|
on Monetary Economics |
| By: | Ryan, Ellen; Whelan, Karl |
| Abstract: | Quantitative easing programmes have driven unprecedented expansions in the supply of central bank reserves around the world over the past two decades, fundamentally changing the implementation of monetary policy. The collapse in money multipliers following QE episodes has often been interpreted as implying banks are happy to passively hold most of the reserves created by QE. This paper develops a simple micro-simulation model of the banking sector that adapts the traditional money multiplier model and allows for bank reserve demand to be inferred from monetary aggregates. The model allows the use of unwanted reserves by banks to play out over time alongside QE purchases and incorporates both significantly higher reserve demand after 2008 and capital constraints. With these additions, the model explains the persistently lower money multipliers seen in the US following QE, as well as the growth in commercial bank deposits. The model suggests the demand from banks for reserves has increased substantially since the introduction of QE but not to the point where banks are passively absorbing all newly created reserves. |
| Keywords: | central banks; Money Multiplier; Quantitative easing |
| JEL: | E51 E52 E58 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15882&r= |
| By: | Dellas, Harris; Tavlas, George |
| Abstract: | We discuss the evolution of the debate on policy rules vs discretion. Doctrinal historians place the starting point of the debate in the nineteenth-century controversy between the Currency and Banking Schools in Britain. We establish that this controversy was not about discretion but about the degree of activism under a single rule -- that of the gold standard. The rules vs discretion issue originated with Henry Simons and the Chicago School in the 1930s, and came to center stage following the Great Inflation in the 1970s. Both the 1930s and 1970s literatures were triggered by monetary-policy failures. The modern literature's main innovations concern its (1) comparison of discretion to optimal policy rather than just to rules, (2) shift of focus to benevolent governments that lack commitment, (3) demonstration of discretion's inefficiencies in both stochastic and deterministic environments, and (4) support of activistic policy rules. |
| Keywords: | Banking School; Chicago School; Currency School; Modern debate; monetary policy; Rules Versus Discretion |
| JEL: | B22 E52 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15976&r= |
| By: | Vargas, Jerrick Jan |
| Abstract: | It is necessary for policy makers to understand how the monetary policy is transmitted to the economy through different channels. This study focused on the reduced-form relationships between money, real output and price level and “channel” variables such as domestic credit, exchange rate and real lending interest rate and examined the monetary transmission mechanism in the Philippines, using the vector autoregression approach (VAR). The results derived from the forecast error variance decompositions analyses show that the main sources of variances in output and price level are their “own” shocks. The results of the impulse response functions indicate that monetary policy can affect output and price level and that the effect of monetary policy on output was strongest after two quarters. An expansionary monetary policy increases output in two quarters however; it has a weak effect on price level after two quarters. Furthermore, domestic credit has the most significant effect on output in the Philippines. Theories in monetary economics suggest that an expansionary monetary policy increases output and price level however, in the case of the Philippines, an expansionary monetary policy increases output but have a weak effect on inflation. |
| Keywords: | Monetary Policy, Vector Autoregression |
| JEL: | E52 |
| Date: | 2021–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107507&r= |
| By: | Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot; Schmidt, Sebastian |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogoff, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not---flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | dominant currency pricing; effective lower bound; Exchange rate; external shock; Insulation; International spillovers; monetary policy |
| JEL: | E31 F41 F42 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15689&r= |
| By: | Dietrich, Alexander; Müller, Gernot; Schoenle, Raphael |
| Abstract: | Using a representative consumer survey in the U.S., we elicit beliefs about the economic impact of climate change. Respondents perceive a high probability of costly, rare disasters in the near future due to climate change, but not much of an impact on GDP growth. Salience of rare disasters through media coverage increases the disaster probability by up to 7 percentage points. We analyze these findings through the lens of a New Keynesian model with rare disasters. First, we illustrate how expectations of rare disasters impact economic activity. Second, we calibrate the model to capture the key aspects of the survey and quantify the expectation channel of climate change: disaster expectations lower the natural rate of interest by about 65 basis points and, assuming a conventional Taylor rule for monetary policy, inflation and the output gap by 0.3 and 0.2 percentage points, respectively. The effect is considerably stronger if monetary policy is constrained by the effective lower bound. |
| Keywords: | climate change; Disasters; Households Expectations; Media focus; monetary policy; Natural rate of interest; Paradox of Communication; survey |
| JEL: | E43 E52 E58 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15866&r= |
| By: | Brandão-Marques, Luis; Gelos, Gaston; Narita, Machiko; Nier, Erlend |
| Abstract: | This paper takes a new approach to assess the benefits of using different policy tools-macroprudential and monetary policies, foreign exchange interventions, and capital controls-in response to changes in financial conditions. Starting from quantile regressions, we evaluate policies across the full distribution of future output growth and inflation using loss functions. Tightening macroprudential policy dampens downside risks to growth from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses. These findings also hold when reacting to easing global financial conditions, while buying foreign exchange or tightening capital controls yields only small net benefits. |
| Keywords: | capital controls; cost-benefit analysis; FX intervention; macroprudential policy; monetary policy |
| JEL: | E01 E52 E58 F31 G21 G28 O24 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15693&r= |
| By: | Michael Junho Lee; Antoine Martin |
| Abstract: | Since the launch of Bitcoin and other first-generation cryptocurrencies, there has been extensive experimentation in the digital currency space. So far, however, digital currencies have yet to gain much ground as a means of payment. Is there a vacuum in the landscape of digital money and payments that central banks are naturally positioned to fill? In this post, Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function, answer some questions regarding the concept of central bank digital currencies (CBDCs). |
| Keywords: | central bank digital currencies |
| JEL: | E58 |
| Date: | 2021–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:91222&r= |
| By: | Gnan, Phillipp; Rieder, Kilian |
| Abstract: | This paper provides the first systematic analysis of individual monetary policy-makers' incentives to communicate during so called "quiet periods" in the run-up to policy meetings. We ask why and when monetary policy-makers breach quiet period rules. Based on proprietary compilations by the European Central Bank's (ECB) Directorate General Communications, we construct a novel statement-level data set documenting all public statements by ECB Governing Council members during the 116 quiet periods between October 2008 and January 2020. We describe the broad trends in quiet period communication since 2008. While career concerns and home bias do not explain breaching behavior, we find that members' policy-making experience and expertise are associated with explicit breaches of the quiet period. Following a statement-by-statement review of the ECB's classification of statements, we also provide an alternative series of quiet period breaches. We show that the difference between the original ECB series and our alternative series is driven by diverging records of explicit breaches by ECB Executive Board members before 2014. Finally, we exploit plausibly exogenous variation in the ECB rotational voting schedule to show that Governing Council members' communication behavior during the quiet period is consistent with the narrative of the ECB Governing Council as a collegial, consensus-seeking decision-making body. Our findings directly contribute to the growing literature on free-riding, career concerns and transparency in monetary policy-making. We also discuss several empirically founded policy implications of our paper relevant to the design of the quiet period in the euro area and monetary policy communication more generally. |
| Keywords: | career concerns; central bank communication; Central bank transparency; decision-making; European Central Bank; Home Bias; leaks; monetary policy; quiet period; rotational voting |
| JEL: | D82 D83 E52 E58 E61 G12 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15735&r= |
| By: | Hetzel, Robert (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise) |
| Abstract: | The monetary aggregate M2 increased from $15,473 billion in February 2020 to $19,670 billion in February 2021, or by 27.1%. Real M2 (M2 deflated by the CPI) increased similarly by 25.3% (https://fred.stlouisfed.org/series/M2REAL). This monetary acceleration, unprecedented outside of wartime, is apparent in a longer-run perspective. From the trough of the last business cycle in June 2009 through February 2020, annualized monthly growth rates for M2 averaged 5.9%. Over the interval March 2020 through June 2020, they averaged 65.6%. Although diminished, rapid M2 growth continued, averaging 12.9% from July 2020 through March 2021. Milton Friedman famously said that inflation is always and everywhere a monetary phenomenon. If he is right, should not this bulge in money lead to an undesirably high rate of inflation? |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:jhisae:0180&r= |
| By: | Brandão-Marques, Luis; Gelos, Gaston; Harjes, Thomas; Sahay, Ratna; Xue, Yi |
| Abstract: | The effectiveness of monetary policy transmission in emerging markets and developing countries (EMDEs) remains subject to considerable debate in academia and among policymakers. Can EMDEs effectively steer inflation and output by controlling short-term interest rates? Or do structural features of these economies, in particular a lack of financial market depth, hinder such transmission? We conduct a novel empirical analysis using Jordà 's (2005) approach for 39 EMDEs to answer these questions. We find that interest rate hikes do reduce output growth and inflation, if the exchange rate is allowed to adjust. Inflation targeting frameworks adopted by independent and transparent central banks matter more than structural features, such as financial development. |
| Keywords: | emerging markets; Exchange rate channel; Financial structure; Inflation targeting; monetary policy |
| JEL: | E3 E4 E5 F4 G1 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15931&r= |
| By: | Carl Grekou; Cécile Couharde; Valérie Mignon |
| Abstract: | In this paper, we investigate from a policy coordination viewpoint the desirability of the West African monetary union project, ECO. Our approach is built around the inclusion of national objectives in the regional integration perspective. Thanks to cluster analysis, we identify two groups of countries with relatively homogenous sustainable exchange rate paths in West Africa. We also find that no single currency peg nor a freely floating exchange rate regime would be preferable for any of the countries or groups of economies. Overall, our findings argue in favor of two ECOs —at least in a first step, i.e., one for each of the two identified zones. Each ECO would serve as a virtual anchor —with some flexibility— for the considered group, and would be determined by a basket of currencies mainly composed of euro and US dollar. |
| Keywords: | Monetary integration; West Africa; CFA franc zone; ECOWAS. |
| JEL: | F33 F45 C38 O55 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-11&r= |
| By: | Kamalyan, Hayk |
| Abstract: | This paper studies state-dependent effects of monetary policy shocks. I first consider state-dependence of policy actions in a simple static model. The model predicts that effectiveness of monetary policy is positively related to the level of output. I next use an estimated DSGE model to quantitatively assess asymmetries in policy transmission mechanism. Consistent with the intuition of the simple model, I find that the effects of monetary policy on output are less powerful in recessions compared to expansions. By contrast, inflation is more sensitive in recessionary states. The latter implies that the aggregate price flexibility is varying across the business cycle. In particular, prices are more flexible when the economy is in a recessionary state. Conversely, prices become more rigid in expansionary states. |
| Keywords: | Expansions, Recessions, State-Dependent Transmission Mechanism, New-Keynesian Model |
| JEL: | E31 E32 E37 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107489&r= |
| By: | Jochen Güntner„; Johannes Henßler |
| Abstract: | Recent advances in the use of high-frequency external instruments to separate the signaling channel of monetary policy from exogenous interest rate changes have solved a number of puzzling responses to supposedly contractionary monetary policy shocks. We show that their effects on U.S. banks' balance sheets, asset markets, and economic activity hinge on the level of geopolitical risk at the time of the FOMC announcement. The S&P500 falls and credit spreads rise by more, while bank balance sheets contract, if geopolitical risk is above its sample median in the quarter or month of the shock. The state-dependent e ects are due to a tightening of credit- and risk-related national financial conditions and imply that, while preparing its monetary policy decisions, the Board of Governors should also keep track of the geopolitical environment. |
| Keywords: | C&I loans; Geopolitical risk; Monetary policy; State-dependent effects |
| JEL: | E43 E44 E51 E52 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2021-09&r= |
| By: | Engel, Charles M; Kazakova, Ekaterina; Wang, Mengqi; Xiang, Nan |
| Abstract: | We re-examine the time-series evidence for failures of uncovered interest rate parity on short-term deposits for the U.S. dollar versus major currencies of developed countries at short-, medium- and long-horizons. The evidence that interest rate differentials predict foreign exchange risk premiums is fragile. The relationship between interest rates and excess returns is not stable over time and disappears altogether when nominal interest rates are near the zero-lower bound. However, we do find evidence that year-on-year inflation rate differentials consistently predict excess returns â?? when the U.S. dollar y.o.y. inflation rate has been relatively high, subsequent returns on U.S. deposits tend to be high. We interpret this evidence as being consistent with hypotheses that posit that markets do not fully react initially to predictable changes in future monetary policy. Interestingly, the predictive power of relative y.o.y. inflation only begins in the mid-1980s when central banks began to target inflation more consistently and continues in the post-ZLB period when interest rates lose their primacy as a policy instrument. We address the problems of parameter instability and small-sample bias that plague the conventional Fama (1984) test, while acknowledging these concerns might remain even in our new findings. |
| Keywords: | Fama regression; foreign exchange risk premium; interest parity |
| JEL: | F30 F31 G15 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15872&r= |
| By: | Larry D. Wall |
| Abstract: | The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their operations in the Treasury securities market in 2020. The article concludes with a discussion of the issues associated with changing specific banking regulations and some more general suggestions for dealing with these types of conflicts. |
| Keywords: | banking regulation; capital adequacy; bank liquidity regulation; interest on reserves; Treasury market; repo market |
| JEL: | E52 E58 G28 |
| Date: | 2021–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:a00001:91177&r= |
| By: | Goodhart, Charles A; Masciandaro, Donato; Ugolini, Stefano |
| Abstract: | This paper analyses the monetary policy that the Most Serene Republic of Venice implemented in the years of calamities using a modern equivalent of helicopter money, precisely an extraordinary money issuing, coupled with capital losses for the issuer. We consider the 1629 famine and the 1630-1631 plague as a negative macroeconomic shock that the incumbent government addressed using fiscal monetization. Consolidating the balance sheets of the Mint and of the Giro Bank, and having heterogenous citizens â?? inequality matters - we show that the Republic implemented what was, in effect, helicopter money driven by political economy reasons, in order to avoid popular riots. |
| Keywords: | central banking; Helicopter money; monetary policy; Pandemic; Venice 1630 |
| JEL: | D7 E5 E6 N1 N2 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15715&r= |
| By: | Kollmann, Robert |
| Abstract: | This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap. |
| Keywords: | domestic and international shock transmission; Exchange rate; expectations-driven and fundamentals-driven liquidity traps; Net exports; terms of trade; zero lower bound |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15631&r= |
| By: | Kamalyan, Hayk |
| Abstract: | In ``The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models'' published in the American Economic Review, Steinsson (2008) argues that a baseline open economy sticky price model with real shocks can rationalize the real exchange rate persistence and hump-shaped dynamics observed in data. The current paper shows that i) the dynamics of the real exchange rate depend upon the parameter values of the Taylor rule, ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework is not capable of fully capturing the real exchange rate adjustment process. |
| Keywords: | Real exchange rate adjustment, Nominal-real exchange rate co-movement, New Keynesian model, Monetary policy rule |
| JEL: | E52 E58 F31 F41 |
| Date: | 2020–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107491&r= |
| By: | Claessens, Stijn; Cornelli, Giulio; Gambacorta, Leonardo; Manaresi, Francesco; Shiina, Yasushi |
| Abstract: | We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002â??17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share â?? the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability. |
| Keywords: | International spillovers; macroprudential policy; non-bank financial intermediation; shadow banking |
| JEL: | G10 G21 O16 O40 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15895&r= |
| By: | Gorodnichenko, Yuriy; Pham, Tho; Talavera, Oleksandr |
| Abstract: | We develop a deep learning model to detect emotions embedded in press conferences after the meetings of the Federal Open Market Committee and examine the influence of the detected emotions on financial markets. We find that, after controlling for the Fed's actions and the sentiment in policy texts, positive tone in the voices of Fed Chairs leads to statistically significant and economically large increases in share prices. In other words, how policy messages are communicated can move the stock market. In contrast, the bond market appears to take few vocal cues from the Chairs. Our results provide implications for improving the effectiveness of central bank communications. |
| Keywords: | Bond market; communication; Emotion; monetary policy; Stock market; text sentiment; voice |
| JEL: | D84 E31 E58 G12 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15932&r= |
| By: | Benigno, Pierpaolo; Rossi, Lorenza |
| Abstract: | Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizing policymaker should behave in line with a contractionary bias, fearing more expansions in output and inflation rather than contractions. On the contrary, the aggregate-supply equation implies that any upward pressure coming from real marginal costs does not necessarily push up inflation. Once these two forces are combined in the optimal policy, an overall expansionary bias emerges. The nonlinearities of the AS equation combined with changes in volatility can be responsible for a flattening in the estimated linear Phillips curve. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15944&r= |
| By: | Gelos, Gaston; Gornicka, Lucyna; Koepke, Robin; Sahay, Ratna; Sgherri, Silvia |
| Abstract: | The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on changes in global financial conditions, domestic structural characteristics, and policies. The approach allows us to differentiate between short- and medium-term effects. We find that FX- and macroprudential interventions are effective in mitigating downside risks to portfolio flows stemming from adverse global shocks, while tightening of capital controls in response appears to be counterproductive. Good institutional frameworks are not able to shield countries from the increased volatility of portfolio flows in the immediate aftermath of global shocks. However, they do contribute to a more rapid bounce-back of foreign flows over the medium term. |
| Keywords: | capital controls; Capital Flows; emerging markets; foreign-exchange intervention; macroprudential policies |
| JEL: | E52 F32 F38 G28 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15842&r= |
| By: | Bartscher, Alina; Kuhn, Moritz; Schularick, Moritz; Wachtel, Paul |
| Abstract: | This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value. Over multi-year time horizons, the employment effects are substantially smaller than the countervailing portfolio effects. We conclude that there is little reason to think that accommodative monetary policy plays a significant role in reducing racial inequities in the way often discussed. On the contrary, it may well accentuate inequalities for extended periods. |
| Keywords: | income distribution; monetary policy; racial inequality; wealth distribution; Wealth effects |
| JEL: | E40 E52 J15 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15734&r= |
| By: | Gerlach, Stefan; Stuart, Rebecca |
| Abstract: | We study co-movements of inflation in a group of 15 countries before and during the classical Gold Standard by fitting a generalisation of the Ciccarelli-Mojon (2010) model on annual data spanning 1851-1913. We find that international inflation functions as an "attractor" for domestic inflation rates. The cross-sectional dispersion of inflation declined gradually over the sample and Bai-Perron tests for structural breaks at unknown points in time suggest that there are breaks in six of reduced-form inflation equations. However, sub-sample estimates indicate that the overall finding that international inflation is an important influence on domestic inflation. |
| Keywords: | Factor Analysis; gold standard; international inflation; principal components |
| JEL: | E31 F40 N10 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15914&r= |
| By: | Braggion, Fabio; Meyerinck, Felix; Schaub, Nic |
| Abstract: | Inflation risk represents one of the most important economic risks faced by investors. In this study, we analyze how investors respond to inflation. We introduce a unique dataset containing local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the famous German hyperinflation. We find that investors buy less (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. We also document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with investors suffering from money illusion. |
| Keywords: | behavioral biases; Individual investors; inflation; Investor Behavior; Money illusion |
| JEL: | D14 E31 G11 G41 N14 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15947&r= |
| By: | Baqaee, David Rezza; Farhi, Emmanuel; Sangani, Kunal |
| Abstract: | We propose a supply-side channel for the transmission of monetary policy. We show that if, as is consistent with the empirical evidence, bigger firms have higher markups and lower pass-throughs than smaller firms, then a monetary easing endogenously increases aggregate TFP and improves allocative efficiency. This endogenous positive "supply shock" amplifies the effects of the positive "demand shock" on output and employment. The result is a flattening of the Phillips curve. This effect is distinct from another mechanism discussed at length in the real rigidities literature: a monetary easing leads to a reduction in desired markups because of strategic complementarities in pricing. We calibrate the model to match firm-level pass-throughs and find that the misallocation channel of monetary policy is quantitatively important, flattening the Phillips curve by about 70% compared to a model with no supply-side effects. We derive a tractable four-equation dynamic model and show that monetary easing generates a procyclical hump-shaped response in aggregate TFP and countercyclical dispersion in firm-level TFPR. The improvements in allocative efficiency amplify both the impact and persistence of interest rate shocks on output. |
| Keywords: | Incomplete pass-through; Misallocation; monetary policy; productivity |
| JEL: | E0 L1 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15702&r= |
| By: | Dąbrowski, Marek A.; Janus, Jakub |
| Abstract: | This paper examines the uncovered interest parity (or forward premium) puzzle in four Central and Eastern European countries -- Czechia, Hungary, Poland, and Romania -- as well as their aggregates from 1999 to 2019. Because the interest parity is a foundation of open-macroeconomy analyses, with important implications for policymaking, especially central banking, more systematic evidence on interest parities in the CEE economies is needed. In this study, we not only address this need but also add to a broader discussion on the UIP puzzle after the global financial crisis. The UIP is verified vis-à-vis three major currencies: the euro, the U.S. dollar, and the Swiss franc. We start by providing a full set of baseline forward premium regressions for which we examine possible structural breaks and perform a decomposition of deviations from the UIP. Next, we explore augmented UIP models and introduce various factors which potentially account for the UIP puzzle, such as the realized volatility of the exchange rate, a volatility model of the excess returns, and international risk and business cycle measures. The study shows that the choice of the reference currency matters for the outcome of the interest parity tests in the CEE economies. The puzzle prevails for the EUR and the CHF but not for the USD, a regularity that has not been documented in previous studies. Second, we find that structural breaks in the time series used to test the UIP are not an essential reason for the general failure of the parity in the region. Third, we demonstrate that even though the risk-based measures largely improve the baseline testing regression, both from statistical and economic points of view, they do not alter the overall outcomes of our empirical models. Additionally, we show that the exchange rate peg of the Czech koruna to the euro from 2013 to 2017 had a significant impact on the UIP. A detailed case study on Poland, using granular survey data, indicates that the directly measured exchange rate expectations do not seem to be informed by the UIP relationship. Employing data on option-implied risk reversals, we reveal that the limited resilience of CEE economies to rare disasters may plausibly explain deviations from the UIP. |
| Keywords: | interest parity puzzle; forward premium puzzle; risk premium; Fama regression; Central and Eastern Europe |
| JEL: | F31 F41 G15 |
| Date: | 2021–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107558&r= |
| By: | Eguren-Martin, Fernando; O’Neill, Cian; Sokol, Andrej; Berge, Lukas von dem |
| Abstract: | We characterise the probability distributions of various categories of gross capital flows conditional on information contained in financial asset prices in a panel of emerging market economies, with a focus on ‘tail’ events. Our framework, based on the quantile regression methodology, allows for a separate role of push- and pull-type factors, and because it is based on high-frequency data, can quantify the likelihood of different outturns before official capital flows data are released. We find that both push and pull factors have heterogeneous effects across the distributions of gross capital flows, which are most marked in the left tails. We also explore the role of various policies, and find that macroprudential and capital flows management measures are stabilising, leading to lower chances of either large portfolio inflows or out flows. JEL Classification: F32, F34, G15 |
| Keywords: | capital controls, capital flight, capital flows, capital flow surges, financial conditions indices, macroprudential policy, push versus pull, quantile regression, retrenchment, sudden stops |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212538&r= |
| By: | Avichai Snir (Department of Banking and Finance, Netanya Academic College, Israel); Haipeng (Allan) Chen (Gatton College of Business and Economics, University of Kentucky, USA); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; Rimini Centre for Economic Analysis) |
| 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 more round 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: | E31 L16 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:21-10&r= |
| By: | Havranek, Tomas; Irsova, Zuzana; Novak, Jiri; Zigraiova, Diana |
| Abstract: | A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients in the intervals (0.23,0.45) and (0.95,1.16) for the currencies of developed and emerging countries respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method. |
| Keywords: | Forward Rate Bias; meta-analysis; Model uncertainty; Publication bias; uncovered interest parity |
| JEL: | C83 F31 G14 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15817&r= |
| By: | Jagjit S. Chadha; Germana Corrado; Luisa Corrado; Ivan De Lorenzo Buratta |
| Abstract: | We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities. |
| JEL: | E32 E44 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202103&r= |
| By: | Engel, Charles M; Wu, Steve Pak Yeung |
| Abstract: | The level of the (log of) the exchange rate seems to have strong forecasting power for dollar exchange rates against major currencies post-2000 at medium- to long-run horizons of 12-, 36- and 60-months. We find that this is true using conventional asymptotic statistics correcting for serial correlation biases. But correcting for small-sample bias using simulation methods, we find little evidence to reject a random walk. This small sample bias arises because of near-spurious correlation when the predictor variable is persistent and the horizon for exchange rate forecasts is long. Similar problems of spurious correlation may arise when other persistent variables are used to forecast changes in the exchange rate. We find, in fact, using asymptotic statistics, the level of the exchange rate provides better forecasts than economic measures of "global risk", and the measures of global risk do not improve the (possibly spurious) forecasting power of the level of the exchange rate. |
| Keywords: | forecasting exchange rates |
| JEL: | C53 F30 F31 G15 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15915&r= |
| By: | Tumisang Loate; Ekaterina Pirozhkova; Nicola Viegi |
| Abstract: | SailingintotheWindevaluatingthenearfutur eofMonetaryPolicyinSouthAfrica |
| Date: | 2021–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11006&r= |
| By: | Kamalyan, Hayk |
| Abstract: | This paper evaluates state-dependence in monetary policy transmission mechanism under Calvo and Rotemberg price adjustment schemes. Although the two models are equivalent to first order, they produce very different results once considered at a higher order. In particular, the Rotemberg model produces more state-dependence compared to the Calvo model. The result is reversed once the macroeconomic wedges are eliminated from the models. |
| Keywords: | State-Dependence, Calvo, Rotemberg, Monetary Policy |
| JEL: | E30 E32 E50 E52 |
| Date: | 2021–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107490&r= |