|
on Monetary Economics |
| By: | Romain M Veyrune; Shaoyu Guo |
| Abstract: | The publication of liquidity forecasts can be understood as part of central banks’ push toward greater transparency regarding monetary policy implementation. However, the advantages of transparency can only be realized if the information provided is accurate and reliable. This paper (1) provides an overview of the international practice of publishing the forecasts; (2) proposes and implements a framework to evaluate the accuracy and reliability of forecasts using the long history of Eurosystem forecasts as a case study; and (3) analyzes the Eurosystem forecast errors to determine the factors influencing forecast quality. A supporting factor for a high-quality forecast is the contemporaneousness of the information used, whereas money market segmentation can weigh on forecast quality. |
| Keywords: | Banking;Liquidity;Open market operations;Exchange rate arrangements;Money markets;WP,autonomous factor,liquidity manager,refinancing operation,market segmentation |
| Date: | 2019–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/296&r=all |
| By: | Corsetti, G.; Kuester, K.; Müller, G. J.; Schmidt, S. |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogoff, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not - flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | External shock, International spillovers, Exchange rate, Insulation, Monetary Policy, Dominant currency pricing, Effective lower bound |
| JEL: | F41 F42 E31 |
| Date: | 2021–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2109&r=all |
| By: | Iulia Ruxandra Teodoru; Asel Toktonalieva |
| Abstract: | This paper estimates the neutral interest rate in the Kyrgyz Republic using a range of methodologies. Results indicate that the real neutral rate is about 4 percent based on an average of models and 3.7 percent based on a Quarterly Projection Model. This is higher than in many emerging markets and is likely explained by higher public debt and an elevated risk premium, low creditor rights and contractual enforcement, and low domestic savings. The use of an estimate of the neutral interest rate provides useful guidance to monetary policy and enhances transparency and independence of the central bank. Our estimate provides a quantitative benchmark for the monetary policy stance in the context of a central bank that is building analytical capacity, integrating additional insights in its decision-making process, and working to improve its communication. Strengthening the monetary transmission mechanism will be critical to enhance the effectiveness of monetary policy, including by allowing more exchange rate flexibility to support the transition to a full-fledged inflation targeting regime, and reducing excess liquidity to enhance the credit channel, reducing dollarization and high interest rate spreads that adversely affect the transmission of the policy rate to the economy. |
| Keywords: | Inflation;Real interest rates;Central bank policy rate;Output gap;Exchange rates;WP,interest rate |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/087&r=all |
| By: | Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti |
| Abstract: | The effective lower bound on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this `irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.15158&r=all |
| By: | Giancarlo Corsetti (Cambridge University and CEPR); Keith Kuester (University of Bonn and CEPR); Gernot J. Müller (University of Tübingen and CEPR); Sebastian Schmidt (European Central Bank and CEPR) |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogo, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not-flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | External shock, International spillovers, Exchange rate, Insulation, Monetary Policy, Dominant currency pricing, Effective lower bound |
| JEL: | F41 F42 E31 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:060&r=all |
| By: | Gurnain Kaur Pasricha |
| Abstract: | This paper borrows the tradition of estimating policy reaction functions from monetary policy literature to ask whether capital controls respond to macroprudential or mercantilist motivations. I explore this question using a novel, weekly dataset on capital control actions in 21 emerging economies from 2001 to 2015. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. This proxy Granger causes future net initiations of non-tariff barriers in most countries. Emerging markets systematically respond to both mercantilist and macroprudential motivations. Policymakers respond to trade competitiveness concerns by using both instruments—inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. Policy is acyclical to foreign debt; however, high levels of this debt reduces countercyclicality to mercantilist concerns. Higher exchange rate pass-through to export prices, and having an inflation targeting regime with non-freely floating exchange rates, increase responsiveness to mercantilist concerns. |
| Keywords: | Capital controls;Fiscal stance;Bank credit;Exchange rates;Foreign currency debt;WP,capital control,monetary policy,exchange rate,foreign currency |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/080&r=all |
| By: | Raouf Boucekkine (Aix-Marseille University, CNRS, France); M. Laksaci (Ecole Supérieure de Banque, Alger, Algeria); M. Touati-Tliba (Ecole Supérieure de Commerce d’Alger, Algeria) |
| Abstract: | We estimate the demand for money for monetary aggregates M1 and M2, and cash in Algeria over the period 1979-2019, and study its long-run stability. We show that the transaction motive is significant for all three aggregates, especially for the demand for cash, reflecting the weight of informal economy “practices”. The elasticity of the scale variable is very close to unity for M2 and M1, and even equal to unity for cash demand (1.006). The elasticity of inflation is also significant for all three aggregates, although its level is higher in the case of cash demand (-6.474). Despite the persistence of certain financial repression mechanisms, interest rate elasticity is significant for all three aggregates, but higher for M1 and cash. The same observation is made for elasticity of the exchange rate, reflecting the effect of monetary substitution, especially for M1 and cash. Finally, our study concludes that the demand for money in terms of M1 remains stable, the same observation being confirmed for the M2 aggregate. However, the demand for fiat currency proves not to be stable. The consequences for the optimal design of monetary policy in Algeria are clearly stated. |
| Keywords: | Monetary policy, money demand, long-run stability, resource-rich countries, Algeria, co-integration |
| JEL: | E41 E42 E52 C13 |
| Date: | 2021–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2021001&r=all |
| By: | Raouf Boucekkine (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Mohammed Laksaci (Ecole Supérieure de Banque, Alger, Algeria); Mohamed Touati-Tliba (Ecole Supérieure de Commerce d’Alger, Algeria) |
| Abstract: | We estimate the demand for money for monetary aggregates M1 and M2, and cash in Algeria over the period 1979-2019, and study its long-run stability. We show that the transaction motive is significant for all three aggregates, especially for the demand for cash, reflecting the weight of informal economy “practices”. The elasticity of the scale variable is very close to unity for M2 and M1, and even equal to unity for cash demand (1.006). The elasticity of inflation is also significant for all three aggregates, although its level is higher in the case of cash demand (-6.474). Despite the persistence of certain financial repression mechanisms, interest rate elasticity is significant for all three aggregates, but higher for M1 and cash. The same observation is made for elasticity of the exchange rate, reflecting the effect of monetary substitution, especially for M1 and cash. Finally, our study concludes that the demand for money in terms of M1 remains stable, the same observation being confirmed for the M2 aggregate. However, the demand for fiat currency proves not to be stable. The consequences for the optimal design of monetary policy in Algeria are clearly stated. |
| Keywords: | monetary policy, money demand, long-run stability, resource-rich countries, Algeria, co-integration |
| JEL: | E41 E42 E52 C13 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2104&r=all |
| By: | Olumuyiwa S Adedeji; Yacoub Alatrash; Divya Kirti |
| Abstract: | Given their pegged exchange rate regimes, Gulf Cooperation Council (GCC) countries usually adjust their policy rates to match shifting U.S. monetary policy. This raises the important question of how changes in U.S. monetary policy affect banks in the GCC. We use bank-level panel data, exploiting variation across banks within countries, to isolate the impact of changing U.S. interest rates on GCC banks funding costs, asset rates, and profitability. We find stronger pass-through from U.S. monetary policy to liability rates than to asset rates and bank profitability, largely reflecting funding structures. In addition, we explore the role of shifts in the quantity of bank liabilities as policy rates change and the role of large banks with relatively stable funding costs to explain these findings. |
| Keywords: | Banking;Central bank policy rate;Deposit rates;Commercial banks;WP,bank,rate,liability,liability rate |
| Date: | 2019–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/268&r=all |
| By: | Donato Masciandaro |
| Abstract: | The aim of the paper is to shed light on how two factors – central bank's design and central bankers' preferences – progressively assumed a crucial role in the evolution of monetary policy economics in the last four decades. The two factors jointly identify the importance of central bank governance in influencing monetary policy decisions through their interactions with the monetary policy rules, given the assumptions about how macroeconomic systems work. |
| Keywords: | monetary policy, central bank independence, central banker conservatism, monetary policy committees, political economics, behavioural economics |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp20153&r=all |
| By: | Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel |
| Abstract: | We propose a framework of optimal monetary policy where debt sustainability may, or may not, be a relevant constraint for the central bank. We show analytically that in each environment the optimal interest rate path consists of a Taylor rule augmented with forward guidance terms. These terms arise either i) from “twisting interest rates†when the central bank ensures debt sustainability, or ii) under no debt concerns, from committing to keep interest rates low at the exit of the liquidity trap. The optimal policy is isomorphic to Leeper’s (1991) “passive monetary/active fiscal policy†regime in the first instance, or “active monetary/passive fiscal policy†regime in the second. We insert our framework into a standard medium scale DSGE model calibrated to the US. Optimal passive monetary policy with debt concerns is ineffective in stabilizing inflation, whereas under no debt concerns, monetary policy is very effective in stabilizing the macroeconomy. |
| Keywords: | Economic models; Fiscal policy; Monetary policy; Monetary policy framework |
| JEL: | C11 E31 E52 E58 E62 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-5&r=all |
| By: | Simona Malovana; Josef Bajzik; Dominika Ehrenbergerova; Jan Janku |
| Abstract: | We examine the potential adverse effects of a prolonged period of low interest rates on financial stability from multiple perspectives. First, we provide a unique comparison of natural rates of interest estimated using two approaches - with and without financial factors - for six large European countries inside and outside the euro area. The results indicate that the need for monetary policy easing or tightening may differ across economies and over time. Financial factors and macro-financial linkages further amplify these differences, implying that business and financial cycles may not be well synchronized across countries, with the financial cycle being more desynchronized. We then provide a comprehensive review of the empirical literature, allowing us to identify and categorize financial vulnerabilities which may be created and fueled by low interest rates. We discuss a situation in which a prolonged period of low interest rates may lead to a point of no return by contributing to higher indebtedness, overvalued asset prices and underpriced risks, resource and credit misallocation, and lower productivity. With respect to all of that, we offer a few monetary policy considerations, including a short discussion of the role of macroprudential policy. Specifically, we suggest that (i) monetary policy should act symmetrically over the medium to long term, (ii) both the short-term and long-term costs and benefits of pursuing accommodative or restrictive monetary policy should be accounted for, and (iii) monetary and macroprudential policies need to be coordinated, and their interactions should be accounted for in order to find the best policy mix for the economy. |
| Keywords: | Financial stability, financial vulnerabilities, low interest rates, monetary policy, natural rate of interest |
| JEL: | E52 E58 G2 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2020/02&r=all |
| By: | Hilde Christiane Bjørnland; Ragna Alstadheim; Junior Maih |
| Abstract: | We analyse whether central banks in small open commodity exporting and importing countries respond to exchange rate movements, taking into consideration that there may be structural changes in parameters and volatility throughout the sample. Using a Markov Switching Rational Expectations framework, we estimate the model for Australia, Canada, New Zealand, Norway, Sweden and the UK. We find that the size of policy responses, and the volatility of structural shocks, have not stayed constant during the sample. Furthermore, monetary policy has responded strongly to the exchange rate in many commodity exporters, most notably in Norway. This has had a stabilizing effect on the exchange rate. In particular, although the terms of trade are highly volatile among commodity exporters, the exchange rate has about the same volatility across all importers and exporters in the recent period. |
| Keywords: | Monetary policy, exchange rates, commodity exporters, markov switching |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0095&r=all |
| By: | Kedan, Danielle; Veghazy, Alexia Ventula |
| Abstract: | We analyse the impact of the Liquidity Coverage Ratio (LCR) on the demand for central bank reserves in the euro area with difference-in-differences estimation techniques. Using a novel dataset and an identification strategy that exploits the cross-country heterogeneity in the regulatory treatment of reserves for LCR purposes prior to the announcement of a harmonised euro area standard as a quasi-natural experiment, we find evidence that points to LCR-induced demand for reserves. Specifically, our results suggest that banks with low LCRs relative to peers increased their central bank reserve holdings as a result of the LCR regulation. Our findings have economically meaningful implications for the operational framework of monetary policy and imply that the Eurosystem’s balance sheet may need to remain larger than it was prior to the financial crisis and the associated introduction of new liquidity regulation. JEL Classification: C23, E52, G28 |
| Keywords: | Basel III, central bank operational framework, ECB, liquidity coverage ratio, monetary policy |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212515&r=all |
| By: | Xing Guo; Pablo Ottonello; Diego J. Perez |
| Abstract: | We study how monetary policy affects the asymmetric effects of globalization. To this end, we build an open-economy heterogeneous-agent New Keynesian model (HANK), in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the international spillovers of policies and shocks, how do alternative exchange-rate regimes compare, and what are the implications for monetary policy of the international price system. Our results indicate the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration. |
| JEL: | E21 E52 F3 F32 F41 F6 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28213&r=all |
| By: | Maximilian Böck (Department of Economics, Vienna University of Economics and Business); Martin Feldkircher (Vienna School of International Studies) |
| 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 |
| JEL: | C32 D83 D84 E52 E70 G40 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp306&r=all |
| By: | Karau, Sören |
| Abstract: | I study whether monetary gold hoarding was the main cause of the Great Depression in a structural VAR analysis. The notion that monetary forces played an important role in bringing about the depression is well established in the narrative literature, but has more recently met some skepticism by formal macroeconometric work. In deliberate contrast to the existing macroeconometric literature, the paper i) uses a newly-assembled monthly data set of the interwar world economy, and ii) models monetary disturbances as shocks to central bank gold demand. Based on a monetary DSGE model, the world gold reserve ratio (the ratio of central bank gold holdings to monetary liabilities) is used to describe monetary conditions. This permits the use of narrative information to sharpen shock identification in a structural VAR analysis based on sign restrictions. Monetary shocks are found to have real effects and to account for a substantial part of the collapse in prices and output during the initial slide into the Great Depression. |
| Keywords: | Great Depression,Gold Standard,Monetary Policy,Narrative Sign Restrictions |
| JEL: | E32 E42 E58 N12 N14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:632020&r=all |
| By: | André, Marine-Charlotte; Traficante, Guido |
| Abstract: | We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate. |
| Keywords: | Monetary policy, small open economy, forward guidance. |
| JEL: | E31 E52 |
| Date: | 2020–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104600&r=all |
| By: | Itai Agur; Anil Ari; Giovanni Dell'Ariccia |
| Abstract: | We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff. |
| Keywords: | Central Bank digital currencies;Currencies;Payment systems;Banking;Bank deposits;WP,central bank,interest rate,market power |
| Date: | 2019–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/252&r=all |
| By: | Lastauskas, Povilas; Nguyen, Anh Dinh Minh |
| 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 time-varying 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. JEL Classification: C32, C54, E52, E58, F44 |
| Keywords: | global economy, uncertainty, US monetary policy, volatility shocks |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212513&r=all |
| By: | Rumen Kostadinov; Francisco Roldán |
| Abstract: | We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy. |
| Keywords: | Inflation;Inflation targeting;Tax incentives;Disinflation;WP,Phillips curve |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/085&r=all |
| By: | Musgrave, Ralph S. |
| Abstract: | Deposit insurance is beneficial in that it ensures everyone has a safe method of storing and transferring money. That is a basic human right. Unfortunately deposit insurance also supports a commercial activity, namely depositing money at a bank with a view to the bank earning interest for the depositor, which a bank can only do by in effect lending out depositors’ money. That is just as commercial as depositing money with a stockbroker, mutual fund or unit trust with a view to interest or some other form of return being earned. And it is not the job of government to support commercial activities. As for the idea that banks create the money they lend out, rather than intermediate, that is dealt with in the opening paragraphs below. Preventing deposit insurance assisting the above commercial activity while retaining a form of totally safe deposits is easily done by splitting deposits into two types: first, those where the depositor simply wants money stored safely, with that money being lodged at the central bank where it earns no interest, and second, those where the depositor wants to be into commerce. Interest is earned on the latter deposits, but depositors carry the risk involved which essentially turns those deposits into equity. And that is precisely what full reserve banking consists of. |
| Keywords: | deposit insurance; full reserve; narrow banking; 100% reserves |
| JEL: | E5 E58 G2 |
| Date: | 2021–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105157&r=all |
| By: | Kevin Foster; Claire Greene |
| Abstract: | In the United States, COVID-19 cases and currency in circulation both surged in March 2020. Did consumer choice play a role in the increase in currency in circulation? With fewer opportunities to shop and pay in person, why would consumers hold more cash? Data from the fall 2019 Survey and Diary of Consumer Payment Choice and interim rapid-response surveys in spring and late summer 2020 give some insights into consumer cash holdings and payments behavior. |
| Keywords: | COVID-19; cash; U.S. currency in circulation; consumer behavior |
| JEL: | D9 D14 E42 |
| Date: | 2021–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:a00001:89583&r=all |
| By: | Cosimo Petracchi |
| Abstract: | One of the most compelling pieces of evidence for monetary non-neutrality is the Mussa puzzle, in which the break in the monetary regime when the Bretton Woods System broke down increased the volatility of not only the nominal exchange rate but the real exchange rate. Using data covering thirty-one European countries from 1954 to 2019, I find that the Mussa puzzle is generalizable: any break in a monetary regime that changes the volatility of the nominal exchange rate also changes the volatility of the real exchange rate. This provides further evidence of monetary non-neutrality. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2021-001&r=all |
| By: | Ling Jin (Inha University) |
| Abstract: | This paper examines how monetary policy affected the borrowing cost of listed firms in Korea before and after the Global Financial Crisis (GFC). I find that the effects of credit channel of monetary transmission are different by the assets size and debt-equity ratio levels of firms. Also, I find that the relationship between monetary policy and the borrowing spread of firms has changed before and after the GFC. The relationship is only significantly positive after the GFC. A statistically significant positive value implies that credit channel works in Korea. As for firm asset size partition, the relationship is significantly positive only after the GFC. As for firm debt-to-equity ratio partition, the coefficient of monetary policy for the low debt-to-equity ratio firms is significant of before and after the GFC. In contrast, the coefficient for the high debt-to-equity ratio firms is significant only before the GFC. Also, the U.S monetary policy has a significant impact on domestic firm’s borrowing spreads after the GFC. These relationships work through international banking channels. |
| Keywords: | Monetary policy Transmission, Credit channel, Borrowing spread, Firm-level data, International banking |
| JEL: | E44 E51 E52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2021-1&r=all |
| By: | Michael Peneder |
| Abstract: | From Aristotle to Ricardo and Menger, economists have emphasised the function of money as a medium of exchange together with the intrinsic qualities that increase its saleability and credibility as a most liquid store of value. But the social institution of money co-evolves with technology. It is significant that the advent of digital cryptocurrencies was initiated by computer scientists and has taken economists completely by surprise. As a consequence, it also forces our profession to rethink the basic phenomenology of money. In accordance with the views of Wieser and Schumpeter, digitization brings to the fore its immaterial function as a standard of value and social technology of account, which increasingly absorbs that of a medium of exchange. The potential impact on economic policy is huge. The variety of different crypto coins has proven the technical feasibility of competing private currencies as proposed by Hayek. In the long term, however, there is reason to doubt the persistence of intense competition. One must fear that major digital platforms will extend their current dominance in multisided virtual market places to include digital payments and money. Central banks are increasingly anxious to preserve public sovereignty over the common unit of account and consider issuing their own digital fiat money. After the current era of intense creative experimentation, the potentially new spontaneous order of private crypto-currencies is likely to be supplanted by central bank digital currencies (CBDCs), the design of which will depend on deliberate public choices and policies. |
| Keywords: | Digitization, evolution of money, currency competition, general ledger, crypto coins, central bank digital currency (CBDC), Austrian economics |
| Date: | 2021–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2021:i:620&r=all |
| By: | Vincent Bodart; François Courtoy; Erica Perego |
| Abstract: | With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, because of the existence of the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle. |
| Keywords: | Storable Commodity;International Financial Shock;Developing Economies |
| JEL: | E32 F41 G15 O11 Q02 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2021-01&r=all |
| By: | Annette Vissing-Jorgensen |
| Abstract: | Starting from a set of facts on the timing of stock returns relative to Federal Reserve decision-making, I argue that informal communication – including unattributed communication -- plays a central role in monetary policy communication. This contrasts with the standard communications framework in which communication should be public and on-the-record because it serves to ensure accountability and policy effectiveness. I lay out possible benefits of using unattributed communication as an institution, but these should be weighed against substantial costs: It runs counter to accountability to use unattributed communication, causes frustration among those trying to understand central bank intensions, and enables use of such communication by individual policymakers. Unattributed communication driven by policymaker disagreements is unambiguously welfare reducing, because it reduces policy flexibility and harms the central bank’s credibility and decision-making process. Central banks may benefit from resisting unattributed communication via expensive newsletters and increasing consensus-building efforts to reduce disagreement-driven unattributed communication. |
| JEL: | E5 G12 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28276&r=all |
| By: | Moez Ben Hassine; Nooman Rebei |
| Abstract: | We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial. |
| Keywords: | Macroprudential policy;Self-employment;Banking;Consumption;Housing;WP,interest rate,monetary policy |
| Date: | 2019–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/255&r=all |
| By: | Michael D. Bordo; Mickey D. Levy |
| Abstract: | In this paper we survey the historical record for over two centuries on the connection between expansionary fiscal policy and inflation. As a backdrop, we briefly lay out several theoretical approaches to the effects of fiscal deficits on inflation: the earlier Keynesian and monetarist approaches; and modern approaches incorporating expectations and forward looking behavior: unpleasant monetarist arithmetic and the fiscal theory of the price level. We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax. There were two peacetime episodes in the early twentieth century when bond financed fiscal deficits that were unbacked by future taxes seem to have greatly contributed to inflation: France in the 1920s and the recovery from the Great Recession in the 1930s in the U.S. In the post-World War II era a detailed examination of the Great Inflation in the 1960s and 1970s in the U.S. and the U.K. suggests that fiscal influences on monetary policy was a key factor. Finally we contrast the experience of the Great Financial Crisis of 2007-2008, when both expansionary fiscal and monetary policy did not lead to rising inflation, with the recent pandemic, which may involve the risks of fiscal dominance and future inflation. |
| JEL: | E3 E62 N4 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28195&r=all |
| By: | Ichiro Fukunaga; Takuji Komatsuzaki; Hideaki Matsuoka |
| Abstract: | This paper quantitatively assesses the effects of inflation shocks on the public debt-to-GDP ratio in 19 advanced economies using simulation and estimation approaches. The simulations based on the debt dynamics equation and estimations of impulse responses by local projections both suggest that a 1 percentage point shock to inflation rate reduces the debt-to-GDP ratio by about 0.5 to 1 percentage points. The results also suggest that the impact is larger and more persistent when the debt maturity is longer, but the difference from the benchmark case is not significant. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce public debt burden only marginally in many advanced economies. |
| Keywords: | Inflation;Public debt;Debt reduction;Long term interest rates;Deflation;WP,inflation shock |
| Date: | 2019–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/297&r=all |
| By: | Jeannine Bailliu; Xinfen Han; Barbara Sadaba; Mark Kruger |
| Abstract: | Given China's complex monetary policy framework, the People's Bank of China's (PBOC) monetary policy rule is difficult to infer from its observed behaviour. In this paper, we adopt a novel approach, using text analytics to estimate and interpret the unknown component in the PBOC's reaction function. We extract the unknown component in a McCallum-type monetary policy rule for China through a state-space model framework using a set of summary topics extracted from official PBOC documents. Then, using a set of sectional topics extracted from the same set of PBOC documents, we provide this component with its rightful interpretation. Our results show that this unknown component is related to the Chinese government's agenda of supply-side structural reforms, suggesting that monetary policy is used as a tool to achieve structural reform objectives. Structural vector autoregression (SVAR) results confirm these findings by providing evidence of the importance of the government's supply-side reform objectives for the conduct of monetary policy. |
| Keywords: | Econometric and statistical methods; International topics; Monetary policy communications; Monetary policy framework |
| JEL: | C63 E58 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-3&r=all |
| By: | David Andolfatto; Ed Nosal |
| Abstract: | Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector—and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how optimal policies vary under different conditions and compare these to recent policy interventions by the Securities and Exchange Commission and the Federal Reserve. We conclude that the conventional view concerning the societal benefits of liquidity transformation and its recommendations for prudential policy extend far beyond their application to depository institutions. |
| Keywords: | shadow banks; bank runs; short-term debt |
| JEL: | G01 G21 G28 |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:89443&r=all |
| By: | Douglas L. Campbell (New Economic School); Aleksandr Chentsov (New Economic School) |
| Abstract: | As several European countries debate entering, or exiting, the euro, a key policy question is how much currency unions (CUs) affect trade. Despite the longstanding academic debate on the topic, even recent research has continued to find that CUs exert a large effect on trade. We find, by contrast, that the sizeable recent estimated impact of CUs on trade is driven by other major geopolitical events and is also sensitive to dynamic controls. Overall, we estimate that the impact of CUs on trade is typically indistinct from zero, depending on the specification and controls, but with fairly large standard errors. |
| Keywords: | Euro, Currency Union Effect, Gravity Estimation |
| JEL: | F15 F33 F54 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0281&r=all |
| By: | Andrew Lee Smith; Victor J. Valcarcel |
| Abstract: | For the second time in the brief 12-year period between 2008 and 2020, central banks have once again turned to asset purchase programs to combat a global economic downturn. While balance sheet expansions have become familiar, balance sheet normalization has proven more elusive. Nevertheless, an understanding of the consequences of unwinding asset purchases is necessary for well-informed decisions over the deployment of these unconventional policy tools. This paper provides a first analysis of the financial market effects of balance sheet normalization based on the U.S. experience between 2017 and 2019. We find evidence that balance sheet normalization tightens financial conditions. Importantly, we show these effects cannot be merely characterized as quantitative easing in reverse. In particular, we find that balance sheet normalization was associated with larger liquidity effects than were evident during various phases of balance sheet expansion. |
| Keywords: | Monetary Policy; Balance Sheet; Liquidity Effect; Structural VAR; Financial Conditions |
| JEL: | E3 E4 E5 |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:89535&r=all |
| By: | William Roberds; Eugene White |
| Abstract: | During late 1920, the president (then called "governor") and board of directors of the Federal Reserve Bank of Atlanta were confronted with an unexpected, devastating collapse in the price of a commodity whose global production was concentrated in their district—cotton. Their judgment was that the fall in cotton prices was temporary and that its effects could be lessened with generous credit policies that did not conflict with the Federal Reserve Act. Other officials within the Federal Reserve System did not agree with this judgment, however, leading to a contentious policy debate and an eventual rollback of the Bank's policy accommodation. |
| Keywords: | Federal Reserve; emergency lending; 13(3) |
| JEL: | E58 N12 |
| Date: | 2020–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:a00001:89439&r=all |
| By: | Camatte Hadrien; Faubert Violaine; Lalliard Antoine; Daudin Guillaume; Rifflart Christine |
| Abstract: | Following the 2008 financial crisis, inflation rates in advanced economies have been at odds with the prediction of a standard Phillips curve. This puzzle has triggered a debate on the global determinants of domestic prices. We contribute to this debate by investigating the impact of exchange rate shocks on consumer prices from 1995 to 2018. We focus on cost-push inflation through global value chains, using three sectoral world input-output datasets. Depending on countries, the absolute value of the elasticity of the household consumption expenditure (HCE hereafter) deflator to the exchange rate ranges from 0.05 to 0.35, confirming the importance of global value chains in channelling external shocks to domestic inflation. Using data from WIOD on a sample of 43 countries, we find that the mean output-weighted elasticity of the HCE deflator to the exchange rate increased in absolute value from 0.075 in 2000 to 0.094 in 2008. After peaking in 2008, it declined to 0.088 in 2014. World Input-Output tables (WIOT hereafter) are released with a lag of several years and the latest WIOT dates back to 2015. To fill this gap, we approximate the impact of an exchange rate shock on the HCE deflator from 2016 onwards using up-to-date GDP and trade data. Our extrapolations suggest that the decline in the elasticity of the HCE deflator continued until 2016, before reversing in 2017 and 2018. Our findings are robust to using three different datasets. |
| Keywords: | Inflation, global value chains, Phillips curve, input output tables, international trade, pass through |
| JEL: | D57 E31 F14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:797&r=all |
| By: | Ibrahim D. Raheem (ILMA University, Karachi, Pakistan); Kazeem B. Ajide (University of Lagos, Lagos, Nigeria) |
| Abstract: | There has been an increasing wave of globalization since the turn of the millennium. This study focuses on two by-products of globalization: dollarization and tourism. Empirical studies have ignored the possible relationship between dollarization and tourism. However, we hypothesize that a booming tourism industry will fuel increase in the usage and circulation of foreign currencies. The objective of this study is to examine the extent to which the tourism industry exacerbates the dollarization process of selected Sub-sahara African (SSA) countries. Using Tobit regression, we found that tourism positively affects dollarization. This result is robust to: (i) alternative measures of tourism; (ii) accounting for endogeneity and outlier effects. |
| Keywords: | C11, E41, F31 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:21/008&r=all |
| By: | Damiano Sandri |
| Abstract: | We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued. |
| Keywords: | Exchange rates;Foreign exchange;Currency swaps;Interest rate parity;Exchange rate forecasting;WP,FX intervention,swap sale,FX reserve,core swap action,swap profitability |
| Date: | 2020–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/090&r=all |
| By: | Hubert Gabrisch (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes’s theory – the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete. |
| Keywords: | uncertainty, interest rate, Keynes, Kalecki, GARCH |
| JEL: | B26 C58 E43 E47 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:191&r=all |