nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒07‒19
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Rules By George McCandless
  2. Monetary policy strategy and inflation in Japan By Fructuoso Borrallo Egea; Pedro del Río López
  3. Media sentiment on monetary policy: determinants and relevance for inflation expectations By Matthieu PICAULT; Julien PINTER; Thomas RENAULT
  4. Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration By Javier García-Cicco
  5. Nine blind men and the PBoC By Makram El-Shagi; Yishuo Ma
  6. Inflation During the Pandemic: What Happened? What is Next? By Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska
  7. Monetary Policy, Sectoral Comovement and the Credit Channel By Federico Di Pace; Christoph Görtz
  8. Macroeconomic Policy Making and Current Account Imbalances in the Euro Area By Taiki Murai; Gunther Schnabl
  9. Role of the Media in the Inflation Expectation Formation Process By Tetiana Yukhymenko
  10. Eco-currency: Proposition of a monetary policy design for a unitary currency program of a frailty economic zone. By Tweneboah Senzu, Emmanuel
  11. Credibility dynamics and inflation expectations By Rumen Kostadinov; Francisco Roldán
  12. One-Stop Source: A Global Database of Inflation By Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska
  13. Euro area periphery countries' fiscal policy and monetary policy surprises By Hülsewig, Oliver; Rottmann, Horst
  14. Mussa Puzzle Redux By Oleg Itskhoki; Dmitry Mukhin
  15. Nonlinear Unemployment Effects of the Inflation Tax By Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum
  16. Reserves Were Not So Ample After All By Adam Copeland; Darrell Duffie; Yilin Yang
  17. Fundamentals vs. policies: can the US dollar's dominance in global trade be dented? By Georgios Georgiadis; Helena Le Mezo; Arnaud Mehl; Cédric Tille
  18. Unconventional Credit Policy in an Economy under Zero Lower Bound By Jorge Pozo; Youel Rojas
  19. What is Programmable Money? By Alexander Lee
  20. Exchange rates, remittances, and competitiveness in Haiti By Díaz-Bonilla, Eugenio; Paz, Flor; Piñeiro, Valeria
  21. Interest Rate Skewness and Biased Beliefs By Michael D. Bauer; Mikhail Chernov
  22. Our absurd fractional reserve bank system. By Musgrave, Ralph S.
  23. Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads By César Sosa-Padilla; Federico Sturzenegger
  24. The Dollarisation Paradox in Cambodia: Network Externalities Matter By Kheng, Veasna; Pan, Lei
  25. Are Rising U.S. Interest Rates Destabilizing for Emerging Market Economies? By Jasper Hoek; Steven B. Kamin; Emre Yoldas
  26. Is Macroprudential Policy Driving Savings? By André Teixeira; Zoë Venter
  27. Who Participates in Cleared Repo? By R. Jay Kahn; Luke Olson
  28. Banking and Inside Money: Revisiting the Efficiency of Deposit Contracts By David Rivero; Hugo Rodríguez Mendizábal
  29. Remittance micro-worlds and migrant infrastructure: circulations, disruptions, and the movement of money By Cirolia, Liza Rose; Hall, Suzanne; Nyamnjoh, Henrietta

  1. By: George McCandless (Central Bank of Argentina)
    Abstract: The object of this paper is to consider the effects on an economy of two alternative channels of monetary policy using a cash in advance model. One of the channels is simply giving money to less well of households (unskilled). The second channel is similar to central bank monetary policy, each period lump sum monetary transfers are given to or extracted from financial intermediaries by skilled and unskilled workers. Having a model with two channels of monetary policy that operate in fundamentally different ways allows one to think carefully about the effects of a monetary policy of sterilization of inflation through contraction of money on the financial side. In addition, having two groups of households, one unskilled, with lower wages and reduced opportunities for saving, and another skilled with higher wages and the ability to own and rent out capital in addition to holding bank deposits, permits a more careful consideration of the welfare effects of this type of policy. In addition, this kind of analysis helps explain why different countries, those with more or fewer unskilled workers, will choose to follow different policies with respect to a politically optimal inflation rate.
    Keywords: cash in advance models, monetary policy rules, monetary policy transmission channels, optimal inflation rate
    JEL: E17 E52 E58
    Date: 2021–05
  2. By: Fructuoso Borrallo Egea (Banco de España); Pedro del Río López (Banco de España)
    Abstract: Faced with a very prolonged period of low inflation, the Bank of Japan has been modifying its monetary policy strategy over the last two decades, pioneering the use of non-standard measures: it reduced policy interest rates to zero and, more recently, to negative levels, and has implemented several asset purchase programmes, forward guidance and, in September 2016, a yield curve control policy. Despite all these efforts, Japan has continued to experience persistently low inflation, with rates well below the central bank’s target in recent decades. This document analyses the changes in the Bank of Japan’s strategy in its struggle against low inflation, focusing in particular on the reasons that led it to adopt the interest rate control policy, describes how this policy works and its main features, and assesses the results obtained. This new strategy has allowed the Bank of Japan to control the yield curve more effectively and sustainably, reducing the volume of asset purchases and mitigating the potential adverse financial stability effects. However, empirical analysis shows that it has still not succeeded in modifying the adaptive and persistent nature of the process of formation of prices and inflation expectations in Japan.
    Keywords: monetary policy, inflation, inflation expectations, interest rates
    JEL: E31 E43 E52
    Date: 2021–06
  3. By: Matthieu PICAULT; Julien PINTER; Thomas RENAULT
    Keywords: , central bank communication, European Central Bank, textual analysis, inflation expectations
    Date: 2021
  4. By: Javier García-Cicco (Central Bank of Argentina)
    Abstract: We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations.
    Keywords: small open economy, monetary policy rules, macroeconomic models, inflation expectations
    JEL: E17 E52 E58
    Date: 2021–04
  5. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Yishuo Ma (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: Over the past decade, several dozen papers have been written that identify the People’s Bank of China’s monetary policy shocks. Yet, what often seems like minor differences in measurements of monetary policy and identifying assumptions yield vastly different implied shocks. In this paper, we pitch 20 shock time series from the literature against each other in a horse race. We use a local projections framework to produce impulse responses based on all shocks for production, prices, money and interest rates and use them to assess the economic plausibility of the competing results. Our results confirm the frequently mentioned relevance of monetary aggregates for Chinese monetary policy but also point the importance of using forward looking policy reaction functions (or account for forward looking variables in a VAR framework) when identifying monetary policy shocks.
    Keywords: China, monetary policy shocks, local projections, meta study
    JEL: C83 E52
    Date: 2021–07
  6. By: Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska
    Abstract: We analyze the evolution and drivers of inflation during the pandemic and the likely trajectory of inflation in the near-term using an event study of inflation around global recessions and a factor-augmented vector auto-regression (FAVAR) model. We report three main results. First, the decline in global inflation during the 2020 global recession was the most muted and shortest-lived of any of the five global recessions over the past 50 years and the increase in inflation since May 2020 has been the fastest. Second, the decline in global inflation from January-May 2020 was four-fifths driven by the collapse in global demand and another one-fifth driven by plunging oil prices, with some offsetting inflationary pressures from supply disruptions. The subsequent surge in inflation has been mostly driven by a sharp increase in global demand. Third, both model-based forecasts and current inflation expectations point to an increase in inflation for 2021 of just over 1 percentage point. For virtually all advanced economies and one-half of inflation-targeting emerging market and developing economies (EMDEs), an increase of this magnitude would leave inflation within target ranges. If the increase is temporary and inflation expectations remain well-anchored, it may not warrant a monetary policy response. If, however, inflation expectations risk becoming unanchored, EMDE central banks may be compelled to tighten monetary policy before the recovery is fully entrenched.
    Keywords: Global Inflation; COVID-19; Global Recession; FAVAR; Oil Prices; Global Shocks
    JEL: E31 E32 Q43
    Date: 2021–07–01
  7. By: Federico Di Pace; Christoph Görtz
    Abstract: Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity.
    Keywords: financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads
    JEL: E22 E32 E44 E52
    Date: 2021
  8. By: Taiki Murai; Gunther Schnabl
    Abstract: The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.
    Keywords: current account, current account imbalances, financial account, euro, EU, European Monetary Union, monetary policy, fiscal policy, TARGET2
    JEL: H62 F32 F33 F42
    Date: 2021
  9. By: Tetiana Yukhymenko (National Bank of Ukraine)
    Abstract: This research highlights the role played by the media in the inflation expectations formation process of different types of respondents in Ukraine. Using a large news corpus and machine learning techniques I constructed news-based measures transforming text into quantitative indicators, which reflect news topics relevant to inflation expectations. As such, I found evidence that the different news topics have an impact on inflation expectations and can explain part of their variance. Thus, my results can help understand inflation expectations, especially as anchoring inflation expectations remains a key challenge for central banks.
    Keywords: Inflation expectations; natural language processing; textual data; machine learning
    JEL: C55 C82 D84 E31 E58
    Date: 2021–06–30
  10. By: Tweneboah Senzu, Emmanuel
    Abstract: The desire to rule a system has never been the interest of a contemporary civilize man rather than to successfully govern. The discoverable tool of a modern man as the greatest invention, to centrally manage a complex market system, dynamically evolving in it, the interaction process of agents, has been a quality policy design and application, which is often guided by an advanced theoretical inductive inference, deduce from historic experience in a framework of assumptions relating to a working system. The constructive foundation of this paper does appreciate the fact that in the practice of policy for unitary currency program involving sovereign nations, is not entirely new epistemology in the field of monetary economics, however, this very study is a complete unique in its deduction because it involves fragile economies managing soft currencies against hard currency economies, to promote sustainable growth, and compel for a competitive development using natural rate of interest as a policy sign-post.
    Keywords: Monetary economics, policy, Eco-currency, Kalman Filter, Wicksellian, Fragile economy
    JEL: E42 E43 E44 E47 E52
    Date: 2021–02–01
  11. By: Rumen Kostadinov (McMaster University); Francisco Roldán (International Monetary Fund)
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit.
    Keywords: Imperfect credibility, reputation, optimal monetary policy, time inconsistency
    JEL: E52 C73
    Date: 2021–06
  12. By: Ha, Jongrim; Kose, M. Ayhan; Ohnsorge, Franziska
    Abstract: This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended time period (1970-2021); and (iii) for a large number of (up to 196) countries. As it doubles the number of observations over the next-largest publicly available sources, our database constitutes a comprehensive, single source for inflation series. We illustrate the potential use of the database with three applications. First, we study the evolution of inflation since 1970 and document the broad-based disinflation around the world over the past half-century, with global consumer price inflation down from a peak of roughly 17 percent in 1974 to 2.5 percent in 2020. Second, we examine the behavior of inflation during global recessions. Global inflation fell sharply (on average by 0.9 percentage points) in the year to the trough of global recessions and continued to decline even as recoveries got underway. In 2020, inflation declined less, and more briefly, than in any of the previous four global recessions over the past 50 years. Third, we analyze the role of common factors in explaining movements in different measures of inflation. While, across all inflation measures, inflation synchronization has risen since the early 2000s, it has been much higher for inflation measures that involve a larger share of tradable goods.
    Keywords: Prices, global inflation, deflation, inflation synchronization, global factor
    JEL: E30 E31 F42
    Date: 2021–07–01
  13. By: Hülsewig, Oliver; Rottmann, Horst
    Abstract: In this study, we explore how fiscal policy in euro area periphery countries responds to monetary policy surprises that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. Using Jordà's (2005) local projection method we find that fiscal discipline, on average, does not wane in response to monetary policy innovations that bring down yields on sovereign bonds. The reaction of economic activity to shocks to monetary policy appears to determine the fiscal stance, rather than the adjustment of borrowing cost.
    Keywords: Euro area periphery countries,fiscal policy,market discipline,monetary policy shocks,local projections
    JEL: E52 E62 H62
    Date: 2021
  14. By: Oleg Itskhoki; Dmitry Mukhin
    Abstract: The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable (the real exchange rate) and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real. We show that an extended set of Mussa facts equally falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models as explanations for the Mussa puzzle. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market — a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, or monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising in the financial market, suggesting the importance of monetary transmission via the risk premium channel.
    JEL: E30 E40 E50 F30 F40 G10
    Date: 2021–06
  15. By: Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum
    Abstract: We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.
    Keywords: Money; Search; Inflation; Unemployment; Unemployment volatility; Fundamental surplus; Product-labor market interaction
    JEL: E24 E30 E40 E50
    Date: 2021–06–29
  16. By: Adam Copeland; Darrell Duffie; Yilin Yang
    Abstract: The Federal Reserve's “balance-sheet normalization,” which reduced aggregate reserves between 2017 and September 2019, increased repo rate distortions, the severity of rate spikes, and intraday payment timing stresses, culminating with a significant disruption in Treasury repo markets in mid-September 2019. We show that repo rates rose above efficient-market levels when the total reserve balances held at the Federal Reserve by the largest repo-active bank holding companies declined and that repo rate spikes are strongly associated with delayed intraday payments of reserves to these large bank holding companies. Intraday payment timing stresses are magnified by early-morning settlement of Treasury security issuances. Substantially higher aggregate levels of reserves than existed in the period leading up to September 2019 would likely have eliminated most or all of these payment timing stresses and repo rate spikes.
    Keywords: repo rates; reserves; Treasuries; payments; central bank balance sheet
    JEL: G14 D47 D82
    Date: 2021–07–01
  17. By: Georgios Georgiadis (European Central Bank); Helena Le Mezo (European Central Bank); Arnaud Mehl (European Central Bank); Cédric Tille (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory ‒ i.e. strategic complementarities in price setting and integration in cross-border value chains ‒ underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro.
    Keywords: International trade invoicing; dominant currency paradigm; markets vs. policies
    JEL: F14 F31 F44
    Date: 2021–07–01
  18. By: Jorge Pozo (Central Reserve Bank of Peru); Youel Rojas (Central Reserve Bank of Peru)
    Abstract: In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium very low levels of credit and stronger reductions of the real and nominal interest, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank loans to firms that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since central bank loans are not subject to the moral hazard problem between bankers and depositors and are government-guaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans.
    Keywords: Unconventional credit policy; asymmetric information; moral hazard; zero Lower bound
    JEL: G21 G28 E44 E5
    Date: 2021–07–01
  19. By: Alexander Lee
    Abstract: This note focuses on the importance of a mechanism guaranteeing the inseparable functionality of the technical components of a programmable money system rather than prescribing the specific nature of those components.
    Date: 2021–06–23
  20. By: Díaz-Bonilla, Eugenio; Paz, Flor; Piñeiro, Valeria
    Abstract: The exchange rate (ER) is one of the most important macroeconomic variables in the economy, defining the price of the domestic currency in relation to a foreign currency or currencies. The level and changes (both actual and expected) of the ER (nominal and real, defined below) have wide influence throughout the economy, affecting and being affected by the demand and supply of traded and nontraded goods and services, the demand and supply of money and monetary assets denominated in local currency in comparison with assets denominated in other currencies, and inflows or outflows of capitals and remittances, among main key variables. In consequence, the ER and ER policies influence growth, employment, inflation, international trade, and banking and fiscal stability (a classical general treatment can be found in Krueger 1983; see also Corden 1990).
    Keywords: HAITI, CARIBBEAN, exchange rate, remittances, economic competition, aid programmes, valuation
    Date: 2021
  21. By: Michael D. Bauer; Mikhail Chernov
    Abstract: Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.
    Keywords: bond markets, yield curve, skewness, biased beliefs, monetary policy
    JEL: E43 E44 E52 G12
    Date: 2021
  22. By: Musgrave, Ralph S.
    Abstract: Fractional reserve banking is inherently risky, which in large part explains the hundreds of bank failures throughout history and the 2007/8 bank crisis which lead to catastrophic economic and social damage. So fractional reserve must have some amazing benefits to make up for the latter shambles, or so you might think. In fact the alleged benefits of fractional reserve as compared to the alternative, namely 100% reserves are unimpressive to put it politely. Three of the main alleged benefits are examined below: first, the fact that fractional reserve banks create liquidity / money, second that it gives private / commercial banks more flexibility and third that it involves lower interest rates.
    Keywords: bank; fractional reserve; 100% reserve
    JEL: E5 G21
    Date: 2021–06–27
  23. By: César Sosa-Padilla; Federico Sturzenegger
    Abstract: There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation affects country risk. We first present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We confirm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.
    JEL: F32 F34 F41
    Date: 2021–06
  24. By: Kheng, Veasna; Pan, Lei
    Abstract: The increase in dollarisation in Cambodia has been contrary to the general belief that macroeconomic and political stability help reduce dollarisation. We provide so far the first explanation for this counterfactual phenomenon. In doing so, this paper develops a theoretical model based on the framework ofUribe (1997) by including a dollar pricing index to amplify the network effects of using a foreign currency (denoted dollar). The dollar pricing index, a proportion of an economy denominated by the dollar, reduces the dollar’s transaction cost, thus increasing its usage in the economy. This increased use of the dollar further improves the experience of using it, hence results in higher usage of dollar in the price quotation. The positive interaction of using the dollar as a unit of account and a means of payment causes dollarisation continues to rise, even though the economy has achieved low inflation and political stability.
    Keywords: Dollarisation; Dollar pricing index; Network externalities
    JEL: E41 F41
    Date: 2021–07–10
  25. By: Jasper Hoek; Steven B. Kamin; Emre Yoldas
    Abstract: Rising U.S. interest rates are often thought to be bad news for emerging market economies (EMEs) as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises. Indeed, as shown in Figure 1 below, the rise in the federal funds rate (the black line) during the Volcker disinflation of the early 1980s was associated with a sharp rise in the incidence of financial crises in EMEs (the green bars).
    Date: 2021–06–23
  26. By: André Teixeira; Zoë Venter
    Abstract: This paper shows that the recent surge in savings is a result of tighter macroprudential policy. Using a difference-in-differences approach with staggered treatment adoption, we find that households in EU countries that adopted macroprudential policy between 2000 and 2019 increased their savings up to one third more than households in countries without macroprudential policy. Furthermore, our results indicate that the loan-to-value ratio explains most of the variation on savings. Finally, we find that a longer exposure to macroprudential policy exacerbates savings with searing consequences on growth.
    Keywords: Macroprudential policy, savings, growth, difference-in-differences
    JEL: E21 E52 O47
    Date: 2021–06
  27. By: R. Jay Kahn (Office of Financial Research); Luke Olson (Office of Financial Research)
    Abstract: The U.S. repo market, which is split among four markets, links a wide range of banks and nonbanks who lend and borrow short-term against securities pledged as collateral. This brief uses the OFR's collection of repo market data to highlight some basic facts about the two cleared repo markets. The broadness of cleared repo market participants underscores two increasingly important trends in U.S. financial markets. First, the rising importance of market-based finance among hedge funds and money market funds. Second, the global scope of U.S. financial markets, as a significant portion of net repo borrowing in cleared markets is by foreign banks. The diversity of institution types also means reference rates based on repo transactions represent a broad range of financial market participants.
    Keywords: Repurchase agreement, cleared markets, financial markets, reference rate
    Date: 2020–07–08
  28. By: David Rivero; Hugo Rodríguez Mendizábal
    Abstract: In this paper we show that nominal demand-deposits are not, in general, Pareto optimal contracts. We construct a variation of the ? model where inside money is essential. In this setting, we show that the interplay between non-contingent deposit contracts and price flexibility is not a sufficient mechanism to provide efficient risk-sharing. Furthermore, state-contingent deposit contracts are not incentive compatible and implementing them would require banks to gather specific information regarding customer preferences that is beyond the scope of current depository institutions.
    Keywords: deposit contracts, risk-sharing, money creation, state contingencies
    JEL: G21 E42
    Date: 2021–07
  29. By: Cirolia, Liza Rose; Hall, Suzanne; Nyamnjoh, Henrietta
    Abstract: Remittances are increasingly central to development discourses in Africa. The development sector seeks to leverage transnational migration and rapid innovations in financial technologies (fintech), to make remittance systems cheaper for end-users and less risky for states and companies. Critical scholarship, however, questions the techno-fix tendency, calling for grounded research on the intersections between remittances, technologies, and everyday life in African cities and beyond. Building on this work, we deploy the concepts of ‘micro-worlds’ and ‘migrant infrastructure’ to make sense of the complex networks of actors, practices, regulations, and materialities which shape remittance circulations. To ground the work, we narrate two vignettes of remittance service providers who operate in Cape Town, South Africa, serving the Congolese diaspora community. We showcase the important role of logistics companies in the ‘informal’ provision of remittance services and the rise of fintech companies operating in the remittance space. These vignettes give substance to the messy and relational dynamics of remittance micro-worlds. This relationality allows us to see how remittances are circulations, not unidirectional flows; how they are not split between formal and informal, but in fact intersect in blurry ways; how digital technologies are central to the story of migrant infrastructures; and how migrants themselves are compositional of these networks. In doing so, we tell a more relational story about how remittance systems are constituted and configured.
    Keywords: remittances; mobile money; regulation; migrant infrastructure; micro-worlds
    JEL: R14 J01
    Date: 2021–05–12

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