nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒03‒01
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. An indicator of monetary bias for emerging and dollarized economies The case of Uruguay By Conrado Brum Civelli; Alfredo García-Hiernaux
  2. Parallel Digital Currencies and Sticky Prices By Harald Uhlig; Taojun Xie
  3. Central Bank Independence and challenges during the global pandemic: balancing monetary and fiscal policy objectives By Ojo, Marianne; Roedl, Marianne
  4. Should the ECB adjust its strategy in the face of a lower r*? By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  5. How Powerful Is Unannounced, Sterilized Foreign Exchange Intervention? By Naef, Alain; Weber, Jacob
  6. The Dynamic Effects of the ECB’s Asset Purchases: a Survey-Based Identification By Lhuissier Stéphane; Nguyen Benoît
  7. Inflation Gap Persistence, Indeterminacy, and Monetary Policy By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  8. Central Bank Digital Currencies and payments: A review of domestic and international implications By Lilas Demmou; Quentin Sagot
  9. Revisiting the New Keynesian policy paradoxes under QE By Bonciani, Dario; Oh, Joonseok
  10. Monetary policy and the corporate bond market: How important is the Fed information effect? By Michael Smolyansky; Gustavo A. Suarez
  11. A Short Period Sraffa-Keynes Model for the Evaluation of Monetary Policy By Peter Docherty
  12. Identifying deposits' outflows in real-time By Edoardo Rainone
  13. Dirty float or clean intervention? The Bank of England in the foreign exchange market By Naef, Alain
  14. The Interaction Between Domestic Monetary Policy and Macroprudential Policy in Israel By Jonathan Benchimol; Gamrasni Inon; Kahn Michael; Ribon Sigal; Saadon Yossi; Ben-ZeâEv Noam; Segal Asaf; Shizgal Yitzchak
  15. "Low for Long" and Risk-Taking By Tobias Adrian
  16. Central Bank Digital Currency: When Price and Bank Stability Collide By Linda Schilling; Jesús Fernández-Villaverde; Harald Uhlig
  17. A Prudential trade-off? Leakages and Interactions with Monetary Policy By Meunier Baptiste; Pedrono Justine
  18. The Sovereign-Bank Nexus: the Role of Debt and Monetary Policy By Hernán D. Seoane
  19. The Macroeconomics of Sticky Prices with Generalized Hazard Functions By Fernando E. Alvarez; Aleksei Oskolkov; Francesco Lippi
  20. Monetary Policy, Firm Heterogeneity, and Product Variety By Masashige Hamano; Francesco Zanetti
  21. Does Policy Communication During COVID Work? By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  22. The Twin Endogeneities Hypothesis: A Theory of Central Bank Evolution By Daniyal Khan
  23. Imported or Home Grown? The 1992-3 EMS Crisis By Eichengreen, Barry; Naef, Alain
  24. Central banking beyond inflation By Braun, Benjamin
  25. World interest rates and macroeconomic adjustments in developing commodity producing countries By Vincent Bodart; François Courtoy; Erica Perego
  26. On the interaction between monetary and macroprudential policies By Martin, Alberto; Mendicino, Caterina; Van der Ghote, Alejandro
  27. Why Does the Fed Move Markets so Much? A Model of Monetary Policy and Time-Varying Risk Aversion By Carolin E. Pflueger; Gianluca Rinaldi
  28. Official statistics release and inflation expectations By Serafín Frache; Rodrigo Lluberas
  29. On the economic desirability of the West African monetary union: would one currency fit all? By Cécile Couharde; Carl Grekou; Valérie Mignon
  30. The Interdependence of Fiscal and Monetary Policy in Uruguay By Elizabeth Bucacos
  31. Fifty Shades of QE: Conflicts of Interest in Economic Research By Brian Fabo; Martina Jancokova; Elisabeth Kempf; Lubos Pastor
  32. Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes By Massimo Guidolin; Valentina Massagli; Manuela Pedio
  33. Whatever it takes to save the planet? Central banks and unconventional green policy By Alessandro Ferrari; Valerio Nispi Landi
  34. The Hockey Stick Phillips Curve and the Zero Lower Bound By Gregor Boehl; Philipp Lieberknecht
  35. Monetary Policy and Racial Inequality By Alina K. Bartscher; Moritz Kuhn; Moritz Schularick; Paul Wachtel
  36. Impact of Green Central Bank Collateral Policy: Evidence from the People’s Bank of China By Macaire, Camille; Naef, Alain
  37. Data-driven analysis of central bank digital currency (CBDC) projects drivers By Toshiko Matsui; Daniel Perez
  38. Herbert Spencer's Case for Free Banking By Bragues, George; Assistant, JHET
  39. The Analytic Theory of a Monetary Shock By Fernando Alvarez; Francesco Lippi
  40. Cash and crises: No surprises by the virus By Rösl, Gerhard; Seitz, Franz
  41. Do Expert Experience and Characteristics Affect Inflation Forecasts? By Jonathan Benchimol; Makram El-Shagi; Yossi Saadon
  42. Can debt monetisation be helpful for Chinaís post-Covid recovery? Some empirical evidence By Cao, Ziyi; Ou, Zhirong
  43. Inflation expectations and the pass-through of oil prices By Knut Are Aastveit; Hilde C. Bjørnland; Jamie L. Cross

  1. By: Conrado Brum Civelli (Banco Central del Uruguay; Universidad Complutense de Madrid; Universidad de la República); Alfredo García-Hiernaux (Universidad Complutense de Madrid)
    Abstract: The instability of the relationships between interest rates, amount of money, and exchange rate, and the transmission problems between different interest rates hinder the measurement of monetary policy through a single variable. This difficulty is particularly relevant in emerging and dollarized economies. This paper proposes a multivariate indicator of monetary bias for these economies in which the monetary and financial variables are considered according to the impact they have on inflation in each period. We analyze the case of Uruguay and use a Factor Augmented Vector Autoregressive Moving Average model with exogenous variables (FAVARMAX) to estimate these effects. Using the evolution of the indicator proposed, called the Monetary Conditions Index (MCI), we characterize the policy adopted by the Central Bank of Uruguay between 2010-2019, a period of inflation targeting.
    Keywords: monetary policy bias; multivariate Indicator; Inflation; FAVARMAX
    JEL: E58 E52 E31 C32
    Date: 2020
  2. By: Harald Uhlig (University of Chicago - Department of Economics; CEPR; NBER); Taojun Xie (National University of Singapore - Lee Kuan Yew School of Public Policy, Asia Competitiveness Institute)
    Abstract: The recent rise of digital currencies opens the door to their use in parallel alongside official currencies (“dollar†) for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.
    Keywords: Private money, cryptocurrency, digital currency, currency choice, monetary policy
    JEL: E52 E30
    Date: 2020
  3. By: Ojo, Marianne; Roedl, Marianne
    Abstract: As well as highlighting why unconventional and conventional accommodative monetary policies have been propagated as being crucial to achieving dual mandates and goals of leading central bank economies, drawing from lessons and experiences whereby accommodative monetary policies have been instigated as a means of addressing prolonged periods of low inflation, this paper highlights how such experiences can also be used to bolster the proposition that "since monetary policy space is limited, and since many of the challenges faced are beyond mandates of central banks, these should be addressed through structural and fiscal policies. " The concept and notion of central bank independence has been interpreted and applied differently across several jurisdictions over the decades. As the financial environment over the years, with the emergence of more complex trading and financial instruments, the traditional tools of central banking - as well as monetary policy tools and channels of transmission have adapted to cope with corresponding changes, challenges and demands of the financial environment. Why are interest rates at such historically low levels? These constitute some of the questions, amongst several research objectives which will be highlighted under the introductory section, that this paper aims to address.
    Keywords: counter-cyclical instruments; Effective Lower Bound; interest rate; accommodative monetary policies; asset purchase program; quantitative easing; uncertainty; government bonds; negative interest rates; inflation
    JEL: E3 E5 E52 E58 E6 E62 K2
    Date: 2021–02
  4. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We address this question using an estimated New Keynesian DSGE model of the Euro Area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails signiï¬ cant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight tenth the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the ECB from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as committing to make-up for recent, below-target inflation realizations.
    Keywords: inflation target, effective lower bound, monetary policy strategy, euro-area.
    JEL: E31 E52 E58
    Date: 2021–01
  5. By: Naef, Alain; Weber, Jacob
    Abstract: Though most central banks actively intervene on the foreign exchange market, the literature offers mixed evidence on their effectiveness: particularly for unannounced interventions. We use new, declassified data from the archives of the Bank of England and the institutional features of the Bretton Woods era to estimate the effects of intervention on the exchange rate. We find that a purchase of pounds equivalent to 1% of the money supply causes a statistically significant, 4-5 basis point appreciation in the pound.
    Date: 2021–02–23
  6. By: Lhuissier Stéphane; Nguyen Benoît
    Abstract: While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending – therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance – interactions apart – implies a higher growth of cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.ion-JEL: O31, L11, L51, J8, L25
    Keywords: Monetary Policy, Asset Purchase Programme, Proxy-SVAR, Eurosystem, ECB, QE
    JEL: E31 E32 E44 E52
    Date: 2021
  7. By: Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
    Abstract: Empirical studies have documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous research into the source of the decline has offered competing views while sidestepping the possibility of equilibrium indeterminacy. This paper examines the source by estimating a medium-scale DSGE model using a Bayesian method that allows for indeterminacy. The estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that induces persistent dynamics of the economy.
    Keywords: Inflation gap persistence; Predictability; Equilibrium indeterminacy; Monetary policy; Non-CES aggregator
    JEL: C62 E31 E52
    Date: 2021–02–22
  8. By: Lilas Demmou; Quentin Sagot
    Abstract: Recent technological developments linked to secure messaging and traceability present an opportunity to address certain challenges in international and domestic payment systems. From an international perspective, foreign exchange markets remain costly and relatively less efficient than domestic payment systems. From a domestic perspective, the decline in the relative importance of cash in most economies reflects changes in consumers’ preferences, which questions the future of money and payment infrastructure. Against that background, private initiatives falling outside of current regulation, such as stable coins and other virtual assets, are associated with several risks and opportunities and have fueled the debate on the opportunities for central banks to issue new form of digital public currency. This note reviews those different propositions and examine their implication for the international and domestic payment systems.
    Keywords: CBDC, central banking, digital currency, international markets, payment systems
    JEL: E42 F33 G28
    Date: 2021–02–05
  9. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: Standard New Keynesian models deliver puzzling results at the effective lower bound of short-term interest rates: greater price flexibility amplifies the fall in output in response to adverse demand shocks; labour tax cuts are contractionary; the multipliers of wasteful government spending are large. These outcomes stem from a failure to characterise monetary policy correctly. Both analytically and numerically, we show that allowing the central bank to respond to inflation with quantitative easing (QE) can resolve all these paradoxes. In quantitative terms, mild adjustments to the central bank’s balance sheet are sufficient to obtain results more in line with conventional wisdom.
    Keywords: Policy paradoxes; unconventional monetary policy; quantitative easing; liquidity trap; effective lower bound
    JEL: E52 E58 E62 E63
    Date: 2021–02–22
  10. By: Michael Smolyansky; Gustavo A. Suarez
    Abstract: Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.
    Keywords: Monetary policy; Corporate bonds; Reaching for yield; Federal Reserve information
    JEL: E40 E52 G12 G14
    Date: 2021–02–16
  11. By: Peter Docherty (University of Technology Sydney)
    Abstract: This paper develops a short period, one sector, Sraffa-Keynes model that can be used for the evaluation of various recommendations outlined in the Post Keynesian monetary policy literature. The model is characterised by the principle of effective demand, Sraffa or target-return pricing (which integrates the determination of key distributive variables and allows for short run cyclical variation in prices), conflict inflation, endogenous money, and a basic approach to monetary policy in the Smithin–Wray tradition of fixing the policy rate to achieve low or specified rates of unemployment. The paper argues that nominal interest rates are the appropriate target for monetary policy rather than real rates given the need to determine appropriate rates of return on capital and the good approximation that nominal rates are for the particular specification that real rates take in the model. A number of key results arise from model simulations: after experiencing two standard macroeconomic shocks, the model returns to a long period equilibrium characterised by the achievement of the target rate of return, desired capacity utilisation, and Sraffian prices of production. Monetary policy is also shown to operate through the typical Post Keynesian transmission mechanism of changes to income distribution. Flexible prices (where firms modify prices to cover the additional costs of running the capital stock at other than full capacity) are lastly shown to have similar effects on activity to monetary policy. Suggestions are made for further work which applies the model to the evaluation of counter-cyclical monetary policy, a comparison of fiscal and monetary policy responses to economic shocks, and which extends the model to a multi-sector context.
    Keywords: monetary policy; demand shock; cost shock; income distribution
    JEL: E11 E12 E52
    Date: 2021–02–17
  12. By: Edoardo Rainone (Bank of Italy)
    Abstract: We propose a method based on control charts to identify in real-time sudden deposits' outflows through payment systems. The performance of the methodology is assessed with both Monte Carlo simulations and real transaction-level TARGET2 data for a large sample of Italian banks. We identify a set of idiosyncratic bank stress episodes and show that deposits are generally shifted to other banks, mainly large and domestic, generating a size premium; only a limited amount migrates to foreign banks. Under the fixed-rate, full allotment regime, the liquidity drain is mostly offset through open market operations.
    Keywords: depositors' trust, interbank networks, payment systems, money, control charts, digital economy, financial stability
    JEL: E50 E40 G01 G10 G21
    Date: 2021–02
  13. By: Naef, Alain
    Abstract: The effectiveness of central bank intervention is debated and despite literature showing mixed results, central banks regularly intervene in the foreign exchange market, both in developing and developed economies. Does foreign exchange intervention work? Using over 60,000 new daily observations on intervention and exchange rates, this paper is the first study of the Bank of England’s foreign exchange intervention between 1952 and 1972. The main finding is that the Bank of England was unsuccessful in managing a credible exchange rate over that period. Running an event study, I demonstrate that betting systematically against the Bank of England would have been a profitable trading strategy. Pressures increased in the 1960s and the Bank eventually manipulated the publication of its reserve figures to avoid a run on sterling.
    Date: 2020–07–28
  14. By: Jonathan Benchimol (Bank of Israel); Gamrasni Inon (Bank of Israel); Kahn Michael (Bank of Israel); Ribon Sigal (Bank of Israel); Saadon Yossi (Bank of Israel); Ben-ZeâEv Noam (Bank of Israel); Segal Asaf (Bank of Israel); Shizgal Yitzchak (Bank of Israel)
    Abstract: We examine the impact of domestic macroprudential (MaP) policy measures targeted at the banking sector, alongside the impact of domestic monetary policy on housing, consumer, and business bank credit dynamics, using individual bank panel data for the period 2004â19. We find that domestic MaP measures targeting housing sector credit reduced the growth rate of housing credit and contributed to business credit growth. Other general MaP measures reduced growth of credit to the business sector. Monetary policy was generally found to be effective, with a significant negative impact on bank credit before the Global Financial Crisis (GFC). The interaction between monetary policy and MaP highlights the role of monetary policy after 2008, and the effect of accommodative monetary policy on consumer and business credit fostered by housing MaP measures. We found that the impact of foreign monetary policy on credit growth is negative, as is the impact of domestic monetary policy, suggesting its capacity to function as a leading indicator for domestic monetary policy.
    Keywords: financial stability, policy evaluation, banking sector, credit markets, regulation, global financial crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2021–02
  15. By: Tobias Adrian
    Abstract: The COVID-19 pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies—including “low for long” interest rates and asset purchases—increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increase medium- and long-run macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice.
    Keywords: Monetary policy;Financial risk;Financial stability;Monetary Policy;Risk-Taking;Financial Stability
    Date: 2020–11–24
  16. By: Linda Schilling (École Polytechnique - CREST; CEPR); Jesús Fernández-Villaverde (University of Pennsylvania - Department of Economics; CEPR; NBER); Harald Uhlig (University of Chicago - Department of Economics; CEPR; NBER)
    Abstract: A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity trans- formation while providing liquidity to private customers who suffer “spending†shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.
    Keywords: Central bank digital currency, monetary policy, bank runs, financial intermediation, inflation targeting, CBDC trilemma
    JEL: E58 G21
    Date: 2020
  17. By: Meunier Baptiste; Pedrono Justine
    Abstract: While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending – therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance – interactions apart – implies a higher growth of cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.ion-JEL: O31, L11, L51, J8, L25
    Keywords: Monetary Policy, Prudential Policy, Policy Interactions, Spillovers, Prudential Leakages, Internation Banking.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2021
  18. By: Hernán D. Seoane
    Abstract: This policy report analyzes one aspect of the sovereign-bank nexus: the feedback effects between banks and sovereigns derived from the holdings of sovereign debt in domestic banks. We study how this relationship evolved during the European debt crisis and how it responded to the implementation of ECB monetary policy based on Open Market Operations and Marginal Lending Facilities. We find evidence of carry trade behavior by banks and we have some mild evidence that this channel may have been boosted by the liquidity provision policies.
    Date: 2020
  19. By: Fernando E. Alvarez (University of Chicago - Department of Economics; NBER); Aleksei Oskolkov (University of Chicago - Department of Economics); Francesco Lippi (Luiss University; EIEF)
    Abstract: We give a thorough analytic characterization of a large class of sticky-price models where the firm’s price setting behavior is described by a generalized hazard function. Such a function provides a tractable description of the firm’s price setting behavior and allows for a vast variety of empirical hazards to be fitted. This setup is microfounded by random menu costs as in Caballero and Engel (1993) or, alternatively, by information frictions as in Woodford (2009). We establish two main results. First, we show how to identify all the primitives of the model, including the distribution of the fundamental adjustment costs and the implied generalized hazard function, using the distribution of price changes or the distribution of spell durations. Second, we derive a sufficient statistic for the aggregate effect of a monetary shock: given an arbitrary generalized hazard function, the cumulative impulse response to a once-and-for-all monetary shock is given by the ratio of the kurtosis of the steady-state distribution of price changes over the frequency of price adjustment times six. We prove that Calvo’s model yields the upper bound and Golosov and Lucas’ model the lower bound on this measure within the class of random menu cost models.
    JEL: C41 C61 E31
    Date: 2020
  20. 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: 2020–06
  21. By: Olivier Coibion (University of Texas at Austin - Department of Economics; NBER); Yuriy Gorodnichenko (University of California, Berkeley - Department of Economics; NBER); Michael Weber (University of Chicago - Booth School of Business; NBER)
    Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households’ expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
    Keywords: Subjective expectations, fiscal policy, monetary policy, COVID-19, surveys
    JEL: E31 C83 D84 J26
    Date: 2020
  22. By: Daniyal Khan (Department of Economics, New School for Social Research)
    Abstract: The paper outlines a theory according to which central banking evolves as the result of an interaction between endogenous money and endogenous institutions. This theory is called the twin endogeneities hypothesis and forms the basis for two models which are developed and used to explain two stylized facts of central bank evolution. These models are examples of operationalization of the hypothesis. The first model, combining endogenous money and hysteresis, explains the first stylized fact, namely that there are two different origin tendencies in the history of central banking. The second model is a heuristic model which combines the swings of the Polanyi pendulum (or the Polanyian double movement) with swings in long run central bank independence to explain the latter. These examples serve to demonstrate how the twin endogeneities hypothesis, a theory in the tradition of institutionalist Post Keynesianism, can be used to develop models which help us unpack and address the evolution of central banking from a theoretical point of view.
    Keywords: Endogeneity, evolution, money, institutions, central banking
    JEL: B52 E02 E5
    Date: 2021–02
  23. By: Eichengreen, Barry; Naef, Alain
    Abstract: Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System. Using this index, we pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.
    Date: 2021–02–23
  24. By: Braun, Benjamin
    Abstract: The world around central banks has shifted. Europe is confronting an unprecedented combination of environmental, economic, and social challenges. Reducing carbon emissions to zero fast enough to avoid catastrophic global warming is difficult; doing so while also reducing economic inequality so as to avert social disintegration and democratic backsliding is very difficult. Addressing this twin challenge will require the state – and the European Union – to deploy all economic policy instruments already at its disposal, and to develop new ones and coordinate their use in new ways. The paper proceeds in three steps. The first section discusses three distinct challenges – legal, political, and ideational – for the debate on the future of central banking. The remainder of the paper will tackle the two main ideational challenges, namely, institutional amnesia (forgetting past realities of central banking) and strategic ignorance (ignoring present realities of central banking). To overcome institutional amnesia, the second section briefly reviews the history of central banking, showing that the price stability is only one of several goals that central banking has, historically, been associated with. To overcome strategic ignorance, the third section reviews three mandate-remote, or ‘extracurricular’ areas of recent ECB activity.
    Date: 2021–02–17
  25. By: Vincent Bodart (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); François Courtoy (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Erica Perego (CEPII, Paris, France)
    Abstract: With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, through the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle.
    Keywords: Storable commodity, International financial shock, Developing economies
    JEL: E32 F41 G15 Q02
    Date: 2021–01–23
  26. By: Martin, Alberto; Mendicino, Caterina; Van der Ghote, Alejandro
    Abstract: The Global Financial Crisis fostered the design and adoption of macroprudential policies throughout the world. This raises important questions for monetary policy. What, if any, is the relationship between monetary and macroprudential policies? In particular, how does the effectiveness of macroprudential policies (or lack thereof) influence the conduct of monetary policy? This discussion paper builds on the insights of recent theoretical and empirical research to address these questions. JEL Classification: E3, E44, G01, G21
    Keywords: capital requirements, financial frictions, systemic risk
    Date: 2021–02
  27. By: Carolin E. Pflueger (University of Chicago - Harris School of Public Policy; National Bureau of Economic Research (NBER)); Gianluca Rinaldi (Harvard University, Department of Economics)
    Abstract: We build a new model integrating a work-horse New Keynesian model with investor risk aversion that moves with the business cycle. We show that the same habit preferences that explain the equity volatility puzzle in quarterly data also naturally explain the large high-frequency stock response to Federal Funds rate surprises. In the model, a surprise increase in the short-term interest rate lowers output and consumption relative to habit, thereby raising risk aversion and amplifying the fall in stocks. The model explains the positive correlation between changes in breakeven inflation and stock returns around monetary policy announcements with long-term inflation news.
    Date: 2020
  28. By: Serafín Frache (Universidad de Montevideo); Rodrigo Lluberas (Banco Central del Uruguay)
    Abstract: The empirical evidence on the social value of public information is scarce. In this paper, we provide evidence on how firms' inflation expectations react to the publication of public information, i.e. the monthly Consumer Price Index (CPI) in a country with a history of high and volatile inflation. We show that firms that answer the survey after the release of public information are more likely to revise their current year inflation expectations, have lower forecast errors, and lower disagreement about future inflation than firms that answer the survey before the publication of the official CPI monthly statistics. In that sense albeit the existing evidence for low-inflation countries suggests that agents do not react to monetary policy announcements or the publication of public information, we show that might not be the case in medium or high-inflation countries.
    Keywords: national accounts, agricultural sector, methodology, regions, employment, structure
    JEL: D22 D84 E31
    Date: 2020
  29. By: Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: In this paper, we investigate from a policy coordination viewpoint the desirability of the West African monetary union project, ECO. Our approach is built around the inclusion of national objectives in the regional integration perspective. Thanks to cluster analysis, we identify two groups of countries with relatively homogenous sustainable exchange rate paths in West Africa. We also find that no single currency peg nor a freely floating exchange rate regime would be preferable for any of the countries or groups of economies. Overall, our findings argue in favor of two ECOs —at least in a first step, i.e., one for each of the two identified zones. Each ECO would serve as a virtual anchor —with some flexibility— for the considered group, and would be determined by a basket of currencies mainly composed of euro and US dollar.
    Keywords: Monetary integration;West Africa;CFA franc zone;ECOWAS
    JEL: F33 F45 C38 O55
    Date: 2021–02
  30. By: Elizabeth Bucacos (Banco Central del Uruguay)
    Abstract: The global COVID-19 pandemic has called for heightened levels of policy intervention stressing governmnt accounts and amplifying their impact on the macroeconomy through an already nonexistent fiscal space. Policymakers' choices during this disruption may shape the economy for decades to come. The main objective of this investigation is to evaluate the degree of fiscal dominance in Uruguay in 1999-2019 in order to improve the understanding of economic policy not only for theoretical reasons but for applied needs related to good practices and accountability. Two strategies are followed: one, to quantify the fraction of fiscal expenditures that is financed by monetary liabilities and, the other one, to analyze the effects of fiscal deficit on the price level and inflation because inflationary financing may prevent the central bank from reaching its inflation target. Both situations may subordinate the monetary policy to the fiscal policy signaling fiscal dominance. In addition, through the analysis performed to assess the degree of fiscal dominance, it was possible to detect the main determining factors of the Uruguayan price level (inflation) formation during the last two decades. So far, preliminary results suggest that inflation is not exclusively a monetary phenomenon and point to some inflationary financing with a mild degree of fiscal dominance.
    Keywords: monetary policy, joint analysis of fiscal and monetary policy, Uruguay
    JEL: E52 E63
    Date: 2021
  31. By: Brian Fabo (National Bank of Slovakia); Martina Jancokova (European Central Bank); Elisabeth Kempf (University of Chicago - Booth School of Business; CEPR); Lubos Pastor (National Bank of Slovakia; University of Chicago - Booth School of Business; NBER; CEPR)
    Abstract: Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
    Keywords: Conflict of interest, central bank, quantitative easing, qe, career concerns
    JEL: A11 E52 E58 G28
    Date: 2020
  32. By: Massimo Guidolin; Valentina Massagli; Manuela Pedio
    Abstract: We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk. Keywords: unconventional monetary policy; transmission channels; heteroskedasticity; vector autoregressions; identification; corporate bond yields. JEL code: G12, C32, G14
    Date: 2021
  33. By: Alessandro Ferrari (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank's balance sheet toward green bonds, i.e. bonds issued by firms in non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model, in which detrimental emissions increase the stock of pollution. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. While a temporary Green QE is an effective tool in mitigating detrimental emissions, it has limited effects in reducing the stock of pollution, if pollutants, such as CO2, stay in the atmosphere for a long time. The welfare gains of Green QE are positive but small. Welfare gains are larger if the flow of emissions negatively affects the utility of households.
    Keywords: central bank, monetary policy, quantitative easing, climate change
    JEL: E52 E58 Q54
    Date: 2021–02
  34. By: Gregor Boehl; Philipp Lieberknecht
    Abstract: The recently observed disconnect between in ation and economic activity can be ex- plained by the interplay between the zero lower bound (ZLB) and the costs of external nancing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate rms' marginal costs. When nominal rates are constrained, larger spreads can more than o set the e ect of lower factor costs and induce only moderate in ation responses. The Phillips curve is hence at at the ZLB, but features a posi- tive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce de ationary e ects.
    Keywords: Phillips Curve, Financial Frictions, Zero Lower Bound, Disin ation, Forward Guidance
    JEL: C62 C63 E31 E32 E44 E52 E58 E63
    Date: 2021–02
  35. By: Alina K. Bartscher; Moritz Kuhn; Moritz Schularick; Paul Wachtel
    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: 2021–02–04
  36. By: Macaire, Camille; Naef, Alain
    Abstract: In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. We measure the impact of the policy on the yield spread between green and non-green bonds, or greenium. Using a difference-in-differences approach to compare pairs of green and non-green bonds issued by the same institutions, we show that the policy increased the greenium by 46 basis points. This experience can be useful to other central banks considering similar polices.
    Date: 2021–02–19
  37. By: Toshiko Matsui; Daniel Perez
    Abstract: In this paper, we use a variety of machine learning methods to quantify the extent to which economic and technological factors are predictive of the progression of Central Bank Digital Currencies (CBDC) within a country, using as our measure of this progression the CBDC project index (CBDCPI). We find that a financial development index is the most important feature for our model, followed by the GDP per capita and an index of the voice and accountability of the country's population. Our results are consistent with previous qualitative research which finds that countries with a high degree of financial development or digital infrastructure have more developed CBDC projects. Further, we obtain robust results when predicting the CBDCPI at different points in time.
    Date: 2021–02
  38. By: Bragues, George; Assistant, JHET
    Abstract: Though now almost entirely forgotten, Herbert Spencer was among the most widely read thinkers during the late 19th century. As part of his system of synthetic philosophy, Herbert Spencer addressed the topics of money and banking. This philosophic system articulates a concept of justice based on the principle of equal freedom. Invoking this principle, Spencer rejected a government superintended regime of money and banking as unjust. Instead, he morally favored a system of free banking. Spencer also defended this system on economic grounds. His argument is that banks could be self-regulating in their management of the money supply, on the condition that the government limit its activities in the financial sphere to the enforcement of contracts. While Spencer’s case is not beyond questioning on philosophic and political grounds, he offers a distinctive and forceful analysis.
    Date: 2021–02–12
  39. By: Fernando Alvarez (University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)); Francesco Lippi (University of Sassari)
    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
  40. By: Rösl, Gerhard; Seitz, Franz
    Abstract: Despite the increasing use of cashless payment instruments, the notion that cash loses importance over time can be unambiguously refuted. In contrast, the authors show that cash demand increased steeply over the past 30 years. This is not only true on a global scale, but also for the most important currencies in advanced countries (USD, EUR, CHF, GBP and JPY). In this paper, they focus especially on the role of different crises (technological crises, financial market crises, natural disasters) and analyse the demand for small and large banknote denominations since the 1990s in an international perspective. It is evident that cash demand always increases in times of crises, independent of the nature of the crisis itself. However, largely unaffected from crises we observe a trend increase in global cash aligned with a shift from transaction balances towards more hoarding, especially in the form of large denomination banknotes.
    Keywords: Cash,banknotes,crises,Corona
    JEL: E41 E51 E58
    Date: 2021
  41. By: Jonathan Benchimol (Bank of Israel); Makram El-Shagi (Henan University); Yossi Saadon (Bank of Israel)
    Abstract: Each person's characteristics may influence that person's behaviors and their outcomes. We build and use a new database to estimate experts' performance and boldness based on their experience and characteristics. We classify experts providing inflation forecasts based on their education, experience, gender, and environment. We provide alternative interpretations of factors affecting experts' inflation forecasting performance, boldness, and pessimism by linking behavioral economics, the economics of education, and forecasting literature. An expert with previous experience at a central bank appears to have a lower propensity for predicting deflation.
    Keywords: expert forecast, behavioral economics, survival analysis, panel estimation, global financial crisis
    JEL: C53 E37 E70
    Date: 2020–10
  42. By: Cao, Ziyi; Ou, Zhirong (Cardiff Business School)
    Abstract: A measure of the degree of debt monetisation is constructed for its impact on the business cycle to be studied in a standard VAR model. Debt monetisation is hardly expansionary, as it raises public demand that crowds out almost as much demand from the private sector. However, it generates ináation, presumably because of ináationary expectations. Nevertheless the impact of debt monetisation on the business cycle dynamics is trivial, due to the low e¢ ciency of the monetary transmission mechanism. Unless policy proposals are for extraordinarily aggressive moves, or they are accompanied by monetary reforms which facilitate monetary transmission, the recent debate on debt monetisation, we argue, possesses more theoretical meaning than practical meaning for Chinaís post-Covid recovery.
    Keywords: Debt monetisation; business cycle; VAR; China
    JEL: E31 E32 E63 H63
    Date: 2021–02
  43. By: Knut Are Aastveit; Hilde C. Bjørnland; Jamie L. Cross
    Abstract: Do inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global market for crude oil? We answer this question with a novel structural vector autoregressive model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through the real price of oil to both expected and realized inflation. Our main insight is that US households form their expectations of inflation differently when faced with long sustained increases in the price of oil, such as the early millennium oil price surge of 2003 to 2008, as compared to short and sharp price fluctuations that characterized much of the twentieth century. We also find that oil demand and supply shocks can explain a large proportion of expected and realized inflation dynamics during multiple periods of economic significance, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.
    Keywords: inflation expectations, inflation pass-through, oil prices
    JEL: E31 D84 Q41 Q43
    Date: 2020–06–30

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