nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒02‒22
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. When Does the Introduction of a New Currency Improve Welfare? By Max Fuchs; Jochen Michaelis
  2. Effectiveness of Foreign Exchange Interventions: Evidence from New Zealand By Andrew Besuyen; Tom Coupé; Kuntal K. Das
  4. Has the Euro paid off? A study of the trade-induced welfare effects of the EMU By Silviano Esteve-Pérez; Salvador Gil-Pareja; Rafael Llorca-Vivero; Jordi Paniagua
  5. Effective Policy Communication: Targets versus Instruments By Francesco D'Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
  6. Asymmetric Effects of Monetary Policy Easing and Tightening By Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
  7. Effective Exchange Rate Regimes and Inflation By Philipp Harms; Jakub Knaze
  8. Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy By ; Alisdair McKay
  9. Fiscal Policy and Households' Inflation Expectations: Evidence from a Randomized Control Trial By Coibion, Olivier; Gorodnichenko, Yuriy; Weber, Michael
  11. Does bank efficiency affect the bank lending channel in China? By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  12. External Vulnerabilities and Exchange Rate Pass-Through: The Case of Emerging Markets By Abdullah Kazdal; Muhammed Hasan Yilmaz
  13. A Reconsideration of the Doctrinal Foundations of Monetary-Policy Rules: Fisher versus Chicago By Tavlas, George S.; Assistant, JHET
  14. Policy uncertainty, lender of last resort and the real economy By Jasova, Martina; Mendicino, Caterina; Supera, Dominik
  15. Uncertainty spill-overs: when policy and financial realms overlap By Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
  16. The Role of Expectations in the Inflation Process in Turkey: Have the Dynamics Changed Recently? By Umit Koc; Fethi Ogunc; Mustafa Utku Ozmen
  17. Chain linking over December and methodological changes in the HICP: view from a central bank perspective By Dietrich, Andreas; Eiglsperger, Martin; Mehrhoff, Jens; Wieland, Elisabeth
  18. The Impact of the Bank of Japan’s Exchange Traded Fund and Corporate Bond Purchases on Firms’ Capital Structure By Linh, Nguyen Thuy
  19. Conditions for Effective Macroprudential Policy Interventions By Khan, Fahad; Ramayandi, Arief; Schröder, Marcel
  20. The Transmission of Monetary Policy via the Banks' Balance Sheet - Does Bank Size Matter? By Tumisang Loate; Nicola Viegi
  21. The Balance Sheet of the Exchange Stabilization Fund, 1934-2019 By Sheng, Jiemin
  22. The Analytic Theory of a Monetary Shock By Fernando E. Alvarez; Francesco Lippi
  23. Investor monitoring, money-likeness and stability of money market funds By Järvenpää, Maija; Paavola, Aleksi
  24. Reforming the Fiscal Rulebook for the Euro Area – and the Challenge of Old and New Public Debt By Jan Priewe
  25. Prices and inflation in the UK - A new dataset By Richard Davies
  26. The Joint Impact of Bank Capital and Funding Liquidity on the Monetary Policy's Risk-Taking Channel By Bruno de Menna
  27. The Relationship Between Nominal Wage and Price Flexibility: New Evidence By Solórzano Diego; Dixon Huw
  28. Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks' Performance By Bruno de Menna
  29. The Riddle of the Natural Rate of Interest By Weshah Razzak
  30. What goes around comes around: How large are spillbacks from US monetary policy? By Max Breitenlechner; Georgios Georgiadis; Ben Schumann
  31. The Fed, housing and household debt over time By Giacomo Rella
  32. The economic dependency of the Bitcoin security By Pavel Ciaian; d'Artis Kancs; Miroslava Rajcaniova
  33. Dominant Currency Dynamics: Evidence on Dollar-Invoicing from UK Exporters By Meredith Crowley; Lu Han; Minkyu Son

  1. By: Max Fuchs (University of Kassel); Jochen Michaelis (University of Kassel)
    Abstract: In recent years, cryptocurrencies such as Bitcoin have emerged, in upcoming years, corporate currencies such as Libra (Diem) and central bank digital currencies will emerge even in low-inflation developed economies. Using the dual currency search model of Kiyotaki and Wright (1993), we show how the introduction of a supplement to traditional money affects average utility. The room for a welfare improvement depends on differences in returns and costs, but, in particular, on the fraction of cash traders who will be replaced by digital money traders.
    Keywords: digital money, dual currency regime, welfare comparison
    JEL: E41 E42 E51
    Date: 2021
  2. By: Andrew Besuyen; Tom Coupé (University of Canterbury); Kuntal K. Das (University of Canterbury)
    Abstract: This paper examines the effectiveness of explicit and implicit foreign exchange (FX) interventions in New Zealand: one secret spot market intervention and two implicit interventions – a regular Monetary Policy Statement (MPS) and an unexpected oral intervention by the Reserve Bank of New Zealand (RBNZ) governor addressing the New Zealand Dollar (NZD). By applying a synthetic control methodology to a unique dataset of RBNZ interventions, we construct a counterfactual to estimate their effect. The results indicate that the actual intervention and the MPS release were ineffective in moving the NZD. However, the speech depreciated the NZD by 1.12%, although the effect was small and short lived. Our findings suggest that FX interventions, explicit or implicit, are a weak policy tool to affect the exchange rate in New Zealand.
    Keywords: Foreign exchange intervention; Explicit intervention; Implicit intervention; Synthetic control; Effectiveness
    JEL: C31 E58 F31
    Date: 2021–02–01
  3. By: Emmanuel Erem (Department of Economics, Maynooth University, Ireland.)
    Abstract: Exchange rate regimes have evolved a lot of the years, specifically the past century, right from the Gold standard to the Bretton Woods era that led to the creation of the International Monetary Fund (IMF) and Post Bretton Woods periods that have seen the emergence of currency unions and a whole range of hybrid and more sophisticated exchange rate regimes. This evolution has led to the emergence of de jure and de facto exchange rate regimes. This discrepancy can be very misleading and pervasive for monetary policy and stability. In this paper, we combine an empirical econometric approach to develop an algorithm that will classify the de facto regimes that countries are practising by modelling exchange rate bands and the behaviour of a particular currency towards an anchor. The sample is representative of the globe. We believe the algorithm performs well and may be adopted by monetary authorities and international bodies like the International Monetary Fund.
    Keywords: Exchange rate regime, algorithm
    JEL: F33
    Date: 2020–04
  4. By: Silviano Esteve-Pérez (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain)); Salvador Gil-Pareja (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain) de Marcenado, 27, 28015, Madrid (Spain)); Rafael Llorca-Vivero (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain)); Jordi Paniagua (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain))
    Abstract: This paper aims to provide policy-relevant insights into the Euro effect. Relying on partial equilibrium estimates using a new dataset that comprises bilateral international and intranational trade flows of 69 countries during the period 1986-2016, we estimate a general equilibrium gravity model that allows us to quantify the welfare effect of the Euro as well as its impact on consumer prices and producer prices. The results of three counterfactual experiments indicate that the Euro has been successful at increasing welfare for Economic and Monetary Union (EMU) and non-EMU member countries. Our results suggest that a two-speed Euro design would have further increased welfare, albeit its distributional effects within countries, i.e., for consumers and producers. The growth effects of the Euro are mainly driven by trade creation outside the EMU, questioning the cohesiveness of the Euro as an optimum currency area.
    Keywords: Euro, trade, welfare, structural gravity, general equilibrium
    JEL: F13 F14
    Date: 2021–02
  5. By: Francesco D'Acunto (Boston College - Carroll School of Management); Daniel Hoang (Karlsruhe Institute of Technology - Department for Finance and Banking); Maritta Paloviita (Bank of Finland); Michael Weber (University of Chicago - Booth School of Business; NBER)
    Abstract: Communication targeting households and ï¬ rms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, which central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will beneï¬ t households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public’s trust in central banks, which is crucial to guarantee the credibility of their policies.
    Keywords: Behavioral macroeconomics, heterogeneous beliefs, limited cognition, expectations formation, household finance
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2020
  6. By: Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
    Abstract: Monetary policy easing and tightening have asymmetric effects: a policy easing has large effects on prices but small effects on real activity variables. The opposite is found for a policy tightening: large real effects but small effects on prices. Non-linearities are estimated using a new and simple procedure based on linear Structural Vector Autoregressions with exogenous variables (SVARX). We rationalize the results through the lenses of a simple model with downward nominal wage rigidities.
    Keywords: monetary policy shocks, non-linear effects, structural VAR models
    JEL: C32 E32
    Date: 2020–12
  7. By: Philipp Harms (Johannes Gutenberg University); Jakub Knaze (Johannes Gutenberg University)
    Abstract: This paper introduces a new effective exchange rate regime classification. Traditional classifications define the stability or flexibility of a currency with respect to one (“anchor”) currency, thus implicitly neglecting information on exchange rate relationships against other currencies. Our new measure is computed as a trade-weighted average of bilateral exchange rate regimes, thus taking into account both direct and indirect relationships against all other currencies. We argue that our “effective” approach is superior when it comes to assessing the impact of exchange rate regimes on inflation, because fixing an exchange rate vis-`a-vis one currency does not completely anchor domestic prices in a world with multiple trading partners. Using our measure of effective exchange rate regimes in a standard empirical analysis of inflation determinants, we find that – compared to freely floating regimes – not only hard pegs, but also narrow and wide soft pegs are associated with significantly lower inflation rates. This challenges the established view that soft pegs do not matter – or are even detrimental – for price stability. We find that the effect of fixing the exchange rate goes significantly beyond the “disciplining effect” on money growth, with the inflation reduction being at least as strong as the effect of an official inflation target.
    Keywords: Exchange rate regimes · Effective exchange rates · Inflation
    JEL: E31 E52 F41
    Date: 2021–01–29
  8. By: ; Alisdair McKay
    Abstract: The prevailing neo-Wicksellian view holds that the central bank's objective is to track the natural rate of interest (r*), which itself is largely exogenous to monetary policy. We challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade-off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r* in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r* after the Great Recession.
    Keywords: Monetary policy; Durable goods; Interest rates
    JEL: E21 E43 E52
    Date: 2021–02–16
  9. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Weber, Michael (World Bank)
    Abstract: Rising government debt levels around the world are raising the specter that authorities might seek to inflate away the debt. In theoretical settings where fiscal policy "dominates" monetary policy, higher debt without offsetting changes in primary surpluses should lead households to anticipate this higher inflation. Are household inflation expectations sensitive to fiscal considerations in practice? We field a large randomized control trial on U.S. households to address this question by providing randomly chosen subsets of households with information treatments about the fiscal outlook and then observing how they revise their expectations about future inflation as well as taxes and government spending. We find that information about the current debt or deficit levels has little impact on inflation expectations but that news about future debt leads them to anticipate higher inflation, both in the short run and long run. News about rising debt also induces households to anticipate rising spending and a higher rate of interest for government debt.
    Keywords: expectations management, inflation expectations, surveys
    JEL: E31 C83 D84
    Date: 2021–02
  10. By: Adeela Rustam (Nanjing University of Aeronautics and Astronautics, China); Ying Wang (Nanjing University of Aeronautics and Astronautics, China)
    Abstract: This study analyses the effectiveness of monetary policy innovations in Pakistan by price and quantity based monetary anchors. We hypothesize that state bank of Pakistan (SBP) cannot evaluate the unanticipated variations in inflation and output in the same year by applying a recursive limitation on structural vector autoregressive disturbances. The monetary policy is found partial in the short-term and rejects the impartiality condition. Whereas the monetary policy execution on price based tools has a robust effect on inflation and output level by rapid improvement. While transformation by quantity based policy, anchors has a mixed impact on economic activity. The effectiveness of policy innovations inclines more towards price anchors rather than quantity. The restricted SVAR suggest that the choice of policy and non-policy variables are essential for monetary policy operations. SBP policy transformation still has the potential to control economic fluctuations. Hence, we put forward the policy that SBP needs to concentrate on price based instruments for effective implementation and assessment of monetary policy.
    Keywords: Monetary Policy Effectiveness South Asia Economic Activity SVAR Pakistan
    JEL: E51 E52 E62 E44
    Date: 2019–06
  11. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 175 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank’s efficiency. While bank efficiency does not exert an impact on the effectiveness of monetary policy transmission overall, it does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. In addition, the expansion of shadow banking activities has been associated with a positive impact of bank efficiency on monetary policy transmission. These results suggest that bank efficiency may influence the bank lending channel in certain cases.
    JEL: E52 G21
    Date: 2021–02–08
  12. By: Abdullah Kazdal; Muhammed Hasan Yilmaz
    Abstract: This study investigates the differentiation of exchange rate-inflation nexus in emerging markets (EM) in the context of external vulnerabilities for the period 2010-2018. In the empirical setting, EM countries are classified into two subgroups as “more vulnerable” and “less vulnerable” according to vulnerability indicators to identify how exchange rate pass-through (ERPT) dynamics change when the vulnerability is amplified by utilizing the interacted panel vector autoregression (IPVAR) model. Empirical results show that more resilient EM countries are experiencing a lower degree of ERPT during the sample period. Countries facing more prominent dollarization and current account deficit are subject to stronger ERPT, while higher inflation, higher risk premium and higher FX debt levels are associated with increasing ERPT as well. On the other hand, countries with higher reserve adequacy or higher foreign direct investment show lower ERPT compared to lower EM groups.
    Keywords: Exchange rate pass-through, External vulnerabilities, Interacted panel VAR model
    JEL: C23 E31 F31
    Date: 2021
  13. By: Tavlas, George S.; Assistant, JHET
    Abstract: There has long been a presumption that the price-level-stabilization frameworks of Irving Fisher and Chicagoans Henry Simons and Lloyd Mints were essentially equivalent. I show that there were subtle, but important, differences in the rationales underlying the policies of Fisher and the Chicagoans. Fisher’s framework involved substantial discretion in the setting of the policy instruments; for the Chicagoans the objective of a policy rule was to tie the hands of the authorities in order to reduce discretion and, thus, monetary-policy uncertainty. In contrast to Fisher, the Chicagoans provided assessments of the workings of alternative rules, assessed various criteria -- including simplicity and reduction of political pressures -- in the specification of rules, and concluded that rules would provide superior performance compared with discretion. Each of these characteristics provided a direct link to the rules-based framework of Milton Friedman. Like Friedman’s framework, Simons’s preferred rule targeted a policy instrument.
    Date: 2021–02–12
  14. By: Jasova, Martina; Mendicino, Caterina; Supera, Dominik
    Abstract: We show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy. JEL Classification: E44, E52, E58, G21, G32
    Keywords: bank credit, central bank liquidity, firm-level employment and investment, haircut subsidy, policy uncertainty
    Date: 2021–02
  15. By: Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
    Abstract: No matter its source, financial- or policy-related, uncertainty can feed onto itself, inflicting the real economic sector, altering expectations and behaviours, and leading to identification challenges in empirical applications. The strong intertwining between policy and financial realms prevailing in Europe, and in Euro Area in particular, might complicate the problem and create amplification mechanisms difficult to pin down. To reveal the complex transmission of country-specific uncertainty shocks in a multi-country setting, and to properly account for cross-country interdependencies, we employ a global VAR specification for which we adapt an identification approach based on magnitude restrictions. Once we separate policy uncertainty from financial uncertainty shocks, we find evidence of important cross-border uncertainty spill-overs. We also uncover a new amplification mechanism for domestic uncertainty shocks, whose true nature becomes more blurred once they cross the national boundaries and spill over to other countries. With respect to ECB policy reactions, we reveal stronger but less persistent responses to financial uncertainty shocks compared to policy uncertainty shocks. This points to ECB adopting a more (passive or) accommodative stance towards the former, but a more pro-active stance towards the latter shocks, possibly as an attempt to tame policy uncertainty spill-overs and prevent the fragmentation of the Euro Area financial markets.
    Date: 2021–02
  16. By: Umit Koc; Fethi Ogunc; Mustafa Utku Ozmen
    Abstract: In this paper, we analyze the role of inflation expectations in inflation dynamics. The hike in inflation following the exchange rate shock in 2018 provides an interesting period to analyze whether the sensitivity of inflation to its main determinants, including expectations, has changed. To this end, we estimate a time-varying parameter Phillips curve model to focus on the changes in inflation dynamics. We also jointly study the formation of inflation expectations to further investigate how the setting of inflation expectations evolved over the course of the rapid rise and the following gradual decline in inflation observed since the second half of 2018. Our results reveal that inflation expectations play an important role in inflation dynamics; and that the sensitivity of inflation to expectations did not change much recently. Meanwhile, the sensitivity of inflation to the exchange rate has sharply risen and corrected only partially afterwards. However, the most notable change has been witnessed in the weight attached to the past inflation in forming expectations; agents pay higher attention to inflation realizations. Overall, our results reveal that inflation expectations and the exchange rate movements are the leading driving forces of inflation in Turkey, in which the interaction between them further amplifies the impact on inflation.
    Keywords: Inflation, Survey-based inflation expectations, State-space model, Turkey
    JEL: E31 C32 C36
    Date: 2021
  17. By: Dietrich, Andreas; Eiglsperger, Martin; Mehrhoff, Jens; Wieland, Elisabeth
    Abstract: Consumer price inflation, as measured by the year-on-year increase in the Harmonised Index of Consumer Prices (HICP), is used by the European Central Bank (ECB) for assessing its monetary policy. The European Statistical System regularly introduces methodological improvements into this chain-linked price index in the linking month (December). If the outcome of such changes is a new series with a very different profile in December – either due to changed seasonality or one-off (sampling) effects – significant statistical distortions may arise when the new index series is chain-linked to the existing series. This paper explains the mechanism behind statistical distortions due to chain linking and provides some recent examples from European price statistics. Several alternative chain-linking practices, as well as recommendations for data users on how to deal with such statistical breaks in the HICP, are presented. JEL Classification: C43, E31
    Keywords: central bank communication, chain linking, Consumer prices, index aggregation methods, seasonality
    Date: 2021–02
  18. By: Linh, Nguyen Thuy
    Abstract: This study examines the effects of the Bank of Japan’s (BOJ’s) exchange traded fund (ETF) and corporate bond (CB) purchases on the capital structure of Japanese listed firms. The results suggest that following the expansion of ETF purchases, treatment firms actively issued more stocks and became less dependent on bond debt and bank loans than control firms, resulting in a lower level of leverage. In contrast, following the introduction of CB purchases, firms whose bonds were eligible for CB purchases issued more corporate bonds, while reducing long-term bank debt by a smaller extent, thus they have a higher leverage ratio than ineligible firms. Moreover, evidence further suggests the existence of an interaction between these two purchasing programs. These results indicate that the BOJ’s ETF and CB purchases have had a considerable impact, implying that the supply of capital plays an important role in determining firms’ capital structure.
    Keywords: Unconventional monetary policy, Risk asset purchases, Difference in differences, Capital structure, Supply-side effects
    JEL: E52 E58 G32
    Date: 2021–01
  19. By: Khan, Fahad (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Schröder, Marcel (Lebanese American University)
    Abstract: This paper aims at identifying effective macroprudential policy (MPP) interventions and analysing the macroeconomic conditions that promote them. We define effective MPP interventions as those that stabilize its underlying target variable, such as credit growth, house price growth, etc. For our analysis, we construct a new database that documents the use of a large number of MPP instruments for 61 advanced and emerging market economies from 2000 to 2016. The new feature of the database is that it maps every recorded MPP intervention in these economies and over this period to stabilize a specific target variable category for banking, health, domestic loans, the exchange rate, foreign capital movements, and house prices. Using this dataset, we introduce a practical way for defining the macroprudential policy effectiveness. We find that MPP interventions are more likely to be effective when several prudential measures are taken together, but at the same time avoid the diminishing returns of repeated MPP tightening. Monetary tightening seems to override the effectiveness of MPP instruments. The output gap, credit cycle, external debt, current account, and global risk appetite also count for the likelihood of MPP successes. The paper provides a guideline for the effective conduct of MPPs.
    Keywords: effectiveness; financial stability; macroprudential policy; probabilistic analysis
    JEL: E32 E58 G15 G28
    Date: 2020–02–25
  20. By: Tumisang Loate (Department of Economics, University of Pretoria); Nicola Viegi (SARB Chair in Monetary Economics, Department of Economics, University of Pretoria)
    Abstract: We study the credit channel of monetary policy in South Africa between 2002 and 2019 using banks' balance sheets. We show that there is a significant heterogeneity within the banking sector in both the loan and deposit sides of the banks' balance sheets. In response to a contractionary monetary policy shock, big banks adjust their loan portfolio by lending to businesses and reducing lending to households whereas for small banks we find the opposite. The increase in corporate lending amid declining inventories is consistent with the hypothesis of ``hedging and safeguarding the capital adequacy ratio" rather than funding business inventories. This paper highlights the importance of heterogeneity in customers, market power and business models in the banking sector, which characterises the socio-demographics dynamics in South Africa.
    Keywords: Credit channel, banks balance sheets, monetary policy
    JEL: E32 E52 G21
    Date: 2021–01
  21. By: Sheng, Jiemin (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this paper, the author explores the balance sheet of the Exchange Stabilization Fund (ESF) over its first 85 years as a lens though which to analyze the fund. An accompanying spreadsheet workbook provides data from the annual balance sheet of the ESF since the fund’s inception in 1934. These data are available in electronic form for the first time, which will be of interest to those wishing to do quantitative analyses of its role in U.S. monetary policy.
    Keywords: Exchange Stabilization Fund (ESF); balance sheet; assets; liabilities; gold; foreign exchange intervention
    JEL: E52 E59 N12
    Date: 2021–02
  22. By: Fernando E. Alvarez; Francesco Lippi
    Abstract: We propose an analytical method to analyze the propagation of a once-and-for-all shock in a broad class of sticky price models. The method is based on the eigenvalue- eigenfunction representation of the dynamics of the cross-sectional distribution of firms’ desired adjustments. A key novelty is that, under assumptions that are appropriate for low-inflation economies, we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications and discuss extensions.
    JEL: E5 E50
    Date: 2021–02
  23. By: Järvenpää, Maija; Paavola, Aleksi
    Abstract: An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets—like prime money market fund (MMF) shares—are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014–2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs’ regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.
    JEL: G01 G23 G28
    Date: 2021–02–12
  24. By: Jan Priewe
    Abstract: Upholding the EU fiscal rules at the elevated public debt level due to the Corona crisis would trigger a phase of long-standing austerity in the euro area. In this study, major proposals for reforms are reviewed, with a critical focus on the expenditure rule, which is central in many think-tanks’ and academic researchers’ advice. A different reform based on a fiscal analogue to the well-known Taylor-rule for monetary policy is designed here. It is argued that under a low-interest environment growth rates exceed interest rates, a fact not compatible with the present ruleset and with far-reaching consequences. This requires redefining debt sustainability. The proposal chooses as the operational variable for fiscal policy primary balances rather than structural balances. The anchor for fiscal stability, until know the 60% cap on public debt, should be replaced by a cap on the interest payments on public debt at roughly 3% of GDP. This allows higher fiscal space for investment and innovations. The fact that the interest rate burden of all Member States in the euro area stands at the lowest level ever experienced, although the debt level is at an all-time high, clarifies that the focus on the debt ratio is misleading. Change could be possible in the secondary law of the EU without change of the Treaties.
    Keywords: Fiscal rules, public debt, deficit bias, austerity, fiscal policy
    JEL: E43 E62 H62 H63
    Date: 2021
  25. By: Richard Davies
    Abstract: This paper presents a new dataset of 41 million UK consumer prices, providing facts on the frequency, size and timing of price changes between 1988 and 2020. The micro data are the 'price quotes' of individual consumer products that make up the official Consumer Prices Index (CPI) for the UK. Prices are recorded between January 1988 and December 2020 and cover a wide-ranging selection of items including food and drink, homewares, furniture and appliances, motoring supplies and fuels as well as a range of services. The extended time coverage allows a comparison of historic shocks, including the ERM crisis, 2008 financial crash and 2016 EU referendum, with the Coronavirus pandemic. The long-run facts fit closely with the pattern of nominal rigidities seen in other countries. Overall, state-dependent rather than time-dependent pricing models are consistent with UK firm behaviour, and the data show strong support for the notion that prices are 'volatile while anchored' as in the more recent menu cost models. The facts show the extraordinary experience of 2020, which was the most volatile year, in terms of pricing, since at least 1991.
    Keywords: EU referendum, covid-19, consumer prices, inflation
    JEL: E12 E31 E32 E51 E52 E58
    Date: 2021–02
  26. By: Bruno de Menna (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Despite an extensive literature on the risk–taking channel of monetary policy, the joint impact of bank capital and deposits on the latter remains poorly documented. Yet that prospect is essential for monetary policy taking action under the Basel III framework involving concomitant capital and funding liquidity standards. Using data on euro area from 1999 to 2018 and triple interactions between monetary policy, equity and funding liquidity, we shed light on a "crowding–out of deposits" effect prior to the 2008 GFC which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, our findings also highlight a missing "crowding–out of deposits" effect amongst poorly efficient banks in the aftermath of the GFC. As a result, a trade-off arises between financial stability and increased funding liquidity for these financial intermediaries, making a special treatment required for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area.
    Keywords: Credit risk,Monetary policy transmission,Capital buffer,Funding liquidity
    Date: 2021–02–11
  27. By: Solórzano Diego; Dixon Huw
    Abstract: The frequencies at which prices and wages are adjusted, interpreted as price and wage flexibility, are key elements in workhorse models used for policy analysis. Yet, there is little evidence regarding the relationship between these two sources of nominal rigidities. Using two large and highly disaggregated price and wage microdata sets, this paper provides evidence that the industries changing more frequently wages reset prices more often. Once the frequency of wage adjustments is accounted for, the share of labor costs becomes less relevant in explaining the frequency of price changes, calling for a reinterpretation on previous findings that the labor share is a robust determinant of the frequency of price adjustments. The results in this study have implications for New Keynesian models' microfoundations, as their predictions have proven to be sensitive to the nominal rigidities assumptions.
    JEL: E31 J31 C26
    Date: 2020–12
  28. By: Bruno de Menna (IEP Toulouse - Sciences Po Toulouse - Institut d'études politiques de Toulouse, LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long". Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.
    Keywords: Monetary policy,Credit risk,Profitability,Cooperative banks,Relationship lending
    Date: 2021–02–11
  29. By: Weshah Razzak
    Abstract: We provide a general equilibrium model with optimizing agents to compute the natural rate of interest for the G7 countries over the period 2000 to 2017. The model is solved for the equilibrium natural rate of interest, which is determined by a parsimonious equation that is easily computed from raw observable data. The model predicts that the natural rate depends positively on the consumption – leisure growth rates gap, and negatively on the capital – labor growth rates gap. Given our computed natural rate, the short-term nominal interest rates in the G7 have been higher than the natural rate since 2000, except for Germany and the U.S. during the period 2009-2017. In addition, the data do not support the prediction of the Wicksellian theory that prices tend to increase when the short-term nominal rate is lower than the natural rate. Projections of the natural rate over the period 2018 to 2024 are positive in Germany, Italy, Japan, and the U.K. and negative in Canada, France, and the U.S. The model predicts that fiscal expansion is an expensive policy to achieve a 2 percent inflation target when the Zero Lower Bound (ZLB) constraint is binding.
    Keywords: Natural rate of interest, Monetary policy
    JEL: C68 E43 E52
    Date: 2020–08–08
  30. By: Max Breitenlechner; Georgios Georgiadis; Ben Schumann
    Abstract: We quantify spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model for the time period from 1990 to 2019. We find that spillbacks account for up to half of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock. Moreover, spillbacks materialise as stock market wealth effects impinge on US consumption, and as Tobin's q effects impinge on US investment. In particular, a contractionary US monetary policy shock depresses global equity prices, weighing on the value of US households' portfolios; and it depresses earnings of US firms through declines in foreign sales inducing them to cut back investment. Net trade does not contribute to spillbacks because US monetary policy shocks affect exports and imports similarly. Finally, spillbacks materialise through advanced rather than through emerging market economies, consistent with their relative importance in US foreign equity holdings and US firms' foreign demand.
    Keywords: US monetary policy, spillovers, spillbacks, Bayesian proxy structural VAR models
    JEL: F42 E52 C50
    Date: 2021–05
  31. By: Giacomo Rella
    Abstract: Did the transmission mechanism of monetary policy through housing and household debt change over time? I explore this question using a ten-variable time-varying parameter VAR model with stochastic volatility estimated on US data from 1960 to 2018. The model captures the joint dynamics of aggregate economy, housing sector, policy and household debt. Monetary policy shocks are identified with timing restrictions. I find evidence that the transmission mechanism of monetary policy through housing and household debt changed over time. The response of new housing starts and residential investment to monetary policy shocks has become slower and slightly larger. In contrast, the sensitivity of household debt to monetary policy shocks diminished since the late 1960s, except of the early 2000s when it increased. House prices stand as the most important variable for the transmission of monetary policy through housing in most recent decades. In the last part of the paper, I frame the aggregate evidence in the light of the institutional changes that have been affecting the US housing finance system since the 1970s.
    Keywords: time-varying parameter VAR, monetary policy, housing, household debt
    JEL: E44 E52 E58 G51 N1
    Date: 2021–02
  32. By: Pavel Ciaian; d'Artis Kancs; Miroslava Rajcaniova
    Abstract: We study to what extent the Bitcoin blockchain security permanently depends on the underlying distribution of cryptocurrency market outcomes. We use daily blockchain and Bitcoin data for 2014-2019 and employ the ARDL approach. We test three equilibrium hypotheses: (i) sensitivity of the Bitcoin blockchain to mining reward; (ii) security outcomes of the Bitcoin blockchain and the proof-of-work cost; and (iii) the speed of adjustment of the Bitcoin blockchain security to deviations from the equilibrium path. Our results suggest that the Bitcoin price and mining rewards are intrinsically linked to Bitcoin security outcomes. The Bitcoin blockchain security's dependency on mining costs is geographically differenced - it is more significant for the global mining leader China than for other world regions. After input or output price shocks, the Bitcoin blockchain security reverts to its equilibrium security level.
    Date: 2021–02
  33. By: Meredith Crowley; Lu Han; Minkyu Son
    Abstract: How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote theuse of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. We show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.
    Keywords: Exchange rate, invoicing currency, firm-level trade, vehicle currency
    JEL: F14 F31 F41
    Date: 2021–01

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