nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒03‒29
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Price Level Targeting with Imperfect Rationality: A Heuristic Approach By Vojtech Molnar
  2. Long-run stability of money demand and monetary policy: the case of Algeria By Raouf Boucekkine; Mohammed Laksaci; Mohamed Touati-Tliba
  3. Central Bank Digital Currency and Balance Sheet Policy By Martina Fraschini; Luciano Somoza; Tammaro Terracciano
  4. Monetary policy uncertainty and inflation expectations By Arce-Alfaro, Gabriel; Blagov, Boris
  5. ZLB and Beyond: Real and Financial Effects of Low and Negative Interest Rates in the Euro Area By Andrejs Zlobins
  6. Unconventional monetary policies and expectations on economic variables By Alessio Anzuini; Luca Rossi
  7. Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico By Remy Beauregard; Jens H. E. Christensen; Eric Fischer; Simon Zhu
  8. The role of information and experience for households' inflation expectations By Conrad, Christian; Enders, Zeno; Glas, Alexander
  9. The Recovery from the Great Recession: Did the FOMC Learn the Right Lessons? By Robert Hetzel
  10. Optimal monetary policy in a dual labor market: the role of informality By Gomez, M.
  11. Monetary dynamics in a network economy By Antoine Mandel; Vipin Veetil
  12. Natural real rates of interest across Euro area countries: Are R-stars getting closer together? By Tomas Reichenbachas; Linas Jurkšas; Rokas Kaminskas
  13. Global Stablecoins: Monetary Policy Implementation Considerations from the U.S. Perspective By David Lowe; Matthew Malloy
  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 Voice of Monetary Policy By Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
  16. Learning from revisions: a tool for detecting potential errors in banks' balance sheet statistical reporting By Francesco Cusano; Giuseppe Marinelli; Stefano Piermattei
  17. Toothless tiger with claws? Financial stability communication, expectations, and risk-taking By Beutel, Johannes; Metiu, Norbert; Stockerl, Valentin
  18. A Reconsideration of the Failure of Uncovered Interest Parity for the U.S. Dollar By Charles Engel; Ekaterina Kazakova; Mengqi Wang; Nan Xiang
  19. Complementarities Between Fiscal Policy and Monetary Policy—Literature Review By Wei Dong; Geoffrey Dunbar; Christian Friedrich; Dmitry Matveev; Romanos Priftis; Lin Shao
  20. Completing the European Banking Union: Capital cost consequences for credit providers and corporate borrowers By Koetter, Michael; Krause, Thomas; Sfrappini, Eleonora; Tonzer, Lena
  21. The Persistent Compression of the Breakeven Inflation Curve By Richard K. Crump; Nikolay Gospodinov; Desi Volker
  22. The Fed's Discount Window in "Normal" Times By Huberto M. Ennis; Elizabeth C. Klee
  23. India’s Approach to Open Banking: Some Implications for Financial Inclusion By Yan Carriere-Swallow; Vikram Haksar; Manasa Patnam
  24. Optimal Monetary Policy with Informality: A First Pass By Gomez, M.; Hairault, J.
  25. Central bank gold reserves and sovereign credit risk By Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
  26. Monetary and Macroprudential Policy Complementarities: Evidence from European Credit Registers By Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
  27. People Pay In Cash By Si, Hoan Luong Cu
  28. Law, mobile money drivers and mobile money innovations in developing countries By Simplice A. Asongu; Peter Agyemang-Mintah; Rexon T. Nting
  29. The Impact of ECB Corporate Sector Purchases on European Green Bonds By Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
  30. Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation By Raphael Auer; Ariel Burstein; Sarah M. Lein
  31. Networking the yield curve: implications for monetary policy By Dalhaus, Tatjana; Schaumburg, Julia; Sekhposyan, Tatevik
  32. Exploiting payments to track Italian economic activity: the experience at Banca d’Italia By Valentina Aprigliano; Guerino Ardizzi; Alessia Cassetta; Alessandro Cavallero; Simone Emiliozzi; Alessandro Gambini; Nazzareno Renzi; Roberta Zizza
  33. Liquidity in the German corporate bond market: Has the CSPP made a difference? By Boneva, Lena; Islami, Mevlud; Schlepper, Kathi
  34. The Return of Cash with the Declining Effect of Crisis: Rise and Fall of Digital Payments in India post Demonetization By Abhipsa Pal; Mahesh Balan U.
  35. Inflation expectations in the euro area: indicators, analyses and models used at Banca d’Italia By Sara Cecchetti; Davide Fantino; Alessandro Notarpietro; Marianna Riggi; Alex Tagliabracci; Andrea Tiseno; Roberta Zizza

  1. By: Vojtech Molnar (Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic)
    Abstract: The paper compares price level targeting and inflation targeting regimes in a New Keynesian model with bounded rationality. Economic agents form their expectations using heuristics—they choose between a few simple rules based on their past forecasting performance. Two main specifications of the price level targeting model are examined—the agents form expectations either about price level or about inflation, which is ex ante not equivalent because of sequential nature of the model. In addition, several formulations of the forecasting rules are considered. Both regimes are assessed by loss function comparison. According to the results, price level targeting is preferred in the case with expectations created about price level under the baseline calibration; but it is sensitive to some model parameters. Furthermore, when expectations are created about inflation, price level targeting over time loses credibility and leads to divergence of the economy. On the other hand, inflation targeting model functions stably. Therefore, while potential benefits of price level targeting have been confirmed under certain assumptions, the results suggest that inflation targeting constitutes more robust choice for monetary policy.
    Keywords: Price level targeting, Inflation targeting, Monetary policy, Bounded rationality, Heuristics
    JEL: E31 E37 E52 E58 E70
    Date: 2021–03
  2. By: Raouf Boucekkine (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, UCL IRES - Institut de recherches économiques et sociales - UCL - Université Catholique de Louvain); Mohammed Laksaci (Ecole Supérieure de Banque); Mohamed Touati-Tliba (ESC Alger - ESC Alger - ESC ALGER - ESC Alger)
    Abstract: We estimate the demand for money for monetary aggregates M1 and M2, and cash in Algeria over the period 1979-2019, and study its long-run stability. We show that the transaction motive is significant for all three aggregates, especially for the demand for cash, reflecting the weight of informal economy "practices". The elasticity of the scale variable is very close to unity for M2 and M1, and even equal to unity for cash demand (1.006). The elasticity of inflation is also significant for all three aggregates, although its level is higher in the case of cash demand (-6.474). Despite the persistence of certain financial repression mechanisms, interest rate elasticity is significant for all three aggregates, but higher for M1 and cash. The same observation is made for elasticity of the exchange rate, reflecting the effect of monetary substitution, especially for M1 and cash. Finally, our study concludes that the demand for money in terms of M1 remains stable, the same observation being confirmed for the M2 aggregate. However, the demand for fiat currency proves not to be stable. The consequences for the optimal design of monetary policy in Algeria are clearly stated.
    Keywords: monetary policy,money demand,long-run stability,resource-rich countries,Algeria,co-integration
    Date: 2021–01
  3. By: Martina Fraschini (University of Lausanne, HEC; Swiss Finance Institute); Luciano Somoza (University of Lausanne, HEC; Swiss Finance Institute); Tammaro Terracciano (University of Geneva, GFRI; Swiss Finance Institute)
    Abstract: This paper studies a stylized economy in which the central bank can hold either treasuries or risky securities against central bank digital currency (CBDC) deposits. The key mechanism driving the results is the reduction in bank deposits that follows the introduction of a CBDC and its impact on the banking sector. With CBDC funds invested in treasuries, the central bank channels funds back to the banking sector via open market operations and the introduction of a CBDC is neutral, consistently with the equivalence theorem of Brunnermeier and Niepelt (2019). However, it is not neutral when accounting for liquidity requirements, quantitative easing, or for CBDC deposits held against risky securities. We reach two main conclusions. First, current monetary policy regimes do matter for CBDC equilibrium effects. Second, there is a trade-off between bank lending to the economy and taxes, as holding risky assets against CBDC deposits leads to lower expected taxes and lower bank lending.
    Keywords: CBDC, central banking, monetary policy, QE
    JEL: E4 E5 G2
    Date: 2021–03
  4. By: Arce-Alfaro, Gabriel; Blagov, Boris
    Abstract: Do inflation expectations react to changes in the volatility of monetary policy? Yes, but only until the global financial crisis. This paper investigates whether increasing the dispersion of monetary policy shocks, which is interpreted as elevated uncertainty surrounding monetary policy, affects the inflation expectation formation process. Based on U.S. data since the 1980s and a stochastic volatility-in-mean structural VAR model we find that monetary policy uncertainty reduces both inflation expectations and inflation. However, after the Great Recession this link has disappeared, even when controlling for the Zero Lower Bound.
    Keywords: Monetary policy uncertainty,inflation expectations,SVAR volatility-in-mean,time-varying coefficients
    JEL: C11 C32 E52
    Date: 2021
  5. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the effects of low and negative interest rates in the euro area on a wide range of macroeconomic and financial variables and documents the changes in the monetary transmission mechanism once the policy rate reaches the zero lower bound (ZLB). To that end, we employ a set of non-linear time series frameworks, namely a time-varying parameter structural vector autoregression with stochastic volatility and non-linear local projections and perform identification via both sign restrictions and high frequency information approaches. Our findings suggest that the policy rate has continued to support the aggregate demand in the euro area even in sub-zero territory. Despite that, we find that the reaction of inflation and its expectations has significantly deteriorated in the post-ZLB period. Regarding the transmission mechanism, we show that policy rate cuts below zero have a more persistent impact on the term structure and interest rate expectations. In addition to that, our results suggest that negative interest rates do not cause a contraction in lending despite the disconnect of lending rates from the policy rate. In general, our findings contribute to the growing list of literature which questions the empirical relevance of the ZLB.
    Keywords: NIRP, ZLB, monetary policy, euro area, non-linearities
    JEL: C54 E43 E52 E58
    Date: 2020–12–30
  6. By: Alessio Anzuini (Bank of Italy); Luca Rossi (Bank of Italy)
    Abstract: We investigate whether forward guidance and large scale asset purchases are effective in steering economic expectations in the US. Using the series of monetary policy shocks recovered in Swanson (2020), local projections, and an algorithm to select the best empirical model, we show that unconventional monetary policies are effective in tilting economic expectations in a direction consistent with central bankers' will. Our empirical findings provide two more insights: responses to LSAP shocks are stronger than those following a FG shock; responses to both types of policies are larger after contractionary shocks as compared to expansionary ones.
    Keywords: unconventional monetary policy, local projections, non-linearities
    JEL: E52 E44 E58
    Date: 2021–03
  7. By: Remy Beauregard; Jens H. E. Christensen; Eric Fischer; Simon Zhu
    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 E47 E52 E58 G12
    Date: 2021–03–01
  8. By: Conrad, Christian; Enders, Zeno; Glas, Alexander
    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,information channels,experience,Bundesbank household survey
    JEL: E31 D84 E71
    Date: 2021
  9. By: Robert Hetzel (Mercatus Center at George Mason University)
    Abstract: In August 2020, monetary policymakers articulated a new framework for conducting monetary policy. That framework reflected the conclusion, drawn from the recovery from the Great Recession, that monetary policy had erred in pursuing preemptive increases in the funds rate. Starting in December 2015, the Federal Open Market Committee (FOMC) had raised the funds rate off the zero lower bound and the inflation rate continued to run below the 2 percent target. Going forward, the FOMC will forgo preemptive increases to ensure an overshoot of its inflation target until the FOMC achieves the goal of ¿maximum employment.¿ What should policymakers have learned from the Great Recession recovery? It was a period of considerable nominal and real stability. In part, that stability was an artifact of an initial moderately contractionary monetary policy that limited the strength of the recovery. But that price stability provided the foundation for the significant decline in the unemployment rate during the recovery.
    Keywords: Federal Reserve System, monetary policy, inflation, COVID-19
    JEL: E5
    Date: 2021–02
  10. By: Gomez, M.
    Abstract: In this paper I analyze the optimal monetary policy in emerging countries whose labor markets are mainly characterized by the presence of a large informal sector. I develop a closed economy model with nominal price and wage rigidities, search and matchingfrictions and a dual labor market. A formal one characterized by matching frictions, and nominal wage rigidities, and an informal one where wages are fully flexible. Under this framework, a trade-off between price and wage inflation emerges. I find that informality increases the response of price and wage inflation to aggregate productivity shocks. As a result, the presence of an informal sector increases the inefficient fluctuations of the labor market variables, such as unemployment, labor market tightness, and formal hiring rate. I derive the second-order approximation to the welfare of the representative agent, and then I characterize the optimal monetary policy for standard calibration of the model. I find that optimal policy with informality features significant deviations from price stability in response to aggregate productivity shocks.
    Keywords: Informality; Monetary policy; Nominal wage and price rigidities; Inflation targeting.
    JEL: E26 E52 E12 E61
    Date: 2020–11–03
  11. By: Antoine Mandel (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras)
    Abstract: We develop a tractable model of price dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms that are governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal changes in demand and downstream via real changes in supply. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model provides an explanation of the price puzzle: a temporary rise in the price level in response to monetary contractions. In our setting, the puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions.
    Keywords: JEL Codes C63,C67,D80,E31,E52 Price Puzzle,Production Network,Money,Monetary Non-Neutrality,Out-of-Equilibrium Dynamics
    Date: 2021–04
  12. By: Tomas Reichenbachas (Bank of Lithuania); Linas Jurkšas (Bank of Lithuania); Rokas Kaminskas (Bank of Lithuania)
    Abstract: Using two different methodologies, we estimate time-varying natural real rates of interest for a majority of euro area (EA) countries, including Lithuania. We find that natural real rates have been declining, particularly since 2008, albeit to different extent across EA countries. Lower rates could (at least partly) be explained by lower productivity and population growth. In line with previous literature, we find evidence of a substantial dispersion of the natural interest rate across EA economies. This became especially evident during the financial crisis of 2008-2009 and the sovereign debt crisis of 2010-2012, while estimates of natural rates tend to converge during "calm" periods. Estimates of natural rates for Lithuania were significantly above the estimates of core EA countries over 2002-2008, but this has changed after the crisis. From 2011 the estimates of natural rates for Lithuania tend to be close to the average for EA countries.
    Keywords: LEuro area, natural rate of interest, common monetary policy, fragmentation
    JEL: C32 E32 E43 E52
    Date: 2021–03–10
  13. By: David Lowe; Matthew Malloy
    Abstract: This note explores the potential effects of the widespread adoption of a global stablecoin (GSC) on key aggregate financial sector balance sheets in the United States. To do this, we map out cash flows of GSC transactions among financial sector entities using a stylized set of 't-accounts'. By analyzing these individual transactions, we infer aggregate and compositional effects on U.S. commercial banking sector and Federal Reserve balance sheets. Through this lens, we also consider how these balance sheet changes could affect monetary policy implementation, the demand for central bank reserves, and the market for U.S. dollar safe assets.
    Keywords: Monetary policy; Banks; Fintech; Stablecoins
    JEL: E40 E50 G21
    Date: 2021–03–22
  14. By: Olivier Accominotti (LSE - Economic History Department - London school of economics and political science - LSE - London School of Economics and Political Science); Delio Lucena-Piquero (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville); Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: 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.
    Keywords: money market,industrial organisation,information asymmetry,bill of exchange,bill of exchange JEL Classification: E42,G23,L14,N20
    Date: 2021
  15. By: Yuriy Gorodnichenko (University of California, Berkeley); Tho Pham (University of Reading); Oleksandr Talavera (University of Birmingham)
    Abstract: We develop a deep learning model to detect emotions embedded in press conferences after the meetings of the Federal Open Market Committee and examine the influence of the detected emotions on financial markets. We find that, after controlling for the Fed's actions and the sentiment in policy texts, positive tone in the voices of Fed Chairs leads to statistically significant and economically large increases in share prices. In other words, how policy messages are communicated can move the stock market. In contrast, the bond market appears to take few vocal cues from the Chairs. Our results provide implications for improving the effectiveness of central bank communications.
    Keywords: monetary policy, communication, voice, emotion, text sentiment, stock market, bond market.
    JEL: E31 E58 G12 D84
    Date: 2021–02
  16. By: Francesco Cusano (Bank of Italy); Giuseppe Marinelli (Bank of Italy); Stefano Piermattei (Bank of Italy)
    Abstract: Ensuring and disseminating high-quality data is crucial for central banks to adequately support monetary analysis and the related decision-making process. In this paper we develop a machine learning process for identifying errors in banks’ supervisory reports on loans to the private sector employed in the Bank of Italy’s statistical production of Monetary and Financial Institutions’ (MFI) Balance Sheet Items (BSI). In particular, we model a “Revisions Adjusted – Quantile Regression Random Forest” (RA–QRRF) algorithm in which the predicted acceptance regions of the reported values are calibrated through an individual “imprecision rate” derived from the entire history of each bank’s reporting errors and revisions collected by the Bank of Italy. The analysis shows that our RA-QRRF approach returns very satisfying results in terms of error detection, especially for the loans to the households sector, and outperforms well-established alternative outlier detection procedures based on probit and logit models.
    Keywords: banks, balance sheet items, outlier detection, machine learning
    JEL: C63 C81 G21
    Date: 2021–03
  17. By: Beutel, Johannes; Metiu, Norbert; Stockerl, Valentin
    Abstract: We study the effects of central bank communication about financial stability on individuals' expectations and risk-taking. Using a randomized information experiment, we show that communication causally affects individuals' beliefs and investment behavior, consistent with an expectations channel of financial stability communication. Individuals receiving a warning from the central bank expect a higher probability of a financial crisis and reduce their demand for risky assets. This reduction is driven by downward revisions in individuals' expected Sharpe ratios due to lower expected returns and higher perceived downside risks. In addition, these individuals deposit a smaller fraction of their savings at riskier banks.
    Keywords: central bank communication,financial stability,stock market expectations,randomized information experiment
    JEL: C11 D12 D83 D91 E58 G11
    Date: 2021
  18. By: Charles Engel; Ekaterina Kazakova; Mengqi Wang; Nan Xiang
    Abstract: We re-examine the time-series evidence for failures of uncovered interest rate parity on short-term deposits for the U.S. dollar versus major currencies of developed countries at short-, medium- and long-horizons. The evidence that interest rate differentials predict foreign exchange risk premiums is fragile. The relationship between interest rates and excess returns is not stable over time and disappears altogether when nominal interest rates are near the zero-lower bound. However, we do find evidence that year-on-year inflation rate differentials consistently predict excess returns – when the U.S. dollar y.o.y. inflation rate has been relatively high, subsequent returns on U.S. deposits tend to be high. We interpret this evidence as being consistent with hypotheses that posit that markets do not fully react initially to predictable changes in future monetary policy. Interestingly, the predictive power of relative y.o.y. inflation only begins in the mid-1980s when central banks began to target inflation more consistently and continues in the post-ZLB period when interest rates lose their primacy as a policy instrument. However, we caution not to rule out the possibility that excess returns are not predictable at all.
    JEL: F3 F41
    Date: 2021–01
  19. By: Wei Dong; Geoffrey Dunbar; Christian Friedrich; Dmitry Matveev; Romanos Priftis; Lin Shao
    Abstract: This paper reviews and summarizes the literature on the complementary relationship between fiscal policy and monetary policy. We focus on four types of fiscal policy: (1) automatic stabilizers, (2) state-contingent non-discretionary fiscal policy, (3) discretionary fiscal stimulus and (4) government credit policies. The literature shows that automatic fiscal stabilizers can play a role in stabilizing business cycle fluctuation. But because they can have multiple policy objectives, their optimal design remains an open question. An alternative policy framework features state-contingent non-discretionary fiscal expenditures with a pre-committed fiscal spending formula triggered by objective macroeconomic conditions. Such a policy offers the advantage of being timely and easy to communicate; but at the same time, it poses challenges for identifying appropriate triggers and program expenditures with high short-run multipliers. The literature also shows that discretionary fiscal expenditures can support aggregate demand, and some expenditures have short-run multipliers close to, or above, 1. While these expenditures can focus on specific policy priorities that are relevant at the time, their discretionary nature may slow the policy response. When interest rates are close to the effective lower bound (ELB), fiscal stimulus can be particularly effective for complementing the stabilizing efforts of monetary policy. Finally, studies show that government credit policies can mitigate economic downturns that are accompanied by severe financial market distress. However, the effects of scaling up this channel are uncertain.
    Keywords: Fiscal policy; Monetary policy
    JEL: E52 E62 E58 E63
  20. By: Koetter, Michael; Krause, Thomas; Sfrappini, Eleonora; Tonzer, Lena
    Abstract: The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks' capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks' capital cost changes on to corporates' borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms' borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.
    Keywords: bail-in,banking union,funding costs,real effects
    JEL: C41 F34 G21 H63
    Date: 2021
  21. By: Richard K. Crump; Nikolay Gospodinov; Desi Volker
    Abstract: Breakeven inflation, defined as the difference in the yield of a nominal Treasury security and a Treasury Inflation-Protected Security (TIPS) of the same maturity, is closely watched by market participants and policymakers alike. Breakeven inflation rates provide a signal about the expected path of inflation as perceived by market participants although they are also affected by risk and liquidity premia. In this post, we scrutinize the dynamics of breakeven inflation, highlighting some intriguing behavior which has persisted for a number of years and even through the pandemic. In particular, we document a substantial downward shift in the level of breakeven inflation as well as a marked flattening of the breakeven inflation curve.
    Keywords: breakeven inflation; expected inflation; inflation risk premia
    JEL: G1
    Date: 2021–03–22
  22. By: Huberto M. Ennis; Elizabeth C. Klee
    Abstract: We study new transaction-level data of discount window borrowing in the U.S. between 2010 and 2017, merged with quarterly data on bank financial con- ditions (balance sheet and revenue). The objective is to improve our under- standing of the reasons for why banks use the discount window during periods outside financial crises. We also provide a model of the decision of banks to borrow at the window, which is helpful for interpreting the data. We find that decisions to gain access and to borrow at the discount window are meaning- fully correlated with some relevant banks' characteristics and the composition of banks' balance sheets. Banks choose simultaneously to obtain access to the discount window and hold more cash-like liquidity as a proportion of assets. Yet, conditional on access, larger and less liquid banks tend to borrow more from the discount window. In general, our findings suggest that banks could, in principle, adapt their operations to modulate, and possibly reduce, their use of the discount window in "normal" times.
    Keywords: Banking; Central Bank; Federal Reserve; Liquidity
    JEL: E52 E58 G28
    Date: 2021–03–19
  23. By: Yan Carriere-Swallow; Vikram Haksar; Manasa Patnam
    Abstract: We examine how the development of the digital infrastructure known as the “India Stack”—including an interoperable payments system, a universal digital ID, and other features—is delivering on the government’s objective to expand the provision of financial services. While each individual component of the India Stack is important, we argue that its key overarching feature is a foundational approach of providing extensive public infrastructures and standards that generates important synergies across the layers of the Stack. Until recently, a large share of India’s population lacked access to formal banking services and was largely reliant on cash for financial transactions. The expansion of mobile-based financial services that enable simple and convenient ways to save and conduct financial transactions has provided a novel alternative for expanding the financial net. The Stack’s improved digital infrastructures have already allowed for a rapid increase in the use of digital payments and the entry of a range of competitors including fintech and bigtech firms.
    Date: 2021–02–26
  24. By: Gomez, M.; Hairault, J.
    Abstract: Our paper aims to unveil how much the monetary policy shall deviate from the flexible-price allocation in an economy with a large informal sector. First of all, the presence of variable taxes in the formal sector generates an inflation bias under discretionary policy which increases with the size of the informal sector. Secondly, we find that only the formal sector due to tax distortion fluctuations is responsible for cost push shocks which are amplified in a more informal economy. The trade-off between inflation and the formal output gap is then dependent on the elasticity of the former variable with respect to the latter one, which is lower in a more informal economy. However, the optimal management of inflation also depends on the elasticity of the informal output gap with respect to the formal output gap. As this elasticity is decreasing with the size of the informal sector, whether inflation volatility (in terms of the aggregate output gap) is lower or higher in a more informal economy is ambiguous. By simulation, we show that economies with a larger informal sector should stabilize more inflation relative to the two sectoral output gaps.
    Keywords: Informality; optimal monetary policy; New-Keynesian macroeconomics;tax distortion
    JEL: E26 E52 E12 H21
    Date: 2020–06–02
  25. By: Rathi, Sawan; Mohapatra, Sanket; Sahay, Arvind
    Abstract: Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This paper performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nation's external vulnerabilities in an uncertain global economic environment.
    Date: 2021–03–22
  26. By: Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
    Abstract: We show strong complementarities between monetary and macroprudential policies in influencing credit. We exploit credit register data - crucially from multiple (European) countries and for both corporate and household credit - in conjunction with monetary policy surprises and indicators of macroprudential policy actions. Expansive monetary policy boosts lending more in accommodative macroprudential environments. This complementary effect of monetary and macroprudential policy is stronger for: (i) expansionary (as opposed to contractionary) monetary policy; (ii) riskier borrowers; (iii) less capitalized banks (especially when lending to riskier borrowers); (iv) consumer and corporate loans (rather than mortgages); and (v) more (ex-ante) productive firms (especially for less capitalized banks).
    Keywords: credit registers,household loans,corporate loans,monetary policy,macroprudential policy
    JEL: G21 G28 G32 G51 E58
    Date: 2021
  27. By: Si, Hoan Luong Cu
    Abstract: The history of the preference to use cash, especially US dollars and gold bars could be traced to the hyperinflation of the 1980s as well as the economic crisis of 2008 – 2009 which saw inflation peaking at 28.3% in Aug 2008 alone.
    Date: 2019–10–28
  28. By: Simplice A. Asongu (Yaounde, Cameroon); Peter Agyemang-Mintah (Abu Dhabi, United Arab Emirate); Rexon T. Nting (London, UK)
    Abstract: This study investigates how the rule of law (i.e. law) modulates demand- and supply-side drivers of mobile money to influence mobile money innovations (i.e. mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money) in developing countries. The following findings from Tobit regressions are established. First, from the demand-side linkages, law modulates: (i) bank accounts and automated teller machine (ATM) penetration for negative interactive relationships with mobile money innovations and (ii) bank sector concentration for a positive interactive relationship with mobile money accounts. Second, from supply-side linkages, law interacts with: (i) mobile subscriptions for a negative relationship with the mobile phone used to send money; (ii) mobile connectivity coverage for a negative nexus on the mobile phone used to receive money and (iii) mobile connectivity performance for a negative influence on the mobile phone used to send/receive money. Policy implications are discussed in the light of enhancing the rule of law as well as improving mobile phone subscription, connectivity and performance dynamics.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2021–01
  29. By: Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
    Abstract: This papers analyzes the effect of the ECB’s Corporate Sector Purchase Programme (CSPP) and the recent Pandemic Emergency Purchase Programme (PEPP) on the yields of eligible green bonds, a new but rapidly growing segment of the corporate bond market. We exploit these policy changes using a difference-in-differences strategy, with ineligible corporate green bonds is- sued in euro, U.S. dollars and Swedish crowns as comparison groups. We find that both programs significantly improve financing conditions for eligible green bonds, thereby increasing the attractiveness of these instruments to issuers and of the euro area as a location of issuance. The effects of the CSPP and PEPP are heterogeneous, both in terms of average impact and persistence of the effects. Yield differences between eligible and ineligible green bonds can last for more than six months. Our analysis informs the debate about new financing options for firms as well as about effects of asset purchase programs on the transition towards a less carbon-intensive economy.
    Keywords: green bonds, bond yields, monetary policy, corporate sector purchase programme (CSPP), pandemic emergency purchase programme (PEPP)
    JEL: E52 E58 G12 G18 Q54
    Date: 2021
  30. By: Raphael Auer; Ariel Burstein; Sarah M. Lein
    Abstract: We dissect the impact of a large and sudden exchange rate appreciation on Swiss border import prices, retail prices, and consumer expenditures on domestic and imported non-durable goods, following the removal of the EUR/CHF floor in January 2015. Cross-sectional variation in border price changes by currency of invoicing carries over to consumer prices and allocations, impacting retail prices of imports and competing domestic goods, as well as import expenditures. We provide measures of the sensitivity of retail import prices to border prices and the sensitivity of import shares to relative prices, which is higher when using retail prices than border prices.
    JEL: F0
    Date: 2021–01
  31. By: Dalhaus, Tatjana; Schaumburg, Julia; Sekhposyan, Tatevik
    Abstract: We introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, we develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units, and establish the finite sample properties of the model via simulations. Second, we employ this innovative framework to jointly model the dynamics of interest rate surprises and to assess how various monetary policy actions, for example, short-term, long-term interest rate targeting and forward guidance, propagate across the yield curve. We find that the network of interest rate surprises is indeed asymmetric, and defined by spillovers between adjacent maturities. Spillover intensity is high, on average, but shows strong time variation. Forward guidance is an important driver of the spillover intensity. Pass-through from short-term interest rate surprises to longer maturities is muted, yet there are stronger spillovers associated with surprises at medium- and long-term maturities. We illustrate how our proposed framework helps our understanding of the ways various dimensions of monetary policy propagate through the yield curve and interact with each other. JEL Classification: C21, C53, E43, E44, E52
    Keywords: dynamic networks, monetary policy, yield-curve
    Date: 2021–03
  32. By: Valentina Aprigliano (Bank of Italy); Guerino Ardizzi (Bank of Italy); Alessia Cassetta (Bank of Italy); Alessandro Cavallero (Bank of Italy); Simone Emiliozzi (Bank of Italy); Alessandro Gambini (Bank of Italy); Nazzareno Renzi (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: This paper provides an overview of how information on payments has been recently exploited by Banca d’Italia staff for the purposes of tracking economic activity and forecasting. In particular, the payment data used for this work are drawn from the payment systems managed by Banca d’Italia (BI-COMP and TARGET2) and from the Anti-Money Laundering Aggregate Reports submitted by banks and by Poste Italiane to the Banca d’Italia’s Financial Intelligence Unit (Unità di Informazione Finanziaria, UIF). We show that indicators drawn from these sources can improve forecasting accuracy; in particular, those available at a higher frequency have proved crucial to properly assessing the state of the economy during the pandemic. Moreover, these indicators make it possible to assess changes in agents’ behaviour, notably with reference to payment habits, and, thanks to their granularity, to delve deeper into the macroeconomic trends, exploring heterogeneity by sector and geography.
    Keywords: short term forecasting, high-frequency data, payment systems, TARGET2, money laundering, COVID-19
    JEL: C53 E17 E27 E32 E37 E42
    Date: 2021–03
  33. By: Boneva, Lena; Islami, Mevlud; Schlepper, Kathi
    Abstract: The Eurosystem purchased €178 billion of corporate bonds between June 2016 and December 2018 under the Corporate Sector Purchase Programme (CSPP). Did these purchases lead to a deterioration of liquidity conditions in the corporate bond market, thus raising concerns about unintended consequences of large-scale asset purchases? To answer this question, we combine the Bundesbank's detailed CSPP purchase records with a range of liquidity indicators for both purchased and nonpurchased bonds. We find that while the flow of purchases supported secondary market liquidity, liquidity conditions deteriorated in the long-run as the Bundesbank reduced the stock of corporate bonds available for trading in the secondary market.
    Keywords: Corporate Bond Market,Central Bank Asset Purchases,Market Liquidity
    JEL: E52 F30 G12
    Date: 2021
  34. By: Abhipsa Pal (Indian Institute of Management Kozhikode); Mahesh Balan U. (Indian Institute of Technology Madras)
    Abstract: The cash crisis in demonetization led to the rise of digital payment adoption in India. Similarly, across the globe, the diffusion of information technology has often been initiated by environmental shocks from crises and disasters. Nevertheless, the impact of the initial shock reduces over time. This results in a gap that challenges the future of the technology, whose primary diffusion had been triggered by the crisis. While the information systems (IS) literature heavily focuses on technology usage during and immediately after crisis situations, the phenomenon of dying effect of the initial push by a shock is rarely investigated, which is the purpose of this paper. We investigate this phenomenon using the cash withdrawal patterns of ATMs located in a state in India, for a period of three continuous years postdemonetization. The findings suggest that the demonetizations’ pushing effect on mobile payments has gradually dampened over the years. This study contributes to the prior IS literature on technology diffusion post-crisis and digital payment continuity. The government and policymakers promoting digital payment diffusion can gain insights from the study, and understand the dying effect of crisis-induced technology adoption.
    Keywords: Technology diffusion; Cash withdrawals; Information technology in Crisis; Digital payments
    Date: 2020–09
  35. By: Sara Cecchetti (Bank of Italy); Davide Fantino (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Marianna Riggi (Bank of Italy); Alex Tagliabracci (Bank of Italy); Andrea Tiseno (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.
    Keywords: inflation expectations, anchoring, surveys
    JEL: E31 E32
    Date: 2021–03

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