nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒01‒18
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Expectations in the U.S.: Linking Markets, Households, and Businesses By Peter D. Williams
  2. Digital Payments, the Cashless Economy, and Financial Inclusion in the United Arab Emirates: Why Is Everyone Still Transacting in Cash? By Jeremy Srouji
  3. Monetary policy and the top one percent: Evidence from a century of modern economic history By Mehdi El Herradi; Aurélien Leroy
  4. Evaluating effectiveness of price level targeting in the presence of increasing uncertainty By Engin Kara; Ahmed Pirzada
  5. On the Drivers of Inflation in Different Monetary Regimes By Daniel Garcés Díaz
  6. Lending Relationships and Optimal Monetary Policy By Zachary Bethune; Guillaume Rocheteau; Russell Wong; Cathy Zhang
  7. Short Rate Dynamics: A Fed Funds and SOFR perspective By Karol Gellert; Erik Schl\"ogl
  8. Liquidity Traps in a World Economy By Robert Kollmann
  9. Exchange rate fluctuations and the financial channel in emerging economies By Joscha Beckmann; Mariarosaria Comunale
  10. Monetary and macroprudential policy complementarities: evidence from European credit registers By Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
  11. The Interplay between Monetary and Fiscal Policies in the EU By António Afonso; Alexandre Sousa
  12. The role and future of cash By Jurgen Spaanderman
  13. India’s Inflation Process Before and After Flexible Inflation Targeting By Patrick Blagrave; Weicheng Lian
  14. Redistribution and the Monetary-Fiscal Policy Mix By Saroj Bhattarai; Jae Won Lee; Choongryul Yang
  15. The 'new normal' during normal times - liquidity regulation and conventional monetary policy By Sînziana Kroon; Clemens Bonner; Iman van Lelyveld; Jan Wrampelmeyer
  16. The international dimension of a fragile EMU By Ioannou Demosthenes; Pagliari Maria Sole; Stracca Livio
  17. Anything but gold. The golden constant revisited By Jean-François Carpantier
  18. Federal Reserve District County Shapefiles By Colton Tousey
  19. Dirty Money: Does the Risk of Infectious Disease Lower Demand for Cash? By Serhan Cevik
  20. EMU reform proposals and their (non) implementation: An overview By Eckert, Sandra; Lindner, Vincent; Nölke, Andreas
  21. Tokens and Accounts in the Context of Digital Currencies By Alexander Lee; Brendan Malone; Paul Wong
  22. International transmission of interest rates: the role of international reserves and sovereign debt By António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
  23. Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations By Wouter Bossu; Masaru Itatani; Catalina Margulis; Arthur D. P. Rossi; Hans Weenink; Akihiro Yoshinaga
  24. Caught in the Crosswinds: The Experiences of Selected Economies Responding to External Volatility with Multiple Policy Levers By Ghada Fayad; Helene Poirson Ward
  25. Should developed economies manage international capital flows? By Dennis Bonam; Gavin Goy; Emmanuel de Veirman
  26. The impact of monetary policy on expectations along the yield curve By Böck, Maximilian; Feldkircher, Martin
  27. Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data By Minsuk Kim; Rui Mano; Mico Mrkaic
  28. Central Bank Independence: Metrics and Empirics By Donato Masciandaro; Jacopo Magurno; Romano Tarsia
  29. Global Impacts of US Monetary Policy Uncertainty Shocks By Povilas Lastauskas; Anh Dinh Minh Nguyen
  30. The Role of Nonlinearity in Indeterminate Models: An Application to Expectations-Driven Liquidity Traps By Yoichiro Tamanyu
  31. Government Bonds, Bank Liquidity and Non-Neutrality of Monetary Policy in the Steady By Wang, Tianxi

  1. By: Peter D. Williams
    Abstract: Inflation has been below the Federal Reserve’s target for much of the past 20 years, creating worries that inflation may be deanchoring from the FOMC’s target. This paper uses a factor model that incorporates information from professional forecasters, household and business surveys, and the market for Treasury inflation protected securities (TIPS) to estimate long-run inflation expectations. These have fallen notably in the past few years (to roughly 1.9 percent for CPI inflation, well below the FOMC’s target). It appears that, even before the covid recession, the private sector viewed the economy as likely to suffer from persistent headwinds to inflation.
    Keywords: Inflation;Return on investment;Oil prices;Liquidity;Inflation targeting;inflation expectations,yield curve,factor modeling,no-arbitrage term structure model,TIPS,surveys,WP,inflation expectation,inflation risk premium,breakeven inflation series,CPI inflation,risk premia
    Date: 2020–11–13
  2. By: Jeremy Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur, ISS - International Institute of Social Studies (ISS), Erasmus University Rotterdam)
    Abstract: Since the oil price downturn of 2015, the United Arab Emirates and fellow Gulf Cooperation Council countries have worked hard to expand digital payments in the interest of improved tax and revenue collection, transparency, and security. Yet despite a deep transformation and diversification of their payment ecosystems and the formalization of plans to become "cashless economies" modelled on South Korea and Sweden, cash continues to dominate payments in both countries. While industry players typically attribute the prevalence of cash in the region to questions of infrastructure readiness, transaction costs, and cyber-security, this paper finds that plans to expand digital payments at the expense of cash may not be well-adapted to countries with high levels of socioeconomic inequality. It proposes a link between socioeconomic inequality and use of cash in emerging economies, and concludes that it may be better to not view the relationship between cash and digital payments in binary zero-sum terms, until there is a better understanding of the socioeconomic , technological, and policy context in which countries like South Korea and Sweden have managed to reduce their reliance on cash in favor of a diversified digital payments ecosystem .
    Keywords: digital payments,cashless economy,financial inclusion,complementary currencies,inequality,non-cash transactions,Gulf Cooperation Council,oil economies,remittances
    Date: 2020–10–30
  3. By: Mehdi El Herradi (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Aurélien Leroy (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    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
    Date: 2020–12–16
  4. By: Engin Kara; Ahmed Pirzada
    Abstract: We argue that understanding the macroeconomic effects of increasing economic uncertainty requires understanding nominal rigidities. In the standard new Keynesian model where all firms face the same degree of nominal rigidity, heightened uncertainty leads to higher inflation and lower output. Introducing heterogeneity in price stickiness, suggested by micro-evidence on prices, changes this prediction of the model. In the new model, increased uncertainty leads to decrease in both inflation and output. These effects are more pronounced with higher trend inflation. We find that price-level targeting is more effective in dealing with the consequences of increasing uncertainty than inflation targeting.
    Date: 2021–01–07
  5. By: Daniel Garcés Díaz
    Abstract: This document proposes a general macroeconomic framework to analyze the behavior of inflation. This approach has two characteristics. The first is the distinction of monetary regimes based on the number of shocks that have a permanent effect on the price level. When all shocks have a permanent impact, the regime determines the inflation rate, as in inflation targeting. On the other hand, when there is only one shock with permanent effects, the regime determines the price level. An example of this is a regime with a fixed exchange rate. Even if there is no explicit target for the domestic price level, this becomes determined by the operation of a regime of this type. The second characteristic comes from the factors that Granger cause the rate of inflation or the price level. With this, a new perspective on four different historical cases emerges. One is the German hyperinflation; the second is that of the United States for a very long sample. For Brazil and Mexico, the analysis demonstrates that their inflationary processes' complexity arises from the regime changes they have gone through.
    JEL: C32 E41 E42 E52
    Date: 2020–12
  6. By: Zachary Bethune; Guillaume Rocheteau; Russell Wong; Cathy Zhang
    Abstract: We construct and calibrate a monetary model of corporate finance with endogenous formation of lending relationships. The equilibrium features money demands by firms that depend on their access to credit and a pecking order of financing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms' incentives to use internal or external finance. We study optimal monetary policy following an unanticipated destruction of relationships under different commitment assumptions. The Ramsey solution uses forward guidance to expedite creation of new relationships by committing to raise the user cost of cash gradually above its long-run value. Absent commitment, the user cost is kept low, delaying recovery.
    Keywords: Credit relationships; banks; corporate finance; optimal monetary policy
    JEL: D83 E32 E51
    Date: 2020–09–25
  7. By: Karol Gellert; Erik Schl\"ogl
    Abstract: The Secured Overnight Funding Rate (SOFR) is becoming the main Risk-Free Rate benchmark in US dollars, thus interest rate term structure models need to be updated to reflect the key features exhibited by the dynamics of SOFR and the forward rates implied by SOFR futures. Historically, interest rate term structure modelling has been based on rates of substantially longer time to maturity than overnight, but with SOFR the overnight rate now is the primary market observable. This means that the empirical idiosyncrasies of the overnight rate cannot be ignored when constructing interest rate models in a SOFR-based world. As a rate reflecting transactions in the Treasury overnight repurchase market, the dynamics of SOFR are closely linked to the dynamics of the Effective Federal Funds Rate (EFFR), which is the interest rate most directly impacted by US monetary policy target rate decisions. Therefore, these rates feature jumps at known times (Federal Open Market Committee meeting dates), and market expectations of these jumps are reflected in prices for futures written on these rates. On the other hand, forward rates implied by Fed Funds and SOFR futures continue to evolve diffusively. The model presented in this paper reflects the key empirical features of SOFR dynamics and is calibrated to futures prices. In particular, the model reconciles diffusive forward rate dynamics with piecewise constant paths of the target short rate.
    Date: 2021–01
  8. By: Robert Kollmann
    Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap.
    Keywords: Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports
    Date: 2021–01
  9. By: Joscha Beckmann (Universität Greifswald); Mariarosaria Comunale (Bank of Lithuania & Vilnius University)
    Abstract: This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyse whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks transmission covering 11 emerging market countries for the period 2000Q1-2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand with regard to foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to appreciation) decreases GDP. The financial channel works mostly in the short-run except for Brazil, Malaysia and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rates.
    Keywords: emerging markets, financial channel, exchange rates, global liquidity
    JEL: F31 F41 F43 G15
    Date: 2020–12–29
  10. By: Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
    Abstract: We document that there are strong complementarities between monetary policy and macroprudential policy in shaping the evolution of bank credit. We use a unique loan-level dataset comprising multiple credit registers from several European countries and different types of loans, including corporate loans, mortgages and consumer credit. We merge this rich information with borrower and bank-level characteristics and with indicators summarising macroprudential and monetary policy actions. We find that monetary policy easing increases both bank lending and lending to riskier borrowers, especially when there is a more accommodative macroprudential environment. These effects are stronger for less capitalised banks. Results apply to both household and firm lending, but they are stronger for consumer and corporate loans than for mortgages. Finally, for firms, the overall increase in bank lending induced by an accommodative policy mix is stronger for more (ex ante) productive firms than firms with high ex ante credit risk, except for banks with low capital. JEL Classification: E51, E52, E58, G21, G28
    Keywords: corporate and household credit, euro area, macroprudential policy, monetary policy
    Date: 2020–12
  11. By: António Afonso; Alexandre Sousa
    Abstract: We study the interactions between monetary and fiscal policiesin the EU countries, for the period 1995-2019. Our results show notably that: i) the inflation rate has a relevantimpact over the central banks’ decision making; ii) the cyclically adjusted primary balance reacts positively to increases in the level of government debt; iii) monetary policy reaction functions do not seem to take into consideration the cyclically adjusted primary balance; iv) fiscal policy, via the cyclically adjusted primary balance, seem to be affected by the short-term interest rate in a negative way.The global economic and financial crisis impacted negatively both the short-term nominal interest rates and the cyclically adjusted primary balance, however with a higher degree in the euro area.
    Keywords: Monetary Policy, Fiscal Policy; Reaction Functions; Great Recession
    JEL: E52 E62 E63 E65 H62
    Date: 2020–12
  12. By: Jurgen Spaanderman
    Abstract: This study analyses some fundamental questions about the future of cash. According to the DNB Payments Strategy 2018-2021, the decreasing use of cash is putting pressure on the cash infrastructure. This raises all kinds of questions about the future of cash.1 Until recently, the downward trend of cash use was mainly a result of citizens' own choices, but since the coronavirus crisis they have also increasingly been forced to pay electronically. In this study we investigate the changing role of cash, the extent to which cash is still needed and how we should deal with its decreasing use. We also investigate whether this decreasing use jeopardises the independence of people who depend on cash, and whether the resilience and, consequently, the smooth operation of the payment system would be reduced if the use of cash as a back-up in the event of disruptions in electronic payments was lost Our starting point is DNB's current policy, which focuses on the general acceptance of cash, the availability of a network for depositing and withdrawing cash, measures to safeguard the reliability and security of cash, and reducing the cost of cash. This study ties in with the recent report on the position of cash by the National Forum on the Payment System (NFPS).2 The main stakeholders in the payment system are represented on this Forum to contribute to a socially robust, efficient and secure payment system. The present study builds on the cash trends described in the NFPS report, focusing on the importance of public money in physical and digital form, the significance of the specific properties of cash, the legal framework and the necessity of keeping cash easily accessible and available.
    Date: 2020–12
  13. By: Patrick Blagrave; Weicheng Lian
    Abstract: We study the inflation process in India, focusing on the periods before and after the adoption of flexible inflation-forecast targeting (FIT) in India. Our analysis uses several approaches including standard Phillips curve estimation for headline and core inflation, an examination of the sensitivity of medium-term inflation expectations to inflation surprises, and the properties of convergence between headline and core inflation. Results indicate an important role for domestic factors in driving the inflation process, and there is evidence that expectations have become more anchored since 2015. This result could be attributable to FIT adoption, or to persistently low food prices which dominate the post-FIT-adoption period. The policy implications of these structural changes in the inflation process are investigated using a semi-structural model calibrated to the Indian economy.
    Keywords: Inflation;Food prices;Inflation targeting;Emerging and frontier financial markets;Import prices;India,WP,inflation expectation,headline inflation processes,food price inflation,core-inflation process,core-inflation determinant,headline inflation forecast
    Date: 2020–11–13
  14. By: Saroj Bhattarai; Jae Won Lee; Choongryul Yang
    Abstract: We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent inflation than the monetary regime. In a quantitative application, we use a two-sector, two-agent New Keynesian model, situate the model economy in a Covid-19 recession, and quantify the effects of the transfer components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We find that the transfer multipliers are significantly larger under the fiscal regime—which results in a milder contraction—than under the monetary regime, primarily because inflationary pressures of this regime counteract the deflationary forces during the recession. Moreover, redistribution produces a Pareto improvement under the fiscal regime.
    Keywords: household heterogeneity, redistribution, monetary-fiscal policy mix, transfer multiplier, welfare evaluation, Covid-19, CARES Act
    JEL: E53 E62 E63
    Date: 2020
  15. By: Sînziana Kroon; Clemens Bonner; Iman van Lelyveld; Jan Wrampelmeyer
    Abstract: We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio (LCR) on conventional monetary policy implementation. Combining unique data sets of Dutch banks from 2002 to 2005, we find that the introduction of the LCR impacts banks' behaviour in open market operations. After the introduction of the LCR, banks bid for higher volumes and pay higher interest rates for central bank funds. In line with theory, banks reduce their reliance on overnight and short term unsecured funding. We do not observe a worsening of collateral quality pledged in open market operations. Thus, to correctly anticipate an open market operation's effect on interest rates, monetary policy requires central banks to consider not only the size of the operation, but also how it impacts banks' liquidity management and compliance with the LCR.
    Keywords: Liquidity regulation; monetary policy implementation; financial intermediation; banks; open market operations
    JEL: G18 G21 E42
    Date: 2021–01
  16. By: Ioannou Demosthenes; Pagliari Maria Sole; Stracca Livio
    Abstract: This paper quantifies the economic influence that shocks to EMU cohesion, which in turn reflect the incomplete nature of the monetary union, have on the rest of the world, by disentangling euro area stress shocks and global risk aversion shocks on the basis of a combination of sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (VAR) model with financial variables. We find that the effects of euro area stress shocks are significant not only for the euro area but also for the rest of the world. Notably, an increase in euro area stress entails a slowdown of economic activity in the rest of the world, as well as a fall in imports/exports of both the euro area and the rest of the world. A decrease in euro area stress has somewhat more widespread beneficial effects on both economic performance and global trade activity.
    Keywords: Economic and Monetary Union, Bayesian SVAR, narrative sign restrictions, panel local projections
    JEL: C23 C32 F02 F33
    Date: 2020
  17. By: Jean-François Carpantier (corresponding member UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper revisits the golden constant - the gold property of keeping a constant purchasing power - via a comparison with a set of 17 commodities (energy, metals, agricultural products). We first use graphical devices of the CPI-deflated commodity prices, then stationarity tests designed to assess how fast the real prices of the commodities revert to their “constant” and, finally, measurements of their convergence speed. We find that the real price of gold is far from a constant, farther than the real price of most other commodities. We also note that the mean reversion of gold real price to its constant/average is weaker and slower than for most other commodities. These findings suggest that most commodities do a better job than gold when it comes to keeping a constant purchasing power. A portfolio of commodities would provide a liquidity similar to gold, while offering to investors a more stable protection against inflation.
    Keywords: gold; inflation; safe haven; portfolio diversification; hedging; commodities
    JEL: C22 G10 G11 G15 N20
    Date: 2020–10–20
  18. By: Colton Tousey
    Abstract: Federal Reserve District boundaries have been discussed many times since they were first defined and have been set for some time now. However, an easily accessible and accurate delineation of the boundaries does not currently exist in a central location. This may create challenges for Regional Banks of the Federal Reserve System, which attempt to provide an accurate picture of the economy in their region. Many times, state-level data are all that are available; however, when county-level data are available, FRS staff can produce more precise estimates of what is happening in a Federal Reserve District. This paper documents the current boundary information and the process used to create a new up-to-date and accurate visual representation of the Federal Reserve Districts. County-level shapefiles are created in ArcGIS for each Federal Reserve District, and access to these files is made available with the release of this paper.
    Keywords: Arc Map; Federal Reserve; Shapefiles; Arc GIS
    Date: 2019–04–17
  19. By: Serhan Cevik
    Abstract: The coronavirus pandemic is a global crisis like no other in modern times, and there is a growing apprehension about handling potentially contaminated cash. This paper is the first empirical attempt in the literature to investigate whether the risk of infectious diseases affects demand for physical cash. Since the intensity of cash use may influence the spread of infectious diseases, this paper utilizes two-stage least squares (2SLS) methodology with instrumental variable (IV) to address omitted variable bias and account for potential endogeneity. The analysis indicates that the spread of infectious diseases lowers demand for physical cash, after controlling for macroeconomic, financial, and technological factors. While the transactional constraints imposed by the COVID-19 pandemic could become a catalyst for the use of digital technologies around the world, electronic payment methods may not be universally available in every country owing to financial and technological bottlenecks.
    Keywords: Communicable diseases;Currencies;COVID-19 ;Deposit rates;Ebola;Demand for cash,currency-in-circulation,digital money,infectious diseases,WP,cash use,handling cash,cash transfer,store of value,infectious-disease outbreak
    Date: 2020–11–20
  20. By: Eckert, Sandra; Lindner, Vincent; Nölke, Andreas
    Abstract: Following the financial crash and the subsequent recession, European policymakers have undertaken major reforms regarding the European Economic and Monetary Union (EMU). Yet, the success rate is mixed. Several reform proposals have either completely failed due to opposition forces or are still pending, sometimes for years. This article provides an overview of reforms in four major policy fields: financial stabilisation, economic governance, fiscal solidarity, and cooperative dissolution. Building on the conceptual foundation of policy analysis, it distinguishes between policy outputs and outcomes. Policy output refers to legislation being adopted or agreement on treaty changes, while policy outcomes depict the result from the implementation process.
    Date: 2020
  21. By: Alexander Lee; Brendan Malone; Paul Wong
    Abstract: This report provides an overview of two concepts that come up frequently in discussions of digital currencies: tokens and accounts. The meaning of each concept differs depending on context. For cryptocurrencies, the term "token" has a relatively straightforward, technology-specific definition. For central bank digital currencies (CBDC), the term "token" takes on more of a conceptual or analytical meaning. To further complicate matters, "tokens" and "accounts" are not always mutually exclusive ideas. This paper identifies areas where this terminology has caused confusion and explains why the terminology is problematic in an effort to improve the technical and conceptual discourse on digital currencies and the "tokenization" of financial assets.
    Date: 2020–12–23
  22. By: António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
    Abstract: We analyse the international transmission of interest rates by focusing onthe role of the accumulation of international reserves and on the financing of sovereign debt. An increase in foreign exchange reserves is expected to moderate the influence of U.S. interest rates.However,a high level of government debt raises the sovereign risk premium. Moreover, an increase in the stock ofgovernment debt denominated in foreign currency may increasethe expected rate of depreciation of the domestic currency. We explain the theoretical mechanisms in a model, which describes the money market equilibrium in an economy with capital account openness. Then, we test the predictions of the model for a panel of advanced and developing economies over the period 1970-2018. Our main findings are: i) significant spillovers from the U.S. interest rates to other countries, mostly for Advanced Economies; ii) a dampening effect of the share of external liabilities in the domestic currency, clearly a determinant of risk premium; iii)a negative effect of international reserves on interest rates, as expected; iv) higher reserves decrease risk premia, for long-term interest rates; v)the significanceof spilloversfades once the sovereign debtreaches100% of GDPin developed countries.
    Keywords: interest rates, international reserves, government debt, spillover effects, monetary policy, fiscal policy, panel analysis
    JEL: C23 E43 E63 F31 F34 G15 H60
    Date: 2021–01
  23. By: Wouter Bossu; Masaru Itatani; Catalina Margulis; Arthur D. P. Rossi; Hans Weenink; Akihiro Yoshinaga
    Abstract: This paper analyzes the legal foundations of central bank digital currency (CBDC) under central bank and monetary law. Absent strong legal foundations, the issuance of CBDC poses legal, financial and reputational risks for central banks. While the appropriate design of the legal framework will up to a degree depend on the design features of the CBDC, some general conclusions can be made. First, most central bank laws do not currently authorize the issuance of CBDC to the general public. Second, from a monetary law perspective, it is not evident that “currency” status can be attributed to CBDC. While the central bank law issue can be solved through rather straithforward law reform, the monetary law issue poses fundmental legal policy challenges.
    Keywords: Central Bank digital currencies;Currencies;Central bank legislation;Legal support in revenue administration;Payment systems;Central Bank Digital Currency,CBDC,Blockchain,Cryptocurrency,Crypto assets,WP,central bank law,monetary unit,book money,digital currency,law reform,token-based CBDC
    Date: 2020–11–20
  24. By: Ghada Fayad; Helene Poirson Ward
    Abstract: A case study approach is used to assess the multi-pronged policy response of seven small financially open economies with flexible exchange rate regimes to external shocks following the global financial crisis. FX intervention was frequently used— including during outflow episodes to prevent disorderly depreciation and preserve financial stability. Monetary policy often considered both financial and external stability. Capital flow management measures were sometimes calibrated symmetrically over the cycle while macroprudential measures were mostly deployed during inflow episodes. Assessment of the macroeconomic conditions paints an inconclusive picture on the benefits or costs of such policies, suggesting the need for further analysis.
    Keywords: Inflation;Exchange rates;Financial sector stability;Depreciation;Central bank policy rate;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,macroprudential measures.,WP,monetary policy decision,exchange rate volatility,inflation targeting regime,monetary policy independence,FX turnover BIS data
    Date: 2020–11–08
  25. By: Dennis Bonam; Gavin Goy; Emmanuel de Veirman
    Abstract: At least since the euro area sovereign debt crisis, it is evident that country risk premium shocks have adverse economic effects, not only in emerging economies, but advanced economies as well. Using a Bayesian Panel Vector Autoregression model, we find that increases in the risk premium lower output under monetary union, yet not in countries with flexible exchange rates and independent monetary policies. We study the transmission mechanism in a two-country New Keynesian model and show that capital controls substantially attenuate the effects of risk premium shocks. However, the welfare gain of imposing capital controls hinges on the nature of the shock and the prevailing exchange rate regime.
    Keywords: Bayesian panel VAR; capital controls; exchange rate regime; welfare
    JEL: F32 F38 F41 F45
    Date: 2020–12
  26. By: Böck, Maximilian; Feldkircher, Martin
    Abstract: This article investigates how market participants adjust their expectations of interest rates at different maturities in response to a monetary policy and a central bank information shock for the US economy. The results show that market participants adjust their expectations faster to changes in interest rates compared to new releases of information by the central bank. This finding could imply that central bank information shocks are more opaque whereas a change in interest rates provides a stronger signal to the markets. Moreover, financial market agents respond with an initial underreaction to both shocks, potentially resembling inattention or overconfidence. Last, we find that the adjustment of expectations for yields with higher maturities takes considerably longer than for short-term yields. This finding is especially important for central banks since in the current low-interest rate environment monetary policy actions mainly consist of policies aimed at the long-end of the yield curve.
    Keywords: monetary policy, expectation formation, belief bias
    Date: 2020–12
  27. By: Minsuk Kim; Rui Mano; Mico Mrkaic
    Abstract: Central banks often buy or sell reserves-–-so called FX interventions (FXIs)---to dampen sharp exchange rate movements caused by volatile capital flows. At the same time, these interventions may entail unintended side effects. In this paper, we investigate whether FXIs incentivize firms to take on more unhedged FX debt, thereby increasing medium-term corporate vulnerabilities. Using a novel dataset with close to 5,000 nonfinancial firms across 19 emerging markets covering 2002--2017, we find that the firm-level share of FX debt rises following intensive use of FXIs, particularly for non-exporting firms in shallow financial markets with no FX debt to begin with. The magnitude of this effect is economically significant, with one standard deviation increase in FXI leading to an average 2 percentage points increase in the FX debt share. For reference, the median share of FX debt in the sample is zero.
    Keywords: Foreign exchange;Exchange rate arrangements;Exchange rates;Currencies;Exchange rate flexibility;WP,firm,balance sheet data,FX intervention
    Date: 2020–09–25
  28. By: Donato Masciandaro; Jacopo Magurno; Romano Tarsia
    Abstract: This paper reviews the evolution of the literature on Central Bank Independence (CBI) focusing on its metrics as well as on its empirical association with macroeconomic variables. Part One describes the evolution of the CBI indicators, while Part Two analyses the econometric studies devoted to shed light on the relationships between CBI and macroeconomic performances.
    Keywords: Monetary Policy, Central Bank Independence, Inflation, Growth, Sacrifice Ratio, Public Finance, Financial Stability
    JEL: E50 E52 E58
    Date: 2021
  29. By: Povilas Lastauskas (Bank of Lithuania & Vilnius University); Anh Dinh Minh Nguyen (Bank of Lithuania & Vilnius University)
    Abstract: We build a new empirical model to estimate the global impact of an increase in the volatility of US monetary policy shocks. Specifically, we admit time-varying variances of local structural shocks from a stochastic volatility specification. By allowing for rich dynamic interaction between the endogenous variables and timevarying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. Moreover, we document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy.
    Keywords: US Monetary Policy, Volatility Shocks, Uncertainty, Global Economy
    JEL: C32 C54 E52 E58 F44
    Date: 2020–12–30
  30. By: Yoichiro Tamanyu (Graduate School of Economics, Keio University)
    Abstract: This paper proposes a novel methodology to derive nonlinear solutions of an indeterminate DSGE model in which the decision rules are affected by sunspot shocks. We apply the method to an expectations-driven liquidity trap---a liquidity trap that arises because of the zero lower bound constraint on the nominal interest rate and the de-anchoring of economic agents' expectations---and find that the model dynamics exhibit significant nonlinearity. Such nonlinearity arises because the zero lower bound ceases to bind once the inflation rate rises because of a temporary increase in inflation expectations.
    Keywords: Indeterminacy, Nonlinearity, Sunspot, Expectations-Driven Liquidity Traps, Zero Lower Bound
    JEL: C62 C63 E31
    Date: 2020–11–28
  31. By: Wang, Tianxi
    Abstract: This paper studies non-neutrality of monetary policy in a model where fiat money is used by banks to meet liquidity demand and a government bond to collateralize reserve borrowing. It finds that if some banks are liquidity constrained, any monetary policy that alters the bond-to-fiat money ratio moves the interbank rate and is non-neutral in the steady state. Moreover, the effect for liquidity un-constrained banks is the opposite of that for the maximally constrained. Lastly, if the expansion of digital ways of payment eliminates depositor withdrawals, fiat money will stop circulation and a bullion standard will probably return.
    Date: 2021–01–12

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