nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒03‒22
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lahcen
  2. A Model of QE, Reserve Demand and the Money Multiplier By Ellen Ryan; Karl Whelan
  3. Nonlinearities and Asymmetric Adjustment to PPP in an Exchange Rate Model with Inflation Expectations By Christina Anderl; Guglielmo Maria Caporale
  4. U.S. monetary policy uncertainty and RMB deviations from covered interest parity By Zhitao Lin; Xingwang Qian
  5. Remittances, monetary institutions, and autocracies By Garriga, Ana Carolina; Meseguer, Covadonga
  6. Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico By ; Remy Beauregard; Jens H. E. Christensen; Eric Fischer
  7. Investigating a measure of conventional and unconventional stimulus for the euro area By Arne Halberstadt; Leo Krippner
  8. A Theory of Foreign Exchange Interventions By Sebastián Fanelli; Ludwig Straub
  9. Determinants of Japanese Household Saving Behavior in the Low-Interest Rate Environment By Sophia Latsos; Gunther Schnabl
  10. Inflation Anchoring and Growth: The Role of Credit Constraints By Sangyup Choi; Davide Furceri; Prakash Loungani; Myungkyu Shim
  11. How to Issue a Central Bank Digital Currency By David Chaum; Christian Grothoff; Thomas Moser
  12. Is the Monetary Policy Effect Different for Bank Lending to Households and Firms? By Youngjin Yun; Byoungsoo Cho
  13. Liquidity traps in a world economy By Robert Kollmann
  14. The ECB's conundrum and 21st century monetary policy: How European monetary policy can be green, social and democratic By van 't Klooster, Jens
  15. The Effect of Monetary Policy on House Prices - How Strong is the Transmission? By Dominika Ehrenbergerova; Josef Bajzik
  16. Monetary policy and inflation-output variability in Sri Lanka: Lessons for Developing Economies By Kesavarajah Mayandy; Paul Middleditch
  17. Monetary policy, firm heterogeneity, and product variety By Masashige Hamano; Francesco Zanetti
  18. Gross Capital Flows by Banks, Corporates and Sovereigns By Stefan Avdjiev; Bryan Hardy; Sebnem Kalemli-Özcan; Luis Servén
  19. An Interbank Network Determined by the Real Economy By Wang, Tianxi
  20. Evolution of Monetary Policy in Peru: An Empirical Application Using a Mixture Innovation TVP-VAR-SV Model By Jhonatan Portilla Goicochea; Gabriel Rodríguez
  21. The Reversal Interest Rate. A Critical Review By Rafael Repullo
  22. The Deposits Channel of Monetary Policy. A Critical Review By Rafael Repullo
  23. Revolution Without Revolutionaries: Interrogating the Return of Monetary Financing By Gabor, Daniela
  24. Trust Shocks, Financial Crises, and Money By Jia, Pengfei
  25. Uncertainty Network Risk and Currency Returns By Mykola Babiak; Jozef Barunik
  26. Discount Rates, Mortality Projections, and Money's Worth Calculations for US Individual Annuities By James M. Poterba; Adam Solomon
  27. On the transmission of monetary policy to the housing market By Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet
  28. Duopolistic competition and monetary policy By Kozo Ueda
  29. Monetary Policy and Racial Inequality By Alina K. Bartscher; Paul Wachtel; Moritz Kuhn; Moritz Schularick
  30. International Macroeconomics With Imperfect Financial Markets By Maggiori, Matteo
  31. Macroprudential Regulation in the Post-Crisis Era: Has the Pendulum Swung Too Far? By Lyu, Juyi; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  32. Imperfect information, heterogeneous demand shocks, and inflation dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  33. Interest on reserves as main monetary policy tool By George J. Bratsiotis
  34. International Co-movements of Inflation, 1851-1913 By Stefan Gerlach; Rebecca Stuart
  35. The EU bank insolvency framework: could less be more? By Giovanni Majnoni; Gabriele Bernardini; Andreas Dal Santo; Maurizio Trapanese
  36. Low interest rates in Europe and the US- one trend, two stories By Maria Demertzis; Nicola Viegi
  37. What goes around comes around: How large are spillbacks from US monetary policy? By Max Breitenlechner; Georgios Georgiadis; Ben Schumann

  1. By: Benchimol, Jonathan; Bounader, Lahcen
    Abstract: We build a behavioral New Keynesian model that emphasizes different forms of myopia for households and firms. By examining the optimal monetary policy within this model, we find four main results. First, in a framework where myopia distorts agents’ inflation expectations, the optimal monetary policy entails implementing inflation targeting. Second, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality in a behavioral world. Third, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy. Fourth, bounded rationality may be associated with welfare gains.
    Keywords: Behavioral macroeconomics; Central bank policy; Cognitive discounting; Heterogeneous expectations; Optimal simple rules
    JEL: C53 E37 E52 D01 D11
    Date: 2021–03
  2. By: Ellen Ryan; Karl Whelan
    Abstract: Quantitative easing programmes have driven unprecedented expansions in the supply of central bank reserves around the world over the past two decades, fundamentally changing the implementation of monetary policy. The collapse in money multipliers following QE episodes has often been interpreted as implying banks are happy to passively hold most of the reserves created by QE. This paper develops a simple micro-simulation model of the banking sector that adapts the traditional money multiplier model and allows for bank reserve demand to be inferred from monetary aggregates. The model allows the use of unwanted reserves by banks to play out over time alongside QE purchases and incorporates both significantly higher reserve demand after 2008 and capital constraints. With these additions, the model explains the persistently lower money multipliers seen in the US following QE, as well as the growth in commercial bank deposits. The model suggests the demand from banks for reserves has increased substantially since the introduction of QE but not to the point where banks are passively absorbing all newly created reserves.
    Keywords: Quantitative easing; Central banks; Money multiplier
    JEL: E51 E52 E58
    Date: 2021–02
  3. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper estimates a model of the real exchange rate including standard fundamentals as well as two alternative measures of inflation expectations for five inflation targeting countries (UK, Canada, Australia, New Zealand, Sweden) over the period January 1993-July 2019. Both a benchmark linear ARDL model and a nonlinear ARDL (NARDL) specification are considered. The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long- and short-run. In particular, the speed of adjustment towards the PPP-implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones. Monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively. The inflation targeting framework might be especially appropriate for this purpose.
    Keywords: nonlinearities, asymmetric adjustment, PPP, real exchange rate, inflation expectations
    JEL: C32 F31 G15
    Date: 2021
  4. By: Zhitao Lin (Jinan University); Xingwang Qian (SUNY Buffalo State College)
    Abstract: This paper examines how U.S. monetary policy uncertainty (MPU) affects RMB deviations from covered interest parity (CIP) and how this effect is influenced by China’s capital controls, the RMB exchange rate regime, and international reserves that constrain the transmitting channel of U.S. MPU shocks. Our findings show that U.S. MPU has a spillover effect and creates deviations from RMB CIP. Capital controls insulate uncertainty shocks and alleviate the U.S. MPU spillover effect. There are some evidences that international reserves alleviate and the liberalized RMB exchange rate regime magnifies the spillover effect. However, their effects become insignificant in the presence of capital controls. Moreover, the U.S. MPU effect on RMB CIP deviation became prominent after the 2008 global financial crisis.
    Keywords: U.S. MPU; deviation from CIP; RMB cross-currency basis; capital controls; exchange rate regime; international reserves
    JEL: E43 F31 G15
    Date: 2020–12–07
  5. By: Garriga, Ana Carolina; Meseguer, Covadonga
    Abstract: How do remittances affect the choice of exchange rate regimes? Previous research shows that remittances, by easing the ‘impossible trinity’, increase the probability of governments adopting fixed exchange rates. However, that research overlooks the conditioning effect of monetary and political institutions. We argue that remittances, by altering recipient governments’ incentives to use monetary policy counter-cyclically, make central bank independence a credible anti-inflationary tool in less credible regimes; that is, autocracies. Thus, autocracies that receive remittances do not need to rely on fixed exchange rates. In this way, remittances open policy alternatives for developing autocracies. Statistical tests on a sample of 87 developing and transitional countries between 1980 and 2010 support our argument.
    Keywords: Remittances; central bank independence; exchange rate regimes; autocracies; developing countries
    JEL: F3 G3
    Date: 2019–10–02
  6. By: ; Remy Beauregard; Jens H. E. Christensen; Eric Fischer
    Abstract: To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.
    Keywords: term structure modeling; liquidity risk; financial market frictions; central bank credibility
    JEL: D84 E31 E43 E44 E47 E52 E58 G12
    Date: 2021–03–01
  7. By: Arne Halberstadt; Leo Krippner
    Abstract: We investigate the effect of the “Effective Monetary Stimulus” (EMS) on German and euro-area macroeconomic variables using a small-scale vector autoregression (VAR). The EMS is obtained from yield curve data and survey data, and is designed to reflect the influence of monetary policy conducted by conventional and unconventional means. Empirically, using the EMS in our VAR obtains plausible and stable structural relationships with inflation and economic activity across and within conventional and unconventional environments, and more so than short-maturity rates or alternative metrics. These results suggest that the EMS provides a useful practical measure of monetary/financial stimulus for policy makers. Our counterfactual results indicate that EMS shocks have been stimulatory for most of the time since 2007, and more so around episodes of unconventional policy actions by the ECB. In turn, these episodes have been followed by higher outcomes of inflation and economic activity.
    Keywords: Monetary Policy, Zero Lower Bound, Dynamic Term Structure Model.
    JEL: E43 E44 E52
    Date: 2021–03
  8. By: Sebastián Fanelli (CEMFI, Centro de Estudios Monetarios y Financieros); Ludwig Straub (Harvard University)
    Abstract: We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.
    Keywords: foreign exchange interventions, limited capital mobility, reserves, coordination.
    JEL: F31 F32 F41 F42
    Date: 2020–09
  9. By: Sophia Latsos; Gunther Schnabl
    Abstract: This paper scrutinizes the role of prolonged, expansionary monetary policy on the savings behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low savings. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household behavior via the interest rate channel and the redistribution channel but not the labor income channel. There is also evidence that rising wealth boosts savings.
    Keywords: monetary policy, household savings, savings rate, Japan, financial repression
    JEL: E21 E43 E52
    Date: 2021
  10. By: Sangyup Choi (Yonsei University); Davide Furceri (IMF); Prakash Loungani (IMF); Myungkyu Shim (Yonsei University)
    Abstract: Can inflation anchoring foster growth? To answer this question, we use panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over 1990–2014 and employ a difference-in-difference strategy based on the theoretical prediction that higher inflation uncertainty particularly depresses investment in industries that are more credit constrained. Industries characterized by high external financial dependence, liquidity needs, and R&D intensity, and low asset tangibility, tend to grow faster in countries with well-anchored inflation expectations. The results, based on an IV approach—using indicators of monetary policy transparency and central bank independence as instruments— confirm our findings.
    Keywords: industry growth; inflation anchoring; inflation forecasts; credit constraints; difference-in-difference; central bank independence
    JEL: E52 E63 O11 O43 O47
    Date: 2020–12–29
  11. 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.
    Date: 2021–02
  12. By: Youngjin Yun (Bank of Korea); Byoungsoo Cho (Bank of Korea)
    Abstract: Monetary policy may affect bank lending differently depending on who the borrower is. We examine both the price and quantity of bank loans in Korea for the 10 years between 2010 and 2019 to study whether the bank lending channel differs for households and firms. Identifying the channel by comparing banks with different amounts of security holdings, we find that the monetary policy effect is significant in business loans, but not in household loans. Evidence suggests that the difference in loan maturities is the reason behind it. Business loans typically have shorter maturities than household loans. Thus, the share of new or refinancing loans, which are more directly influenced by monetary policy shocks, is higher in business loans than in household loans. Our findings provide important policy implications for the cases where household and business sector debts evolve in different directions.
    Keywords: monetary policy, bank lending channel, business loans, household loans
    JEL: E3 E5 G2
    Date: 2021–01–01
  13. By: Robert Kollmann
    Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.
    Keywords: Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports
    JEL: E3 E4 F2 F3 F4
    Date: 2021–01
  14. By: van 't Klooster, Jens
    Abstract: The ECB’s mandate was drafted 30 years ago and focuses narrowly on preventing inflation. As a consequences, the ECB lacks clear democratic guidance concerning the challenges it faces today: how to deal with government debt and what to do to fight climate change. This lack of guidance undermines the legitimacy of its choices and the effectiveness of its programmes. The EU’s political institutions can solve the ECB’s conundrum by providing it with renewed democratic authorisation.
    Date: 2021–02–03
  15. By: Dominika Ehrenbergerova; Josef Bajzik
    Abstract: In the current long-lasting period of low interest rates and overheating housing markets, the discussion of the effect of monetary policy on house prices has arisen again. We examine the broad empirical literature on this topic. We collect 1,447 estimates of the effect of changes in short-term interest rates on house prices. These estimates come from 31 studies and are drawn from vector autoregression models. On average, an increase in the interest rate by one percentage point causes a median decrease in house prices of 0.7 percent for the one-year horizon and 0.9 percent for the two-year horizon. Moreover, we show that at the medium-term (monetary policy) horizon, the effect of monetary policy remains significant after correcting for the publication bias present in the literature. In addition, we collect more than 40 control variables. These capture, first, the context in which the estimates were obtained, and, second, the characteristics of the economies in question. Within both groups of variables we identify several significant aspects explaining differences in the estimates reported in the literature. The most prominent drivers of the heterogeneity are the use of sign restrictions, the inclusion of additional endogenous variables in VAR models, and the level of indebtedness.
    Keywords: House prices, meta-analysis, monetary policy, publication selection, transmission
    JEL: C83 E52 R21
    Date: 2020–12
  16. By: Kesavarajah Mayandy; Paul Middleditch
    Date: 2020
  17. By: Masashige Hamano; Francesco Zanetti
    Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts an important 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 incumbent 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 that corroborates the relevance of monetary policy for product variety resulting from firm entry and exit.
    Keywords: Monetary policy, firm heterogeneity, product variety, reallocation
    JEL: E32 E52 L51 O47
    Date: 2021–01
  18. By: Stefan Avdjiev (Bank for International Settlements); Bryan Hardy (Bank for International Settlements); Sebnem Kalemli-Özcan (University of Maryland); Luis Servén (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We construct a new quarterly data set of international capital flows broken down by sector: banks, corporates and sovereigns. Using our novel data set, we establish severalkey facts that demonstrate the importance of distinguishing in- and outflows by the domestic sectoral identity. We find that public sector flows may serve as a countervailing force to private sector flows, especially in emerging markets (EMs), as these flows respond differently not only to country-specific fundamentals but also to global shocks. The high inflow-outflow correlation observed in total capital flow data is driven by within-sector flows, especially those of AE banks. In general, inflows and outflows of AEs and inflows to EMs are primarily AE banks’ transactions, and, as a consequence, respond similarly to capital flow drivers. By contrast, EM outflows respond differently to global shocks and changes in fundamentals, leading to lower inflow-outflows correlations for EMs.
    Keywords: Quarterly capital flows, external corporate and bank debt, systemic risk.
    JEL: F21 F41 O1
    Date: 2020–09
  19. By: Wang, Tianxi
    Abstract: As a means of payment, bank liability circulates in a cycle. A fraction of one bank's liability naturally flows out to another, creating a network of interbank connections. We demonstrate how this network is determined by the production technologies, the resources distribution and the Input-Output network of the real economy. We find banks with a smaller outflow fraction see their funding costs less dependent on the interbank interest rate; the heterogeneity in banks' outflow fraction causes lending ine¢ ciency; and the identities of depositors and borrowers matter. These results will not arise if banks are modelled as intermediaries of loanable funds.
    Keywords: circulation of bank liability, interbank network, outflow fraction, identities of depositors and borrowers
    Date: 2021–03–10
  20. By: Jhonatan Portilla Goicochea (Departamento de Economía de la Pontificia Universidad Católica del Perú); Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: This paper discusses the evolution of monetary policy (MP) in Peru in 1996Q1-2016Q4 using a mixture innovation time-varying parameter vector autoregressive model with stochastic volatility (TVP-VAR-SV) as proposed by Koop et al. (2009). The main empirical results are: (i) the VAR coefficients and volatilities change more gradually than the covariance errors over time; (ii) the volatility of MP shocks was higher under the pre- Inflation Targeting (IT) regime; (iii) a surprise increase in the interest rate produces GDP growth falls and reduces inflation in the long run; (iv) the interest rate reacts more quickly to aggregate supply (AS) shocks than to aggregate demand (AD) shocks; (v) MP shocks explain a high percentage of domestic variable behavior under the pre-IT regime but their contribution decreases under the IT regime.
    Keywords: Poítica Monetaria, TVP-VAR-SV, Estimación Bayesiana, Modelo de Mezcla de Innovaciones, Economía Peruana
    Date: 2020
  21. By: Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK’s capital constraint features the future value of the bank’s capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.
    Keywords: Monetary policy, reversal rate, negative interest rates, bank profitability, bank market power, capital requirements.
    JEL: E52 G21 L13
    Date: 2020–10
  22. By: Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.
    Keywords: Monetary policy transmission, banks' market power, deposits channel.
    JEL: E52 G21 L13
    Date: 2020–12
  23. By: Gabor, Daniela
    Abstract: This paper disentangles the claims that we are witnessing a revolution in central banking - the return of large interventions in government bond markets. It argues that not all central bank purchases of government bonds are alike, but they should be evaluated against the objectives of the interventions and the broader macro-financial setup of the economy. It distinguishes two regimes of monetary financing – shadow vs subordinated – across objectives of intervention, targets, institutional hierarchy, macroeconomic paradigm, and accumulation regime/distribution of political power. Shadow monetary financing, it argues, offers a weak framework for monetary-fiscal interactions, one that actively undermines both the rethink of fiscal rules, and fiscal support for the low-carbon transition.
    Date: 2021–03–11
  24. By: Jia, Pengfei
    Abstract: A precondition for a well-functioning monetary system is trust. This paper develops a neoclassical general equilibrium model in which public and private money coexist and the impact of trust shocks on the macroeconomy is examined. In this paper, trust is modelled as limited commitment between borrowers and lenders. A borrower who issues private money can credibly commit to repay at most a fraction of his or her future output. The paper shows that a lack of trust can engineer a financial crisis, with substantial effects on both the real and monetary variables. In the model, an unexpected drop in the trust parameter causes young workers to divert less of their savings into investment goods and more of their savings into consumption goods. A fall in capital investment in turn leads to a decline in real output. I also show that trust shocks can have detrimental effects on both workers and entrepreneurs. In addition, the model shows that, to clear the money market, an increase in the real demand for government money causes the price level to fall, inducing transitory deflation. This is in line with the low inflation episodes during and following the Great Recession. The decline in capital investment and the price level also implies that the amount of deposits has to shrink in a financial crisis. Finally, once trust shocks hit the economy, the money multiplier drops. This is due to the decrease in capital investment and the increase in the real demand for government money.
    Keywords: Trust shocks, Financial crises, Public money, Private money.
    JEL: E31 E32 E41 E44 E51
    Date: 2021–02–26
  25. By: Mykola Babiak; Jozef Barunik
    Abstract: We examine the pricing of a horizon specific uncertainty network risk, extracted from option implied variances on exchange rates, in the cross-section of currency returns. Buying currencies that are receivers and selling currencies that are transmitters of short-term shocks exhibits a high Sharpe ratio and yields a significant alpha when controlling for standard dollar, carry trade, volatility, variance risk premium and momentum strategies. This profitability stems primarily from the causal nature of shock propagation and not from contemporaneous dynamics. Shock propagation at longer horizons is priced less, indicating a downward-sloping term structure of uncertainty network risk in currency markets.
    Keywords: foreign exchange rates; network risk; currency variance; predictability; term structure;
    JEL: G12 G15 F31
    Date: 2021–02
  26. By: James M. Poterba; Adam Solomon
    Abstract: Estimates the expected present discounted value (EPDV) of future payouts on both immediate and deferred annuities are sensitive to the discount rate used to value future payment streams and assumptions about future mortality rates. This paper illustrates this with respect to annuities that were available in the US retail insurance market in 2020. The spread between the interest rates on Treasury and corporate bonds was high by historical standards as a share of the riskless Treasury yield during much of 2020, making the choice of discount rate more consequential than in the past. The EPDV estimates also depend on whether the rapid but since-attenuated decline in US old-age mortality rates during the 1990s and early 2000s is extrapolated to future decades. The “money’s worth” is the EPDV divided by the annuity’s purchase price. Our central estimates, using discount rates drawn from the corporate BBB yield curve and future mortality rates that combine a Society of Actuaries individual annuitant mortality table with projections of future mortality improvements from the Social Security Administration, suggest money’s worth values for annuities offered to 65-year-old men and women of about 92 cents per premium dollar. Recent Department of Labor rulemaking requires defined contribution plan sponsors to provide participants with estimates of the annuity income stream that their plan balance could purchase. These estimates, like EPDVs, are also sensitive to both prospective rate of return and mortality rate assumptions.
    JEL: G22 J14 J26
    Date: 2021–03
  27. By: Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet
    Abstract: We provide empirical evidence on the heterogeneous transmission of monetary policy to the housing market across and within countries. We use household-level data from Germany, Italy and Switzerland together with the respective monetary policy shocks identified from high-frequency data. We find that the pass-through of monetary policy shocks to rates of newly originated (fixed-rate) mortgages is twice as strong in Switzerland than in Germany and Italy. After an accommodative monetary policy shock, this is associated in the housing market with a larger immediate, and persistent increase of transitions from renting to owning; a stronger decrease in rents; and an increase of the price-rent ratio. Within Italy, we find a stronger pass-through to mortgage rates, housing tenure transitions and the price-rent ratio in the northern regions that have been characterized in the literature as more financially developed than the southern regions.
    Keywords: Monetary policy transmission, housing market, home ownership, rents, house prices
    JEL: E21 E52 R21
    Date: 2021
  28. By: Kozo Ueda
    Abstract: A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.
    Keywords: Duopoly, monetary policy, strategic complementarities, New Keynesian model
    JEL: D43 E32 E52
    Date: 2021–01
  29. By: Alina K. Bartscher; Paul Wachtel; Moritz Kuhn; Moritz Schularick
    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
  30. By: Maggiori, Matteo
    Abstract: A review of recent advances in open economy analysis under segmented international financial markets. A set of modeling tools that have been used to understand ?financial crises, the ensuing policy response (e.g., Quantitative Easing and FX intervention), deviations from arbitrage (CIP deviations), and more generally the impact of capital flows on exchange rates. This modeling approach has also sheds a different light on classic topics such as the exchange rate disconnect, international risk sharing, UIP failures, and the carry trade.
    Date: 2021–03–08
  31. By: Lyu, Juyi (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: This paper presents an institutional model to investigate the cooperation between a government and a central bank. The former selects the monetary policy and then delegates the organization of macroprudential policy to the latter. Their policy stances are the result of sequential constrained utility maximization. Using indirect inference, we find a set of coefficients that can capture the UK policy stances for 1993-2016. This suggests post-crisis regulation has been overly intrusive. Finally, we show that this regulatory dilemma can be avoided by committing to a highly stabilizing monetary regime that uses QE extensively.
    Keywords: Bank regulation; Financial stability; Monetary policy; Public choice theory
    JEL: E52 E58 G28
    Date: 2021–03
  32. By: Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
    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
  33. By: George J. Bratsiotis
    Date: 2021
  34. By: Stefan Gerlach; Rebecca Stuart
    Abstract: We study co-movements of inflation in a group of 15 countries before and during the classical Gold Standard by fitting a generalisation of the Ciccarelli-Mojon (2010) model on annual data spanning 1851-1913. We find that international inflation functions as an "attractor" for domestic inflation rates. The cross-sectional dispersion of inflation declined gradually over the sample and Bai-Perron tests for structural breaks at unknown points in time suggest that there are breaks in six of reduced-form inflation equations. However, sub-sample estimates indicate that the overall finding that international inflation is an important influence on domestic inflation.
    Keywords: international inflation, Gold standard, principal components, factor analysis.
    JEL: E31 F40 N10
    Date: 2021–03
  35. By: Giovanni Majnoni (Banca d'Italia); Gabriele Bernardini (Banca d'Italia); Andreas Dal Santo (Solidus Capital Group); Maurizio Trapanese (Banca d'Italia)
    Abstract: The framework for bank crisis management in the Banking Union (BU) complies with multiple criteria. Each of these criteria is based on a sound policy rationale; however, when combined, they can generate unintended consequences that undermine the effectiveness of the system, highlighting a case of fallacy of composition. This paper suggests that a piecemeal reform is not adequate to tackle the framework’s shortcomings. A broader effort is required to streamline the current criteria into a single rulebook, achieving effectiveness through simplification. The successful experience of the US framework for bank failure management provides a useful benchmark. It shows that the generalized, if not exclusive, reliance on a single, clearly defined, easily measurable and quickly actionable criterion – the Least Cost Test – makes it possible to offer full protection to taxpayers and to contain the destruction of value caused by bank failures, thereby safeguarding the economy. We suggest that its adoption by the BU would help to frame a common approach to failing banks of all sizes and would provide a unifying force and a solution to the geographic and institutional fragmentation of the current set-up.
    Keywords: financial crises, international regulation
    JEL: F53 G01 G20
    Date: 2021–02
  36. By: Maria Demertzis; Nicola Viegi
    Abstract: We thank Lionel Guetta-Jeanrenaud for excellent research assistance and Faÿçal Hafied for drawing our attention to ESOPs. We are grateful to seminar participants at Bruegel for comments and suggestions. This research has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement no. 822390. In both Europe and the United States, interest rates have been declining for more than fifteen years. For much of this...
    Date: 2021–03
  37. By: Max Breitenlechner (University of Innsbruck); Georgios Georgiadis (European Central Bank); Ben Schumann (Free University of Berlin)
    Abstract: We quantify spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model for the time period from 1990 to 2019. We find that spillbacks account for up to half of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock. Moreover, spillbacks materialise as stock market wealth effects impinge on US consumption, and as Tobin’s q effects impinge on US investment. In particular, a contractionary US monetary policy shock depresses global equity prices, weighing on the value of US households’ portfolios; and it depresses earnings of US firms through declines in foreign sales inducing them to cut back investment. Net trade does not contribute to spillbacks because US monetary policy shocks affect exports and imports similarly. Finally, spillbacks materialise through advanced rather than through emerging market economies, consistent with their relative importance in US foreign equity holdings and US firms’ foreign demand.
    Keywords: US monetary policy, spillovers, spillbacks, Bayesian proxy structural VAR models
    JEL: F42 E52 C50
    Date: 2021–02–18

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