nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒12‒07
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Surprises, Central Bank Information Shocks, and Economic Activity in a Small Open Economy By Laséen, Stefan
  2. Liquidity and monetary transmission: a quasi-experimental approach By Miller, Sam; Wanengkirtyo, Boromeus
  3. The German Federal Constitutional Court ruling and the European Central Bank's strategy By Feld, Lars P.; Wieland, Volker
  4. Optimal simple objectives for monetary policy when banks matter By Laureys, Lien; Meeks, Roland; Wanengkirtyo, Boromeus
  5. Optimal quantitative easing in a monetary union By Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
  6. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Dirk Niepelt
  7. Monetary Policy Challenges From Falling Natural Interest Rates By Klaus Adam
  8. Inflation expectation uncertainty in a New Keynesian framework By Fuest, Angela; Schmidt, Torsten
  9. Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target By Klaus Adam; Oliver Pfäuti; Timo Reinelt
  10. Central Bank Digital Currency: A Literature Review By Francesca Carapella; Jean Flemming
  11. Optimal Quantitative Easing in a Monetary Union By Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
  12. The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices By Jayawickrema, Vishuddhi
  13. Banks, low interest rates, and monetary policy transmission By Wang, Olivier
  14. Accounting for Low Long-Term Interest Rates: Evidence from Canada By Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz
  15. Using forecast-augmented VAR evidence to dampen the forward guidance puzzle By Christoffel, Kai; de Groot, Oliver; Mazelis, Falk; Montes-Galdón, Carlos
  16. Policies for Transactional De-Dollarization: A Laboratory Study By Johar Arrieta; David Florián; Kristian López; Valeria Morales
  17. Interest rate risk and monetary policy normalisation in the euro area By Reghezza, Alessio; Rodriguez d’Acri, Costanza; Pancotto, Livia; Molyneux, Philip
  18. Sovereign default risk, macroeconomic fluctuations and monetary-fiscal stabilisation By Kirchner, Markus; Rieth, Malte
  19. Four Phases in the History of Money By Luis Angeles
  20. Closing the Monetary Policy Curriculum Gap: A Primer for Educators Making the Transition to Teaching the Fed's Ample-Reserves Framework By Jane E. Ihrig; Scott A. Wolla
  21. Has the Inflation Process Changed? Selective Review of Recent Research on Inflation Dynamics By Oleksiy Kryvtsov; James MacGee
  22. Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents By Ojasvita Bahl; Chetan Ghate; Debdulal Mallick
  23. Monetary policy and regional unemployment By Shaun Markham
  24. Optimal Feasible Expectations in Economics and Finance By Lake, A.
  25. Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism By Qinchun He; Yulei Luo; Jun Nie; Heng-fu Zou
  26. Predicting Disaggregated CPI Inflation Components via Hierarchical Recurrent Neural Networks By Oren Barkan; Itamar Caspi; Allon Hammer; Noam Koenigstein
  27. Analysis of Inflation Trends in Urban and Rural Parts of Azerbaijan: Main Drivers and Links to Oil Revenue By Niftiyev, Ibrahim
  28. Monetizing Privacy with Central Bank Digital Currencies By Rod Garratt; Michael Junho Lee
  29. When the penny doesn’t drop – Macroeconomic tail risk and currency crises By Chanelle Duley; Prasanna Gai
  30. Macroprudential capital buffers in heterogeneous banking networks: Insights from an ABM with liquidity crises By Gurgone, Andrea; Iori, Giulia
  31. Effects of eligibility for central bank purchases on corporate bond spreads By Taneli Mäkinen; Fan Li; Andrea Mercatanti; Andrea Silvestrini
  32. Uncertainty shocks and inflation dynamics in the U.S. By Qazi Haque; Leandro M. Magnusson
  33. How Bank Reserves Are Distributed Matters. How You Measure Their Distribution Matters Too. By Gara Afonso; Marco Cipriani; Steph Clampitt; Haitham Jendoubi; Gabriele La Spada; Will Riordan
  34. Foreign exchange intervention: A new database By Fratzscher, Marcel; Heidland, Tobias; Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik
  35. Time-varying trend models for forecasting inflation in Australia By Na Guo; Bo Zhang; Jamie Cross

  1. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper I study the effects of monetary policy on economic activity and asset prices in Sweden, separately identifying the effects of a conventional policy change from effects of new information about economic fundamentals. Recent research has shown that high-frequency changes in policy interest rate futures prices around central bank policy announcements might not only contain monetary policy shocks but also central bank information shocks. I add to this line of research by studying a case where the central bank, in contrast to many other central banks studied in this literature, is very open and transparent about the monetary policy decision and publishes a full set of forecasts including the interest rate at the same moment as the decision is revealed. I use this information to construct an informationally-robust instrument for monetary policy shocks as the component of high-frequency market surprises triggered by policy announcements that is orthogonal to both central bank’s economic projections, including policy rate projections, and to past market surprises. I also add sign restrictions on stock market changes around the announcement to separate structural monetary policy shock from central bank information shocks. In contrast to recent work for other countries, I do not find that separating monetary policy shocks from central bank information shocks is important to measure the effects of monetary policy in Sweden.
    Keywords: Monetary Policy; External Instruments; Monetary Policy Surprises; Information Effect; Small Open Economy; Exchange Rate; Stock Prices; House Prices.
    JEL: C32 C36 D83 E31 E43 E44 E52 E58 G14
    Date: 2020–10–01
  2. By: Miller, Sam (Alan Turing Institute); Wanengkirtyo, Boromeus (Bank of England)
    Abstract: In the face of lower real interest rates, central bank balance sheets are likely to remain larger relative to pre-crisis levels, resulting in greater banking system liquidity. However, there is little evidence on the impact of higher liquidity on credit supply and the monetary transmission mechanism in the ‘new normal’. We exploit a novel dataset on bank liquidity positions arising from a unique regulatory regime and combine it with a highly-detailed, loan-level administrative dataset on UK mortgages. Using the design of quantitative easing auctions as an instrument for liquidity to address endogeneity, we find that more liquid banks charge slightly higher mortgage interest rates, and pass on significantly less changes in risk-free rates. We explain this through bank behaviour that attempts to preserve net interest margins in the face of holding low-yielding liquidity. Consistent with this, we find excess liquidity leads to reaching-for-yield responses in banks’ mortgage risk-taking. Additionally, the results shed light on the optimal mix between (un)conventional monetary policy tools. Policies that boost bank net interest margins are more likely to help the transmission of risk-free rates to lending rates.
    Keywords: Bank liquidity; interest rate pass-through; monetary policy
    JEL: E52 E58 G21
    Date: 2020–11–20
  3. 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. This paper shows how a regular proportionality check could be integrated in the ECB's strategy that is currently undergoing a systematic review. In particular, it proposes 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
  4. By: Laureys, Lien (Bank of England); Meeks, Roland (International Monetary Fund); Wanengkirtyo, Boromeus (Bank of England)
    Abstract: We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilising inflation, a measure of resource utilisation, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
    Keywords: Monetary policy; simple loss function; banks; medium-scale DSGE models; euro area economy
    JEL: E17 E52 E58 G21
    Date: 2020–11–20
  5. By: Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
    Abstract: This paper explores the optimal allocation of government bond purchases within a monetary union, using a two-region DSGE model, where regions are asymmetric with respect to economic size and portfolio characteristics: the extent of substitutability between assets of different maturity and origin, asset home bias, and steady-state levels of government debt. An optimal quantitative easing (QE) policy under commitment does not only reflect different region sizes, but is also a function of these dimensions of portfolio heterogeneity. By calibrating the model to the euro area, we show that optimal QE favors purchases from the smaller region (Periphery instead of Core), given that the former faces stronger portfolio frictions. A fully optimal policy consisting of both the short-term interest rate and QE lifts the monetary union away from the zero lower bound faster than an optimal interest rate policy alone, which entails forward guidance.
    Keywords: Optimal monetary policy; quantitative easing; monetary union; DSGE model; portfolio rebalancing; zero lower bound
    JEL: E43 E52 E58 F45
    Date: 2020–11
  6. By: Dirk Niepelt
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies di er with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Keywords: Reserves, deposits, central bank digital currency, monetary policy, Friedman rule, equivalence, Ramsey policy, bank pro ts, money creation
    JEL: E42 E43 E51 E52
    Date: 2020–11
  7. By: Klaus Adam
    Abstract: The real interest rates consistent with stable inflation (the natural rates of interest) has displayed a sustained downward trend in advanced economies over past decades. This has considerably complicated the conduct of monetary policy, which is increasingly constrained by the inability to lower nominal rates further. Over the same time period, the volatility of housing prices and stock prices has increased considerably, generating additional challenges for monetary policy. This paper summarizes recent academic research that analyses the monetary policy implications of lower natural rates and rising asset price volatility in a setting where policy is constrained by a lower bound on nominal rates. It focuses on the implications for (1) the optimal inflation target and (2) the question how monetary policy should respond to asset price movements.
    Date: 2020–11
  8. By: Fuest, Angela; Schmidt, Torsten
    Abstract: For monetary policy guiding inflation expectations provides an instrument to achieve price stability. However, expectation uncertainty may undermine monetary policy's ability to stabilise the economy. This study examines the effects of inflation expectation uncertainty on inflation, inflation expectations and the output gap by means of a structural VAR with stochastic volatility in mean. Inflation expectation uncertainty negatively affects the inflation rate and the output gap, without having a distinct effect on the level of expectations. This result is replicable with a model in which uncertainty is approximated by a cross-sectional survey measure. Furthermore, simulating an uncertainty shock in a DSGE model shows that the demand channel dominates the supply channel of an inflation expectation uncertainty shock.
    Keywords: uncertainty,inflation expectations,Phillips curve,New Keynesian model
    JEL: E31 E52 C32 C63
    Date: 2020
  9. By: Klaus Adam; Oliver Pfäuti; Timo Reinelt
    Abstract: The decline in natural interest rates in advanced economies over the past decades has been accompanied by a signi cant increase in the volatility of housing prices. We show that the monetary policy implications of these macroeconomic trends depend|in the presence of a lower-bound constraint on nominal rates|on the source of increased housing price volatility. If housing price expectations are rational, increased housing price volatility re ects more volatile housing demand shocks. Under optimal monetary policy, average in ation then increases only minimally, as average natural rates fall and housing shocks become more volatile. Instead, if housing price volatility is partly due to speculative housing price beliefs, as suggested by survey data, then lower natural rates endogenously trigger larger uctuations in subjective housing price beliefs and housing prices. A belief-driven increase in housing price volatility causes also the natural rate of interest to become more volatile. This exacerbates the lower-bound problem, especially when average natural rates are low. Under optimal monetary policy, average in ation then rises much more strongly following a fall in natural rates, rationalizing larger increases in the in ation target.
    Keywords: inflation target, real estate booms, natural rate
    JEL: E31 E44
    Date: 2020–11
  10. By: Francesca Carapella; Jean Flemming
    Abstract: Technological advances in recent years have led to a growing number of fast, electronic means of payment available to consumers for everyday transactions, raising questions for policymakers about the role of the public sector in providing a digital payment instrument for the modern economy. From a theoretical standpoint, the introduction of a central bank digital currency (CBDC) raises long-standing questions relating to the provision of public and private money (Gurley and Shaw 1960), and the ability of the central bank to use CBDC as a means for transmitting monetary policy directly to households (Tobin 1985).
    Date: 2020–11–09
  11. By: Serdar Kabaca; Renske Maas; Kostas Mavromatis; Romanos Priftis
    Abstract: This paper explores the optimal allocation of government bond purchases within a monetary union, using a two-region DSGE model, where regions are asymmetric with respect to economic size and portfolio characteristics: the extent of substitutability between assets of different maturity and origin, asset home bias, and steady-state levels of government debt. An optimal quantitative easing (QE) policy under commitment does not only reflect different region sizes but is also a function of these dimensions of portfolio heterogeneity. By calibrating the model to the euro area, we show that optimal QE favors purchases from the smaller region (Periphery instead of Core), given that the former faces stronger portfolio frictions. A fully optimal policy consisting of both the short-term interest rate and QE lifts the monetary union away from the zero lower bound faster than an optimal interest rate policy alone, which entails forward guidance.
    Keywords: Business fluctuations and cycles; Economic models; Monetary policy
    JEL: E58
    Date: 2020–11
  12. By: Jayawickrema, Vishuddhi
    Abstract: I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.
    Keywords: forward guidance, quantitative easing, asset purchases, zero lower bound
    JEL: E52 E58
    Date: 2020–11
  13. By: Wang, Olivier
    Abstract: This paper studies how low interest rates weaken the short-run transmission of monetary policy and contract the long-run supply of bank credit. As U.S. bond rates have fallen, the pass-through of monetary shocks to loan and deposit rates has weakened while the spread on U.S. bank loans has risen. I build a model in which banks earn deposit and loan spreads, deposits compete with money, and banks’ lending capacity depends on their equity. The short-run transmission of monetary policy is dampened at low rates, because deposit spreads act as a better hedge for bank equity against unexpected monetary shocks. In the long run, persistent low rates decrease banks’ “seigniorage” revenue from deposit spreads, hence bank equity and loan supply contract, and loan spreads increase. JEL Classification: E4, E5, G21
    Keywords: deposit spread, financial intermediation, interest rate pass-through, loan spread, low interest rates
    Date: 2020–11
  14. By: Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz
    Abstract: In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.
    Keywords: affine arbitrage-free term structure model; liquidity risk; financial market frictions; r-star
    JEL: C32 E43 E52 G12 G17
    Date: 2020–11–24
  15. By: Christoffel, Kai; de Groot, Oliver; Mazelis, Falk; Montes-Galdón, Carlos
    Abstract: We estimate the effects of interest rate forward guidance (FG) using a parsimonious VAR, augmented with survey forecast data. The identification strategy of FG shocks via sign and zero restrictions is successfully tested by the recovery of true IRFs from simulated data. The identified shocks from the VAR suggest that FG has a stronger effect on macro variables and deviations are more instantaneous compared to the hump-shaped response following unanticipated changes in monetary policy. We apply this evidence to calibrate free parameters of an otherwise estimated DSGE model in order to dampen the FG Puzzle. JEL Classification: C54, E43, E58
    Keywords: Bayesian VAR, DSGE models, monetary policy, non-standard measures, survey forecasts
    Date: 2020–11
  16. By: Johar Arrieta (Central Bank of Peru); David Florián (Central Bank of Peru); Kristian López (UCSC); Valeria Morales (Central Bank of Peru)
    Abstract: Partial currency substitution typically occurs in small economies amid economic crises, when the local currency loses some of its essential functions and a foreign currency, usually the US Dollar, is widely adopted. Interestingly, the coexistence of two currencies often persists after macroeconomic stability has been restored, which imposes challenges to the conduct of monetary policy. Central banks have responded by applying de-dollarization policies. This paper studies the effectiveness of three of them: (1) taxes on transactions in foreign currency among domestic agents, (2) storage costs on foreign currency holdings, and (3) information on the acceptance rate of the foreign currency among local agents. We extend the model in Matsuyama et al. (1993) to study the effects of these policies, both theoretically and experimentally. We contribute to the theoretical literature by characterizing a new circulation regime where agents use the foreign currency solely for international trade and settle domestic transactions exclusively in local currency. Our experimental evidence suggests that both taxes and storage costs reduce the overall acceptability of foreign currency in international and domestic transactions (around 40 percent in both cases). Information treatment does not have a significant impact relative to baseline.
    Keywords: Bimonetary Economy, Dollarization, Central Bank, Monetary Policy, Experiment, Money.
    JEL: E51 E52 E58 E59 C91 C92
    Date: 2020–11
  17. By: Reghezza, Alessio; Rodriguez d’Acri, Costanza; Pancotto, Livia; Molyneux, Philip
    Abstract: In the current low interest rate environment in the euro area there is potential for a sudden increase in interest rates and heightened interest rate risk (IRR). By using a sample of 81 euro area banks during the period 2014Q4-2018Q1 and a confidential supervisory measure of IRR, this paper identifies which bank-specific characteristics can amplify or weaken the impact of a 200 basis points positive shock in interest rates. We find that banks reliant on core deposits, that hold more floating-interest rate loans and that diversify their lending, either by sector or geography, are less exposed to a positive change in interest rates. Interestingly, we discover that banks that did not exploit the exceptional financing provided by the European Central Bank (ECB) reveal greater IRR exposure. These findings advance the debate on the impact on euro area banking of a possible return to a normalised monetary policy. JEL Classification: E43, E44, E52, G21, F44
    Keywords: balance-sheet determinants, interest rate risk, low interest rate environment, unconventional monetary policies
    Date: 2020–11
  18. By: Kirchner, Markus; Rieth, Malte
    Abstract: This paper examines the role of sovereign default beliefs for macroeconomic fluctuations and stabilisation policy in a small open economy where fiscal solvency is a critical problem. We set up and estimate a DSGE model on Turkish data and show that accounting for sovereign risk significantly improves the fit of the model through an endogenous amplication between default beliefs, exchange rate and inflation movements. We then use the estimated model to study the implications of sovereign risk for stability, fiscal and monetary policy, and their interaction. We find that a relatively strong fiscal feedback from deficits to taxes, some exchange rate targeting, or a monetary response to default premia are more effective and efficient stabilisation tools than hawkish inflation targeting.
    Keywords: small open economies,sovereign risk,monetary policy,exchange rates,business cycles,DSGE models
    JEL: E58 E63 F41
    Date: 2020
  19. By: Luis Angeles
    Abstract: The history of money can be characterized into four major phases, from the earliest written records during the 3rd millennium BC to the present day. This characterization sheds light on both the nature and the evolution of money, and helps us to understand today’s monetary arrangements. Money evolves over time as the preferred means of payment shift from metal to coinage and from coinage to different forms of debt, and as the unit of account becomes more or less linked to the value of a commodity, in particular gold or silver.
    JEL: E51 E58 G21
    Date: 2020–11
  20. By: Jane E. Ihrig; Scott A. Wolla
    Abstract: The Federal Reserve (the Fed), the central bank of the United States, has a Congressional mandate to promote maximum employment and price stability. While those goals were articulated in 1977, the approach and tools used to implement those objectives have changed over time.
    Date: 2020–10–23
  21. By: Oleksiy Kryvtsov; James MacGee
    Abstract: For most of 2011–19, inflation in Canada and advanced economies registered below inflation targets. This has spurred a debate on whether “lowflation” is a temporary phenomenon or rather a sign of a fundamental change in inflation behaviour—in Canada and globally. So far, we know little. Global factors—changes in the price of oil and shifts in trade due to globalization—can only explain a portion of the fluctuations in domestic inflation. Emerging survey data are showing that inflation expectations of managers and households behave very differently from model expectations based on full information and rational behaviour. Recent surveys using randomized control trials reveal that changes in monetary or fiscal policies may lead to unexpected responses of inflation expectations and firm behaviour. Changes in the markets for consumer goods raise the need for us to rethink the methods for measuring inflation. We discuss the questions that these observations bring up for central bankers.
    Keywords: Central bank research; Inflation and prices; Monetary policy
    Date: 2020–11
  22. By: Ojasvita Bahl (Indian Statistical Institute, Delhi); Chetan Ghate (Indian Statistical Institute, Delhi); Debdulal Mallick (Deakin University)
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse domestic or external shocks. Such interventions typically involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on the sectoral and aggregate dynamics of ináation, and the distribution of consumption amongst rich and poor households? To address this, we build a tractable two-sector (agriculture and manufacturing) two-agent (rich and poor) New Keynesian DSGE model with redistributive policy shocks. We calibrate the model to the Indian economy. We show that for an ináation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not. Our paper contributes to a growing literature on understanding the role of consumer heterogeneity in monetary policy
    Keywords: TANK models, HANK Models, Ináation Targeting, Emerging Market and Developing Economies, Food Security, Procurement and Redistribution, DSGE
    JEL: E31 E32 E44 E52 E63
    Date: 2020–07
  23. By: Shaun Markham (Reserve Bank of New Zealand)
    Abstract: This Analytical Note examines the effects of monetary policy on New Zealand’s regional labour markets. Unemployment rates differ between regions, which raises the question of monetary policy’s possible contribution to these differences. Our analysis suggests monetary policy has different impacts on unemployment depending on the region. Some regions, such as Waikato, Manawatu/Wanganui and the upper South Island, appear to be more sensitive to monetary policy than others. Future research will investigate the reasons driving these regional differences, which may include the mix of industry, demography or other factors.
    Date: 2020–10
  24. By: Lake, A.
    Abstract: Trying to estimate rational expectations does not usually minimise forecast error when forecasting macroeconomic or financial variables in reality. This is because, with samples of realistic length, optimal feasible forecasts contain conditional biases that reduce forecast variance. I demonstrate this by using penalised factor models to show that statistically simple inflation forecasts, primarily based on past inflation, are optimal even when other relevant financial and economic variables are available. I also show that US household inflation forecasts display many similarities to these simple optimal forecasts, but also contain mistakes that increase forecast error. Therefore a combination of `optimal feasible expectations' and behavioural errors explain US household inflation forecasts. This suggests that optimal feasible expectations, with additional behavioural errors in some cases, could explain forecast formation across economics and finance.
    Keywords: Forecasting, Expectations, Uncertainty, Shrinkage, Ination, Nominal Rigidities, Factor Models
    JEL: E37 D84 C53
    Date: 2020–11–11
  25. By: Qinchun He; Yulei Luo; Jun Nie; Heng-fu Zou
    Abstract: According to Schumpeter (1934), entrepreneurs are driven to innovate not only for the fruits of success but for success itself. This description of entrepreneurship echoes Weber’s (1958) description of the “spirit of capitalism,” which states that people enjoy the accumulation of wealth irrespective of its effect on smoothing consumption. This paper explores the implications of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and could promote economic growth when the spirit of capitalism is strong. Furthermore, we show that the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate. Finally, our calibrated model suggests that the spirit of capitalism explains an important share (about one-third) of long-run growth in the United States.
    Keywords: Spirit of capitalism; Cash-in-advance; Schumpeterian model; Monetary policy; Growth and welfare
    JEL: E52 O42 O47
    Date: 2020–11–09
  26. By: Oren Barkan; Itamar Caspi; Allon Hammer; Noam Koenigstein
    Abstract: We present a hierarchical architecture based on Recurrent Neural Networks (RNNs) for predicting disaggregated inflation components of the Consumer Price Index (CPI). While the majority of existing research is focused mainly on predicting the inflation headline, many economic and financial entities are more interested in its partial disaggregated components. To this end, we developed the novel Hierarchical Recurrent Neural Network (HRNN) model that utilizes information from higher levels in the CPI hierarchy to improve predictions at the more volatile lower levels. Our evaluations, based on a large data-set from the US CPI-U index, indicate that the HRNN model significantly outperforms a vast array of well-known inflation prediction baselines.
    Date: 2020–11
  27. By: Niftiyev, Ibrahim
    Abstract: Inflation is one of the most important economic indicators for a country. Understanding inflation based on the consumer spending patterns allows for better conceptualization of the phenomenon and improved policy responses for the unwanted developments, more precisely, increased price levels in consumer markets. The current working paper develops Consumer Price Index-based inflation indicator via the help of the Laspeyres price index in the case of Azerbaijan to evaluate the post-booming period (which is since 2011). Moreover, the significant results of correlation analysis between the Paasche Price Index and oil prices, oil revenue, and real effective exchange rate (REER) demonstrate initial signals about the urban and rural inflation dynamics and trends in the case of oil-rich Azerbaijan.
    Keywords: Inflation,Macroeconomic Data,Consumer Price Index (CPI),Oil revenue,Laspeyres Index,Paasche Index,Azerbaijan Economy
    JEL: E01 E31 F41 O50
    Date: 2020
  28. By: Rod Garratt; Michael Junho Lee
    Abstract: In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the COVID-19 pandemic. While digitalization of payment activity improves data utilization by firms, it can also infringe upon consumers’ right to privacy. Drawing from a recent paper, this blog post explains how payment data acquired by firms impacts market structure and consumer welfare. Then, we discuss the implications of introducing a central bank digital currency (CBDC) that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash.
    Keywords: central bank digital currencies; privacy; market structure; data
    JEL: D14 G2 E5
    Date: 2020–11–23
  29. By: Chanelle Duley; Prasanna Gai
    Abstract: We extend the canonical global game model of currency crises to allow for macroeconomic tail risk. The exchange rate peg is attacked if fundamentals reach a critical threshold, or if there is a sufficiently large public shock. Large shocks generate doubt amongst investors about both the state of the world and about what others know, giving rise to multiple equilibria. We ï¬ nd a non-monotonic relationship between tail risk and the probability of (a fundamentals-based) crisis and show how this effect depends on the magnitude and direction of public shocks. Our analysis sheds new light on the way in which international ï¬ nancial contagion played a part in the sterling crisis of 1931.
    Keywords: Global games, currency crises, rank beliefs, inter-war gold standard, sterling crisis of 1931
    JEL: F31 G01 E44 N24
    Date: 2020–11
  30. By: Gurgone, Andrea; Iori, Giulia
    Abstract: To date, macroprudential policy inspired by the Basel III package is applied irrespective of the network characteristics of the banking system. We study how the implementation of macroprudential policy in the form of additional capital requirements conditional to systemic-risk measures of banks should regard the degree of heterogeneity of financial networks. We adopt a multi-agent approach describing an artificial economy with households, firms, and banks in which occasional liquidity crises emerge. We shape the configuration of the financial network to generate two polar worlds: one is characterized by few banks who lend most of the credit to the real sector while borrowing interbank liquidity. The other shows a higher degree of homogeneity. We focus on a capital buffer for SII and two buffers built on measures of systemic impact and vulnerability. The research suggests that the criteria for the identification of systemic-important banks may change with the network heterogeneity. Thus, capital buffers should be calibrated on the heterogeneity of the financial networks to stabilize the system, otherwise they may be ineffective. Therefore, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly.
    Keywords: agent-based model,capital requirements,capital buffers,,financial networks,macroprudential policy,systemic-risk
    JEL: C63 D85 E44 G01 G21
    Date: 2020
  31. By: Taneli Mäkinen (Bank of Italy); Fan Li (Duke University); Andrea Mercatanti (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: The causal effect of the European Central Bank's corporate bond purchase program on bond spreads in the primary market is evaluated, making use of a novel regression discontinuity design. The results indicate that the program did not, on average, permanently alter the yield spreads of eligible bonds relative to those of noneligible. Combined with evidence from previous studies, this finding suggests the effects of central bank asset purchase programs are in no way limited to the prices of the specific assets acquired.
    Keywords: asset purchase programs, corporate bonds, causal inference
    JEL: C21 G18
    Date: 2020–11
  32. By: Qazi Haque (Economics Discipline, Business School, University of Western Australia); Leandro M. Magnusson (Economics Discipline, Business School, University of Western Australia)
    Abstract: We estimate a time-varying parameter VAR (TVP-VAR) with stochastic volatility using post-WWII U.S. data to study the effects of uncertainty shocks on inflation. We find the response of inflation to be statistically insignificant until mid-to-late 1990s and negative thereafter. Our findings suggest that uncertainty shocks do not propagate like aggregate supply shocks and look like aggregate demand shocks since late 1990s.
    Keywords: Uncertainty shocks; inflation dynamics; TVP-VARs with stochastic volatility
    JEL: C32 E31 E32 E44
    Date: 2020
  33. By: Gara Afonso; Marco Cipriani; Steph Clampitt; Haitham Jendoubi; Gabriele La Spada; Will Riordan
    Abstract: Changes in the distribution of banks’ reserve balances are important since they may impact conditions in the federal funds market and alter trading dynamics in money markets more generally. In this post, we propose using the Lorenz curve and Gini coefficient as a new approach to measuring reserve concentration. Since 2013, concentration, as captured by the Lorenz curve and the Gini coefficient, has co-moved with aggregate reserves, decreasing as aggregate reserves declined (such as in 2015-18) and increasing as aggregate reserves increased (such as at the onset of the COVID-19 pandemic).
    Keywords: reserves; concentration; COVID-19
    JEL: G1
    Date: 2020–11–24
  34. By: Fratzscher, Marcel; Heidland, Tobias; Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik
    Abstract: We construct a novel database of monthly foreign exchange interventions for 49 countries over up to 22 years. We build on a text classification approach that extracts information about interventions from news articles and calibrate our procedure to data about actual interventions. Our new dataset allows us to document stylized facts about the use of foreign exchange interventions for countries that neither publish their data nor make them available to researchers. Moreover, we show that foreign exchange interventions are used in a complementary way with capital controls and macroprudential regulation.
    Keywords: foreign exchange intervention,capital controls,macroprudential regulation,international capital flows
    JEL: F31 F33 E58
    Date: 2020
  35. By: Na Guo; Bo Zhang; Jamie Cross
    Abstract: We investigate whether a class of trend models with various error term structures can improve upon the forecast performance of commonly used time series models when forecasting CPI inflation in Australia. The main result is that trend models tend to provide more accurate point and density forecasts compared to conventional autoregressive and Phillips curve models. The best short-term forecasts come from a trend model with stochastic volatility in the transitory component, while medium to long-run forecasts are better made by specifying a moving average component. We also find that trend models can capture various dynamics in periods of significance which conventional models cannot. This includes the dramatic reduction in inflation when the RBA adopted inflation targeting, the one-off 10 per cent Goods and Services Tax inflationary episode in 2000, and the gradual decline in inflation since 2014.
    Keywords: trend model, inflation forecast, Bayesian analysis, stochastic volatility
    JEL: C11 C52 E31 E37
    Date: 2020–11

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