nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒06‒14
forty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB’s unconventional policies By Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
  2. The Role of Money in Monetary Policy at the Lower Bound By Billi, Roberto M; Söderström, Ulf; Walsh, Carl
  3. An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies By Hartley, Jonathan S.; Rebucci, Alessandro
  4. US monetary policy and the financial channel of the exchange rate: evidence from India By Shesadri Banerjee; M S Mohanty
  5. Point targets, tolerance bands, or target ranges? Inflation target types and the anchoring of inflation expectations By Ehrmann, Michael
  6. An Exploration of First Nations Reserves and Access to Cash By Heng Chen; Walter Engert; Kim Huynh; Daneal O’Habib
  7. Interest, Reserves, and Prices By Gianluca Benigno; Pierpaolo Benigno
  8. Inflation dynamics and forecast : frequency matters By Martins, Manuel M. F.; Verona, Fabio
  9. Using Conventional Monetary Policy Unconventionally: Overturning Inflation and Output Gap Dynamics Using a Super-Inertial Interest Rate Rule By Guy Segal
  10. Monetary Policy Announcements, Information Schocks, and Exchange Rate Dynamics By Daniel Gründler; Eric Mayer; Johann Scharler
  11. Forecasting CPI Inflation Components with Hierarchical Recurrent Neural Network By Oren Barkan; Jonathan Benchimol; Itamar Caspi; Allon Hammer; Noam Koenigstein
  12. Monetary and Macroprudential Policies under Dollar-Denominated Foreign Debt By Hidehiko Matsumoto
  13. Understanding the German criticism of the Target system and the role of central bank capital By Perotti, Roberto
  14. Fiscal and Monetary Anomie in Argentina: The Legacy of Endemic Populism By Emilio Ocampo
  15. Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule By Rogelio De la Peña
  16. Income Inequality as Long-term Conditioning Factor of Monetary Transmission to Bank Interest Rates in EA Countries By Tomas Domonkos; Boris Fisera; Maria Siranova
  17. "Another Bretton Woods Reform Moment: Let Us Look Seriously at the Clearing Union" By Jan Kregel
  18. When Does Monetary Policy Sway House Prices? A Meta-Analysis By Josef Bajzik; Dominika Ehrenbergerova; Tomas Havranek
  19. Asymmetric Effects of Monetary Policy Easing and Tightening By Debortoli, Davide; Forni, Mario; Gambetti, Luca; Sala, Luca
  20. What Do Price Equations Say About Future Inflation? By Ray C. Fair
  21. Voting right rotation, behavior of committee members and financial market reactions: Evidence from the U.S. Federal Open Market Committee By Michael Ehrmann; Robin Tietz; Bauke Visser
  22. Sustainable finance, current and future implications for banks and monetary policy: assessing COVID impacts By Ojo/Roedl, Marianne
  23. A New Monetary Policy Shock with Text Analysis By Ochs, A. C.R.
  24. Trade, Unemployment, and Monetary Policy By Cacciatore, Matteo; Ghironi, Fabio
  25. Central bank digital currency: the quest for minimally invasive technology By Raphael Auer; Rainer Boehme
  26. The Journey towards Dollarization: The Role of the Tourism Industry By Ibrahim D. Raheem; Kazeem B. Ajide
  27. Comfort in Floating: Taking Stock of Twenty Years of Freely-Floating Exchange Rate in Chile By Albagli, Elias; Calani, Mauricio; Hadzi-Vaskov, Metodij; Marcel, Mario; Ricci, Luca Antonio
  28. "A Keynesian Approach to Modeling the Long-Term Interest Rate" By Tanweer Akram
  29. Monetary dynamics in a network economy By Antoine Mandel; Vipin Veetil
  30. Toward a general framework for constructing and evaluating core inflation measures By Guillermo Carlomagno; Jorge Fornero; Andrés Sansone
  31. Around-the-Clock USD/MXN Volatility: Macroeconomic Announcement Spillovers and FX Market Intervention Mechanisms By Wilfrido Jurado Pedroza
  32. Contagious zombies By Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
  33. Sophisticated and Unsophisticated Runs By Marco Cipriani; Gabriele La Spada
  34. On the effectiveness of macroprudential policy By Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
  36. An Economic Analysis of ‘Quota 90’ By Davide Bernardi; Roberto Ricciuti
  37. Inflation Spike and Falling Product Variety during the Great Lockdown By Jaravel, Xavier; O'Connell, Martin
  38. Emerging Economies' Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors By Yoshihiko Norimasa; Kazuki Ueda; Tomohiro Watanabe
  39. The Long Shadows of the Great Inflation: Evidence from Residential Mortgages By Botsch, Matthew J.; Malmendier, Ulrike M.
  40. Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy By Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
  41. ICMA's Official Sector Panel on the Transition to Risk Free Rates By Nathaniel Wuerffel
  42. The natural interest rate in China By Daniel Rees; Guofeng Sun
  43. Final Demand-Intermediate Demand Aggregation System of Japan's Producer Price Index By Moegi Inoue; Atsushi Kawakami; Ayako Masujima; Ichiro Muto; Shogo Nakano; Izumi Takagawa
  44. The Ends of 30 Big Depressions By Ellison, Martin; Lee, Sang Seok; O'Rourke, Kevin Hjortshøj
  45. On The Contribution of Interest Expense (Income) on Total Output By Nizam, Ahmed Mehedi
  46. "COVID Relief and the Inflation Warriors" By Yeva Nersisyan; L. Randall Wray

  1. By: Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
    Abstract: This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of the impacts of these unconventional instruments of monetary policy is challenging. We propose a novel identification approach that seeks to overcome this challenge by combining a dense, controlled event study with forward curve counterfactuals that we construct using predictive rate densities derived from rate options. We find that NIRP has exerted a sizeable influence on the term structure of interest rates throughout maturities while, on net, the impact of rate FG has been more muted. QE explains the lion’s share of yield effects, particularly over the back end of the yield curve. We then feed these rate counterfactuals into a large-scale Bayesian VAR and generate alternative histories for the euro area macro-economy that one would likely have observed between 2013 and 2020 in no-NIRP (with or without FG) and in no-QE regimes. According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so. JEL Classification: C32, C54, C58, E50, E51, E52
    Keywords: forward curve, forward guidance, large-scale asset purchases, monetary policy, negative interest rates, rate options, yield curve
    Date: 2021–06
  2. By: Billi, Roberto M; Söderström, Ulf; Walsh, Carl
    Abstract: In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional inflation targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the fiscal authority to engage alongside the central bank in fighting recessions. To illustrate this fiscal benefit of MGT, we introduce a simple rule for the fiscal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society.
    Keywords: Automatic Stabilizers; Fiscal policy; Friedman's k-percent rule; ZLB constraint
    JEL: E31 E42 E52
    Date: 2020–06
  3. By: Hartley, Jonathan S.; Rebucci, Alessandro
    Abstract: Amid the COVID-19 outbreak and related expected economic downturn, many developed and emerging market central banks around the world engaged in new long-term asset purchase programs, or so-called quantitative easing (QE) interventions. This paper conducts an event-study analysis of 20 COVID-19 QE announcements made by 17 global central banks on their local 10-year government bond yields. We find that the average developed market QE announcement had a statistically significant -0.14% 1-day impact, which is slightly smaller than past interventions during the Great Recession era. In contrast, the average impact of emerging market QE announcements was significantly larger, averaging -0.37% and -0.63% over 1-day and 3-day windows, respectively. Across developed and emerging bond markets, we estimate an overall average 1-day impact of -0.27%. We also show that all 10-year government bond yields in our sample rose sharply in mid-March 2020, but fell substantially after the period of QE announcements that we study in the paper.
    Keywords: Bond Interest Rates; central banks; COVID-19; event study; International Bond Markets; monetary policy; Policy Announcements; Quantitative easing
    JEL: E52 E58 F3 G12 G14
    Date: 2020–06
  4. By: Shesadri Banerjee; M S Mohanty
    Abstract: The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. We contribute to this debate using micro- and macro-level analyses from India over the period 2004-2019. Using a dynamic panel estimation model of non-financial firms, we show that US monetary tightening adversely affects firms’ net worth and reduces domestic credit relative to external credit. Using a sign-identified VAR model, we find that the contractionary US monetary policy leads to a significant downturn in the domestic credit and business cycles. The responses of firms and the impact on the domestic credit cycle suggest that the financial channel of the exchange rate is one of the conduits transmitting US monetary policy to India.
    Keywords: US monetary policy, international transmission of monetary policy, dynamic panel estimation, sign-restricted VAR model, financial channel, Indian economy
    JEL: E32 E52 F41 F42 F61 F62
    Date: 2021–05
  5. By: Ehrmann, Michael
    Abstract: Inflation targeting is implemented in different ways – most often by adopting point targets, by having tolerance bands around a point target, or by specifying target ranges. Using data for 20 economies, this paper tests whether the various target types affect the anchoring of inflation expectations at shorter horizons differently. It tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means. JEL Classification: E52, E58, E31
    Keywords: inflation expectations, inflation targeting, point target, target range, tolerance band
    Date: 2021–05
  6. By: Heng Chen; Walter Engert; Kim Huynh; Daneal O’Habib
    Abstract: Providing bank notes is one of the Bank of Canada’s core functions. The Bank is therefore interested in whether cash is adequately distributed across society, and this also influences the Bank’s thinking on issuing a central bank digital currency. We provide a perspective on these issues by exploring access of First Nations reserves to cash. To do so, we measure the distance between the 637 reserve band offices in Canada and their closest cash sources. In this study, these cash sources are branches of financial institutions (FIs), automated bank machines (ABMs) owned by FIs, and white label ABMs. We measure the distance between band offices and cash sources by geographical distance (“as the crow flies”) and by travel distance (e.g., road routes). We also provide some information on access to financial services more generally and set out questions for future research.
    Keywords: Bank notes; Digital currencies and fintech; Financial institutions; Financial services; Payment clearing and settlement systems
    JEL: E41 E42 E5 G21
  7. By: Gianluca Benigno; Pierpaolo Benigno
    Abstract: We would like to propose a new framework for monetary policy analysis that encompasses, as a special case, the Neo-Wicksellian paradigm. A general form of an aggregate-demand equation reveals a role for liquidity, as well as less effective movements in future real rates with respect to current ones, in stimulating aggregate demand. The quantity of reserves and their interest rate both matter for determining inflation and economic activity.
    Keywords: monetary policy framework; reserves; inflation
    JEL: E31 E43 E52 E58
    Date: 2021–06–01
  8. By: Martins, Manuel M. F.; Verona, Fabio
    Abstract: Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.
    JEL: C53 E31 E37
    Date: 2021–06–08
  9. By: Guy Segal (Bank of Israel)
    Abstract: Using simulations on different macroeconomic models, we show that monetary policy can mitigate the drop in output after a negative demand shock and lead to a positive inflation gap and convergence to its target from above. Thus, the risk hitting the ELB is lower due to the overshooting inflation. Such dynamics are feasible under a super-inertial rule, i.e., when the degree of interest rate smoothing is above a threshold greater than one. The more backward-looking the economy is, the higher the threshold is. Hence, a superinertial policy should be in the toolbox of central banks to support demand-shock dominated crisis.
    Date: 2021–05
  10. By: Daniel Gründler; Eric Mayer; Johann Scharler
    Abstract: We study nominal exchange rate dynamics in the aftermath of U.S. monetary policy announcements. Using high-frequency interest rate and stock price movements around FOMC announcements, we distinguish between pure monetary policy shocks and information shocks, which are associated with new information contained in the announcements. Contractionary pure policy shocks give rise to a strong, but transitory, appreciation on impact. Information shocks also appreciate the exchange rate, but the effect builds up only slowly over time and is highly persistent. Thus, we conclude that although the short-run effects on the exchange rate are primarily due to pure policy shocks, the medium-run response is driven by information effects.
    Keywords: central bank information, high-frequency identification, proxy VAR, exchange rate dynamics
    JEL: E44 E52 E30
    Date: 2021
  11. By: Oren Barkan (Ariel University); Jonathan Benchimol (Bank of Israel); Itamar Caspi (Bank of Israel); Allon Hammer (Tel-Aviv University); Noam Koenigstein (Tel-Aviv University)
    Abstract: We present a hierarchical architecture based on Recurrent Neural Networks (RNNs) for predicting disaggregated inflation components of the Consumer Price Index (CPI). While the majority of existing research is focused on predicting headline inflation, many economic and financial institutions are interested in its partial disaggregated components. To this end, we developed the novel Hierarchical Recurrent Neural Network (HRNN) model, which utilizes information from higher levels in the CPI hierarchy to improve predictions at the more volatile lower levels. Based on a large dataset from the US CPI-U index, our evaluations indicate that the HRNN model significantly outperforms a vast array of well-known inflation prediction baselines. Our methodology and results provide additional forecasting measures and possibilities to policy and market makers on sectoral and component-specific prices.
    Keywords: Inflation forecasting, Disaggregated inflation, Consumer Price Index, Machine learning, Gated Recurrent Unit, Recurrent Neural Networks
    JEL: C45 C53 E31 E37
    Date: 2021–03
  12. By: Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail:
    Abstract: This paper studies the optimal monetary and macroprudential policies in a small open economy that borrows from abroad in foreign currency. The model features a novel mechanism in which sudden stops due to an occasionally binding borrowing constraint trigger a sharp currency depreciation through balance of payments adjustments, thereby increase the domestic-currency value of foreign debt and cause severe economic downturns. A policy analysis shows that a contractionary monetary policy mitigates depreciation during a crisis, but the anticipation of policy interventions during the crisis induces larger borrowings ex ante and destabilizes the economy. A combination of an ex ante macroprudential tax on foreign borrowing and ex post monetary policy interventions can stabilize the economy and improve social welfare.
    Keywords: Exchange rate, Balance of payments, Sudden stops, Monetary policy, Macroprudential policy
    JEL: F31 F32 F38 F41
    Date: 2021–05
  13. By: Perotti, Roberto
    Abstract: Criticism of the Target system by a group of central European scholars has become a widespread argument against the policies of the European Central Bank and even the integrity of the monetary union, and even standard fare in the media and in the political debate in Germany. Most academics and practitioners that have participated in the debate have been dismissive of the German preoccupations. In this paper, I first try and clarify the many remaining misunderstandings about the workings and implications of the Target system. I propose a unified, systematic and simple approach to the study of the workings of the Target system in response to different shocks and in comparison with different alternative regimes. I then argue that the German criticism of the Target system is not so unfounded after all, and should be taken seriously, both on theoretical grounds and for its political implications.
    Keywords: Central bank capital; European Monetary Union; Target2 system
    JEL: E58 E63 F33
    Date: 2020–07
  14. By: Emilio Ocampo
    Abstract: Argentina’s modern economic history offers perhaps the clearest evidence in support of a rules-based fiscal and monetary policy framework. From 1899 until 1914 the country abided by the rules of the gold standard and experienced rapid GDP growth with price stability. After WWI and until 1939, when it was mostly off the gold standard, its inflation rate and fiscal balances remained in line with those of the world’s most developed countries. During the 1930s the Argentine Treasury was able to issue long-term debt in pesos at rates between 3% and 4% per annum. Something fundamental happened after 1945 and its effects proved persistent: since then inflation has averaged 143% a year –with several bouts of extreme inflation and hyperinflation. In the last 50 years, persistent and high fiscal imbalances, low growth and recurrent sovereign debt defaults have become semi-permanent features of the Argentine economy. This paper argues that Argentina suffers from a condition that can be described as fiscal and monetary anomie, the roots of which can be traced back to the establishment of a populist-corporatist economic regime in 1946. It also contends that the failure of the 1990s structural reforms reinforced this condition.
    Keywords: Argentina, Economic History, Fiscal Policy, Monetary Policy, Populism
    JEL: E5 E63 N16 O54
    Date: 2021–05
  15. By: Rogelio De la Peña
    Abstract: It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.
    JEL: C51 E32 E44 E52 E58 E61 F41 G21 G28
    Date: 2021–04
  16. By: Tomas Domonkos (Slovak Academy of Sciences & Comenius University in Bratislava, Slovakia); Boris Fisera (Slovak Academy of Sciences; Charles University, Prague); Maria Siranova (Slovak Academy of Sciences)
    Abstract: In this paper we investigate the effect of income inequality on the transmission of standard and unconventional monetary policy shocks to bank loan rates. We hypothesize that income inequality might encapsulate important characteristics of credit market demand. We use an interacted panel error correction model to examine a set of EA countries over the years 2008-2016. Our findings suggest that higher income inequality hinders the transmission of standard monetary policy to consumer loans and limits the use of unconventional monetary policy in the housing loans segment. Conversely, more unequal societies are characterized by stronger monetary transmission in the small firm loans segment.
    Keywords: interest-rate pass-through, interacted PMG, income inequality, standard monetary policy, unconventional monetary policy
    JEL: D31 E21 E52 E58
    Date: 2021–05
  17. By: Jan Kregel
    Abstract: This policy brief explores a route to remaking the international financial system that would avoid the contradictions inherent in some of the prevailing reform proposals currently under discussion. Senior Scholar Jan Kregel argues that the willingness of central banks to consider electronic currency provides an opening to reconsider a truly innovative reform of the international financial system, and one that is more appropriate to a digital monetary world: John Maynard Keynes's original clearing union proposal. Kregel investigates whether such a clearing system could be built up from an already-existing initiative that has emerged in the private sector. He analyzes the operations of a private, cross-border payment system that could serve as a real-world blueprint for a more politically palatable equivalent of Keynes's international clearing union.
    Date: 2021–02
  18. By: Josef Bajzik (Charles University & Czech National Bank, Prague, Czech Republic); Dominika Ehrenbergerova (Charles University & Czech National Bank, Prague, Czech Republic); Tomas Havranek (Charles University, Prague, Czech Republic & CEPR)
    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: 2021–05
  19. By: Debortoli, Davide; Forni, Mario; Gambetti, Luca; Sala, Luca
    Abstract: Monetary policy easing and tightening have asymmetric effects: a policy easing has large effects on prices but small effects on real activity variables. The opposite is found for a policy tightening: large real effects but small effects on prices. Nonlinearities are estimated using a new and simple procedure based on linear Strutural Vector Autoregressions with exogenous variables (SVARX). We rationalize the result through the lens of a simple model with downward nominal wage rigidities.
    Keywords: monetary policy shocks; nonlinear effects; structural VAR models
    JEL: C32 E32
    Date: 2020–07
  20. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses an econometric approach to examine the inflation consequences of the American Rescue Plan Act of 2021. Price equations are estimated and used to forecast future inflation. The main results are: 1) The data suggest that price equations should be speciï¬ ed in level form rather than in ï¬ rst or second difference form. 2) There is some slight evidence of nonlinear demand effects on prices. 3) There is no evidence that demand effects have gotten smaller over time. 4) The stimulus from the act combined with large wealth effects from past household savings, rising stock prices, and rising housing prices is large and is forecast to drive the unemployment rate down to below 3.5 percent by the middle of 2022. 5) Given this stimulus, the inflation rate is forecast to rise to slightly under 5 percent by the middle of 2022 and then comes down slowly. 6) There is considerable uncertainty in the point forecasts, especially two years out. The probability that inflation will be larger than 6 percent next year is estimated to be 31.6 percent. 7) If the Fed were behaving as historically estimated, it would raise the interest rate to about 3 percent by the end of 2021 and 3.5 percent by the end of 2022 according to the forecast. This would lower inflation, although slowly. By the middle of 2022 inflation would be about 1 percentage point lower. The unemployment rate would be 0.5 percentage points higher.
    Keywords: Price equations, Inflation, Fed policy
    JEL: E31 E52
    Date: 2021–05
  21. By: Michael Ehrmann (European Central Bank); Robin Tietz (Cass Business School); Bauke Visser (Erasmus University Rotterdam)
    Abstract: Whether Federal Reserve Bank presidents have the right to vote on the U.S. monetary policy committee depends on a mechanical, yearly rotation scheme. Rotation is without exclusion: also nonvoting presidents attend and participate in the meetings of the committee. Does voting status change behavior? We find that the data go against the hypothesis that without the voting right, presidents use their public speeches and their meeting interventions to compensate for the loss of formal influence; rather, they support the hypothesis that the voting right makes presidents more involved. We also find that speeches move financial markets less in years that presidents vote. We argue that these discounts are consistent with their communication behavior.
    Keywords: voting right rotation, monetary policy committee, central bank communication, FOMC, financial market response
    JEL: E58 D71 D72
    Date: 2021–06–05
  22. By: Ojo/Roedl, Marianne
    Abstract: The implications of COVID developments for monetary policy will certainly extend beyond the increased use of digital platforms and payments. The current environment is also focused on smart green techniques and green initiatives aimed at promoting a transition to a net zero based carbon emissions economy. During the onset of the pandemic, it was initially thought that carbon emissions would fall drastically – given the impact of the pandemic, not only on the airlines industry, but also as a result of “Stay at Home” measures imposed by jurisdictions, which even made it illegal to drive to certain places, where purposes for doing so were unjustified. However, the pandemic has also witnessed unprecedented levels in digital subscriptions, online sales and marketing – also fueled through digital payments and the use of digital platforms and distributed ledger technologies in facilitating cashless payments – cash, namely bank notes and coins, also being considered to be a medium of COVID transmission. Coupled with attributes such speed, convenience and ease, the need for financial inclusion has also become an objective in facilitating the era of innovative digital means of payments. As well as considering the current implications of measures that have been instigated to address the impacts of the pandemic, drawing from past and current lessons from selected jurisdictions, this paper also considers why the transition to a net zero carbon economy may prove more challenging than may first appear. However, jurisdictional differences and historical developments will play a part in determining how sustainable certain implemented policies and measures are – as well as in facilitating a transition to normality.
    Keywords: EU Green Deal; sustainable finance, interest rates; inflation; pandemic asset purchase program (PEPP); APP asset purchase program; longer term financing operations; transition risks; financial stability; CBDCs
    JEL: E5 G21 G28 G3 G38 K2
    Date: 2021–06–02
  23. By: Ochs, A. C.R.
    Abstract: Measures of monetary shocks commonly give rise to the puzzling result where a monetary tightening has an expansionary effect. A possible reason is that agents may believe that monetary shocks contain information regarding the central bank’s assessment of the economic environment (Nakamura and Steinsson, 2018). Under this hypothesis, the estimated response to monetary policy shocks would contain two conflating effects: the actual effect of monetary policy and the reaction of private agents to the newly acquired information. This paper overcomes this problem by extracting a novel series of monetary shocks using text analysis methods on central bank documents. The resulting text-based variables contain the informational content from changes in the policy rate. Thus, they can be used to extract exogenous changes in monetary policy that are orthogonal to any central bank information. Using this information-free measure of monetary policy shocks reveals that a monetary tightening is not expansionary, even when estimated on more recent periods.
    Date: 2021–06–09
  24. By: Cacciatore, Matteo; Ghironi, Fabio
    Abstract: We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.
    Keywords: Optimal monetary policy; trade integration
    JEL: E24 E32 E52 F16 F41 J64
    Date: 2020–06
  25. By: Raphael Auer; Rainer Boehme
    Abstract: CBDCs should let central banks provide a universal means of payment for the digital era. At the same time, such currencies must safeguard consumer privacy and maintain the two-tier financial system. We set out the economic and operational requirements for a "minimally invasive" design – one that preserves the private sector's primary role in retail payments and financial intermediation – for CBDCs and discuss the implications for the underlying technology. Developments inspired by popular cryptocurrency systems do not meet these requirements. Instead, cash is the model for CBDC design. Showing particular promise are digital banknotes that run on "intermediated" or "hybrid" CBDC architectures, supported with technology to facilitate record-keeping of direct claims on the central bank by private sector entities. Their economic design should emphasise the use of the CBDC as medium of exchange but needs to limit its appeal as a savings vehicle. In the process, a novel trade-off for central banks emerges: they can operate either a complex technical infrastructure or a complex supervisory regime. There are many ways to proceed, but all require central banks to develop substantial technological expertise.
    Keywords: central bank digital currency, CBDC, payments, cash, privacy, distributed systems
    JEL: E42 E58 G21 G28
    Date: 2021–06
  26. By: Ibrahim D. Raheem (ILMA University, Karachi, Pakistan); Kazeem B. Ajide (University of Lagos, Lagos, Nigeria)
    Abstract: There has been an increasing wave of globalization since the turn of the millennium. This study focuses on two by-products of globalization: dollarization and tourism. Empirical studies have ignored the possible relationship between dollarization and tourism. However, we hypothesize that a booming tourism industry will fuel increase in the usage and circulation of foreign currencies. The objective of this study is to examine the extent to which the tourism industry exacerbates the dollarization process of selected Sub-sahara African (SSA) countries. Using Tobit regression, we found that tourism positively affects dollarization. This result is robust to: (i) alternative measures of tourism; (ii) accounting for endogeneity and outlier effects.
    Keywords: Dollarization, Tourism, Sub-saharan Africa
    JEL: C11 E41 F31
    Date: 2021–01
  27. By: Albagli, Elias; Calani, Mauricio; Hadzi-Vaskov, Metodij; Marcel, Mario; Ricci, Luca Antonio
    Abstract: Chile offers an example of a country that has overcome the fear of floating by reducing balance sheet mismatches, enhancing financial market development, as well as improving monetary, fiscal, and political institutions, and strengthening policy credibility. Under the floating regime, Chile's economic adjustment to external shocks appears significantly improved, and its exchange rate pass-through has substantially declined. Our results reinforce the case that moving to a clear and credible floating regime can be associated with a reduction in the fear of floating via economic transformation (like smaller balance sheet mismatches, a larger hedging market, and a lower exchange rate pass-through).
    Keywords: central bank independence; exchange rate pass-through; Exchange Rate Regime; FX derivatives; Hedging; Policy Credibility
    JEL: E31 E52 F31 F33 F41 G15
    Date: 2020–06
  28. By: Tanweer Akram
    Abstract: There are several widely used benchmark models of the long-term interest rate in quantitative finance. However, these models have yet to incorporate Keynes's valuable insights about interest rate dynamics. The Keynesian approach to interest rate dynamics can be readily incorporated in the benchmark models of the long-term interest rate. This paper modifies several benchmark interest rate models. In these modified models the long-term interest rate is related to the short-term interest rate and a Wiener process. The Keynesian approach to interest rate dynamics can be useful in addressing theoretical and policy issues.
    Keywords: Long-Term Interest Rate; Bond Yields; Monetary Policy; Short-Term Interest Rate; John Maynard Keynes
    JEL: E12 E43 E50 E58 E60 G10 G12 G41
    Date: 2021–06
  29. By: Antoine Mandel (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras)
    Abstract: We develop a tractable model of price dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms that are governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal changes in demand and downstream via real changes in supply. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model provides an explanation of the price puzzle: a temporary rise in the price level in response to monetary contractions. In our setting, the puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions.
    Keywords: Out-of-Equilibrium Dynamics,Monetary Non-Neutrality,Money,Production Network,Price Puzzle
    Date: 2021–04
  30. By: Guillermo Carlomagno; Jorge Fornero; Andrés Sansone
    Abstract: There is no unifying framework for evaluating core inflation measures, so we propose a general framework to close this gap. Our methodology uses disaggregated data of consumer price index, and hinges on a standard quadratic loss function. We show that the usual indicator that excludes food and energy, which is the most widespread measure of core inflation for Central Banks, performs poorly across the five countries analyzed, due to substantial bias, low persistence, high volatility, and low forecasting power. Therefore, our recommendation is to revise its use. By optimally selecting the CPI components to be excluded with our methodology, the properties of core inflation measures can be significantly improved. Finally, we argue that when there is a preference regarding the use of fixed exclusion measures, nothing is lost and much can be gained by optimally selecting the excluded items, instead of sticking with the usual adhoc criteria.
    Date: 2021–04
  31. By: Wilfrido Jurado Pedroza
    Abstract: This paper advances the literature on the dynamics of the U.S. Dollar-Mexican Peso (USD/MXN) volatility process by leveraging high-frequency data. First, it documents the factors that characterize the intraday volatility process of the USD/MXN exchange rate at high frequencies based on a sample of five-minute returns from 2008 to 2017. Second, it empirically identifies the effects and the relative impact on the USD/MXN volatility process of various macroeconomic announcements, at different frequencies. The results conclude that the most impactful releases are associated with the monetary policy announcements by the Federal Reserve and Banco de México, together with the publication of some U.S. and China macroeconomic data. Furthermore, the results suggest that the different mechanisms implemented by Mexico's FX Commission have accomplished their objective of stabilizing the volatility of the USD/MXN.
    JEL: E5 F31 G12 G14
    Date: 2021–06
  32. By: Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
    Abstract: Does banks' zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting that - even in Germany - particularly weak banks used the European Central Bank's very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks' lending decisions as a signal about borrowers' credit quality might be misled by banks' zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.
    Keywords: unconventional monetary policy,zombie lending,trade credit
    JEL: G1 G20 E58
    Date: 2021
  33. By: Marco Cipriani; Gabriele La Spada
    Abstract: In March 2020, U.S. prime money market funds (MMFs) suffered heavy outflows following the liquidity shock triggered by the COVID-19 crisis. In a previous post, we characterized the run on the prime MMF industry as a whole and the role of the liquidity facility established by the Federal Reserve (the Money Market Mutual Fund Liquidity Facility) in stemming the run. In this post, based on a recent Staff Report, we contrast the behaviors of retail and institutional investors during the run and explain the different reasons behind the run.
    Keywords: COVID-19; sophisticated investors; money market funds (MMFs); MMF
    JEL: G1 G23
    Date: 2021–06–02
  34. By: Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
    Abstract: Since the global financial crises, many countries have implemented macroprudential policies with the aim to render the financial system more resilient to shocks and limit the procyclicality of the financial system. We present theoretical and empirical evidence on the effectiveness of macroprudential policy, on both, financial stability and economic growth focussing on capital measures and borrower-based measures. JEL Classification: G21
    Keywords: bank capital, borrowers, financial stability, macroprudential policy
    Date: 2021–05
  35. By: Marco Onofri; Gert Peersman; Frank R. Smets (-)
    Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a nancial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.
    Date: 2021–05
  36. By: Davide Bernardi (Department of Economics (University of Verona)); Roberto Ricciuti (Department of Economics (University of Verona))
    Abstract: The revaluation of the Lira against the Pound, the so-called ‘quota 90’, was a major economic policy decision taken by the Fascist government in 1926. The economic history literature has seen this policy as the domestic implementation of the return to the Gold Exchange Standard characterizing the interwar period, with relatively limited economic consequences. We interpret the effects of this decision through an Error Correction Model and find that the economic cost in terms of output was limited. We claim that the main reason for this muted effect lied in a labor market that Fascist reforms tilted in favor of the firms.
    Keywords: Quota 90, Fascism, fascist economic policy, fixed exchange regime, Italy.
    JEL: N14 E52 C32
    Date: 2021–06
  37. By: Jaravel, Xavier; O'Connell, Martin
    Abstract: We characterize inflation dynamics during the Great Lockdown using scanner data covering millions of transactions for fast-moving consumer goods in the United Kingdom. We show that there was a significant and widespread spike in inflation. First, aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months. Over half of this increase stems from reduced frequency of promotions. Consumers' purchasing power was further eroded by a reduction in product variety, leading to a further 85 basis points increase in the effective cost of living. Second, 96% of households have experienced inflation in 2020, while in prior years around half of households experienced deflation. Third, there was inflation in most product categories, including those that experienced output falls. Only 13% of product categories experienced deflation, compared with over half in previous years. While market-based measures of inflation expectations point to disinflation or deflation, these findings indicate a risk of stagflation should not be ruled out. We hope our approach can serve as a template to facilitate rapid diagnosis of inflation risks during economic crises, leveraging scanner data and appropriate price indices in real-time.
    Keywords: Great Lockdown; inflation
    JEL: D12 E31 I30
    Date: 2020–06
  38. By: Yoshihiko Norimasa (Bank of Japan); Kazuki Ueda (Bank of Japan); Tomohiro Watanabe (Nippon Life Insurance Company)
    Abstract: This study uses panel quantile regression to examine the risk of capital outflows in times of stress (capital flows-at-risk, CFaR) for 16 emerging economies. Our analysis shows that changes in financial conditions in advanced economies and in the monetary policy stance of the United States affect the risk of large capital outflows for some countries. In particular, we find that tighter financial conditions in advanced economies during a phase when the U.S. monetary policy stance is changing significantly affect emerging economies' CFaR. Further, using government debt as a measure of emerging economies' structural vulnerability, we find that an increase in government debt substantially raises the risk of capital outflows in times of stress. Moreover, while in the case of debt investment, CFaR tend to be greater the higher the level of government debt, in the case of other investment (consisting mainly of bank lending), CFaR tend to increase when financial conditions in advanced economies deteriorate.
    Keywords: Risk of Capital Outflows (CFaR: Capital Flows-at-Risk); Global Factors; Local Factors; Panel Quantile Regression; Relative Entropy
    JEL: E52 F32 F34 F37
    Date: 2021–05–26
  39. By: Botsch, Matthew J.; Malmendier, Ulrike M.
    Abstract: A major puzzle in financial contracting is consumers' aversion to adjustable rates. In the mortgage market, the empirical mix of contracts (80% fixed-rate) is inconsistent with standard life-cycle consumption models. We argue that these choices reflect the longlasting effect of the Great Inflation, and have sizable welfare implications. First, we show that consumers who have experienced higher inflation expect higher future interest-rate increases, which explains their preference for fixed-rate financing. Next, we quantify the influence of personal inflation experiences on mortgage financing using linked data from the Census Bureau's Residential Finance Survey. We estimate a discrete-choice model over mortgage financing alternatives. The structural parameters indicate that one additional percentage point of experienced inflation increases a borrower's willingness to pay for a fixed-rate mortgage by 6 to 14 basis points, compared to the adjustable-rate alternative in a given origination year. This experience effect has a major impact on the product mix of FRMs versus ARMs: Nearly one in seven households would switch to an ARM if not for the longlasting effect of personal inflation experiences. Our simulations suggest that households who would otherwise have switched pay $8,000-$16,000 in year-2000, after-tax dollars for the embedded inflation protection of the FRM.
    Keywords: behavioral finance; Contract choice; household finance; Inflation expectations; Mortgage Choice
    JEL: D14 D83 D84 D91 E31 G41 G51
    Date: 2020–06
  40. By: Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels. **** RESUMEN: Estudiamos cómo los controles de capital y la política macroprudencial doméstica controlan el auge de la oferta de crédito, específicamente la deuda bancaria local y extranjera. Para lograr identificación, aprovechamos los datos del registro de crédito y los balances de los bancos, y la introducción simultánea de controles de capital en las entradas de deuda en moneda extranjera y un aumento de los requerimientos de reserva sobre los depósitos bancarios nacionales en Colombia durante un fuerte auge de crédito. Nuestros resultados sugieren que, en primer lugar, un aumento en la tasa de política monetaria local, que eleva la diferencial de la tasa de interés con Estados Unidos, permite que más bancos endeudados en moneda extranjera realicen operaciones con fondos cambiarios baratos con préstamos en pesos más caros, especialmente hacia empresas opacas y más riesgosas. Los controles de capitales gravan la deuda en moneda extranjera y rompen el carry trade. En segundo lugar, el aumento de los requerimientos de reserva sobre los depósitos internos reduce directamente la oferta de crédito, y más aún para las empresas opacas y más riesgosas, en lugar de mejorar la transmisión de las tasas monetarias sobre la oferta de crédito. Es importante destacar que diferentes bancos financian el crédito durante el auge con financiación nacional o extranjera. Por lo tanto, los controles de capital y la política macroprudencial interna mitigan de manera complementaria el auge y la asunción de riesgos asociada a través de dos canales distintos.
    Keywords: Capital controls, Macroprudential and monetary policy, Carry trade, Credit supply, Risk-taking, Controles de capital, políticas macroprudencial y monetaria, Carry trade, oferta de crédito, toma de riesgo
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2021–06
  41. By: Nathaniel Wuerffel
    Abstract: This virtual event presented an opportunity to hear from the UK Financial Conduct Authority, the Federal Reserve Bank of New York, the Swiss National Bank, and the European Central Bank about progress and the remaining challenges in the transition from LIBOR/interbank offered rates to risk-free rates, international coordination, and key messages from the official sector for market firms in the run-up to the end of 2021.
    Keywords: LIBOR; risk free rates; transition
    Date: 2021–06–02
  42. By: Daniel Rees; Guofeng Sun
    Abstract: We estimate the natural interest rate in China. The natural interest rate averaged between 3 and 5 per cent between the late 1990s and 2010, but declined over the next decade to around 2 per cent. We attribute around two-thirds of the decline in China's natural interest rate to a lower rate of potential output growth. As the decline in the natural interest rate in China mirrors that observed in many other economies, it is possible that global factors explain part of the decline in the natural rate not explained by lower growth.
    Keywords: real interest rate, natural interest rate, monetary policy
    JEL: E32 E40 E44
    Date: 2021–06
  43. By: Moegi Inoue (Bank of Japan); Atsushi Kawakami (Bank of Japan); Ayako Masujima (Bank of Japan); Ichiro Muto (Bank of Japan); Shogo Nakano (Bank of Japan); Izumi Takagawa (Bank of Japan)
    Abstract: One of the main objectives of the producer price index (PPI) is to serve as an aggregation price index that appropriately represents the overall supply-demand condition regarding goods and services in an economy as a whole. In this respect, the current system of Japan fs PPI system is confronted with the following two challenges: (i) overall inflationary pressures in the entire economy cannot be tracked because the indexes for goods and services are separately constructed and published; and (ii) the effects of price changes in upstream stages in the production flow are exaggerated because the PPI is aggregated as the "all commodities index" in which prices of commodities in different demand stages are aggregated through weight-averaging by gross trade value. In order to overcome those challenges, we construct a price index of Final Demand-Intermediate Demand aggregation system of Japan fs PPI (the FD-ID price index) by assigning commodity-level Japanese PPI indexes for goods and services to the stage of final demand and the four stages of intermediate demand, in an optimal manner in accordance with the production flow in the Input-Output table and by aggregating the indexes in a way that eliminates multiple counting. The use of the FD-ID price index makes it possible to measure inflationary pressures in the entire Japanese economy, including both goods and services sectors. It also becomes possible to track the process of price changes being transmitted from upstream to downstream stages in the production flow across the sectors of goods and services. This study provides detailed explanations of the methodology for constructing the Japanese FD-ID price index and the characteristics of the constructed index.
    Keywords: Producer price index; FD-ID aggregation system; Input-Output table; Multiple counting problem.
    JEL: C82 E31
    Date: 2021–06–04
  44. By: Ellison, Martin; Lee, Sang Seok; O'Rourke, Kevin Hjortshøj
    Abstract: How did countries recover from the Great Depression? In this paper we explore the argument that leaving the gold standard helped by boosting inflationary expectations and lowering real interest rates. We do so for a sample of 30 countries, using modern nowcasting methods and a new dataset containing more than 230,000 monthly and quarterly observations for over 1,500 variables. In those cases where the departure from gold happened on clearly defined dates, it seems clear that inflationary expectations rose in the wake of departure. IV regressions and synthetic matching techniques suggest that the relationship is causal.
    Keywords: gold standard; Great Depression; inflationary expectations
    JEL: F33 N10
    Date: 2020–07
  45. By: Nizam, Ahmed Mehedi
    Abstract: A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn, affects the aggregate demand and total GDP. So far, no concerted effort has been made to investigate this positive inter-relation between interest income and GDP in the existing literature. Here in the first place we intuitively describe the inter-relation between interest income and output and then provide a micro-foundation of our intuitive reasoning in the context of a small endowment economy with finitely-lived identical households. Then we try to uncover the impact of nominal interest income on the macroeconomy using multiplier theory for a panel of some 04 (four) OECD countries. We define and calculate the corresponding multiplier values algebraically and then we empirically measure them using impulse response analysis under structural panel VAR framework. Large, consistent and positive values of the cumulative multipliers indicate a stable positive relationship between nominal interest income and output. Moreover, variance decomposition of GDP shows that a significant portion of the variance in GDP is attributed to interest income under VAR/VECM framework. Finally, we have shown how and where our analysis fits into the existing body of knowledge.
    Keywords: nominal interest expense, nominal lending rate, domestic credit, GDP, economic multiplier, monetary policy transmission mechanism, banking.
    JEL: E43 E50 E52 G21 H3
    Date: 2021–06–06
  46. By: Yeva Nersisyan; L. Randall Wray
    Abstract: With the unveiling of President Biden's nearly $2 trillion proposal for addressing the COVID-19 crisis, Democrats appear keen to avoid repeating the mistakes of the Great Recession—most notably the inadequate fiscal response. Yeva Nersisyan and L. Randall Wray observe that while Democrats are not falling for the "deficit bogeyman" this time, critics have pushed the idea that the increase in government spending will cause inflation. Nersisyan and Wray argue that the current fiscal package should be evaluated as a set of relief measures, not stimulus, and that the objections of the inflation worriers should not stand in the way of taking needed action.
    Date: 2021–02

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