nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒08‒09
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Measuring Household Inflation Perceptions and Expectations: The Effect of Guided vs Non-Guided Inflation Questions By Bernd Hayo; Pierre-Guillaume Meon
  2. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  3. Fiscal and monetary policy interactions in a low interest rate world By Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
  4. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  5. Policy biases in a model with labor market frictions By Richard Dennis; Tatiana Kirsanova
  6. The Positive Case for a CBDC By Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
  7. Monetary policy shocks over the business cycle: Extending the Smooth Transition framework By Martin Bruns; Michele Piffer
  8. Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented? By Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Tille, Cédric
  9. The Bank Liquidity Channel of Financial (In)stability By Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
  10. Catch me (if you can): assessing the risk of SARS-CoV-2 transmission via euro cash By Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
  11. From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective By Brent Bundick; Nicolas Petrosky-Nadeau
  12. Exploring the potential benefits of inflation overshooting By Robert Amano; Marc-André Gosselin; Kurt See
  13. Japanese monetary policy and household saving By Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
  14. Deflation and Declining Business Dynamism in a Cash-in-Advance Economy By FURUKAWA Yuichi; NIWA Sumiko
  15. Risk, Inside Money, and the Real Economy By van Buggenum, Hugo
  16. Inflation Expectations and Central Bank Communication with Unknown Prior By Tatsushi Okuda; Tomohiro Tsuruga
  17. Money Creation in Russia: Does the Money Multiplier Exist? By Vadim O. Grishchenko; Alexander Mihailov; Vasily N. Tkachev
  18. Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution By Martin Kuncl; Alexander Ueberfeldt
  19. Extreme capital flow episodes from the Global Financial Crisis to COVID-19: An exploration with monthly data By Annamaria de Crescenzio; Etienne Lepers
  20. Public debt and inflation nexus in Nigeria: An ARDL bounds test approach By Aimola, Akingbade U; Odhiambo, Nicholas M
  21. Revisiting the macroeconomic effects of monetary policy shocks By Firmin Doko Tchatoka; Qazi Haque
  22. Monetary policy in the age of automation By Luca Fornaro; Martin Wolf
  23. Precautionary saving and un-anchored expectations By Grimaud, Alex
  24. Corporate loans, banks’ internal risk estimates and central bank collateral: evidence from the euro area By Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
  25. TARGET2 - The European system for large-value payments settlement By Paolo Bramini; Matteo Coletti; Francesco Di Stasio; Pierfrancesco Molina; Vittorio Schina; Massimo Valentini
  26. Tradable and Non-tradable Inflation in Turkey: Predicting Different States with Markov Regime-Switching Approach By Hulya Saygili; Aysun Turkvatan
  27. Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs By Brianti, Marco
  28. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  29. Cash and COVID-19: The impact of the second wave in Canada By Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
  30. Inflation during the pandemic: What happened? What is next? By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  31. Secular Stagnation, Low Interest Rates and Low Inflation: Causes and Implications for Policy By Kollmann, Robert; Lubik, Thomas; Roeger, Werner
  32. Price rigidity in Brazil: Microeconomic evidence and Macroeconomic Implications By Debora Silva Oliveira; Mauro Rodrigues
  33. Coexistence of Money and Interest-Bearing Bonds By van Buggenum, Hugo
  34. Impossible trinity in a small open economy: A state-space model informed policy simulation By Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
  35. A digital euro: a contribution to the discussion on technical design choices By Emanuele Urbinati; Alessia Belsito; Daniele Cani; Angela Caporrini; Marco Capotosto; Simone Folino; Giuseppe Galano; Giancarlo Goretti; Gabriele Marcelli; Pietro Tiberi; Alessia Vita
  36. Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia By Sui-Jade Ho; Oezer Karagedikli
  37. One-stop source: A global database of inflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  38. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly

  1. By: Bernd Hayo (University of Marburg); Pierre-Guillaume Meon (Universite libre de Bruxelles)
    Abstract: An experiment using a representative survey of the German population shows that letting respondents report a number rather than asking them to choose from a list of predefined ranges lowers the response rate for both perceived past and expected inflation and decreases (increases) reported past (expected) inflation. Income, education, gender, objective and subjective knowledge about monetary policy, and political affiliation affect the effect’s size but not its sign. East and West German respondents who were 15 or older when the Berlin Wall fell have reactions different from those who were younger at that time, which supports the ‘impressionable years’ hypothesis based on different inflation experiences.
    Keywords: Inflation perception, inflation expectation, survey question design, Germany, household survey, impressionable years hypothesis
    JEL: E52 E58 Z1
    Date: 2021
  2. By: Coleman, Winnie; Nautz, Dieter
    Abstract: Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation,Online Surveys,Covid-19 Pandemic
    JEL: E31 E52 E58
    Date: 2021
  3. By: Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
    Abstract: We analyse fiscal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning. The ZLB induces a deterioration of economic performance and raises the risk of persistent low ation that can disanchor in ation expectations and lead to debt de ation. Systematic use of quantitative easing (QE) can partially substitute for interest rate easing and, if sufficiently aggressive, can maintain average in ation in line with the central bank's goal. By compressing term premia on longterm interest rates, QE creates fiscal space that facilitates expansionary fiscal policy and reduces debt-de ation risk. The ZLB can be counteracted with less aggressive QE if mildly negative policy rates are feasible, if more countercyclical fiscal policy can be activated, or if the central bank can credibly communicate a clear in ation goal. Timidity in implementing QE and excessively debt-averse fiscal policies are counterproductive.
    Keywords: zero lower bound, fiscal policy, debt de ation, quantitative easing, perpetual learning
    Date: 2021–07
  4. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. JEL Classification: E31, E32, E37, E52, E58
    Keywords: asset purchases, effective lower bound, forward guidance, make-up strategies, monetary policy
    Date: 2021–07
  5. By: Richard Dennis; Tatiana Kirsanova
    Abstract: We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.
    Keywords: Labor market frictions, matching, optimal policy
    JEL: E52 E61 C62 C73
    Date: 2021–07
  6. By: Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
    Abstract: In this paper we discuss the competition and innovation arguments for issuing a central bank digital currency (CBDC). A CBDC could be an effective competition policy tool for payments. On innovation, we argue that a CBDC could be necessary to support the vibrancy of the digital economy by helping solve market failures and fostering competition and innovation in new digital payments markets. Overall, competition and innovation are supporting arguments for issuing a CBDC.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E58 L5
    Date: 2021–07
  7. By: Martin Bruns (University of East Anglia); Michele Piffer (King's College London)
    Abstract: We extend the Smooth Transition Vector Autoregressive model to allow for identification via a combination of external instruments and sign restrictions, while estimating rather than calibrating the parameters ruling the nonlinearity of the model. We hence o er an alternative to using the recursive identification with selected calibrated parameters, which is the main approach currently available. We use the model to study how the effects of monetary policy shocks change over the business cycle. We show that financial variables, inflation and output respond to a monetary shock more in a recession than in an expansion, in line with the predictions from the financial accelerator literature.
    Keywords: Nonlinear models, proxy SVARs, monetary policy shocks, sign restrictions.
    JEL: C32 E52
    Date: 2021–08–05
  8. By: Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Tille, Cédric
    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. JEL Classification: F14, F31, F44
    Keywords: dominant currency paradigm, international trade invoicing, markets vs. policies
    Date: 2021–07
  9. By: Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (Rice University); Farzad Saidi (UniversityofBonn & CEPR)
    Abstract: We examine the system-wide effects of liquidity regulation on banks’ balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantative easing.
    Keywords: liquidity regulation, securitization, interbank markets, financial stability, quantitative easing
    JEL: E44 G01 G21 G28
    Date: 2021–08
  10. By: Tamele, Barbora; Zamora-Pérez, Alejandro; Litardi, Chiara; Howes, John; Steinmann, Eike; Todt, Daniel
    Abstract: In the light of fears that the SARS-CoV-2 virus might be transmitted via cash – fears that were stoked by statements in the media and from public authorities – this paper aims to address the following issues: (1) to provide a descriptive account of the change in the circulation of euro banknotes and the use of cash in transactions during the pandemic; and (2) to assess the survivability of the virus on cash and the potential transmission risks. The pandemic has caused a significant increase in demand for cash as a store of value but a decrease in the use of cash in transactions. Although citizens reported using cash less in transactions partly out of fear of infection, research confirms that the risk of the virus being transmitted by banknotes and coins is very low. This supports the findings from the scientific community concluding that SARS-CoV-2 mainly spreads via respiratory fluids and airborne transmission, and that surfaces play a very minor role. JEL Classification: I10, I12, E41, E58
    Keywords: banknotes, cash demand, cash use, coins, COVID-19 pandemic, safety, SARS-CoV-2 virus, survivability, transferability
    Date: 2021–07
  11. By: Brent Bundick; Nicolas Petrosky-Nadeau
    Abstract: The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC's reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
    Keywords: Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound
    JEL: E32 E52 J64
    Date: 2021–07–15
  12. By: Robert Amano; Marc-André Gosselin; Kurt See
    Abstract: After a period with the interest rate at the effective lower bound, temporarily overshooting inflation may offer important economic benefits. This may be especially true for vulnerable segments of the population, such as workers with low attachment to the labour force and the long-term unemployed.
    Keywords: Inflation targets; monetary policy; monetary policy framework; and labour markets
    JEL: E52 J20
    Date: 2021–07
  13. By: Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
    Abstract: This paper analyzes the impact of monetary policy on household saving in Japan between 1993 and 2017. Using annual data from the Japan Panel Survey of Consumers it is shown that monetary expansion has contributed to a widening gap in households' net saving through an adverse effect on the volume of saving of non-academic households. In contrast, households with at least one academic tend to be able to compensate these adverse effects of monetary expansion or can even benefit from it. The paper documents how inequality in terms of the ability to build up wealth has increased in Japan over the past decades. The statistical analysis controls for household size as well as potential spatial effects in the transmission mechanism of monetary policy on household saving.
    Keywords: Japan,interest rate,monetary policy,household saving,inequality
    JEL: D31 D63 E52 E58
    Date: 2021
  14. By: FURUKAWA Yuichi; NIWA Sumiko
    Abstract: This study considers the relationship between deflation and declining business dynamism. We do this by incorporating the empirical evidence that inflationary factors essentially affect all stages of an R&D firm's life cycle―entry, exit, and survival―into an R&D-based growth model. Our model has a new feature; namely, the entry, exit, and survival of R&D firms are all endogenous and subject to a cash-in-advance constraint. The core finding is that deflation can significantly affect the nature of business dynamism. Specifically, a decrease in the inflation rate potentially encourages or discourages innovation and survival investments; however, it necessarily discourages both if the entry cost is sufficiently high. In this case, deflation stifles business dynamism, leading to lower entry and exit rates and a maturity bias in the firm age distribution. Calibrating the model to the U.S. economy, we show that deflation causes declining business dynamism under realistic values of entry, exit, and growth rates. Then, we show that deflation also causes welfare loss if the natural rate of firm exit is higher.
    Date: 2021–07
  15. By: van Buggenum, Hugo (Tilburg University, School of Economics and Management)
    Date: 2021
  16. By: Tatsushi Okuda (Associate Director and Economist, Institute for Monetary and Economic Studies (currently, Director, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Tomohiro Tsuruga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail:
    Abstract: We construct a noisy information model of central bank communication on future inflation rates and highlight an informational friction that plays a key role in explaining several empirical properties of firms' inflation expectations. Using a survey of Japanese firms' inflation expectations, we document new empirical facts related to the size of firms and their inflation expectations. We observe a persistent deviation of expectations from the central bank's inflation target and find that the deviation is monotonically increasing in firm size, while the degree of the forecasting imprecision, responsiveness to actual inflation, and the heterogeneity in firms' expectations are monotonically decreasing in firm size. To reconcile these empirical regularities, we construct a dynamic model of inflation expectation formation by Bayesian firms where the central bank's inflation forecast serves as a noisy public signal of future inflation rates and propose an informational friction in the communication about future inflation: the central bank's prior about the future inflation rate, which is unknown to firms. In this setup, the sluggishness of the adjustment of inflation expectations is amplified by the central bank's communication. Moreover, this friction drastically changes the role and the effect of central bank communication on firms' expectations formation. Firms utilize the inflation forecast as a signal not of the level but of changes in future inflation rates.
    Keywords: Imperfect information, inflation expectations, communication
    JEL: E50 D83 D84 D82
    Date: 2021–07
  17. By: Vadim O. Grishchenko (Research and Forecasting Department, Bank of Russia); Alexander Mihailov (Department of Economics, University of Reading); Vasily N. Tkachev (International Finance Department, Moscow State University of International Relations (MGIMO- University))
    Abstract: For decades, the monetary economics literature has considered multiple deposit expansion via the money multiplier logic as empirically corroborated. However, the developments witnessed in advanced economies since the Global Financial Crisis challenged this settled view, and central banks as well as the Bank for International Settlements were among the first to openly reconsider it. In this paper, we revisit the issue empirically, but in a way aligned with a 'narrative' context of the evolving institutional frameworks for banking activities and monetary policy that profoundly and ultimately shape it out. Using a vector autoregression model estimated on Russian monthly data over two subsamples, 2005-2012 and 2012-2019, we find robust evidence that, while multiple deposit expansion may have existed in underdeveloped financial systems in the past, where the volume of lending was limited by the supply of bank reserves, nowadays lending is constrained mainly by the demand for credit. The key explanations we propose are: the rapid rise of money markets in the 20th- 21st centuries, the unlimited access to central bank liquidity provision facilities, and the evolution of bank management from the 'golden rule' of banking, where liquidity gaps aim at zero, to Asset and Liability Management, where banks flexibly manage liquidity gaps. Our results robustly show that the influence on real money balances of money supply factors, such as bank reserve requirements and the real monetary base, has become statistically insignificant over the recent decade in Russia, while that of money demand factors, such as the nominal interest rate, has remained significant and negative, which is consistent with the economic intuition we have suggested.
    Keywords: multiple deposit expansion, money multiplier, supply of bank reserves, demand for credit, evolution of bank management, monetary policy, Russia
    JEL: E41 E42 E44 E51 E58 G21
    Date: 2021–08–03
  18. By: Martin Kuncl; Alexander Ueberfeldt
    Abstract: We identify a sizable wealth redistribution channel which creates a monetary policy trade-off whereby short-term economic stimulus is followed by persistently lower output over the medium term. This trade-off is stronger in economies with more nominal household debt but weakened by a more aggressive monetary policy stance and underprice-level targeting. Given this trade-off, low-for-long episodes can lead to persistently depressed output. The medium-term implications of the wealth redistribution channel rely on the presence of labor supply heterogeneity, which we show both analytically and in the context of an estimated New Keynesian general equilibrium model with household heterogeneity.
    Keywords: Monetary policy framework; Monetary policy transmission
    JEL: E21 E50
    Date: 2021–08
  19. By: Annamaria de Crescenzio; Etienne Lepers
    Abstract: The COVID-19 pandemic triggered a sudden funding squeeze manifested in major disruptions in international capital flows, the most dramatic of the wave of extreme capital flow episodes since the global financial crisis (GFC). This paper contributes to efforts to better understand this extreme episode in the context of post-GFC structural financial changes. To do so, it presents a new monthly dataset of gross capital flows for 41 countries, better suited to the identification of sudden shocks than quarterly Balance of Payments data. Leveraging on this dataset, the paper first develops a more precise identification of extreme capital flow episodes since the GFC and revisit their drivers, asking whether COVID-19 episode significantly changed recent findings of the weaker role of global factors. The answer is no. Rather, the role of global factors may have further lost explanatory power in the post-GFC period including COVID. On the other hand, pull factors such as pre-COVID vulnerabilities and country-specific and pandemic-specific factors appear key to explaining the identified cross-country heterogeneity.
    JEL: F32 F34 F38
    Date: 2021–07–26
  20. By: Aimola, Akingbade U; Odhiambo, Nicholas M
    Abstract: Inflationary tendencies of public debt have been the cause of an unsettling debate among policymakers in Nigeria. Using the autoregressive distributed lag (ARDL) framework, this study attempts to investigate the impact of total public debt on inflation in Nigeria for the period 1983?2018. The cointegrating regression results reveal evidence of a stable long-run relationship among inflation, total public debt, money supply, interest rate, economic growth, trade openness, and private investment in the presence of structural breaks. Empirical results show that the impact of public debt on inflation is statistically insignificant, irrespective of whether the regression was in the short or the long run. Hence, the study concludes that inflation in Nigeria could be driven by other factors other than public debt.
    Keywords: public debt; inflation; ARDL; Nigeria.
    Date: 2021–07
  21. By: Firmin Doko Tchatoka; Qazi Haque
    Abstract: We shed new light on the effects of monetary policy shocks in the US. Gertler and Karadi (2015) suggest that movements in credit costs may result in substantial impact of monetary policy shocks on economic activity. Using the proxy SVAR framework, we show that once the Volcker disinflation period is left out and one focuses on the post-1984 period, monetary policy shocks have no significant effects on output, despite large movements in credit costs. Our finding is robust to weak identification and alternative measure of economic activity.
    Keywords: Monetary policy shocks, Proxy-SVAR, Weak identification, Output Dynamics
    JEL: E31 E32 E43 E44 E52
    Date: 2021–07
  22. By: Luca Fornaro; Martin Wolf
    Abstract: We provide a framework in which monetary policy affects firms’ automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary expansions can increase output by inducing firms to invest and automate more, while having little impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Running the economy hot, through expansionary monetary and fiscal policies, may have a positive long run impact on labor productivity and wages. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.
    Keywords: monetary policy, automation, fiscal expansions, hysteresis, liquidity traps, secular stagnation, endogenous productivity, wages
    JEL: E32 E43 E52 O31 O42
    Date: 2021–07
  23. By: Grimaud, Alex
    Abstract: This paper revisits monetary policy in a heterogeneous agents new Keynesian (HANK) model where agents use adaptive learning (AL) in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual AL processes. In this model, supply shocks generate precautionary saving and possible long-lasting disinflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen the learning effects which is in contradiction with previously established representative agent under learning results. Price level targeting appears to resolve most of the problem by netter anchoring long-run expectations of future utility flows.
    Keywords: Adaptive learning, supply shocks, precautionary saving, heterogeneous expectations, HANK and price level targeting
    JEL: E25 E31 E52
    Date: 2021–07–05
  24. By: Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
    Abstract: We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks. JEL Classification: G21, G28
    Keywords: banking regulation, central bank liquidity, internal ratings, probability of default
    Date: 2021–07
  25. By: Paolo Bramini (Bank of Italy); Matteo Coletti (Bank of Italy); Francesco Di Stasio (Bank of Italy); Pierfrancesco Molina (Bank of Italy); Vittorio Schina (Bank of Italy); Massimo Valentini (Bank of Italy)
    Abstract: TARGET2 is the main European platform for the settlement of large-value payments in central bank money open to Central banks and commercial banks participation. TARGET2 was a prerequisite of the Monetary Union establishment and is a pillar for its functioning, for the single monetary policy conduct and the financial integration of the euro area. This publication explains its genesis and functioning, and outlines its possible future developments.
    Keywords: payment systems, market infrastructures, gross settlement
    JEL: E42 E58
    Date: 2021–07
  26. By: Hulya Saygili; Aysun Turkvatan
    Abstract: The recent literature debates the significance of different regimes of inflation and trade linkages in explaining the relationship between inflation and alternative reference indicators. This paper contributes to this literature in several respects. First, it explores which states of the reference indicators are more related with low, normal or high regimes of inflation. Second, it takes globalization into account and performs the analysis for goods and services in the consumer basket classified with respect to their trade openness and content of intermediate imports: tradable/non-tradable items and items with low/high imported intermediate share. It applies Markov regime-switching models to determine the states of inflation and reference series then compare probability scores of matching different regimes of inflation and different regimes of reference indicators. Third, it computes Consumer Price Indices in tradable/non-tradable and low/high imported intermediate details for an emerging country, Turkey which distinguishes from the others with high trade openness, high global integration rate and implementation of inflation targeting regime.
    Keywords: Inflation regimes, Tradable/non-tradable inflation, Markov regime-switching models, Probability score analysis
    JEL: E31 F41 C11
    Date: 2021
  27. By: Brianti, Marco (University of Alberta, Department of Economics)
    Abstract: This paper separately identifies financial and uncertainty shocks using a novel SVAR procedure and discusses their distinct monetary policy implications. The procedure relies on the qualitatively different responses of corporate cash holdings: after a financial shock, firms draw down their cash reserves as they lose access to external finance, while uncertainty shocks drive up cash holdings for precautionary reasons. Although both financial and uncertainty shocks are contractionary, my results show that the former are inflationary while the latter generate deflation. I rationalize this pattern in a New-Keynesian model: after a financial shock, firms increase prices to raise current liquidity; after an uncertainty shock, firms cut prices in response to falling demand. These distinct channels have stark monetary policy implications: conditional on uncertainty shocks, the monetary authority can potentially stabilize output and inflation at the same time, while in the case of financial shocks, the central bank can stabilize inflation only at the cost of more unstable output fluctuations.
    Keywords: financial shocks; uncertainty shocks; SVAR; inflation; monetary policy
    JEL: E30 E31 E32 E44
    Date: 2021–08–02
  28. By: Nicola Amendola (Università di Roma Tor Vergata, Italy); Lorenzo Carbonari (Università di Roma Tor Vergata, Italy); Leo Ferraris (Università di Milano-Bicocca, Italy)
    Abstract: We examine a theoretical model of liquidity with three assets - money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing
    JEL: E40
    Date: 2021–07
  29. By: Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
    Abstract: We use consumer surveys conducted in April, July and November 2020 to study how the COVID-19 pandemic affected the demand for cash and the use of various methods of payment. Continuing from Chen et al. (2020, 2021), we use data from the Bank Note Distribution System (BNDS) to track how the amount of cash in circulation changed throughout 2020. The November 2020 survey included a three-day payment diary. We compare this diary with similar diaries from 2009, 2013 and 2017 to study long-term trends in cash use and payment methods.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Digital currencies and fintech; Econometric and statistical methods
    JEL: C12 E4 O54
    Date: 2021–07
  30. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    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
  31. By: Kollmann, Robert; Lubik, Thomas; Roeger, Werner
    Abstract: Slow growth, low interest rates and low inflation have characterized the macroeconomic environment in the Euro Area and other advanced economies since the global financial crisis of 2008-09. In this economic landscape there are growing concerns that advanced economies will face continued stagnation. This has not abated in the wake of the COVID-19 pandemic as the underlying trends and driving factors are still in force. This special issue of the Journal of Economic Dynamics and Control consists of 8 papers that offer novel empirical and theoretical perspectives on slow growth, low interest rates and inflation rates, and discuss resulting challenges for macroeconomic policy. All papers were presented at a virtual conference organized by the Journal of Economic Dynamics and Control, the European Commission and the Centre for Economic Policy Research (CEPR) on 5-6 November 2020.
    Keywords: Secular stagnation; Low interest rates; Low inflation; Monetary and Fiscal Policy
    JEL: E3 E4 E5 E6 F3
    Date: 2021–07–30
  32. By: Debora Silva Oliveira; Mauro Rodrigues
    Abstract: This paper calibrates multi-sector models of menu costs with intermediate inputs to the Brazilian economy. In particular, we use the model proposed by Nakamura and Steinsson (2010) to undestand the degree of monetary non-neutralitry induced by price rigidity. For comparison, we estimate a VAR model for the aggregate economy (Shapiro and Watson, 1988) and compute the share of real GDP fluctuations due to nominal shocks. Multi-sector models account for up to 12.6% of output fluctuations. This is consistent with our VAR estimations, where the nominal component is responsible for approximately 15% of the observed variation in aggregate output.
    Keywords: Price rigidity; monetary non-neutrality; Microdata
    JEL: E30 E50
    Date: 2021–08–05
  33. By: van Buggenum, Hugo (Tilburg University, School of Economics and Management)
    Date: 2021
  34. By: Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
    Abstract: Should monetary policy independence be maintained when the exchange rate is fixed under closed capital account conditions in a small open economy? We apply the Kalman filter at State Space model to test the Nepalese economy’s policy trilemma condition involving restricting capital flow, maintaining policy independence and fixing the exchange rate over the period 1989-2019. Accounting for two-thirds of Nepal’s total trade, Nepal is heavily trade-dependent to India in South Asia, which underwent economic liberalisation during the early 1990s. We modify the traditional Taylor-rule-based monetary policy reaction function to more closely represent Nepal’s economic characteristics by mixing backward-looking and forward-looking strategies and incorporating a fixed exchange rate in the monetary policy reaction function. The simulation results provide strong evidence of policy trilemma failure and inevitable policy trade-offs. In the monetary policy reaction function of both domestic and foreign conditions, the parameter value of domestic condition needs to be close to zero, to get the simulated interest rate close to observed. The loss of monetary policy independence raises a range of policy issues for the Nepalese economy: the rationale for fixing the exchange rate, and the efficacy of capital account closure which might deteriorate the effectiveness of monetary policy.
    Keywords: Monetary Policy Independence, Impossible Trinity, State Space Model, Calibration, Policy Simulation
    JEL: E47 E52 E58
    Date: 2021–07
  35. By: Emanuele Urbinati (Bank of Italy); Alessia Belsito (Bank of Italy); Daniele Cani (Bank of Italy); Angela Caporrini (Bank of Italy); Marco Capotosto (Bank of Italy); Simone Folino (Bank of Italy); Giuseppe Galano (Bank of Italy); Giancarlo Goretti (Bank of Italy); Gabriele Marcelli (Bank of Italy); Pietro Tiberi (Bank of Italy); Alessia Vita (Bank of Italy)
    Abstract: In the last decade, the advent of new technologies has dramatically changed the banking and financial ecosystem. Financial operators have transformed their services in the context of the Fintech phenomenon; households’ payment habits are rapidly changing as well, embracing the revolution brought by the digital innovations. In this context, a number of central banks are devoting significant resources to examining the feasibility of introducing a digital currency as a complement to physical money. After an introduction that illustrates the main characteristics defining a Central Bank Digital Currency (CBDC), the paper presents ongoing CBDC-related work around the globe, discusses how a digital currency could support a central bank in performing its functions, and analyses its key features. The paper then illustrates a possible digital euro solution based on the integration of an account-based platform with a DLT-based one. The integration of these two components would make it possible to reap the benefits of two complementary solutions, reciprocally balancing their advantages and disadvantages, as regards, for instance, privacy. Finally, the paper presents the findings of experiments on the digital euro carried out by experts of the euro-area National Central Banks and the ECB; according to the results of those experiments, the integration of an account-based platform with a DLT-based one may provide a sound basis on which to build a fully-fledged solution, capable of meeting both regulatory and retail users’ needs.
    Keywords: digital euro, payment systems, financial market infrastructure, blockchain
    JEL: E42
    Date: 2021–07
  36. By: Sui-Jade Ho (Bank Negara Malaysia); Oezer Karagedikli (South East Asian Central Banks Research and Training)
    Abstract: By conducting a high-frequency event study similar to Gürkaynak et al.(2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.
    JEL: J31 J64
    Date: 2021
  37. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
    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
  38. By: Javier Bianchi; Louphou Coulibaly
    Abstract: We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.
    Keywords: Monetary and macroprudential policies; Liquidity traps; International spillovers; Capital flows
    JEL: E21 E52 F32 E62 E44 E43 E23
    Date: 2021–07–27

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