nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒01‒11
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. On the effectiveness of the European Central Bank's conventional and unconventional policies under uncertainty By Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
  2. Uncertainty and voting on the Bank of England’s Monetary Policy Committee By Firrell, Alastair; Reinold, Kate
  3. Money Velocity and the Natural Rate of Interest By Luca Benati
  4. The central bank balance sheet as a policy tool: past, present and future By Bailey, Andrew; Bridges, Jonathan; Harrison, Richard; Jones, Josh; Mankodi, Aakash
  5. The Monetary Crisis and Foundation for Reserve Bank of India (1890-1935) By Balaji, M.; Institute of Research, Asian
  6. Managing External Volatility: Policy Frameworks in Non-Reserve Issuing Economies By Helene Poirson Ward; Nathan Porter; Itai Agur; Jiaqian Chen; Johannes Eugster; Stefan Laseen; Jeta Menkulasi; Kenji Moriyama; Celine Rochon; Katsiaryna Svirydzenka; Camilo E Tovar Mora; Zhongxia Zhang; Aleksandra Zdzienicka
  7. Leaning Against House Prices: A Structural VAR Investigation By Luca Benati
  8. Tendance de l'inflation sous-jacente en RDC: une modélisation à partir de l'approche VAR structurelle By Murhula, Pacifique
  9. The Federal Reserve’s Review of Its Monetary Policy Framework: A Roadmap By David E. Altig; Jeffrey C. Fuhrer; Marc Giannoni; Thomas Laubach
  10. Monetary policy and the top one percent: Evidence from a century of modern economic history By Mehdi El Herradi; Aurélien Leroy
  11. Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature By Grahame Johnson; Sharon Kozicki; Romanos Priftis; Lena Suchanek; Jonathan Witmer; Jing Yang
  12. Wealth distribution and monetary policy By Ludmila Fadejeva; Zeynep Kantur
  13. Inflation-Linked Bonds, Nominal Bonds, and Countercyclical Monetary Policies By Westerhout, Ed
  14. Rare disasters, the natural interest rate and monetary policy. By Alessandro Cantelmo
  15. Macroprudential Policy and the Inward Transmission of Monetary Policy: the case of Chile, Mexico, and Russia By Georgia Bush; Tomás Gómez; Alejandro Jara; David Moreno; Konstantin Styrin; Yulia Ushakova
  16. Inflation-Linked Bonds, Nominal Bonds, and Countercyclical Monetary Policies By Westerhout, Ed
  17. Optimal inflation and the identification of the Phillips curve By McLeay, Michael; Tenreyro, Silvana
  18. International Evidence on Long-Run Money Demand By Luca Benati; Robert E. Lucas Jr.; Juan Pablo Nicolini; Warren Weber
  19. The Dynamics of Foreign Direct Investment and Exchange Rates: An Interconnection Approach in ASEAN By Syarifuddin, Ferry
  20. Causal and Frequency Analyses of Purchasing Power Parity By Jun Nagayasu
  21. The Applied fiscal-monetary theory: Character of constraint and essentials to the advancement of developing economies By Tweneboah Senzu, Emmanuel
  22. Fiscal Policy and the Business Cycle in the West African Monetary Zone By Alabi, M. K.; Amirthalingam, K.
  23. Money Laundering and Central Bank Governance in the European Union By Panicos Demetriades; Radosveta Vassileva
  24. Zombie Credit and (Dis-)Inflation: Evidence from Europe By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
  25. Monetary Policy and Inequality By Andersen, Asger Lau; Johannesen, Niels; Jørgensen, Mia; Peydró, José-Luis
  26. Alternative measures of underlying inflation in the euro area By Cristina Conflitti
  27. House Prices and Macroprudential Policies: Evidence from City-level Data in India By Bhupal Singh
  28. How Does Zombie Credit Affect Inflation? Lessons from Europe By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
  29. The International Spillover of U.S. Monetary Policy via Global Production Linkages By Julian di Giovanni

  1. By: Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
    Abstract: In this paper, we investigate the effectiveness of conventional and unconventional monetary policy measures by the European Central Bank (ECB) conditional on the prevailing level of uncertainty. To obtain exogenous variation in central bank policy, we rely on high-frequency surprises in financial market data for the euro area (EA) around policy announcement dates. We trace the dynamic effects of shocks to the short-term policy rate, forward guidance and quantitative easing on several key macroeconomic and financial quantities alongside survey-based measures of expectations. For this purpose, we propose a Bayesian smooth-transition vector autoregression (ST-VAR). Our results suggest that transmission channels are impaired when uncertainty is elevated. While conventional monetary policy is less effective during such periods, and sometimes also forward guidance, quantitative easing measures seem to work comparatively well in uncertain times.
    Date: 2020–11
  2. By: Firrell, Alastair (Bank of England); Reinold, Kate (Bank of England)
    Abstract: Differences of opinion are a natural and vital part of monetary policy making by committee. With the appropriate stance for monetary policy both unobservable and uncertain, individual policymakers need to synthesise a wide range of information, including the views of other committee members. Using a novel measure of views that we construct from text analysis of the Bank of England Monetary Policy Committee’s minutes and speeches, we show that both individual economic assessments and broader committee views are important in explaining individual voting. But in periods of high uncertainty both become more volatile and carry less weight in votes, consistent with the predictions of a simple voting model embedding a signal extraction problem. There is no increase in the dispersion of economic assessments in periods of uncertainty, nor in the mean dissent rate. Thus we show that interpreting the voting record as a reflection of policy uncertainty is unreliable, and highlight the value of individual committee members’ communications — such as speeches — for conveying differences in view.
    Keywords: Central bank communication; committees; monetary policy; uncertainty
    JEL: D71 D81 E52 E58
    Date: 2020–12–18
  3. By: Luca Benati
    Abstract: M1 velocity is, approximately, the permanent component of the short-term rate. This implies that agents–in deciding how much wealth to allocate to non interest bearing M1, as opposed to interest-bearing assets–almost uniquely react to permanent shocks to the opportunity cost, essentially ignoring transitory shocks. This suggests that money-demand models must be modified to allow for such distinct reaction to permanent and transitory variation in the opportunity cost of holding M1. Under monetary regimes making inflation stationary, permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest.
    Keywords: Money demand; unit roots; cointegration; structural VARs; natural rate of interest.
    JEL: E30 E32
    Date: 2020–12
  4. By: Bailey, Andrew (Bank of England); Bridges, Jonathan (Bank of England); Harrison, Richard (Bank of England); Jones, Josh (Bank of England); Mankodi, Aakash (Bank of England)
    Abstract: This paper focuses on what has been learned from the past decade of previously unconventional monetary policy measures and the emerging lessons from the effects of monetary policy responses to the Covid shock. The paper explores two observations from recent quantitative easing (QE) policies in detail. First, large QE programmes implemented quickly may be particularly effective in times of market dysfunction. Second, a rapid pace of asset purchases may also enhance QE effectiveness during these periods. These observations suggest a particular form of ‘state contingency’ for the impact of QE. The paper analyses the potential implications of such state contingency for the appropriate conduct of QE policies and the choice of policy instruments in more normal times. The paper also outlines some potential implications for future central bank balance sheet policies and the operational framework to support them.
    Keywords: Monetary policy; financial stability; central bank balance sheet; quantitative easing; reserves
    JEL: E52 E58
    Date: 2020–12–18
  5. By: Balaji, M.; Institute of Research, Asian
    Abstract: The monetary policy of British India was highly controversial during the interwar period as it aimed to protect the budgetary obligations and private commerce. The currency stabilization policy was seen as a tool to protect the British economic interest while they ruled India. The currency came under serious pressure during the World War I and Great depression, the facets of Indian currency’s dependence was exposed through the modified council bill system and Gold exchange standard. The much-needed currency reforms and banking system were conceded by the colonial administration after much wrangling for half a century.
    Date: 2020–12–12
  6. By: Helene Poirson Ward; Nathan Porter; Itai Agur; Jiaqian Chen; Johannes Eugster; Stefan Laseen; Jeta Menkulasi; Kenji Moriyama; Celine Rochon; Katsiaryna Svirydzenka; Camilo E Tovar Mora; Zhongxia Zhang; Aleksandra Zdzienicka
    Abstract: Since the global financial crisis, non-reserve-issuing economies (NREs) have been highly sensitive to episodes of external pressures. With monetary policy independence constrained by this sensitivity, many NREs have utilized other policy instruments. This paper confirms the vulnerability of NREs to external shocks and finds that in some circumstances managing such shocks with multiple instruments can both lessen the policy response required from any one policy tool to financial and external shocks and increase the effectiveness of policies in stabilizing macro-financial conditions. Effectiveness however does not always imply appropriateness, which rests on an evaluation of potential trade-offs and unintended consequences.
    Date: 2020–12–18
  7. By: Luca Benati
    Abstract: Evidence from monetary VARs suggests that in the U.S., Canada, and the U.K. the impact of monetary shocks on real house prices is about three to five times as large as that onreal GDP. Although these trade-offs are not manifestly unfavorable, in the light of the large differences in the magnitudes of house prices and GDP fluctuations, a monetary policy of leaning against the former would inevitably entail significant losses in the latter. I use the identified VARs in order to explore the corresponding trade12 offs associated with a monetary policy of weakly, but systematically leaning against house prices. Results from ‘modest’ (in the sense of Leeper and Zha, 2003) policy counterfactuals suggest that, in population, the impact on real house prices is about three times as large as that on real GDP for all of the three countries. Within the specific context of the upsurge in U.S. house prices which pre-dated the financial crisis, a shortfall of one per cent of GDP would have been associated with a decline in real house prices by about four per cent.
    Keywords: Structural VARs; house prices; sign restrictions; zero restrictions.
    JEL: E30 E32
    Date: 2020–12
  8. By: Murhula, Pacifique
    Abstract: In this paper, we estimate a SVAR model to analyze the trend of underlying inflation in the Democratic Republic of Congo and follow the identification approach of Blanchard and Quah (1989) to impose long-run restrictions. Thus, we use Congolese data on the growth rate of activity and the inflation rate from 2002Q1 to 2019Q4. Our results broadly confirm those generally found in the literature and show that the monetary shock has, in accordance with the identification constraint, almost no effect on economic activity, which tends to validate the verticality of the Phillips curve and the persistence of the negative real shock considerably explains the volatility of inflation in the Democratic Republic of Congo (DRC).
    Keywords: Core Inflation, Price Stability, Monetary Policy, Economic Growth, Structural VAR
    JEL: C32 E31 E52 E58 O47
    Date: 2020–12–28
  9. By: David E. Altig; Jeffrey C. Fuhrer; Marc Giannoni; Thomas Laubach
    Abstract: In early 2019, the Federal Open Market Committee (FOMC or the Committee) launched a comprehensive review of its monetary policy framework (MPF)—the strategies, tools, and communication practices employed by the Federal Reserve to achieve its congressionally mandated goals of maximum employment and price stability.
    Date: 2020–08–27
  10. By: Mehdi El Herradi (; Aurélien Leroy (LAREFI, University of Bordeaux, Pessac, France)
    Abstract: This paper examines the distributional e ects of monetary policy in 12 OECD economies between 1920 and 2016. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to analyse how top income shares respond to monetary policy shocks. The results indicate that monetary tightening strongly decreases the share of national income held by the top one percent and vice versa for a monetary expansion, irrespective of the position of the economy. This e ect (i) holds for the top percentile and the ultra-rich (top 0.1% and 0.01% income shares), while (ii) it does not necessarily induce a decrease in income inequality when considering the entire income distribution. Our ndings also suggest that the e ect of monetary policy on top income shares is likely to be channeled via real asset returns.
    Keywords: monetary policy, top incomes, macroeconomic policy trilemma, external instrument
    JEL: E25 E42 E52
    Date: 2020–12
  11. By: Grahame Johnson; Sharon Kozicki; Romanos Priftis; Lena Suchanek; Jonathan Witmer; Jing Yang
    Abstract: This paper summarizes the literature on the performance of various extended monetary policy tools when conventional policy rates are constrained by the effective lower bound. We highlight issues that may arise when these tools are used by central banks of small open economies. Tools that have already been used by various central banks include forward guidance and balance sheet policies—such as quantitative easing, yield curve targeting, credit easing, funding-for-lending and purchases of other assets. The paper also touches on the use of negative interest rates. The evidence to date suggests that such tools have allowed central banks to ease financial conditions and thereby stimulate aggregate demand. The article also considers overt monetary financing (often referred to as “helicopter money†) as an additional tool if conditions require even more aggressive easing. We review the sequencing and pacing of the use of such tools, as well as spillover effects and financial stability concerns, as important aspects of implementation strategies.
    Keywords: Monetary policy; Monetary policy implementation; Monetary policy transmission
    JEL: E63
    Date: 2020–12
  12. By: Ludmila Fadejeva (Bank of Latvia); Zeynep Kantur
    Abstract: We observe differences in the net wealth distribution by age among European countries. The net wealth distribution in Western EU countries is consistent with the life cycle hypothesis. However, in Eastern EU countries, the wealth distribution is skewed towards younger ages. The aim of the paper is twofold: first, we study the characteristics of economies leading to differences in the net wealth distribution by age; second, we evaluate the impact of these differences on the transmission of monetary policy. To do so, we develop a modified New Keynesian model where the demand side is represented by a multi-period overlapping generation setup, and the supply side of the economy follows the New Keynesian framework. The model is used to analyse the interaction between monetary policy and wealth accumulation originated by demographics and the productivity gap among generations in a coherent general equilibrium model. The HFCS database is used to calibrate the model for two groups of European countries. We find that the shape of net wealth distribution by age has an important bearing on the effectiveness and hence conduct of monetary policy.
    Keywords: overlapping generations model, New Keynesian model, wealth distribution, monetary policy
    JEL: E32 E52 J11
    Date: 2020–09–16
  13. By: Westerhout, Ed (Tilburg University, Center For Economic Research)
    Keywords: Inflation-indexed Bonds; Time-Consistent Discretionary Monetary Policies; Stabilization Properties of Monetary Policies; Inflation Risk Premium
    Date: 2021
  14. By: Alessandro Cantelmo (Bank of Italy)
    Abstract: This paper evaluates the impact of rare disasters on the natural interest rate and macroeconomic conditions by simulating a nonlinear New-Keynesian model. The model is calibrated using data on natural disasters in OECD countries. From an ex-ante perspective, disaster risk behaves as a negative demand shock and lowers the natural rate and inflation, even if disasters hit only the supply side of the economy. These effects become larger and nonlinear if extreme natural disasters become more frequent, a scenario compatible with climate change projections. From an ex-post perspective, a disaster realization leads to temporarily higher natural rate and inflation if supply-side effects prevail. If agents' risk aversion increases temporarily, disasters may generate larger demand effects and lead to a lower natural rate and inflation. If supply-side effects dominate, the central bank could mitigate output losses at the cost of temporarily higher inflation in the short run. Conversely, under strict inflation targeting, inflation is stabilized at the cost of larger output losses.
    Keywords: rare disasters, natural disasters, natural interest rate, climate change, DSGE, monetary policy
    JEL: E4 E5
    Date: 2020–12
  15. By: Georgia Bush; Tomás Gómez; Alejandro Jara; David Moreno; Konstantin Styrin; Yulia Ushakova
    Abstract: This paper studies whether domestic macroprudential policy may attenuate the inward transmission of monetary-policy shocks from the U.S. to domestic banks' lending growth in three emergingmarket economies -Chile, Mexico, and Russia. Identification relies on banks' heterogeneous exposure to the prudential policies and the fact that foreign monetary policy shocks are exogenous from the perspective of these economies. After analyzing the effects of the aggregate domestic prudential policy stance, we focus on specific prudential policies targeting mortgage and consumer loans, as well as foreign-currency deposits. Although our overall results are mixed, we find evidence that the strength of international monetary policy spillovers varies depending on the stance of the domestic macroprudential policy. In particular, a tighter reserve requirement stance over foreigncurrency deposits in Chile dampens the effect of an international monetary policy shock on domestic local-currency lending, but reinforces that on foreign-currency lending, whereas in Russia, it dampens the effect on both local currency and foreign currency lending, although to different degrees. Prudential policies targeting the asset side of banks' balance sheets, such as mortgage loans or consumer credit, are found to amplify international monetary policy spillovers in some cases and attenuate in others, depending on the country context.
    Date: 2020–12
  16. By: Westerhout, Ed (Tilburg University, School of Economics and Management)
    Date: 2021
  17. By: McLeay, Michael; Tenreyro, Silvana
    Abstract: Several academics and practitioners have pointed out that inflation follows a seemingly exogenous statistical process, unrelated to the output gap, leading some to argue that the Phillips curve has weakened or disappeared. In this paper, we explain why this seemingly exogenous process arises, or, in other words, why it is difficult to empirically identify a Phillips curve, a key building block of the policy framework used by central banks. We show why this result need not imply that the Phillips curve does not hold—on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimizing welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve. We discuss different strategies to circumvent the identification problem and present evidence of a robust Phillips curve in US data.
    JEL: J1
    Date: 2020–01–01
  18. By: Luca Benati; Robert E. Lucas Jr.; Juan Pablo Nicolini; Warren Weber
    Abstract: We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. The evidence supports the existence of a stable long-run relationship between the ratio of M1 to GDP and a short-term interest rate for a large majority of the countries. The log-log specification provides a good characterization of the data, with the exception of periods featuring very low interest rates. An extension of the theory that imposes limits on the amount households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6
    Keywords: Long-run money demand, Cointegration
    Date: 2020–12
  19. By: Syarifuddin, Ferry
    Abstract: This paper examines the direct and spillover effects of the exchange rate on foreign direct investment (FDI) inflows based on a panel of ASEAN countries for the period 2001 to 2018. We utilize the spatial econometric approach to accommodate the nature of spatial dependence among ASEAN countries. Our results suggest that the effect of the exchange rate depends on the source-region of FDI, implying the existence of spatial heterogeneity in ASEAN’s FDI. We also show that FDI inflows in ASEAN is not only influenced by the exchange rate of the country itself but also by those of the neighboring countries.
    Keywords: Foreign Direct Investment, Exchange Rates, Macroeconomics, Spatial Models
    JEL: F21
    Date: 2020–12–01
  20. By: Jun Nagayasu
    Abstract: A century after its development, the purchasing power parity theorem, which links exchange rates with prices, remains one of the most popular and influential economic theories. This study examines the relationship between exchange rates and prices from the perspectives of causality and spillovers. Using a panel of countries and advanced statistical methods, we estimate spillovers for all combinations of origins and destinations at di erent frequency bands, and show that their relationship is time-varying and multidirectional and has some validity at short and long time horizons. Furthermore, using exchange rate regimes, economic structures, currency crises, and trade openness, we identify economic conditions influencing the size and direction of spillovers.
    Date: 2021–01
  21. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper makes a proposition that the chaotic functioning order of the operating factors of the economy as a system only results in a constraint. And further, argue that a persistent aggregate chaotic functioning becomes a complex constraint, creating more distortion in the performance of the economy. Which the study further establishes the major causal factors that make the mainstream theoretical approach to economic growth and development within fiscal-monetary policy and its management space, fails to be effective in application towards developing and under developing economies, and recommends resolution as a method in a form of a policy framework, having within its core a job creation system to initiate full employment towards development as a focal interest of the paper.
    Keywords: Monetary Policy, Fiscal Policy, Development theory, Economic growth, Constraint
    JEL: E51 E52 E58 E62 E63
    Date: 2020–12–31
  22. By: Alabi, M. K. (University of Ilorin); Amirthalingam, K. (University of Colombo)
    Abstract: The Economic Community of West African States has come up with a new single currency to be used for its proposed West African monetary union. It is called eco. Among the West African states are a group of countries collectively referred to as the West African Monetary Zone. For the smooth running of a monetary union, fiscal policy should be sustainable and countercyclical. Main objectives of this study are to assess the relationship between fiscal policy and the business cycle and the role of institutions. Panel data of six countries for the period 2001-2018 were used. A fiscal reaction model was estimated. The cyclical component of real general government expenditure was used to represent fiscal policy while the cyclical component of real Gross Domestic Product (GDP) was used as a proxy for the business cycle. Results showed that West African Monetary Zone member countries exhibit pro-cyclical fiscal policy and weak fiscal sustainability. Also, the quality of institutions has the capability of making fiscal policy less procyclical. The policy implication of this study’s finding is that these countries may not perform well if they go ahead with the single currency union. These countries must make concerted efforts to improve the quality of institutions and implement countercyclical fiscal policies. Meanwhile the proposed monetary union should be suspended.
    Keywords: Fiscal Policy; Business cycle; Monetary Union; West African Monetary Zone; Pro-cyclical
    Date: 2020–12–30
  23. By: Panicos Demetriades; Radosveta Vassileva
    Abstract: Dirty money is often a by-product or a symptom of political corruption in the jurisdictions in which it originates. It can also spread corruption and erode democracy on its journey to its final destination. This typically involves multiple jurisdictions and is the reason why it is so hard to detect. Recently, a series of money laundering scandals have highlighted weaknesses in the anti-money laundering and counter-terrorist financing (AML/CFT) framework of the European Union (EU), the implementation of which remains the responsibility of member states. The paper argues that EU’s defences against money laundering have been weakened partly reflecting a little-known erosion in the independence of member state central banks which are often the AML supervisors. It puts forward a number of new proposals to strengthen governance and AML/CFT implementation in the EU.
    Date: 2020–05
  24. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
    Abstract: We show that “zombie credit”—cheap credit to impaired firms—has a disinflationary effect. By helping distressed firms to stay afloat, such credit creates excess production capacity, thereby putting downward pressure on product prices. Granular European data on inflation, firms, and banks confirm this mechanism. Industry-country pairs affected by a rise of zombie credit show lower firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. Without a rise in zombie credit, inflation in Europe would have been 0.4 percentage point higher post-2012.
    Keywords: zombie lending; undercapitalized banks; disinflation; firm productivity; eurozone
    JEL: E31 E44 G21
    Date: 2020–12–01
  25. By: Andersen, Asger Lau; Johannesen, Niels; Jørgensen, Mia; Peydró, José-Luis
    Abstract: We analyze the distributional effects of monetary policy on income, wealth and consumption. For identification, we exploit administrative household-level data covering the entire population in Denmark over the period 1987-2014, including detailed information about income and wealth from tax returns, in conjunction with exogenous variation in the Danish monetary policy rate created by a long-standing currency peg. Our results consistently show that all income groups gain from a softer monetary policy, but that the gains are monotonically increasing in the ex-ante income level. Over a two-year horizon, a decrease in the policy rate of one percentage point raises disposable income by less than 0.5% at the bottom of the income distribution, by around 1.5% at the median income and by around 5% at the top. The effects on asset values through increases in house prices and stock prices are larger than the effects on disposable income by more than an order of magnitude and exhibit a similar monotonic income gradient. We show how all these distributional effects reflect systematic differences in the exposure to the direct and indirect channels of monetary policy. Consistent with the main results for disposable income and asset values, we also find that the effects on net wealth and consumption (car purchases) increase monotonically over the ex-ante income distribution. Our estimates imply that softer monetary policy increases income inequality by raising income shares at the top of the income distribution and reducing them at the bottom.
    Keywords: monetary policy,inequality,household heterogeneity
    JEL: E2 E4 E5 G2 G1 G5
    Date: 2020
  26. By: Cristina Conflitti (Bank of Italy)
    Abstract: This paper proposes two measures of underlying inflation for euro area as an alternative to the Harmonized Index of Consumer Prices excluding Food and Energy. The first measure, called the Core cycle measure, is constructed by using a Phillips curve model to distinguish disaggregated prices that respond to the economic cycle (procyclical), from those which do not (acyclical). The second measure, called the Common core measure, is constructed using a factor model to remove components that are subject to large or unusual price changes, which are unlikely to be related to the underlying trend of inflation because of their idiosyncratic nature. Each measure has merits and shortcomings, suggesting that they should be taken together to assess inflation developments.
    Keywords: core inflation, disaggregate consumer prices, dynamic factor model, Phillips curve
    JEL: C32 E31 E32
    Date: 2020–12
  27. By: Bhupal Singh
    Abstract: This paper examines the efficacy of macroprudential policies in addressing housing prices in a developing country while underscoring the importance of fundamental factors. The estimated models using city-level data for India suggest a strong influence of fundamental factors in driving housing prices. There is compelling evidence of the effectiveness of macroprudential tools viz., Loan-to-value (LTV) ratio, risk weights, and provisioning requirements, in influencing housing price movements. A granular analysis suggests an even stronger impact on housing prices of a change in the regulatory LTV ratio for large-sized vis-à-vis small-sized mortgages, which buttresses their potency in fighting house price speculations. A tightening of the risk weights on the housing assets of banks causes significant downward pressure on house prices. Similarly, regulatory changes in standard asset provisioning on housing loans also influence house prices.
    Date: 2020–12–18
  28. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
    Abstract: Even after the unprecedented stimulus by central banks in Europe following the global financial crisis, Europe’s economic growth and inflation have remained depressed, consistently undershooting projections. In a striking resemblance to Japan’s “lost decades,” the European economy has been recently characterized by persistently low interest rates and the provision of cheap bank credit to impaired firms, or “zombie credit.” In this post, based on a recent staff report, we propose a “zombie credit channel” that links the rise of zombie credit to dis-inflationary pressures.
    Keywords: zombie lending; undercapitalized banks; disinflation; firm productivity; Eurozone
    JEL: G1 G21
    Date: 2020–12–22
  29. By: Julian di Giovanni
    Abstract: The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary policy to world stock markets.
    Keywords: global production network; asset prices; monetary policy shocks
    JEL: F0 G1
    Date: 2021–01–06

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