nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒05‒17
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Can central bank communication help to stabilise inflation expectations? By Jung, Alexander; Kühl, Patrick
  2. Mobile technology supply factors and mobile money innovation: Thresholds for complementary policies By Simplice A. Asongu; Nicholas M. Odhiambo
  3. Stuck at Zero: Price Rigidity in a Runaway Inflation* By Avichai Snir; Haipeng Allan Chen; Daniel Levy
  4. A re-examination of the exchange rate – interest rate differential relationship in Ghana By Ofori, Isaac Kwesi; Armah, Mark Kojo
  5. Monetary Policy and Inequality By Andersen, Asger Lau; Johannesen, Niels; Jørgensen, Mia; Peydró, José Luis
  6. Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regression with liquid assets of banks as the threshold variable. Using annual data for Indian banks covering the period 2005-2017, we find that there is a negative impact of monetary policy tightening on bank lending. In a low liquidity regime, banks react more strongly to monetary policy as compared to in a high liquidity regime. The reaction of different bank groups (public sector and private sector banks) to monetary policy is heterogenous across the liquidity regimes. Our results suggest that for effective transmission of monetary policy, any abundant liquidity with public sector banks must be neutralized by the monetary authority. By Md Gyasuddin Ansari; Rudra Sensarma
  7. Do exchange rates absorb demand shocks at the ZLB? By Hoffmann, Mathias; Hürtgen, Patrick
  8. The People versus the Markets: A Parsimonious Model of Inflation Expectations By Reis, Ricardo
  9. Parallel Digital Currencies and Sticky Prices By Uhlig, Harald; Xie, Taojun
  10. Central Bank Digital Currency: When Price and Bank Stability Collide By Fernández-Villaverde, Jesús; Schilling, Linda Marlene; Uhlig, Harald
  11. Central Bank Money: Liability, Asset, or Equity of the Nation? By Allen, Jason; Bateman, Will; Gleeson, Simon; Kumhof, Michael; Lastra, Rosa M; Omarova, Saule
  12. State-dependent pricing turns money into a two-edged sword By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  13. Sources of Bias in Inflation Rates and Implications for Inflation Dynamics By Braun, Rahel; Lein, Sarah
  14. CBDC: Can central banks succeed in the marketplace for digital monies? By Bofinger, Peter; Haas, Thomas
  15. What drives the German TARGET balances? Evidence from a BVAR approach By Bettendorf, Timo; Jochem, Axel
  16. The Puzzling Change in the International Transmission of U.S. Macroeconomic Policy Shocks By Ilzetzki, Ethan
  17. Why Does Capital Flow from Equal to Unequal Countries? By de Ferra, Sergio; Mitman, Kurt; Romei, Federica
  18. Reconstruction of the Spanish money supply, 1492-1810 By Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
  19. Monetary Policy, Sectoral Comovement and the Credit Channel By Federico Di Pace; Christoph Gortz
  20. Risk sharing in currency unions: The migration channel By Kohler, Wilhelm; Müller, Gernot J.; Wellmann, Susanne
  21. Five Facts about the Distributional Income Effects of Monetary Policy By Niklas Amberg; Thomas Jansson; Mathias Klein; Anna Rogantini Picco
  22. TARGET2-Securities (T2S) - The Pan-European Platform for the Settlement of Securities in Central Bank Money By Cristina Mastropasqua; Alessandro Intonti; Michael Jennings; Clara Mandolini; Massimo Maniero; Stefano Vespucci
  23. The Deposits Channel of Monetary Policy: A Critical Review By Repullo, Rafael
  24. The Story of the Real Exchange Rate By Itskhoki, Oleg
  25. How Does International Capital Flow? By Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
  26. Inflation -- who cares? Monetary Policy in Times of Low Attention By Oliver Pf\"auti
  27. Data Revisions and the Effects of Monetary Policy Volatility By Kamalyan, Hayk
  28. Uncertainty shocks in currency unions By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
  29. Optimal Monetary and Macroprudential Policies By Josef Schroth
  30. Informal Central Bank Communication By Vissing-Jørgensen, Annette
  31. Slow recoveries, endogenous growth and macroprudential policy By Bonciani, Dario; Gauthier, David; Kanngiesser, Derrick
  32. Price Setting and Volatility: Evidence from Oil Price Volatility Shocks By Matthew Klepacz
  33. A re-examination of the exchange rate – interest rate differential relationship in Ghana By Ofori, Isaac Kwesi; Armah, Mark Kojo
  34. Banks and negative interest rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  35. Monetary Policy, Interbank Liquidity and Lending Behaviour of Banks in India By Md Gyasuddin Ansari; Rudra Sensarma
  36. Behaviour in the Canadian large-value payment system: COVID-19 vs. the global financial crisis By Alexander Chaudhry; Anneke Kosse; Karen Sondergard
  37. CIP Deviations, the Dollar, and Frictions in International Capital Markets By Wenxin Du; Jesse Schreger
  38. Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy By Nils Gornemann; Keith Kuester; Makoto Nakajima
  39. The cost of holding foreign exchange reserves By Eduardo Levi Yeyati; Juan Francisco Gómez

  1. By: Jung, Alexander; Kühl, Patrick
    Abstract: This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors’ attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel. JEL Classification: C20, D80, E52, E58, G14
    Keywords: forward guidance, high-frequency identification, information and news channel, information demand, website attention
    Date: 2021–05
  2. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study complements the extant literature by assessing how enhancing supply factors of mobile technologies affect mobile money innovations for financial inclusion in developing countries. The mobile money innovation outcome variables are: mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money. The mobile technology supply factors are: unique mobile subscription rate, mobile connectivity performance, mobile connectivity coverage and telecommunications (telecom) sector regulation. The empirical evidence is based on quadratic Tobit regressions and the following findings are established. There are Kuznets or inverted shaped nexuses between three of the four supply factors and mobile money innovations from which thresholds for complementary policies are provided as follows: (i) Unique adults’ mobile subscription rates of 128.500%, 121.500% and 77.750% for mobile money accounts, the mobile used to send money and the mobile used to receive money, respectively; (ii) the average share of the population covered by 2G, 3G and 4G mobile data networks of 61.250% and 51.833% for the mobile used to send money and the mobile used to receive money, respectively; and (iii) a telecom sector regulation index of 0.409, 0.283 and 0.283 for mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money, respectively. Some complementary policies are discussed, because at the attendant thresholds, the engaged supply factors of mobile money technologies become necessary, but not sufficient conditions of mobile money innovations for financial inclusion.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2021–01
  3. By: Avichai Snir (Netanya Academic College); Haipeng Allan Chen (University of Kentucky); Daniel Levy (RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël], RCEA - Research 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 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,Cost of Price Adjustment,Menu Cost,Hyperinflation
    Date: 2021
  4. By: Ofori, Isaac Kwesi; Armah, Mark Kojo
    Abstract: This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of the relationship in both the short-run and long-run. Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to interest rate.
    Keywords: Inflation Targeting, Exchange Rate, Impulse Response Function, Interest Rate Differential, VAR, Ghana
    JEL: A1 E4 E43 E5 F3 F31 G21
    Date: 2021–05–11
  5. By: Andersen, Asger Lau; Johannesen, Niels; Jørgensen, Mia; Peydró, José Luis
    Abstract: We analyze the distributional effects of monetary policy on income, wealth and consumption. For identification, we exploit administrative household-level data covering the entire population in Denmark over the period 1987-2014, including detailed information about income and wealth from tax returns, in conjunction with exogenous variation in the Danish monetary policy rate created by a long-standing currency peg. Our results consistently show that all income groups gain from a softer monetary policy, but that the gains are monotonically increasing in the ex-ante income level. Over a two-year horizon, a decrease in the policy rate of one percentage point raises disposable income by less than 0.5% at the bottom of the income distribution, by around 1.5% at the median income and by around 5% at the top. The effects on asset values through increases in house prices and stock prices are larger than the effects on disposable income by more than an order of magnitude and exhibit a similar monotonic income gradient. We show how all these distributional effects reflect systematic differences in the exposure to the direct and indirect channels of monetary policy. Consistent with the main results for disposable income and asset values, we also find that the effects on net wealth and consumption (car purchases) increase monotonically over the ex-ante income distribution. Our estimates imply that softer monetary policy increases income inequality by raising income shares at the top of the income distribution and reducing them at the bottom.
    Date: 2020–12
  6. By: Md Gyasuddin Ansari (Indian Institute of Management Kozhikode); Rudra Sensarma (Indian Institute of Management Kozhikode)
    Keywords: Monetary policy transmission, Panel Threshold Regression, Liquidity, Bank Lending, Lending Channel.
    Date: 2021–03
  7. By: Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: According to the two-country full information New Keynesian model with flexible exchange rates, the real exchange rate appreciates in response to an asymmetric negative demand shock at the zero lower bound (ZLB) and exacerbates the adverse macroeconomic effects. This finding requires inflation expectations to adjust counterfactually large. When modeling inflation expectations consistent with survey expectations using imperfect information, we find that exchange rates can absorb demand shocks at the ZLB. In sharp contrast to the full information model: (i) A negative demand shock concentrated in the home country causes a real exchange rate depreciation that partially absorbs the demand shock. (ii) A VAR with an identified demand shock via sign restrictions is consistent with a real exchange rate depreciation at the ZLB. (iii) When the ZLB is binding in the home country, it is optimal for the foreign policymaker to reduce rather than increase foreign interest rates. (iv) Forward guidance that reveals the true state of the economy exacerbates the negative output gap in the two countries.
    Keywords: monetary policy,inflation expectations,imperfect information,real exchange rates
    JEL: F33 E31 E32
    Date: 2021
  8. By: Reis, Ricardo
    Abstract: Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy.
    JEL: D84 E31 E52
    Date: 2021–01
  9. By: Uhlig, Harald; Xie, Taojun
    Abstract: The recent rise of digital currencies opens the door to their use in parallel alongside official currencies (``dollar'') for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.
    Keywords: currency choice; digital currency; monetary policy; New Keynesian Model; sticky prices
    JEL: E30 E52
    Date: 2020–12
  10. By: Fernández-Villaverde, Jesús; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer "spending'' shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.
    Keywords: bank runs; CBDC trilemma; Central bank digital currency; Financial Intermediation; Inflation targeting; monetary policy
    JEL: E58 G21
    Date: 2020–12
  11. By: Allen, Jason; Bateman, Will; Gleeson, Simon; Kumhof, Michael; Lastra, Rosa M; Omarova, Saule
    Abstract: Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as 'social equity' that confers rights of participation in the economy's payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances.
    Keywords: Assets; central bank balance sheet; Central bank digital currency; Central bank money; central bank reserves; currency; equity; Government Debt; liabilities; Quantitative easing
    JEL: E41 E42 E44 E51 E52 E58 G21 H61 H63 K0 K11 K12
    Date: 2020–12
  12. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
    Abstract: Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations.
    Keywords: Crises; New keynesian; Nominal GDP; price stability; Rational Expectations; State-Dependence
    JEL: E2 E3
    Date: 2021–01
  13. By: Braun, Rahel; Lein, Sarah
    Abstract: Official statistics measuring the cost of living are known to suffer from several biases. This paper shows that the size of the biases can vary with economic conditions. Using homescan data, it is first confirmed that official price indexes can be tracked using such granular datasets. While the often-acknowledged substitution bias is shown to be relatively small, neglected preference adjustment and product entry/exit results in a 2.6 percentage point bias in the annual inflation rate on average. Furthermore, the bias is particularly large in the aftermath of a shock to relative prices, increasing to 3.7 percentage points.
    Keywords: bias in inflation indexes; Homescan data; Inflation measurement
    JEL: C23 C3 E31 E4 E5
    Date: 2021–01
  14. By: Bofinger, Peter; Haas, Thomas
    Abstract: The discussion about central bank digital currencies (CBDC) has gained an impressive momentum. So far, however, the main focus has been on the macroeconomic implications of CBDCs and the narrow perspective of developing a digital substitute for cash. This paper adds a microeconomic dimension of CBDC to the discussion. We provide an overview of the existing payment ecosystem and derive a systemic taxonomy of CBDCs that distinguishes between new payment objects and new payment systems. Using our systemic taxonomy, we are able to categorize different CBDC proposals. In order to discuss and evaluate the different CBDC design options, we develop two criteria: allocative efficiency, i.e. whether a market failure can be diagnosed that justifies a government intervention, and attractiveness for users, i.e. whether CBDC proposals constitute attractive alternatives for users compared to existing payment objects and payment systems. Our analysis shows that there is no justification for digital cash substitutes from the point of view of allocative efficiency and the user perspective. Instead, our analysis opens the perspective for a retail payment system organized or orchestrated by the central bank without a new, independent payment object.
    Keywords: Central bank digital currency; central banks; international payments; Payment systems
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2020–11
  15. By: Bettendorf, Timo; Jochem, Axel
    Abstract: Applying a BVAR model, the present paper first identifies the possible drivers of Germany's TARGET claims. In this context, in terms of potential causes, a distinction is made between a rise in the global risk assessment, tensions within the euro area, and European monetary policy. It becomes evident that the TARGET flows between 2015 and 2017 can be ascribed in large part to monetary policy and to a minor extent to the risk assessment within the euro area. At the peak of the European debt crisis between 2010 and mid-2012, the TARGET flows were affected by uncertainty in the euro area as a dominant factor, although global factors also played a key role according to the model. The BVAR model we use opens up the possibility of studying the causes of current fluctuations in Germany's TARGET claims.
    Keywords: target balances,risk,monetary policy,bayesian vector autoregression,sign restrictions
    JEL: C32 E52 F32
    Date: 2021
  16. By: Ilzetzki, Ethan
    Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on the a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
    Keywords: Exchange Rates; International Financial Intermediation; International spillovers; monetary
    Date: 2021–01
  17. By: de Ferra, Sergio; Mitman, Kurt; Romei, Federica
    Abstract: Capital flows from equal to unequal countries. We document this empirical regularity in a large sample of advanced economies. The capital flows are largely driven by private savings. We propose a theory that can rationalize these findings: more unequal countries endogenously develop deeper financial markets. Households in unequal counties, in turn, borrow more, driving the observed direction of capital flows.
    Keywords: Capital Flows; current account; inequality
    JEL: E21 F32 F41
    Date: 2021–01
  18. By: Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
    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 monetary 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. This monetary expansion can account for most of the price level rise in early modern Spain. In its absence, Spain would have required substantial deflation to accommodate its early modern output gains.
    Keywords: Early Modern Period; equation of exchange; Quantity Theory of Money
    JEL: E31 E51 N13
    Date: 2020–12
  19. By: Federico Di Pace (Bank of England); Christoph Gortz (University of Birmingham)
    Abstract: Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence - a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity.
    Keywords: financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads.
    JEL: E22 E32 E44 E52
    Date: 2021–04
  20. By: Kohler, Wilhelm; Müller, Gernot J.; Wellmann, Susanne
    Abstract: Country-specific business cycle fluctuations are potentially very costly for member states of currency unions because they lack monetary autonomy. The actual costs depend on the extent to which consumption is shielded from these fluctuations and thus on the extent of risk sharing across member states. The literature to date has focused on financial and credit markets as well as on transfer schemes as channels of risk sharing. In this paper, we show how the standard approach to quantify risk sharing can be extended to account for migration as an additional channel of cross-country risk sharing. In theory, migration should play a key role when it comes to insulating per capita consumption from aggregate fluctuations, and our estimates show that it does so indeed for US states, but not for the members of the Euro area (EA). Consistent with these results, we also present survey evidence which shows that migration rates are about 20 times higher in the US. Lastly, we find, in line with earlier work, that risk sharing is generally much more limited across EA members.
    Keywords: Risk sharing,Currency unions,Labour migration,Migration rates,Euro Area
    JEL: F41 F22 G15 J61
    Date: 2021
  21. By: Niklas Amberg; Thomas Jansson; Mathias Klein; Anna Rogantini Picco
    Abstract: We use Swedish administrative individual-level data to document five facts about the distributional income effects of monetary policy. (i) The effects of monetary policy shocks are U-shaped with respect to the income distribution—i.e., expansionary shocks increase the incomes of high- and low-income individuals relative to middle-income individuals. (ii) The large effects in the bottom are accounted for by the labor-income response and (iii) those in the top by the capital-income response. (iv) The heterogeneity in the labor-income response is due to the earnings heterogeneity channel, whereas (v) that in the capital-income response is due to the income composition channel.
    Keywords: monetary policy, income inequality, heterogeneous agents, administrative data
    JEL: C55 E32 E52
    Date: 2021
  22. By: Cristina Mastropasqua (Bank of Italy); Alessandro Intonti (Bank of Italy); Michael Jennings (Bank of Italy); Clara Mandolini (Bank of Italy); Massimo Maniero (Bank of Italy); Stefano Vespucci (Bank of Italy)
    Abstract: The launch of TARGET2-Securities (T2S) in June 2015 marked a fundamental step towards the integration of Europe’s post-trading market. The Eurosystem’s decision in 2008 to build a pan-European platform for the settlement of securities in central bank money stemmed from the objectives and tasks embedded in the ESCB/ECB Statute, to define and implement the monetary policy of the Union and promote the smooth operation of payment systems. T2S also represents a key building block of capital market integration in the EU. The platform was realized by Banque de France, Banca d’Italia, Deutsche Bundesbank, Banco de España (4CB). Its project and operational costs were borne by all Eurosystem central banks; these costs will be entirely recovered through the service charges applied to T2S users. Today T2S is well-established in the landscape of European and global payment infrastructures. In 2020, it hosted the operations of twenty-one CSDs from twenty European markets; it settled over seven hundred thousand transactions per day in central bank money on a stable basis, with peaks of over one million. Its functioning is constantly monitored and subject to regular reporting by the Eurosystem to the market. In addition, it is subject to Eurosystem supervision according to the international principles defined for technological infrastructures of systemic importance. The evolution of T2S is a continuous development process; the next objectives concern the integration with other TARGET Services and the reiforcement of IT security and resilience measures, for which work is in progress. The challenges posed by emerging distributed technologies applied to securities settlement do not appear to constitute an alternative to the extremely advanced features of T2S. The European Commission’s issuance programme, which can be reasonably assumed will have propulsive effects for the European capital market, represents on the other hand an opportunity to enhance T2S network effects, increasing the number and size of settled instruments and the business opportunities for the markets connected to it. This work is divided into six chapters. Chapter 1 describes how T2S works. Chapter 2 explains the legal framework and the external governance structure. Chapter 3 focuses on the operations carried out in T2S by the European financial community. Chapter 4 illustrates the tasks carried out by Banca d’Italia. Chapter 5 describes the experiences of three leading Italian operators in T2S since its inception. Chapter 6 provides an account of planning and policy aspects, of the challenges posed by new technologies and of the opportunities to increase the central role of T2S in the European landscape. Creation date: 2021-05
    Keywords: payment systems, market infrastructures,financial markets,economic integration
    JEL: E42 E44 F36
  23. By: Repullo, Rafael
    Abstract: Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.
    Keywords: banks' market power; deposits channel; monetary policy transmission
    JEL: E52 G21 L13
    Date: 2020–12
  24. By: Itskhoki, Oleg
    Abstract: The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly-behaved variables empirically, tightly co-moving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This survey lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint and monetary policy regime. We show that RER is inherently a general-equilibrium variable, which depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.
    Keywords: Backus-Smith puzzle; PPP puzzle; real exchange rate
    JEL: E30 F31 F41
    Date: 2020–12
  25. By: Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
    Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a 2-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalize the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis creditors stop financing debt rather than current accounts, and because following a crisis current accounts are not the primary channel through which balance sheets adjust. Second, we re-interpret the global saving glut hypothesis by submitting that US households do not finance current account deficits with foreigners' physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin's current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by domestic or foreign banks rather than US current account deficits. Finally, we show that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate and synchronized sets of economic decisions.
    Keywords: bank lending; current account; global saving glut; Gross capital flows; International Capital Flows; money creation; Sudden stops; Triffin's dilemma
    JEL: E44 E51 F41 F44
    Date: 2020–12
  26. By: Oliver Pf\"auti
    Abstract: Based on a model of optimal information acquisition, I propose an approach to measure attention to inflation in the data. Applying this approach to US consumers and professional forecasters provides substantial evidence that attention to inflation in the US decreased significantly over the last five decades. Consistent with the theoretical model, attention is higher in times of volatile inflation. To examine the consequences of limited attention for monetary policy, I augment the standard New Keynesian model with a lower-bound constraint on the nominal interest rate and inflation expectations that are characterized by limited attention. Accounting for the lower bound fundamentally alters the normative implications of low attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound. In the presence of the lower bound, limited attention can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. To prevent these traps, it is optimal to increase the inflation target as attention declines.
    Date: 2021–05
  27. By: Kamalyan, Hayk
    Abstract: This paper evaluates the effects of monetary policy volatility by fully accounting for real-time nature of policy setting. The empirical analysis shows that the impact of real-data volatility on output is about two times lower compared to that of final data volatility. Qualitatively, the effects of the two measures of volatility are similar. These findings suggest that the business cycle implications of policy-related volatility may possibly be overstated.
    Keywords: Final Data, Real-Time Data, Monetary Policy Volatility
    JEL: E32 E52 E58
    Date: 2021–01–04
  28. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
    Abstract: Uncertainty shocks cause economic activity to contract and more so, if monetary policy is constrained by an effective lower bound on interest rates. In this paper, we investigate whether countries within currency unions are also particularly prone to suffer from the adverse effects of heightened uncertainty because they lack monetary independence. First, we estimate a Bayesian VAR on quarterly time series for Spain. We find that country-specific uncertainty shocks impact economic activity adversely. Second, we calibrate a DSGE model of a small open economy and show that it is able to account for the evidence. Finally, we show that currency-union membership strongly reduces the effects of uncertainty shocks because it anchors long-run expectations of the price level and thus alleviates precautionary price setting in the face of increased uncertainty.
    Keywords: Euro Area; Euro crisis; Exchange Rate Regime; monetary policy; Uncertainty shocks
    JEL: E44 F41
    Date: 2020–12
  29. By: Josef Schroth
    Abstract: This paper studies monetary policy in an economy where banks make risky loans to firms and provide liquidity services in the form of deposits to households. For given bank equity, market discipline implies that banks can take more deposits when assets are safer or more profitable. Banks respond to loan losses by making their balance sheets safer—i.e., they reduce risky lending sharply and accumulate more safe bonds. In contrast, a social planner would respond by making banks temporarily more profitable such that a riskier balance sheet can be maintained. A planner would temporarily reduce the expansiveness of monetary policy to avoid bonds becoming too liquid in support of the liquidity premium banks earn via deposits. Specifically, when bank equity is low, then optimal monetary policy stabilizes output by supporting bank lending rather than employment.
    Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Inflation targets; Monetary policy
    JEL: E60 G28
    Date: 2021–05
  30. By: Vissing-Jørgensen, Annette
    Abstract: Starting from a set of facts on the timing of stock returns relative to Federal Reserve decision-making, I argue that informal communication â?? including unattributed communication -- plays a central role in monetary policy communication. This contrasts with the standard communications framework in which communication should be public and on-the-record because it serves to ensure accountability and policy effectiveness. I lay out possible benefits of using unattributed communication as an institution, but these should be weighed against substantial costs: It runs counter to accountability to use unattributed communication, causes frustration among those trying to understand central bank intensions, and enables use of such communication by individual policymakers. Unattributed communication driven by policymaker disagreements is unambiguously welfare reducing, because it reduces policy flexibility and harms the central bank's credibility and decision-making process. I suggest that central banks resist unattributed communication via expensive newsletters and increase consensus-building efforts to reduce disagreement-driven unattributed communication.
    Keywords: communication; monetary policy; Stock market
    JEL: E5 G12
    Date: 2020–12
  31. By: Bonciani, Dario (Bank of England); Gauthier, David (Bank of England); Kanngiesser, Derrick (Bank of England)
    Abstract: Banking crises have severe short and long‑term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macroprudential policy supports economic activity and productivity growth by strengthening bank’s resilience to adverse financial shocks. The improved intermediation capacity of a safer banking system leads to a higher steady state growth rate. The optimal bank capital ratio of 18% increases welfare by 6.7%, 14 times more than in the case without endogenous growth. When the economy enters a liquidity trap, the effects of financial disruptions and thus the benefits of macroprudential policy are even more significant.
    Keywords: Slow recoveries; endogenous growth; financial stability; macroprudential policy
    JEL: E32 E44 E52 G01 G18
    Date: 2021–04–23
  32. By: Matthew Klepacz
    Abstract: How do changes in aggregate volatility alter the impulse response of output to monetary policy? To analyze this question, I study whether individual prices in Producer Price Index micro data are more likely to change and to move in the same direction when aggregate volatility is high, which would increase aggregate price exibility and reduce the effectiveness of monetary policy. Taking advantage of plausibly exogenous oil price volatility shocks and heterogeneity in oil usage across industries, I find that price changes are more dispersed and less frequent, implying that prices are less likely to move in the same direction when aggregate volatility is high. This contrasts with findings in the literature about idiosyncratic volatility. I use a state-dependent pricing model to interpret my findings. Random menu costs are necessary for the model to match the positive empirical relationship between oil price volatility and price change dispersion. This is the case because random menu costs reduce the extent to which firms with prices far from their optimum all act in a coordinated fashion when volatility increases. The model implies that increases in aggregate volatility do not substantially reduce the ability of monetary policy to stimulate output.
    Keywords: Volatility; Ss model; Menu cost; Monetary policy; Oil
    JEL: E30 E31 E50
    Date: 2021–04–30
  33. By: Ofori, Isaac Kwesi; Armah, Mark Kojo
    Abstract: This paper revisits the exchange rate and interest rate differential relationship since Ghana adopted the inflation targeting regime. Using macro-data spanning 2002 to 2019 for Ghana and the United States, we show the nonexistence of the relationship in both the short-run and long-run. Further, we show a positive but slow responsiveness of exchange rate to interest rate differential shocks from the short-run to medium term. The long-run result however shows a case of a strong and significant response of exchange rate to interest rate differential shocks. We recommend that the Bank of Ghana address perennial macroeconomic instability, especially on inflation which we conjecture to fuel investment uncertainty and investment insensitivity to the interest rate.
    Keywords: Inflation Targeting,Exchange Rate,Impulse Response Function,Interest Rate Differential,VAR,Ghana
    JEL: A1 E4 E43 E3 F5
    Date: 2021
  34. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks’ lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different “initial” conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank lending, bank risk taking, deposits, euro-area heterogeneity, negative interest rates, zero lower bound
    Date: 2021–05
  35. By: Md Gyasuddin Ansari (Indian Institute of Management Kozhikode); Rudra Sensarma (Indian Institute of Management Kozhikode)
    Abstract: In this paper we investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 40 commercial banks during the period 1999-2018. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending. We also find heterogenous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that managing net liquidity positions of banks is necessary to realize the desired effects of monetary policy.
    Keywords: Monetary policy transmission, Interbank Liquidity, Bank Lending.
    Date: 2021–03
  36. By: Alexander Chaudhry; Anneke Kosse; Karen Sondergard
    Abstract: The Large Value Transfer System (LVTS) is Canada’s electronic funds transfer system for large-value and time-critical payments. It forms the backbone of the Canadian financial system. If the payments in the LVTS were to come to a halt, this would have a systemic impact on overall economic activity and affect the stability of the Canadian financial system. In this note we discuss the role that the LVTS has played during the onset of the Covid-19 pandemic and we evaluate the stress experienced in the system in 2020. In particular, we examine the number and value of rejected and delayed payments, the proportion of Tranche 2 transactions and intraday bilateral credit limit adjustments. We show that lessons learned from the 2008–09 global financial crisis in terms of the timing and effectiveness of specific Bank of Canada policy measures have helped avoid potential liquidity stresses in the LVTS in 2020.
    Keywords: Coronavirus disease (COVID-19); Financial institutions; Financial stability; Payment clearing and settlement systems
    JEL: E65
    Date: 2021–05
  37. By: Wenxin Du; Jesse Schreger
    Abstract: The covered interest rate parity (CIP) condition is a fundamental arbitrage relationship in international finance. In this chapter, we review its breakdown during the Global Financial Crisis and its continued failure in the subsequent decade. We review how to measure CIP deviations, discuss the drivers of CIP deviations, and the implications of CIP deviations for global financial markets.
    JEL: E0 F0 G0
    Date: 2021–05
  38. By: Nils Gornemann (Board of Governors of the Federal Reserve System, International Finance Division, Washington, D.C. 20551); Keith Kuester (University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany); Makoto Nakajima (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574)
    Abstract: We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth rich or retired tend to favor inflation targeting. The wealth-poor working class, instead, favors unemployment-centric policy. One- and two-agent alternatives can show unanimous disapproval of inflation-centric policy, instead. We highlight how the political support for inflation-centric policy depends on wage setting, the tax system, and the portfolio that households have.
    Keywords: Monetary Policy, Unemployment, Search and Matching, Heterogeneous Agents, General Equilibrium, Dual Mandate
    JEL: E12 E21 E24 E32 E52 J64
    Date: 2021–05
  39. By: Eduardo Levi Yeyati (Universidad Torcuato Di Tella/The Brookings Institution); Juan Francisco Gómez (Universidad de Buenos Aires)
    Abstract: Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
    Keywords: International reserves exchange rate policy capital flows financial crisis
    JEL: E42 E52 F33 F41
    Date: 2021–03

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