidity in financial markets By Emanuele Franceschi
  6. Persistence and Long Memory in Monetary Policy Spreads By Guglielmo Maria Caporale; Luis A. Gil-Alana
  7. A simple model of liquidity By Emanuele Franceschi
  8. Tracing the impact of the ECB's asset purchase programme on the yield curve By Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Vladu, Andreea
  9. Revisiting the Euro’s Trade Cost and Welfare Effects By Felbermayr, Gabriel; Steininger, Marina
  10. Optimal Monetary Policy with Heterogeneous Agents By Galo Nuño; Carlos Thomas
  11. Beyond LIBOR: Money Markets and the Illusion of Representativeness By Lilian Muchimba; Alexis Stenfors
  12. Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy By Julian di Giovanni; Galina Hale
  13. How Loose, how tight? A measure of monetary and fiscal stance for the euro area. By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  14. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
  15. Economic Principles of PoPCoin, a Democratic Time-based Cryptocurrency By Haoqian Zhang; Cristina Basescu; Bryan Ford
  16. Banking Crises under a Central Bank Digital Currency (CBDC) By Bitter, Lea
  17. The Micro-level Price Response to Monetary Policy By Balleer, Almut; Zorn, Peter
  18. Natural rate chimera and bond pricing reality By Brand, Claus; Goy, Gavin W; Lemke, Wolfgang
  19. Forward Guidance and Durable Goods Demand By Alisdair McKay; Johannes F. Wieland
  20. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  21. The Phillips Curve at the ECB By Eser, Fabian; Lane, Philip; Moretti, Laura; Osbat, Chiara; Karadi, Peter
  22. Fifty Shades of QE: Conflicts of Interest in Economic Research By Brian Fabo; Martina Jancokova; Elisabeth Kempf; Lubos Pastor
  23. Negative Interest Rates on Central Bank Digital Currency By Jia, Pengfei
  24. Loss Averse Depositors and Monetary Policy around Zero By Christian Stettler
  25. Monetary Policy and Firm Dynamics By Matthew Read

  1. By: Wischnewsky, Arina; Jansen, David-Jan; Neuenkirch, Matthias
    Abstract: This paper retraces how financial stability considerations interacted with U.S. monetary policy before and during the Great Recession. Using text-mining techniques, we construct indicators for financial stability sentiment expressed during testimonies of four Federal Reserve Chairs at Congressional hearings. Including these text-based measures adds explanatory power to Taylor-rule models. In particular, negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylorrule factors, even in the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks.
    Keywords: monetary policy,financial stability,Taylor rule,text mining
    JEL: E52 E58 N12
    Date: 2020
  2. By: Tillmann, Peter
    Abstract: This paper studies the demand for information about monetary policy, while the literature on central bank transparency and communication typically studies the supply of information by the central bank or the reception of the information provided. We use a new data set on the number of views of the Federal Reserve's website to measure the demand for information. We show that exogenous news about the state of the economy as re ected in U.S. macroeconomic news surprises raise the demand for information about monetary policy. Surprises trigger an increase in the number of views of the policy-relevant sections of the website, but not the other sections. Hence, market participants do not only revise their policy expectations after a surprise, but actively acquire new information. We also show that attention to the Fed matters: a high number of views on the day before the news release weakens the high-frequency response of interest rates to macroeconomic surprises.
    Keywords: website traffic,nonfarm payroll,attention,event study,central bank communication
    JEL: E5
    Date: 2020
  3. By: Aymeric Ortmans; Fabien Tripier
    Abstract: This paper studies how the announcement of ECB’s monetary policies has stopped the contagion of the COVID-19 pandemic in the European sovereign debt markets. We show that up to March 9, the occurence of new cases in euro area countries has a sizeable and persistent effect on 10-years sovereign bond spreads relative to Germany: the occurrence of 1000 new cases is accompanied by an immediate increase in the spread which lasts 5 days after, reaching an increase of 0.54 percentage point. Afterwards, the effect is close to zero and not significant. We interpret this change as a successful outcome of the ECB’s press conference on March 12 despite the ”we are not here to close spreads” controversy. Indeed, a counterfactual shows that without this shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18, when the ECB’s Pandemic Emergency Purchase Programme has finally been announced.
    Keywords: COVID-19;European Central Bank;Sovereign debt;Monetary policy;Local projections
    JEL: E52 E58 E65 H63
    Date: 2020–10
  4. By: Raphael A. Auer; Giulio Cornelli; Jon Frost
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: central bank digital currency, CBDC, payments, central banking, digital currency, digital money, distributed ledger technology, blockchain
    JEL: E42 E44 E51 E58 G21 G28 F31
    Date: 2020
  5. 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
  6. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: The overnight money market rate is a key monetary policy tool. In recent years, central banks worldwide have developed new monetary policy strategies aimed at keeping its deviations from the policy rate small and short-lived. This paper describes the main instruments used for this purpose by the US Fed, the ECB and the BoE and also their policy responses to the Great Financial Crisis (GFC). Fractional integration and long-memory methods are then applied to investigate how those affected the persistence of policy spreads (i.e., the difference between overnight rates and policy rates) during different sub-periods. It is found that this increased sharply during the GFC but has fallen back in recent years. In the case of the ECB the introduction of the new €-STR benchmark in particular appears to have made monetary policy more effective.
    Keywords: interest rates, persistence, central banks, long memory, fractional integration
    JEL: C22 E52
    Date: 2020
  7. 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
  8. By: Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Vladu, Andreea
    Abstract: We trace the impact of the European Central Bank (ECB) asset purchase programme (APP) on the yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the "free-float of duration risk" borne by pricesensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by almost one percentage point. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases has a significant impact on term premia.
    Keywords: Term structure of interest rates,term premia,central bank asset purchases,monetary policy,European Central Bank
    JEL: C5 E43 E52 E58 G12
    Date: 2020
  9. By: Felbermayr, Gabriel; Steininger, Marina
    Abstract: When, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct an ex post evaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.
    Keywords: Euro,trade,general equilibrium,quantitative trade models,European Union
    JEL: F15 F17 N74
    Date: 2019
  10. By: Galo Nuño; Carlos Thomas
    Abstract: We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.
    Keywords: optimal monetary policy, incomplete markets, Gâteau derivative, nominal debt, inflation, redistributive effects, continuous time
    JEL: E50 E62 F34
    Date: 2020
  11. By: Lilian Muchimba (University of Portsmouth); Alexis Stenfors (University of Portsmouth)
    Abstract: Money market benchmarks are important indicators for economic agents. They are also crucial for central banks in assessing the functioning of the interest rate channel of the monetary transmission mechanism. However, whereas the unsecured interbank money market conventionally has been seen as encompassing instruments with maturities up to one year, it appears as if it consists of two markets. The ultra-short-term money market (typically just one day) is large, liquid and traded regularly. The term money market (one, three or six months), by contrast, is small, illiquid and rarely traded. This paper explores the feasibility of creating and maintaining a money market benchmark which does not represent an underlying liquid market. From a sociological perspective, it addresses two critical aspects of financial benchmarks: i) that they are related to but separate and distinct from the objects determining them and ii) that they are measurements and as such cannot be bought or sold (Stenfors and Lindo 2018). By doing so, the paper also reflects upon the desire by financial regulators following the LIBOR manipulation scandal to replace estimation-based by transaction-based benchmarks, as well as some challenges and contradictions in conventional central banking theory.
    Keywords: Bank of Zambia, banks, benchmarks, Eurodollar market, LIBOR, monetary transmission mechanism, reference rates
    JEL: B52 E43 E52 G15 G28
    Date: 2020–11–08
  12. 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 fifty-four sectors in twenty-six 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 percent of the total impact of U.S. monetary policy shocks on average country-sector stock returns is 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: 2020–11–01
  13. By: Nicoletta Batini (International Monetary Fund); Alessandro Cantelmo (Bank of Italy); Giovanni Melina (International Monetary Fund); Stefania Villa (Bank of Italy)
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint monetary and fiscal policy stance in the euro area (EA) and its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models also featuring financial intermediaries and long-term government debt. The analysis highlights the short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left as the 'only game in town' after 2013. Individual countries' DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at EA level, due to the different fiscal stances.
    Keywords: policy stance, euro area, monetary policy, fiscal policy.
    JEL: E4 E5 E6
    Date: 2020–09
  14. By: Elliott, David; Meisenzahl, Ralf; Peydro, Jose-Luis; Turner, Bryce
    Abstract: We show that nonbanks (funds, shadow banks, fintech) reduce the effectiveness of tighter monetary policy on credit supply and the resulting real effects, and increase risk-taking. For identification, we exploit exhaustive US loan-level data since 1990s and Gertler-Karadi monetary policy shocks. Higher policy rates shift credit supply from banks to less-regulated, more fragile nonbanks. The bank-to-nonbank shift largely neutralizes total credit and associated consumption effects for consumer loans and attenuates the response of total corporate credit (firm investment) and mortgages (house price spillovers). Moreover, different from the so-called risktaking channel, higher policy rates imply more risk-taking by nonbanks.
    Keywords: Nonbank Lending,Monetary Policy Transmission,Risk-Taking Channel
    JEL: E51 E52 G21 G23 G28
    Date: 2020
  15. By: Haoqian Zhang; Cristina Basescu; Bryan Ford
    Abstract: While democracy is founded on the principle of equal opportunity to manage our lives and pursue our fortunes, the forms of money we have inherited from millenia of evolution has brought us to an unsustainable dead-end of exploding inequality. PoPCoin proposes to leverage the unique historical opportunities that digital cryptocurrencies present for a "clean-slate" redesign of money, in particular around long-term equitability and sustainability, rather than solely stability, as our primary goals. We develop and analyze a monetary policy for PoPCoin that embodies these equitability goals in two basic rules that maybe summarized as supporting equal opportunity in "space" and "time": the first by regularly distributing new money equally to all participants much like a basic income, the second by holding the aggregate value of these distributions to a constant and non-diminishing portion of total money supply through demurrage. Through preliminary economic analysis, we find that these rules in combination yield a unique form of money with numerous intriguing and promising properties, such as a quantifiable and provable upper bound on monetary inequality, a natural "early adopter's reward" that could incentivize rapid growth while tapering off as participation saturates, resistance to the risk of deflationary spirals, and migration incentives opposite those created by conventional basic incomes.
    Date: 2020–11
  16. By: Bitter, Lea
    Abstract: One of the main concerns when considering Central Bank Digital Currency (CBDC) is the disintermediating effect on the banking sector in normal times, and even more the risk of a bank run in times of crisis. This paper extends the bank run model of Gertler and Kiyotaki (2015) by analyzing the impact of a CBDC. A CBDC is an additional type of liability to the central bank which, by accounting identity, must be accompanied by respective accommodations on the asset side. The model compares the effects of two different asset side policies with each other and to the economy without a CBDC. I find that a CBDC reduces net worth in the banking sector in normal times but mitigates the risk of a bank run in times of crisis. The prevailing concerns about the risk of a bank run turn out to be partial equilibrium considerations disregarding the asset side effects of a CBDC.
    Keywords: Central Bank Digital Currency (CBDC),Digital Currency,Central Banking,Financial Intermediation,Bank Runs,Lender of Last Resort
    JEL: E42 E58 G01 G21
    Date: 2020
  17. By: Balleer, Almut; Zorn, Peter
    Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. After expansionary monetary policy, the increase in the frequency of price change is economically small, the average absolute size across all price changes falls, and the aggregate price level hardly adjusts as a result. These estimates imply a strong degree of monetary non-neutrality because they rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments.
    Keywords: price setting,extensive margin,intensive margin,monetary policy,local projections,menu cost
    JEL: E30 E31 E32 E52
    Date: 2020
  18. By: Brand, Claus; Goy, Gavin W; Lemke, Wolfgang
    Abstract: Incorporating arbitrage-free term-structure dynamics into a semi-structural macro-model, we jointly estimate the real equilibrium interest rate (r*), trend inflation, and term premia for the United States and the euro area, using a Bayesian approach. The natural real rate and trend inflation are cornerstones determining equilibrium yields across maturities and macroeconomic trends. Taking into account the secular decline in equilibrium rates, term premia exhibit cyclical behavior over the business cycle, rather than the commonly reported trend. Our estimates suggest a fall in r* from a pre-crisis level of about 3% to around zero, but estimates are subject to sizeable uncertainty. Including survey expectations can lift r* estimates for recent quarters by a margin.
    Keywords: Natural rate of interest,r*,equilibrium real rate,arbitrage-free Nelson-Siegel term structure model,term premia,unobserved components,Bayesian estimation
    JEL: C11 C32 E43 G12 E44 E52
    Date: 2020
  19. By: Alisdair McKay; Johannes F. Wieland
    Abstract: Durable goods attenuate the power of forward guidance. The extensive and intensive margins of durable goods demand are both more sensitive to the contemporaneous user cost than to future user costs. Changes in the contemporaneous real interest rate directly affect the contemporaneous user cost and durable demand, whereas promises of low future real interest rates have weaker effects through equilibrium price changes. Quantitatively, reducing the real interest rate one year from now increases output by only forty percent as much as reducing the real interest rate today. Our results are little affected by the maturity of financial assets that finance durable purchases.
    JEL: E21 E22 E43 E52 E58
    Date: 2020–11
  20. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital ows receded significantly in the aftermath of the global financial crisis, portfolio ows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis "second phase of global liquidity" (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher global investment fund in ows to euro area equities and debt. These in ows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance in the euro area. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
    Keywords: Monetary policy,international spillovers,capital ows,investment funds
    JEL: F32 F42 G11 G15
    Date: 2020
  21. By: Eser, Fabian; Lane, Philip; Moretti, Laura; Osbat, Chiara; Karadi, Peter
    Abstract: We explain the role of the Phillips Curve at the ECB in the analysis of the economic outlook and the formulation of monetary policy. First, revisiting the structural Phillips Curve, we highlight the challenges in recovering structural parameters from reduced-form estimates and relate the reduced-form Phillips Curve to (semi-)structural models used at the ECB for policy analysis. Second, we identify the slope of the structural Phillips Curve following two approaches: one that exploits cross-country variation and the other using high-frequency monetary policy surprises as external instruments. Third, we present reduced-form evidence based on thick-modelling and dynamic model averaging techniques, focusing on the relation between slack and in ation and the role of in ation expectations. In relation to the recent weakness of in ation, we discuss the role of firm profits in the pass-through from wages to prices and the contribution of external factors. Overall, the available evidence supports the view that the absorption of slack and a firm anchoring of in ation expectations remain central to successful in ation stabilisation.
    Keywords: Inflation,Phillips Curve,Monetary Policy,European Central Bank
    JEL: E31 E52
    Date: 2020
  22. By: Brian Fabo (National Bank of Slovakia); Martina Jancokova (European Central Bank); Elisabeth Kempf (Booth School of Business, University of Chicago); Lubos Pastor (National Bank of Slovakia Abstract: Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production. Length: 63 pages)
    JEL: A11 E52 E58 G28
    Date: 2020–10
  23. By: Jia, Pengfei
    Abstract: Paying negative interest rates on central bank digital currency (CBDC) becomes increasingly relevant to monetary operations, since several major central banks have been actively exploring both negative interest rate policy and CBDC after the Great Recession. This paper provides a formal analysis to evaluate the macroeconomic impact of negative interest rates on CBDC through the lens of a neoclassical general equilibrium model with monetary aggregates. In the benchmark model, agents have access to two types of assets: CBDC and productive capital. The demand for digital currency is motivated by a liquidity constraint. I show that paying negative interest on CBDC induces agents to save less and consume more via a substitution effect. A drop in savings in turn causes a fall in capital investment, subsequent output, and real money balances. To clear the money market, the price level increases. I then extend the model to include government bonds which deliver a positive return. This allows me to study a non-trivial portfolio effect: when the government pays a negative interest rate on CBDC, the tax on agents' capital spending increases, inducing a decrease in capital investment and an increase in government bonds in agents' portfolio. Such a policy causes a drop in investment and output. However, there is a transitory decline in the price level due to a "flight to quality".
    Keywords: CBDC, Negative interest rates, Monetary policy, Public money.
    JEL: E21 E22 E31 E42 E52 E63
    Date: 2020–10–26
  24. By: Christian Stettler (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Recent experience from Europe and Japan shows that commercial banks generally pass negative short-term policy rates on to wholesale depositors, such as insurances and pension funds. Yet, they refrain from charging negative rates to ordinary retail customers. This paper asks whether the existing evidence on the inverse relationship between market experience and the degree of loss aversion can explain this transmission pattern. To this end, I allow for loss averse depositors within a simple two-period di erentiated products duopoly with switching costs. It turns out that if depositors are especially averse to negative deposit rates, banks keep deposit rates at zero as policy rates decline, while accepting squeezed and possibly negative deposit margins. The lowest current policy rate at which the bankingsystem is willing to shield depositors from a negative deposit rate decreases with increasing i) degrees of loss aversion; ii) levels of switching costs; and iii) market expectations about the future policy rate. A calibration of the model indicates how low central banks could e ectively go without taking steps to make paper currency more costly.
    Keywords: Deposits, effective lower bound, loss aversion, negative interest rates
    JEL: D43 E43 E52 E58 G21 L13
    Date: 2020–04
  25. By: Matthew Read
    Abstract: Do firm dynamics matter for the transmission of monetary policy? Empirically, the startup rate declines following a monetary contraction, while the exit rate increases, both of which reduce aggregate employment. I present a model that combines firm dynamics in the spirit of Hopenhayn (1992) with New-Keynesian frictions and calibrate it to match cross-sectional evidence. The model can qualitatively account for the responses of entry and exit rates to a monetary policy shock. However, the responses of macroeconomic variables closely resemble those in a representative-firm model. I discuss the equilibrium forces underlying this approximate equivalence, and what may overturn this result.
    Date: 2020–11

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