nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒01‒25
forty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Chatelain, Jean-Bernard; Ralf, Kirsten
  2. Alternative monetary approaches and causal nexus breakdown in rate of interest and currency reserves in Italy, 1961-1990 By Giuseppe Conti; Luciano Fanti
  3. The ECB and the Cost of Independence. Unearthing a New Doom-Loop in the European Monetary Union By Armando Marozzi
  4. A Quantitative Model for the Integrated Policy Framework By Tobias Adrian; Christopher J. Erceg; Jesper Lindé; Pawel Zabczyk; Jianping Zhou
  5. Central bank cryptocurrencies in a competitive equilibrium environment: Can strong money demand survive in the digital age? By Saito, Makoto
  6. Taylor Rule Yield Curve By Masazumi Hattori; Tomohide Mineyama; Jouchi Nakajima
  7. A Conceptual Model for the Integrated Policy Framework By Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
  8. Exchange Rate Pass-Through in the Caucasus and Central Asia By Tigran Poghosyan
  9. Parallel Digital Currencies and Sticky Prices By Harald Uhlig; Taojun Xie
  10. Imported or Home Grown? The 1992-3 EMS Crisis By Eichengreen Barry; Naef Alain
  11. Update to Figure 1 in "Macroeconomic Shocks and their Propagation" By Edoardo Chiarotti; ;
  12. Leaning Against the Wind: A Cost-Benefit Analysis for an Integrated Policy Framework By Luis Brandao-Marques; R. G Gelos; Machiko Narita; Erlend Nier
  13. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Chatelain, Jean-Bernard; Ralf, Kirsten
  14. Redistribution and the monetary–fiscal policy mix By Saroj Bhattarai; Jae Won Lee; Choongryul Yang
  15. Macroeconomic Expectations and Credit Card Spending By Misha Galashin; Martin Kanz; Ricardo Perez-Truglia
  16. Regional and State Heterogeneity of Monetary Shocks in Argentina By Emilio Blanco; Pedro Elosegui; Alejandro Izaguirre; Gabriel Montes Rojas
  17. Shocks and Frictions in US Business Cycle: A Bayesian DSGE Approach By Mansur, Alfan
  18. Mortgage Prepayment, Race, and Monetary Policy By Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
  19. It is Only Natural: Europe’s Low Interest Rates By Marco Arena; Gabriel Di Bella; Alfredo Cuevas; Borja Gracia; Vina Nguyen; Alex Pienkowski
  20. Liquidity Traps in a World Economy By Kollmann, Robert
  21. How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices? By Chadi Abdallah; Kangni R Kpodar
  22. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
  23. Sources of inflation and the effects of balanced budgets and inflation targeting in developing economies By Guilherme Klein Martins; Peter Skott
  24. Central Bank Digital Currency: When Price and Bank Stability Collide By Linda Schilling; Jesús Fernández-Villaverde; Harald Uhlig
  25. Federal reserve chair communication sentiments’ heterogeneity, personal characteristics, and their impact on target rate discovery By Juan Arismendi-Zambrano; Massimo Guidolin; Alessia Paccagnini
  26. Solving the Price Puzzle Via A Functional Coefficient Factor-Augmented VAR Model By Zongwu Cai; Xiyuan Liu
  27. Measuring Sudden Stops in Mongolia By Batjargal, Dulamzaya; Doojav, Gan-Ochir
  28. Do Monetary Policy Frameworks Matter in Low Income Countries? By Alina Carare; Carlos de Resende; Andrew T. Levin; Chelsea Zhang
  29. Large devaluations and inflation inequality: evidence from Brazil By Raphael Gouvea
  30. Impact of Remittances on Natural Rate of Dollarization—Trends in Caucasus and Central Asia By Rocio Gondo; Altynai Aidarova; Manmohan Singh
  31. Foreign demand for euro banknotes JEL Classification: E41, E47, E49, E59, F24 By Lalouette, Laure; Zamora-Pérez, Alejandro; Rusu, Codruta; Bartzsch, Nikolaus; Politronacci, Emmanuelle; Delmas, Martial; Rua, António; Brandi, Marco; Naksi, Martti
  32. Global Banks’ Dollar Funding: A Source of Financial Vulnerability By Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
  33. Fifty shades of QE: Conflicts of interest in economic research By Fabo, Brian; Jančoková, Martina; Kempf, Elisabeth; Pástor, Luboš
  34. Demonetisation 2016 and its impact on Indian economy and taxation By Pratap Singh
  35. Determinants of Disagreement: Learning from Indian Inflation Expectations Survey of Households By Singh, Gaurav Kumar; Bandyopadhyay, Tathagata
  36. The Effectiveness of Futures-based Foreign Exchange Intervention: Comparative Studies of Brazil and India By Syarifuddin, Ferry; Izzulhaq, Syahid
  37. "Keynes's Clearing Union Is Alive and Well and Living in Your Mobile Phone" By Jan Kregel
  38. Managing Macrofinancial Risk By Tobias Adrian; Francis Vitek
  39. A Survey of Research on Retail Central Bank Digital Currency By John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
  40. The macroprudential toolkit: effectiveness and interactions By Millard, Stephen; Rubio, Margarita; Varadi, Alexandra
  41. Exchange Rates and Domestic Credit—Can Macroprudential Policy Reduce the Link? By Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
  42. An empirical behavioral model of households’ deposit dollarization By Ramis Khabibullin; Alexey Ponomarenko

  1. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: A minimal central bank credibility, with a non-zero probability of not renegning his commitment ("quasi-commitment"), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete lack of credibility, with the certainty that the policy maker will renege his commitment ("optimal discretion"), leads to the local instability of inflation dynamics. In the textbook example of the new-Keynesian Phillips curve, the response of the policy instrument to inflation gaps for optimal policy under quasi-commitment has an opposite sign than in optimal discretion, which explains this bifurcation.
    Keywords: Ramsey optimal policy, Imperfect commitment, Discretion, New-Keynesian Phillips curve, Imperfect credibility.
    JEL: C61 C62 E31 E52 E58
    Date: 2021
  2. By: Giuseppe Conti; Luciano Fanti
    Abstract: Following a renewed interest for the investigation of the monetary policy in the Italian experience, this paper focus on the role of the official reserves as a target of Bank of Italy for the period 1961-1990, motivated by a long lasting tradition (e.g. Hawtrey, Keynes, Kaldor) for which reserves were crucial for the central bank behaviour. This paper analyses, mostly by using the Granger causality test, if this "traditional" rule could have been working for Italy in recent periods as well, regardless of exchange rate regimes and the mainstream monetary theories. Main conclusions neatly support the existence of two sub-periods: a first one (before 1979) during which the "traditional" praxis occurs; and a second one (after 1979) when the "alternative" praxis seems to prevail. This would confirm the break in monetary targeting adopted by the Italian central bank at the end of the Seventies.
    Keywords: Monetary policy, interest rate, reserve ratio, Bank of Italy, Granger test
    JEL: E52 E58
    Date: 2020–12–01
  3. By: Armando Marozzi
    Abstract: Central Bank Independence has often been praised as a "free lunch" as it lowers inflation with no costs to output. This paper, instead, claims that in a peculiar monetary union such as the European Monetary Union (EMU) defending the independence during a financial crisis can be macroeconomically costly: unconventional monetary policies may expose the European Central Bank (ECB) to the threat of fiscal dominance which, in turn, might endogenously shift the ECB’s fiscal stance toward fiscal conservatism. Fiscally hawkish signals can then depress GDP and inflation, thereby forcing the ECB to prolong the unconventional stimuli to achieve its target. This paper finds evidence of this new "doom-loop" at the core of the EMU.
    Keywords: ECB, monetary-fiscal interaction, CBI, unconventional monetary policy, EMU, fiscal communication
    JEL: E52 E58 E61 E63
    Date: 2021
  4. By: Tobias Adrian; Christopher J. Erceg; Jesper Lindé; Pawel Zabczyk; Jianping Zhou
    Abstract: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
    Keywords: Return on investment;Inflation;Interest rate parity;Exchange rates;Real exchange rates;WP
    Date: 2020–07–07
  5. By: Saito, Makoto
    Abstract: This paper discusses the possible macroeconomic consequences of the introduction of cryptocurrencies by central banks (so-called central bank cryptocurrencies or CBCCs) in a competitive equilibrium environment. In this setup, central banks set not only the money supply, but also the interest rate on CBCCs, whereas bond interest rates, the price level, and the exchange rates between CBCCs are determined in competitive markets. We first resolve a severe confrontation between the quantity theory of money (QTM) and the fiscal theory of the price level (FTPL) in that as long as the currency interest rate lies below the bond interest rate, the QTM is applicable in principle. However, once the bond interest rate (asymptotically) matches that of the currency, the FTPL takes the place of the QTM. We then investigate whether the introduction of CBCCs plays a role in the disappearance of strong money demand (currently present at near-zero interest rates in Japan) and its alternatives. We find that if a central bank sets the currency interest rate below a near-zero bond interest rate, then strong money demand disappears, and the massive issuance of long-term public bonds is no longer absorbed in currency markets. However, once the consolidated government succeeds in lowering the currency interest rate to be deeply negative, it can obtain immense seigniorage, allowing it to repay these public bonds. In addition, if the bond interest rate also falls, even below zero for long periods, then the government can exploit seigniorage from CBCC holders without limit.
    Date: 2020–12
  6. By: Masazumi Hattori; Tomohide Mineyama; Jouchi Nakajima
    Abstract: We propose the Taylor rule yield curve for the United States, which is an extension of the Taylor rule for the short-term policy rate to points in time in the future horizon. The estimated Taylor rule expected rates are useful for considering the monetary policy stance reflected in the entire yield curve, which is valid even during the periods when the federal funds rate (FFR) hits its effective lower bound (ELB). The analysis shows that the Taylor rule deviations (TRDs), the gap between the Taylor rule expected rates and market Overnight Index Swap (OIS) rates, for maturities much longer than overnight could influence the outputgap and inflation rates in the United States, even during the period when the FFR hit the ELB for a considerable duration and the Federal Reserve resorted to an unconventional monetary policy. Moreover, the TRDs for long maturities can be regarded as a measure of risk appetite in financial markets. Our methodology in this study can be directly applied for analysis in other countries that experienced similar periods of policy rates hitting their ELBs, as long as data on economists' forecasts of output and inflation are available.
    Date: 2021–01
  7. By: Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
    Abstract: In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.
    Keywords: Capital controls;Housing;Exchange rates;Currency markets;Central bank policy rate;WP,exchange rate,FX intervention,interest rate
    Date: 2020–07–07
  8. By: Tigran Poghosyan
    Abstract: This paper estimates the extent and speed of exchange rate pass-through (ERPT) in seven Caucasus and Central Asia (CCA) countries using monthly data over the January 1995–May 2020 period. The estimations are performed using the local projections method. We find that the average pass-through in the CCA is about 10 percent on impact and about 25 percent after 12 months. There is no evidence of asymmetric ERPT with respect to the size and the sign of exchange rate changes. The pass-through is broadly unchanged in fixed versus floating exchange rate regimes. There has been a downward shift in the speed of ERPT in the aftermath of the global financial crisis as CCA countries have entered a relatively low inflation environment. The pass-through estimates could be used by the CCA monetary authorities for inflation projections. The absence of non-linearities in the pass-through with respect to the exchange rate regime suggests that transition from fixed to floating exchange rate regimes in the region is not likely to impose additional inflationary costs.
    Keywords: Exchange rates;Exchange rate adjustments;Exchange rate pass-through;Exchange rate arrangements;Inflation;WP,confidence interval
    Date: 2020–08–07
  9. By: Harald Uhlig; Taojun Xie
    Abstract: The recent rise of digital currencies opens the door to their use in parallel alongside official currencies ("dollar'') for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.
    JEL: E30 E52
    Date: 2020–12
  10. By: Eichengreen Barry; Naef Alain
    Abstract: Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System. Using this index, we pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.
    Keywords: European Monetary System, exchange rates, foreign exchange intervention, currency crisis.
    JEL: F31 E5 N14 N24
    Date: 2020
  11. By: Edoardo Chiarotti (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: This note proposes an update to Figure 1 in "Macroeconomic Shocks and their Propagation" in the Handbook of Macroeconomics of 2016 (Ramey, 2016). Figure 1 of Ramey (2016) reports Impulse-Response Functions (IRFs) of variables of interest to a shock in the Federal Funds Rate, following the baseline and variations of the Vector Autoregression (VAR) models in Christiano et al. (1999). This note shows that, when using a time series for FED non-borrowed reserves that is not corrected for regulatory changes in reserves requirements, the results for the period 1983-07 are robust to the inclusion of monetary variables.
    Keywords: Central Bank, FED Reserves, VAR
    JEL: E52 E58 E65
    Date: 2021–01–07
  12. By: Luis Brandao-Marques; R. G Gelos; Machiko Narita; Erlend Nier
    Abstract: This paper takes a new approach to assess the costs and benefits of using different policy tools—macroprudential, monetary, foreign exchange interventions, and capital flow management—in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic loss functions, estimating policy effects on the full distribution of future output growth and inflation with quantile regressions. Tightening macroprudential policy dampens downside risks to growth stemming from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses, calling for caution in the use of monetary policy to “lean against the wind.” These findings hold when policies are used in response to easing global financial conditions. Buying foreign-exchange or tightening capital controls has small net benefits.
    Keywords: Macroprudential policy;Macroprudential policy instruments;Credit;Financial conditions index;Capital flow management;WP,financial conditions,loss function
    Date: 2020–07–07
  13. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among different monetary-policy rules when caring about a number of policy targets such as the output gap and expected inflation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Keywords: Determinacy, Proportional Feedback Rules, Dynamic Stochastic General Equilibrium, Ramsey Optimal Policy under Quasi-Commitment.
    JEL: B22 B23 B41 C61 C62 E52
    Date: 2020–10–31
  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: 2020–12
  15. By: Misha Galashin; Martin Kanz; Ricardo Perez-Truglia
    Abstract: How do macroeconomic expectations affect consumer decisions? We examine this question using a natural field experiment with 2,872 credit card customers from a large commercial bank. We conduct a survey to measure consumer expectations about future inflation and the nominal exchange rate and combine this with an information-provision experiment that generates exogenous variation in these expectations. We merge the survey and experimental data with detailed administrative data on the subjects' credit card transactions and balances. The experiment is designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. We find that the information provided to participants strongly affects subjective expectations. However, we do not find any significant effects on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). Our preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance.
    JEL: C81 C93 D83 D84 E03 E31
    Date: 2020–12
  16. By: Emilio Blanco (Banco Central de la República Argentina); Pedro Elosegui (Banco Central de la República Argentina); Alejandro Izaguirre (Universidad de San Andrés); Gabriel Montes Rojas (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: This paper empirically investigates how economic activity in Argentina at regional and provincial (i.e., state) levels respond to central national monetary policy shocks, as given by a change in the interest rate. The rst result is that regional heterogeneity of monetary shocks exists in Argentina. At the regional level the long-term eects of increasing the interest rate are negative and statistically signicant. At the provincial level, 11 provinces show a negative and signicant impact of a shock on the interest rate over employment. However, there are 13 provinces in which the eect is not statistically signicant, including the City of Buenos Aires and Buenos Aires Province. Bayesian methods are implemented to study the discrepancies in the impact on dierent provinces.
    Keywords: Monetary Policy, Monetary Transmission, Regional Effects
    JEL: E52 G21 R11 R12
  17. By: Mansur, Alfan
    Abstract: This paper aims to replicate and extend Smets and Wouters (2007) who study the shocks and frictions in the US business cycle using a Bayesian DSGE methodology. The novelty of this research is by applying the extended Taylor rule for monetary policy in which the monetary policy also targets full employment. The SW model seems able to fit the US macroeconomic data very well. When the output gap in the Monetary policy Taylor rule is replaced with the unemployment rate, wage mark up shock becomes more persistent in determining inflation and interest rate. Productivity shock also becomes stronger in driving output. However, some unexpected results also come up, e.g. the negative responses of hours worked to a risk premium shock and inflation to the demand shocks
    Keywords: shocks, frictions, monetary policy
    JEL: C11 E32 E52
    Date: 2020–10–24
  18. By: Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
    Abstract: During the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.
    Keywords: mortgage; refinance; race; monetary policy; interest rate
    JEL: D14 E52 G51
    Date: 2020–12–18
  19. By: Marco Arena; Gabriel Di Bella; Alfredo Cuevas; Borja Gracia; Vina Nguyen; Alex Pienkowski
    Abstract: Estimates of the natural interest rate are often useful in the analysis of monetary and other macroeconomic policies. The topic gathered much attention following the great financial crisis and the Euro Area debt crisis due to the uncertainty regarding the timing of monetary policy normalization and the future path of interest rates. Using a sample of European countries (including several members of the Euro Area), this paper provides estimates of country-specific natural interest rates and some of their drivers between 2000 and 2019. In line with the literature, our findings suggest that natural interest rates declined during this period, and despite a rebound in the last few years of it, they have not recovered to their pre-crisis levels. The paper also discusses the implications of the decline in natural interest rates for monetary conditions and debt sustainability.
    Keywords: Real interest rates;Output gap;Global financial crisis of 2008-2009;Financial crises;Central bank policy rate;WP,monetary policy,math display,fiscal policy
    Date: 2020–07–03
  20. By: Kollmann, Robert
    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
    JEL: E3 E4 F2 F3 F4
    Date: 2021–01–03
  21. By: Chadi Abdallah; Kangni R Kpodar
    Abstract: We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.
    Keywords: Fuel prices;Inflation;Energy prices;Oil prices;Personal income;WP,price,standard deviation,fuel price shock,spiral effects
    Date: 2020–06–12
  22. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Keywords: Capital controls;Central bank policy rate;Emerging and frontier financial markets;Capital outflows;Capital flows;WP,capital control,real GDP,net capital,output gap
    Date: 2020–06–26
  23. By: Guilherme Klein Martins (University of Massachusetts Amherst, USA); Peter Skott (University of Massachusetts Amherst, USA)
    Abstract: This paper presents a model of inflation in developing economies and uses it to evaluate macroeconomic policy in those countries. We see cross-sectoral interactions between demand and supply side forces as central and show that the standard macroeconomic policy recommendations of inflation targeting and balanced budgets (i) increase volatility by amplifying external shocks and (ii) can lead to premature deindustrialization. The analysis applies to economies with marked underemployment, a central feature of developing and emerging countries. The recent Brazilian experience is used to illustrate the argument.
    Keywords: inflation targeting, Dutch disease, overvaluation, commodities boom, Washington consensus
    JEL: E63 O23 O14
    Date: 2020
  24. By: Linda Schilling; Jesús Fernández-Villaverde; Harald Uhlig
    Abstract: A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer “spending” shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.
    Keywords: central bank digital currency, monetary policy, bank runs, financial intermediation, inflation targeting, CBDC trilemma
    JEL: E58 G21
    Date: 2020
  25. By: Juan Arismendi-Zambrano; Massimo Guidolin; Alessia Paccagnini
    Abstract: We construct a communication risk profile of the U.S. Federal Reserve Chair by measuring the sentiment of their public statements during their tenure. Communications’ sentiment impact on the interest rates price discovery process by the market after the FOMC meeting is analyzed. The results show that there is a significant difference in the communications’ sentiment that is heterogeneous on the personal characteristics, controlling for the economic environment, and that the Chair communications’ sentiment plays a role in diminishing the surprise of Federal Reserve announcements.
    Keywords: Federal Reserve, Monetary Policy, Communications, Federal Funds Rate, Machine Learning
    JEL: G12 G14 G18 G21 G28 G41
    Date: 2020–12
  26. By: Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Xiyuan Liu (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)
    Abstract: Effects of monetary policy shocks on large amounts of macroeconomic variables are identified by a new class of functional-coefficient factor-augmented vector autoregressive (FAVAR) models, which allows coefficients of classical FAVAR models to vary with some variable. In the empirical study, we analyze the impulse response functions estimated by the newly proposed model and compare our results with those from classical FAVAR models. Our empirical finding is that our new model has an ability to eliminate the well-known price puzzle without adding new variables into the dataset.
    Keywords: Factor-augmented vector autoregressive; Functional coefficient models; Impulse response functions; Nonparametric estimation; Price puzzle
    JEL: C14 C32 E30 E31
    Date: 2021–01
  27. By: Batjargal, Dulamzaya; Doojav, Gan-Ochir
    Abstract: In this paper, we empirically examine the sudden stops in capital flows in Mongolia based on Calvo et al. (2004) approach in the past two decades. We found 5 episodes of sudden stops in capital flows and 5 episodes of sudden stops in domestic credits since 1998. Domestic sudden stops lasted longer than the external sudden stop and, in most cases, external sudden stops are followed by the domestic sudden stops. The common consequences of sudden stops on the economy are reduced investments, slack in credits, economic slowdown, the exchange rate depreciation, decline in reserves, and banking crisis/difficulties.
    Keywords: Sudden stops, Capital flows, Exchange rate volatility, Mongolia
    JEL: F0 F32 F41
    Date: 2020–06
  28. By: Alina Carare; Carlos de Resende; Andrew T. Levin; Chelsea Zhang
    Abstract: In recent years, many Low-Income Countries (LICs) have implemented substantial reforms to their monetary policy frameworks, but existing economic research has not provided a clear rationale to guide those efforts. In this paper we analyze the role of monetary policy frameworks in the propagation of aggregate shocks, using a large panel dataset of 79 LICs over the period 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs. We find highly significant differences in the propagation of external shocks between the LICs that target monetary aggregates or inflation compared to those that maintain rigid nominal exchange rates as a nominal anchor. We also find that the large surprise devaluation of the Central African Franc (CFA) in January 1994 had highly significant effects on the GDP growth of 10 CFA countries compared to 18 similar countries that were outside the CFA zone. Our empirical analysis provides strong support for the role of monetary policy frameworks in facilitating macroeconomic stability in LICs—a conclusion that is particularly relevant as LICs now face a multitude of similar shocks associated with the global COVID-19 pandemic.
    Keywords: Monetary policy frameworks;Exchange rates;Production growth;Inflation targeting;Oil prices;WP,oil price shock,terms of trade,change frequency,monetary policy framework in LICs,sensitivity analysis,transparent monetary policy framework,unanticipated monetary policy shock
    Date: 2020–07–24
  29. By: Raphael Gouvea (Institute for Applied Economic Research (IPEA); Department of Economics, University of Massachusetts Amherst)
    Abstract: In the aftermath of large devaluations, prices of tradable goods/lower-priced varieties increase significantly more than the prices of nontradables/higher-priced varieties. These relative price changes may lead to inflation inequality when household consumption baskets are different across the distribution of income. Using Cravino and Levchenko [2017]’s methodology, we show that inflation of poor households in Brazil was at least 11 percentage points higher than of the rich in the aftermath of the 2002 large devaluation. A detailed case study of the City of São Paulo estimates an inflation inequality ranging from 8 to 11 percentage points in the city.
    Keywords: Exchange Rate Devaluation, Pass-Through, Inflation, Inequality
    JEL: F31 F41 E31
    Date: 2020
  30. By: Rocio Gondo; Altynai Aidarova; Manmohan Singh
    Abstract: This paper discusses migration and remittances trends, and calculates the natural (or benchmark) level of dollarization in Caucasus, Central Asia and others in the region. This natural level of dollarization is conceptually linked to the currency allocation in a portfolio of deposits to maximize welfare, in line with Ize and Levy Yeyati (2003). The fall in remittances due to the economic slowdown since the spread of COVID-19 affects the macroeconomic fundamentals that determine demand for foreign currency deposits. We calculate the natural dollarization level by integrating structural macroeconomic characteristics. We show that despite the reduction in deposit dollarization, there is still a gap with respect to the natural level of dollarization, especially in a scenario of (persistent) lower remittance inflows.
    Keywords: Remittances;Dollarization;Currencies;Exchange rates;Income;WP,remittance,deposit dollarization
    Date: 2020–09–11
  31. By: Lalouette, Laure; Zamora-Pérez, Alejandro; Rusu, Codruta; Bartzsch, Nikolaus; Politronacci, Emmanuelle; Delmas, Martial; Rua, António; Brandi, Marco; Naksi, Martti
    Keywords: banknotes, currency substitution, euro, euroisation, foreign demand for money, hoarding, remittances
    Date: 2021–01
  32. By: Adolfo Barajas; Andrea Deghi; Claudio Raddatz; Dulani Seneviratne; Peichu Xie; Yizhi Xu
    Abstract: Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems’ resilience, US dollar funding remains a global vulnerability, as evidenced by strains that reemerged in March 2020 in the midst of the COVID-19 crisis. We show that shocks to US dollar funding costs lead to financial stress in the home economies of these global non-US banks, and to spillovers to borrowers, especially emerging economies. US dollar funding vulnerability amplifies these negative effects, while some policy-related factors act as mitigators, such as swap line arrangements between central banks and international reserve holdings. Thus, these vulnerabilities should be monitored and, to the extent possible, controlled.
    Keywords: Banking;Commercial banks;Currencies;Liquidity requirements;Liquidity indicators;WP,dollar,return on assets,USD lending
    Date: 2020–07–03
  33. By: Fabo, Brian; Jančoková, Martina; Kempf, Elisabeth; Pástor, Luboš
    Abstract: Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
    JEL: A11 E52 E58 G28
    Date: 2021
  34. By: Pratap Singh (Institute for Social and Economic Change)
    Abstract: Demonetisation is a process in which the government withdraws legal tender status of currency issued by it. The first demonetisation happened on 12th January, 1946 and the second on 16th January, 1978. The demonetisation 2016 is the third such decision which took place on 8th November, 2016, in which Rs. 1000 and Rs. 500 currency was demonetised, which was 86 per cent of the total currency under circulation. The present study attempts to understand the scope and reasons of demonetisation and its impact on various sectors of the economy and on taxation. The study is descriptive in nature and uses secondary data taken from various sources like the Reserve Bank of India, Ministry of Finance and other sources. The study concludes that demonetisation had both positive and negative impacts.
    Keywords: Demonetisation; Indian economy; Taxation
    Date: 2019
  35. By: Singh, Gaurav Kumar; Bandyopadhyay, Tathagata
    Abstract: This study explores the determinants of disagreement in households' belief on future inflation. Households commonly show strong information rigidity as a consequence of stickiness in their information update (Mankiw and Reis, 2002, 2006). This paper contributes to the understanding of the formation of disagreement of the Indian households by investigating the effects of - day to day purchasing experiences of the agents, the intensity of news about inflation in the media, and central bank transparency. We find the positive effects of their recent price experiences, media influence, and inflation targeting on lowering the disagreement. Female and Young people tend to exhibit stronger effects in comparison to their counterparts.
    Date: 2021–01–20
  36. By: Syarifuddin, Ferry; Izzulhaq, Syahid
    Abstract: This paper examines the effectiveness of futures-based foreign exchange (FX) intervention in determining the exchange rate dynamics and exchange rate pass-through effect. We specifically compare the case of Brazil and India to evaluate and take a lesson learned from those countries’ policy designs and outcomes in utilizing the futures-based FX intervention. By utilizing autoregressive and distributed lag estimations, our empirical results show that the futures-based FX interventions in Brazil are effective in determining the exchange rate movement and reducing exchange rate pass-through, while the futures-based intervention in India is neutral. The results are also confirmed in the robustness checks estimations. The finding implies that the effectiveness of futures-based FX intervention is related to the economic-institutional aspects within these countries, which also suggests that an effective futures-based FX intervention occurs only under specific circumstances.
    Keywords: Foreign Exchange Intervention; Futures-based FX Intervention; Brazil; India
    JEL: E44 E58 G28
    Date: 2020–12–01
  37. By: Jan Kregel
    Abstract: While governments may consider implementation of John Maynard Keynes's original clearing union proposal for the international financial architecture too difficult or radical, Senior Scholar Jan Kregel notes that the private sector has already produced a virtual equivalent of an international global monetary system. Currently, this system is employed as an extension of the international mobile telephone services provided by a private company, rather than a financial institution. The clearing system he describes provides an example of a possible solution that retains national currencies without requiring the substitution of the dollar with another national currency or basket of national currencies.
    Date: 2021–01
  38. By: Tobias Adrian; Francis Vitek
    Abstract: We augment a linearized dynamic stochastic general equilibrium (DSGE) model with a tractable endogenous risk mechanism, to support the joint analysis of monetary and macroprudential policy. This state dependent conditional heteroskedasticity mechanism specifies the conditional variances of structural shocks as functions of the business or financial cycle. The resultant heteroskedastic linearized DSGE model preserves the satisfactory simulation and forecasting performance of its nested homoskedastic counterpart for the conditional means of endogenous variables, while substantially improving its goodness of fit to their conditional distributions. In particular, the model matches the key stylized facts of growth at risk. Accounting for state dependent conditional heteroskedasticity makes it optimal for monetary policy to respond more aggressively to the business cycle, and for macroprudential policy to manage the resilience of the banking sector more actively over the financial cycle.
    Keywords: Mortgages;Production growth;Macroprudential policy;Short term interest rates;Banking;WP,math display
    Date: 2020–08–07
  39. By: John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
    Abstract: This paper examines key considerations around central bank digital currency (CBDC) for use by the general public, based on a comprehensive review of recent research, central bank experiments, and ongoing discussions among stakeholders. It looks at the reasons why central banks are exploring retail CBDC issuance, policy and design considerations; legal, governance and regulatory perspectives; plus cybersecurity and other risk considerations. This paper makes a contribution to the CBDC literature by suggesting a structured framework to organize discussions on whether or not to issue CBDC, with an operational focus and a project management perspective.
    Keywords: Central Bank digital currencies;Banking;Currencies;Payment systems;Digital currencies;WP,CBDC issuance,CBDC arrangement,CBDC holding,cyber-security payment,monetary policy
    Date: 2020–06–26
  40. By: Millard, Stephen (Bank of England); Rubio, Margarita (Nottingham University); Varadi, Alexandra (Bank of England)
    Abstract: We use a DSGE model with financial frictions, leverage limits on banks, loan to value (LTV) limits and debt‑service ratio (DSR) limits on mortgage borrowing to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain household indebtedness in booms, though can be used with capital requirements to keep DSRs under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool.
    Keywords: Macroprudential policy; monetary policy; leverage ratio; affordability constraint; collateral constraint
    JEL: E44 E58 G21 G28
    Date: 2021–01–15
  41. By: Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
    Abstract: This paper examines empirically the role of macroprudential policy in addressing the effects of external shocks on financial stability. In a sample of 62 economies over the period of 2000: Q1–2016: Q4, our dynamic panel regressions show that an appreciation of the local exchange rate is associated with a subsequent increase in the domestic credit gap, while a prior tightening of macroprudential policies dampens this effect. These results are strong for small open economies, and robust when we explicitly account for potential simultaneity and reverse causality biases. We also examine a feedback effect where strong domestic credit pulls in additional cross-border funding, potentially further increasing systemic risk, and find that targeted capital controls can play a complementary role in alleviating this effect.
    Keywords: Macroprudential policy;Credit gaps;Domestic credit;Capital controls;Real exchange rates;WP,exchange rate,monetary policy,currency appreciation,real GDP
    Date: 2020–09–11
  42. By: Ramis Khabibullin (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We use the behavioral concept to endogenously model the evolution of the link between households’ deposit dollarization and exchange rate developments in Russia. We estimate the model empirically and show that the reaction of households to exchange rate appreciation weakens when exchange rate developments become more volatile. The proposed model outperforms the contemporary nonlinear time series models in forecasting the changes in dollarization during the Bank of Russia’s transition to a flexible exchange rate regime.
    Keywords: Dollarization, behavioral finance, variational Bayes, Russia
    JEL: C11 D84 E44 G17
    Date: 2020–12

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