nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒08‒16
forty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Effects of monetary policy communication in emerging market economies: Evidence from Malaysia By Sui-Jade Ho; Ozer Karagedikli
  2. Daily Monetary Policy Rules and the ECB's Medium-Term Orientation By Jens Klose
  3. The Mundellian trilemma and optimal monetary policy in a world of high capital mobility By Richard T. Froyen; Alfred V. Guender
  4. Fifty shades of QE: comparing findings of central bankers and academics By Jančoková, Martina; Pástor, Ľuboš; Fabo, Brian; Kempf, Elisabeth
  5. The financial market impact of ECB monetary policy press conferences - a text based approach By Parle, Conor
  6. Qualitative and quantitative Central Bank communications and professional forecasts: Evidence from India By Ashima Goyal; Prashant Parab
  7. Cryptocurrencies and Gold - Similarities and Differences By Jens Klose
  8. Household Inflation Expectations and Consumer Spending: Evidence from Panel Data By Mary A. Burke; Ali K. Ozdagli
  9. Dash for dollars By Cesa-Bianchi, Ambrogio; Eguren-Martin, Fernando
  10. The monetary policy strategy of the European Central Bank: Review and recommendations By Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
  11. Reserves Were Not So Ample After All By Adam Copeland; Darrell Duffie; Yilin Yang
  12. Monetary autonomy of CESEE countries and nominal convergence in EMU: a cointegration analysis with structural breaks By Léonore Raguideau-Hannotin
  13. Greening Monetary Policy: Evidence from the People's Bank of China By Macaire Camille,; Naef Alain.
  14. Risk sharing in the EMU: a time-varying perspective By Foresti, Pasquale; Napolitano, Oreste
  15. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok Sørensen, Christoffer; Rottner, Matthias
  16. The case for a positive euro area inflation target: evidence from France, Germany and Italy By Adam, Klaus; Gautier, Erwan; Santoro, Sergio; Weber, Henning
  17. The Inflation Experience of Low Income Households By Jude Darmanin
  18. ECB communication as a stabilization and coordination device: evidence from ex-ante inflation uncertainty By Fernandes, Cecilia Melo
  19. Consumers' updating, policy shocks and public debt: An empirical assessment of state dependencies By Martin Geiger; Marios Zachariadis
  20. Expectations, Unemployment and Inflation: an Empirical Investigation By Galstyan, Vahagn
  21. Are households indifferent to monetary policy announcements? By Fiorella De Fiore; Marco Jacopo Lombardi; Johannes Schuffels
  22. The changing link between labor cost and price inflation in the United States By Bobeica, Elena; Ciccarelli, Matteo; Vansteenkiste, Isabel
  23. A unified framework for CBDC design: remuneration, collateral haircuts and quantity constraints By Assenmacher, Katrin; Berentsen, Aleksander; Brand, Claus; Lamersdorf, Nora
  24. Present Bias Amplifies the Household Balance-Sheet Channels of Macroeconomic Policy By David Laibson; Peter Maxted; Benjamin Moll
  25. Consistent Evidence on Duration Dependence of Price Changes By Fernando E. Alvarez; Katarína Borovičková; Robert Shimer
  26. Bank and non-bank financial institutions’ crossborder linkages: New evidence from international banking data By Emter, Lorenz; Killeen, Neill; McQuade, Peter
  27. Use of the Federal Reserve's repo operations and changes in dealer balance sheets By Mark A. Carlson; Zack Saravay; Mary Tian
  28. Economic Support during the COVID Crisis. Quantitative Easing and Lending Support Schemes in the UK By Mahmoud Fatouh; Simone Giansante; Steven Ongena
  29. Imperfect pass-through to deposit rates and monetary policy transmission By Polo, Alberto
  30. “Unusual, Unstable, Complicated, Unreliable and Temporary” Reinterpreting the Ebb and Flow of Globalization By Michael D. Bordo; Catherine R. Schenk
  31. E-money, Financial Inclusion and Mobile Money Tax in Sub-Saharan African Mobile Networks By Tarna Silue
  32. Monetary policy, neutrality and the environment By Faria, Joao Ricardo; McAdam, Peter; Viscolani, Bruno
  33. Is Price Level Targeting a Robust Monetary Rule? By Szabolcs Deak; Paul Levine; Afrasiab Mirza; Joseph Pearlman
  34. US Spillovers of US Monetary Policy: Information effects & Financial Flows By Santiago Camara
  35. Financial Dollarization in Emerging Markets: Efficient Risk Sharing or Prescription for Disaster? By Lawrence Christiano; Hüsnü Dalgic; Armen Nurbekyan
  36. Optimal Monetary Policy and Incomplete Information: Does the Real Exchange Matter? By Rodrigo Caputo; Felipe Leal
  37. Stuck at Zero: Price Rigidity in a Runaway Inflation By Daniel Levy; Avichai Snir; Haipeng (Allan) Chen
  38. The relation between interest rate and profit rate: the role of bank profitability in an endogenous money framework By Zolea, Riccardo
  39. Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment By Dikau, Simon; Volz, Ulrich
  40. Reserve Accumulation, Growth and Financial Crises By Gianluca Benigno; Luca Fornaro; Michael Wolf
  41. Heterogeneous Loans and the Effect of Monetary Interventions By Gianluca Cafiso; Giulia Rivolta
  42. Exchange rate pass-through, monetary policy, and real exchange rates - Iceland and the 2008 crisis By Sebastian Edwards; Luis Cabezas
  43. Ripple effects of monetary policy By Frederic Boissay; Emilia Garcia-Appendini; Steven Ongena
  44. Carbon Taxation and Inflation: Evidence from the European and Canadian Experience By Maximilian Konradt; Beatrice Weder di Mauro

  1. By: Sui-Jade Ho; Ozer Karagedikli
    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: 2021–07
  2. By: Jens Klose (THM Business School Giessen)
    Abstract: This article develops the first granular database on daily real-time inflation rates and output. Four different European forecast sources and three computation methods are applied to calculate those daily data. These are used in two types of monetary policy rules, for three different interest rates as the dependent variable. The results indicate that the main source of differences in the forecast horizons and response coeffcients is not the data sources or the computation method but, rather, the monetary policy rule applied and the interest rate used. That is, the results differ if unconventional monetary policies are considered. Moreover, the results tend to be time-varying; that is, sudden shifts in the optimal forecast horizon can be identified, leading to substantially altered policy rules.
    Keywords: Monetary policy rules, ECB, medium-term orientation
    JEL: E52 E58
    Date: 2021
  3. By: Richard T. Froyen; Alfred V. Guender
    Abstract: This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central bank to chart an independent course but does not insulate the domestic economy from foreign monetary or financial shocks. The gains from a flexible exchange rate may be considerable and vary in accordance with the mandate of the central bank. The Mundellian Trilemma highlights the acute shortage of policy instruments. We show that macroprudential policy in the form of an interest equalization tax, enhances the ability of an optimizing central bank to effectively stabilize domestic output and inflation in the presence of policy changes abroad and potentially destabilizing capital flows.
    Keywords: Mundellian Trilemma, policy independence, capital mobility, instrument shortage, capital controls
    JEL: E3 E5 F3
    Date: 2021–07
  4. By: Jančoková, Martina; Pástor, Ľuboš; Fabo, Brian; Kempf, Elisabeth
    Abstract: We compare the findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers find QE to be more effective than academic papers do. Central bank papers report larger effects of QE on output and inflation. They also report QE effects on output that are more significant, both statistically and economically, and they use more positive language in the abstract. Central bank researchers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production. JEL Classification: A11, E52, E58, G28
    Keywords: career concerns, central bank, economic research, QE, quantitative easing
    Date: 2021–08
  5. By: Parle, Conor (Central Bank of Ireland)
    Abstract: Using methods from natural language processing I create two measures of the monetary policy tilt of the ECB entitled the “Hawk-Dove Indices”, that outline the beliefs of the ECB on the current state of the economy and the outlook for growth and inflation. These measures closely track interest rate expectations over the tightening and loosening cycle, and can provide a useful measure of monetary policy tilt at zero lower bound episodes and contains information about the state of the economy. I exploit the time lag between decision announcements and the ECB’s monetary policy press conference to assess the immediate financial market impact of changes in communication within the press conference, free from the effects of the shock from the monetary policy decision. Consistent with the literature on the information channel of monetary policy, I find a non-negligible positive (negative) effect on stock prices of a more hawkish (dovish) tone in the press conference, indicating that the ECB reveals “private information” during these press conferences, and that market participants internalise this as good (bad) news regarding the future state of the economy, rather than internalising a future potential increase (decrease) in interest rates. This effect is stronger prior to the introduction of formal forward guidance, suggesting that since then ECB communication has been less surprising to markets in recent times.
    Keywords: Monetary policy, communication, machine learning, natural language processing, event study, information effects
    JEL: E52 E58 C55
    Date: 2021–05
  6. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: We analyze the influence of qualitative and quantitative communications of the Reserve Bank of India on inflation expectations of professional forecasters, and draw out implications for the impact of policy variables on expectations. Estimating Carroll-type epidemiological models of expectation formation, we find large speed of adjustment of professional forecasters' expectations. Analysis of the determinants of inflation forecasts, inflation surprises and forecaster disagreement reveals significant influence of quantitative RBI communications in the form of inflation projections. This effect is prominent for shorter horizon forecasts and after the adoption of flexible inflation targeting regime. Macroeconomic fundamentals like lagged inflation and Repo rate too play a significant role in influencing inflation forecasts. Choice of words in the RBI monetary policy statements has more impact since October 2016, after monetary policy committee became the decision-making body.
    Keywords: Inflation expectations, Survey of professional forecasters, Central bank
    JEL: E31 E52 E58
    Date: 2021–04
  7. By: Jens Klose (THM Business School Giessen)
    Abstract: This article investigates similarities and differences between gold and four cryptocurrencies (Bitcoin, Ethereum, Bitcoin Cash and Litecoin). To do so, we estimate a system-GARCH-in-mean with respect to four determinants for the period starting 7/18/2014 at earliest until 7/12/2021. We find that, first, liquidity premia are less important. Second, volatility premia exist in either gold and cryptocurrencies. Third, the response of cryptocurrencies to exchange rate changes is more pronounced than for gold at least if developing countries are included. Fourth, gold exhibits a safe haven status, while cryptocurrencies do not. So those cannot be seen as a store of value but rather as speculative assets.
    Keywords: Cryptocurrencies, Gold, System-GARCH-in-mean
    JEL: E42 G15 C58
    Date: 2021
  8. By: Mary A. Burke; Ali K. Ozdagli
    Abstract: Recent research offers mixed results concerning the relationship between inflation expectations and consumption, using qualitative measures of readiness to spend. We revisit this question using survey panel data of actual spending from the U.S. between 2009 and 2012 that also allows us to control for household heterogeneity. We find that durables spending increases with expected inflation only for selected types of households while nondurables spending does not respond to expected inflation. Moreover, spending decreases with expected unemployment. These results imply a limited stimulating effect of inflation expectations on aggregate consumption, which could be reversed if inflation and unemployment expectations move together.
    Keywords: Inflation expectations; survey data; durable and nondurable goods consumption
    JEL: D12 E52 E58
    Date: 2021–08–03
  9. By: Cesa-Bianchi, Ambrogio (Bank of England); Eguren-Martin, Fernando (Bank of England)
    Abstract: Within-firm variation of corporate bond spreads around the Covid-19 outbreak shows that US dollar-denominated bonds experienced larger increases in spreads relative to non-dollar bonds, especially at short maturities. Differently, in the non-dollar sample it was the spreads of longer maturity bonds that widened more markedly. Price pressures arising from a liquidity-driven dash for cash alone cannot rationalize these findings. Instead, the patterns we uncover suggest a ‘dash for dollars’, in which investors sold their dollar-denominated assets first, with a consequent impact on prices. We link these dynamics to the dominant role of the US dollar in the international financial system.
    Keywords: Heterogeneity; credit spreads; liquidity; dash-for-cash; US dollar; Covid-19; event-study; identification
    JEL: E44 E58 G01 G12 G15 G18
    Date: 2021–07–23
  10. By: Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
    Abstract: The European Central Bank (ECB) is currently conducting a review of its monetary policy strategy. The last formal review took place in 2003. Now the focus is on the extent to which this strategy has contributed in recent years to fulfill the mandate set out in the Treaties of the European Union and whether certain elements need to be adjusted. Against this background, the Kronberger Kreis, the academic advisory board of the Stiftung Marktwirtschaft (Market Economy Foundation), examines whether the ECB's monetary policy strategy still holds promise for success, whether its mandate should be reinterpreted and how the use of specific instruments should be assessed. In its analysis, the Kronberger Kreis draws on the experience of the financial crisis, the euro debt crisis and the coronavirus crisis and argues that greater attention should be paid to the side effects and proportionality of monetary policy measures. The central banks of the Eurosystem are now the largest creditors of the member states. Fiscal dominance of monetary policy should be avoided. The ECB's hierarchical mandate prioritizing price stability should not be called into question. The envisaged numerical target for consumer price inflation of below, but close to, two percent remains reasonable. However, the ECB should also consider other measures of inflation in its decisions and their communication. In addition, the ECB should rely more strongly on quantitative benchmarks (interest rate rules, money supply growth). The transparency of monetary policy could be significantly increased, for example, by publishing surveys and forecasts of the ECB's Governing Council. In principle, all measures must take into account the need to strengthen the independence of the ECB and the stability of the monetary union.
    Date: 2021
  11. 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.
    JEL: G12 G2
    Date: 2021–07
  12. By: Léonore Raguideau-Hannotin (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, UPN - Université Paris Nanterre)
    Abstract: This paper investigates the monetary autonomy of Central Eastern and South Eastern European countries with the Euro area. These countries are European Union Member States that have not adopted yet the Euro single currency. Despite high degree of convergence as measured by Maastricht criteria, four of them do no plan to enter the Euro area soon. We therefore assess monetary autonomy of these countries over the long run through the use of a multivariate cointegration methodology with structural breaks (Johansen et al., 2000). This methodology allows us to capture the multidimensional aspects of monetary autonomy in the context of nominal convergence in the Economic and Monetary Union, by including both domestic and Euro area variables into the system (policy rates, inflation rates, exchange rate). It also enables us to exploit all information contained in the macroeconomic series of these countries, for which broken economic history translates into non-stationary time series with breaks. Our empirical results suggest that modelling structural breaks changes the number and/or nature of cointegrating relations between our variables compared to the standard error correction model without breaks. With this modelling, we fi nd monetary policy spillover from the Euro area to Bulgaria, the Czech Republic, Hungary and Romania. The inclusion of Euro area inflation to our baseline model enriches the cointegrating relations for the Czech Republic and Bulgaria. Poland is found to be the most monetary-independent country of our study across the various models estimated. On the other hand, Romania's monetary interdependence with Euro area is better modelled without taking into account any structural break.
    Abstract: La motivation de ce papier est de comprendre les interdépendances existant entre les politiques monétaires conventionnelles menées par les pays CESEE membres de l'Union Européenne et par la zone Euro. Elles sont théoriquement renforcées par la convergence nominale à l'œuvre dans ces pays (et telle que mesurée par certains critères de Maastricht) et les trilemme et dilemme de politique monétaire. Pour autant, les pays CESEE en régime de change flottant ne sont pas candidats à l'adhésion au Mécanisme de Change Européen II, dernier stade du processus d'adhésion à l'Euro. La question de recherche posée se rapporte ainsi au degré d'autonomie des politiques monétaires domestiques par rapport à la zone Euro. La principale contribution de ce papier est de proposer une analyse de cointégration multivariée par pays des variables de politique monétaire domestique (augmentées des variables monétaires de la zone Euro et du taux de change), robuste aux ruptures structurelles caractéristiques des séries macroéconomiques de ces économie en transition. Nos résultats confirment la pertinence de cette modélisation à ruptures pour la Bulgarie, la Hongrie et la République Tchèque. Le degré de dépendance monétaire est lié aux régimes de change, sans que cela soit vérifié pour la Croatie. La Pologne est le pays le plus autonome monétairement sur longue période et l'interdépendance entre la Roumanie et la zone Euro est mieux modélisée sans prendre en compte de rupture structurelle.
    Keywords: CESEE countries,Economic and Monetary Union,European Union,Nominal convergence,Monetary autonomy,Structural breaks,Cointegration,EMU,EU
    Date: 2021–02–21
  13. By: Macaire Camille,; Naef Alain.
    Abstract: In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. The PBoC also gave green financial bonds a “first-among-equals” status. We measure the impact of the policy on the yield spread between green and non-green bonds. We show that pre-reform trends are minor, meaning that both green and non-green bonds yields evolved similarily at the time of the reform. Using a difference-in-differences approach, we show that the policy increased the spread by 46 basis points. Our approach differs from the literature in that we match bonds under review with non-green bonds with similar characteristics and issued by the same firm, which improves the relevance of firm fixed-effects. We also specifically investigate the impact on green bonds. The granularity of the data (daily) also allows us to conduct a dynamic analysis by dividing the sample into weekly, monthly and quarterly observations. Our results also show that the impact of the reform starts to materialize after three weeks, has a maximum effect after three months, and has a persistent effect over six months.
    Keywords: People’s Bank of China, Central Bank Collateral Framework, Green Bonds, Bond Yields, Greenium.
    JEL: E52 E58 Q51 Q54 G12 G18
    Date: 2021
  14. By: Foresti, Pasquale; Napolitano, Oreste
    Abstract: The development of effective risk sharing mechanisms is one of the main passages for the success and longevity of a monetary union. In this paper, we study risk sharing, measured as income and consumption smoothing, in the EMU. As we employ time-varying estimations, we are able to retrieve time patterns of risk sharing for each member country and to compare them with the degree of economic asymmetry within the EMU. Other than documenting the need for stronger risk sharing mechanisms in the EMU, our results also suggest that much more attention should be dedicated to fostering homogeneity in risk sharing across member countries. We document the existence of increasing heterogeneity in the risk sharing capacity between member countries that can potentially exacerbate and amplify the impact of asymmetric shocks and further destabilize the EMU.
    Keywords: consumption smoothing; economic asymmetry; EMU; income smoothing; risk sharing
    JEL: J1 F3 G3
    Date: 2021–07–14
  15. By: Darracq Pariès, Matthieu; Kok Sørensen, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening in a low interest rate environment have unintended recessionary effects? Using a non-linear macroeconomic model fitted to the euro area economy, we show that the effectiveness of monetary policy can decline in negative territory until it reaches a turning point, where monetary policy becomes contractionary. The framework demonstrates that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector. The possibility of the reversal interest rate gives rise to a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, substantially mitigates the probability of encountering the reversal rate and increases the effectiveness of negative interest rate policies. This new motive emphasizes the strategic complementarities between monetary policy and macroprudential policy.
    Keywords: Reversal Interest Rate,Negative Interest Rates,MacroprudentialPolicy,Monetary Policy,ZLB
    JEL: E32 E44 E52 E58 G21
    Date: 2021
  16. By: Adam, Klaus; Gautier, Erwan; Santoro, Sergio; Weber, Henning
    Abstract: Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal inflation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms. JEL Classification: E31, E52
    Keywords: micro price trends, optimal inflation target, welfare
    Date: 2021–07
  17. By: Jude Darmanin
    Abstract: Consumer price inflation in Malta is officially measured through the Retail Price Index (RPI). The RPI calculates the price change of a basket of goods and services, which is derived from average expenditure shares obtained through the Household Budgetary Survey (HBS). In practice, the representation of an “average†household is skewed towards high income households, whose expenditure makes up a relatively larger share of total consumer spending. As a result, the RPI might not always accurately measure the inflation rate faced by low income households, whose basket differs from the overall average for all households. This study uses HBS data to calculate an estimated inflation rate for household in the bottom income quartile. The results suggest that between 2010 and 2020 these households experienced some periods of higher inflation than suggested by the official rate. This was particularly so during periods of rising food and energy prices in the first half of the sample period. A similar result was found for retired household, who form a large subset of low income household. Despite this, an analysis of the minimum wage and the minimum pension suggests that benefits have maintained their purchasing power since 2010, even when accounting for higher inflation. In part, this was due to ad hoc government allowances on top of automatic annual increments.
    JEL: E30 E31 I31 I38
  18. By: Fernandes, Cecilia Melo
    Abstract: This paper investigates the impact of ECB communication of its assessment of the economic outlook on ex-ante inflation uncertainty and sheds light on how central bank information shocks operate. The paper finds that ECB communication of new outlook information not only reduces professional forecasters’ disagreement (i.e., the cross-sectional dispersion of their average point forecasts of inflation) but also makes forecasters less uncertain about their own beliefs, thus reducing ex-ante average individual uncertainty. By combining and exploiting these types of ex-ante inflation uncertainty, results suggest that central bank information acts as a “coordination device” able to influence opinions and actions. Most importantly, it generates a “stabilizer effect” by substantially decreasing the dispersion among the inflation point forecasts, which converge towards their unconditional aggregate mean. The results of this paper not only help to explain the impact of new central bank information, but they are also useful for policymakers to define a communication strategy that attenuates ex-ante inflation uncertainty in the most effective way. JEL Classification: D83, E52, E58, E65, G14
    Keywords: central bank communication, euro area, ex-ante inflation uncertainty, inflation expectations
    Date: 2021–08
  19. By: Martin Geiger (Liechtenstein-Institut); Marios Zachariadis (University of Cyprus)
    Abstract: We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending, consumption intentions rise in the low-debt state and fall in the highdebt state. Overall, such a shock has adverse e ects on expectations in high-debt states. Similarly, contractionary monetary policy shocks induce pessimistic expectations in the highdebt state but not in the low-debt state. The estimated responses suggest that higher public debt fuels considerations regarding its repayment, giving rise to state dependencies in the updating of expectations in response to both fiscal and monetary policy shocks.
    Keywords: expectations, rational inattention, Ricardian, fiscal theory of the price level
    JEL: E31 E52 E62 E63
  20. By: Galstyan, Vahagn (Central Bank of Ireland)
    Abstract: This paper analyses the empirical relation between inflation and unemployment over the past 25 years by using a panel state-space model. After controlling for the global factor, I find that the domestic rate of unemployment explains 11 percent in the variation of headline inflation, suggesting a significant power that domestic slack has in influencing medium-term core inflation. The global factor, in turn, is well explained by global oil and food prices as well as global trade integration. The contribution of the global slack in explaining the global component of inflation is negligible. Additionally, using a set of threshold regressions, I identify break points that split inflation dynamics into various regimes. In particular, I find a higher sensitivity of inflation to unemployment in high-inflation and/or low unemployment regimes. This finding is consistent with less frequent price adjustments of firms in low-inflation and high-unemployment environments.
    Keywords: Phillips Curve, State-Space Model, Non-Linearities
    JEL: E31 E32 E50
    Date: 2021–07
  21. By: Fiorella De Fiore; Marco Jacopo Lombardi; Johannes Schuffels
    Abstract: We study the impact of the Fed's monetary policy announcements on households' expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee (FOMC) meetings, over the period 2013-2019. We find that Fed decisions affect expectations of interest rates on savings accounts, particularly for respondents with high financial and numerical literacy. The impact of monetary policy announcements on inflation expectations is muted, even in response to some of the most relevant meetings of the FOMC that took place during that period. Expectations of personal financial conditions are barely affected. Our results stand in contrast to experimental studies that find strong effects of monetary policy and other macroeconomic news on expectations of households receiving a specific treatment, suggesting that the news naturally reaching the general population may provide weaker signals.
    Keywords: households, monetary policy, central bank communication, inflation expectations, survey data
    Date: 2021–08
  22. By: Bobeica, Elena; Ciccarelli, Matteo; Vansteenkiste, Isabel
    Abstract: The link between US labor cost and price inflation has weakened notably over the past three decades. In this paper we document this decline and analyse potential contributing factors. We consider four important trends that have shaped the US economy of late: (i) improved anchoring of inflation expectations; (ii) the changing constellation of shocks hitting the economy; (iii) increased trade integration and (iv) rising firm market power. We find that the improved anchoring of inflation expectations has played a particularly relevant role but also that the latter two trends offer promising avenues to understand the decline in pass-through from labor cost to price inflation. Our results also bring supportive evidence to the view taken by the FED in the context of its monetary policy strategy review that a robust job market can be sustained without causing an outbreak of inflation. JEL Classification: C32, E24, E31
    Keywords: inflation, labor costs, pass-through, structural VAR, United States
    Date: 2021–08
  23. By: Assenmacher, Katrin; Berentsen, Aleksander; Brand, Claus; Lamersdorf, Nora
    Abstract: We study the macroeconomic effects of central bank digital currency (CBDC) in a dynamic general equilibrium model. Timing and information frictions create a need for inside (bank deposits) and outside money (CBDC) to finance production. To steer the quantity of CBDC, the central bank can set the lending and deposit rates for CBDC as well as collateral and quantity requirements. Less restrictive provision of CBDC reduces bank deposits. A positive interest spread on CBDC or stricter collateral or quantity constraints reduce welfare but can contain bank disintermediation, especially if the elasticity of substitution between bank deposits and CBDC is small. JEL Classification: E58, E41, E42, E51, E52
    Keywords: central bank digital currency, monetary policy, search and matching
    Date: 2021–07
  24. By: David Laibson; Peter Maxted; Benjamin Moll
    Abstract: We study the effects of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households' marginal propensity to consume (MPC), present bias increases the impact of fiscal policy. Present bias also amplifies the effect of monetary policy but, at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity-injections to high-MPC households. But present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.
    JEL: D14 D15 E03 E2 E21 E5 E62 E71 G4
    Date: 2021–07
  25. By: Fernando E. Alvarez; Katarína Borovičková; Robert Shimer
    Abstract: We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones.
    JEL: C14 C41 E31 E50
    Date: 2021–07
  26. By: Emter, Lorenz (Central Bank of Ireland); Killeen, Neill (Central Bank of Ireland); McQuade, Peter (Central Bank of Ireland)
    Abstract: This Note examines the factors associated with global banks’ cross-border claims on non-bank financial institutions. In line with the substantial growth of non-bank financial intermediation internationally, banks’ cross-border claims on non-bank financial institutions have grown rapidly in recent years. As a global hub for non-bank financial intermediation, Ireland hosts a large share of the non-bank financial institutions captured within these international banking data. Our results suggest that tightening (loosening) monetary policy can decrease (increase) cross-border bank claims on non-bank financial institutions at a global level. Moreover, we find that the tightening of borrower-based macroprudential policies is associated with an increase in cross-border bank flows to non-bank financial institutions. Our findings illustrate the potential for cross-border spillovers from changes to monetary and macroprudential policies and the importance of closely monitoring cross-border linkages between banks and non-bank financial institutions. Our findings also highlight the need for developing and operationalising the macroprudential policy framework for non-bank financial intermediation given the potential for spillover effects across the financial system.
    Date: 2021–06
  27. By: Mark A. Carlson; Zack Saravay; Mary Tian
    Abstract: Before the 2008 financial crisis, the Federal Reserve (Fed) regularly conducted repurchase agreements (repos) in a fairly modest size with primary dealers to adjust the supply of reserves in the banking system and to keep the federal funds rate at the target set by the FOMC. During the economic downturn that followed the financial crisis, the Fed engaged in large scale asset purchases in order to provide additional monetary accommodation, and those purchases significantly increased the supply of reserves and eliminated the need for the Fed to engage in repo operations to increase reserves in the system.
    Date: 2021–08–06
  28. By: Mahmoud Fatouh (Bank of England); Simone Giansante (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We investigate how the interaction of the Brexit and COVID waves of the Bank of England’s quantitative easing with the leverage ratio capital requirements or government COVID lending support schemes affected bank business lending. We find that the former QE programme was particularly successful in increasing lending to nonfinancial businesses, except for QE-banks subject to the UK leverage ratio, suggesting that the latter ratio incentivized QE-banks to lend to business anyway. The government schemes helped expand lending especially to SMEs post QE COVID, indicating that complementing QE with other credit easing programmes can improve its impact on lending to the real economy. During COVID-stress, changes to the UK leverage ratio supported better market-making in securities markets, and additional QE liquidity boosted stronger repo market intermediation.
    Keywords: Monetary policy, quantitative easing, bank lending, COVID-19
    JEL: E51 G21
    Date: 2021–04
  29. By: Polo, Alberto (Bank of England)
    Abstract: I document three salient features of the transmission of monetary policy shocks: imperfect pass-through to deposit rates, impact on credit spreads, and substitution between deposits and other bank liabilities. I develop a monetary model consistent with these facts, where banks have market power on deposits, a duration-mismatched balance sheet, and a dividend-smoothing motive. Deposit demand has a dynamic component, as in the literature on customer markets. A financial friction makes non-deposit funding supply imperfectly elastic. The model indicates that imperfect pass-through to deposit rates is an important source of amplification of monetary policy shocks.
    Keywords: Monetary policy transmission; deposit rates; banks; market power
    JEL: E43 E52 G21
    Date: 2021–07–30
  30. By: Michael D. Bordo; Catherine R. Schenk
    Abstract: In 1919, John Maynard Keynes wrote his famous tract The Economic Consequences of the Peace. In that work, he anticipated the collapse of the first era of globalization that began in the mid-nineteenth century. He admonished the short-sighted assumption that these years of relative peace and prosperity for many was a permanent norm, interrupted only briefly by the Great War. The diplomatic failures, lapses in leadership, and promotion of narrow interests and vision outlined by Keynes underpinned his prediction of a backslash of economic nationalism, trade protectionism, and recession. The paper revisits the turning points in the evolution of the global economic system since 1919 by focusing primarily on the evolution of the international monetary system and policy cooperation/coordination. We identify three disruptions and examine how each prompted a change in the underlying ideology about how the international monetary system should organize: World War I, Bretton Woods, 1970s Great Inflation and Managed Floating. Each turning point was characterized by different forms and institutions of cooperation, how rules (either explicit or implicit) were designed and implemented, and the crucial importance of the historical context.
    JEL: F02 F33 N10
    Date: 2021–07
  31. By: Tarna Silue (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: E-money and financial inclusion are both development challenges for developing countries, the former contributing to improving tax mobilization and the latter to achieving particular sustainable development objectives. However, one of the central financial inclusion and e-money services providers is mobile network operators using mobile money. The latter is subject to numerous taxes that can affect their operations. The paper studies the incidence of the new mobile money excise duty in the mobile networks sector on the adoption of electronic money and the advancement of financial inclusion through digital services in sub-Saharan countries. It appears that the introduction of the tax leads to an increase in user fees, which has a positive impact on demand for cash, and it is only in the presence of the latter that MM reduces the demand for cash for studied countries. In addition, the study assumes that tax administrations in these countries would raise more revenue without this excise because the tax is not conducive to the full adoption of e-money.
    Keywords: Financial inclusion,Mobile money,Tax incidence
    Date: 2021–07
  32. By: Faria, Joao Ricardo; McAdam, Peter; Viscolani, Bruno
    Abstract: We study the interaction between monetary and fiscal policies in a Ramsey-Sidrauski model augmented with environmental capital. Equilibrium solutions are studied through the “Green Golden Rule”. Despite the non-separability of money in utility and intertemporally non-separable preferences, money is environmentally neutral. Policy impacts the environment via the marginal rate of transformation rather than the marginal rate of substitution between consumption and environment. Fiscal policies, lump sum and distortionary, under a balanced budget, are also environmentally non-neutral. Only under a non-balanced budget, when deficits are monetized, is money environmentally non-neutral. In alternative approaches (Cash-in-Advance, Transactions Costs), money is environmentally non-neutral. JEL Classification: E52, E62, H23
    Keywords: cash in advance, Chichilnisky et al. conjecture, environmental capital, Friedman rule, green golden rule, Ramsey-Sidrauski, transactions costs
    Date: 2021–07
  33. By: Szabolcs Deak (Department of Economics, University of Exeter); Paul Levine (School of Economics, University of Surrey); Afrasiab Mirza (Department of Economics, University of Birmingham); Joseph Pearlman (Department of Economics, City University London)
    Abstract: We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions performs nearly as well as models with financial frictions on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions.
    Keywords: Bayesian estimation, DSGE models, financial frictions, forecasting, prediction pools, optimal simple rules
    JEL: D18 D91 Z1 C9
    Date: 2021–08–10
  34. By: Santiago Camara
    Abstract: This paper presents evidence of an informational effect in changes of the federal funds rate around FOMC announcements by exploiting exchange rate variations for a panel of emerging economies. For several FOMC announcements dates, emerging market economies' exchange rate strengthened relative to the US dollar, in contrast to what the standard theory predicts. These results are in line with the information effect, which denote the Federal Reserve's disclosure of information about the state of the economy. Using Jarocinski \& Karadi 2020's identification scheme relying on sign restrictions and high-frequency surprises of multiple financial instruments, I show how different US monetary policy shocks imply different spillovers on emerging markets financial flows and macroeconomic performance. I emphasize the contrast in dynamics of financial flows and equity indexes and how different exchange rate regimes shape aggregate fluctuations. Using a structural DSGE model and IRFs matching techniques I argue that ignoring information shocks bias the inference over key frictions for small open economy models.
    Date: 2021–08
  35. By: Lawrence Christiano; Hüsnü Dalgic; Armen Nurbekyan
    Abstract: This paper pushes back against two views about the effects of dollarization. First, there is a view that the dollar is a device by which rich countries provide business cycle insurance to emerging market (EME) countries. We find that the dollar is important for risk sharing, but the evidence suggests that it is primarily a device to shift business cycle risk across different people within individual EMEs and within rich countries rather than across countries. Second, there is a widespread view that dollarization raises the risk of systemic banking and other crises. Although we identify sources of fragility in some aspects of dollarization, the common view that financial dollarization is a source of fragility is over-stated. Our insurance view about financial dollarization and the lack of risks to financial stability emerges from a study of a large cross-country dataset, as well as case studies for Peru and Armenia. We develop a simple model which formalizes the insurance view, which is consistent with the key cross-country facts on interest rate differentials, deposit dollarization and exchange rate depreciations in recessions.
    JEL: F3 F4 G15
    Date: 2021–07
  36. By: Rodrigo Caputo; Felipe Leal
    Abstract: In a small economy, with complete markets and domestic price stickiness, a monetary policy rule that reacts to domestic inflation implements the efficient allocation, as long as it also reacts to the natural rate of interest. In this case, a policy response to the exchange rate or any other foreign variable is inefficient. We show that, when the central bank is unable to observe the natural rate of interest, a domestic inflation targeting rule that reacts also to the real exchange rate is optimal. This rule is able to fully stabilize domestic inflation and, at the same time, induces efficient movements in relative prices (terms of trade) through nominal devaluations. Indeterminacy can arise, but a stronger policy response to domestic inflation can prevent this from happening.
    Date: 2021–06
  37. By: Daniel Levy (Bar-Ilan University); Avichai Snir; Haipeng (Allan) Chen
    Abstract: We use micro level retail price data from convenience stores to study the link between 0-ending price points and price rigidity during a period of a runaway inflation, when the annual inflation rate was in the range of 60%–430%. Surprisingly, we find that 0-ending prices are less likely to adjust, and when they do adjust, the average adjustments are larger. These findings suggest that price adjustment barriers associated with round prices are strong enough to cause a systematic delay in price adjustments even in a period of a runaway inflation, when 85 percent of the prices change every month.
    Date: 2021–04
  38. By: Zolea, Riccardo
    Abstract: The relation between interest and profit rate is crucial, as it has a major impact on income distribution, and it is relevant for the interpretation of the functioning of the economic system. After reviewing the literature, I try to interpret this relation between rates using banking profitability as the keystone. The condition that the capital employed in the banking industry should receive a profit rate at least equal to the general profit rate, combined with a careful examination of the functioning of the banking sector, makes conceivable an endogenous determination of the interest rate. The bank interest rate on loans is the price of the "loan" commodity, given the production conditions of the banking sector, where the rate set by the central bank constitutes the price of an input of the banking industry. I also analyse the formation of the interest rate structure, taking as starting points the main refinancing rate set by the central bank and the normal profitability of bank capital, with the lending rate on bank loans being the upper margin and the deposit rate the lower margin of the interest rate corridor. The interest rates structure is thus determined by several elements, confirming Marx's idea of a heterogeneous determination of interest rates. Alternatively, it can be assumed that, as the banking industry is characterized by a high degree of monopoly, its profit rate is higher than the average for the rest of the economy. In Marxian terms this reflects contrast between financial capitalists and productive capitalists, where the high degree of monopoly of the banking sector becomes a weapon to capture a higher share of total profits.
    Keywords: Bank profitability, rate of profit, interest rate, Marx
    JEL: E43 G2
    Date: 2021
  39. By: Dikau, Simon; Volz, Ulrich
    Abstract: Chinese monetary and financial authorities have been among the pioneers in promoting green finance. This paper investigates the use of one specific monetary policy tool, namely window guidance, by the People’s Bank of China (PBC) and the China Banking Regulatory Commission (CBRC) to encourage financial institutions to expand credit to sustainable activities and curb lending to heavy-polluting industries. We investigate window guidance targets for the period 2001-2020 and find that ‘green window guidance’ was used by the CBRC from at least 2006 and by the PBC from 2007 to discourage lending to carbon-intensive and polluting industries and/or to increase support to sustainable activities. Both authorities stopped discouraging lending to carbon-intensive/polluting industries in 2014. Sustainable objectives were subsequently also removed from the PBC’s list of priority sectors at the start of 2019, ending the practice of green window guidance in China. Sustainability-enhancing window guidance targets were replaced and formalised through new ‘Guidelines for Establishing the Green Financial System’, reflecting efforts to move away from controls-based towards market-based policy instruments. Based on this analysis, the paper draws four lessons for the design of green finance policies for other countries that seek to enhance sustainable finance and mitigate climate change and related risks.
    Keywords: sustainable finance; central banking and financial supervision; China; Centre for Climate Change Economics and Policy; ES/P005241/1; ES/R009708/1; 71661137002
    JEL: G10 G20 G30 Q01 Q50
    Date: 2021–05–14
  40. By: Gianluca Benigno; Luca Fornaro; Michael Wolf
    Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: Fast growing emerging countries i) run current account surpluses, ii) accumulate international reserves and receive net private in flows. We study a two-sector, tradable and nontradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. The optimal reserve management en- tails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. The model is also consistent with the negative relationship between in flows of foreign aid and growth observed in low income countries.
    Keywords: foreign reserve accumulation, gross capital flows, growth, financial crises, allocation, puzzle, exchange rate undervaluation
    JEL: F31 F32 F41 F43
    Date: 2021–07
  41. By: Gianluca Cafiso; Giulia Rivolta
    Abstract: The amount of credit in the economy is a heterogeneous aggregate that can be analyzed across different dimensions. Considering such dimensions provides insights into the effect of monetary policy interventions because the credit components are observed to respond differently. Several possible motivations are behind such a differential response and those relate to either demand and supply factors intrinsic to the transmission mechanism of monetary policy. Our objective is to unveil such a differential response across a couple of relevant dimensions and discuss the possible causes behind what observed. The analysis refers to the US and is based on a vector auto-regression estimated using Bayesian techniques and identified with a combination of sign and zero-restrictions.
    Keywords: bank loans, non-bank loans, monetary interventions, households, corporate business, non-corporate business, Bayesian VAR
    JEL: E44 E51 G20 G21 C11
    Date: 2021
  42. By: Sebastian Edwards; Luis Cabezas
    Abstract: We use detailed data for Iceland to examine two often-neglected aspects of the “exchange rate pass-through” problem. First, we investigate whether the pass-through coefficient varies with the degree of “international tradability” of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003-2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its “flexible inflation targeting,” and that the coefficients are significantly higher for tradable than for nontradable goods.
    JEL: E31 E52 E58 F3 F41
    Date: 2020–02
  43. By: Frederic Boissay; Emilia Garcia-Appendini; Steven Ongena
    Abstract: Is conventional monetary policy transmitted through the demand for and supply of intermediate goods in an economy? Analyzing unique US data on corporate linkages, we document that downstream and upstream corporate financial health are instrumental for the transmission of monetary policy. Our estimates suggest that contractionary changes in monetary conditions lead to reductions in both the demand and the supply of all financially constrained business partners, thereby creating bottlenecks, which induce the linked firms themselves to curtail their own activities ("ripple effects"). Overall, our estimates suggest that changes in monetary conditions may have a quantitatively larger impact on firms' operations through the changes in demand and supply induced by constrained business partners than through the firms' own financial conditions.
    Keywords: monetary policy transmission, supply chain, aggregate demand, cost channel
    Date: 2021–08
  44. By: Maximilian Konradt (IHEID, Graduate Institute of International and Development Studies, Geneva); Beatrice Weder di Mauro (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: What is the effect of climate policies on inflation and economic activity? Answering this question is critical for central banks trying to achieve price stability. This paper studies the experience from existing carbon taxes in Canada and Europe, introduced over the last 30 years. Based on two separate empirical approaches, we find that carbon taxes do not have to be inflationary and may even have deflationary effects. In particular, our evidence suggests that the increase in energy prices was more than offset by a fall in the prices of services and other non-tradables. Our results are robust for Europe and Canada, as well as a number of different country groupings. At least in case of British Columbia, a contraction in household incomes and expenditures, in particular among the richer households, could explain the deflationary effect.
    Keywords: Carbon taxes; carbon pricing; inflation; monetary policy; climate change
    JEL: E31 E50 Q54 Q43
    Date: 2021–08–12

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