nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒04‒12
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Economic performance under different monetary policy frameworks By Cobham, David; Macmillan, Peter; Mason, Connor; Song, Mengdi
  2. The journey towards dollarization: the role of the tourism industry By Raheem, Ibrahim; Ajide, Kazeem
  3. Predicting Inflation with Neural Networks By Livia Paranhos
  4. It's Worse than "Reverse" The Full Case Against Ultra Low and Negative Interest Rates By William White
  5. Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform By Hendrickson, Joshua
  6. A Search and Bargaining Model of Non-degenerate Distributions of Money Holdings By Kazuya Kamiya; So Kubota
  7. COVID-19 and the Fed?s Monetary Policy By Hetzel, Robert
  8. The misalignment of real effective exchange rate: Evidence from Tunisia By Ahmed Derbali; ;
  9. Monetary Policy Spillover into a Developing Country When the US Federal Fund Rate Rises: Evidence on a Bank Lending Channel By Daiju Aiba
  10. A Critique of Interest Rate?Oriented Monetary Economics By Sumner, Scott
  11. Reforming Australian Monetary Policy: How Nominal Income Targeting Can Help Get the Reserve Bank Back on Track By Kirchner, Stephen
  12. COVID-19 and the Fed?s Credit Policy By Hetzel, Robert
  13. A Term Structure Interest Rate Model with the Exit Time from the Negative Interest Rate Policy By Kentaro Kikuchi
  14. Dancing Alone or Together: The Dynamic Effects of Independent and Common Monetary Policies By Povilas Lastauskas; Julius Stakenas
  15. Inflation, endogenous quality increment, and economic growth By Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
  16. The Voice of Monetary Policy By Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
  17. Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation By Brent H. Meyer; Nicholas B. Parker; Xuguang Simon Sheng
  18. Inflation? It's Import Prices and the Labor Share! By Lance Taylor; Nelson H. Barbosa-Filho
  19. Unconventional Monetary Policy and Bond Market Connectedness in the New Normal By Umut Akovali; Kamil Yilmaz
  20. Liquidity management and monetary transmission: Empirical analysis for India By Vikas Chamal; Ashima Goyal
  21. Five Years of Inflation Targeting Without Economic Growth: What Should Be Changed The Case of Russia By Gasanov, Oscar
  22. The Money Value Problem: Convertibility & Stable Prices Revisited By Patterson, David
  23. Global financial cycles and exchange rate forecast: A factor analysis By Raheem, Ibrahim
  24. Rules vs. Discretion Revisited: A Proposal to Make the Strategy of Monetary Policy Transparent By Hetzel, Robert
  25. The Science and Art of Communicating Fan Chart Uncertainty: The case of Inflation Outcome in Sierra Leone By Jackson, Emerson Abraham; Tamuke, Edmund
  26. Bank Supervisory Goals versus Monetary Policy Implementation By Larry D. Wall
  27. Corralling Expectations: The Role of Institutions in (Hyper)Inflation By Hartwell, Christopher A; Szybisz, Martin Andres

  1. By: Cobham, David; Macmillan, Peter; Mason, Connor; Song, Mengdi
    Abstract: We first outline the major trends in monetary policy frameworks, which are shifts towards inflation targeting and towards frameworks which offer higher degrees of monetary control. We then examine the economic performance (inflation and growth) associated with different frameworks, presenting unconditional and conditional analyses, running regressions weighted by GDP and population as well as by the number of countries, and using predictions of countries’ monetary policy framework choices to address the issue of endogeneity. We find some differences in performance associated with the different monetary policy frameworks, together with a general improvement over time which is explained in part by the trends towards inflation targeting and more precise monetary control but in part, and perhaps more strongly, reflects a more general trend towards better economic performance.
    Keywords: monetary policy framework, exchange rate targeting, inflation targeting, inflation, economic growth, weighted regressions
    JEL: E52 E61 F41
    Date: 2021–04–03
  2. By: Raheem, Ibrahim; Ajide, Kazeem
    Abstract: There has been an increasing wave of globalization since the turn of the millennium. This study focuses on two by-products of globalization: dollarization and tourism. Empirical studies have ignored the possible relationship between dollarization and tourism. However, we hypothesize that a booming tourism industry will fuel increase in the usage and circulation of foreign currencies, thus increasing the level of dollarization. The objective of this study is to examine the extent to which the tourism industry exacerbates the dollarization process of selected Sub-sahara African (SSA) countries. Using Tobit regression, we found that tourism positively affects dollarization. Our results are robust to: (i) alternative measures of tourism; (ii) accounting for endogeneity and outlier effects.
    Keywords: Dollarization; tourism; Subsaharan Africa
    JEL: C1 E40 F31
    Date: 2020–12
  3. By: Livia Paranhos
    Abstract: This paper applies neural network models to forecast inflation. The use of a particular recurrent neural network, the long-short term memory model, or LSTM, that summarizes macroeconomic information into common components is a major contribution of the paper. Results from an exercise with US data indicate that the estimated neural nets usually present better forecasting performance than standard benchmarks, especially at long horizons. The LSTM in particular is found to outperform the traditional feed-forward network at long horizons, suggesting an advantage of the recurrent model in capturing the long-term trend of inflation. This finding can be rationalized by the so called long memory of the LSTM that incorporates relatively old information in the forecast as long as accuracy is improved, while economizing in the number of estimated parameters. Interestingly, the neural nets containing macroeconomic information capture well the features of inflation during and after the Great Recession, possibly indicating a role for nonlinearities and macro information in this episode. The estimated common components used in the forecast seem able to capture the business cycle dynamics, as well as information on prices.
    Date: 2021–04
  4. By: William White (Economic Development and Review Committee, OECD)
    Abstract: It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the 'reversal interest rate') if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy 'debt trap' that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.
    Keywords: negative interest rates, yield curve control, financial stability, banking supervision, shadow banking.
    JEL: E40 E43 E44
    Date: 2021–03–05
  5. By: Hendrickson, Joshua (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2019–06–13
  6. By: Kazuya Kamiya (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN); So Kubota (Faculty of Political Science and Economics, Waseda University)
    Abstract: We study a standard search and bargaining model of money, where goods are traded only in decentralized markets and distributions of money holdings are non-degenerate in equilibria. We assume fixed costs in each seller's production, which allows an analytical characterization of a tractable equilibrium. Each Nash bargaining solution satisfies pay-all property, where the buyer pays the whole amount of cash as a corner solution, and the seller produces goods as the interior solution. In the stationary equilibrium, the aggregate variables, such as total production and the number of matchings, are expressed by given parameters, i.e., determinate. On the other hand, individual-level variables are indeterminate. Distributional monetary policies are e ective in both the short-run and the long-run.
    Date: 2021–03
  7. By: Hetzel, Robert (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2020–10–08
  8. By: Ahmed Derbali (Central Bank of Tunisia); ;
    Abstract: This paper presents an estimation of the Tunisian equilibrium exchange rate based on the Behavioral Equilibrium Exchange Rate approach (BEER). The BEER framework links exchange rates to its fundamentals: Tunisian productivity, partners' productivity, trade openness and terms of trade. We calculate the distortion between the observed Real Exchange Rate (RER) and the equilibrium rate, and the misalignments related thereto. Vector autoregressive models and vector error correction models are applied to characterize the joint dynamics of variables in the long run, using quarterly data over the period 1990-2020. We find that this period was marked by phases of overvaluation and undervaluation of the RER. The empirical results indicate a low sensitivity of the RER to monetary and trade shocks. Indeed, the error correction mechanism on the one hand confirms one of the convergences of the real exchange rate series of its trajectory to its long-term target value. On the other hand, it reflects the success of monetary and commercial policies exploited to absorb unpredictable shocks capable of preventing the stability of real exchange rate from its equilibrium value.
    Keywords: Equilibrium exchange rate, Misalignment, BEER approach, Error correction model
    JEL: C32 F31 O55
    Date: 2021–03–29
  9. By: Daiju Aiba
    Abstract: Banks in developing countries are highly dependent on funding sources from abroad, and such high dependency on external funding could cause vulnerability to the sector by channeling the effects of foreign monetary policies to domestic bank lending. In this paper, we study the international transmission of monetary policy of US and banks’ major shareholders’ home countries into bank lending in Cambodia, using data on banks’ loan disbursement and balance sheets from 2013Q1 to 2019Q2. Cambodia is one of the least developed countries in the south-east Asian region, while its economy is highly dollarized and capital movement is free. This environment is likely to allow banks to transmit financial shocks into domestic lending. As a result, we find that US monetary policy affected domestic lending through the channel of foreign funding exposure, suggesting that Cambodian banks with foreign funding exposure are likely to reduce lending when there is a rise in the cost of funding from abroad. We also find that an increase in the US monetary policy rate is associated with increases in loan disbursements in secured loans, USD currency loans, and retail loans, suggesting the monetary transmission also affected loan reallocations by changing risk-taking behavior in bank lending. In addition, we find that these results are robust for US monetary policy effects, but weak and not robust for monetary policies of banks’ major shareholders’ home countries.
    Keywords: Bank Lending Channel, International Monetary Policy Transmission, Capital Inflow, Developing Countries, Dollarization, Cambodia
    Date: 2020–08–11
  10. By: Sumner, Scott (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2020–11–23
  11. By: Kirchner, Stephen (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2021–01–27
  12. By: Hetzel, Robert (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2020–07–29
  13. By: Kentaro Kikuchi (Faculty of Economics, Shiga University)
    Abstract: In the government bond markets in Japan and a number of European countries, neg-ative interest rates have been observed in recent years. Incorporating a negative lowerbound for interest rates into a term structure model makes it possible for the model toreplicate yield curves that include negative rates. In this study, we propose a new termstructure model with a stochastic lower bound where the short rate is de ned as the sumof the quadratic form of the Gaussian process and a negative lower bound for interestrates. The lower bound is characterized by a Brownian bridge with the random intervalpinned at zero at the starting time and the end time of a negative interest rate policy(NIRP). Under this setting, we derive a zero coupon bond price formula by imposing theno arbitrage condition. We calibrate our proposed model using Japanese yield curve dataand estimate the implied posterior distribution of the time to exit from the NIRP.
    Keywords: Yield curve, No arbitrage condition, Quadratic Gaussian term structuremodel, Brownian bridge, Negative interest rate policy.
    JEL: E43 E52 G12
  14. By: Povilas Lastauskas (Bank of Lithuania, Vilnius University); Julius Stakenas (Vilnius University)
    Abstract: What would have been the hypothetical effect of monetary policy shocks had a country never joined the euro area, in cases where we know that the country in question actually did join the euro area? It is one thing to investigate the impact of joining a monetary union, but quite another to examine two things at once: joining the union and experiencing actual monetary policy shocks. We propose a methodology that combines synthetic control ideas with the impulse response functions to uncover dynamic response paths for treated and untreated units, controlling for common unobserved factors. Focusing on the largest euro area countries, Germany, France, and Italy, we find that an unexpected rise in interest rates depresses inflation and significantly appreciates exchange rate, whereas GDP fluctuations are less successfully controlled when a country belongs to the monetary union than would have been the case under the independent monetary policy. Importantly, Italy turns out to be the overall beneficiary, since all three channels – price, GDP, and exchange rate – deliver the desired results. We also find that stabilizing an economy within a union requires somewhat smaller policy changes than attempting to stabilize it individually, and therefore provides more policy space.
    Keywords: Dynamic causal effects; Monetary union; Price puzzle; Common factors
    JEL: C14 C32 C33 E52
    Date: 2021–03–26
  15. By: Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
    Abstract: This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.
    Keywords: Monetary Policy, Economic Growth, R&D, Endogenous Quality Increment
    JEL: E41 O30 O40
    Date: 2021–03–15
  16. By: Yuriy Gorodnichenko (University of California, Berkeley); Tho Pham (Department of Economics, 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: 2021–04–07
  17. By: Brent H. Meyer (Federal Reserve Bank of Atlanta); Nicholas B. Parker (Federal Reserve Bank of Atlanta); Xuguang Simon Sheng (American University)
    Abstract: We rely on the Atlanta Fed's Business Inflation Expectations Survey to draw inference about firm's inflation perceptions, expectations, and uncertainty through the lens of firms' unit (marginal) costs. Using methods grounded in the survey literature, we find evidence that the concept of “aggregate inflation" as measured through price statistics like the Consumer Price Index (CPI) hold very little relevance for business decision makers. This lack of relevance manifests itself through experiments (including randomized controlled trials) that show varying question wording researchers use to elicit inflation expectations and perceptions significantly changes firm's responses. Our results suggest firms have become rationally ignorant of the concept of inflation in a low inflation environment. Instead, we find that unit (marginal) costs are the relevant lens with which to capture firms' views on the nominal side of the economy. We then investigate both firm-level (micro) and aggregated (macro) probabilistic unit cost expectations. On a firm-level, unit costs are an important determinant of firms' price-setting behavior. Aggregating across firms' beliefs, firms' unit cost perceptions strongly co-move with official aggregate price statistics and, importantly, firms' expectations for the nominal side of the economy bear little in common with the \prices in general" expectations of households. Rather, firms' aggregated beliefs strongly covary with the inflation expectations of professional forecasters and market participants.
    Keywords: Bimodality, Inflation Expectations, Probability Distributions, Randomized Controlled Trials, Uncertainty, Unit Cost
    JEL: E31 E52
    Date: 2021–03
  18. By: Lance Taylor (New School for Social Research); Nelson H. Barbosa-Filho (Getulio Vargas Foundation, Brazil)
    Abstract: Recognizing that inflation of the value of output and its costs of production must be equal, we focus on a cost-based macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis. For decades the import and profit shares of cost have risen, while the wage share has declined to around 50% with money wage increases lagging the sum of growth rates of prices and productivity. Conflicting claims to income are the underlying source of inflationary pressure. Inflation affects income (labor's spending power) and wealth. Monetarist theory around 1900 concentrated on the latter (Bryan and the ''Cross of Gold)'' leading to the standard Laffer curve. It was replaced by the Friedman-Phelps model which has incorrect dynamics (labor payments do not fall during an expansion, they go up). Samuelson and Solow introduced a version of the Phillips curve that violates macroeconomic accounting. Rational expectations replaced Friedman but was immediately falsified by output drops after the Volcker shock treatment around 1980. There followed a complicated transition from rational expectations to inflation targeting, anchored by economists' misunderstanding of the physical meaning of ergodicity and ontological blindness. It did not help that the real balance effect is irrelevant because money makes up a small part of wealth. Rather than issuing veiled threats of disaster if its policy advice is not followed, the Fed now announces inflation targets which it cannot meet. Contemporary structuralist theory suggests that conflicting income claims set the inflation rate. Firms can mark up costs but workers have latent bargaining power over the labor share that they can exercise. Import costs and policy repercussions complicate the picture, but a simple vector error correction model and visual analysis suggest that money wages would have to grow one percentage point faster than prices plus productivity for several years if the Fed is to meet a three percent inflation target. The results pose a Biden policy trilemma: (i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth), (ii) which would provoke faster inflation with feedback to rising interest rates, and (iii) the resulting asset price deflation likely facing political resistance from Wall Street and affluent households.
    Keywords: Cost-based inflation, structuralist inflation, conflicting claims
    JEL: E31 E32
    Date: 2021–01–20
  19. By: Umut Akovali (Koc University); Kamil Yilmaz (Koc University)
    Abstract: Since the global financial crisis, major central banks gradually switched to unconventional monetary policies (UMPs) as part of their efforts to directly influence the long-term interest rates. This study analyzes the impact of conventional/unconventional monetary policies on sovereign bond return spillovers across countries and maturities since February 2007. Following the Taper Tantrum of mid-2013 and the ECB’s policy convergence to other major central banks in 2015, the long-term return connectedness across countries increased, overtaking the short-term connectedness and lowering the dispersion of connectedness measures across maturities. Over the same period, net connectedness from short- to long-term maturities weakens, while net connectedness from medium- to long-term maturities stays strong. Finally, panel regression results show that UMPs in the form of higher central bank asset ratios led to higher pairwise long-term return connectedness even when the control variables such as trade and portfolio investment flows and the distance between pairs of countries are included in regression analysis.
    Keywords: Unconventional monetary policy, quantitative easing, yield curve, vector autoregression, variance decomposition, elastic net.
    JEL: F34 G15 C32 G23
    Date: 2021–03
  20. By: Vikas Chamal (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: A change in monetary operating procedures provides a natural experiment we use to evaluate first whether Indian monetary policy transmission is better when durable liquidity is in surplus or when it is in deficit; second is it better with interest rates as the policy instrument or quantity of money or a mixture of the two. After showing our period of analysis can be divided into two liquidity regimes, we estimate separate structural vector auto-regressions for the financial and real sector, as well as SVARs for the whole period with alternative operating instruments. Monetary transmission from the repo rate was better during the period the liquidity adjustment facility (LAF) was in surplus with the central bank in absorption mode denoting excess durable liquidity. Pass through was faster and the repo rate had a greater influence on other variables. The impact of the rate on output gap exceeds that on inflation. The weighted average call money rate was found to outperform others as the operating target. Monetary policy has evolved so that policy rates are more effective in transmission compared to money supply, but best results are when durable liquidity is also in surplus. The results suggest keeping the LAF in deficit mode over 2011-19 was not optimal.
    Keywords: Monetary transmission, liquidity deficit and surplus, repo rate, instrument, operating target
    JEL: E52 E58 E65
    Date: 2021–03
  21. By: Gasanov, Oscar
    Abstract: The article provides a review of approaches to assessing and analyzing the effectiveness of the interest rate and exchange rate policy of the Bank of Russia in the period 2015-2019. Despite the decrease in the rate of price growth, inflationary expectations of economic agents remain at a high level. Monetary policy continues to be tight. The stability of the exchange rate to external shocks, expected from the introduction of inflation targeting and a free floating rate, did not happen. The complex of conditions that have developed due to geopolitical factors, low growth rates and the global economic crisis caused by the coronavirus pandemic require the search for new targets, such as economic growth and exchange rate stability. To maintain the stability of the ruble exchange rate, it is recommended to sell foreign exchange reserves accumulated according to the "Budget rule" in an equivalent amount; to support the liquidity of banks during periods of an attack on the ruble, it should through foreign exchange REPO, and develop a derivatives market.
    Keywords: inflation targeting, consumer price index, exchange rate, monetary policy, Russian ruble, Bank of Russia
    JEL: E52 E58
    Date: 2020–10–20
  22. By: Patterson, David (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: We could benefit from a radically new approach to the money value problem, by re-engaging an old one. With the loss of gold as value standard, in favor of the “cost of living”, physical convertibility was lost as a value-conforming mechanism, but modern financial markets and the particular device of the REPO (collateralized loan in asset exchange form) could be employed to deliver its equivalent effects: value enforceable by the individual currency holder (or ower) and conformance of its value in the market generally. Such a modern form of convertibility could enforce a standard of choice. Technological advance is steadily eroding the foundations of the “cost-of-living” index. As consumption mutates with invention, the sensible cost to target becomes that of the American standard of living, in the form of a per capita share of total consumption spending, not so different, upon examination, from the share commanded by a resource of stable relative scarcity (such as gold), and superior in some ways to nominal GDP as target. Convertibility to such a standard would resolve multiple policy issues, including the “duality” of the statutory mandate and the challenges of negative interest. The “zero lower bound” would be eliminated, and “economic stability” disentangled from “financial stability”, to the advantage of both. Fiat convertibility, as we may call it, could be adopted discretionarily by the Fed, but there are strong arguments for a rule of law. We may need one to deal with deteriorating national finances. In the bargain we could reconsider the merits of a central bureaucracy “managing the economy.”
    Date: 2021–04
  23. By: Raheem, Ibrahim
    Abstract: This study applies portfolio balance theory in forecasting exchange rate. The study further argues for the need to account for the role of Global Financial Cycle (GFCy). As such, the first stage of the analysis is estimate a GFCy model and obtain the idiosyncratic shock. Next, we use the results in the first stage as a predictor for exchange rate. The study builds dataset for 20 advanced and emerging countries from 1990Q1- 2017Q2. Among other things, there are three important results to note. First, our approach to forecast exchange rate is able to beat the benchmark random walk model. Second, the best prediction is made at short term forecasting horizons, i.e. 1 and 4 quarters forecast ahead. Third, the performance of the early sample size outweighs that of the late sample size.
    Keywords: Exchange rate; Factor models; Global financial cycle; Forecasting
    JEL: E3 E37 F31
    Date: 2020
  24. By: Hetzel, Robert (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2019–06–25
  25. By: Jackson, Emerson Abraham; Tamuke, Edmund
    Abstract: The use of macro-econometric modelling technique has become a norm for policy decisions in central banks and in particular, the Bank of Sierra Leone. This study has leveraged on the technicalities of scientific and artistic approaches of assessing risks around point / baseline forecast; this in general makes it more convincing for probability confidence bands to be used in explaining uncertainty that surround point forecast in particular. In the case of this study, the use of the Box-Jenkins ARIMAX model has made it possible to highlight the relevance of Composite Leading Indicator (CLI) like Exchange Rate in alerting signals about early turning point of inflation outcome, both in terms of the uncertainty and risks surrounding its projections. With the derived (scientific) probability distribution of risks (30%, 60% and 90%), it was possible for the study outcome to unearth vast amount of information from the Inflation Fan Chart, particularly with respect to the art of providing balanced assessment of policy framework needed to communicate the BSL’s price stability objective. While the use of Fan Chart is hailed as a very relevant tool, the paper also recommend the use of other model approaches like Scenario and Sensitivity analysis, also considered relevant in providing leading evidence of balancing risks surrounding macroeconomic outlook.
    Keywords: Fan Chart; Normal Distribution; Forecast uncertainty; Balanced Risks
    JEL: C15 C52 C81 E37 E59
    Date: 2021–01–02
  26. By: Larry D. Wall
    Abstract: The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their operations in the Treasury securities market in 2020. The article concludes with a discussion of the issues associated with changing specific banking regulations and some more general suggestions for dealing with these types of conflicts.
    Keywords: banking regulation; capital adequacy; bank liquidity regulation; interest on reserves; Treasury market; repo market
    JEL: E52 E58 G28
    Date: 2021–03–29
  27. By: Hartwell, Christopher A; Szybisz, Martin Andres
    Abstract: Changes in prices and especially in aggregate price levels are subjected to complex dynamics and extreme endogeneity, as expectations, current conditions, policies, and the rules of the game combine to form inflationary outcomes. This paper explores how inflationary expectations are set – and limited – via an exploration of the role of institutions in corralling expectations. Using a continuous time formulation of the second derivative of the price level, we introduce expectations and institutional related variables to understand how expectations can become unstable. Testing the model on monthly institutional and macroeconomic data for several countries, we find that one institution in particular, property rights, keeps inflationary expectations in check and stops high inflation from becoming hyperinflation. In a situation where property rights have broken down, however, expectations are allowed to roam free and quickly become unstable.
    Keywords: Institutions; property rights; expectations; inflation
    JEL: E02 E31 E42 E52
    Date: 2021–01–27

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