nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒05‒31
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A Quantitative Model for the Integrated Policy Framework By Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
  2. Explaining Monetary Spillovers: The Matrix Reloaded By Kearns, Jonathan; Schrimpf, Andreas; Xia, Fan Dora
  3. A dilemma between liquidity regulation and monetary policy: some history and theory By Monnet, Eric; Vari, Miklos
  4. Tiers of joy? Reserve tiering and bank behavior in a negative-rate environment By Andreas Fuster; Tan Schelling; Pascal Towbin
  5. How Does U.S. Monetary Policy Affect Emerging Market Economies? By Ozge Akinci; Albert Queraltó
  6. Is It Time to Reassess the Focal Role of Core PCE Inflation? By Randal Verbrugge
  7. The Inflation Expectations of U.S. Firms: Evidence from a New Survey By Candia, Bernardo; Coibion, Olivier; Gorodnichenko, Yuriy
  8. When Does Monetary Policy Sway House Prices? A Meta-Analysis By Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
  9. COVID-19 and Monetary Policy with Zero Bounds: A Cross-Country Investigation By Hakan Yilmazkuday
  10. Systemic Risk Spillovers Across the EURO Area By Alexandros Skouralis
  11. Independent Policy, Dependent Outcomes: A Game of Cross-Country Dominoes across European Yield Curves By Ioannis Chatziantoniou; David Gabauer; Alexis Stenfor
  12. Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight By Woodford, Michael; Xie, Yinxi
  13. Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts By Kilian, Lutz; Zhou, Xiaoqing
  14. Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix By Bilbiie, Florin Ovidiu; Monacelli, Tommaso
  15. Negative Monetary Policy Rates and Systemic Banks' Risk-Taking: Evidence from the Euro Area Securities Register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis
  16. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By Elliott, David; Meisenzahl, Ralf; Peydró, José Luis; Turner, Bryce C.
  17. Lessons from early central banking for today By Bindseil, Ulrich
  18. Micro level data for macro models: the distributional effects of monetary policy By Luisa Corrado; Daniela Fantozzi
  19. Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices By Foellmi, Reto; Jäggi, Adrian; Schnell, Fabian
  20. Effective Demand Failures and the Limits of Monetary Stabilization Policy By Woodford, Michael
  21. Bubbles against Financial Repression By Plantin, Guillaume
  22. Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect By Caballero, Ricardo; Simsek, Alp
  23. Free Banking in Sweden: The Case of Private Bank Notes, 1831-1902 By Jonung, Lars
  24. Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates By Cao, Shuo; Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel
  25. Monetary Policy when the Phillips Curve is Locally Quite Flat By Beaudry, Paul; Hou, Chenyu; Portier, Franck
  26. Pandemic Ebbs and Flows: Economic Data, Inflation Concerns, and Policymaking By Eric S. Rosengren
  27. Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences By Konstantins Benkovskis; Olegs Tkacevs; Karlis Vilerts
  28. Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy By Julian di Giovanni; Galina Hale
  29. Liquidity Traps in a Monetary Union By Kollmann, Robert
  30. The International Aspects of Macroprudential Policy By Forbes, Kristin
  31. Nelson-Siegel Decay Factor and Term Premia in Japan By Junko Koeda; Atushi Sekine
  32. Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model By Satoshi Hoshino; Daisuke Ida
  33. Which firms benefit from corporate QE during the COVID-19 crisis? The case of the ECB's Pandemic Emergency Purchase Program By Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
  34. A Bird eye from covid-19 crisis on the Relevance of the cfa franc devaluation of January 1994 and the honeymoon effect: an assessment with the equilibrium real exchange rate. Cases of Cameroonian and Gabonese economies By Kuikeu, Oscar
  35. Interest Rates, Market Power, and Financial Stability By Martinez Miera, David; Repullo, Rafael
  36. Payments Evolution from Paper to Electronic: Bill Payments and Purchases By Joanna Stavins
  37. Forecasting with Shadow-Rate VARs By Andrea Carriero; Todd E. Clark; Massimiliano Marcellino; Elmar Mertens
  38. The Influence of US Dollar Funding Conditions on Asian Financial Markets By Lee , Junkyu; Rosenkranz , Peter; Ramayandi , Arief; Pham , Hoang
  39. Balancing public-private partnerships in a digital age: CBDCs, central banks and technology firms By Ojo, Marianne
  40. Central Bank Communication: One Size Does Not Fit All By Joan Huang; John Simon

  1. By: Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
    Abstract: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
    Keywords: Capital Flow Measures; DSGE model; emerging economies; FX intervention; monetary policy
    JEL: C54 E52 E58 F41
    Date: 2020–07
  2. By: Kearns, Jonathan; Schrimpf, Andreas; Xia, Fan Dora
    Abstract: This paper relies on a high-frequency identification approach to provide new insights into monetary policy spillovers by major central banks. Our long and broad sample (1999-2019, from four major economies to 47 advanced and emerging market economies) allows us to accurately identify the properties of spillovers and to shed light on different transmission channels. We find that spillovers by the Fed to foreign interest rates are large, but more surprisingly, document an intensification of spillovers by the ECB over time. Spillovers are more significant to bond yields in advanced economies than they are to those in emerging markets. Differentiating across key spillover channels, we find strongest support for a financial links channel, but weaker evidence for the macroeconomic links channel and FX regime channel.
    Keywords: Financial Integration; high-frequency data; monetary policy spillovers
    JEL: E44 F36 F42 F65
    Date: 2020–07
  3. By: Monnet, Eric; Vari, Miklos
    Abstract: History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named "securities-reserve requirements", were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened
    Keywords: Basel III; central bank history; Liquidity coverage ratio (LCR); liquidity ratios; Monetary policy implementation; reserve requirements
    JEL: E43 E52 E58 G28 N10 N20
    Date: 2020–07
  4. By: Andreas Fuster; Tan Schelling; Pascal Towbin
    Abstract: As negative interest rates exert pressure on bank profitability, several central banks have introduced reserve tiering systems to lessen the burden. Reserve tiering means that banks are only charged the negative policy rate above a certain threshold of reserves. Altering the threshold affects bank profits and therefore has potential effects on the macroeconomy and financial stability. However, assessing these effects is challenging, because the introduction or modification of reserve tiers has usually been accompanied by other monetary policy actions, such as rate changes or quantitative easing measures. We are able to circumvent these issues by exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.
    Keywords: Reserve tiering, negative interest rates, banking, risk-taking channel
    JEL: E52 G21
    Date: 2021
  5. By: Ozge Akinci; Albert Queraltó
    Abstract: The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced economies. It is because higher U.S. policy rates have a disproportionately larger impact on rates in EMEs. In our recent research, we develop a model with cross-border financial linkages that provides theoretical foundations for these empirical findings. In this Liberty Street Economics post, we use the model to illustrate the spillovers from a tightening of U.S. monetary policy on credit spreads and on the uncovered interest rate parity (UIP) premium in EMEs with dollar-denominated debt.
    Keywords: financial frictions; U.S. monetary policy spillovers; currency premium; financial conditions
    JEL: E52 F00
    Date: 2021–05–17
  6. By: Randal Verbrugge
    Abstract: In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. Excluded items do not just experience transitory shocks, but also have persistent trends; thus excluding them imparts a significant time-varying bias to core inflation. Meanwhile, items that are not excluded can experience volatility and moreover can cause core inflation to depart notably from trend inflation, sometimes at crucial moments. Two other prominent trend inflation measures, trimmed mean PCE inflation and median PCE inflation, gracefully address these issues, but themselves have notable time-varying bias. I discuss the source of the bias in these other measures and how to correct for bias in real time. I then summarize and extend a wide variety of evidence comparing these three trend measures. I conclude that, for a variety of considerations that are relevant for monetary policy deliberations and communication, either trimmed mean PCE inflation or median PCE inflation are superior measures.
    Keywords: core inflation; forecasting; monetary policy; trimmed mean; median
    JEL: E0 E31 E37 E52 C8
    Date: 2021–05–18
  7. By: Candia, Bernardo (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley)
    Abstract: Introducing a new survey of U.S. firms' inflation expectations, we document key stylized facts involving what U.S. firms know and expect about inflation and monetary policy. The resulting time series of firms' inflation expectations displays unique dynamics, distinct from those of households and professional forecasters. By any typical definition of "anchored" expectations, the inflation expectations of U.S. managers appear far from anchored, much like those of households. And like households, U.S. managers are largely uninformed about recent aggregate inflation dynamics or monetary policy. These results complement existing evidence on firms' inflation expectations from other countries and confirm that inattention to inflation and monetary policy is pervasive among U.S. firms as well.
    Keywords: expectations, surveys, anchoring, rational inattention
    JEL: E3 E4 E5
    Date: 2021–05
  8. By: Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
    Abstract: Several central banks have leaned against the wind in the housing market by increasing the policy rate preemptively to prevent a bubble. Yet the empirical literature provides mixed results on the impact of short-term interest rates on house prices: the estimated semi-elasticities range from -12 to positive values. To assign a pattern to these differences, we collect 1,447 estimates from 31 individual studies that cover 45 countries and 69 years. We then relate the estimates to 39 characteristics of the financial system, business cycle, and estimation approach. Our main results are threefold. First, the mean reported estimate is exaggerated by publication bias, because insignificant results are underreported. Second, omission of important variables (liquidity and long-term rates) likewise exaggerates the effects of short-term rates on house prices. Third, the effects are stronger in countries with more developed mortgage markets and generally later in the cycle when the yield curve is flat and house prices enter an upward spiral.
    Keywords: interest rates,house prices,monetary policy transmission,meta-analysis,publication bias,Bayesian model averaging
    JEL: C83 E52 R21
    Date: 2021
  9. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Using daily data on policy rates from 28 advanced economies and 32 emerging markets, this paper investigates the monetary policy reaction function of central banks during the Coronavirus Disease 2019 (COVID-19) outbreak. The results show that emerging markets or countries without a zero bound on their interest rates were able to reduce interest rates as a reaction to reduced economic activity and to the volatility in their exchange rates, whereas advanced economies or countries with a zero bound on their interest rates were not. Several policy implications follow for countries with a zero bound on their interest rates amid COVID-19.
    Keywords: COVID-19, Coronavirus, Monetary Policy, Reaction Function, Google Mobility, Exchange Rate
    JEL: E52 E58
    Date: 2021–05
  10. By: Alexandros Skouralis
    Abstract: The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.
    Keywords: Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks
    JEL: C32 E44 F36 F45
    Date: 2021
  11. By: Ioannis Chatziantoniou (University of Portsmouth); David Gabauer (Software Competence Center Hagenberg); Alexis Stenfor (University of Portsmouth)
    Abstract: This study investigates the dynamic transmission mechanism between 2Y, 5Y and 10Y interest rate swaps (IRS) for six European currencies (CHF, DKK, EUR, GBP, NOK and SEK) from August 6, 1999 to March 4, 2021 applying the time-varying parameter vector autoregressive connectedness approach in the spirit of Antonakakis et al. (2020). Furthermore, the connectedness approach (Diebold and Yılmaz, 2012, 2014) is extended to allow analyzing aggregated and conditional connectedness measures which improve their interpretability and obtain more in-depth information concerning the cross-maturity/cross-currency propagation mechanism. We document that EUR and DKK have been the most prominent transmitters of shocks in the network. We also find that the 10Y IRS has increasingly assumed a net-transmitting role at the expense of the 2Y IRS – in line with a shift towards unconventional monetary policy and quantitative easing. From a policymaking perspective, this implies means that the role of the domestic short-term interest rate has lost relevance for the monetary transmission mechanism at the expense of the foreign long-term interest rate.
    Keywords: Dynamic Connectedness; Aggregated Connectedness, Conditional Connectednes; Interest Rate Swaps; TVP-VAR; Yield Curves.
    JEL: C32 C5 F3 G15
    Date: 2021–05–25
  12. By: Woodford, Michael; Xie, Yinxi
    Abstract: This paper reconsiders the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint on the effectiveness of conventional monetary policy, under an assumption of bounded rationality. In particular, we reconsider the potential role of countercyclical fiscal transfers as a tool of stabilization policy. Because Ricardian Equivalence no longer holds when planning horizons are finite (even when relatively long), we find that fiscal transfers can be a powerful tool to reduce the contractionary impact of an increased financial wedge during a crisis, and can even make possible complete stabilization of both aggregate output and inflation under certain circumstances, despite the binding lower bound on interest rates. However, the power of such policies depends on the degree of monetary policy accommodation. We also show that a higher level of welfare is generally possible if both monetary and fiscal authorities commit themselves to history-dependent policies in the period after the financial disturbance that causes the lower bound to bind has dissipated.
    Keywords: Monetary Accommodation; monetary and fiscal policy coordination; planning horizons
    JEL: E52 E63 E7
    Date: 2020–07
  13. By: Kilian, Lutz; Zhou, Xiaoqing
    Abstract: The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.
    Keywords: anchor; Expectations; gasoline price; Household survey; inflation; missing disinflation; oil price
    JEL: E31 E52 Q43
    Date: 2020–08
  14. By: Bilbiie, Florin Ovidiu; Monacelli, Tommaso
    Abstract: Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity---making fiscal and monetary policy inextricably linked. Changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.
    Keywords: aggregate demand; inequality; Optimal Monetary-Fiscal Policy; redistribution; TANK
    JEL: D91 E21 E62
    Date: 2020–08
  15. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: banks; negative rates; Non-Standard Monetary Policy; reach-for-yield; securities
    JEL: E43 E52 E58 G01 G21
    Date: 2020–07
  16. By: Elliott, David; Meisenzahl, Ralf; Peydró, José Luis; Turner, Bryce C.
    Abstract: We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment.
    Keywords: consumer loans; monetary policy; Mortgages; Nonbank lending; Shadow banks; syndicated loans
    JEL: E51 E52 G21 G23 G28
    Date: 2020–07
  17. By: Bindseil, Ulrich
    Abstract: Contrary to popular belief, the history of central banking begins much earlier than 1800. Many current issues of central bank policy can be traced back to the public giro banks of the 15th century, and have been discussed in numerous essays at least since the 17th century. Are the same debates merely repeating themselves in new shapes? And, more importantly, what can we learn today from those first four centuries of central bank history and debates? This paper argues that despite the end of convertibility into precious metal of central bank money, relevant lessons can be derived from early central banking for today, and develops this around five concrete themes.
    JEL: E5 N2
    Date: 2021
  18. By: Luisa Corrado; Daniela Fantozzi
    Abstract: In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use a novel database based on the survey micro level data on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment which enables us to compute measures of inequality and the distribution over time for different incomes and subgroups of individuals. The identification strategy is based on the monetary surprises estimated in the Euro area Monetary Policy Event-Study Database (EA-MPD) for the Euro area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios: 1999-2012 (pre-QE) and 1999-2017 (including the QE period). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable, labor and financial income more persistently than a conventional monetary shock. These effects are heterogeneous and seem to benefit mostly the bottom of the distribution. The impact on financial wealth is ambiguous favoring the wealthy households mainly in the short-run. Our evidence suggests that QE is associated with a decrease in Italian households’ inequality.
    Keywords: Income Inequality, monetary policy, Local Projections, Survey Data, High-Frequency Data
    JEL: C81 D31 E52 E58
    Date: 2021–05
  19. By: Foellmi, Reto; Jäggi, Adrian; Schnell, Fabian
    Abstract: How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm and product price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.
    Keywords: Distance to Border; Exchange rate; Price Setting Behavior of Firms
    JEL: E30 E31
    Date: 2020–07
  20. By: Woodford, Michael
    Abstract: The COVID-19 pandemic presents a challenge for stabilization policy that is different from those resulting from either "supply" or "demand" shocks that similarly affect all sectors of the economy, owing to the degree to which the necessity of temporarily suspending some (but not all) economic activities disrupts the circular flow of payments, resulting in a failure of what Keynes (1936) calls "effective demand." In such a situation, economic activity in many sectors of the economy can be much lower than would maximize welfare (even taking into account the public health constraint), and interest-rate policy cannot eliminate the distortions --- not because of a limit on the extent to which interest rates can be reduced, but because monetary stimulus fails to stimulate demand of the right sorts. Fiscal transfers are instead well-suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources without any need for a monetary policy response.
    Keywords: circular flow; Covid-19 pandemic; Fiscal Transfers; Network structure
    JEL: E12 E52 E63
    Date: 2020–08
  21. By: Plantin, Guillaume
    Abstract: During a financial crisis, a central bank temporarily subsidizes the interest rate so as to maintain borrowing at normal levels. Savers may search for yield and blow rational stochastic bubbles that generate a higher expected return than the policy rate before bursting at the end of monetary easing. Unlike standard rational bubbles, that are not monetary phenomena, these bubbles are "bad" in the sense that they crowd out investments that would otherwise generate a higher expected return than that on the bubbles.
    Date: 2020–08
  22. By: Caballero, Ricardo; Simsek, Alp
    Abstract: We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the Covid-19 shock.
    Keywords: asset prices; COVID-19; monetary policy; Output gap; Overshooting; Wall/Main Street disconnect
    JEL: E21 E32 E43 E44 E52 G12
    Date: 2020–08
  23. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper examines the Swedish record of competition in the supply of bank notes in the 19th century. Between 1831 and 1902, private commercial banks, organized as partnerships with unlimited liability for their owners, issued notes competing with the notes of the Riksbank, the bank owned by the Riksdag, the Swedish parliament. The private banks turned out to be competitive in this market despite several legal obstacles, most notably that private notes were never legal tender – only Riksbank notes were. The private note-issuing banks developed techniques to increase the distribution of their notes. No case of an overissue of notes or of runs by the public on private note banks occurred. No private bank failed to redeem its notes into Riksbank notes. Opinion in the Riksdag remained hostile to private bank notes, reflected in the gradual restriction of the denominations of the notes issued by private banks and in rising taxes on private notes. Eventually, the Riksdag gave its bank, the Riksbank, a monopoly of note issue in Sweden. The evidence from the Swedish experience of free banking suggests that the design of the legal system was the prime explanation for the successful performance of private notes.
    Keywords: Free banking; central banking; private bank notes; unlimited liability; currency competition; Riksbank; Sweden
    JEL: E42 E51 E58 G21 K20 N13 N23
    Date: 2021–05–11
  24. By: Cao, Shuo; Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel
    Abstract: Using a unique dataset of individual professional forecasts we document disagreement about the future path of monetary policy particularly at longer horizons. The stark differences in short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an affine term structure model in which investors hold heterogeneous beliefs about the long-run level of rates. Our model fits U.S. Treasury yields and the short rate paths predicted by different groups of professional forecasters very well. About a third of the variation in term premiums is driven by short-rate disagreement.
    Keywords: disagreement; heterogeneous beliefs; Noisy information; Speculation; Survey Forecasts; Term premium; yield curve
    JEL: D83 D84 E43 G10 G12
    Date: 2020–08
  25. By: Beaudry, Paul; Hou, Chenyu; Portier, Franck
    Abstract: This papers begins by highlighting how the presence of a cost channel of monetary policy can offer new insights into the behavior of inflation when the Phillips curve is locally quite flat. For instance, we highlight a key condition whereby lax monetary policy can push the economy in a low inflation trap and we discuss how, under the same condition, standard policy rules for targeting inflation may need to be modified. In the second part of the paper we explore the empirical relevance of the conditions that give rise to these observations using US data. To this end, we present both (i) a wide set of estimates derived from single-equation estimation of the Phillips curve and (ii) estimates based on structural estimation of a full model. The results from both sets of empirical exercises strongly support the key condition we derived.
    Keywords: inflation; interest rates; monetary policy
    JEL: E24 E3 E32
    Date: 2020–08
  26. By: Eric S. Rosengren
    Abstract: With a shock as large as the pandemic, policymakers need to be alert to potential changes to the economy. To date, inflation expectations and the underlying inflation rate look to be stable. It is important to keep in mind the difficulty that was experienced in achieving inflation of 2 percent in the United States and most of the developed world after the Great Financial Crisis. As a result, my perspective is that the emphasis on actual outcomes rather than forecasts of rising inflationary pressures when setting monetary policy appears justified. However, given the noise in the data, it will be important to carefully filter underlying inflation trends as labor markets tighten.
    Keywords: economic outlook; COVID-19; inflation; monetary policy; fiscal policy; labor market; inflationary trends
    Date: 2021–05–14
  27. By: Konstantins Benkovskis (Bank of Latvia); Olegs Tkacevs (Bank of Latvia); Karlis Vilerts (Bank of Latvia)
    Abstract: This paper analyzes the determinants of interest rate spreads during the period 2014–2020 in the euro area, with a focus on the Baltic countries. Against the background of accommodative monetary policy, interest rates on loans in the euro area have declined markedly, except in a few countries. In Latvia, Lithuania and Estonia, interest rates on new loans to non-financial corporations in 2020 were about the same as in 2014, and at the same time they were among the highest in the euro area. In this study, we apply the Ho and Saunders (1981) theoretical framework to identify explanatory factors of spreads and use the obtained econometric estimates to calculate the so-called pure spread by subtracting the influence of the bank funding structure and other bank-specific factors from the interest rate spread. Our study shows that even after accounting for the conventional determinants of interest rate spread, differences in the pure spread between euro area countries, especially between the Baltic countries and the rest of the euro area, persist. In part, these differences can be explained by varying degrees of financial sector market concentration. However, the bulk of the gap in spreads remains unexplained. The findings of this paper suggest that properly designed policy measures are needed to reduce spreads in the Baltic countries and lessen the fragmentation in the euro area. This would allow for more effective monetary policy transmission and stimulate lending and post-Covid economic recovery in the Baltics.
    Keywords: tax interest rate spread, interest rate on loans, market concentration
    JEL: G21 L11 E43 E52
    Date: 2021–05–18
  28. By: Julian di Giovanni; Galina Hale
    Abstract: We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns across countries and sectors using a newly constructed dataset. Our estimation strategy is based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use the SAR model to decompose the overall impact of U.S. monetary policy on global stock returns into a direct and a network effect. We find that nearly 70% of the total impact of U.S. monetary policy shocks on country-sector stock returns are due to the network effect of global production linkages. Our results are robust to changes in the definitions of stock returns and monetary policy shocks, to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to alternative empirical specifications.
    JEL: F10 F36 G15
    Date: 2021–05
  29. By: Kollmann, Robert
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Euro Area; international fiscal spillovers; liquidity trap; monetary union; terms of trade; zero lower bound
    JEL: E3 E4 F2 F3 F4
    Date: 2020–08
  30. By: Forbes, Kristin
    Abstract: Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The "Corona Crisis" provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish.
    Keywords: Bank Regulation; capital-flow measures; macroprudential; Spillovers
    JEL: E44 E5 F33 F36 F38 G21 G23 G28
    Date: 2020–08
  31. By: Junko Koeda (Waseda University. Address: 1-6-1 Nishiwaseda, Shinjuku-ku, Tokyo, 169-8050.); Atushi Sekine (Graduate School of Social Sciences, Chiba University)
    Abstract: This study examines the two-decade-long low interest rate environment in Japan using the NelsonSiegel yield curve framework emphasizing the role of decay factor. We find that the decay factor has declined particularly after the global financial crisis, pushing down the entire yield curve as well as the conditional variance of bond yield in Japan. The decay factor was very low when BOJ's yield curve control started in 2016 and remained low with small fluctuations since. Decay factor shocks can be interpreted as long-dated term premium shocks, and these shocks tend to decrease with BOJ's bond purchases, controlling for other possible factors that affect term premia such as business cycles and economic uncertainty.
    Keywords: decay factor, Nelson Siegel, term premium, yield curve control, Japan, nonlinear state space model
    JEL: E58 E52 C32
    Date: 2021–04
  32. By: Satoshi Hoshino (Faculty of Economics, Okayama Shoka University / Research Fellow, Graduate School of Economics, Kobe University); Daisuke Ida (Faculty of Economics, Momoyama Gakuin University / Research Fellow, Graduate School of Economics, Kobe University)
    Date: 2021–05
  33. By: Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
    Abstract: Using an event study methodology, this paper examines how European firms have been affected by the announcement of the Pandemic Emergency Purchase Program (PEPP) of the ECB. Firms with an investment-grade rating benefit relatively more as evidenced by higher share prices and lower CDS spreads, which reflects that the ECB is restricted to purchasing investment-grade corporate debt securities. The gains to shareholders relative to the total gains of shareholders and debtholders are negatively related to firm leverage, consistent with the existence of debt overhang. Firms more heavily impacted by the pandemic benefit relatively little from the PEPP, which could reflect that the business models of some of these firms are heavily damaged by the pandemic. Monetary policy in the form of the PEPP and national fiscal responses to the pandemic are shown to be complements in the sense that a strong pre-PEPP fiscal response enhances the potential for the PEPP to positively affect equity and debt valuations.
    Keywords: Equity returns; Pandemic; Quantitative easing
    JEL: E52 G14
    Date: 2020–08
  34. By: Kuikeu, Oscar
    Abstract: The Relevance on policy orientation concerning currency have been assess in the past at the evening related to the cfa franc devaluation of January 1994 on Cameroon and Gabon. Once more it’s relatively means that despite the amount of debate on the peg into the cfa franc zone in particular with the devaluation of January 1994 this system of currency arrangement gives to his members states a lot of benefit as the honeymoon effect? In other words, in the currently context of covid-19 what are the basis to assess on this issue? These are the main questions we are trying to answer, here. Globally speaking, considering the Results the Residual based approach of cointegration is an unvaluable engine to investigate on this kind of consideration about currency area. In fact, he have been able as well as to assess the effect of the peg on the currency arrangement but also to infer on the verifiability for the considering currency area of the honeymoon effect.
    Keywords: Real exchange Rates equilibrium real exchange rates honeymoon effect cointegrate system
    JEL: C32 F33
    Date: 2021–05–12
  35. By: Martinez Miera, David; Repullo, Rafael
    Abstract: This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital.
    Keywords: Bank monitoring; bank risk-taking; Imperfect Competition; intermediation margins; monetary policy
    JEL: E52 G21 L13
    Date: 2020–07
  36. By: Joanna Stavins
    Abstract: Consumer payments in the United States gradually have been shifting away from paper checks for the past several years. Cash use has declined as well, although at a much slower pace. As the number of check payments has decreased, those payments have been replaced with electronic and card payments. However, the transition from paper to electronic and card payments for bills has not proceeded in the same way as the transition for purchases. Using detailed consumer survey panel data collected over nine years, we track the same respondents over time and find that consumers who reduced their check or cash use for bill payments in a given year were more likely to reduce their check or cash use for purchases in the following year; but a reduction in check or cash use for purchases was not followed by the use of fewer checks or less cash for bill payments. The results suggest that a change in bill payment behavior may be a precursor to payment behavior changes in general. These results may help predict changes in payment instrument use for various transaction types as new payment methods, such as faster payments or central bank digital currency, become available to consumers in the future.
    Keywords: consumer payments; check; cards; electronic payments
    JEL: D12 D14 D15
    Date: 2021–04–01
  37. By: Andrea Carriero; Todd E. Clark; Massimiliano Marcellino; Elmar Mertens
    Abstract: Interest rate data are an important element of macroeconomic forecasting. Projections of future interest rates are not only an important product themselves, but also typically matter for forecasting other macroeconomic and financial variables. A popular class of forecasting models is linear vector autoregressions (VARs) that include shorter- and longer-term interest rates. However, in a number of economies, at least shorter-term interest rates have now been stuck for years at or near their effective lower bound (ELB), with longer-term rates drifting toward the constraint as well. In such an environment, linear forecasting models that ignore the ELB constraint on nominal interest rates appear inept. To handle the ELB on interest rates, we model observed rates as censored observations of a latent shadow-rate process in an otherwise standard VAR setup. The shadow rates are assumed to be equal to observed rates when above the ELB. Point and density forecasts for interest rates (short term and long term) constructed from a shadow-rate VAR for the US since 2009 are superior to predictions from a standard VAR that ignores the ELB. For other indicators of financial conditions and measures of economic activity and inflation, the accuracy of forecasts from our shadow-rate specification is on par with a standard VAR that ignores the ELB.
    Keywords: Macroeconomic forecasting; effective lower bound; term structure; censored observations
    JEL: C34 C53 E17 E37 E43 E47
    Date: 2021–03–29
  38. By: Lee , Junkyu (Asian Development Bank); Rosenkranz , Peter (Asian Development Bank); Ramayandi , Arief (Asian Development Bank); Pham , Hoang (Oregon State University)
    Abstract: More than 20 years after the Asian financial crisis, the region’s continued high reliance on United States (US) dollar-denominated funding has significant implications for the transmission of global financial conditions to domestic financial and macroeconomic circumstances. Given limited domestic capital market-based financing solutions, a high reliance on funding denominated in US dollars renders countries vulnerable to changing global financial and liquidity conditions. Using a dynamic panel and a vector autoregression model to assess the exchange rate as a possible transmission channel, we find that changes in bilateral US dollar exchange rates can have a significant impact on sovereign credit risk. In particular, a depreciation of the domestic currency against the US dollar leads to a widening of the sovereign bond spread. This finding suggests a significant relationship between US dollar funding exposure, US dollar liquidity conditions, and domestic financial conditions in some emerging Asian economies, and thus highlights one source of structural vulnerability. Given that the magnitude of the effects varies across countries, policy makers need to monitor closely the interplay between the exchange rates and local financial market conditions with tailored prescriptions for domestic financial resilience.
    Keywords: bond spread; emerging Asian economies; exchange rate; US dollar funding conditions
    JEL: F15 F31 F62 F65 G12 G15
    Date: 2021–03–10
  39. By: Ojo, Marianne
    Abstract: What roles exist for public and private partnerships within the context of central bank digital currencies (CBDCs), in an increasingly digitalized global system? Do central bank digital currencies (CBDCs) serve as public goods rather than tools which should primarily remain within the realm and governance of private sector firms? What challenges or risks are presented through the use of CBDCs and how can such risks be mitigated through current existing structures - as well as models which have been propounded in relation to public – private partnerships? This paper aims to contribute to the literature on the topic through a consideration of several variants and models of CBDCs under which the public private partnership would function, namely the synthetic CBDC (sCBDC) and the two-tiered CBDC. Further, two other types of CBDCs, namely the wholesale CBDC and the retail CBDC will be distinguished - as well as the account based CBDC, which is contrasted to CBDCs based on digital tokens. Whilst concerns for privacy and security remain paramount and cannot be undermined, particularly from the perspectives of distributed ledger technologies (and blockchains – through which such platforms operate), such concerns need to be weighed against the need for identification since regulators will be better supported in their goals in enforcing the law, as well as identifying fraudulent operations, where sufficient identification procedures have been put in place
    Keywords: CBDCs; synthetic CBDCs; two tiered CBDCs; retail CBDC; distributed ledger technologies; regulation; governance; anti trust ; competition; financial stability
    JEL: E58 F2 F64 G3
    Date: 2021–05
  40. By: Joan Huang (Reserve Bank of Australia); John Simon (Reserve Bank of Australia)
    Abstract: High-quality central bank communication can improve the effectiveness of monetary policy and is an essential element in providing greater central bank transparency. There is, however, no agreement on what high-quality communication looks like. To shed light on this, we investigate 3 important aspects of central bank communication. We focus on how different audiences perceive the readability and degree of reasoning within various economic publications; providing the reasons for decisions is a critical element of transparency. We find that there is little correlation between perceived readability and reasoning in the economic communications we analyse, which highlights that commonly used measures of readability can miss important aspects of communication. We also find that perceptions of communication quality can vary significantly between audiences; one size does not fit all. To dig deeper we use machine learning techniques and develop a model that predicts the way different audiences rate the readability of and reasoning within texts. The model highlights that simpler writing is not necessarily more readable nor more revealing of the author's reasoning. The results also show how readability and reasoning vary within and across documents; good communication requires a variety of styles within a document, each serving a different purpose, and different audiences need different styles. Greater central bank transparency and more effective communication require an emphasis not just on greater readability of a single document, but also on setting out the reasoning behind conclusions in a variety of documents that each meet the needs of different audiences.
    Keywords: central bank communications; machine learning; natural language processing; readability; central bank transparency
    JEL: C61 C83 D83 E58 Z13
    Date: 2021–05

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