nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒04‒26
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Optimal monetary policy with the risk-taking channel By Angela Abbate; Dominik Thaler
  2. Communicating Monetary Policy Rules By Troy A. Davig; Andrew Foerster
  3. Optimal Foreign Reserves and Central Bank Policy Under Financial Stress By Luis Felipe Céspedes; Roberto Chang
  4. Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model By Hoshino, Satoshi; Ida, Daisuke
  5. The Long Run Stability of Money in the Proposed East African Monetary Union By Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
  6. The Forecasts of Individual FOMC Members: New Evidence after Ten Years By Jaime Marquez; S Yanki Kalfa
  7. The International Monetary and Financial System By Gourinchas, PO; Rey, H; Sauzet, M
  8. Optimal Constrained Interest-Rate Rules under Heterogeneous Expectations By Gasteiger, Emanuel
  9. How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US By Rafael Mariam Camarero; Gilles Dufrénot; Cecilio Tamarit
  10. 'Liked', 'Shared', 'Commented': Central Bank Communication on Facebook and Twitter By Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
  11. Dominant currency paradigm† By Gopinath, G; Boz, E; Casas, C; Díez, FJ; Gourinchas, PO; Plagborg-Møller, M
  12. On Optimal Currency Areas and Common Cycles: Are the Acceding Countries Ready to Join the Euro? By Louisa Grimm; Sven Steinkamp; Frank Westermann
  13. Predicting Inflation with Neural Networks By Paranhos, Livia
  14. Inflation Expectations and Firms’ Decisions: New Causal Evidence By Coibion, Olivier; Gorodnichenko, Yuriy; Ropele, Tiziano
  15. Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries By Oguzhan Cepni; Rangan Gupta; Qiang Ji
  16. What Matters in Households' Inflation Expectations? By Philippe Andrade; Erwan Gautier; Eric Mengus
  17. Imperfect Information, Heterogeneous Demand Shocks,and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  18. Uncertainty about exchange rates affects import prices in the Euro Area By Blagov, Boris
  19. Optimal Algorithmic Monetary Policy By Luyao Zhang; Yulin Liu
  20. Trade in coinage, Gresham's Law, and the drive to monetary unification: the Holy Roman Empire, 1519-59 By Volckart, Oliver
  21. The catalytic role of IMF programs By Claudia Maurini; Alessandro Schiavone
  22. The Time Has Come to Permanently Retire All Our Caribbean Currencies By Worrell, DeLisle
  23. On robustness of average inflation targeting By Honkapohja, Seppo; McClung, Nigel
  24. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
  25. Under the same (Chole)sky: DNK models, timing restrictions and recursive identification of monetary policy shocks By Giovanni Angelini; Marco M. Sorge
  26. On selling sovereigns held by the ECB to the ESM: Institutional and economic policy implications By Avgouleas, Emilios; Micossi, Stefano
  27. How does international monetary leadership end? The Sterling Area revisited By De Bromhead, Alan; Jordan, David; Kennedy, Francis; Seddon, Jack
  28. Monetary-Fiscal Interactions and Redistribution in Small Open Economies By Gergo Motyovszki
  29. Oil, Equities, and a “Nonbinding” Zero Lower Bound: The Monetary Policy Response to COVID-19 By Deepa Dhume Datta; Benjamin K. Johannsen; Robert J. Vigfusson
  30. Deep Reinforcement Learning in a Monetary Model By Mingli Chen; Andreas Joseph; Michael Kumhof; Xinlei Pan; Rui Shi; Xuan Zhou
  31. Understanding the greater diffusion of mobile money innovations in Africa By Asongu, Simplice; Biekpe, Nicholas; Cassimon, Danny

  1. By: Angela Abbate; Dominik Thaler
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).
    Keywords: Risk-taking channel, optimal monetary policy
    JEL: E44 E52
    Date: 2021
  2. By: Troy A. Davig; Andrew Foerster
    Abstract: Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation tolerance bands, and provide economic projections. When inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this communication replicates and provides the same information as a rule-based policy. In addition, the communication strategy produces a natural benchmark for assessing central bank performance.
    Keywords: monetary policy; inflation targeting; Taylor rule; communication
    JEL: E10 E52 E58 E61
    Date: 2021–04–12
  3. By: Luis Felipe Céspedes; Roberto Chang
    Abstract: We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.
    Date: 2020–09
  4. By: Hoshino, Satoshi; Ida, Daisuke
    Abstract: This paper reevaluates the role of asset price stabilization in Japan during the 1980s through a Bayesian estimation of the dynamic stochastic general equilibrium model. Our results show the presence of the wealth channel from increased stock prices in Japan. In addition, we argue the possibility that the Bank of Japan (BOJ) may have conducted its monetary policy by targeting the stock price stability in addition to inflation and the output gap. The BOJ's response to stock price movements as a matter of policy, however, is subject to considerable uncertainty. Our results indicate that while the BOJ may have reacted to stock prices deviated from their fundamental values, it could not prevent a stock price bubble simply by implementing a contractionary monetary policy shock. Therefore, we conclude that the BOJ's monetary policy stance aimed at stabilizing stock price fluctuations and minimizing macroeconomic volatility, whereas endogenous volatility was caused by bad shocks.
    Keywords: Monetary policy; Bayesian estimation; DSGE model; Stock prices; Wealth effect;
    JEL: E52 E58
    Date: 2021–04–21
  5. By: Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
    Abstract: This study investigates the stability of money in the proposed East African Monetary Union (EAMU). The study uses annual data for the period 1981 to 2015 from five countries making up the East African Community (EAC). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries. This divergence is articulated in terms of differences in CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long term determinants and error correction in event of a shock. Specifically, the results show that the demand for money is stable in the cases of Burundi, Rwanda and Tanzania based on the CUSUM and CUSUMSQ tests, while for the remaining countries (Kenya and Uganda) only partial stability is apparent. In event of a shock, Kenya will restore its long run equilibrium fastest, followed by Tanzania and Burundi.
    Keywords: Stable; demand for money; bounds test
    JEL: C22 E41 O55
    Date: 2020–01
  6. By: Jaime Marquez (Johns Hopkins SAIS); S Yanki Kalfa (University of California San Diego)
    Abstract: A central tenet of Macroeconomics is that monetary policy is forward looking. But Romer (2010) uses the forecasts of the participants of the U.S. Federal Open Market Committee’s (FOMC) and shows a remarkable heterogeneity in these participants’ outlooks. What accounts for this forecast heterogeneity? And how can one reconcile the tension between the need for a single monetary and the heterogeneity of forecasts that are steering it? To study these two questions, we continue the line of work initiated by Romer (2010). We study two sources of heterogeneity: Institutional and Dynamic. Institutional Heterogeneity is about differences in participants’ education, voting status, and regional affiliation — and the associated implications for forecast rationality. Dynamic Heterogeneity is about herd behavior, extreme forecasts, temporal aggregation, and macroeconomic shocks. These factors emphasize that forecast heterogeneity is not a given constant but rather, that it changes in response to the alignment between private and social interests of the FOMC. We find that forecast revisions are large and remarkably heterogenous across participants. Specifically, the FOMC’s forecast heterogeneity is systematically related to differences in participants’ education, voting status, and regional affiliation, as Romer anticipated. These results should not be surprising: heterogeneity is a built-in feature of the functioning of the Federal Reserve System and the role of the FOMC is to reconcile the differences. The reconciliation of private and public interests, and the implied heterogeneity of courses of action, involves a conversation in which the Chair gets the benefit of the doubt.
    JEL: E5 C3
    Date: 2021–04
  7. By: Gourinchas, PO; Rey, H; Sauzet, M
    Abstract: International currencies fulfill different roles in the world economy, with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers and of the exorbitant privilege, and we analyze the emergence of a new Triffin dilemma.
    Date: 2019–08–02
  8. By: Gasteiger, Emanuel
    Abstract: This paper examines optimal monetary policy under heterogeneous expectations. To this end, we develop a stochastic New Keynesian model with a cost-push shock and coexistence of one-step-ahead rational and adaptive expectations in decentralized markets. On the one side, heterogeneous expectations imply an amplification mechanism that has many adverse consequences missing under the rational expectations paradigm. On the other side, even discretionary optimal monetary policy can manipulate expectations via a novel channel. We argue that the incorporation of heterogeneous expectations in both the design and implemen tation of discretionary optimal monetary policy to exploit this channel lowers macroeconomic volatility. We find that: (1.) surprisingly, a more hawkish policy can reduce losses due to volatility, but an overly hawkish policy does not; (2.) overestimating the share of rational expectations in the design and implementation of policy creates additional losses, while the underestimation does not; (3.) credible commitment eliminates or mitigates many of the ramifications of heterogeneous expectations.
    Keywords: heterogeneous expectations,optimal monetary policy,policy design,policy implementation
    JEL: D84 E52
    Date: 2021
  9. By: Rafael Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain)); Gilles Dufrénot (Corresponding author: AMSE and CEPII. email:; Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, PO Box 22006 E-46071 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
  10. By: Yuriy Gorodnichenko (University of California, Berkeley); Tho Pham (University of Reading); Oleksandr Talavera (University of Birmingham)
    Abstract: This study is a comprehensive analysis of the Federal Reserve System (FED) communication on social media and its effectiveness. Our examination shows that although the FED uses both Twitter and Facebook for public outreach, communication via Twitter is more popular and gains greater public engagement. There are heterogeneous effects across different topics of the FED's social media posts, post types, as well as across Twitter user groups. The general public is most active in engaging with the FED accounts, followed by media, investors, academics, and government accounts. Further investigation suggests inconclusive evidence of stock market reactions to the FED communication on social media. However, market participants do update their inflation expectations based on information contained in the FED's social media posts.
    Keywords: central bank communication, social media, public engagement, financial market.
    JEL: E50 E58
    Date: 2021–05
  11. By: Gopinath, G; Boz, E; Casas, C; Díez, FJ; Gourinchas, PO; Plagborg-Møller, M
    Abstract: We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment.
    Keywords: Economics, Commerce, Management, Tourism and Services, Commerce, Management, Tourism and Services
    Date: 2020–03–01
  12. 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
    Date: 2021
  13. By: Paranhos, Livia (University of Warwick)
    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.
    Keywords: forecasting ; inflation ; neural networks ; deep learning ; LSTM model
    Date: 2021
  14. By: Coibion, Olivier; Gorodnichenko, Yuriy; Ropele, Tiziano
    Keywords: inflation expectations, surveys, inattention
    Date: 2019–04–29
  15. By: Oguzhan Cepni (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara, Turkey); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China)
    Abstract: In this paper, we investigate how conventional and unconventional monetary policy shocks affect the stock market of eight advanced economies, namely, Canada, France, Germany, Japan, Italy, Spain, the U.K., and the U.S., conditional on the state of sentiment. In this regard, we use a panel vector auto-regression (VAR) with monthly data (on output, prices, equity prices, metrics of monetary policies, and consumer and business sentiments) over the period of January 2007 till July 2020, with the monetary policy shock identified through the use of both zero and sign restrictions. We find robust evidence that, compared to the low investor sentiment regime, the reaction of stock prices to expansionary monetary policy shocks is stronger in the state associated with relatively higher optimism, both for the overall panel and the individual countries (with some degree of heterogeneity). Our findings have important implications for academicians, investors, and policymakers.
    Keywords: Conventional and unconventional monetary policies, equity prices, sentiment, OECD countries, panel VAR, zero and sign restrictions
    JEL: C32 C33 E30 E51 E52 G15
    Date: 2021–04
  16. By: Philippe Andrade; Erwan Gautier; Eric Mengus
    Abstract: We provide survey evidence on how households’ inflation expectations matter for their spending highlighting a behavioral distortion compared to the New Keynesian setup. A large share of households expects prices to remain stable instead of increasing. Such a belief is linked to individual experience with non-durable goods frequently purchased. Households expecting stable prices consume less durable goods than those expecting positive inflation. In contrast, differences across households expecting positive inflation are associated with insignificant differences in durable consumption decisions. That distortion implies that managing aggregate demand through households’ inflation expectations is limited and can run out of ammunition.
    Keywords: behavioural macroeconomics, heterogeneous beliefs, expectation formation, households’ spending, inflation expectation channel, stabilization policies
    JEL: D12 D83 E21 E31 E52
    Date: 2021
  17. By: Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
    Abstract: Using sector-level survey data for the universe of Japanese firms, we establish the positive co-movement in the firm’s expectations about aggregate and sector-specific de¬mand shocks. We show that a simple model with imperfect information on the current aggregate and sector-specific components of demand explains the positive co-movement of expectations in the data. The model predicts that an increase in the relative volatil¬ity of sector-specific demand shocks compared to aggregate demand shocks reduces the sensitivity of inflation to changes in aggregate demand. We test and corroborate the theoretical prediction on Japanese data and find that the observed decrease in the relative volatility of sector-specific demand has played a significant role for the decline in the sensitivity of inflation to movements in aggregate demand from mid-1980s to mid-2000s.
    Keywords: : Imperfect information, Shock heterogeneity, Inflation dynamics
    Date: 2021–02–08
  18. By: Blagov, Boris
    Abstract: RWI research shows that monetary policy should take uncertainty about exchange rate fluctuations into account. When aiming at price stability, central banks closely monitor exchange rates. Their level is known to influence prices, since many product components are sourced internationally. An RWI study suggests that central bankers should also take the level of uncertainty about future exchange rates into account when aiming at price stability. The study finds that in the Euro Area, importers bear the main burden of the uncertainty. Mainly affected are countries like Germany, Italy, and the Netherlands, whose industries rely heavily on intermediate goods imports. When uncertainty increases, importers buy less goods to lower the risk. Consequently, prices for intermediate goods fall.
    Date: 2021
  19. By: Luyao Zhang; Yulin Liu
    Abstract: Centralized monetary policy, leading to persistent inflation, is often inconsistent, untrustworthy, and unpredictable. Algorithmic stable coins enabled by blockchain technology are promising in solving this problem. Algorithmic stable coins utilize a monetary policy that is entirely rule-based. However, there is little understanding about how to optimize the rule. We propose a model that trade-offs between the price and supply stability. We further study the comparative statistics by varying several design features. Finally, we discuss the empirical implications and further research for industry applications.
    Date: 2021–04
  20. By: Volckart, Oliver
    Abstract: Research on premodern monetary unions has so far started out from the idea that such unions were designed to promote trade and economic integration. The present paper demonstrates that this in an anachronistic misconception. Premodern monetary unions were the answer to political and fiscal problems caused by Gresham’s Law in a monetary environment characterised permeable borders and by the increasing integration of currency markets. As integration advanced significantly in the fifteenth and early sixteenth centuries, the regional monetary unions that had been formed in the late medieval Holy Roman Empire were increasingly insufficient to address these problems. This is why the imperial estates were interested in creating and Empire-wide common currency – an aim they reached at the end of the 1550s.
    JEL: N0 J1
    Date: 2021–04
  21. By: Claudia Maurini (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: This paper investigates the impact of IMF programs on private capital flows in the assisted countries. We look at the impact on inflows and outflows of both traditional and precautionary programs, also taking into account the characteristics of the programs. Using the entropy balancing method to address the selection bias, we find that traditional IMF programs have an anticatalytic effect on private capital inflows; this effect is mainly driven by programs that went off-track and by exceptional access programs. By contrast, precautionary programs are found to have a catalytic effect, working mainly through outflows.
    Keywords: International Monetary Fund, catalysis, capital flows
    JEL: F33 F34 G11 G15
    Date: 2021–04
  22. By: Worrell, DeLisle (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The currencies of Caribbean countries have now outlived their usefulness, and have become a liability. They were devised at a time when most payments were made using notes and coin, issued in distant metropolitan centres. Scarcity of the means of payment was a severe hindrance to commerce. In response Currency Boards were set up, to issue local currency as needed in the colonies. The system worked well because the local currency issue was backed by an equivalent value of Sterling, in a global system of fixed exchange rates. In contrast, nowadays payments are made mostly by electronic communication, credit and debit cards, cheques and drafts, with settlement over digitized bank accounts. In today’s world an own currency has become a liability for small economies, limiting access to international goods and services, exposing residents to risks of currency devaluation and inflation, eroding the value of domestic savings, increasing economic inequalities, providing a tool for unproductive government spending, and diverting attention from the need to increase productivity and enhance international competitiveness.
    Keywords: Dollarisation; exchange rate; fixed exchange rate; foreign currency; currency board; open economy
    JEL: F31 F32
    Date: 2021–04
  23. By: Honkapohja, Seppo; McClung, Nigel
    Abstract: This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.
    JEL: E31 E52 E58
    Date: 2021–04–21
  24. By: Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992–3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Keywords: Financial crisis, Currency crisis, Euro, European Monetary System, Economics
    Date: 2020–04–01
  25. By: Giovanni Angelini; Marco M. Sorge
    Abstract: Recent structural VAR studies of the monetary transmission mechanism have voiced concerns about the use of recursive identification schemes based on short-run exclusion restrictions. We trace out the effects on impulse propagation of informational constraints embodying classical Cholesky-timing restrictions in otherwise standard Dynamic New Keynesian (DNK) models. By reinforcing internal propagation mechanisms and enlarging a model's equilibrium state space, timing restrictions may produce a non-trivial moving average component of the equilibrium representation, making finite order VARs a poor approximation of true adjustment paths to monetary impulses, albeit correctly identified. They can even serve as an independent source of model-based nonfundamentalness, thereby hampering shock identification via VAR methods. This notwithstanding, restricted DNK models are shown to feature (i) invertible equilibrium representations for the observables and (ii) fast-converging VAR coefficient matrices under empirically tenable parameterizations. This alleviates concerns about identification and lag truncation bias: low-order Cholesky-VARs do well at uncovering the transmission of monetary impulses in a truly Cholesky world.
    JEL: C3 E3
    Date: 2021–04
  26. By: Avgouleas, Emilios; Micossi, Stefano
    Abstract: A repetition of austerity policies of the early 2010s is not consistent with maintaining adequate growth and sovereign debt sustainability in the post-pandemic environment, argue the authors of this CEPS Policy Insight. Likewise, a debt restructuring process with deep haircuts will just upset the fragile state of the markets and create a run on the debt of the most vulnerable member states, forcing the ECB to buy even more debt. Common policies are thus required to keep the sovereigns acquired by the ECB with its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) programmes out of financial markets for an indefinite period. The European Stability Mechanism (ESM) can offer the appropriate instrument by purchasing the ECB-held sovereign debt and issuing own liabilities to fund the purchases. The programme could develop gradually, over several years, to ensure the smooth rollover of expiring securities. As the purchases would be funded by the ESM’s own liabilities, backed by the sovereign holdings, ESM debt would become the long- sought-after European safe asset. The authors argue that this ESM action could be conducted without an ESM Treaty change. It would be premised on the legal framework of the revised Article 14 (precautionary financial assistance). The ESM could then gradually evolve into a debt management agency for the euro area. The transfer of much of ECB sovereign holdings to the ESM would restore monetary policy independence and ease any frictions in this field, thereby allowing EU policymakers’ focus to shift to the completion of the European Banking Union. This paper follows up on a CEPS Policy Insight of October 2020, in which Stefano Micossi argued that the increase in sovereign indebtedness under way in the euro area should be managed through collective policy actions.
    Date: 2021–03
  27. By: De Bromhead, Alan; Jordan, David; Kennedy, Francis; Seddon, Jack
    Abstract: How does international monetary leadership end? This paper examines the decline of the Sterling Area between 1945 and 1979 to understand the process of international economic disintegration. Using an original cross-national panel dataset, we conduct survival analysis which systematically evaluates a comprehensive set of economic and political factors about when and why countries chose to leave the Sterling Area. We find that membership of the Sterling Area was determined by multidimensional aspects. Our results highlight the significance of international economic and geopolitical factors, such as trade and diplomatic alignment, on the decision to leave. However we also find that domestic political and historical factors, such as democracy and imperial legacy, played a role in the Sterling Area's unravelling. Finally, we use our results to examine the experience of individual countries and their decisions to leave the Sterling Area. Revisiting this history of a gradually dissolving economic order, played out in the shadow of Britain's waning imperial and economic power, has cautionary implications for the future of the US dollar order.
    Keywords: The Sterling Area,international monetary regime,internationalcurrency,sterling,decline,disintegration
    JEL: N10 F02 F22 F33
    Date: 2021
  28. By: Gergo Motyovszki
    Abstract: Ballooning public debts in the wake of the covid-19 pandemic can present monetary-fiscal policies with a dilemma if and when neutral real interest rates rise, which might arrive sooner in emerging markets: policymakers can stabilize debts either by relying on fiscal adjustments (AM-PF) or by tolerating higher inflation (PM-AF). The choice between these policy mixes affects the efficacy of the fiscal expansion already today and can interact with the distributive properties of the stimulus across heterogeneous households. To study this, I build a two agent New Keynesian (TANK) small open economy model with monetary-fiscal interactions. Targeting fiscal transfers more towards high-MPC agents increases the output multiplier of a fiscal stimulus, while raising the degree of deficit-financing for these transfers also helps. However, precise targeting is much more important under the AM-PF regime than the question of financing, while the opposite is the case with a PM-AF policy mix: then deficit-spending is crucial for the size of the multiplier, and targeting matters less. Under the PM-AF regime fiscal stimulus entails a real exchange rate depreciation which might offset "import leakage" by stimulating net exports, if the share of hand-to-mouth households is low and trade is price elastic enough. Therefore, a PM-AF policy mix might break the Mundell-Fleming prediction that open economies have smaller fiscal multipliers relative to closed economies.
    Keywords: monetary-fiscal interactions, small open economy, hand-to-mouth agents, redistribution, public debt, Ricardian equivalence
    Date: 2021
  29. By: Deepa Dhume Datta; Benjamin K. Johannsen; Robert J. Vigfusson
    Abstract: We analyze the recent behavior of oil and equity prices in the context of our earlier work, Datta, et al. (2021), which focuses on the previous zero lower bound (ZLB) episode, in the aftermath of the Global Financial Crisis. We find that the correlation between oil and equity returns and the responsiveness of these returns to macroeconomic surprises are perhaps elevated relative to normal times but somewhat moderated relative to the previous ZLB episode.
    Date: 2021–04–14
  30. By: Mingli Chen; Andreas Joseph; Michael Kumhof; Xinlei Pan; Rui Shi; Xuan Zhou
    Abstract: We propose using deep reinforcement learning to solve dynamic stochastic general equilibrium models. Agents are represented by deep artificial neural networks and learn to solve their dynamic optimisation problem by interacting with the model environment, of which they have no a priori knowledge. Deep reinforcement learning offers a flexible yet principled way to model bounded rationality within this general class of models. We apply our proposed approach to a classical model from the adaptive learning literature in macroeconomics which looks at the interaction of monetary and fiscal policy. We find that, contrary to adaptive learning, the artificially intelligent household can solve the model in all policy regimes.
    Date: 2021–04
  31. By: Asongu, Simplice; Biekpe, Nicholas; Cassimon, Danny
    Abstract: The present research extends Lashitew, van Tulder and Liasse (2019, RP) in order to understand the greater diffusion of mobile money innovations in Africa. To make this assessment, a comparative analysis is engaged between sampled African countries and the corresponding sampled developing countries. Three main types of predictor groups are used for the study, namely: demand, supply and macro-level factors. The empirical evidence is based on Tobit regressions. The tested hypothesis is confirmed because from a comparative analysis between African-specific estimates and those of the sampled countries, not all factors driving mobile money innovations in Africa are apparent in the findings of Lashitew et al. (2019). An extended analysis is also performed to take on board the concern of multicollinearity from which, the best estimators from the study are derived. Comparative findings from correlation analysis show that an African specificity is largely traceable to the ‘unique mobile subscription rate’ variable. An in-depth empirical analysis further confirms an African specificity in the outcome variables (especially in the mobile used to send/receive money) which, may be traceable to informal sector variables not documented in Lashitew et al. (2019). Scholarly and policy implications are discussed.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2020–09

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