nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒03‒15
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Pass-Through with Central Bank Digital Currency By Janet Hua; Yu Zhu
  2. Quantitative Easing in the US and Financial Cycles in Emerging Markets By Marcin Kolasa; Grzegorz Wesołowski
  3. Exchange Rate Pass-Through, Monetary Policy, and Real Exchange Rates: Iceland and the 2008 Crisis By Sebastian Edwards; Luis Cabezas
  4. Indonesia’s Financial Markets and Monetary Policy Dynamics Amid the Covid-19 Pandemic By Sugandi, Eric Alexander
  5. Do Monetary Policy Frameworks Matter in Low Income Countries? By Alina Carare; Carlos de Resende; Andrew T. Levin; Chelsea Zhang
  6. Monetary policy surprises and their transmission through term premia and expected interest rates By Kaminska, Iryna; Mumtaz, Haroon; Sustek, Roman
  7. Fiscal Policy and Households' Inflation Expectations: Evidence from a Randomized Control Trial By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; Michael Weber
  8. The money-inflation nexus revisited By Leopold Ringwald; Thomas O. Zörner
  9. Dual Labor Market and the "Phillips Curve Puzzle" By Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
  10. The FOMC risk shift By Kroencke, Tim-Alexander; Schmeling, Maik; Schrimpf, Andreas
  11. A BVAR Model for Forecasting Ukrainian Inflation By Nadiia Shapovalenko; ;
  12. The persisting effect of the pandemic on Money Market Funds and money markets By Golden, Brian
  13. Negative Interest Rates; Taking Stock of the Experience So Far By Luis Brandao-Marques; Marco Casiraghi; R. G Gelos; Gunes Kamber; Roland Meeks
  14. The Origination and Distribution of Money Market Instruments: Sterling Bills of Exchange during the First Globalization By Olivier Accominotti; Delio Lucena-Piquero; Stefano Ugolini
  15. The money-inflation nexus revisited By Ringwald, Leopold; Zörner, Thomas O.
  16. A Model of Credit, Money, Interest, and Prices By Saki Bigio; Yuliy Sannikov
  17. Do macroprudential policies affect non-bank financial intermediation? By Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
  18. Currency Depreciations in Emerging Economies: A Blessing or a Curse for External Debt Management? By Boris Fisera; Menbere Workie Tiruneh; David Hojdan
  19. The dynamics of bank rates in a negative-rate environment - the Swiss case By Romain Baeriswyl; Lucas Marc Fuhrer; Petra Gerlach-Kristen; Jörn Tenhofen
  20. Optimal irreversible monetary policy By Kohei Hasui; Teruyoshi Kobayashi; Tomohiro Sugo
  21. Interest Rate Swaps and the Transmission Mechanism of Monetary Policy: A Quantile Connectedness Approach By Ioannis Chatziantoniou; David Gabauer; Alexis Stenfor
  22. Money illusion in free-to-play games By Benti, Behailu Shiferaw; Haß, Dominik; Stadtmann, Georg
  23. Quantifying the COVID-19 Effects on Core PCE Price Inflation By Matteo Luciani
  24. Financial inclusion, technology and their impacts on monetary and fiscal policy: theory and evidence By Robert Oleschak
  25. Imperfect Information, Heterogeneous Demand Shocks,and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  26. Preconditions for a General-Purpose Central Bank Digital Currency By ; ; Paul Wong
  27. On the possibility of a cash-like CBDC By Armelius, Hanna; Claussen, Carl Andreas; Hull, Isaiah
  28. A Quantity Theory Framework for Thinking about Monetary Policy By Hetzel, Robert
  29. Research Data Series: Index of Common Inflation Expectations By Hie Joo Ahn; Chad Fulton
  30. On Cointegration and Cryptocurrency Dynamics By Keilbar, Georg; Zhang, Yanfen
  31. Money Flow Network Among Firms' Accounts in a Regional Bank of Japan By FUJIWARA Yoshi; INOUE Hiroyasu; YAMAGUCHI Takayuki; AOYAMA Hideaki; TANAKA Takuma; KIKUCHI Kentaro
  32. Imperfect Tacit Collusion and Asymmetric Price Transmission By Bulutay, Muhammed; Hales, David; Julius, Patrick; Tasch, Weiwei
  33. Macroepidemics and unconventional monetary policy: Coupling macroeconomics and epidemiology in a financial DSGE-SIR framework. By Verónica Acurio Vásconez; Olivier Damette; David W. Shanafelt
  34. A Machine Learning Based Regulatory Risk Index for Cryptocurrencies By Ni, Xinwen; Härdle, Wolfgang Karl; Xie, Taojun

  1. By: Janet Hua; Yu Zhu
    Abstract: This paper investigates how the introduction of an interest-bearing central bank digital currency (CBDC) that serves as a perfect substitute for bank deposits as an electronic means of payment affects monetary policy pass-through. When the deposit market is not fully competitive, the CBDC tends to weaken the pass-through of the interest on reserves. The interest on CBDC impacts the deposit market more directly compared with the interest on reserves. The CBDC rate can also have stronger pass-through to the loan market; however, the effect can be dampened by the policy on the interest on reserves. Therefore, coordination between the two policy rates is needed to effectively achieve policy goals.
    Keywords: Digital currencies and fintech; Monetary policy transmission
    JEL: E52
    Date: 2021–03
  2. By: Marcin Kolasa; Grzegorz Wesołowski
    Abstract: Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American countries. We first show empirically that a typical round of QE by the US Fed leads to a persistent expansion in credit to households and a significant loss of price competitiveness in this group of economies. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose a time-varying tax on capital inflows. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers.
    Keywords: quantitative easing, global financial cycle, domestic credit, exchange rate interventions, capital controls, macroprudential policy
    JEL: E44 E58 F41 F42 F44
    Date: 2021–03
  3. By: Sebastian Edwards; Luis Cabezas
    Abstract: We use detailed data for Iceland to examine two often-neglected aspects of the “exchange rate pass-through” problem. First, we investigate whether the pass-through coefficient varies with the degree of “international tradability” of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003-2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its “flexible inflation targeting,” and that the coefficients are significantly higher for tradable than for nontradable goods.
    JEL: E31 E52 E58 F31 F41
    Date: 2021–03
  4. By: Sugandi, Eric Alexander (Asian Development Bank Institute)
    Abstract: We examine the impact of the COVID-19 pandemic on Indonesia’s financial markets and monetary policy dynamics. We explore five types of financial markets in Indonesia: (1) the Indonesian rupiah (IDR) interbank money market; (2) the US Dollar (USD) interbank money market; (3) government conventional bond (SUN) markets; (4) the stock market; and (5) the USD/IDR spot market. We examine Bank Indonesia's (BI) three types of monetary policy instrument: (1) BI seven-day reverse repo rate; (2) minimum reserve requirement ratios; and (3) BI’s monetary operations. We find that the COVID-19 pandemic causes different impacts of particular monetary policy instruments on Indonesia’s financial markets during the pandemic compared with those in the non-pandemic period.
    Keywords: COVID-19; monetary policy; Indonesia’s financial markets; Bank Indonesia
    JEL: E58 G10
    Date: 2020–11–16
  5. By: Alina Carare; Carlos de Resende; Andrew T. Levin; Chelsea Zhang
    Abstract: Microeconomic evidence indicates a very high frequency of price adjustment in low income countries (LICs), raising the question of whether LICs may be reasonably characterized as exhibiting monetary neutrality. To address this question, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that maintain rigid nominal exchange rates. We also conduct an event study of the surprise devaluation of the Central African Franc (CFA) in January 1994 and find that it had highly significant effects on the output growth of 10 CFA countries relative to 18 similar countries outside the CFA zone. Consequently, the hypothesis of monetary neutrality is decisively rejected, and these findings provide strong support for the role of monetary policy frameworks in fostering price stability and macroeconomic stability in LICs.
    JEL: E02 E52 E58 O11 O23
    Date: 2021–03
  6. By: Kaminska, Iryna (Bank of England); Mumtaz, Haroon (Queen Mary University of London); Sustek, Roman (Queen Mary University of London)
    Abstract: Monetary policy moves the yield curve. How much is due to expected interest rates versus term premia? And does it matter for macroeconomic outcomes? Using an affine term structure model, we shed new light on these questions. Estimation is subject to restrictions addressing estimation bias in expected interest rates obtained by previous studies. High-frequency yield curve decompositions around FOMC announcements into term premia and expected interest rates then provides instruments for a local projection model. The effects of interest rate expectations and term premia are found equally important for the transmission mechanism and broadly consistent with macroeconomic theory.
    Keywords: High-frequency data; monetary policy transmission mechanism; restricted affine term structure models; yield curve decomposition; local projection method; Bayesian estimation
    JEL: C58 E43 E52 E58 G12
    Date: 2021–03–05
  7. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; 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.
    Keywords: expectations management, inflation expectations, surveys
    JEL: E31 C83 D84
    Date: 2021
  8. By: Leopold Ringwald (Department of Economics, Vienna University of Economics and Business); Thomas O. Zörner (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper proposes a Bayesian Logistic Smooth Transition Autoregressive (LSTAR) model with stochastic volatility (SV) to model inflation dynamics in a nonlinear fashion. Inflationary regimes are determined by smoothed money growth which serves as a transition variable that governs the transition between regimes. We apply this approach on quarterly data from the US, the UK and Canada and are able to identify well-known, high inflation periods in the samples. Moreover, our results suggest that the role of money growth is specific to the economy under scrutiny. Finally, we analyse a variety of different model specifications and are able to confirm that adjusted money growth still has leading indicator properties on inflation regimes.
    Keywords: Money-inflation link, Nonlinear modeling, Bayesian inference, LSTAR-SV model
    JEL: C11 C32 E31 E51
    Date: 2021–03
  9. By: Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
    Abstract: Low inflation was once a welcome to both policy makers and the public. However, Japan's experience during the 1990's changed the consensus view on price of economists and central banks around the world. Facing deflation and zero interest bound at the same time, Bank of Japan had difficulty in conducting effective monetary policy. It made Japan's stagnation unusually prolonged. Too low inflation which annoys central banks today is translated into the "Phillips curve puzzle". In the US and Japan, in the course of recovery from the Great Recession after the 2008 global financial crisis, the unemployment rate had steadily declined to the level which was commonly regarded as lower than the natural rate or NAIRU. And yet, inflation stayed low. In this paper, we consider a minimal model of dual labor market to explore what kind of change in the economy makes the Phillips curve flat. The level of bargaining power of workers, the elasticity of the supply of labor to wage in the secondary market, and the composition of the workforce are the main factors in explaining the flattening of the Phillips curve. We argue that the changes we consider in the model, in fact, has plausibly made the Phillips curve flat in recent years.
    Date: 2021–03
  10. By: Kroencke, Tim-Alexander; Schmeling, Maik; Schrimpf, Andreas
    Abstract: We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call "risk shifts", are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion's share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news; and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.
    Keywords: Monetary Policy Surprises,Equity Premium,Fund Flows,Portfolio Rebalancing,Price Pressures
    JEL: G10 G12 E44
    Date: 2021
  11. By: Nadiia Shapovalenko (National Bank of Ukraine); ;
    Abstract: In this paper, I examine the forecasting performance of a Bayesian Vector Autoregression (BVAR) model with steady-state prior and compare the accuracy of the forecasts against the forecasts of QPM model and official NBU forecasts over the period 2016q1–2020q1. My findings suggest that inflation forecasts produced by the BVAR model are more accurate than those of the QPM model two quarters ahead and are competitive for the longer horizon. For GDP growth, the forecasts of the BVAR outperform those of the QPM for the whole forecast horizon. For inflation they also outperform the official NBU forecasts over the monetary policy horizon, whereas the opposite is true for the forecasts of the GDP growth.
    Keywords: BVAR, forecast evaluation, inflation forecasting
    JEL: C30 C53 E37
    Date: 2021–03–05
  12. By: Golden, Brian (Central Bank of Ireland)
    Abstract: This letter examines the impact of a sudden surge in demand for cash in March, on money markets in general and Irish-resident Money Market Funds (MMFs) in particular. The immediate impact was felt across MMFs invested in money market debt issued by banks and companies. Liquidity declined in money markets while some investors in these funds redeemed their shares/units. In response, MMFs invested very cautiously in these securities in the following months. These effects are quite typical of what occurred in other key financial centres for MMFs and contributed to a sharp contraction in volumes in money markets.
    Date: 2020–10
  13. By: Luis Brandao-Marques; Marco Casiraghi; R. G Gelos; Gunes Kamber; Roland Meeks
    Abstract: This paper focuses on negative interest rate policies and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.
    Keywords: Negative interest rates;Monetary policy;Bank lending rates;Nonbank financial institutions;Negative interest rates;monetary policy;bank lending and profitability;nonbank financial institutions
    Date: 2021–03–03
  14. By: Olivier Accominotti (LSE); Delio Lucena-Piquero (LEREPS); Stefano Ugolini (LEREPS)
    Abstract: This paper presents a detailed analysis of how liquid money market instruments -- sterling bills of exchange -- were produced during the first globalisation. We rely on a unique data set that reports systematic information on all 23,493 bills re-discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of these bills. Our analysis reveals the truly global dimension of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organisation of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.
    Date: 2021–03
  15. By: Ringwald, Leopold; Zörner, Thomas O.
    Abstract: This paper proposes a Bayesian Logistic Smooth Transition Autoregressive (LSTAR) model with stochastic volatility (SV) to model inflation dynamics in a nonlinear fashion. Inflationary regimes are determined by smoothed money growth which serves as a transition variable that governs the transition between regimes. We apply this approach on quarterly data from the US, the UK and Canada and are able to identify well-known, high inflation periods in the samples. Moreover, our results suggest that the role of money growth is specific to the economy under scrutiny. Finally, we analyse a variety of different model specifications and are able to confirm that adjusted money growth still has leading indicator properties on inflation regimes.
    Keywords: Money-inflation link, Nonlinear modeling, Bayesian inference, LSTAR-SV model
    Date: 2021–03
  16. By: Saki Bigio; Yuliy Sannikov
    Abstract: This paper integrates a realistic implementation of monetary policy through the banking system into an incomplete-markets economy with wage rigidity. Monetary policy sets policy rates and alters the supply of reserves. These tools grant independent control over credit spreads and an interest target. Through these tools, monetary policy affects the evolution of real interests rates, credit, output, and the wealth distribution—both in the long and in the short run. We decompose the effects through a combination of the interest and credit channels that depend on the size of the central bank’s balance sheet. Monetary policy reaches an expansionary limit when it enters a liquidity trap. The model highlights a trade-off between worse microeconomic insurance (insurance across agents) and greater macroeconomic insurance (insurance across states). The model prescribes that monetary policy should operate with a small balance sheet which tightens credit during booms, and should expand its balance sheet and lower policy rates during busts.
    JEL: E31 E32 E41 E42
    Date: 2021–03
  17. By: Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
    Abstract: We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002–17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share – the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability.
    Keywords: macroprudential policy, non-bank financial intermediation, shadow banking, international spillovers
    JEL: G10 G21 O16 O40
    Date: 2021–02
  18. By: Boris Fisera (Slovak Academy of Sciences; Charles University, Prague); Menbere Workie Tiruneh (Slovak Academy of Sciences; Webster Vienna Private University); David Hojdan (Webster Vienna Private University)
    Abstract: We investigate the long-term effect of domestic currency depreciation on the external debt for a panel of 41 emerging economies over the years 1999-2019. Using heterogenous panel cointegration methods, we find that domestic currency depreciation leads to an increase in external debt to GDP ratio over the long-term and it reduces the sustainability of external debt. This is particularly the case for larger depreciations, while smaller depreciations might reduce the external debt burden over the long-term for more developed emerging economies. Poorer emerging economies face a greater increase in external debt burden following domestic currency depreciation. We also find that higher exchange rate volatility and the use of floating exchange rates contributes to an increase in external debt burden over the long-term. Consequently, our results suggest that for emerging economies, having more volatile and floating exchange rates reduces the sustainability of external debt. We find asymmetrical effects of exchange rate depreciation on external debt: higher central bank independence limits the effect of currency depreciation on external debt, while higher financial development and illicit financial flows augment the effect of depreciation on external debt.
    Keywords: external debt, exchange rate, currency depreciation, exchange rate volatility, exchange rate regime, DFE estimator, PMG estimator
    JEL: E50 F31 F34
    Date: 2021–03
  19. By: Romain Baeriswyl; Lucas Marc Fuhrer; Petra Gerlach-Kristen; Jörn Tenhofen
    Abstract: This paper documents the change in banks' interest rate setting behaviour in a negative-rate environment. In a positive-rate environment, the pricing of mortgages and deposits follows the dynamics of capital market rates for comparable maturities. When capital market rates fall below zero, the dynamic of mortgage and deposit rates changes. Because deposit rates tend to be sticky at zero and do not fall with short-term capital market rates into negative territory, banks' liability margin shrinks. In an attempt to preserve their overall interest margin, banks raise long-term mortgage rates in response to a decline in short-term capital market rates, while they continue to decrease long-term mortgage rates when long-term market rates fall. Overall, our results imply that a policy rate cut reduces bank rates less in a negative-rate environment than in a positive-rate environment.
    Keywords: Interest rate pass-through, mortgages, monetary policy
    JEL: E43 E52 G21
    Date: 2021
  20. By: Kohei Hasui (Faculty of Economics, Matsuyama University); Teruyoshi Kobayashi (Faculty of Economics, Kobe University); Tomohiro Sugo (Bank of Japan)
    Abstract: Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank's discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of policy irreversibility at which the social loss is minimized.
    Date: 2021–02
  21. By: Ioannis Chatziantoniou (University of Portsmouth); David Gabauer (Software Competence Center Hagenberg); Alexis Stenfor (University of Portsmouth)
    Abstract: We investigate 1-year interest rate swaps on USD, EUR, JPY and GBP between 2005 and 2020 utilising a quantile connectedness model. This approach allows for a nuanced investigation of connectedness and adds to understanding the monetary policy transmission mechanism within a highly integrated international financial system. Substantial interest rate changes (in either direction) matter for connectedness in financial markets. The results also indicate which currency drives developments depending on the direction of the change in interest rates.
    Keywords: Interest Rate Swaps; Monetary Policy Transmission Mechanism; Quantile Vector Autorergression
    JEL: C51 E43 F65 G15
    Date: 2021–03–08
  22. By: Benti, Behailu Shiferaw; Haß, Dominik; Stadtmann, Georg
    Abstract: Regularly, free-to-play games use their own virtual currency for in-game store purchases. We analyze the money illusion phenomenon by examining free-to-playgames and their virtual currency exchange rate policies. We find that above pari exchange rates and advertising bonus packs instead of price discounts lead to money illusion on the side of the customer. Based on our findings, we derive managerial and policy implications.
    Keywords: Money illusion,free-to-play games,virtual currency exchange rate,price incentives,bonus pack versus price discount
    JEL: D18 L88 M37 Z28
    Date: 2021
  23. By: Matteo Luciani
    Abstract: The 12-month change in core PCE price inflation was 1.5 percent in December. Why was core inflation so low in 2020? How much of this weakness can be attributed to the COVID pandemic? And what does this mean for inflation going forward?
    Date: 2021–02–25
  24. By: Robert Oleschak
    Abstract: In economies with a low level of financial inclusion (FI), most activities are settled in cash and are thus more difficult to trace, record, and tax. I show theoretically that economies with inefficient financial technologies exhibit low levels of FI and of tax revenue and that using an inflation tax as an additional source of income improves welfare. Improvements in technology lead to a higher level of FI, increased tax revenue and lower (optimal) inflation. I test this prediction using panel data from a broad set of countries. The data show a strong and robust negative link between FI and inflation and a positive link between FI and tax revenue for developing countries.
    Keywords: Financial inclusion, financial technology, monetary policy, fiscal policy
    JEL: C12 C22 E31 E41 G21 H21
    Date: 2021
  25. By: Tatsushi Okuda (Bank of Japan); Tomohiro Tsuruga (International Monetary Fund); Francesco Zanetti (University of Oxford)
    Abstract: Using sector-level survey data for the universe of Japanese firms, we establish the positive co-movement in the firm’s expectations about aggregate and sector-specific demand shocks. We show that a simple model with imperfect information on the current aggregate and sector-specific components of demand explains the positive co-movement of expectations in the data. The model predicts that an increase in the relative volatility of sector-specific demand shocks compared to aggregate demand shocks reduces the sensitivity of inflation to changes in aggregate demand. We test and corroborate the theoretical prediction on Japanese data and find that the observed decrease in the relative volatility of sector-specific demand has played a significant role for the decline in the sensitivity of inflation to movements in aggregate demand from mid-1980s to mid-2000s.
    Keywords: Imperfect information, Shock heterogeneity, Inflation dynamics.
    JEL: E31 D82 C72
    Date: 2021–03
  26. By: ; ; Paul Wong
    Abstract: Over the last few years, interest in the potential issuance of a general-purpose central bank digital currency (CBDC) has increased. Introducing and operating a CBDC would require actions by many stakeholders and not just the central bank. In view of the far-reaching implications of introducing a new form of money to the public, the decision cannot be taken lightly. This paper outlines foundational preconditions and proposes areas of work that may help achieve them prior to the possible implementation of a potential future general-purpose CBDC in the United States. These foundational preconditions include clear policy objectives, broad stakeholder support, a strong legal framework, robust technology, and readiness for market acceptance and adoption.
    Date: 2021–02–24
  27. By: Armelius, Hanna; Claussen, Carl Andreas; Hull, Isaiah
    Abstract: We explain why all CBDCs will need a ledger that keeps track of CBDC ownership regardless of whether they are “token-based”, “DLT-based” or “on a blockchain”; and regardless of how we define these terms. Consequently, token-based CBDCs appear not to have a greater capacity for providing payments that are peer-to-peer, offline or anonymous like cash than “account-based” CBDCs.
    Keywords: CBDC,Tokens,Offline
    JEL: E42 E51
    Date: 2021
  28. By: Hetzel, Robert (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In August 2020, FOMC chair Jerome Powell announced a strategy for achieving an inclusive value of the FOMC’s goal of maximum employment. The strategy rests on discovering the minimal value of sustainable unemployment by running the economy above potential until the unemployment rate declines to a level that initiates an inflation overshoot from the FOMC’s longer-run 2 percent target. There is presumably no contradiction with an FOMC target for inflation of 2 percent. As indicated by the appellation “flexible-average-inflation targeting” (FAIT), the inflation overshoot would compensate for prior undershoots of the 2 percent target. The FOMC’s current framework is reminiscent of the 1970s. With a country fractured over the Vietnam War and a militant civil rights movement, a socially desirable low unemployment rate became a political imperative. FOMC chairman Arthur Burns accepted the challenge (Hetzel 1998, 2008, Ch. 8). The Keynesian consensus of the time promised to deliver a socially desirable rate of unemployment at least as low as 4 percent at the cost of only moderate inflation. This desirable Phillips curve trade-off between unemployment and inflation became the centerpiece of monetary policy. Modigliani and Papademos (1975 and 1976) provided the organizing principle for monetary policy. Namely, there is a predictable and “exploitable” trade-off in which changes in inflation depend upon the difference between the unemployment rate and a full-employment rate termed the nonaccelerating inflation rate of unemployment (NAIRU). At least in 2021, however, the FOMC assumption is that there is no trade-off because the Phillips curve is assumed flat at least down to its prepandemic low of 3.5%. When persistent inflation above 2% emerges, the adjective “flexible” in FAIT becomes relevant. The FOMC will then trade off between two competing goals – 2% inflation and inclusive maximum employment.
    Date: 2021–03
  29. By: Hie Joo Ahn; Chad Fulton
    Abstract: In an earlier FEDS Note, "Index of Common Inflation Expectations," we introduced the Index of Common Inflation Expectations, or "CIE", which summarizes the comovement of a wide variety of inflation expectations measures based on a dynamic factor model.
    Date: 2021–03–05
  30. By: Keilbar, Georg; Zhang, Yanfen
    Abstract: This paper aims to model the joint dynamics of cryptocurrencies in a nonstationary setting. In particular, we analyze the role of cointegration relationships within a large system of cryptocurrencies in a vector error correction model (VECM) framework. To enable analysis in a dynamic setting, we propose the COINtensity VECM, a nonlinear VECM specification accounting for a varying systemwide cointegration exposure. Our results show that cryptocurrencies are indeed cointegrated with a cointegration rank of four. We also find that all currencies are affected by these long term equilibrium relations. A simple statistical arbitrage trading strategy is proposed showing a great in-sample performance.
    Keywords: Cointegration,VECM,Nonstationarity,Cryptocurrencies
    JEL: C00
    Date: 2020
  31. By: FUJIWARA Yoshi; INOUE Hiroyasu; YAMAGUCHI Takayuki; AOYAMA Hideaki; TANAKA Takuma; KIKUCHI Kentaro
    Abstract: In this study, we investigate the flow of money among bank accounts possessed by firms in a single region by employing an exhaustive list of all the bank transfers in a regional bank in Japan, to clarify how the network of money flow is related to the economic activities of the firms. The network statistics and structures are examined and shown to be similar to those of a nationwide production network. Specifically, the bowtie analysis indicates what we refer to as a "walnut" structure with core and upstream/downstream components. To quantify the location of an individual account in the network, we used the Hodge decomposition method and found that the Hodge potential of the account has a significant correlation to its position in the bowtie structure as well as to its net flow of incoming and outgoing money and links, namely the net demand/supply of individual accounts. In addition, we used non-negative matrix factorization to identify important factors underlying the entire flow of money; it can be interpreted that these factors are associated with regional economic activities. One factor has a feature whereby the remittance source is localized to the largest city in the region, while the destination is scattered. The other factors correspond to the economic activities specific to different local places. This study serves as a basis for further investigation on the relationship between money flow and economic activities of firms.
    Date: 2021–01
  32. By: Bulutay, Muhammed; Hales, David; Julius, Patrick; Tasch, Weiwei
    Abstract: We investigate the role tacit collusion plays in Asymmetric Price Transmission (APT), the tendency of prices to respond more rapidly to positive than to negative cost shocks. Using a laboratory experiment that isolates the effects of tacit collusion, we observe APT pricing behavior in markets with 3, 4, 6, and 10 sellers, but not in duopolies. Furthermore, we find that sellers accurately forecast others’ prices, but nevertheless consistently set their own prices above the profit-maximizing response, particularly in the periods immediately following negative shocks. Overall, our findings support theories in which tacit collusion plays a central role in APT.
    Keywords: Asymmetric Price Transmission,Tacit Collusion,Oligopolistic Competition,Market Power,Rockets and Feathers
    JEL: D43 L13 C92 C72 C73
    Date: 2021
  33. By: Verónica Acurio Vásconez; Olivier Damette; David W. Shanafelt
    Abstract: Despite the fact that the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. In our paper, we use a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model to a traditional epidemiological model, we are able to evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (“epi loans”). To the best of our knowledge, our paper is the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the effects of unconventional monetary policy.
    Keywords: New-Keynesian model, dsge, covid-19, epidemiology.
    JEL: D58 E32 E52
    Date: 2021
  34. By: Ni, Xinwen; Härdle, Wolfgang Karl; Xie, Taojun
    Abstract: Cryptocurrencies’ values often respond aggressively to major policy changes, but none of the existing indices informs on the market risks associated with regulatory changes. In this paper, we quantify the risks originating from new regulations on FinTech and cryptocurrencies (CCs), and analyse their impact on market dynamics. Specifically, a Cryptocurrency Regulatory Risk IndeX (CRRIX) is constructed based on policy-related news coverage frequency. The unlabeled news data are collected from the top online CC news platforms and further classified using a Latent Dirichlet Allocation model and Hellinger distance. Our results show that the machine-learning-based CRRIX successfully captures major policy-changing moments. The movements for both the VCRIX, a market volatility index, and the CRRIX are synchronous, meaning that the CRRIX could be helpful for all participants in the cryptocurrency market. The algorithms and Python code are available for research purposes on
    Keywords: Cryptocurrency,Regulatory Risk,Index,LDA,News Classification
    JEL: C45 G11 G18
    Date: 2020

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