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on Monetary Economics |
| By: | Georg Leitner (Department of Economics, Vienna University of Economics and Business); Teresa Hübel (Department of Economics, Vienna University of Economics and Business); Anna Wolfmayr (Department of Economics, Vienna University of Economics and Business); Manuel Zerobin (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | This paper empirically investigates the effect of monetary policy on systemic risk within the Euro area. We estimate a Bayesian proxy-VAR where we exploit high-frequency identified monetary policy surprises for identification. Employing aggregate as well as market specific systemic risk measures, we provide novel evidence on the heterogeneous risk transmission of conventional and unconventional monetary policy on different financial markets. We find that expansionary conventional monetary policy, near term guidance and forward guidance decrease systemic risk whereas quantitative easing (QE) increases systemic risk. While the effects are qualitatively homogeneous for near term guidance and forward guidance, there exists heterogeneity in the risk transmission of conventional monetary policy and QE across different financial markets. The latter increases systemic risk significantly within bond markets, foreign exchange markets and among financial intermediaries. This might be caused by increased search for yield behaviour as QE distinctively reduces longer term interest rates. Our analysis shows that there is a potential threat to financial stability caused by QE which should be concerned by monetary- and macroprudential policymakers. |
| Keywords: | Monetary Policy, CISS, Systemic Risk, Bayesian-Proxy-VAR, High-Frequency Identification |
| JEL: | C32 E44 E52 G10 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp312&r=all |
| By: | Bauer, Michael D.; Swanson, Eric T. |
| Abstract: | High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a "Fed information effect" channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. The authors show that these empirical results are also consistent with a "Fed response to news" channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. They provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, regressions that include the previously omitted public macroeconomic news, high-frequency stock market responses to Fed announcements, and a new survey that they conduct of individual Blue Chip forecasters all indicate that the Fed and private sector are simply responding to the same public news, and that there is little if any role for a "Fed information effect". |
| Keywords: | Federal Reserve,forecasts,survey,Blue Chip,Delphic forward guidance |
| JEL: | E43 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:155&r=all |
| By: | Leitner, Georg; Hübel, Teresa; Wolfmayr, Anna; Zerobin, Manuel |
| Abstract: | This paper empirically investigates the effect of monetary policy on systemic risk within the Euro area. We estimate a Bayesian proxy-VAR where we exploit high-frequency identified monetary policy surprises for identification. Employing aggregate as well as market specific systemic risk measures, we provide novel evidence on the heterogeneous risk transmission of conventional and unconventional monetary policy on different financial markets. We find that expansionary conventional monetary policy, near term guidance and forward guidance decrease systemic risk whereas quantitative easing (QE) increases systemic risk. While the effects are qualitatively homogeneous for near term guidance and forward guidance, there exists heterogeneity in the risk transmission of conventional monetary policy and QE across different financial markets. The latter increases systemic risk significantly within bond markets, foreign exchange markets and among financial intermediaries. This might be caused by increased search for yield behaviour as QE distinctively reduces longer term interest rates. Our analysis shows that there is a potential threat to financial stability caused by QE which should be concerned by monetary- and macroprudential policymakers. |
| Keywords: | Monetary Policy, CISS, Systemic Risk, Bayesian-Proxy-VAR, High-Frequency Identification |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:8062&r=all |
| By: | Stella Mnoyan (Monetary Policy Department, Central Bank of Armenia) |
| Abstract: | In this paper, we develop a semi-structural macroeconomic model to estimate the Exchange Rate Pass-through in Armenia using Bayesian estimation. The pass-through both to import prices and core inflation is somewhat lower than the average results for comparable emerging economies reported in the literature. As we calculate time-varying pass-through rates we also explore critical factors causing shifts over time. The macroeconomic view of exchange rate pass-through incompleteness, especially the monetary policy credibility factor, plays a significant role. |
| Keywords: | Purchasing Power, Taylor Rule, Risk Premia, Exchange Rates, Exchange Rate Pass-through, Output Inflation, Bayesian Analysis, Econometric Modeling, Simulation |
| JEL: | F31 E31 E37 C11 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ara:wpaper:013&r=all |
| By: | Biljana Jovanovic (National Bank of the Republic of North Macedonia); Marko Josimovski (National Bank of the Republic of North Macedonia) |
| Abstract: | In this paper, we investigate the effects of monetary policy concerning the inflation rates specific for each income group of households. We find that the prices specific for high-income households are generally more rigid and less volatile compared to the prices specific for middle and lower-income households. This means that monetary policy can differently affect the different inflation rates specific for each of the income groups. By using a Factor-Augmented VAR (FAVAR) model, we show that a monetary policy shock affects high-income households less compared to middle and lower-income households, although the differences between the separate income groups are generally small. Then, by using a small scale gap model, we find that the prices of low-income households are the most sensitive to a monetary policy shock, while the prices of the top-income households are the least sensitive to the shock, which is in line with our empirical findings. |
| Keywords: | Inflation, monetary policy, distributional effects |
| JEL: | E31 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2021-01&r=all |
| By: | Luca Agnello (SEAS - University of Palermo, Dept Econ Business & Stat); Vitor Castro (Loughborough University, Sch Business & Econ, NIPE - University of Minho, Econ Policies Res Unit); Gilles Dufrénot (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); Fredj Jawadi (Université de Lille); Ricardo Sousa (The Economic Policies Research Unit (NIPE) - The Economic Policies Research Unit (NIPE), LSE - London School of Economics and Political Science) |
| Abstract: | We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank's actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit. |
| Keywords: | central bank reserves,asset prices,nonlinear models,inflation,output gap,shadow short rate,term spread,unconventional monetary policy reaction function |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03101417&r=all |
| By: | Dmitry Khametshin (Banco de España) |
| Abstract: | This article documents the difference in corporate bond issuance between the euro area (EA) and the United States (US) in 2020, especially in the high-yield (HY) segment, and discusses the role that the monetary policy measures undertaken by the US Federal Reserve (Fed) and the ECB in response to the Covid-19 crisis may have played in explaining such difference. We document that the issuance of HY bonds since February 2020 has been lower by historical standards in the EA than in the US. The Fed’s measures aimed at the HY segment, mainly the purchase of HY bond exchange traded funds (ETFs), could have reduced credit spreads and improved market liquidity, which in turn could have stimulated debt issuance. Alternatively, HY issuers in the EA may have faced better bank funding conditions due to the ECB’s targeted longer term refinancing operations (TLTRO) and to other measures by national fiscal authorities, leading such issuers to substitute bank credit for bond finance. The article discusses these possibilities and argues that they all may have played a role to a certain extent. |
| Keywords: | corporate bond purchase programs, monetary policy, COVID-19 |
| JEL: | E58 E43 G12 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2110&r=all |
| By: | Haavio, Markus; Laine, Olli-Matti |
| Abstract: | We analyze the economic performance of different monetary policy strategies, or rules, in a low interest rate environment, using simulations with a DSGE model which has been estimated for the euro area. We study how often the effective lower bound of interest rates (ELB) is likely to bind, and how much forgone monetary policy accommodation this entails. Macroeconomic outcomes are measured by the mean levels and the volatility of output (gaps), unemployment and inflation. We present three sets of results. First, the macroeconomic costs of the ELB are likely to grow in a non-linear manner if the monetary policy space (the difference between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point inflation target appears to outperform a target range. Third, the (relative) performance of low-for-long (L4L) monetary policy rules depends on the size of the monetary policy space. The L4L rules tend to perform well, if the monetary space is small, but if the space is larger these rules, while stabilizing inflation, may lead to more volatility in the real economy than flexible inflation targeting. |
| JEL: | E31 E32 E52 E58 |
| Date: | 2021–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2021_005&r=all |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US) |
| Abstract: | The lack of developed financial markets and well-functioning transmission channels assigns monetary aggregates in emerging economies the potential role of nominal anchor, intermediate target, or informational variable for monetary policy. The effectiveness of this approach relies crucially on the correct measurement of money, which is not fulfilled by the conventional index based on the simple sum of financial assets. This paper calculates alternative Divisia monetary aggregates for Russia over the period 1998-2019, which account for the level of liquidity of a given monetary asset by assigning weights according to the usefulness of that asset for transaction services. Divisia is found to follow a growth pattern markedly different from the simple sum, whereby deviations between the two series are even more pronounced when foreign-currency accounts are included. We conduct three empirical exercises to demonstrate the advantages of Divisia over the simple sum. Divisia confirms the stability of the money demand function and reflects portfolio shifts in response to changes in the opportunity cost of simple sum. Lastly, Divisia mitigates the price puzzle phenomenon relative to the conventional measure. We conclude that Divisia monetary aggregates would improve the effectiveness of monetary policy in Russia. |
| Keywords: | Monetary policy, monetary aggregates, Divisia, nowcasting, Russia |
| JEL: | C43 E41 E52 O52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202101&r=all |
| By: | Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli |
| Abstract: | Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers. |
| Keywords: | Accountability; European Central Bank; politicians; European Parliament |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp20159&r=all |
| By: | Kapp, Daniel; Kristiansen, Kristian |
| Abstract: | This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy. JEL Classification: E22, E52, G12 |
| Keywords: | equity risk premia, monetary policy shocks, monetary policy transmission |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212535&r=all |
| By: | Donato Masciandaro; Davide Romelli; Gaia Rubera |
| Abstract: | How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions. |
| Keywords: | monetary policy, central bank communication, financial markets, social media, Twitter, Federal Reserve, European Central Bank, Bank of England |
| JEL: | E44 E52 E58 G14 G15 G41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp20160&r=all |
| By: | ITO Hiroyuki; KAWAI Masahiro |
| Abstract: | When the new corona virus (COVID-19) pandemic triggered the global economic crisis in March 2020, the US dollar appreciated while the prices of many other financial assets plunged. The US dollar also appreciated in the immediate aftermath of the Global Financial Crisis (GFC) in 2008. These two episodes signify the important role the US dollar plays as an international currency and the dominant role of the US dollar and the limited use of the local currencies for international transactions, especially in Asia. Using a wide variety of data on the use of currencies for international transactions, we find that the US dollar is the predominantly important currency in the Asian region for cross-border trade, investment, finance, international reserve holding and exchange rate management. In many aspects of international transactions, the use of local currencies in the ASEAN+3 countries is underdeveloped. Recently, the Chinese renminbi is on its way to becoming one of the major international currencies. However, it is still a long way for the renminbi to become a major currency even in the Asian region. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:21019&r=all |
| By: | D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael |
| Abstract: | Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, which central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will benefit households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public's trust in central banks, which is crucial to guarantee the credibility of their policies. |
| Keywords: | Behavioral Macroeconomics,Heterogeneous Beliefs,Limited Cognition,Expectations Formation,Household Finance |
| JEL: | D12 D84 D91 E21 E31 E32 E52 E65 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:147&r=all |
| By: | Demary, Markus; Hüther, Michael |
| Abstract: | Inflation has started to increase, and the return of inflation comes at a time in which economies begin to recover from pandemic-induced and lockdown-induced recessions. This raises questions about how much and how long inflation will go up as well as about whether central banks have to step-up against inflation at the cost of slowing down the economic recovery. Has "low for long" turned into "higher for longer"? We look at the different possible factors that could drive inflation, like pandemic- and lockdown-induced pend-up demand, price-wage-spirals, fiscal policy and other relevant factors. We conclude from our analysis that inflation could possibly rise in the short-term, but that inflation will return to low rates in the medium-term. While pend-up demand will result in higher prices, the inflation effect will only be transitory and moreover concentrated on services related to tourism and accommodation and be absent in other sectors where digital alternatives leading to more competition are available. Even in the case in which the combination of accommodative monetary policy and expansionary fiscal policy would close the output gap and drive the economy towards a state of overheating, we expect a low inflationary effect because of the flat Phillips-curve. Thus, we do not expect any trade-offs for central banks between fighting inflation and supporting the economies to grow and to deleverage. Instead, we see a welcomed return of inflation towards its target value accompanied by an economic recovery that enables central banks to end their asset purchasing programmes and their negative interest rate policies in a natural way, that means we expect higher interest rates without risks to the economic recovery. |
| JEL: | E31 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwkrep:122021&r=all |
| By: | Sergio Florez-Orrego |
| Abstract: | This paper depicts an often neglected channel of transmission of monetary policy, namely international safety appetite, as an important source of production and risk-taking international monetary spillovers. The model features a local economy with exogenous financial frictions that lead firms to need both local and foreign financing to pay for their factors of production. Global and local risk-averse banks supply firms with risky loans while buying safe assets to governments to hedge themselves against equity shocks. Monetary policy shocks of a hegemon currency issuer affect returns obtained by banks for the risky loans they concede, altering these agents' risk pricing and balance sheet composition. Main results outline that global monetary policy tightening reduces the returns of risky global loans, inducing global banks to reduce risky loan creation, ultimately decreasing both production and consumption volatility internationally. Two more secondary results arise. First, local monetary authorities may counteract global monetary policy spillovers, but this will entail a trade-off between boosting production and reducing consumption volatility. Second, both global and local expansive monetary policy increase the demand for global safe assets, relaxing the budget constraint of monopolistic global safe asset issuers. Understanding the international safety appetite mechanism of transmission appears to be of critical importance as it may impact the effectiveness of monetary policy in open economies as well as its optimal design. |
| Keywords: | global currencies, monetary policy spillovers, exorbitant privilege. |
| JEL: | E42 E44 E52 E63 F42 F44 |
| Date: | 2021–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:019153&r=all |
| By: | Nadar, Anand |
| Abstract: | This study investigatesthe effectiveness of fiscal policy and monetary policy in India. We collected the time series data for India ranging from 1960 to 2019 from World Development Indicator (WDI). We applied the bound test co-integration approach to check the long-run relationship between fiscal policy, monetary policy, and economic growth in the context of Indian economy. The short-run and long-run effects of fiscal policy and monetary policy have been estimated using ARDL models. The results showed that there is a long-run relationship between fiscal and monetary policies with economic growth. The estimated short-run coefficients indicated that a few immediate short run impacts of fiscal and monetary policies are insignificant. However, the short-run impacts become significant as time passes. The long-run results suggested that the long-run impact of both fiscal and monetary policies on economic growth are positive and significant. More specifically, the GDP level increases if the money supply and government expenditure increase (Expansionary fiscal and monetary policies). On the other hand, the GDP level decreasesif the money supply and government expenditure decrease (contractionary fiscal and monetary policies). Therefore, this study recommends to use expansionary policies to spur the Indian economy. |
| Date: | 2021–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:39s7a&r=all |
| By: | Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano |
| Abstract: | We employ a nonlinear VAR framework and a state-of-the-art identification strategy to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We then use the estimated framework to quantify the output loss due to the large uncertainty shock that materialized in 2008Q3. We find such a shock to be able to explain about 60% of the output loss in the 2008-2014 period. The same estimated model unveils the role successfully played by the Federal Reserve in limiting the output loss that would otherwise have occurred had monetary policy been conducted as in normal times. Finally, we show that the rule estimated during the great recession is able to deliver an economic outcome closer to the flexible price one than the rule describing the Federal Reserve's conduct in normal times. |
| Keywords: | uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession |
| JEL: | C22 E32 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8985&r=all |
| By: | Carlo Altavilla; Luc Laeven; José-Luis Peydró |
| 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: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1246&r=all |
| By: | Roman Garcia; Dimitri Lorenzani; Daniel Monteiro; Francesco Perticari; Bořek Vašíček; Lukas Vogel |
| Abstract: | This paper analyses empirically the main direct and indirect transmission channels of financial spillovers and contagion risks in the euro area, focusing on the sovereign-to-sovereign, sovereign-to-bank, and bankto-bank channels. We employ correlation analysis, analysis of bank balance sheets, reduced-form models inferring the interconnectedness among agents from market data, and simulated structural models. The value added by this paper to the literature consists both in analysing the recent episodes of financial distress (until 2019), which happened after reforms of the Economic and Monetary Union (EMU) architecture were introduced in response to the euro area debt crisis, and in our reliance on complementary analytical tools (“tool kit”). Overall, the paper suggests that: (i) sovereign-to-sovereign spillover risks have weakened, arguably also due to a more limited role of redenomination risk; (ii) financial spillovers from sovereigns to banks (and vice versa) have become smaller in recent years; and (iii) the bank-to-bank transmission channel remains the most relevant in terms of financial spillovers and potential contagion. Finally, when analysing the impact of financial spillovers on the real economy, we find that higher financial risks can imply sizeable losses in terms of real GDP growth. |
| JEL: | C01 E43 G01 G21 G28 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:137&r=all |
| By: | Louisa Grimm; Sven Steinkamp; Frank Westermann |
| Abstract: | The former EU president Jean-Claude Junker has proposed that all countries of the European Union should also adopt the euro as their currency and recent research has shown that countries currently pursuing this goal indeed fulfill the classical Optimal Currency Area (OCA) criterion of positively correlated shocks with the European Monetary Union (EMU). We illustrate, however, that not only the correlation of shocks but also a common impulse response pattern over time is needed for a currency area to be optimal. We test this additional OCA criterion using the concept of a common serial correlation test. The test clearly rejects the notion that the potentially acceding countries share a common cyclical response pattern with the EMU aggregate – except for Sweden. Instead, the business cycles in most of the other countries exhibit only a very weak form of codependence. |
| Keywords: | Codependent Business Cycles; Serial Correlation Common Feature; European Monetary Integration; Seasonality; Optimum Currency Area |
| JEL: | C32 E32 F36 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0120&r=all |
| By: | Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia) |
| Abstract: | Whether inflation and output respond symmetrically or asymmetrically to contractionary and expansionary monetary policy shock of the same size has important policy implications. This paper shows the presence of asymmetric responses in Armenian inflation and output to positive and negative monetary policy shocks of the same size by employing econometric models. Contractionary policy decreases inflation less than expansionary policy increases it. Output reacts in the opposite way. An estimated small open economy DSGE model with sticky wages and investment adjustment costs explains about half of the asymmetry observed in the monetary policy transmission mechanism. This paper finds that the main part of inflation reaction asymmetry is a result of a highly convex Phillips curve for the importers. The nonlinearities of the internal economy explain the predominant part of the asymmetry in output reaction. |
| Keywords: | nonlinear VAR, New Keynesian Model, monetary policy, asymmetries, business cycle, expansion, recession, asymmetric effects of monetary policy |
| JEL: | C32 E12 E32 E52 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:ara:wpaper:018&r=all |
| By: | Tiziana Marie Gauci; Noel Rapa (Central Bank of Malta) |
| Abstract: | The paper applies two commonly used methods in the literature to estimate the shadow economy in Malta, the Currency Demand Approach and the Multiple Indicator Multiple Causes (MIMIC) model. Given the unobservable nature of the shadow economy, estimates are surrounded by a considerable degree of uncertainty. While these two methods differ somewhat on the historical evolution of the size of the Maltese shadow economy, which in turn can be traced back to their different underlying assumptions, both suggest that it has remained relatively stable over the last decade, standing at just below 21% of official GDP in 2019. Where possible, these estimates are compared to other studies on the same subject where we find that the dynamic properties of our variable follow those found in the literature. |
| JEL: | C32 E26 H26 O17 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mlt:wpaper:0220&r=all |
| By: | Coibion, Olivier; Gorodnichenko, Yuriy; Ropele, Tiziano |
| Keywords: | inflation expectations, surveys, inattention |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:econwp:qt54f0k77k&r=all |
| By: | Mario Canales; Bernabe Lopez-Martin |
| Abstract: | We analyze the role of uncertainty and risk for price setting behavior and inflation. To this end, we exploit the micro-level data underlying the Consumer Price Index of Chile for the period 2010-2018. We consider in our analysis a set of established measures in the literature, among others: the economic policy uncertainty index (EPU) for Chile, the VIX for emerging economies, two indices of real and financial uncertainty constructed by Jurado, Ludvigson and Ng (AER, 2015), and the volatilities of the nominal exchange rate and the domestic stock market index. We find that uncertainty and risk are positively associated with product-level inflation, and with the frequency of positive price changes at the variety-establishment level, as well as a negative association with the frequency of negative price changes. The results are quantitatively important, the values of coefficients can be larger than of those typically estimated for the exchange rate pass-through in the literature and in our own estimations (for fluctuations equivalent to one standard deviation in the explanatory variables). In contrast, we find little association with the magnitudes of price adjustments. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:908&r=all |
| By: | Cristina Fuentes-Albero; John M. Roberts |
| Abstract: | In August 2020, the Federal Open Market Committee approved a revised Statement on Longer-Run Goals and Monetary Policy Strategy (FOMC, 2020) and in the subsequent FOMC meetings, the Committee made material changes to its forward guidance to bring it in line with the new framework. Clarida (2021) characterizes the new framework as comprising a number of key features. |
| Date: | 2021–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2021-04-12&r=all |
| By: | Wesley Janson; Randal Verbrugge |
| Abstract: | tatistical agencies track rental expenditures for use in the national accounts and in consumer price indexes (CPIs). As such, statistical agencies should include late payment fees and nonpayment in rent. In the US context, late payment fees are excluded from the CPI. Ostensibly, nonpayment of rent is included in the US CPI; but its treatment is deficient, and we demonstrate that small variations in nonpayment could lead to large swings in shelter inflation, and might have played a role in the 2009 measured shelter inflation collapse. They didn’t: while the national nonpayment incidence is 2-3 percent, in the 1 million plus rent observations in BLS rent microdata from 2000-2016, no nonpayment is recorded. A back-of-the-envelope calculation suggests that, assuming nonpayment undermeasurement continued after 2016, CPI shelter inflation may have been overestimated by about 1 percentage point per month (annualized) in 2020. Late fees and nonpayment are difficult to measure in real time. We offer implementation suggestions that are consistent with CPI procedures. |
| Keywords: | shelter inflation; nonpayment; eviction; COVID collapse; CPI mismeasurement |
| JEL: | E31 R31 |
| Date: | 2021–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:90678&r=all |
| By: | Joseph, Andreas (Bank of England); Kalamara, Eleni (King’s College London); Kapetanios, George (King’s College London); Potjagailo, Galina (Bank of England) |
| Abstract: | We forecast CPI inflation in the United Kingdom up to one year ahead using a large set of monthly disaggregated CPI item series combined with a wide set of forecasting tools, including dimensionality reduction techniques, shrinkage methods and non-linear machine learning models. We find that exploiting CPI item series over the period 2011–19 yields strong improvements in forecasting UK inflation against an autoregressive benchmark, above and beyond the gains from macroeconomic predictors. Ridge regression and other shrinkage methods perform best across specifications that include item-level data, yielding gains in relative forecast accuracy of up to 70% at the one-year horizon. Our results suggests that the combination of a large and relevant information set combined with efficient penalisation is key for good forecasting performance for this problem. We also provide a model-agnostic approach to address the general problem of model interpretability in high-dimensional settings based on model Shapley values, partial re-aggregation and statistical testing. This allows us to identify CPI divisions that consistently drive aggregate inflation forecasts across models and specifications, as well as to assess model differences going beyond forecast accuracy. |
| Keywords: | Inflation; forecasting; machine learning; state space models; CPI disaggregated data; Shapley values |
| JEL: | C32 C45 C53 C55 E37 |
| Date: | 2021–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0915&r=all |
| By: | Emilio Ocampo |
| Abstract: | A fiscal deficit of 8.5% of GDP, limited access to credit locally and internationally, country risk premiums at default levels and money supply growing at 80% annually, have led some analysts to predict that Argentina might be heading into a “3-digit modern hyperinflation.” Although this opinion is not widely held, the consensus inflation forecast for 2021 is 47%, a level significantly below any definition of hyperinflation but high by global standards (above the 98th percentile). Even more worrisome, over the last decade inflation has shown a persistent upward trend and since January 2019 has averaged 45%. Given all of the above, it is worthwhile investigating when Argentina experienced it and why. This paper attempts to answer the first part of this question. According to a widely accepted view there was only one hyperinflation between 1989 and 1990. This paper argues that Argentina experienced four hyperinflationary episodes that were part of a long-term cycle that started in 1945. |
| Keywords: | Argentina, Inflation, Extreme Inflation, Hyperinflation |
| JEL: | E31 N16 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:787&r=all |
| By: | Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia) |
| Abstract: | This paper develops empirical models and shows the presence of asymmetric responses of inflation and output in Armenia to the same size of positive and negative monetary policy shocks. Tight monetary policy yields more reduction in output compared to the increase of output in a response to the same size of loose monetary policy. On the other hand, relatively more inflation is created by expansionary policy. The theoretical micro founded model with New Keynesian frictions is developed to explain asymmetries in transmission mechanism of policy. The model is estimated for the Armenian economy using fifteen macroeconomic time series and fifteen structural shocks. Impulse response functions of second order approximated theoretical model, based on estimated structural parameters, match asymmetries from empirical models. The methodology of mixed equations is applied to calculate the contribution of the particular friction in a creation of asymmetry in the transmission mechanism. The asymmetric response of inflation is mostly the result of highly convex Phillips curve of importers. Another part of asymmetry in inflation is created by internal economy’s price setting frictions and labor market rigidities. The significant part of asymmetric response in output is caused by nonlinearities in capital and labor markets. Adding curvatures of the small open economy into the second order approximated model, the size of asymmetry increases through the channel of higher asymmetry in real exchange rate. Third order theoretical moments of simulated models match directions and sizes of observed data. Variance decomposition of output shows that both demand and supply shocks are important drivers of output. The paper does policy experiments in demand and supply driven business cycle environments. In a demand driven growing economy, the aggressive contractionary monetary policy accelerates the decline of output with diminishing effect on inflation. Aggressive expansionary monetary policy increases the efficiency of creating inflation and decreases the stimulation of output in a demand driven recession. When the economy is in supply driven expansion, the increase in reaction of monetary policy accelerates the decline in output with no significant relative impact on inflation. In a supply driven recession, the aggressive response increases the reaction of output with diminishing effect on inflation. |
| Keywords: | Nonlinear VAR, Simulation, New Keynesian DSGE, Monetary Policy, Asymmetries, Business Cycle, Expansion, Recession, Asymmetric Effects of Monetary Policy |
| JEL: | C32 E12 E32 E52 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ara:wpaper:011&r=all |
| By: | Mariam Camarero (University Jaume I and INTECO, Department of Economics, Castellón (Spain).); Gilles Dufrénot (Aix-Marseille Univ, CNRS, AMSE, Marseille, France and CEPII); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Valencia, Spain.) |
| Abstract: | In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable. |
| Keywords: | potential growth, Inequality, natural interest rate, G7, state-space model |
| JEL: | E62 E52 E21 C32 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2123&r=all |
| By: | Wilhelm Kohler; Gernot Müller; Susanne Wellmann |
| Abstract: | Country-specific business cycle fluctuations are potentially very costly for member states of currency unions because they lack monetary autonomy. The actual costs depend on the extent to which consumption is shielded from these fluctuations and thus on the extent of risk sharing across member states. The literature to date has focused on financial and credit markets as well as on transfer schemes as channels of risk sharing. In this paper, we show how the standard approach to quantify risk sharing can be extended to account for migration as an additional channel of cross-country risk sharing. In theory, migration should play a key role when it comes to insulating per capita consumption from aggregate fluctuations, and our estimates show that it does so indeed for US states, but not for the members of the Euro area (EA). Consistent with these results, we also present survey evidence which shows that migration rates are about 20 times higher in the US. Lastly, we find, in line with earlier work, that risk sharing is generally much more limited across EA members. |
| Keywords: | risk sharing, currency unions, labour migration, migration rates, Euro area |
| JEL: | F41 F22 G15 J61 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8982&r=all |
| By: | Mariam Camarero (University Jaume I, INTECO - Grupo de Investigacion en Integracion Economica); Gilles Dufrénot (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); Cecilio Tamarit (Department of Applied Economics II, University of Valencia, Avda. dels Tarongers s/n, Valencia 46022 - affiliation inconnue) |
| Abstract: | In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable. |
| Keywords: | potential growth,inequality,natural interest rate,G7,state-space model |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03191667&r=all |
| By: | Guglielmo Maria Caporale; Gloria Claudio-Quiroga; Luis A. Gil-Alana |
| Abstract: | This paper analyses the relationship between CPI and real GDP in both the US and the UK using fractional integration and long-range dependence techniques. All series appear to be highly trended and to exhibit high degrees of integration and persistence, especially in the case of CPI. Since the two variables have different degrees of integration in each of the two countries, fractional cointegration tests cannot be carried out. We assume instead weak exogeneity of each of them in turn and test for causality by regressing the other variable against lagged values of the weakly exogenous one. We find that the only significant relationship implies the existence of a lagged effect of prices on output in the case of the US, which suggests a dominant role for demand shocks. |
| Keywords: | real output, prices, persistence, fractional integration |
| JEL: | C22 C23 E32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8970&r=all |