nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒07‒26
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Sectoral shocks and monetary policy in the United Kingdom By Dixon, Huw; Franklin, Jeremy; Millard, Stephen
  2. The fuel of unparalleled recovery: Monetary policy in South Africa between 1925 and 1936 By Swanepoel, Christie; Fliers, Philip
  3. "Multifactor Keynesian Models of the Long-Term Interest Rate" By Tanweer Akram
  4. U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter By Shaghil Ahmed; Ozge Akinci; Albert Queraltó
  5. Debt Management in a World of Fiscal Dominance By Boris Chafwehé; Charles de Beauffort; Rigas Oikonomou
  6. Sequencing Extended Monetary Policies at the Effective Lower Bound By Yang Zhang; Lena Suchanek; Jonathan Swarbrick; Joel Wagner; Tudor Schlanger
  7. Monetary Policy Risk: Rules vs. Discretion By David Backus; Mikhail Chernov; Stanley E. Zin; Irina Zviadadze
  8. Oligopoly Banking, Risky Investment, and Monetary Policy By Altermatt, Lukas; Wang, Zijian
  9. Foreign Exchange Intervention, Capital Flows, and Liability Dollarization By Paul Castillo; Juan Pablo Medina
  10. Monetary Policy and Wealth Effects: The Role of Risk and Heterogeneity By Nicolas Caramp; Dejanir H. Silva
  11. Inside the black box: tools for understanding cash circulation By Luca Baldo; Elisa Bonifacio; Marco Brandi; Michelina Lo Russo; Gianluca Maddaloni; Andrea Nobili; Giorgia Rocco; Gabriele Sene; Massimo Valentini
  12. Tracking ECB's communication: Perspectives and Implications for Financial Markets By FORTES, Roberta; Le Guenedal, Theo
  13. Sustainable finance, current and future implications for banks and monetary policy: assessing COVID impacts By Ojo/Roedl, Marianne
  14. Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented? By Georgios Georgiadis; Helena Le Mezo; Arnaud Mehl; Cedric Tille
  15. Money Aggregates, Debt, Pent-Up Demand, and Inflation: Evidence from WWII By Federico S. Mandelman
  16. Supplementary Paper Series for the "Assessment" (3): Inflation-Overshooting Commitment:An Analysis Using a Macroeconomic Model By Takuji Kawamoto; Jouchi Nakajima; Tomoaki Mikami
  17. Bitcoin, Currencies, and Bubbles By Nassim Nicholas Taleb
  18. Incentive compatible relationship between the ERM II and close cooperation in the Banking Union: the cases of Bulgaria and Croatia By María J. Nieto; Dalvinder Singh
  19. Interest rate skewness and biased beliefs By Bauer, Michael; Chernov, Mikhail
  20. L'impatto della pandemia sull'uso degli strumenti di pagamento in Italia By Ardizzi Guerino; Alessandro Gambini; Andrea Nobili; Emanuele Pimpini; Giorgia Rocco
  21. What are the main differences between the practice of supervising large banks in the UK and in the euro area, and what are the main risks of regulatory divergence? By Haselmann, Rainer; Tröger, Tobias
  22. Sowing the Seeds of Financial Crises: Endogenous Asset Creation and Adverse Selection By Nicolas Caramp
  23. A community's resilience to the covid-19 crisis. The Florain monetary community. By Raphaël DIDIER
  24. The eurozone: what is to be done? By Minford, Patrick; Ou, Zhirong; Wickens, Michael; Zhu, Zheyi

  1. By: Dixon, Huw (Cardiff Business School); Franklin, Jeremy (Bank of England); Millard, Stephen (Bank of England, Centre for Macroeconomics and Durham University Business School.)
    Abstract: In this paper, we examine the extent to which monetary policy should respond to movements in sectoral inflation rates. To do this we construct a Generalised Taylor model that takes specific account of the sectoral make-up of the consumer price index (CPI). We calibrate the model for each sector using the UK CPI microdata. We find that a policy rule that allows for different responses to inflation in different sectors outperforms a rule which just targets aggregate CPI, as does a rule that responds only to non food and energy inflation. However, we find that the optimal sectoral rule only leads to a small absolute improvement in terms of extra consumption.
    Keywords: CPI inflation, Sectoral inflation rates, Generalised Taylor economy, Financial Intermediation
    JEL: E17 E31 E52
    Date: 2021–05
  2. By: Swanepoel, Christie; Fliers, Philip
    Abstract: The newly established South African Reserve Bank (SARB) was tasked to protect the currency by navigating the interwar gold standard, and, from March 1933, maintaining parity with the Pound Sterling. We find that South Africa's exit from gold secured an unparalleled and rapid recovery from the Great Depression. South Africa's exit was accompanied by an inextricable link of the SARB's policy rate to the interest rate set by the Bank of England (BoE). This sacrifice of independent monetary policy allowed the SARB to fix the country's exchange rate without impeding the flow of gold to London. The SARB fuelled the economy by reducing its policy rates and accumulating gold. Had South Africa not devalued, the country would have suffered a severe depression and persistent deflation. An alternative to the devaluation, was for the SARB to pursue a cheap money strategy. By setting interest rates historically low, we find that South Africa could have achieved higher levels of economic growth, at the cost of higher inflation. Ultimately, South Africa's unparalleled recovery can be ascribed to the devaluation, however the change in the SARB monetary policy and the bank's control over the gold markets were of paramount importance.
    Keywords: monetary policy management,interwar gold standard,South Africa
    JEL: N14 N20 E42 E52 E58 F33
    Date: 2021
  3. By: Tanweer Akram
    Abstract: This paper presents multifactor Keynesian models of the long-term interest rate. In recent years there have been a proliferation of empirical studies based on the Keynesian approach to interest rate modeling. However, standard multifactor models of the long-term interest rate in quantitative finance have not been yet incorporated Keynes's insights about interest rate dynamics. Keynes's insights about the influence of the current short-term interest rate are introduced in two different multifactor models of the long-term interest rate to illustrate how the long-term interest rate relates to the short-term interest rate, the central bank’s policy rate, inflation expectations, the central bank’s inflation target, volatility in financial markets, and Wiener processes.
    Keywords: Long-Term Interest Rate; Government Bond Yields; Monetary Policy; Short-Term Interest Rate; Inflation; Inflation Target; John Maynard Keynes
    JEL: E12 E43 E50 E58 E60 G10 G12 G41
    Date: 2021–07
  4. By: Shaghil Ahmed; Ozge Akinci; Albert Queraltó
    Abstract: Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission of U.S. monetary changes to emerging market economies (EMEs). We utilize a calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, and imperfectly anchored inflation expectations. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals, but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeos that EME central banks face. We show that these tradeoffs are more favorable when inflation expectations are well anchored.
    Keywords: Financial frictions; U.S. monetary policy spillovers; Adaptive expectations
    JEL: E32 E44 F41
    Date: 2021–07–15
  5. By: Boris Chafwehé (Joint Research Centre European Commission); Charles de Beauffort (National Bank of Belgium and IRES/LIDAM, UCLouvain); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: We study the impact of debt maturity management in an economy where monetary policy is ’passive’ and subservient to fiscal policy. We setup a tractable model, to characterize analytically the dynamics of inflation, as well as other macroeconomic variables, showing their dependence on the monetary policy rule and on the maturity of debt. Debt maturity becomes a key variable when the monetary authority reacts to inflation and the appropriate maturity of debt can restore the efficacy of monetary policy in controlling inflation. This requires debt management to focus on issuing long bonds. Moreover, we propose a novel framework of Ramsey optimal coordinated debt and monetary policies, to derive analytically the interest rate rule followed by the monetary authority as a function of debt maturity. The optimal policy model leads to the same prescription, long term debt financing enables to stabilize inflation. Lastly, the relevance of debt maturity in reducing inflation variability is also confirmed in a medium scale DSGE model estimated with US data.
    Keywords: Passive monetary policy, Govenment debt management, Fiscal and monetary policy interactions, Bayesian estimation, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2021–07–13
  6. By: Yang Zhang; Lena Suchanek; Jonathan Swarbrick; Joel Wagner; Tudor Schlanger
    Abstract: In response to the global COVID-19 pandemic, the Bank of Canada aggressively lowered its policy interest rate and provided additional easing using forward guidance and quantitative easing. In this analysis, we use simulations in the Bank of Canada’s projection model—the Terms-of-Trade Economic Model—to consider a suite of extended monetary policies (EMPs) to support the economy following the COVID-19 crisis. We focus on the implementation sequencing of three EMP options when the policy rate is at the effective lower bound: credit easing, forward guidance and quantitative easing. We find that the policy mix that delivers the best outcome for the Canadian economy calls for immediately implementing forward guidance and quantitative easing, followed by credit easing when containment measures are lifted. Furthermore, going “full scale” and implementing all available EMP options effectively helps stabilizing the economy because each of these tools reinforces the others. We also quantify the fiscal response needed to offset the gap in gross domestic product created by the effective lower bound, given operational limitations in scaling up EMPs.
    Keywords: Coronavirus disease (COVID-19); Monetary policy; Monetary policy transmission
    JEL: E58
    Date: 2021–07
  7. By: David Backus; Mikhail Chernov; Stanley E. Zin; Irina Zviadadze
    Abstract: Long-run asset-pricing restrictions in a macro term-structure model identify discretionary monetary policy separately from a policy rule. We find that policy discretion is an important contributor to aggregate risk. In addition, discretionary easing coincides with good news about the macroeconomy in the form of lower inflation, higher output growth, and lower risk premiums on short-term nominal bonds. However, it also coincides with bad news about long-term financial conditions in the form of higher risk premiums on long-term nominal bonds. Shocks to the rule correlate with changes in the yield curve’s level. Shocks to discretion correlate with changes in its slope.
    JEL: E43 E52 G12
    Date: 2021–07
  8. By: Altermatt, Lukas; Wang, Zijian
    Abstract: Oligopolistic competition in the banking sector and risk in the real economy are important characteristics of developed economies, but have so far mostly been abstracted from in monetary economics. We build a dynamic general equilibrium model of monetary policy transmission that incorporates both of these features and document that including them leads to important insights in our understanding of the transmission mechanism. Various equilibrium cases can occur, and policies have differing effects in these cases. We calibrate the model to the U.S. economy in 2016-2019 in order to study how changes in the degree of banking competition or the policy rate would have affected equilibrium outcomes. We find that doubling banking competition would have increased welfare by 1.02\%, but at the cost of increasing the probability of bank default from 0.02\% to 0.44\%. We further find that the policy rate was set optimally to minimize the probability of bank default, but that a decrease in the policy rate by 1pp would have increased welfare by 0.40\%. We also show that bank profits are increasing in the policy rate, in particular when interest rates are low. Thus, a 1pp reduction in the policy rate would have reduced profits per bank by 35.5\% in our calibrated economy. Finally, we document that monetary policy pass-through is incomplete under imperfect competition in the banking sector, as a change in the policy rate by 1pp leads to a change of only 0.92pp in the loan rate, while pass-through to the deposit rate is nearly complete for rate increases, but almost zero for rate reductions due to the zero-lower bound.
    Keywords: Oligopoly competition, Risky investment, Monetary policy, Financial intermediation
    Date: 2021–07–13
  9. By: Paul Castillo (Central Bank of Peru); Juan Pablo Medina (Universidad Adolfo Ibanez, Chile)
    Abstract: This paper investigates the relevance of foreign exchange intervention in dealing with the global financial cycle in emerging economies. We show in a VAR analysis that a shock to global capital flows has a sizable effect on economic activity, and this effect is amplified in emerging economies with liability dollarization. However, countries that systematically rely on sterilized foreign exchange intervention display lower output and real exchange rate volatility in response to global capital flows shocks. We then develop a small open economy model with liability dollarization and balance sheets effects calibrated to an emerging economy. The model is consistent with the empirical evidence. Model simulations show that liability dollarization amplifies the effects of the global financial cycle and that foreign exchange intervention can reduce macroeconomic volatility and improve welfare. These results point to the importance of foreign exchange reserves in insulating emerging economies from shocks to global capital flows.
    Keywords: Foreign Exchange Intervention; Global Financial Cycle; Liability Dollarization; Balance Sheet Effects; Emerging Economies
    JEL: E58 F31 F41
    Date: 2021–06–25
  10. By: Nicolas Caramp; Dejanir H. Silva (Department of Economics, University of California Davis)
    Abstract: We study the role of wealth effects, i.e. the revaluation of stocks, bonds, and human wealth, in the monetary policy transmission mechanism. The analysis of wealth effects requires to incorporate realistic asset-pricing dynamics and heterogeneous households’ portfolios. Thus, we build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters and ii) positive private debt. The model captures time-varying risk premia and precautionary savings in a linearized setting that nests the textbook New Keynesian model. Quantitatively, the model matches the empirical response of asset prices as well as the heterogeneous impact on borrowers and savers. We find that wealth effects induced by time-varying risk and private debt account for the bulk of the output response to monetary policy.
    Keywords: Monetary Policy, Wealth Effects, Asset Prices, Heterogeneity
    JEL: E21 E52 E44
    Date: 2021–07–15
  11. By: Luca Baldo (Bank of Italy); Elisa Bonifacio (Bank of Italy); Marco Brandi (Bank of Italy); Michelina Lo Russo (Bank of Italy); Gianluca Maddaloni (Bank of Italy); Andrea Nobili (Bank of Italy); Giorgia Rocco (Bank of Italy); Gabriele Sene (Bank of Italy); Massimo Valentini (Bank of Italy)
    Abstract: In this study, we assess the main drivers of banknote circulation in Italy over the last decades by using a number of econometric tools proposed in the literature. We explore the role played by the banknote flows from abroad, changes in the institutional framework and disentangle domestic demand for transaction purposes from other components, including liquidity hoarding. We find that changes in legal limits on cash payment and money holdings for precautionary reasons explain the bulk of cash dynamics. Moreover, the share of transaction demand declined over time becoming of second-order. Finally, we find that, during the pandemic from Covid-19, the exceptional raise in cash circulation was mostly the result of an increase in precautionary demand due to both economic uncertainty and restrictions to mobility that resulted into a marked decline of lodgments to the central bank.
    Keywords: cash circulation, cash, payment habits, Covid-19 pandemic
    JEL: E41 E42 G2
    Date: 2021–07
  12. By: FORTES, Roberta; Le Guenedal, Theo
    Abstract: This article assesses the communication of the European Central Bank (ECB) using Natural Language Processing (NLP) techniques. We show the evolution of discourse over time and capture the main themes of interest for the central bank that go beyond its traditional mandate of maintaining price stability, enlightening main concerns and themes of discussion among board members. We also built sentiment signals compatible with any form of language, both formal and informal, an important step as the ECB aims to enhance communication with non-expert audiences. In a second step, we measure the impact of the ECB's communication on the EUR/USD exchange rate. We found that our quantitative series, both topics and sentiment, improve financial-linked models consistently in all periods analyzed (2.5\% on average). Meaningful signals comprise a broad range of subjects and vary in time. This suggests that overall ECB's talk matters for asset prices, including themes not directly related to monetary policy. This result is particularly important in a context in which the ECB, as well as other major central banks, are moving towards integrating issues closer to the society into their scope of action, implying that subjects, which were considered peripheral, may become central. This emphasizes the importance for markets to effectively track central banks' communication to improve investment processes.
    Keywords: Quantitative trading, Central Bank, Fixed Income,Exchange Rates, Text mining, NLP, Euro
    JEL: C38 C63 E44 F3 F31 G12
    Date: 2020–12
  13. 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
  14. By: Georgios Georgiadis (European Central Bank); Helena Le Mezo (European Central Bank); Arnaud Mehl (European Central Bank & CEPR); Cedric Tille (Geneva Graduate Institute & CEPR)
    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: 2021–07–06
  15. By: Federico S. Mandelman
    Abstract: The COVID-19 pandemic produced a massive decline in U.S. consumption in 2020 and swift fiscal and monetary responses. After growing at a rather steady 5 percent rate for decades, the money supply (M2) increased 25 percent over the past year alongside unprecedented fiscal support, raising some inflationary concerns. Concurrent with the reopening of the economy as vaccines roll out, this article derives some lessons from the U.S. experience during and after WWII. The debt-to-GDP ratio increased from 40 percent to 110 percent because of the war effort. Most of it was financed by Fed debt purchases, through a de facto yield curve control that held down short- and long-term interest rates. The money supply doubled in size, but inflation was muted during the conflict as private consumption demand was severely restrained. Private consumption was suppressed, as factories were fully devoted to the rearmament effort, food was rationed, and construction was practically prohibited. Households’ saving boomed as a result. After the war, swift pent-up consumption demand culminated in a short-lived spike in inflation from 2 percent to 20 percent in 1946–47, which quickly returned to 2 percent in 1949. Contractionary monetary and fiscal policies, along well-anchored low inflation expectations inherited from the Great Depression, appeared to have contributed to rapid disinflation. I also discuss the experiences of Japan and Europe in recent decades.
    Keywords: Money aggregates; inflation; World War II; pent-up demand; COVID-19
    JEL: E19 I19
    Date: 2021–05–17
  16. By: Takuji Kawamoto (Bank of Japan); Jouchi Nakajima (Bank of Japan); Tomoaki Mikami (Bank of Japan)
    Abstract: In its "Inflation-Overshooting Commitment," the Bank of Japan commits to continuing to expand the monetary base until the year-on-year rate of increase in the CPI exceeds the price stability target of 2 percent and stays above the target in a stable manner. Through the commitment, the Bank of Japan is implementing a so-called "makeup strategy," which aims to offset a part of past inflation misses from the target by allowing actual inflation to overshoot the target for some time and thereby stabilizing average inflation over the business cycle. Existing studies have shown that such makeup strategies are actually effective for the U.S. economy. This paper examines the effectiveness of the makeup strategy for Japan's economy, where inflation expectations formation is known to be largely adaptive. Specifically, we build a small-scale macroeconomic model for Japan's economy and conduct simulation analysis to study the implications of adopting the makeup strategy for early achievement of the inflation target as well as the incurring social welfare costs. Simulation results show that when the inflation rate has been below the target, it is effective to stabilize average inflation by offsetting the past inflation misses over some makeup windows. In addition, the results suggest that when the natural rate of interest is lower, the optimal makeup window becomes longer.
    Keywords: Monetary Policy; Inflation-overshooting commitment; Makeup strategy; Average inflation targeting; Stochastic simulation
    JEL: C53 E31 E47 E52 E58
    Date: 2021–07–13
  17. By: Nassim Nicholas Taleb
    Abstract: We apply quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin in particular -- as there are about $10,000$ cryptocurrencies, we focus (unless otherwise specified) on the most discussed crypto of those that claim to hew to the original protocol (Nakamoto, 2009) and the one with, by far, the largest market capitalization. In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than $0$), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one's investments, a shield against government tyranny, nor a tail protection vehicle for catastrophic episodes. Furthermore, there appears to be an underlying conflation between the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, and the speculative variations in the price of a zero-sum asset with massive negative externalities. Going through monetary history, we also show how a true numeraire must be one of minimum variance with respect to an arbitrary basket of goods and services, how gold and silver lost their inflation hedge status during the Hunt brothers squeeze in the late 1970s and what would be required from a true inflation hedged store of value.
    Date: 2021–06
  18. By: María J. Nieto (Banco de España); Dalvinder Singh (University of Warwick)
    Abstract: The goal of expanding participation in the European Banking Union was to allow the “outs” to enter into close cooperation, but it did not include the simultaneous joining of the Exchange Rate Mechanism (ERM II). Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to various questions. What is the rationale behind the double requirement of having simultaneously to apply to become a member of the ERM II and to prepare to become a member of the Banking Union via the rule-based “close-cooperation” coordination mechanism between the EU non-euro-area national competent authorities (NCAs) and the European Central Bank (ECB)? Does the integration of close-cooperation countries’ banking systems with the euro-area banking systems support the decision to join the ERM II and “opting in” to the Single Supervisory Mechanism (SSM)? What are the advantages of preparing to become a full member of the euro area and the SSM? It is evident from the research undertaken in this paper that there are clear benefits of close cooperation for these member states whose domestic currencies are already linked to the euro, in view of the dominant position eurozone banks have in their respective domestic markets. It is more difficult for a national central bank or NCA to exercise discretion in implementing ECB decisions once it is committed to the path leading to full European Monetary Union (EMU) membership. Hence the commitment to join the EMU minimises the authority risk for the ECB as well as for the Single Resolution Board, as safeguards become non-significant and termination is not an issue. The uncertainty about the functioning and durability of the close-cooperation arrangement is largely removed.
    Keywords: Banking Union, close cooperation, ERM II
    JEL: E02 E44 F15 G15 G21 H12 K23
    Date: 2021–07
  19. By: Bauer, Michael; Chernov, Mikhail
    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
  20. By: Ardizzi Guerino (Bank of Italy); Alessandro Gambini (Bank of Italy); Andrea Nobili (Bank of Italy); Emanuele Pimpini (Bank of Italy); Giorgia Rocco (Bank of Italy)
    Abstract: This paper evaluates the impact of the COVID-19 pandemic on the use of retail payment instruments in Italy. After a brief overview of the trends prevailing in Italy before the spread of the pandemic, we analyse the dynamics of the main indicators on payment habits during the two waves of infection that have affected the country. We estimate the effects on the payment industry using different measures of the intensity of the pandemic in order to capture the impact of fears of contagion on the behaviour of households and businesses and the impact of the measures taken to contain the infection, which imposed constraints on social mobility and productive and commercial activities. The estimates show that the pandemic has increased the use of cards compared with cash at the physical point of sale and has encouraged transactions through more innovative payment technologies that allow physical distancing, such as purchases with contactless cards, those on e-commerce sites, and those made by bank transfer. Moreover, the analysis at the regional level suggests that the increase in more innovative electronic payments was more marked in Central and Southern Italy, areas in which, before the pandemic, the diffusion of electronic means of payment was more contained in comparison with the North of the country. The frequency of online purchases, on the other hand, has grown more in the North, which has a more evolved digital ecosystem and has been more severely affected by health emergency and, therefore, by stricter restrictions.
    Keywords: Covid-19, cash, payment cards, other payment instruments
    JEL: E41 E42 G2 O3
    Date: 2021–07
  21. By: Haselmann, Rainer; Tröger, Tobias
    Abstract: This in-depth analysis provides evidence on differences in the practice of supervising large banks in the UK and in the euro area. It identifies the diverging institutional architecture (partially supranationalised vs. national oversight) as a pivotal determinant for a higher effectiveness of supervisory decision making in the UK. The ECB is likely to take a more stringent stance in prudential supervision than UK authorities. The setting of risk weights and the design of macroprudential stress test scenarios document this hypothesis. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
    Keywords: Bank Supervision,Economic Governance,Banking Union,Brexit
    Date: 2021
  22. By: Nicolas Caramp (Department of Economics, University of California Davis)
    Abstract: What sows the seeds of financial crises, and what policies can help avoid them? I model the interaction between the ex-ante production of assets and ex-post adverse selection in financial markets. Positive shocks that increase market prices exacerbate the production of low-quality assets and can increase the likelihood of a financial market collapse. The interest rate and the liquidity premium are endogenous and depend on the functioning of financial markets as well as the total supply of assets (private and public). Optimal policy balances the economy’s liq- uidity needs ex-post with the production incentives ex-ante, and it can be implemented with three instruments: government bonds, asset purchase programs, and transaction taxes. Pub- lic liquidity improves incentives but implies a higher deadweight loss than private market interventions. Optimal policy does not rule out private market collapses but mitigates the fluctuations in the total liquidity.
    JEL: E44 G01 G12 D82
    Date: 2021–07–15
  23. By: Raphaël DIDIER
    Abstract: In this paper, we study the resilience of the community of individual users of a French local currency in the face of an abrupt halt in exchanges during the first containment related to the covid-19 pandemic (March 17, 2020 to May 11, 2020). Our study is based on the local currency of the Nancy Basin, the Florain, for which we have a field survey conducted before the pandemic, three interviews conducted between the first and second containment in France (May 12 and October 30, 2020), observations and figures obtained during participation in the association's general assembly and publications found on the structure's blog. This allowed us to highlight sociological factors (feeling of being a consum’actor, social representations of members and existence of an identity niche among active volunteers) and organizational factors (ethos of active volunteers, sociocratic mode of governance of the association and inscription of the Florain community in a life basin) that contribute to community resilience. However, in the particular case of a local currency, we show that there is also a predominant institutional dimension, linked to its social and political nature, which makes the community of individual users a local monetary community.
    Keywords: local currency, crisis, resilience, covid-19, SSE, governance, sociocracy, territory, values, monetary community.
    JEL: A14 E42 R11
    Date: 2021
  24. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School); Wickens, Michael (Cardiff Business School); Zhu, Zheyi (Cardiff Business School)
    Abstract: We construct a macro DSGE model of the eurozone and its two main regions, the North and the South, with the aim of matching the macro facts of these economies by indirect inference and using the resulting empirically-based model to assess possible new policy regimes. The model we have found to fit the facts suggests that substantial gains in macro stability and consumer welfare are possible if the fiscal authority in each region is given the freedom to respond to its own economic situation. Further gains could come with the restoration of monetary independence to the two regions, in effect creating a second 'southern euro' bloc.
    Keywords: eurozone; macro stability; fiscal policy; monetary independence
    JEL: E32 E52 E62 F41
    Date: 2021–06

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.