nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒02‒08
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central bank credibility, long-term yields and the effects of monetary integration By Marcin Kolasa; Dominik Supera
  2. Dollarization and Foreign Exchange Reserve : Debate on the Effectiveness of Monetary Policy in DR. Congo By PINSHI, Christian P.
  3. Do Old Habits Die Hard? Central Banks and the Bretton Woods Gold Puzzle By Eric Monnet; Damien Puy
  4. Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy By Eric Monnet; Miklos Vari
  5. Liquidity Premium, Credit Costs, and Optimal Monetary Policy By Lee, Sukjoon
  6. Macroeconomic Consequences of Foreign Exchange Futures Market for Inflation Targeting Economies By Syarifuddin, Ferry
  7. The Supply-Side Effects of Monetary Policy By David Baqaee; Emmanuel Farhi; Kunal Sangani
  8. On the Use of Current or Forward-Looking Data in Monetary Policy: A Behavioural Macroeconomic Approach By Paul De Grauwe; Yuemei Ji
  9. Achieving the Bank of Japan’s Inflation Target By Gee Hee Hong; Rahul Anand; Yaroslav Hul
  10. Multilateral Divisia monetary aggregates for the Euro Area By Barnett, William; Gaekwad, Neepa
  11. International Bank Lending Channel of Monetary Policy By Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon
  12. EQCHANGE annual assessment 2020 By Carl Grekou
  13. Nominal Contracts and the Payment System By Hajime Tomura
  14. Monetary Policy, Firm Heterogeneity, and Product Variety By Masashige Hamano; Francesco Zanetti
  15. Financial structure, capital openness and financial crisis By Zhai, Weiyang
  16. A New Keynesian Phillips Curve With Staggered Contracts and Indexation By Musy, Olivier
  17. In Search of Lost Time: Examining the Duration of Sudden Stops in Capital Flows By Antonio David; Carlos Eduardo Gonçalves
  18. Granger Predictability of Oil Prices After the Great Recession By Szilard Benk; Max Gillman
  19. Uncertainty and monetary policy in good and bad times: A replication of the VAR investigation by Bloom (2009) By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  20. Exchange arrangements entering the twenty-first century: which anchor will hold? By Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth S.
  21. Bankruptcy Codes and Risk Sharing of Currency Unions By Xuan Wang
  22. Inflation, interest rate and economic growth nexuses in SACU countries By Taderera, Christie; Runganga, Raynold; Mhaka, Simbarashe; Mishi, Syden
  23. Unequal Unemployment Effects of COVID-19 and Monetary Policy across U.S. States By Hakan Yilmazkuday
  24. Central Bank of Congo : Four Factors Affecting Monetary Policy Effectiveness By PINSHI, Christian P.
  25. Monetary transitions in Cabo Verde: from the escudo zone to the exchange agreement with Portugal By João Estevao
  26. How to Improve Inflation Forecasting in Canada By Troy D Matheson
  27. Inflation heterogeneity and its impact on inequality: evidence from the United States By Tavares, Francisco
  28. The Story of the Real Exchange Rate By Oleg Itskhoki
  29. A Requiem for the Fiscal Theory of the Price Level By Roger Farmer; Pawel Zabczyk
  30. Monetary Policy and Racial Inequality By Alina K. Bartscher; Moritz Kuhn; Moritz Schularick; Paul Wachtel
  31. The Intertemporal Cost of Living and Dynamic Inflation: The Case of the Czech Republic By Ivan Sutoris
  32. The Distortionary Effects of Central Bank Direct Lending on Firm Quality Dynamics By Li, Wenhao; Li, Ye
  33. Pandemic recession, helicopter money and central banking: Venice, 1630 By Goodhart, C. A. E.; Masciandaro, Donato; Ugolini, Stefano
  34. The Journey towards Dollarization: The Role of the Tourism Industry By Ibrahim D. Raheem; Kazeem B. Ajide
  35. Eggs in One Basket: Security and Convenience of Digital Currencies By Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
  36. A Model of Bank-Note Runs By Hajime Tomura
  37. The Fed's Discount Window in "Normal" Times By Huberto M. Ennis; Elizabeth C. Klee
  38. Firm-Level Data and Monetary Policy: The Case of a Middle Income Country By Lahcen Bounader; Mohamed Doukali

  1. By: Marcin Kolasa; Dominik Supera
    Abstract: Forming a monetary union implies equalization of short-term interest rates across the member states as monetary policy is delegated to a common central bank, but also leads to integration of risk-free bond markets. In this paper we develop a quantitative open economy model where long-term bond yields matter for real allocations. We next use the model to shed light on the macroeconomic effects of convergence in bond prices within a currency union. Our focus is on a small open economy, where the pre-accession level of interest rates is high due to floating exchange rate and relatively low central bank focus on stabilizing inflation. We find that, from the perspective of social welfare in the country adopting a common currency, the benefits associated with lower long-term yields can outweigh the costs related to a loss of monetary independence.
    Keywords: monetary integration, bond yields, central bank credibility
    JEL: E30 E43 E44 E52 F45
    Date: 2021–01
  2. By: PINSHI, Christian P.
    Abstract: The high degree of dollarization combined with low foreign exchange reserves obstruct the management of monetary policy. The debate is launched on the effectiveness of monetary policy in this context of dollarization and meager reserves. To restore the effectiveness of monetary policy in the DR Congo, we advocate for fiscal discipline (that is to say, eradicate fiscal dominance) that is constant and sustainable, a guarantee of sustainable macroeconomic stability. Monetary targeting should remain the adopted strategy until proven otherwise and the choice of a floating exchange rate regime is better for good macroeconomic management in the case of the DR Congo. However, changes in the nominal exchange rate should be implicitly included in the implementation of monetary policy.
    Keywords: Monetary policy, Dollarization, Foreign exchange reserve
    JEL: E42 E51 E52 F31
    Date: 2019–11
  3. By: Eric Monnet; Damien Puy
    Abstract: Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers.
    Keywords: Gold;Gold reserves;International reserves;Currencies;Banking;WP,Bretton Woods system,gold standard exposure,unit of currency,exchange rate,gold standard practice
    Date: 2019–07–24
  4. By: Eric Monnet; Miklos Vari
    Abstract: This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.
    Keywords: Banking;Reserve requirements;Liquidity requirements;Liquidity indicators;Government securities;WP,discount window,money market,bank liquidity,discount rate
    Date: 2019–08–16
  5. By: Lee, Sukjoon
    Abstract: I study how monetary policy affects firms' external financing decisions. More precisely, I study the transmission mechanism of monetary policy to credit costs in a general equilibrium macroeconomic model where firms issue corporate bonds or obtain bank loans, and corporate bonds are not just stores of value but also serve a liquidity role. The model shows that an increase in the nominal policy rate can lower the borrowing cost in the corporate bond market, while increasing that in the bank loan market, and I provide empirical evidence that supports this result. The model also predicts that a higher nominal policy rate induces firms to substitute corporate bonds for bank loans, which is supported by the existing empirical evidence. In the model, the Friedman rule is suboptimal so that keeping the cost of holding liquidity at a positive level is socially optimal. The optimal policy rate is an increasing function of the degree of corporate bond liquidity.
    Keywords: Corporate Finance; Credit Cost; Bank Loan; Corporate Bond; Liquidity Premium; Monetary Policy
    JEL: E43 E44 E51 E52 G12 G21
    Date: 2020–11–15
  6. By: Syarifuddin, Ferry
    Abstract: Although the discussion on foreign exchange (FX) futures market has drawn significant concern in the economic literature, this paper is the first attempt to address how the FX futures market impacts macroeconomic conditions with the inflation targeting regime. We use a dataset comprising of four emerging market countries with inflation targeting regime and active FX futures market, namely Brazil, Mexico, Turkey, and India, from January 2015 to December 2018. By utilizing Bayesian Panel Vector Autoregressions, we find that the FX futures rate shocks significantly affect the macroeconomic environment and monetary policy due to the strong relationship between the spot and futures market. We also find the initial indication of the market squeezing mechanism in the FX futures market. However, it occurs only in a small magnitude and a short period and thus, the spot exchange rate, inflation rate, and economic growth would not fluctuate abnormally. Our findings are robust for the various robustness checks.
    Keywords: Foreign Exchange Futures Market, Inflation Targeting Framework, Macroeconomy, Emerging Economies
    JEL: E52 E58 G23
    Date: 2020–12
  7. By: David Baqaee; Emmanuel Farhi; Kunal Sangani
    Abstract: We propose a supply-side channel for the transmission of monetary policy. We study an economy with heterogeneous firms, sticky prices, and endogenous markups. We show that if, as is consistent with the empirical evidence, bigger firms have higher markups and lower pass-throughs than smaller firms, then a monetary easing endogenously increases aggregate TFP and improves allocative efficiency. This endogenous positive “supply shock” amplifies the effects of the positive “demand shock” on output and employment. The result is a flattening of the Phillips curve. This effect is distinct from another mechanism discussed at length in the real rigidities literature: a monetary easing leads to a reduction in desired markups because of strategic complementarities in pricing. We calibrate the model to match firm-level pass-throughs and find that the misallocation channel of monetary policy is quantitatively important, flattening the Phillips curve by about 70% compared to a model with no supply-side effects. We derive a tractable four-equation dynamic model and show that monetary easing generates a procyclical hump-shaped response in aggregate TFP and countercyclical dispersion in firm-level TFPR. The improvements in allocative efficiency amplify both the impact and persistence of interest rate shocks on output.
    JEL: E0 E12 E24 E3 E4 E5 L11 O4
    Date: 2021–01
  8. By: Paul De Grauwe; Yuemei Ji
    Abstract: We analyse the use of current and forward-looking data in the setting of monetary policy (Taylor rule). We answer the question of whether the use of forward-looking data is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that the answer to our question depends on the nature of the monetary policy regime. In general, in a strict inflation targeting regime the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime. Finally, nowcasting tends to improve the quality of monetary policy especially in a strict inflation targeting regime.
    Keywords: Taylor rule, behavioural macroeconomics, animal spirits, strict inflation targeting, dual mandate, nowcasting
    Date: 2021
  9. By: Gee Hee Hong; Rahul Anand; Yaroslav Hul
    Abstract: The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model’s baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.
    Keywords: Inflation;Inflation targeting;Banking;Central bank policy rate;Output gap;WP
    Date: 2019–11–01
  10. By: Barnett, William; Gaekwad, Neepa
    Abstract: In light of the “two-pillar strategy” of the European Central Bank, good measures of aggregated money across countries in the Euro area are policy relevant. The objective of this paper is to focus on the multilateral Divisia monetary aggregates for the Euro area to produce a theoretically consistent measure of monetary services for the Euro area monetary union. Based on theory developed in Barnett (2007), the multilateral Divisia monetary aggregates for 17 Euro area countries are found to provide a better signal of recession, when compared to the corresponding simple sum monetary aggregates.
    Keywords: Divisia index, European Union, European Monetary Union, Monetary aggregation.
    JEL: C43 C82 E51 E52 F33
    Date: 2021–01
  11. By: Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon
    Abstract: How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.
    Keywords: Bank credit;Cross-border banking;International banking;Monetary tightening;Central bank policy rate;WP,monetary policy shock
    Date: 2019–11–01
  12. By: Carl Grekou
    Abstract: This publication, accompanying the 2020’s update of EQCHANGE, aims at providing an overview of exchange rate misalignments for 2019. In a nutshell, changes in the exchange rate misalignments on the eve of the Covid-19 pandemic have been relatively modest except few EMEs and DCs that registered large swings. This is especially the case of Egypt, India and Nigeria, and to a lesser extent of Brazil, Indonesia and Thailand. The Turkish lira, despite a continued plunge, maintained its large undervaluation due to the inflation spur. The US dollar, owing to its appreciation, registered a small increase in its overvaluation. The currency movements vis-à-vis the US dollar shaped most of the dynamics in the advanced economies that generally registered downward movements in the currency misalignments. This holds also for the Chinese renminbi that still appear broadly in line —with its fundamentals— despite a depreciation. In Europe, Germany, Ireland, Norway, Sweden, and the United Kingdom displayed undervaluations; Finland, France, Italy and Luxembourg were close to their equilibrium; and Belgium, Austria, Greece, Portugal and Spain displayed overvaluations.
    Keywords: EQCHANGE;Exchange Rates;Currency Misalignments;Global Imbalances
    JEL: E3 E4 E5 E6 F3 F4
    Date: 2020–12
  13. By: Hajime Tomura (Faculty of Political Science and Economics, Waseda University)
    Abstract: This paper introduces into an overlapping generations model the courts inability to distinguish different qualities of goods of the same kind. Given the recognizability of fiat money for the court, this friction leads to the use of nominal debt contracts as well as the use of fiat money as a means of payment in the goods market. This result holds without dynamic inefficiency or lack of double coincidence of wants. Instead, money is necessary because it is essential for credit. However, there can occur a shortage of real money balances for liability settlements, even if the money supply follows a Friedman rule. This problem can be resolved if the central bank can lend fiat money to agents elastically at a zero intraday interest rate within each period. Given the economy being dynamically efficient, this policy makes the money supply cease to be the nominal anchor for the price level. In this case, the monetary steady state becomes compatible with other nominal anchors than the money supply.
    Keywords: Nominal contract; Discount window; Trade credit; Cashless economy; Payment system; Legal tender
    JEL: E42 E51 E58
    Date: 2020–03
  14. By: Masashige Hamano (Waseda University); Francesco Zanetti (University of Oxford)
    Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.
    Keywords: Monetary policy; firm heterogeneity; product variety; reallocation
    JEL: E32 E52 L51 O47
    Date: 2020–05
  15. By: Zhai, Weiyang
    Abstract: This paper examines how the financial structure and capital openness of a country have affected the likelihood of financial crisis over the past two decades. By applying a panel probit estimation to a sample of 38 countries, we find the following. 1) An economy with a more market-based financial structure is less likely to experience a currency crisis. 2) More capital openness is associated with a lower probability of a currency crisis. 3) Countries with a more market-based financial structure are also less likely to experience a currency crisis if that structure is coupled with a more open capital account. 4) Unlike what is found for currency crises, neither financial structure nor capital openness has any effect on banking crises.
    Keywords: financial structure; capital openness; currency crisis; banking crisis
    JEL: G01 G15 G28
    Date: 2020–12–29
  16. By: Musy, Olivier
    Abstract: We develop a New Keynesian Phillips curve based on a combination of staggered price contracts and indexation to past inflation. This Phillips curve links current inflation dynamics to past inflation with a positive weight, as well as current and lagged expectations of inflation and output, giving a possible alternative explanation for recent empirical findings on the role of expectations in the determination of inflation.
    Keywords: Inflation Dynamics, Staggered contracts, Price Indexation, Sticky Prices, New Keynesian Phillips Curve, Sticky Expectations
    JEL: E3 E31 E5
    Date: 2020–12–28
  17. By: Antonio David; Carlos Eduardo Gonçalves
    Abstract: This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter.
    Keywords: Sudden stops;Exchange rate arrangements;Capital controls;Terms of trade;Capital flows;WP,state
    Date: 2019–11–01
  18. By: Szilard Benk; Max Gillman
    Abstract: Real oil prices surged from 2009 through 2014, comparable to the 1970’s oil shock period. Standard explanations based on monopoly markup fall short since inflation remained low after 2009. This paper contributes strong evidence of Granger (1969) predictability of nominal factors to oil prices, using one adjustment to monetary aggregates. This adjustment is the subtraction from the monetary aggregates of the 2008-2009 Federal Reserve borrowing of reserves from other Central Banks (Swaps), made after US reserves turned negative. This adjustment is key in that Granger predictability from standard monetary aggregates is found only with the Swaps subtracted.
    Keywords: Oil prices;Inflation;Gold prices;Monetary base;Consumer price indexes;WP,sub,M1 Divis-SWP,excess reserves
    Date: 2019–11–01
  19. By: Giovanni Caggiano (Monash University, University of Padova and Bank of Finland); Efrem Castelnuovo (University of Melbourne and University of Padova); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: This paper revisits the well-known VAR evidence on the real effects of uncertainty shocks by Bloom (Econometrica 2009(3): 623-685. doi: 10.3982/ECTA6248). We replicate the results in a narrow sense using Eviews. In a wide sense, we extend his study by working with a smooth transition-VAR framework that allows for business cycle-dependent macroeconomic responses to an uncertainty shock. We find a significantly stronger response of real activity in recessions. Counter-factual simulations point to a greater effectiveness of systematic monetary policy in stabilizing real activity in expansions.
    Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2020–08
  20. By: Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth S.
    Abstract: This article provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Even if central bankers' communications jargon has evolved considerably in recent decades, it is apparent that many still place a large implicit weight on the exchange rate. The U.S. dollar scores as the world's dominant anchor currency by a very large margin. By some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled. We argue that in addition to the usual safe assets story, the record accumulation of reserves since 2002 may also have to do with many countries' desire to stabilize exchange rates in an environment of markedly reduced exchange rate restrictions or, more broadly, capital controls: an important amendment to the conventional portrayal of the macroeconomic trilemma.
    JEL: N20 F40 F30 E50
    Date: 2019–05–01
  21. By: Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
    Keywords: Equilibrium default, bankruptcy code, fiscal union, capital markets union, financial stability, bank credit and inside money, price-level and exchange rate determinacy, liquidity-intermediary asset pricing
    JEL: E42 F33 G15 G21
    Date: 2021–01–21
  22. By: Taderera, Christie; Runganga, Raynold; Mhaka, Simbarashe; Mishi, Syden
    Abstract: Various theories ascertain that there is a positive relationship between inflation and interest rate. Developed and developing economies are still in search of an optimum inflation rate that increases economic growth. The SACU members has recorded low growths levels over the past years coupled with low inflation rates. This study examines the relationship between inflation rate, interest rate and economic growth in Southern African Customs Union (SACU) countries. Panel data for SACU countries covering the period 1991 to 2018 was analysed using Pooled Mean Group (PMG) estimators which are Panel Autoregressive Distributed Lag (ARDL) model, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) to enable isolating short and long run effects and for robustness.The results of the study show that inflation has a positive impact on economic growth while lending rate has a negative impact on growth in the long run. These results imply that policymakers should allow a high sustainable inflation rate in order to promote economic growth while interest rate can be used as a monetary policy instrument to achieve the desired inflation rate that will affect economic growth positively.
    Keywords: Inflation, Interest rate, Economic growth, Southern African Customs Union
    JEL: E31 E4 O42 O47
    Date: 2021–01–19
  23. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper shows that daily Google trends can be used as an alternative to conventional U.S. data (with alternative frequencies) on unemployment, interest rates, inflation and coronavirus disease 2019 (COVID-19). This information is used to investigate the effects of COVID-19 and the corresponding monetary policy on the U.S. unemployment, both nationally and across U.S. states, by using a structural vector autoregression model. Historical decomposition analyses show that the U.S. unemployment is mostly explained by COVID-19, whereas the contribution of monetary policy is almost none. An investigation based on the U.S. states further suggests that COVID-19 and the corresponding monetary policy conducted based on nationwide economic developments have resulted in unequal changes in state-level unemployment rates, suggesting evidence for distributive effects of national monetary policy.
    Keywords: COVID-19, Coronavirus, Google Trends, Monetary Policy
    JEL: J63 F66 I10
    Date: 2021–01
  24. By: PINSHI, Christian P.
    Abstract: Four factors affect the effectiveness of monetary policy, three of which are exogenous, fiscal dominance, dollarization and global risks; one is endogenous, monetary policy framework that integrates strategy, tactics and governance of monetary policy. We show that the factors that undermine the effectiveness of the Central bank of Congo (BCC) are much more exogenous. However, the monetary policy framework needs to be rethought. For a lasting effectiveness of the BCC’s monetary policy, it would be necessary to put in place sustainable fiscal discipline, serious de-dollarization measures, and economic growth policies that strengthen resilience.
    Keywords: Central Bank, monetary policy framework, fiscal dominance, dollarization, global risks.
    JEL: E52 E58 E60 F4
    Date: 2020–05
  25. By: João Estevao
    Abstract: During the colonial period and within the framework of the monetary system of the Portuguese colonies, Cabo Verde lived in a situation of relative monetary and exchange stability. After independence, in 1975, the country underwent two monetary transitions: the first, immediately after independence and with the abandonment of the exchange rate parity with the Portuguese escudo; and the second, from 1998 onwards, following an exchange cooperation agreement with Portugal. During both transitions, the country could rebuild monetary and exchange stability, as a result of the way in which institutional and external factors of stability were used in each of them. However, the second transition significantly affected the evolution of trade and international investments in Cabo Verde, whose expansion resulted in a strong growth of the economy and exports. This paper analyses not only the conditions of monetary and exchange stability in the two transitions, but also the nature of the changes that took place with the second transition. Those changes were reflected in a trend of structural transformation and consolidation of the market economy in Cabo Verde, paving the way to the good economic performance of the last few decades.
    Date: 2020–06
  26. By: Troy D Matheson
    Abstract: Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.
    Keywords: Inflation;Central bank policy rate;Economic forecasting;Output gap;Inflation targeting;WP,core inflation,inflation expectation
    Date: 2019–09–13
  27. By: Tavares, Francisco
    Abstract: Aggregate inflation measures such as the Consumer Price Index seek to capture the impact on households consumption possibilities of changes in prices over time and are generally assumed as representative of all consumers. This is only true if households have all the same consumption patterns. Based on household level microdata, we construct specific household baskets of consumption and calculate the inflation for each one. By comparing Plutocratic and Democratic indexes, and inflation between groups of income, we conclude that households experienced different inflation rates, with the poorer suffering more with the loss in the purchasing power. The potential impacts of these findings on Fiscal and Monetary Policy show that around 1.77 million households could be paying federal income taxes when they should not; Social Security benefits could be up to 9.70% higher for some households; Federal Funds Rates would be 0.8 percentage points higher, based on a Taylor type rule, if FED used a Democratic core inflation index.
    Keywords: Inflation Consumer Price Index Price Indexes Personal Consumption Expenditure Price Index Consumption Patterns Consumer Expenditure Survey
    JEL: E20 E31 E43 E52 E62
    Date: 2021–01–04
  28. By: Oleg Itskhoki
    Abstract: The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly-behaved variables empirically, tightly co-moving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This survey lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint and monetary policy regime. We show that RER is inherently a general-equilibrium variable, which depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.
    JEL: E31 F31 F41 G15
    Date: 2020–12
  29. By: Roger Farmer; Pawel Zabczyk
    Abstract: The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
    Keywords: Real interest rates;Fiscal policy;Public debt;Overlapping generations models;Negative interest rates;WP,price level
    Date: 2019–10–11
  30. By: Alina K. Bartscher (Department of Economics, University of Bonn); Moritz Kuhn (Department of Economics, University of Bonn; CEPR and IZA); Moritz Schularick (Federal Reserve Bank of New York; and Department of Economics, University of Bonn; and CEPR); Paul Wachtel (Department of Economics, New York University Stern School of Business)
    Abstract: This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value. Over multi-year time horizons, the employment effects are substantially smaller than the countervailing portfolio effects. We conclude that there is little reason to think that accommodative monetary policy plays a significant role in reducing racial inequities in the way often discussed. On the contrary, it may well accentuate inequalities for extended periods.
    Keywords: monetary policy, racial inequality, income distribution, wealth distribution, wealth effects
    JEL: E40 E52 J15
    Date: 2021–01
  31. By: Ivan Sutoris
    Abstract: When consumers optimize intertemporally, a true cost of living index will depend on changes in both current and future prices as well as rates of return on financial assets. This paper aims to construct a measure of such "dynamic inflation" for the Czech Republic from a solution to the household's intertemporal consumption-saving problem. Dynamic inflation is derived to be a function of current movements in consumption and house prices as well as revisions to forecasts of the future paths of inflation and interest rates. The resulting series constructed from Czech data roughly follows CPI inflation, but is more volatile and less persistent. Housing booms can cause persistent upward deviations, while changes in expected interest rates have a stabilizing effect. In addition, the intertemporal cost of living can also potentially be affected by low-frequency structural shifts in the economy.
    Keywords: Cost of living, CPI, dynamic inflation, intertemporal optimization
    JEL: C43 D15 E31
    Date: 2020–12
  32. By: Li, Wenhao (U of Southern California); Li, Ye (Ohio State U)
    Abstract: Bypassing the banking systems, central banks around the world lent to nonfinancial firms on an unprecedented scale during the Covid-19 crisis. Effective and necessary as it is, direct lending is subject to credit mispricing given central banks' lack of information on individual borrowers. Our dynamic model characterizes a downward bias in firm quality distribution that is self-perpetuating: Direct lending in the current crisis necessitates a greater scale of interventions in future crises, which in turn cause more severe distortion of firm quality distribution. Such effects are amplified by firms' forward-looking investment decisions in normal times. Low-quality firms overinvest to take advantage of underpriced central bank credit in future crises while, on a relative basis, high-quality firms underinvest. The distortionary effects can be mitigated by central banks' use of market information, collaboration and regulation of informed banks, and coordination of direct lending and conventional monetary policy.
    JEL: E5 G0
    Date: 2020–11
  33. By: Goodhart, C. A. E.; Masciandaro, Donato; Ugolini, Stefano
    Abstract: This paper analyses the monetary policy that the Most Serene Republic of Venice implemented in the years of calamities using a modern equivalent of helicopter money, precisely an extraordinary money issuing, coupled with capital losses for the issuer. We consider the 1629 famine and the 1630-1631 plague as a negative macroeconomic shock that the incumbent government addressed using fiscal monetization. Consolidating the balance sheets of the Mint and of the Giro Bank, and having heterogenous citizens - inequality matters - we show that the Republic implemented what was, in effect, helicopter money driven by political economy reasons, in order to avoid popular riots.
    Keywords: central banking; helicopter money; monetary policy; pandemic; Venice 1630
    JEL: D70 E50 E60 N10 N20
    Date: 2021–01
  34. 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: Dollarization, Tourism, Sub-saharan Africa
    JEL: C11 E41 F31
    Date: 2021–01
  35. By: Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
    Abstract: Digital currencies store balances in anonymous electronic addresses. We analyze the trade-offs between the safety and convenience of aggregating balances in addresses, electronic wallets and banks. In our model, agents balance the risk of theft of a large account with the cost to safeguarding a large number of passwords for many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and trade-offs along these dimensions; we analyze the welfare effects of differing industry structures and interdependencies. In particular, we examine, the consequences of “password aggregation" programs, which, in effect, consolidate risks across accounts.
    Keywords: Central bank research; Digital currencies and fintech; Financial services; Payment clearing and settlement systems
    JEL: E42 E51 E58
    Date: 2021–01
  36. By: Hajime Tomura (Faculty of Political Science and Economics, Waseda University)
    Abstract: This paper presents a three-period model to endogenize the need for bank notes given the availability of trade credit. The model shows that banks can improve risk sharing in the economy by discounting commercial bills to issue bank notes, because bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. This characteristic of bank notes, however, can cause a self-fulfilling mass refusal of bank notes by payees due to endogenous default on commercial bills. This result holds even if bank notes are not redeemable on demand before maturity. The model shows that a capital requirement is not sufficient for preventing a self-fulfilling mass refusal of bank notes, while a reserve requirement is.
    Keywords: Bank notes; Trade credit; Commercial bills; Bank run; Reserves; Payment system
    JEL: E42 G21
    Date: 2020–03
  37. By: Huberto M. Ennis; Elizabeth C. Klee
    Abstract: We study new transaction-level data of discount window borrowing in the U.S. from 2010–17, merged with quarterly data on bank financial conditions (balance sheet and revenue). The objective is to improve our understanding of the reasons why banks use the discount window during periods outside financial crises. We also provide a model of the decision of banks to borrow at the window, which is helpful for interpreting the data. We find that decisions to gain access and to borrow at the discount window are meaningfully correlated with some relevant characteristics of banks and the composition of their balance sheets. Banks choose simultaneously to obtain access to the discount window and hold more cash-like liquidity as a proportion of assets. Yet, conditional on access, larger and less liquid banks tend to borrow more from the discount window. In general, our findings suggest that banks could, in principle, adapt their operations to modulate, and possibly reduce, their use of the discount window in "normal" times.
    Keywords: Discount window; Financial crises; Borrowing
    Date: 2021–01–13
  38. By: Lahcen Bounader; Mohamed Doukali
    Abstract: We test the existence of the balance sheet channel of monetary policy in a middle-income country. Firm-level data scarcity and quality, in such a context, make the identification of this channel a steep challenge. To circumvent this challenge, we use panel instrumental variables estimation with measurement error to analyze the financial statements of 58 500 Moroccan firms over the period 2010-2016. Our analysis confirms the existence of this channel. It shows that monetary policy has a significant impact on small and medium enterprises’ access to banks’ financing, and that firm-specific variables are key determinants of firms’ financing decisions.
    Keywords: Financial statements;Loans;Collateral;Trade credits;Banking;WP,firm,long-term debt,short-term debt
    Date: 2019–11–01

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