nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒03‒08
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Should the ECB Adjust its Strategy in the Face of a Lower r*? By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  2. The ECB monetary policy response to the Covid-19 crisis By Pablo Aguilar; Óscar Arce; Samuel Hurtado; Jaime Martínez-Martín; Galo Nuño; Carlos Thomas
  3. Monetary policy shocks and inflation inequality By Christoph Lauper; Giacomo Mangiante
  4. How to issue a central bank digital currency By David Chaum; Christian Grothoff; Thomas Moser
  5. The New Monetary Policy Revolution: Advice and Dissent By Philip Turner
  6. The role of information and experience for households' inflation expectations By Christian Conrad; Zeno Enders; Alexander Glas
  7. Central bank currency swap lines By Enrique Esteban García-Escudero; Elisa J. Sánchez Pérez
  8. Learning, expectations and monetary policy By Pablo Garcia
  9. Is money demand really unstable? Evidence from divisia monetary aggregates By William A. Barnett; Taniya Ghosh; Masudul Hasan Adil
  10. The role of labor market structure and shocks for monetary policy in Kazakhstan By Alisher Tolepbergen
  11. Exchange Rate Predictability with Nine Alternative Models for BRICS Countries By Afees A. Salisu; Rangan Gupta; Won Joong Kim
  12. How persistent is inflation in Kazakhstan? A fractionally integrated approach By Alisher Tolepbergen
  13. A Fundamental Connection: Exchange Rates and Macroeconomic Expectations By Vania Stavrakeva; Jenny Tang
  14. Is inflation targeting a strategy past its sell-by date? By Alberto Locarno; Alessandra Locarno
  15. Cash and COVID-19: The Effects of Lifting Containment Measures on Cash Demand and Use By Heng Chen; Walter Engert; Kim Huynh; Gradon Nicholls; Julia Zhu
  16. Euro area house price fluctuations and unconventional monetary policy surprises By Hülsewig, Oliver; Rottmann, Horst
  17. Fiscal Policy and Households’ Inflation Expectations: Evidence from a Randomized Control Trial By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  18. The hockey stick Phillips curve and the zero lower bound By Böhl, Gregor; Lieberknecht, Philipp
  19. An introduction to the current debate on central bank digital currency (CBDC) By Juan Ayuso Huertas; Carlos Antonio Conesa Lareo
  20. Talking in a language that everyone can understand? Transparency of speeches by the ECB Executive Board By Glas, Alexander; Müller, Lena
  21. What kind of region reaps the benefits of a currency union? By Augusto Cerqua; Roberta Di Stefano; Guido Pellegrini
  22. CRIX an Index for cryptocurrencies By Trimborn, Simon; Härdle, Wolfgang Karl
  23. UK Inflation Forecasts since the Thirteenth Century By James M. Nason; Gregor W. Smith
  24. Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization By Ayushi Bajaj; Nikhil Damodaran
  25. A structural investigation of quantitative easing By Böhl, Gregor; Goy, Gavin; Strobel, Felix
  26. On global determinacy of New Keynesian models By Kim, Minseong
  27. The common and speci fic components of inflation expectation across European countries By Chen, Shi; Härdle, Wolfgang Karl; Wang, Weining
  28. Clouded in Uncertainty: Pursuing Financial Stability with Monetary Policy By Sylvain Leduc
  29. Bitcoin: An Inflation Hedge but Not a Safe Haven By Sangyup Choi; Junhyeok Shin
  30. Unconventional monetary policy and corporate bond issuance By De Santis, Roberto A.; Zaghini, Andrea
  31. Selective Attention in Exchange Rate Forecasting By Svatopluk Kapounek; Evžen Kocenda; Zuzana Kucerová
  32. "Has Japan Been Following Modern Money Theory Without Recognizing It? No! And Yes." By Yeva Nersisyan; L. Randall Wray

  1. 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 significant 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: 2021–02
  2. By: Pablo Aguilar (Banco de España); Óscar Arce (Banco de España); Samuel Hurtado (Banco de España); Jaime Martínez-Martín (Banco de España); Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: The ECB has responded forcefully to the challenges posed by the COVID-19 crisis for the euro area economy. This paper reviews the different monetary policy measures adopted by the ECB since the COVID-19 outbreak and explains their rationale. It also looks at several analyses of the impact of some of the main measures on both the Spanish economy and that of the euro area as a whole.
    Keywords: European Central Bank, asset purchases, refinancing operations
    JEL: E44 E52 E58
    Date: 2020–10
  3. By: Christoph Lauper; Giacomo Mangiante
    Abstract: We evaluate household-level inflation rates since 1980, for which we compute various dispersion measures, and we assess their reaction to monetary policy shocks. We find that (i) contractionary monetary policy significantly and persistently decreases inflation dispersion in the economy, and that (ii) different demographic groups are heterogeneously affected by monetary policy. Due to different consumption bundles, lower-income households experience higher average inflation, which at the same time is decreasing more after a contractionary monetary policy shock, leading to an overall convergence of inflation rates between income groups. Finally, these results imply that (iii) consumption and income inequality are significantly different when controlling for different inflation rates.
    Keywords: monetary policy, inflation inequality, redistributional effects
    JEL: E31 E52
    Date: 2021–01
  4. By: David Chaum; Christian Grothoff; Thomas Moser
    Abstract: With the emergence of Bitcoin and recently proposed stablecoins from BigTechs, such as Diem (formerly Libra), central banks face growing competition from private actors offering their own digital alternative to physical cash. We do not address the normative question whether a central bank should issue a central bank digital currency (CBDC) or not. Instead, we contribute to the current research debate by showing how a central bank could do so, if desired. We propose a token-based system without distributed ledger technology and show how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposits.
    Keywords: Digital currencies, central bank, CBDC, blind signatures, stablecoins
    JEL: E42 E51 E52 E58 G2
    Date: 2021
  5. By: Philip Turner
    Abstract: Central banks have undertaken a revolution in monetary policy. They reluctantly abandoned conventional wisdom designed to keep them out of political trouble. This paper looks at this revolution through the lens of the divergent perspectives of the IMF and the BIS. The Jeremiahs predicted this revolution would fail to reduce unemployment and lead only to financial ruin. The Jeremiahs were proved wrong on both counts. Radical whatever-it-takes monetary expansion rescued a depressed world economy. Regulatory reform kept financial risks in check. Because central banks now have two distinct monetary policy instruments - their balance sheet as well as the policy interest rate - monetary policy may have financial stability as an objective in addition to its traditional macroeconomic one. The questions for 2021 and beyond are two. The first is: if the mix of large balance sheets, a sudden jump in government debt and yet-to-be-determined regulatory failures creates new financial stability or macroeconomic risks, what should central banks do? The second is: will governments let them?
    Keywords: Monetary policy, financial stability, financial crisis, fiscal dominance, QE, lender of last resort, macroprudential policy, central banks, Fed, ECB, Bank of England, Bank of Japan, Basel Committee, BIS, CGFS, FSB, IEO, IMF
    JEL: E52 E58 G18
    Date: 2021–02
  6. By: Christian Conrad (Heidelberg University, Germany; KOF Swiss Economic Institute, Switzerland; Rimini Centre for Economic Analysis); Zeno Enders (Heidelberg University, Germany; CESifo); Alexander Glas (FAU Erlangen-Nürnberg, Germany)
    Abstract: Based on a new survey of German households, we investigate the role that information channels and lifetime experience play in households' inflation expectations. We show that the types of information channels that households use to inform themselves about monetary policy are closely related to their socioeconomic characteristics. These information channels, in turn, have a major influence on the level of perceived past and expected future inflation, as well as on the uncertainty thereof. The expected future change in inflation and the unemployment rate, however, is strongly influenced by individual experience of these variables. Similarly, the expected response of inflation to a change in the interest rate is also shaped by experience. We propose the interpretation that households obtain inflation numbers from the media, but their ‘economic model’ is shaped by experience.
    Keywords: household expectations, inflation expectations, experience, information channels, Bundesbank household survey
    JEL: E31 D84 E71
    Date: 2021–02
  7. By: Enrique Esteban García-Escudero (Banco de España); Elisa J. Sánchez Pérez (Banco de España)
    Abstract: As the US dollar plays a pivotal role in international trade and financial markets, non-US banks’ reliance on short-term wholesale funding markets (such as repo, commercial paper, certificate of deposit and swap markets) to finance their dollar assets makes them especially vulnerable to shocks in these markets, such as those arising from the global financial and COVID-19 crises. The crisis management mechanisms in place before the global financial crisis (the International Monetary Fund and international reserves) were overwhelmed by it. Only the rapid deployment of an international currency swap network, as a result of policy cooperation between the main global central banks, allowed equilibrium between dollar supply and demand to be restored and the severest consequences of the market strains for non-US banks to be avoided.
    Keywords: central bank swap lines, IMF, International Monetary System, dollar funding, non-US banks, global financial crisis, COVID-19 crisis, cross-currency basis, international lender of last resort
    JEL: E41 E51 E58 F34
    Date: 2020–09
  8. By: Pablo Garcia
    Abstract: I present a New Keynesian model in which the central bank’s anti-inflationary preferences change over time. Agents do not observe the current monetary regime, but rationally learn about it using Bayes theorem. The model provides a structural interpretation for the contractionary effects of monetary policy uncertainty shocks as recently documented in the empirical literature. In addition, the model shows that learning reduces the effects of monetary policy on the economy by softening the link between fundamentals and equilibrium prices and allocations.
    Keywords: C11, D83, E52
    JEL: C11 D83 E52
    Date: 2021–02
  9. By: William A. Barnett (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research); Masudul Hasan Adil (Flame University)
    Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use the same linear modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship between real money balances and real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of the existence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart.
    Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
    JEL: C23 E41 E52
    Date: 2021–02
  10. By: Alisher Tolepbergen (NAC Analytica, Nazarbayev University)
    Abstract: In this paper we study the role of labor market structure and shocks for monetary policy in Kazakhstan employing a New Keynesian model with labor market rigidities. First, we examine to what extent more flexible labor market affects the transmission of monetary policy in the calibrated version of the model. The results show that more flexible wage-setting process improves the transmission mechanism. A monetary policy shock translates faster to inflation. Further, we find that the relevance of other features of labor market for the transmission of monetary policy shocks is limited. Second, we estimate the model using Bayesian techniques to identify labor market shocks that are important for monetary policy making. The estimation results suggest that shocks to the bargaining power of workers explain most of output and inflation fluctuations and thus should be closely monitored by the central bank.
    Keywords: DSGE; labor market; wage rigidity; Bayesian estimation
    JEL: E32 E52 J64 C11
    Date: 2020–12
  11. By: Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Won Joong Kim (Department of Economics, Konkuk University, Seoul, Republic of Korea)
    Abstract: We examine exchange rate predictability using time-varying and constant parameter models that are conditioned on three variants of Taylor rules as well as six additional alternative models, namely, monetary model (MM); purchasing power parity (PPP); uncovered interest rate parity (UIRP) and three different factor (F1, F2 and F3) models, for BRICS countries. Monthly consumer price index, industrial production index, interest rate, broad money and exchange rates were used to construct the alternative fundamentals for exchange rate predictability for the period of January 1999 and March 2020. The out-of-sample forecast performances of the contending models were evaluated at the forecasting horizons of 1, 4, 8 and 12 using RMSFE and DM statistics, under the full, pre-GFC and post-GFC sample periods. We find that models conditioned on the Taylor rule fundamentals with homogeneous coefficients without interest rate smoothing as well as PPP- and UIRP-based fundamentals offer better exchange rate predictability of the BRICS than the random walk model across the forecast horizons. In addition, constant parameter models offer superior forecasting ability relative to the time-varying parameter models. Our results are sensitive to the data sample, frequency and the choice of fundamentals captured in the predictive model of exchange rate.
    Keywords: Exchange Rate Predictability, BRICS, time-varying parameter (TVP) model, Taylor rule, random walk
    JEL: F31 F37
    Date: 2021–02
  12. By: Alisher Tolepbergen (NAC Analytica, Nazarbayev University)
    Abstract: The paper analyzes persistence properties of monthly inflation and its components in Kazakhstan using fractionally integrated approach for the period between February 2001 and June 2020. The results suggest the presence of long memory behavior in inflation series. General inflation, food inflation, and non-food inflation experience a break in late 2015 when the National Bank of Kazakhstan announced a shift in the monetary policy regime. The evidence for the effect of the policy change on inflation persistence is mixed. Non-food inflation is fractionally cointegrated with the nominal depreciation rate. Finally, the estimation of persistence parameter is sensitive to the choice of data frequency.
    Keywords: Inflation; persistence; fractional integration
    JEL: C22 E31
    Date: 2020–09
  13. By: Vania Stavrakeva; Jenny Tang
    Abstract: This paper presents new stylized facts about exchange rates and their relationship with macroeconomic fundamentals. We show that macroeconomic surprises explain a large majority of the variation in nominal exchange rate changes at a quarterly frequency. Using a novel present value decomposition of exchange rate changes that is disciplined with survey forecast data, we show that macroeconomic surprises are also a very important driver of the currency risk premium component and explain about half of its variation. These surprises have even greater explanatory power during economic downturns and periods of financial uncertainty.
    Keywords: exchange rates; exchange rate disconnect; macroeconomic announcements; international finance; professional forecast
    JEL: E44 F31 G14 G15
    Date: 2020–12–01
  14. By: Alberto Locarno (Bank of Italy); Alessandra Locarno (Libera Universita Internazionale degli Studi Sociali "Guido Carli")
    Abstract: In this paper we compare alternative monetary policy strategies to assess which one is best suited (1) to reduce output and inflation volatility and at the same time (2) minimise the frequency and costs of ZLB episodes. We consider only targeting rules, i.e. rules that minimise the loss function assigned by the Government to the monetary policymaker, who is assumed to set the policy rate under discretion. We run a horse race among eight different strategies. Our analysis confirms the theoretical findings by Svensson (1999) and Vestin (2006) that price-level targeting can guarantee a better performance than inflation targeting in terms of both of the criteria described above. These findings are valid regardless of whether interest-rate variability is included in the loss function or not and are robust to changes in model parameters. Nominal GDP-level targeting also performs well: though it is not uniformly superior to inflation targeting or average inflation targeting, it succeeds in ensuring better outcomes over a large range of model parameters and social preferences.
    Keywords: E ective lower bound, infl ation targeting, price-level targeting
    JEL: E31 E37 E52 E58
    Date: 2021–02
  15. By: Heng Chen; Walter Engert; Kim Huynh; Gradon Nicholls; Julia Zhu
    Abstract: We conduct a follow-up to Chen et al. (2020) and study demand for and use of cash after the containment measures imposed at the beginning of the COVID-19 pandemic were relaxed during the summer of 2020. We find that bank notes in circulation continued to rise in July due to ongoing cash withdrawals and decreased cash deposits in the Bank Note Distribution System. The probability of consumers using cash for payments increased in July compared with April 2020. As well, consumer cash holdings, measured as the median value of cash on hand, returned to August 2019 levels.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Digital currencies and fintech; Econometric and statistical methods
    JEL: C12 C9 E4 O5 O54
  16. By: Hülsewig, Oliver; Rottmann, Horst
    Abstract: This paper examines the reaction of house prices in a panel of euro area countries to monetary policy surprises over the period 2010-2019. UsingJordà's (2005) local projection method, we find that house prices rise in response to expansionary monetary policy shocks that can be related to unconventional monetary policy measures. Thus, monetary policy should take into account the risk of house price fluctuations when implementing new large scale policy interventions.
    Keywords: House price fluctuations,unconventional monetary policy,local projection method
    JEL: E52 E58 E32 G21
    Date: 2021
  17. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    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.
    JEL: E31 E62
    Date: 2021–02
  18. By: Böhl, Gregor; Lieberknecht, Philipp
    Abstract: The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.
    Keywords: Phillips Curve,Financial Frictions,Zero Lower Bound,Disinflation,Forward Guidance
    JEL: C62 C63 E31 E32 E44 E52 E58 E63
    Date: 2021
  19. By: Juan Ayuso Huertas (Banco de España); Carlos Antonio Conesa Lareo (Banco de España)
    Abstract: This paper provides an overview of the concept of central bank digital currency (CBDC) that may serve as a basis for an ordered discussion and an in-depth analysis of the different relevant aspects in the ongoing debate about this digital financial asset. The primary objective is to review the grounds that could warrant issuing CBDC and undertake a preliminary analysis of its main implications, especially those linked to the CBDC models that seem most likely to be adopted, judging by the motivations of the central banks whose issuance plans are currently most advanced.
    Keywords: central bank digital currency, stablecoins, cryptocurrencies, cryptoassets
    JEL: E42 E52 E58
    Date: 2020–03
  20. By: Glas, Alexander; Müller, Lena
    Abstract: Using novel data on speeches held by members of the European Central Bank's Executive Board, we investigate whether monetary policy transparency has increased over time. With respect to the general public as the target audience, our findings suggest that the European Central Bank successfully improved the frequency and clarity of information provision since its inception. The increase in transparency is gradual, rather than being induced by changes in the Executive Board's composition or major economic events such as the Great Recession. However, the clarity of speeches in recent years is still fairly low. Moreover, our findings indicate that clarity decreased under Christine Lagarde's presidency following the outbreak of the Coronavirus pandemic. We conclude that while the European Central Bank was able to increase transparency over time, further improvements in clarity are required to make monetary policy truly accessible to the broad public.
    Keywords: Central Bank Communication,Monetary Policy Transparency,Clarity,Readability
    JEL: E52 E58
    Date: 2021
  21. By: Augusto Cerqua (Department of Social Sciences and Economics, Sapienza University of Rome); Roberta Di Stefano (Department of Methods and Models for Economics, Territory and Finance, Sapienza University of Rome); Guido Pellegrini (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: What is the economic impact of joining a currency union? Is this impact heterogeneous across regions? And how does it change in case of a recession? We answer these questions by investigating the economic impact of joining the euro area for the latecomers, i.e., the countries that adopted the euro after 2002. Di erently from previous literature, we use NUTS-2 regions as units of analysis. This novelty allows us to investigate the theoretical predictions of a currency union impact at a more appropriate geographi- cal level. Using a counterfactual approach based on the recently developed kernel balancing estimator, we estimate the overall as well as the disaggre- gated impact of joining the euro area. We find that the adoption of the euro brought about a small positive e ect, which was, however, dampened by the Great Recession. Individual regional estimates suggest heterogeneous returns with benefits accruing mostly to core regions.
    Keywords: euro area, accession countries, regional data, kernel balancing estimator
    JEL: C23 F33 R11
    Date: 2021–02
  22. By: Trimborn, Simon; Härdle, Wolfgang Karl
    Abstract: The cryptocurrency market is unique on many levels: Very volatile, frequently changing market structure, emerging and vanishing of cryptocurrencies on a daily level. Following its development became a difficult task with the success of cryptocurrencies (CCs) other than Bitcoin. For fiat currency markets, the IMF offers the index SDR and, prior to the EUR, the ECU existed, which was an index representing the development of European currencies. Index providers decide on a fixed number of index constituents which will represent the market segment. It is a challenge to fix a number and develop rules for the constituents in view of the market changes. In the frequently changing CC market, this challenge is even more severe. A method relying on the AIC is proposed to quickly react to market changes and therefore enable us to create an index, referred to as CRIX, for the cryptocurrency market. CRIX is chosen by model selection such that it represents the market well to enable each interested party studying economic questions in this market and to invest into the market. The diversified nature of the CC market makes the inclusion of altcoins in the index product critical to improve tracking performance. We have shown that assigning optimal weights to altcoins helps to reduce the tracking errors of a CC portfolio, despite the fact that their market cap is much smaller relative to Bitcoin. The codes used here are available via
    Keywords: Index construction,Model selection,Bitcoin,Cryptocurrency,CRIX,Altcoin
    JEL: C51 C52 G10
    Date: 2020
  23. By: James M. Nason (North Carolina State University); Gregor W. Smith (Queen's University)
    Abstract: Historians have suggested there were waves of inflation or price revolutions in the UK (and earlier England) in the 13th, 16th, and 18th centuries, prior to the ongoing inflation since 1914. We study retail price inflation since 1251 and model its forecasts. The model is an AR(n) but allows for gradually evolving or drifting parameters and stochastic volatility. The long-horizon forecasts suggest only one inflation wave, that of the 20th century. We also use the model to measure inflation predictability and price-level instability from the beginning of the sample and to provide measures of real interest rates since 1695.
    Keywords: inflation, price revolutions, stochastic volatility, time-varying parameters
    JEL: E31 E37
    Date: 2021–02
  24. By: Ayushi Bajaj; Nikhil Damodaran
    Abstract: Consumer payment choice is based on heterogeneous preferences, availability, usage costs, and effective taxes. We examine the consequences of this choice on consump-tion distribution, aggregate output, welfare and the shadow economy. We employ this framework to analyze India’s unexpected demonetization of 86% of its currency in circulation. We find that this shock to liquidity led to an immediate and temporary fall in aggregate output and welfare. Further, it led to disparate distributional effects as not all consumers could switch to non-cash payments. Using consumption distribu-tion data, we find the lower and middle deciles in rural areas were disproportionately affected.
    JEL: D83 E41 E52 E58 O17
    Date: 2020–12
  25. By: Böhl, Gregor; Goy, Gavin; Strobel, Felix
    Abstract: Did the Federal Reserve's Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, we estimate a large-scale DSGE model over the sample from 1998 until 2020, including data of the Fed's balance sheet. We allow for QE to affect the economy via multiple channels that arise from several financial frictions. Our nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. We find that QE increased output by about 1.2 percent, reflecting a net increase in investment of nearly 9 percent accompanied by a 0.7 percent drop in aggregate consumption. Both government bond and capital asset purchases effectively improved financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated, leading to a disinflationary effect of about 0.25 percent annually.
    Keywords: Quantitative Easing,Liquidity Facilities,Zero Lower Bound,Nonlinear Bayesian Estimation
    JEL: C62 C63 E32 E58 E63
    Date: 2021
  26. By: Kim, Minseong
    Abstract: New Keynesian models assume that inflation rate and output level are endogenous variables. However, given that firms are price setters and suppliers in the models, it is more reasonable to assume that, absent equilibrium coordination (or tatonnement) issues usually abstracted away, both variables actually are state variables determined by expectations in the past. This secures global equilibrium determinacy and a previously unavailable account of inflation rate for New Keynesian models. Furthermore, the principle of effective demand is implemented via the expectation channel.
    Date: 2021–02–14
  27. By: Chen, Shi; Härdle, Wolfgang Karl; Wang, Weining
    Abstract: Inflation expectation (IE) is often considered to be an important determinant of actual inflation in modern economic theory, we are interested in investigating the main risk factors that determine its dynamics. We fiirst apply a joint arbitrage-free term structure model across different European countries to obtain estimate for country-specific IE. Then we use the two-component and three-component models to capture the main risk factors. We discover that the extracted common trend for IE is an important driver for each country of interest. Moreover a spatial-temporal copula model is tted to account for the non-Gaussian dependency across countries. This paper aims to extract informative estimates for IE and provide good implications for monetary policies.
    Keywords: in ation expectation,joint yield-curve modeling,factor model,common trend,spatial-temporal copulas
    JEL: C02 C13 C38 E31 E43
    Date: 2020
  28. By: Sylvain Leduc
    Date: 2020–11–17
  29. By: Sangyup Choi (Yonsei Univ); Junhyeok Shin (Yonsei Univ)
    Abstract: During the recent COVID-19 pandemic, many commonalities shared by Bitcoin and gold raise the question of whether Bitcoin can hedge inflation or provide a safe haven as gold often does. By estimating a Vector Autoregression (VAR) model, we provide systematic evidence on the relationship among inflation, uncertainty, and Bitcoin and gold prices. Bitcoin appreciates against inflation (or inflation expectation) shocks, confirming its inflation-hedging property claimed by investors. However, unlike gold, Bitcoin prices decline in response to financial uncertainty shocks, rejecting the safe-haven quality. Interestingly, Bitcoin prices do not decrease after policy uncertainty shocks, partly consistent with the notion of Bitcoin’s independence from government authorities. We also find an interesting asymmetry in the drivers of Bitcoin price dynamics between the bullish and bearish market. The main findings hold with or without the COVID-19 pandemic episode.
    Keywords: Cryptocurrencies; Bitcoin; inflation-hedging; safe-haven; gold; COVID-19
    JEL: E41 E44 F31 G10
    Date: 2021–03
  30. By: De Santis, Roberto A.; Zaghini, Andrea
    Abstract: We assess the effect and the timing of the corporate arm of the ECB quantitative easing (CSPP) on corporate bond issuance. Because of several contemporaneous mea- sures, to isolate the programme effects we rely on one key eligibility feature: the euro denomination of newly issued bonds. We find that the significant increase in bonds issuance by eligible firms is due to the CSPP and that this effect took at least six months to unfold. This result holds even when comparing firms with similar ratings, thus providing evidence that unconventional monetary policy can foster a financing diversification regardless of firms' risk profile. We also highlight the impact of the programme on the real economic activity. The evidence suggests that while all firms increased investment in capital expenditures and intangible assets, the CSPP induced eligible firms to invest in marketable and equity securities, to repurchase their own stocks, to hold cash and to carry out short-term investment.
    Keywords: quantitative easing,CSPP,corporate bond market
    JEL: E52 G15 G32
    Date: 2021
  31. By: Svatopluk Kapounek; Evžen Kocenda; Zuzana Kucerová
    Abstract: We analyze the exchange rate forecasting performance under the assumption of selective attention. Although currency markets react to a variety of different information, we hypothesize that market participants process only a limited amount of information. Our analysis includes more than 100,000 news articles relevant to the six most-traded foreign exchange currency pairs for the period of 1979–2016. We employ a dynamic model averaging approach to reduce model selection uncertainty and to identify time-varying probability to include regressors in our models. Our results show that smaller sizes models accounting for the presence of selective attention offer improved fitting and forecasting results. Specifically, we document a growing impact of foreign trade and monetary policy news on the euro/dollar exchange rate following the global financial crisis. Overall, our results point to the existence of selective attention in the case of most currency pairs.
    Keywords: exchange rate, selective attention, news, forecasting, dynamic model averaging
    JEL: F33 G41 C11
    Date: 2021
  32. By: Yeva Nersisyan; L. Randall Wray
    Abstract: Modern Money Theory (MMT) economists have used Japan as an example of a country that demonstrates that high deficits and debt do not lead to insolvency, high interest rates, or inflation. MMT insists that governments that issue their own sovereign currency cannot be forced into insolvency, that they can make all payments as they come due, and that they do not really spend tax revenue or borrow in their own currency--with Japan serving as an example of a country that does not face financial budget constraints as normally defined. In this paper we evaluate whether Japan is the poster child of MMT and argue that policy-wise Japan is not following MMT recommendations; in fact, it is generally adopting policies that are precisely the opposite of those proposed by MMT, consistently adopting the path of stop-go fiscal measures and engaging in inadequate and temporary fiscal stimuli in the face of recessions, followed by austerity whenever the economy has seemed to recover.
    Keywords: Modern Money Theory; Budget Deficits; Sovereign Debt; Japanese Government Debt; MMT Policy
    JEL: E12 E32 E42 E58 H62 H63
    Date: 2021–02

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