nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒05‒03
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central Bank Digital Currencies and Monetary Policy Effectiveness in the Euro Area By Alexandra Mitschke
  2. Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations By Christina Anderl; Guglielmo Maria Caporale
  3. The anchoring of long-term inflation expectations of consumers: insights from a new survey By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  4. Euro Area House Prices and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  5. Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations By Michael Ehrmann
  6. Systemic Instability of the Interbank Credit Market - A Contribution to a Resilient Financial System By Thomas Gries; Alexandra Mitschke
  7. Optimal monetary policy with non-homothetic preferences By Blanco, Cesar; Diz, Sebastian
  8. Coins with benefits: On existence, pricing kernel and risk premium of cryptocurrencies By Chen, Yi-Hsuan; Vinogradov, Dmitri V.
  9. The Dynamic Impact of FX Interventions on Financial Markets By Menkhoff, Lukas; Rieth, Malte; Stöhr, Tobias
  10. Modeling the impact of Coronavirus uncertainty on bank system vulnerability and monetary policy conduct By Ben salem, salha; slama, ines
  11. Monetary Policy, Equity Markets and the Information Effect By Calvin He
  12. Financial statecraft and transaction costs: The case of renminbi internationalization By Zucker Marques, Marina
  13. Monetary Policy Press Releases: An International Comparison By Mario Gonzalez; Raul Cruz Tadle
  14. The Importance of External Shocks and Global Monetary Conditions for A Small-Open Economy By Gulnihal Tuzun
  15. Reconstruction of the Spanish Money Supply, 1492-1810 By Felix Ward; Yao Chen; Nuno Palma
  16. Credibility Dynamics and Inflation Expectations By Rumen Kostadinov; Francisco Roldán
  17. The bias and efficiency of the ECB inflation projections: a State dependent analysis By Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
  18. Stuck at Zero: Price Rigidity in a Runaway Inflation By Snir, Avichai; Chen, Haipeng (Allan); Levy, Daniel
  19. Bagehot for Central Bankers By Laurent Le Maux
  20. Collateral Framework: Liquidity Premia and Multiple Equilibria By Lengwiler, Yvan; Orphanides, Athanasios
  21. Impact of Abundant Reserves on Money Markets and Policy Implementation By Lorie Logan
  22. Collateral framework: Liquidity premia and multiple equilibria By Lengwiler, Yvan; Orphanides, Athanasios
  23. The Credit Channel Through the Lens of a Semi- Structural Model By Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
  24. The Credit Composition of Global Liquidity By Helmut Herwartz; Christian Ochsner; Hannes Rohloff
  25. Credit Supply, Firms, and Earnings Inequality By Christian Moser; Farzad Saidi; Benjamin Wirth; Stefanie Wolter
  26. Is Mobile Money Changing Rural Africa? Evidence from a Field Experiment By Catia Batista; Pedro C. Vicente
  27. Exchange Rates and Insulation in Emerging Markets By Eichengreen, Barry; Park, Donghyun; Ramayandi, Arief; Shin, Kwanho

  1. By: Alexandra Mitschke (University of Paderborn)
    Abstract: In consequence of the progressive digitalization and declining trend of cash- usage in payments, the majority of central banks is currently researching the topic of Central Bank Digital Currencies (CBDCs). Since 2020, the ECB is preparing a review into whether to issue a digital complement to physical cash and central bank deposits, the so-called digital euro. This study investigates its potential impact on the transmission of monetary policy. We fiÂ…rst survey and interpret key properties of money and money-like assets in the current monetary framework, which motivates a discussion of the proposed forms of CBDCs and the digital euro. Against this background, we extend and close the arbitrage model of Meaning et al. (2018) to investigate the effect of CBDCs on the effectiveness of monetary policy transmission and the ability of the banking sector to fulÂ…fil regulatory liquidity requirements. We conclude that monetary policy would be effective following the introduction of interest-bearing CBDCs, potentially reinforcing the mechanism. Further, we confiÂ…rm that an increase in non-pecuniary benefiÂ…ts of holding bank deposits in relation to CBDCs can mitigate the risk of a potential disintermediation of the banking sector.
    Keywords: Central Bank Digital Currencies, Monetary System, Monetary Policy
    JEL: E41 E42 E52 E58
    Date: 2021–04
  2. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper re-examines the UIP relation by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Cointegrated Smooth Transition VAR (CVSTAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. We find that the nonlinear framework is more appropriate to capture the adjustment towards the UIP equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages are stronger. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, UIP holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility.
    Keywords: UIP, exchange rate, nonlinearities, asymmetric adjustment, CVAR (Cointegrated VAR), CVSTAR (Cointegrated Smooth Transition VAR), interest rate expectations, interest rate announcements
    JEL: C32 F31 G15
    Date: 2021
  3. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible deanchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
    Keywords: inflation expectations
    JEL: E31 E58 F62
    Date: 2021–04
  4. By: Oliver Hülsewig; Horst Rottmann
    Abstract: This paper examines the reaction of house prices in a panel of euro area countries to monetary policy surprises over the period 2010-2019. Using Jordà’s (2005) local projection method, we find that real house prices rise in response to expansionary monetary policy shocks that can be related to unconventional policy measures. In the core countries including Ireland, we also find that lending for house purchases increases relative to nominal output. Thus, household debt rises.
    Keywords: Euro area house prices, unconventional monetary policy, local projection method
    JEL: E52 E58 E32 G21
    Date: 2021
  5. By: Michael Ehrmann
    Abstract: Inflation targeting is implemented in different ways – most often by adopting point targets, by having tolerance bands around a point target, or by specifying target ranges. Using data for 20 economies, this paper tests whether the various target types affect the anchoring of inflation expectations at shorter horizons differently. It tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means.
    Keywords: inflation targeting, inflation expectations, point target, tolerance band, target range
    JEL: E52 E58 E31
    Date: 2021
  6. By: Thomas Gries (University of Paderborn); Alexandra Mitschke (University of Paderborn)
    Abstract: Interbank markets have infrequently exhibited sudden interest rate spikes. These disruptions in a key …financial market can undermine fi…nancial stability. Imperfections, such as moral hazard, …financial frictions, and negative externali- ties have been suggested as potential explanations for interbank market disrup- tions. However, we still know very little how the interbank market works (Allen et al., 2018). We complement traditional stock analyses by modelling dynamics in the interbank credit market, focusing on the ‡flow process between lending and borrowing institutions. In our theoretical model credit supply is restricted by the availability of stochastic liquidity in‡ows to lending institutions. Follow- ing a shock in the form of an increase in volatility of these liquidity in‡flows, a sequential fl‡ow adjustment process sets in. In "“normal times" ”the fl‡ow dynamics remain smooth within a stable adjustment regime. However, a higher volatility can change the lending process, resulting in a bifurcation of the equilibrium. Defi…ning interbank "market resilience" as the probability of remaining in the stable regime, we examine the impact of monetary policy tightening on inter- bank market stability. A change in the volatility of reserve fl‡ows, which is more likely when central banks tighten monetary policy, may threaten the resilience of interbank markets and increase the probability of the market to fall into a regime of unstable dynamics. Thus, we stress that tightening monetary policy could incidentally reduce interbank market resilience up to a potential market collapse, even in the absence of contagion phenomena.
    Keywords: Financial Markets, Interbank Lending, Monetary Policy
    JEL: E44 E52 G11 G21
    Date: 2021–04
  7. By: Blanco, Cesar; Diz, Sebastian
    Abstract: This paper explores the optimal design of monetary policy in a multisector model where agents' preferences are non-homothetic. Non-homotheticity derives from the existence of a minimum consumption requirement for food, which households need to satisfy for subsistence. We find that the introduction of a minimum consumption requirement reduces the weight on food inflation in the optimal index that the monetary authority should target. We identify three motives for such prescription. First, non-homothetic preferences turn the stabilization of food inflation more costly, as it requires larger deviations of output from the efficient level. Second, proximity to the subsistence level turns the demand for food insensitive to monetary policy. Inflation in this sector thus becomes difficult to control. Third, non-homothetic preferences imply that households spend only a small share of any additional income on food. This means that prices in this sector have a reduced impact on aggregate consumption demand. Hence, responding to inflation in this sector becomes less relevant. Importantly, our results provide a rationale for targeting an index that excludes (or attaches a limited weight to) food inflation, a usual practice amongst central bankers.
    Keywords: Inflation, Price Index, Monetary Policy
    JEL: E31 E52
    Date: 2021–04–26
  8. By: Chen, Yi-Hsuan; Vinogradov, Dmitri V.
    Abstract: Cryptocurrencies come with benefits, such as anonymity of payments and positive network effects of user adoption, and transaction risks including unconfirmed transactions, hacks, and frauds. They compete with central-bank-regulated money but consumers may prefer one currency over the other. In our arbitrage-free world utility from consumption depends on benefits, which are governed by distinct stochastic processes, implying incomplete markets and distinct pricing kernels. We characterize the cryptocurrency kernels, evaluate the otherwise unobservable benefits, and show their contribution to pricing. The model explains both the co-existence of the two currencies and the high volatility of the cryptocurrency price.
    Keywords: Bitcoin,cryptocurrency,pricing kernel,currency competition
    JEL: A1 D0 E21 G12
    Date: 2021
  9. By: Menkhoff, Lukas (HU Berlin and DIW Berlin); Rieth, Malte (DIW Berlin); Stöhr, Tobias (Kiel Institute for the World Economy)
    Abstract: Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Applying this approach to the most important, freely floating currencies, we find that FX intervention shocks significantly affect exchange rates and that this impact persists for months. We show for Japan and the US that interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.
    Keywords: foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices;
    JEL: F31 F33 E58
    Date: 2019–12–04
  10. By: Ben salem, salha; slama, ines
    Abstract: The uncertainty of COVID-19 seriously disrupts the world through various macroeconomic and financial channels. For Tunisia, the Pandemic came when the economy was confronting persevering macroeconomic imbalances, regardless of new progress with policy and reform implementation. This context hits the Tunisian economy, especially as it has not yet exited from the negative effect of the 2011 revolution. This paper aims to analyze how the coronavirus uncertainty shock affects the monetary policy's conduct and the banking system's vulnerability in Tunisia. Using the structural VAR model, we find that the adaptation of an easing credit' policy by the bank can attenuate the uncertainty of COVID-19 uncertainty in a short period but it causes negative consequences on the Tunisian economy in a subsequent period. The empirical results show also that uncertainty decreases the ability of the central bank to improve economic activity and control inflation.
    Keywords: COVID-19 uncertainty, bank vulnerability, monetary policy conduct, economic implication
    JEL: E4 E6 G1
    Date: 2021–04
  11. By: Calvin He (Reserve Bank of Australia)
    Abstract: Central banks analyse copious amounts of information to assess the economic outlook to then set monetary policy. So, could changes in monetary policy reveal some additional information about the economic outlook to the public? This channel is known as the 'information effect'. The information effect posits that, in addition to the usual effects of monetary policy, agents interpret an interest rate increase as signalling some additional positive economic information. This effect, if strong enough, could then lead to dynamics where an increase in interest rates causes an expansion in economic activity. I evaluate whether the information effect can be detected in Australia through the lens of equity markets. I find that, contrary to the predictions of the information effect, a surprise monetary tightening from a monetary policy announcement causes equity prices to fall. I also show that this response in equity prices is, at least in part, driven by downward adjustments in expected earnings growth. These responses are consistent with conventional views of the effects of monetary policy. However, looking beyond monetary policy announcements yields some evidence that an information effect could be present through other forms of Reserve Bank of Australia (RBA) communication. I find speeches delivered by the RBA Governor generate responses in equity prices and earnings forecasts consistent with the information effect. But this result appears to be the exception rather than the rule. For most monetary policy communication, at least in equity markets, the information effect is not an important channel of monetary policy.
    Keywords: monetary policy; information effect; equity markets; equity prices; earnings forecasts
    JEL: E40 E43 E44 E50 E52 E58
    Date: 2021–04
  12. By: Zucker Marques, Marina
    Abstract: The scholarly debate on currency internationalization focuses on country characteristics and policies as the main determinants in currency competition. However, this literature has neglected the fact that, given the intertwined nature of the international monetary system, other countries' actions and the functioning logic of international finance can also impact a currency's international status. This article shows that RMB usage has been boosted not only by Chinese statecraft but also by economic actors' recent difficulties in using the dollar. The American financial sanctions against Chinese trade partners, the cyclical instability of international finance, as well as peripheral countries' low inflows of dollars have encouraged firms and banks to use the renminbi as an alternative to the dollar. In addition to contributing to a broader understanding of the drivers of currency internationalization, this article proposes a model that explains the mechanisms that push firms and banks away from the incumbent international currency. I posit that changes in domestic and international conditions influence currency transaction costs, thereby propelling economic actors to increase their use of currencies with relatively lower transaction costs. Interviews with Chinese senior officials from the PBOC and the Ministry of Commerce, manufacturing companies, and bank staff are the main primary sources for this article. I triangulate this information with news reports and speeches both in Chinese and English.
    Keywords: international monetary system,renminbi internationalization,financial statecraft,dollar,currency competition
    Date: 2021
  13. By: Mario Gonzalez; Raul Cruz Tadle
    Abstract: Around the world, several countries have adopted inflation targeting as their monetary policy framework. These institutions set their target interest rates in monetary policy meetings. The policy decisions are then circulated through press releases that explain those decisions. The information contained in these press releases includes current policies, economic outlook, and signals about likely future policies. In this paper, we examine and compare the information contained in the monetary press releases of a group of inflation targeting countries using linguistic methods, such as Latent Dirichlet Allocation (LDA), an automated linguistic method. In addition, using Semi-automated Content Analysis, we create a measure that we call the Sentiment Score index based on this information for each of the countries in the sample. We use this index to compare the communication strategy of the central banks and how predictable monetary policy movements are based on the information given in the press releases.
    Date: 2021–04
  14. By: Gulnihal Tuzun
    Abstract: The purpose of this study is to assess how do the domestic and foreign shocks affect the fundamental macroeconomic variables of a small-open economy, and in particular Turkey. The domestic supply, demand and monetary policy shocks as well as their global counterparts are identified by employing a Bayesian structural VAR model with sign and zero restrictions. After a US monetary tightening shock, the results demonstrate an appreciation of US Dollar against Turkish lira, a rise in the consumer price level in the Turkish economy, a contractionary monetary policy shock accompanied by a fall in the real output level. This reaction is a strong evidence of the existence of a global interest rate contagion present in the international macroeconomics literature.
    Keywords: Bayesian VAR, Sign and zero restrictions, Shock identification, Monetary policy
    JEL: C11 C32 E52 F41
    Date: 2021
  15. By: Felix Ward (Erasmus University Rotterdam); Yao Chen (Erasmus University Rotterdam); Nuno Palma (University of Manchester)
    Abstract: How did the Spanish money supply evolve in the aftermath of the discovery of large amounts of precious metals in Spanish America? We synthesize the available data on the mining of precious metals and their international flow to estimate the money supply for Spain from 1492 to 1810. Our estimate suggests that the Spanish money supply increased more than ten-fold. Viewed through the equation of exchange this money supply increase can account for most of the price level rise in early modern Spain.
    Keywords: early modern period, equation of exchange, quantity theory of money
    JEL: E31 E51 N13
    Date: 2021–04–26
  16. By: Rumen Kostadinov; Francisco Roldán
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit.
    Keywords: Imperfect credibility; reputation; optimal monetary policy; time inconsistency
    JEL: E52 C73
    Date: 2021–04
  17. By: Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    JEL: C12 C22 C53 E31 E52
    Date: 2021–04–29
  18. By: Snir, Avichai; Chen, Haipeng (Allan); Levy, Daniel
    Abstract: We use micro level retail price data from convenience stores to study the link between 0-ending price points and price rigidity during a period of a runaway inflation, when the annual inflation rate was in the range of 60%–430%. Surprisingly, we find that 0-ending prices are less likely to adjust, and when they do adjust, the average adjustments are larger. These findings suggest that price adjustment barriers associated with round prices are strong enough to cause a systematic delay in price adjustments even in a period of a runaway inflation, when 85 percent of the prices change every month.
    Keywords: Sticky Prices; Rigid Prices; 0-Ending Price Points; 9-Ending Price points; Runaway Inflation; Hyperinflation; Cost of Price Adjustment; Menu Cost
    JEL: D4 D40 D91 E31 L11 L16 M20 M30
    Date: 2021–04–27
  19. By: Laurent Le Maux (University of Western Brittany)
    Abstract: Walter Bagehot (1873) published his famous book, Lombard Street, almost 150 years ago. The adage "lending freely against good collateral at a penalty rate" is associated with his name and his book has always been set on a pedestal and is still considered as the leading reference on the role of lender of last resort. Nonetheless, without a clear understanding of the theoretical grounds and the institutional features of the British banking system, any interpretation of Bagehot's writings remains vague if not misleading-which is worrisome if they are supposed to provide a guideline for policy makers. The purpose of the present paper is to determine whether Bagehot's recommendation remains relevant for modern central bankers or whether it was indigenous to the monetary and banking architecture of Victorian times.
    Keywords: Bagehot,Central Banking,Lender of Last Resort
    Date: 2021–04–19
  20. By: Lengwiler, Yvan (University of Basel); Orphanides, Athanasios
    Abstract: Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. We show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
    Keywords: monetary policy, government finance, yields, liquidity premium, default premium, collateral, cliff effect, multiple equilibria.
    JEL: E58 E62 E43
    Date: 2021–04
  21. By: Lorie Logan
    Abstract: Remarks at the SIFMA Webinar (delivered via videoconference).
    Keywords: Federal Reserve; reserves; Treasury General Account (TGA); rates; overnight reverse repo (ON RRP); money market funds (MMFs); money markets; facility; overnight
    Date: 2021–04–15
  22. By: Lengwiler, Yvan; Orphanides, Athanasios
    Abstract: Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The authors show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
    Keywords: monetary policy,government finance,yields,liquidity premium,default premium,collateral,cliff effect,multiple equilibria
    JEL: E58 E62 E43
    Date: 2021
  23. By: Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
    Abstract: In this paper, we estimate a semi-structural model with a banking sector for the Chilean economy. Our innovation consists of incorporating a system of equations that reflects the dynamics of credit, interest rate spreads and loan-loss provisions to the Central Bank of Chile’s semi-structural model “MSEP”. We estimate the model and analyze the macroeconomic effects of incorporating this sector. We find that the banking sector plays a role in accelerating the business cycle through lower spreads and procyclical credit supply, in contrast to the counter-cyclical role it has had in COVID-19 crisis. Additionally, we decompose the effects of this sector’s variables in the historical business cycle. We find that credit growth can explain on average about 0.3 pp of total output gap variation. Moreover, we find that in episodes of severe stress, this role can grow to 1.9 pp, as has been the case of the COVID-19 pandemic. This last fact is important, given that in many cases, monetary policy is faced with the challenge of implementing non-conventional measures, many of them through the commercial banking sector. We find that this specification allows the model to better quantify the impact of measures that have favored the flow of credit specially in periods of stress.
    Date: 2021–04
  24. By: Helmut Herwartz (University of Goettingen); Christian Ochsner (University of Goettingen); Hannes Rohloff (University of Goettingen)
    Abstract: We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model. Going beyond previous work, we decompose aggregate credit components into credit supply and demand flows directed at businesses, households and governments. We show that this decomposition enhances the understanding of global liquidity considerably. Whereas global government sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply the businesses and households with credit to maximize profits along the financial cycle. Moreover, the government sector demands credit in times of bust-episodes, whereas private entities demand credit in times of booms. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial aggregates.
    Keywords: global liquidity, credit composition, nancial cycle, dynamic factor model
    JEL: C32 C38 E32 E44 E51
    Date: 2021
  25. By: Christian Moser (Columbia University, Federal Reserve Bank of Minneapolis, and CEPR); Farzad Saidi (University of Bonn and CEPR); Benjamin Wirth (Bavarian State Office for Statistics); Stefanie Wolter (Institute for Employment Research (IAB))
    Abstract: We study the distributional consequences of monetary policy-induced credit supply in the labor market. To this end, we construct a novel dataset that links worker employment histories to firm financials and banking relationships in Germany. Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages and employment. These effects are heterogeneous within and between firms. Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages. Between firms, wages fall by more at initially higher-paying employers. In this way, credit affects the distribution of pay and employment in line with predictions of an equilibrium model with both credit and search frictions.
    Keywords: Wages, Employment, Worker and Firm Heterogeneity, Monetary Policy, Negative Interest Rates
    JEL: J31 E24 J23 G21 E51
    Date: 2021–04
  26. By: Catia Batista (Nova School of Business and Economics, CReAM, IZA and NOVAFRICA); Pedro C. Vicente (Nova School of Business and Economics, BREAD, and NOVAFRICA)
    Abstract: Rural areas in sub-Saharan Africa are typically underserved by financial services. We measure the economic impact of introducing mobile money for the first time in rural villages of Mozambique using a randomized control trial. This intervention led to consumption smoothing through increased transfers as a response to both geo-referenced village-level floods and household-level idiosyncratic shocks. Importantly, we find that the availability of mobile money increased migration out of rural areas, where we observe lower agricultural activity and investment. Our work illustrates how financial inclusion can accelerate African urbanization and structural change while improving welfare in rural areas.
    Keywords: mobile money, migration, remittances, technology adoption, insurance, consumption smoothing, investment, savings, Mozambique, Africa.
    JEL: O12 O15 O16 O33 G20 R23
    Date: 2021–04
  27. By: Eichengreen, Barry (University of California, Berkeley); Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets—not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high. On the other hand, Obstfeld, Ostry, and Qureshi (2017) find that countries with flexible exchange rate regimes experience less real and financial instability in the face of global financial volatility. We contribute to this empirical debate by significantly extending their analysis. Overall, our findings are broadly consistent with their results, suggesting that flexible exchange rate regimes are better at insulating emerging markets from external shocks. There are, however, a few subtle differences. In particular, we find somewhat less robust evidence that limited flexibility is enough to insulate emerging markets from shocks.
    Keywords: exchange rate; exchange rate regime; fixed; flexible; insulate; intermediate; shock
    JEL: F31
    Date: 2020–02–26

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