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on Monetary Economics |
| By: | Bertrand Gruss; Sandra Lizarazo; Francesco Grigoli |
| Abstract: | Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence. |
| Keywords: | Inflation;Economic forecasting;Inflation targeting;Central bank policy rate;Futures;Anchoring,disagreement,dispersion,information rigidity,in?ation expectations,sticky information.,WP,inflation expectation,expectation dispersion,monetary policy surprise,price level,inflation dispersion,inflation expectation formation mechanism |
| Date: | 2020–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/252&r=all |
| By: | Daniel Baksa; Zsuzsa Munkacsi |
| Abstract: | The evidence on the inflation impact of aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model, we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first, using this framework, to discuss how aging affects the transmission channels of monetary policy. We are also the first to examine aging and optimal central bank policies. As aging redistributes wealth among generations and the labor force becomes more scarce, our model suggests that aging makes monetary policy less effective and in more gray societies central banks should react more strongly to nominal variables. |
| Keywords: | Aging;Inflation;Consumption;Real interest rates;Labor supply;WP,monetary policy,transmission mechanism |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/198&r=all |
| By: | Hajime Tomura (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | This paper introduces the court's inability to discern different qualities of goods of the same kind into an overlapping generations model. This friction makes fiat money circulate not only as a means of payments for goods, but also as a means of liability repayments in an equilibrium. This result holds with or without dynamic inefficiency. In this equilibrium, a shortage of real money balances for liability repayments can cause underinvestment by borrowers, even if the money supply follows a Friedman rule. This problem can be resolved by an elastic money supply through an intraday discount window at a zero discount fee. In this case, supplying no fiat money overnight maximizes aggregate consumption in a monetary steady state in a dynamically efficient economy. This policy, however, can also lead to a self-fulfilling crunch of discount window lending if commercial banks intermediate the lending from the central bank with a collateral constraint, and if the discount window market is segregated. This equilibrium can be eliminated if the central bank is the monopolistic public issuer of fiat money that also acts as the lender of last resort. |
| Keywords: | Nominal contract; Discount window; Credit crunch; Lender of last resort; Payment system |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:1905&r=all |
| By: | Marco Gross; Christoph Siebenbrunner |
| Abstract: | To support the understanding that banks’ debt issuance means money creation, while centralized nonbank financial institutions’ and decentralized bond market intermediary lending does not, the paper aims to convey two related points: First, the notion of money creation as a result of banks’ loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure. It would lose its impact in the hypothetical case that only one (“singular”) commercial bank would exist. We link our discussion to the emergence and design of central bank digital currencies (CBDC), with a special focus on how loans would be granted in a CBDC world. |
| Keywords: | Banking;Currency issuance;Bank credit;Commercial banks;Monetary base;WP,bank,lending,nonbank,nonbank lending,process |
| Date: | 2019–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/285&r=all |
| By: | Tobias Adrian; Fernando Duarte; Nellie Liang; Pawel Zabczyk |
| Abstract: | We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via their impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel. |
| Date: | 2020–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/236&r=all |
| By: | Grégory Claeys |
| Abstract: | This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON), as an input to the Monetary Dialogue of 8 June 2020 between ECON and the President of the European Central Bank. The original paper is available on the European Parliament’s webpage (here). Copyright remains with the European Parliament at all times. The author is grateful to Agnès Bénassy-Quéré, Maria Demertzis, Francesco Papadia, Stavros Zenios,... |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:36749&r=all |
| By: | Demary, Markus; Hüther, Michael |
| Abstract: | The European Central Bank (ECB) is reviewing its strategy. Key pillars are its communication and how monetary policy should address climate change. We advise the ECB to strengthen its communication especially with social groups unfamiliar with monetary policy. When it comes to climate change, the ECB should be responsive, but not activist. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwkkur:1222020&r=all |
| By: | Mariam El Hamiani Khatat; Mark Buessings-Loercks; Vincent Fleuriet |
| Abstract: | This paper argues that there is scope for monetary policy under an exchange rate anchor, and discusses the related monetary policy design and implementation. It shows that the exchange rate can be used as the main monetary policy instrument while the policy rate can target the exchange rate. An exchange rate anchor is compatible with an inflation objective, provided fiscal dominance is not an issue, monetary conditions are supportive of the peg, and the level of international reserves is adequate. The paper argues that, while an exchange rate anchor is more prone to policy inconsistencies, there is ample scope for strengthening monetary policy design and implementation under soft pegs. In that context, the principles of dichotomy and interest rate parity are critical. |
| Keywords: | Exchange rates;Exchange rate arrangements;Exchange rate anchor;Central bank policy rate;Banking;WP,exchange rate,interest rate,monetary policy |
| Date: | 2020–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/180&r=all |
| By: | Robin Döttling; Lev Ratnovski |
| Abstract: | We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less. |
| Keywords: | Depreciation;Intangible capital;Asset prices;Currencies;Investment policy;WP,intangible investment,abnormal returns,investment response,adjustment cost,cost of capital |
| Date: | 2020–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/160&r=all |
| By: | Hassan Afrouzi; Choongryul Yang |
| Abstract: | We develop a fast, tractable, and robust method for solving the transition path of dynamic rational inattention problems in linear-quadratic-Gaussian settings. As an application of our general framework, we develop an attention-driven theory of dynamic pricing in which the Phillips curve slope is endogenous to systematic aspects of monetary policy. In our model, when the monetary authority is more committed to stabilizing nominal variables, rationally inattentive firms pay less attention to changes in their input costs, which leads to a flatter Phillips curve and more anchored inflation expectations. This effect, however, is not symmetric. A more dovish monetary policy flattens the Phillips curve in the short-run but generates a steeper Phillips curve in the long-run. In a calibrated version of our general equilibrium model, we find that our mechanism quantifies a 75% decline in the slope of the Phillips curve in the post-Volcker period, relative to the period before it. |
| Keywords: | rational inattention, dynamic information acquisition, Phillips curve |
| JEL: | D83 D84 E03 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8840&r=all |
| By: | Karol Gellert; Erik Schlogl (Finance Discipline Group, UTS Business School, University of Technology Sydney) |
| Abstract: | The Secured Overnight Funding Rate (SOFR) is becoming the main Risk–Free Rate benchmark in US dollars, thus interest rate term structure models need to be updated to reflect the key features exhibited by the dynamics of SOFR and the forward rates implied by SOFR futures. Historically, interest rate term structure modelling has been based on rates of substantially longer time to maturity than overnight, but with SOFR the overnight rate now is the primary market observable. This means that the empirical idiosyncrasies of the overnight rate cannot be ignored when constructing interest rate models in a SOFR–based world. <p>As a rate reflecting transactions in the Treasury overnight repurchase market, the dynamics of SOFR are closely linked to the dynamics Effective Federal Funds Rate (EFFR), which is the interest rate most directly impacted by US monetary policy target rate decisions. Therefore, these rates feature jumps at known times (Federal Open Market Committee meeting dates), and market expectations of these jumps are reflected in prices for futures written on these rates. On the other hand, forward rates implied by Fed Funds and SOFR futures continue to evolve diffusively. The model presented in this paper reflects the key empirical features of SOFR dynamics and is calibrated to futures prices. In particular, the model reconciles diffusive forward rate dynamics with piecewise constant paths of the target short rate. |
| Keywords: | SOFR; EFFR; Fed Funds; interest rate term structure modelling; interest rate futures |
| JEL: | G13 G18 E43 |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:420&r=all |
| By: | Mirko Abbritti; Sebastian Weber |
| Abstract: | We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members. |
| Keywords: | Total factor productivity;Return on investment;Labor markets;Commodity markets;Inflation;WP,labor market |
| Date: | 2019–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/123&r=all |
| By: | Quarm, Richmond Sam; Busharads, Mohamed Osman Elamin; Institute of Research, Asian |
| Abstract: | In conventional economics, two types of macroeconomic policy i.e. fiscal policy and monetary policy are used to streamline the business cycle. This paper has examined the cyclical behavior of these variables over the business cycle of Bangladesh. The objective of this examination is to show whether policies (fiscal policy and monetary policy) in Bangladesh are taken with a motive to stabilize the economy or only to promote economic growth. In other words, it has examined whether the policies in Bangladesh are procyclical or countercyclical or acyclical. Hodrick Prescott (HP) filter has been used to separate the cyclical component of considered variables. Both correlation and regression-based analysis have provided that in Bangladesh government expenditure and interest rates behave procyclically, but money supply behaves acyclically over the business cycle. Besides, this paper has tried to identify the long-term as well as the short-term relationship between real GDP and the macroeconomic policy variables with the help of the Johansen cointegration test, vector error correction model (VECM), and block exogeneity Wald test. Through these analyses, this study has found that fiscal policy has a significant impact on GDP growth both in the short-run and long-run. In the case of monetary policy, although the interest rate has an impact on real output both in the short-run and long-run, the money supply has neither a short-run nor long-run effect on output growth. |
| Date: | 2020–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:45fwz&r=all |
| By: | Luisa Corrado (DEF and CEIS, Università di Roma "Tor Vergata"); Daniela Fantozzi (National Statistical Institute (Istat)) |
| Abstract: | In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use for the first time the survey microdata on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment to build measures of inequality and the distribution over time for incomes and subgroups of individuals. The identification strategy is based on surprises estimated in the EA-MPD database for the Euro Area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios (pre and post-QE). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable and labor income more persistently than a conventional monetary shock. The financial channel has an equalizing effect favoring the less wealthy households mainly in the long-run. Overall, our evidence suggests that QE is associated with a decrease in Italian households inequality. |
| Keywords: | Income Inequality, Monetary Policy, Local Projections, Survey Data, High Frequency Data. |
| JEL: | C81 D31 E52 E58 |
| Date: | 2020–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:491&r=all |
| By: | Grégory Claeys; Guntram B. Wolff |
| Abstract: | This note was prepared at the request and with the financial support of the Croatian Presidency of the Council of the European Union, as a background paper for discussion at the informal ECOFIN in Zagreb, which was cancelled because of the COVID-19 outbreak and implementation of containment measures. • The euro became an international currency when it was created two decades ago. However, the euro's internationalisation peaked as early as... |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:37033&r=all |
| By: | Jaehyuk Choi; Desheng Ge; Kyu Ho Kang; Sungbin Sohn |
| Abstract: | The literature on using yield curves to forecast recessions typically measures the term spread as the difference between the 10-year and the three-month Treasury rates. Furthermore, using the term spread constrains the long- and short-term interest rates to have the same absolute effect on the recession probability. In this study, we adopt a machine learning method to investigate whether the predictive ability of interest rates can be improved. The machine learning algorithm identifies the best maturity pair, separating the effects of interest rates from those of the term spread. Our comprehensive empirical exercise shows that, despite the likelihood gain, the machine learning approach does not significantly improve the predictive accuracy, owing to the estimation error. Our finding supports the conventional use of the 10-year--three-month Treasury yield spread. This is robust to the forecasting horizon, control variable, sample period, and oversampling of the recession observations. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.09394&r=all |
| By: | Zefeng Chen; Sanaa Nadeem; Shanaka J Peiris |
| Abstract: | In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs). |
| Date: | 2021–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/010&r=all |
| By: | Christian Pinshi (UNIKIN - Université de Kinshasa) |
| Date: | 2020–12–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03087715&r=all |
| By: | Karnaukh, Nina (Ohio State U) |
| Abstract: | I find that 30-minute changes in bond yields around scheduled Federal Open Market Committee (FOMC) announcements are predictable with the pre-FOMC Blue Chip professionals' revisions in GDP growth forecasts. A positive pre-FOMC GDP growth revision predicts a contractionary policy news shock (positive change in bond yields), a negative GDP growth revision predicts an expansionary policy news shock (negative change in bond yields). Failing to account for this predictability biases the estimates of monetary policy effects on the economy. First, the Fed's information effect dissipates as the truly unpredictable policy news shock does not affect professionals' beliefs about the economy. Second, net policy shock has a more negative impact on future actual GDP, than the raw policy shock. |
| JEL: | E43 E52 G12 G17 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2020-27&r=all |
| By: | Olalude, Gbenga Adelekan; Olayinka, Hammed Abiola; Ankeli, Uchechi Constance |
| Abstract: | This study modelled and forecast inflation in Nigeria using the monthly Inflation rate series that spanned January 2003 to October 2020 and provided three years monthly forecast for the inflation rate in Nigeria. We examined 169 ARMA, 169 ARIMA, 1521 SARMA, and 1521 SARIMA models to identify the most appropriate model for modelling the inflation rate in Nigeria. Our findings indicate that out of the 3380 models examined, SARMA (3, 3) x (1, 2)12 is the best model for forecasting the monthly inflation rate in Nigeria. We selected the model based on the lowest Akaike Information Criteria (AIC) and Schwarz Information Criterion (SIC) values, volatility, goodness of fit, and forecast accuracy measures, such as Root Mean Square Error (RMSE), Mean Absolute Error (MAE), and Mean Absolute Percentage Error (MAPE). The AIC and SIC of the model are 3.3992 and 3.5722, respectively with an adjusted R2 value of 0.916. Our diagnostic tests (Autocorrelation and Normality of Residuals) and forecast accuracy measures indicate that the presented model, SARMA (3, 3)(1, 2)12, is good and reliable for forecasting. Finally, the three years monthly forecast was made, which shows that the Inflation rate in Nigeria would continue to decrease but maintain a 2 digits value for the next two years, but is likely to rise again in 2023. This study is of great relevance to policymakers as it provides a foresight of the likely future inflation rates in Nigeria. Keywords: Inflation; Modelling, Forecasting; ARMA; ARIMA; SARMA; SARIMA; |
| Keywords: | Inflation; Modelling; Forecasting; ARMA; ARIMA; SARMA; SARIMA |
| JEL: | C22 C52 C53 E31 E37 E47 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:105342&r=all |
| By: | John Hooley; Lam Nguyen; Mika Saito; Shirin Nikaein Towfighian |
| Abstract: | This paper explores the causes and consequences of fiscal dominance over monetary policy in Sub-Saharan Africa (SSA). Fiscal dominance has always been a pressing problem as it can contribute to inflation and macroeconomic instability, and increasingly so as fiscal deficits and public debt are rising in many SSA countries. We find that legal limits and availability of alternative financing options play an important role in determining the extent to which government deficits tend to be financed by the central bank. We also find economically significant effects of central bank lending to government on the exchange rate and inflation. |
| Date: | 2021–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/017&r=all |
| By: | Ronald Heijmans; Froukelien Wendt |
| Abstract: | Banks and financial market infrastructures (FMIs) that are not able to fulfill their payment obligations can be a source of financial instability. This paper develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network, combining liquidity risk and interconnections in one approach, and applying this to the TARGET2 payment system. Findings suggest that the most critical participants in TARGET2 are other payment systems, because of the size of underlying payment flows. Some banks may be critical, but this is mainly due to their interconnectedness with other TARGET2 participants. Central counterparties and central securities depositories are less critical. These findings can be used in financial stability analysis, and feed into central bank policies on payment system access, oversight, and crisis management. |
| Keywords: | Payment systems;PFM information systems;Liquidity risk;Banking;Liquidity;WP,payment instruction,transaction data,customer payment,payment flow,settlement bank |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/081&r=all |
| By: | Godfrey I. Ihedimma (Spiritan University, Nneochi, Abia State, Nigeria); Godstime I. Opara (Imo State University, Owerri, Imo State, Nigeria) |
| Abstract: | Nigeria is unarguably one of the countries with its citizens widely spread across the globe and the income earned forms a huge chunk of remittance back to Nigeria. The study focuses on what implications remittances may have for unemployment in Nigeria. Remittance is treated as being endogenously determined by the number of migrants, the nominal exchange rate (with the Naira as local currency), the inflation rate and the migrants’ income. Data from 1981 to 2019 is calibrated for structural break points and stationarity under conditions of regimes changes. While the data was found to have been affected by regime changes and stationary in levels, an Instrumental Variable Regression model was estimated and it was found that remittance positively and significantly influence unemployment. However, when remittance is interacted with the dependants in Nigeria, unemployment is observed to fall. The study strongly recommends that fiscal planning should take an account of the inflow of remittances when curbing unemployment. The study further recommends that there is the need to deliberately encourage a rise in the demand for the Naira as this would protect the value of locally produced goods from being eroded by remittances. |
| Keywords: | Remittance, Dependant, Endogenous, Financial Openness, Unemployment, Interaction, IV Estimation |
| JEL: | F24 J61 O15 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:20/103&r=all |
| By: | Naef, Alain |
| Abstract: | This paper presents new daily data on central bank reserves during the Bretton Woods period. It is the first paper to provide daily data for the Bank of France, Bank of England and Swiss National Bank directly from these central bank’s archives. I discuss some of the issue with these data and make them available to other researchers for further analysis. |
| Date: | 2021–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:he7gx&r=all |
| By: | Patrick Blagrave |
| Abstract: | Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least. |
| Keywords: | Inflation;Trade integration;Nominal effective exchange rate;Food prices;WP,moving average,Core CPI Inflation,dependent variable |
| Date: | 2019–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/147&r=all |
| By: | Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne] - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - CNRS - Centre National de la Recherche Scientifique) |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03103172&r=all |
| By: | Krishnamurthy, Arvind (Stanford U); Li, Wenhao (U of Southern California) |
| Abstract: | We develop a model of financial crises with both a financial amplification mecha- nism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. A pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. Mixing sentiment and amplification allows the model to additionally match the pre-crisis evidence. We consider two versions of sentiment, a Bayesian belief updating process and one that overweighs recent observations. Both models match the crisis patterns qualitatively, while the non-Bayesian model better matches the pre-crisis froth quantitatively. Finally, we show that a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not condition on true beliefs. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3874&r=all |
| By: | Francesca Diluiso (Mercator Research Institute on Global Commons and Climate Change (MCC)); Barbara Annicchiarico (DEF and CEIS, Università di Roma "Tor Vergata"); Matthias Kalkuhl (Mercator Research Institute on Global Commons and Climate Change (MCC) & University of Potsdam); Jan C. Minx (Mercator Research Institute on Global Commons and Climate Change (MCC) & Priestley International Centre for Climate, university of Leeds) |
| Abstract: | Limiting global warming to well below 2°C may result in the stranding of carbon-sensitive assets. This could pose substantial threats to financial and macroeconomic stability. We use a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the risks a low-carbon transition poses to financial stability and the different instruments central banks could use to manage these risks. We show that, even for very ambitious climate targets, transition risks are limited for a credible, exponentially growing carbon price, although temporary \green paradoxes" phenomena may materialize. Financial regulation encouraging the decarbonization of the banks' balance sheets via tax-subsidy schemes significantly reduces output losses and inflationary pressures but it may enhance financial fragility, making this approach a risky tool. A green credit policy as a response to a financial crisis originated in the fossil sector can potentially provide an effective stimulus without compromising the objective of price stability. Our results suggest that the involvement of central banks in climate actions must be carefully designed in compliance with their mandate to avoid unintended consequences. |
| Keywords: | Climate policy, financial instability, financial regulation, green credit policy monetary policy; transition risk |
| JEL: | E50 H23 Q43 Q50 Q58 |
| Date: | 2020–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:501&r=all |
| By: | Federico Cingano; Fadi Hassan |
| Abstract: | We study the impact of international financial flows on credit allocation exploiting the early 2000s boom of capital inflows in Italy. Using detailed bank-firm matched data we compare the patterns of credit allocation of banks with different exposure to the shock. Exposed banks significantly expand lending to high productivity and low credit-constraint firms. Constrained but high productivity firms also benefit from the shock. These results hold using alternative measures of firm productivity and credit constraints or of bank exposure to the flows, and do not seem to be driven by concurrent changes in bank funding or by the sorting of borrowers and lenders. We also find that the patterns of credit allocation induced by capital inflows have a positive, albeit small, impact on aggregate TFP. These results show that international financial flows did not contribute to increase misallocation. |
| Keywords: | International financial flows, misallocation, productivity |
| JEL: | F30 F43 G21 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1697&r=all |
| By: | Timothy Hills; Huy Nguyen; Randa Sab |
| Abstract: | This study focuses on identifying the main factors that influenced country-specific and aggregate demand for IMF concessional financing between 1986 and 2018 and makes within-period and out-of-period forecasts. We find that the external debt level, inflation, and real effective exchange rate are the main economic variables influencing concessional borrowing for most eligible countries. Finally, our approach is able to provide quite accurate country-level and aggregate forecasts for historical financing events prior to the COVID-19 pandemic. |
| Date: | 2021–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/015&r=all |
| By: | Si Guo; Philippe D Karam; Jan Vlcek |
| Abstract: | Inflation rates rose sharply in the Philippines during 2018. Understanding the demand and supply sources of inflation pressures is key to monetary policy response. Qualitatively, indicators have pointed to evidence of inflation pressures from both sides in 2018, with the supply factors, by and large, associated with commodity-price shocks and demand factors deduced from gleaning at the wider non-oil trade deficits seen in the Philippines. Quantitatively, we deploy a semi-structural model to decompose the contributions of various shocks to inflation. Our main findings are (1) supply factors (mainly global commodity prices) played a prominent role in explaining the rise in inflation in 2018; (2) demand factors also contributed to inflation in a non-negligible way, justifying the need for tighter monetary policy in 2018; (3) the size of the estimated output gap (an important indicator of demand pressures) could be larger, when considering the widening trade deficits in 2018; and (4) a delayed monetary policy tightening can be costly in terms of higher inflation rates, requiring larger and more aggressive interest rate hikes to bring inflation under control, based on a counterfactual exercise. |
| Keywords: | Inflation;Oil prices;Output gap;Inflation targeting;Monetary tightening;WP,inflation rate,headline inflation,price,monetary policy |
| Date: | 2019–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/153&r=all |