nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒05‒24
53 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Niepelt, Dirk
  2. Effectiveness of expectations channel of monetary policy transmission: Evidence from India By Ashima Goyal; Prashant Parab
  3. International Evidence on Shock-Dependent Exchange Rate Pass-Through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  4. Monetary Policy Surprises and Exchange Rate Behavior By Gürkaynak, Refet S.; Kara, A. Hakan; Kisacikoglu, Burçin; Lee, Sang Seok
  5. Monetary Policy in the Next Recession? By Cecchetti, Stephen G; Feroli, Michael; Kashyap, Anil K; Mann, Catherine L; Schoenholtz, Kermit
  6. Monetary Policy with a Central Bank Digital Currency: The Short and the Long Term By Böser, Florian; Gersbach, Hans
  7. The digitalization of money By Markus Brunnermeier; Harold James; Jean-Pierre Landau
  8. The German Federal Constitutional Court Ruling and the European Central Bank's Strategy By Feld, Lars P; Wieland, Volker
  9. FX policy when financial markets are imperfect By Matteo Maggiori
  10. Do Old Habits Die Hard? Central Banks and the Bretton Woods Gold Puzzle. By Monnet, Eric; Puy, Damien
  11. Central bank digital currency in an open economy By Ferrari, Massimo; Mehl, Arnaud; Stracca, Livio
  12. A Quest for Monetary Policy Shocks in Japan by High Frequency Identification By Fumitaka Nakamura; Nao Sudo; Yu Sugisaki
  13. Rise of the central bank digital currencies: drivers, approaches and technologies By Auer, Raphael; Cornelli, Giulio; Frost, Jon
  14. Monetary-Fiscal Crosswinds in the European Monetary Union By Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
  15. Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation By Auer, Raphael; Burstein, Ariel Tomas; Lein, Sarah
  16. Designing Central Bank Digital Currencies By Agur, Itai; Ari, Anil; DellAriccia, Giovanni
  17. Dominant Currencies: How firms choose currency invoicing and why it matters By Amiti, Mary; Itskhoki, Oleg; Konings, Jozef
  18. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  19. A Simple Model of Monetary Policy under Phillips-Curve Causal Disagreements By Ran Spiegler
  20. Fifty Shades of QE: Conflicts of Interest in Economic Research By Fabo, Brian; Jancokova, Martina; Kempf, Elisabeth; Pástor, Lubos
  21. Global Financial Cycle and Liquidity Management By Jeanne, Olivier; Sandri, Damiano
  22. Does household net financial wealth explain the asymmetric reaction of household consumption to monetary policy shocks in South Africa? By Eliphas Ndou
  23. Funding behaviour of debt management offices and the ECB’s Public Sector Purchase Programme By Plessen-Mátyás, Katharina; Kaufmann, Christoph; von Landesberger, Julian
  24. "A short history of transparency and central banks in the academic literature" By Eric Dehay; Nathalie Levy
  25. Countercyclical Liquidity Policy and Credit Cycles: Evidence from Macroprudential and Monetary Policy in Brazil By Barbone Gonzalez, Rodrigo; Blanco Barroso, João Barata R.; Peydró, José Luis; van Doornik, Bernardus
  26. The Reversal Interest Rate: A Critical Review By Repullo, Rafael
  27. Imported or Home Grown? The 1992-3 EMS Crisis By Eichengreen, Barry; Naef, Alain
  28. Expectations-driven liquidity traps: Implications for monetary and fiscal policy By Nakata, Taisuke; Schmidt, Sebastian
  29. On the Weakness of the Swedish Krona By Bacchetta, Philippe; Chikhani, Pauline
  30. Global Liquidity and Impairment of Local Monetary Policy By Fendoglu, Salih; Gulsen, Eda; Peydró, José Luis
  31. Capital account liberalisation in a large emerging economy: An Analysis of onshore-offshore arbitrage By Nidhi Aggarwal; Sanchit Arora; Rajeswari Sengupta
  32. Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy By di Giovanni, Julian; Hale, Galina B
  33. Dominant currency dynamics: Evidence on dollar-invoicing from UK exporters By Crowley, Meredith A; Han, Lu; Son, Minkyu
  34. Unemployment risk, liquidity traps and monetary policy By Bonciani, Dario; Oh, Joonseok
  35. The transmission of monetary policy via the banks’ balance sheet - does bank size matter? By Tumisang Loate; Nicola Viegi
  36. The impact of macroprudential policies on capital flows in CESEE By Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
  37. 'Quantitative Easing' and central bank asset purchases in South Africa: A DSGE approach By Cobus Vermeulen
  38. Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk By Javier Bianchi; César Sosa Padilla
  39. Average Inflation Targeting and Household Expectations By Coibion, Olivier; Gorodnichenko, Yuriy; Knotek, Edward; Schoenle, Raphael
  40. How should Central Banks accumulate reserves? By Federico Sturzenegger
  41. Central Bank Digital Currency and Financial System By Shigenori Shiratsuka
  42. Monetary Capacity By Bonfatti, Roberto; Brzezinski, Adam; Karaman, Kivanç; Palma, Nuno Pedro G.
  43. Inflation and Unemployment, new insights during the EMU accession By Jean-Louis Combes; Pierre Lesuisse
  44. Prospect Theory and Currency Returns: Empirical Evidence By Kozhan, Roman; Taylor, Mark P; Xu, Qi
  45. A historical perspective on prudential regulation, currency mismatches and exchange rates in Latin America and the Caribbean By Martín Tobal; Renato Yslas
  46. Money, Banking, and Old-School Historical Economics By Monnet, Eric; Velde, François R.
  47. Fragmentation in the European Monetary Union: Is it really over? By Bertrand Candelon; Angelo Luisi; Francesco Roccazzella
  48. The Economics of Currency Risk By Hassan, Tarek Alexander; Zhang, Tony
  49. Offshoring and Inflation By Comin, Diego; Johnson, Robert
  50. How Expected Inflation Distorts the Current Account and the Valuation Effect By Herkenhoff, Philipp; Sauré, Philip
  51. Mobile technology supply factors and mobile money innovation: Thresholds for complementary policies By Asongu, Simplice A; Odhiambo, Nicholas M
  52. On the optimal control of interbank contagion in the euro area banking system By Fukker, Gábor; Kok, Christoffer
  53. The Global Factor Structure of Exchange Rates By Korsaye, Sofonias Alemu; Trojani, Fabio; Vedolin, Andrea

  1. By: Niepelt, Dirk
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Keywords: bank profits; Central bank digital currency; deposits; equivalence; Friedman Rule; monetary policy; money creation; Ramsey Policy; Reserves
    JEL: E42 E43 E51 E52 G21
    Date: 2020–11
  2. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: We examine the efficacy of expectations channel of monetary policy transmission in India using survey-based expectations of households and professional forecasters in a Structural Vector Auto Regression (SVAR) framework. To analyse the fixed point between inflation and inflation expectations, we estimate how expectations shocks feed into the dynamics of macroeconomic aggregates. Second, we find the shocks affecting these expectations. Third, we estimate shocks influencing core inflation. SPF expectations shocks affect headline and food inflation and RBI projections. Petrol price shocks, RBI projection shocks and supply shocks (headline inflation) affect household inflation expectations. Food inflation affects expectations in the short run while core inflation has long-run influence. 3-month-ahead SPF forecasts are influenced by supply-side shocks, monetary policy shocks and RBI projections. Results are robust to alternative identifications. In the early years of flexible inflation targeting that we cover the main interaction was between SPF forecasts and RBI projections on to core. The fixed point was stable because the response of each variable was less than unity. The evidence indicates the expectations channel of transmission was more effective than the aggregate demand channel.
    Keywords: Household expectations, Survey of professional forecasters, Central bank communications, Expectations channel, Structural vector auto regression
    JEL: D83 D84 E52 E58
    Date: 2021–04
  3. By: Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
    Abstract: We analyse the economic conditions (the "shocks") behind currency movements and show how that analysis can help address a range of questions, focusing on exchange rate pass-through to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.
    Keywords: Currency wars; Exchange rate; inflation; monetary policy; Pass-Through; Price level
    JEL: E31 E37 E52 F47
    Date: 2020–09
  4. By: Gürkaynak, Refet S.; Kara, A. Hakan; Kisacikoglu, Burçin; Lee, Sang Seok
    Abstract: Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using eventstudies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two- country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the eventstudy and model implications for these. We find that there is heterogeneity in this dimension in the eventstudy and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling eventstudy analysis with model-based mechanisms of asset pricing.
    Keywords: central bank information effect; Exchange rate response to monetary policy; open economy macro-finance modeling
    JEL: E43 E44 E52 E58 G14
    Date: 2020–09
  5. By: Cecchetti, Stephen G; Feroli, Michael; Kashyap, Anil K; Mann, Catherine L; Schoenholtz, Kermit
    Abstract: In many advanced countries, lowering the policy rate to zero probably will be insufficient to counter the next conventional recession. We explore a range of new monetary policy (NMP) tools including forward guidance, balance sheet tools and negative interest rates. Reflecting the complex transmission of monetary policy, we examine each NMP's impact on financial conditions indexes (FCIs) in eight advanced economies. We find: (1) the global component of financial conditions is quite important; (2) state-contingent forward guidance is the tool most associated with improved conditions; (3) policymakers typically implemented NMPs during stress periods, and this endogenous usage pattern makes any econometric assessment difficult; (4) NMPs generally were not sufficient to overcome the headwinds already present. This leads us to conclude that, while central bankers should work to incorporate NMP tools into their reaction function, they should be humble about their likely effectiveness.
    Keywords: financial conditions; Financial conditions index; forward guidance; maturity extension; monetary policy; Negative Interest Rates; Quantitative easing; Stabilization Policy; Unconventional Monetary Policy
    JEL: E32 E52 E58
    Date: 2020–10
  6. By: Böser, Florian; Gersbach, Hans
    Abstract: We examine how the introduction of an interest-bearing central bank digital currency (CBDC) impacts bank activities and monetary policy. Depositors can switch from bank deposits to CBDC as a safe medium of exchange at any time. As banks face digital runs, either because depositors have a preference for CBDC or fear bank insolvency, monetary policy can use collateral requirements (and default penalties) to initially increase bankers' monitoring incentives. This leads to higher aggregate productivity. However, the mass of households holding CBDC will increase over time, causing additional liquidity risk for banks. After a certain period, monetary policy with tight collateral requirements generating liquidity risk for banks and exposing bankers to default penalties would render banking non-viable and prompt the central bank to abandon such policies. Under these circumstances, bankers' monitoring incentives will revert to low levels. Accordingly, a CBDC can at best yield short-term welfare gains.
    Keywords: Central bank digital currency - Monetary policy - Banks - Deposits
    JEL: E42 E52 E58 G21 G28
    Date: 2020–09
  7. By: Markus Brunnermeier; Harold James; Jean-Pierre Landau
    Abstract: The ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms. Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account.
    Keywords: digital money, digital currency area, digital dollarization, currency competition
    JEL: E42 E52 F33
    Date: 2021–05
  8. By: Feld, Lars P; Wieland, Volker
    Abstract: The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. This paper shows how a regular proportionality check could be integrated in the ECB's strategy that is currently undergoing a systematic review. In particular, it proposes to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.
    Keywords: central bank independence; Monetary institutions; monetary law; Monetary policy strategy; Policy Rules; Proportionality; Quantitative easing
    JEL: E52 E58 K10
    Date: 2020–09
  9. By: Matteo Maggiori
    Abstract: In the last 15 years, central banks have purchased securities at unprecedented levels via quantitative easing and foreign exchange intervention. These policies have constituted the core response to crises such as the 2008–09 Great Financial Crisis, the 2011–12 European sovereign debt crisis and the ongoing Covid-19 pandemic. In many cases, policymakers have resorted to these policies as traditional monetary policy was constrained by the zero lower bound. In this paper, I review recent advances in open economy analysis with financial frictions. This type of analysis offers a different take on exchange rates compared with their traditional role as shock absorbers. When international financial intermediation is imperfect, the exchange rate is pinned down by imbalances in the demand and supply of assets in different currencies and, crucially, by the limited risk-bearing capacity of the financial intermediaries that absorb these imbalances. Exchange rates are distorted by financial forces and can be a source of shocks to the real economy rather than a re-equilibrating mechanism.
    JEL: E44 F31 F32 F41 G15
    Date: 2021–05
  10. By: Monnet, Eric; Puy, Damien
    Abstract: We assess the importance of individual and institutional experience in shaping macroeconomic policy by studying the persistence of gold standard monetary practices in the Bretton Woods system. Using new historical data from the IMF, we show that, although they were not required to, countries continued to back currency in circulation with gold. The longer an institution had spent in the gold standard before 1944 (and the older the policymakers), the tighter the link between gold and currency during Bretton Woods. Such "old habits" prevented dollars and gold from working as perfect substitutes and ultimately contributed to the demise of the Bretton Woods system. Our findings highlight the persistence of past practices, even in the face of radical institutional change, and its consequences on the international monetary system.
    Keywords: Bretton Woods; central banking; culture & beliefs; Foreign reserves; gold; international monetary system
    JEL: D83 E52 F33 M1 N10
    Date: 2020–09
  11. By: Ferrari, Massimo; Mehl, Arnaud; Stracca, Livio
    Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC). We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies.
    Keywords: Central bank digital currency; DSGE model; international monetary system; open-economy; Optimal monetary policy
    JEL: E50 F30
    Date: 2020–10
  12. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Nao Sudo (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Yu Sugisaki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The use of changes in short-term interest rates (STIRs) within a 30-minute window around monetary policy announcements has been increasingly adopted in empirical studies. However, variations of STIRs within such a narrow window may be too small under the effective lower bound (ELB). To address the issue, this paper constructs a measure of monetary policy shocks using STIR futures in Japan, where the policy interest rate has been close to the ELB for an exceptionally long period. We show that (i) variations within a 30-minute window are closely correlated with key financial variables while those outside the window are correlated less, suffering from noise, (ii) expansionary shocks with respect to unconventional measures have continued to lower the long-term yield, and (iii) the impulses of macroeconomic variables to the shocks agree with what conventional theory predicts overall.
    Keywords: Monetary policy shocks, high frequency identification, effective lower bound
    JEL: E32 E44 E52
    Date: 2021–04
  13. By: Auer, Raphael; Cornelli, Giulio; Frost, Jon
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: CBDC; Central bank digital currency; central banks; digital currency; distributed ledger technology; international payments; monetary policy; Payments; technology
    JEL: E42 E44 E51 F31 G21 G28
    Date: 2020–10
  14. By: Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
    Abstract: We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy can be analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the real discount rate declines, absorbing the increase in deficit due to the fiscal policy leaning towards the easing. Conversely, in response to an unconventional easing of the long end of the yield curve, the discount rate declines strongly, while the primary fiscal surplus barely moves. The long-run effect of unconventional monetary easing on inflation is about half than that of conventional, a result which is also consistent with the muted response of fiscal policy. Results do not point to large differences across countries.
    Keywords: monetary-fiscal interaction, fiscal policy, monetary policy, intertemporal government budget constraint
    JEL: E31 E63 E52
    Date: 2021–05
  15. By: Auer, Raphael; Burstein, Ariel Tomas; Lein, Sarah
    Abstract: We dissect the impact of a large and sudden exchange rate appreciation on Swiss border import prices, retail prices, and consumer expenditures on domestic and imported non-durable goods, following the removal of the EUR/CHF floor in January 2015. Cross-sectional variation in border price changes by currency of invoicing carries over to consumer prices and allocations, impacting retail prices of imports and competing domestic goods, as well as import expenditures. We provide measures of the sensitivity of retail import prices to border prices and the sensitivity of import shares to relative prices, which is higher when using retail prices than border prices.
    Keywords: exchange rate pass-through; Expenditure Switching; invoicing currency; large exchange rate shock; nominal rigidities; Optimal price-setting
    JEL: F12 F31 F41 L11
    Date: 2020–10
  16. By: Agur, Itai; Ari, Anil; DellAriccia, Giovanni
    Abstract: We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC, and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of a payment instrument depend on the number of its users. A CBDC can be designed with attributes similar to cash or deposits, and can be interest bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades of bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoffs.
    Keywords: CBDC; digital currency; Financial Intermediation; Fintech; network effects
    JEL: E41 E58 G21
    Date: 2020–10
  17. By: Amiti, Mary; Itskhoki, Oleg; Konings, Jozef
    Abstract: The currency of invoicing in international trade is central for the international transmission of shocks and macroeconomic policies. Using a new dataset on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework that features variable markups, international input sourcing, and staggered price setting with endogenous currency choice, and also allowing for the dominant currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities to exchange rate changes, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit close to complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, and especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchangerate. Finally, the effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run, consistent with sticky price models of currency choice.
    Keywords: currency choice; exchange rate pass-through
    JEL: E31 F31 F41
    Date: 2020–10
  18. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis “second phase of global liquidity” (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability. JEL Classification: F32, F42, G15, G23
    Keywords: capital flows, international spillovers, Monetary policy, non-bank financial intermediation
    Date: 2021–05
  19. By: Ran Spiegler
    Abstract: I study a static textbook model of monetary policy and relax the conventional assumption that the private sector has rational expectations. Instead, the private sector forms inflation forecasts according to a misspecified subjective model that disagrees with the central bank's (true) model over the causal underpinnings of the Phillips Curve. Following the AI/Statistics literature on Bayesian Networks, I represent the private sector's model by a direct acyclic graph (DAG). I show that when the private sector's model reverses the direction of causality between inflation and output, the central bank's optimal policy can exhibit an attenuation effect that is sensitive to the noisiness of the true inflation-output equations.
    Date: 2021–05
  20. By: Fabo, Brian; Jancokova, Martina; Kempf, Elisabeth; Pástor, Lubos
    Abstract: Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
    Keywords: career concerns; central bank; Conflict Of Interest; QE; Quantitative easing
    JEL: A11 E52 E58 G28
    Date: 2020–11
  21. By: Jeanne, Olivier; Sandri, Damiano
    Abstract: We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating reserves when global liquidity is high to buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows beyond the laissez-faire equilibrium. The model also provides a role for foreign exchange intervention in less financially developed countries. The main predictions of the model are consistent with the data.
    Keywords: capital flow management; capital controls; Capital Flows; Foreign Exchange Reserves; sudden stop
    JEL: F31 F32 F36 F38
    Date: 2020–09
  22. By: Eliphas Ndou
    Abstract: Ndou et al (2019) showed that, in absolute terms, the decline in household consumption due to the monetary policy tightening shocks exceeds the increase in household consumption, following the monetary policy loosening shocks of the same magnitude. This paper applies a counterfactual vector autoregression (VAR) approach to determine whether the household net financial wealth explains the asymmetric reaction of household consumption to monetary policy shocks in South Africa. I find that the percentage of fluctuations in the consumption changes attributed to the wealth changes is much bigger to the monetary policy tightening shocks compared to the loosening shocks. In addition, I find that the household net financial wealth channel propagates the changes in the household consumption more to the monetary policy tightening shocks than to the monetary policy loosening shocks. I reach the same conclusion using household net worth. This finding of asymmetric household consumption reaction implies that the monetary policy tightening stance will slow down economic growth more than the loosening shock can stimulate it.
    Keywords: Household net financial wealth, Consumption, Monetary policy, counterfactual VAR model
    JEL: E21 E52 E58
    Date: 2020–09
  23. By: Plessen-Mátyás, Katharina; Kaufmann, Christoph; von Landesberger, Julian
    Abstract: This paper investigates whether the funding behaviour of euro area debt management offices (DMOs) changed with the start of the ECB’s Public Sector Purchase Programme (PSPP). Our results show that (i) lower yield levels and (ii) PSPP purchases supported higher maturities at issuance. The former indicates a behaviour of “locking in low rates for longer”, while the latter suggests the existence of an additional “demand effect” of the PSPP on DMO strategies beyond the PSPP’s effect via yields. The combined impact of the PSPP via these channels amounts to maturity extensions at issuance of about one year in our estimation, which compares to the average issuance maturity for Germany, France, Italy and Spain before the PSPP of four years. Our finding that DMOs extend maturities when funding conditions ease invites further work on the economic implications of public debt management during the PSPP and its relevance for monetary policy transmission. JEL Classification: E52, E58, E63, H63
    Keywords: central bank asset purchases, public debt management, sovereign debt maturity structure, unconventional monetary policy
    Date: 2021–05
  24. By: Eric Dehay (RIME-Lab - Recherche Interdisciplinaire en Management et Économie Lab - ULR 7396 - UA - Université d'Artois - Université de Lille); Nathalie Levy
    Abstract: Central banks underwent a "transparency revolution" during the 90s. Rather than considering it have been guided by a cost-benefit analysis, we assume that it is also a response imposed by a changing environment. The purpose of this text is to highlight the events or major trends that have brought about this revolution. A systematic review of the academic literature makes it possible to identify the concomitant themes that led to the questioning of the secret practices around central banks. It appears that the adoption of inflation targeting in the conduct of monetary policy and the creation of the euro, followed by the financial crisis and a growing general demand for greater transparency in the economic and political spheres, were the decisive events of the revolution.
    Keywords: Transparency,Central banks
    Date: 2020–01–01
  25. By: Barbone Gonzalez, Rodrigo; Blanco Barroso, João Barata R.; Peydró, José Luis; van Doornik, Bernardus
    Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
    Keywords: Credit cycles; liquidity; macroprudential and monetary policy; reserve requirements
    JEL: E51 E52 E58 G21 G28
    Date: 2020–09
  26. By: Repullo, Rafael
    Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK's capital constraint features the future value of the bank's capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.
    Keywords: bank market power; Bank profitability; Capital requirements; monetary policy; Negative Interest Rates; reversal rate
    JEL: E52 G21 L13
    Date: 2020–10
  27. By: Eichengreen, Barry; Naef, Alain
    Abstract: Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System. Using this index, we pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.
    Date: 2020–10
  28. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely-studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
    Keywords: discretion; effective lower bound; Fiscal policy; monetary policy; Policy Delegation; Sunspot equilibria
    JEL: E52 E61 E62
    Date: 2020–11
  29. By: Bacchetta, Philippe; Chikhani, Pauline
    Abstract: The Swedish krona depreciated sharply between 2013 and early 2020 but standard models are unable to explain this depreciation. This paper reviews the experience of the krona. By estimating an "equilibrium" value for the real exchange rate, we confirm a growing undervaluation after 2014. The depreciation could initially be explained by a decline in interest rates and then by quantitative easing and the Riksbank communication regarding the krona. However, monetary policy cannot explain the extent of the depreciation nor the long depreciation period of seven years. We then review various complementary explanations proposed in the literature including, imperfect information, financial frictions, the role of financial shocks and the convenience yield. Many of these elements can plausibly explain the weakness of the krona, but cannot be quantified.
    Date: 2020–11
  30. By: Fendoglu, Salih; Gulsen, Eda; Peydró, José Luis
    Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data -the credit and international interbank registers- from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.
    Keywords: banks; carry trade; emerging markets; Global financial cycle; monetary policy
    JEL: F30 G01 G15 G21 G28
    Date: 2020–09
  31. By: Nidhi Aggarwal (Indian Institute of Management, Udaipur); Sanchit Arora (Ernst and Young); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we decipher the openness of India's capital account by calculating the covered interest parity (CIP) deviations between the onshore-offshore rupee market. India is a country with an elaborate and comprehensive system of capital controls covering all kinds of international financial transactions. This has led to a thriving offshore rupee market of non-deliverable currency forward (NDF) contracts. We analyse more than 20 years (1999- 2020) of daily return differentials in the NDF market vis-a-vis the onshore spot market, estimate structural breaks in CIP deviations and connect these sub-periods to the patterns of changes in de-jure capital control actions announced by the Indian authorities. We also estimate no-arbitrage bands around the CIP using a Self-Exciting Threshold Autoregressive (SETAR) model. We find that on average over the duration of our sample period the capital controls broadly restrict capital outflows more than they restrict capital inflows. We also find that over time India has become more financially integrated with the rest of the world, though the process of capital account opening has not been a continuous and smooth one. This is reflected in large variations in CIP deviations across the period, and in recent times, smaller deviations and narrowing no-arbitrage bands that capture the transactions costs and the degree to which the capital controls are binding.
    Keywords: Capital account openness, Financial integration, Covered interest parity, Capital controls, Foreign exchange market
    JEL: G15 F30 F31 F32
    Date: 2021–04
  32. By: di Giovanni, Julian; Hale, Galina B
    Abstract: We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of 54 sectors in 26 countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80% of the total impact of U.S. monetary policy shocks on average country-sector stock returns are due to the network effect of global production linkages. We further show that U.S. monetary policy shocks have a direct impact predominantly on U.S. sectors and then propagate to the rest of the world through the global production network. Our results are robust to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to changes in variable definitions and empirical specifications.
    Keywords: asset prices; global production network; monetary policy shocks
    JEL: F10 F36 G15
    Date: 2020–10
  33. By: Crowley, Meredith A; Han, Lu; Son, Minkyu
    Abstract: How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market.
    Keywords: Exchange rate; firm-level trade; invoicing currency; Vehicle currency
    JEL: F14 F31 F41
    Date: 2020–11
  34. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: When the economy is in a liquidity trap and households have a precautionary motive to save against unemployment risk, adverse demand shocks cause severe deflationary spirals and output contractions. In this context, we study the implications of optimal monetary policy, which consists of keeping the nominal rate at zero longer than implied by current macroeconomic conditions. Under such policy and incomplete markets, expected improvements in labour market conditions mitigate the rise in unemployment risk and decline in demand. As a result, market incompleteness may alleviate contractions in output and inflation during a liquidity trap. However, reducing market incompleteness mitigates the fall in demand under realistic monetary policy rules.
    Keywords: Unemployment risk; Liquidity trap; Zero lower bound; Monetary policy
    JEL: E21 E24 E32 E52 E61
    Date: 2021–05–14
  35. By: Tumisang Loate; Nicola Viegi
    Abstract: We study the credit channel of monetary policy in South Africa between 2002 and 2019 using banks’ balance sheets. We show that there is a signiï¬ cant heterogeneity within the banking sector in both the loan and deposit sides of the banks’ balance sheets. In response to a contractionary monetary policy shock, big banks adjust their loan portfolio by lending to businesses and reducing lending to households whereas for small banks we ï¬ nd the opposite. The increase in corporate lending amid declining inventories is consistent with the hypothesis of “hedging and safeguarding the capital adequacy ratio†rather than funding business inventories. This paper highlights the importance of heterogeneity in customers, market power and business models in the banking sector, which characterises the socio-demographics dynamics in South Africa.
    Keywords: Credit channel, banks balance sheets, unconventional monetary policy
    JEL: E32 E52 G21
    Date: 2021–01
  36. By: Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) – a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control – besides domestic macroeconomic quantities – for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility. JEL Classification: C38, E61, F44, G28
    Keywords: capital flows, CESEE, global factors, macroprudential policy, regime-switching FAVAR
    Date: 2021–05
  37. By: Cobus Vermeulen
    Abstract: This paper develops a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model to evaluate the effect of the temporary emergency purchases of government bonds by the South African Reserve Bank (SARB) during 2020. The model is constructed in the portfolio balancing framework, in which the non-bank private sector holds a portfolio of imperfectly substitutable domestic government bonds of different maturities. This allows bond purchases by the central bank, through changing the composition of household bond portfolios, to influence the macroeconomy. The model is calibrated and simulated on South African data. Consistent with similar models of Quantitative Easing simulated for the US and the UK, the results here illustrate that bond purchases by the SARB could have a broader stimulatory macroeconomic impact, over and above the SARB’s primary objective of providing liquidity to domestic ï¬ nancial markets. This includes an expansion in the money supply, a fall in long-term government bond yields, and an increase in consumption, inflation and output. However, given the relatively small scale of the SARB’s bond purchases, the stimulus effect is modest.
    Keywords: open-economy DSGE, central bank asset purchases, quantitative easing, portfolio balance theory
    JEL: E12 E17 E44 E52
    Date: 2020–11
  38. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa Padilla (University of Notre Dame/NBER)
    Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings sug- gest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
    Keywords: International reserves Sovereign default Macroeconomic stabilization Fixed exchange rates Inflation targeting
    JEL: F32 F34 F41
    Date: 2020–12
  39. By: Coibion, Olivier; Gorodnichenko, Yuriy; Knotek, Edward; Schoenle, Raphael
    Abstract: Using a daily survey of U.S. households, we study how the Federal Reserve's announcement of its new strategy of average inflation targeting affected households' expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed's new strategy than others, nor are their expectations different. When we provide randomly selected households with pertinent information about average inflation targeting, their expectations still do not change in a different way than when households are provided with information about traditional inflation targeting.
    Keywords: communication; Inflation expectations; Inflation targeting; randomized controlled trial; Surveys
    JEL: E3 E4 E5
    Date: 2020–09
  40. By: Federico Sturzenegger (Universidad de San Andres)
    Abstract: There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how to finance those reserves. Does it matter if reserves are accumulated through unsterilized purchases, by issuing domestic currency liabilities or by issuing foreign currency liabilities? This paper explores this question by looking at the impact of different ways to finance reserve accumulation on country spreads. The results suggest that the financing source is not irrelevant. Accumulating reserves through unsterilized interventions or by issuing domestic debt, do reduce country risk. On the contrary accumulating reserves by issuing foreign liabilities seems not to have a meaningful effect.
    Date: 2020–05
  41. By: Shigenori Shiratsuka (Faculty of Economics, Keio University)
    Abstract: Central bank digital currencies (CBDCs) are digital payment instruments provided by a central bank as its direct liability, denominated in the sovereign currency. CBDCs are classified into two main variants: "wholesale" CBDCs for limited counterparties mainly used in large-value payments between financial institutions, and "general purpose" CBDCs for a wide range of end-users, such as households and businesses. General purpose CBDCs are regarded as a payment device with high substitutability with both banknotes and bank deposits, as a key financial system infrastructure to enhance the efficiency and functioning of the payment services. General purpose CBDCs can be designed to enhance the separability between payment services and financial intermediation services. General purpose CBDCs are expected to play a key role in revitalizing the financial system by promoting market-based financial intermediation services while securing the stability of the payment system. To that end, the overall design of financial system infrastructures, such as access to central bank services, deposit insurance system, and wholesale payment and settlement system, needs to be comprehensively transformed with due consideration on the feature of financial systems, which is the strong status quo bias due to high degree of institutional complementarity.
    Keywords: Nonmarket valuation, Central bank digital currency, Financial system, payment services, financial intermediation services, institutional complementarity
    JEL: E40 E42 E58 G20 G21 G28
    Date: 2021–05–01
  42. By: Bonfatti, Roberto; Brzezinski, Adam; Karaman, Kivanç; Palma, Nuno Pedro G.
    Abstract: Monetary capacity refers to a state's capacity to circulate money that is accepted by the public, whereas fiscal capacity refers to its capacity to tax. In this paper, we show both theoretically and empirically that monetary and fiscal capacity, and by extension, markets and states have a symbiotic relationship. On the theoretical front, we propose a model that establishes that a higher monetary capacity incentivizes the government to invest in the capacity to tax, because monetization eases taxation. Higher fiscal capacity, in turn, increases the public demand for money, because expected inflation is lower. On the empirical front, we find that monetary capacity had a significant and substantial causal impact on fiscal capacity. To identify this impact, we rely on a natural experiment, instrumenting the money stocks of England, France and Spain between 1550 and 1790 by the silver and gold output in the New World. Finally, to put our findings into a long-run perspective, we collect money stock and tax revenue data for European states from antiquity to the modern period, and document the close relationship between the two. These findings indicate that economic and political development cannot be understood independently. They also qualify the theory of the long-run neutrality of money: exogenous changes in money stock can and did have real long-run effects.
    Keywords: fiscal capacity; inflation; monetary capacity; monetary non-neutrality; monetization; Quantity Theory of Money; taxation
    JEL: E50 E60 H21 N10 O11
    Date: 2020–09
  43. By: Jean-Louis Combes (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Pierre Lesuisse (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: In the process of EU integration, toward the EA accession, we try to understand, how changes in exchange rate regime, attributed to the switch through the ERM-II and to the EA accession, influence the dynamic between inflation and unemployment, i.e., shock on the Phillips curve coefficient. We look at a panel of countries, in the CEECs over the last twenty years, using a recent work from McLeay and Tenreyro (2020), to clarify the impact of loosing the monetary autonomy. Being under a pegged regime is not associated with a flattened Phillips curve. However, after the EA accession, the Phillips curve coefficient becomes not significant. This result is confirmed, looking at other small EA countries; while "economic leaders" tend to maintain a significant trade-off between inflation and unemployment. Using recent work from
    Keywords: Phillips curve,European Monetary Union,Panel
    Date: 2021–05–04
  44. By: Kozhan, Roman; Taylor, Mark P; Xu, Qi
    Abstract: We empirically investigate the role of prospect theory in the foreign exchange market. Using the historical distribution of exchange rate changes, we construct a currency-level measure of prospect theory value and find that it negatively forecasts future currency excess returns. High prospect theory value currencies significantly underperform low prospect theory value currencies. The predictability is higher when arbitrage is limited and during periods of excess speculative demand of ir- rational traders. These findings are consistent with the hypothesis that investors mentally represent currencies by their historical distributions or charts and evaluate the distribution in the way described by prospect theory.
    Keywords: currency returns; foreign exchange; Limits to Arbitrage; prospect theory
    JEL: F31 G12 G15 G40
    Date: 2020–09
  45. By: Martín Tobal (Banco de México); Renato Yslas (Banco de México)
    Abstract: This paper runs a survey across seventeen countries from Latin American and the Caribbean about the use, implementation characteristics and policy motivations of limits and requirements on FX positions, as well as the exchange rate regimes of these economies over 1992-2012. Among other novel stylized facts, we show that when referring to policy motivations, national authorities linked their regulatory measures mostly to currency mismatches and fluctuations of the exchange rate, and this pattern was clearer for the more flexible exchange rate regimes adopted in the aftermath of the currency crisis of the 1990s and early 2000s. Thus, we use the survey and the synthetic control method to show that changes in limits and requirements on FX positions affected fluctuations of the exchange rate.
    Keywords: Prudential Regulation; Exchange Rate Regimes; Foreign Currency Positions
    JEL: E58 F31
    Date: 2021–05
  46. By: Monnet, Eric; Velde, François R.
    Abstract: We review developments in the history of money, banking, and financial intermediation over the last twenty years. We focus on studies of financial development, including the role of regulation and the history of central banking. We also review the literature of banking and financial crises. This area has been largely unaffected by the so-called new econometric methods that seek to prove causality in reduced form settings. We discuss why historical macroeconomics is less amenable to such methods, discuss the underlying concepts of causality, and emphasize that models remain the backbone of our historical narratives.
    Keywords: Banking; Causality; Financial Intermediation; historical macroeconomics; money
    JEL: N01 N10 N20
    Date: 2020–10
  47. By: Bertrand Candelon (Université catholique de Louvain); Angelo Luisi (Université catholique de Louvain); Francesco Roccazzella (Université catholique de Louvain)
    Abstract: Sovereign bond market fragmentation represents one of the major challenges European authorities have had to tackle since the outburst of the euro area debt crisis in 2010. By investigating the inter-country shock transmission through a new methodology that reconciles Factor and Global Vector Autoregressive models, we first show that fragmentation risk well preceded the sovereign debt crisis outburst. Most importantly, by analyzing the recent period, we document a rise in fragmentation risk in the euro area during the COVID pandemic. This rise, connected to the pressure on public debts and deficits due to the pandemic period, questions the European integration process and calls for early measures to avoid a new sovereign debt crisis.
    Keywords: Euro Area, Sovereign bond, Fragmentation, COVID
    JEL: F36 F37 G12 H63
    Date: 2021–05–14
  48. By: Hassan, Tarek Alexander; Zhang, Tony
    Abstract: This article reviews the literature on currency and country risk with a focus on its macroeconomic origins and implications. A growing body of evidence shows countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.
    Keywords: Capital Flows; carry trade; Country risk; currency risk; Forward premium puzzle; uncovered interest parity
    Date: 2020–09
  49. By: Comin, Diego; Johnson, Robert
    Abstract: Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation.
    Date: 2020–10
  50. By: Herkenhoff, Philipp; Sauré, Philip
    Abstract: We show that the current account balance (CA) is systematically distorted by an inflation effect, which arises because income on foreign-issued debt is recorded as nominal interest in the currency of denomination. Since nominal interest includes compensations for expected inflation, increases in the latter must impact the CA. Guided by the relevant international accounting rules, we impute the inflation effect for 50 economies between 1991 and 2017. When adjusting for the inflation effect, the absolute value of yearly CAs drops by 0.13% of GDP on average. Over the full period, the reduction is sizable 22.85% of initial GDP for the average country (26.4% for the U.S.). As the flip-side of the CA distortions, the inflation effect contributes systematically to the well-known valuation effect of net foreign assets, of which about a twelfth is accounted for between 1991 and 2017 for the average country and well over half for the U.S.
    Keywords: current account; inflation; Valuation effects
    JEL: F30 F32
    Date: 2020–11
  51. By: Asongu, Simplice A; Odhiambo, Nicholas M
    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
    Date: 2021–05
  52. By: Fukker, Gábor; Kok, Christoffer
    Abstract: In this paper we present a methodology of model-based calibration of additional capital needed in an interconnected financial system to minimize potential contagion losses. Building on ideas from combinatorial optimization tailored to controlling contagion in case of complete information about an interbank network, we augment the model with three plausible types of fire sale mechanisms. We then demonstrate the power of the methodology on the euro area banking system based on a network of 373 banks. On the basis of an exogenous shock leading to defaults of some banks in the network, we find that the contagion losses and the policy authority's ability to control them depend on the assumed fire sale mechanism and the fiscal budget constraint that may or may not restrain the policy authorities from infusing money to halt the contagion. The modelling framework could be used both as a crisis management tool to help inform decisions on capital/liquidity infusions in the context of resolutions and precautionary recapitalisations or as a crisis prevention tool to help calibrate capital buffer requirements to address systemic risks due to interconnectedness. JEL Classification: C61, D85, G01, G18, G21, G28, L14
    Keywords: contagion, fire sales, interbank networks, macroprudential policy, optimal control, stress testing
    Date: 2021–05
  53. By: Korsaye, Sofonias Alemu; Trojani, Fabio; Vedolin, Andrea
    Abstract: We provide a model-free framework to study the global factor structure of exchange rates. To this end, we propose a new methodology to estimate international stochastic discount factors (SDFs) that jointly price cross-sections of international assets, such as stocks, bonds, and currencies, in the presence of frictions. We theoretically establish a two-factor representation for the cross-section of international SDFs, consisting of one global and one local factor, which is independent of the currency denomination. We show that our two-factor specification prices a large cross-section of international asset returns, not just in- but also out-of-sample with R2s of up to 80%.
    Keywords: Capital Flows; factor models; Financial Frictions; incomplete markets; International Asset Pricing; Lasso; Market Segmentation; regularization; Stochastic discount factor
    JEL: F31 G15
    Date: 2020–10

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