nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒08‒30
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Whatever it takes to understand a central banker - Embedding their words using neural networks. By Martin Baumgaertner; Johannes Zahner
  2. Central Bank Digital Currency in Historical Perspective: Another Crossroad in Monetary History By Michael D. Bordo
  3. Mortgage pricing and monetary policy By Benetton, Matteo; Gavazza, Alessandro; Surico, Paolo
  4. The Joint Dynamics of Money and Credit Multipliers Since the Gold Standard Era By Luca Benati
  5. Money Market Integration in Spain in the Ninetheen Century: The Role of the 1875-1885 Decade By Emma M., Iglesias; J. Carles, Maixé-Altés
  6. The Treasury Market in Spring 2020 and the Response of the Federal Reserve By Annette Vissing-Jorgensen
  7. The Fed Explained By Raul Anibal Feliz
  8. Money and Foreign Exchange Markets Dynamics in Nigeria: A Multivariate GARCH Approach By Atoi, Ngozi Victor; Nwambeke, Chinedu G.
  9. The currency that came in from the cold - Capital controls and the information content of order flow By Francis Breedon; Thórarinn G. Pétursson; Paolo Vitale
  10. Is Money Essential? An Experimental Approach By Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
  11. Effect of Government Transfer on Money Supply: A Closer Look into the Interaction Between Monetary and Fiscal Policy By Nizam, Ahmed Mehedi
  12. Redistribution of wealth through cross border financial transactions: A closer look By Nizam, Ahmed Mehedi
  13. Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission By Leslie Sheng Shen
  14. Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking By Ye Li; Simon Mayer
  15. Consumption baskets of Indian households: Comparing estimates from the CPI, CES and CPHS. By Goyal, Ananya; Pandey, Radhika; Sane, Renuka
  16. Monetary Policy Shocks and Economic Growth in Morocco: A Factor-Augmented Vector Autoregression (FAVAR) Approach By Marouane Daoui; Bouchra Benyacoub
  17. Comparing minds and machines: implications for financial stability By Buckmann, Marcus; Haldane, Andy; Hüser, Anne-Caroline
  18. Cryptocurrencies: An empirical view from a Tax Perspective By Andreas Thiemann

  1. By: Martin Baumgaertner (THM Business School); Johannes Zahner (Philipps-Universitaet Marburg)
    Abstract: Dictionary approaches are at the forefront of current techniques for quantifying central bank communication. This paper proposes embeddings – a language model trained using machine learning techniques – to locate words and documents in a multidimensional vector space. To accomplish this, we gather a text corpus that is unparalleled in size and diversity in the central bank communication literature, as well as introduce a novel approach to text quantification from computational linguistics. Utilizing this novel text corpus of over 23,000 documents from over 130 central banks we are able to provide high quality text-representations –embeddings– for central banks. Finally, we demonstrate the applicability of embeddings in this paper by several examples in the fields of monetary policy surprises, financial uncertainty, and gender bias.
    Keywords: Word Embedding, Neural Network, Central Bank Communication, Natural Language Processing, Transfer Learning
    JEL: C45 C53 E52 Z13
    Date: 2021
  2. By: Michael D. Bordo
    Abstract: Digitalization of Money is a crossroad in monetary history. Advances in technology has led to the development of new forms of money: virtual (crypto) currencies like bitcoin; stable coins like libra/diem; and central bank digital currencies (CBDC) like the Bahamian sand dollar. These innovations in money and finance have resonance to earlier shifts in monetary history: 1) The shift in the eighteenth and nineteenth century from commodity money (gold and silver coins) to convertible fiduciary money and inconvertible fiat money; 2) the shift in the nineteenth and twentieth centuries from central bank notes to a central bank monopoly; 3) Then evolution since the seventeenth century of central banks and the tools of monetary policy. This paper analyzes the arguments for a CBDC through the lens of monetary history. The bottom line is that the history of transformations in monetary systems suggests that technical change in money is inevitably driven by the financial incentives of a market economy. Government has always had a key role in the provision of outside money, which is a public good. Government has also regulated inside money provided by the private sector. This held for fiduciary money and will likely hold for digital money. CBDC could make monetary policy more efficient, and it could transform the international monetary and payments systems.
    JEL: E42 E52 E58
    Date: 2021–08
  3. By: Benetton, Matteo (Haas School of Business, University of California); Gavazza, Alessandro (London School of Economics); Surico, Paolo (London Business School)
    Abstract: This paper provides novel evidence on lenders’ mortgage pricing and on how central bank operations affected it. Using the universe of mortgages originated in the UK, we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as UK’s Funding for Lending Scheme, lenders decreased interest rates and increased origination fees. To understand lenders’ pricing strategies and their effects on market equilibrium, we develop and estimate a structural discrete-continuous model of mortgage demand and lender competition in which borrowers may have different sensitivities to rates and fees. We use the estimated model to decompose the effects of central bank unconventional monetary policy on mortgage pricing and lending, finding that central bank operations increased borrower surplus and lender profits. Moreover, although origination fees allow lender to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.
    Keywords: origination fees; mortgage demand; heterogeneity; structural estimation; unconventional monetary policy
    JEL: E52 G21
    Date: 2021–08–13
  4. By: Luca Benati
    Abstract: Since the XIX century, technological progress has allowed commercial banks to create ever greater amounts of broad money and credit starting from a unit of monetary base. Crucially, however, at the very low frequencies the relative amounts of the two aggregates created out of a unit of base money have remained unchanged over time in each of the 42 countries I analyze. This finding questions the widespread notion that, since WWII, credit has become disconnected from broad money, and suggests that, except for their greater productivity at creating broad money and credit out of base money, today’s commercial banks are not fundamentally different from their XIX century’s counterparts. The implication is that only the ascent of shadow banks has introduced a disconnect between broad money and credit.
    Keywords: Money; credit; Lucas critique; financial crises.
    Date: 2021–08
  5. By: Emma M., Iglesias; J. Carles, Maixé-Altés
    Abstract: Are transaction costs and half-lives between two cities the same in both directions in traditional city-based monetary systems? Market conditions and political circumstances may not justify this assumption; and we provide evidence that it does not hold in the 1825-1885 period in Spain. Moreover, we show empirical evidence that market integration in Spain from 1875 to 1885 was a slow process of monetary unification with decreasing transaction costs, and a very inefficient convergence. Therefore, full integration did not happen in the period 1875-1885 and had to wait until mid-1880s, when the Spanish money-market was unified due to financial innovations.
    Keywords: Integration of monetary markets; Nineteenth century; Monetary and financial history; Market Convergence and Efficiency; Western Europe; Private Finance, Capital Markets
    JEL: E02 E42 F02 F15 F31 F36 L10 N13 N73
    Date: 2021–08–22
  6. By: Annette Vissing-Jorgensen
    Abstract: Treasury yields spiked during the initial phase of COVID. The 10-year yield increased by 64 bps from March 9 to 18, 2020, leading the Federal Reserve to purchase $1T of Treasuries in 2020Q1. Fed purchases were causal for reducing Treasury yields based on the timing of purchases (which increased on March 19), the timing of yield reversal and Fed purchases in the MBS market, and evidence against confounding factors. Treasury-QE worked more via purchases than announcements. The yield spike was driven by liquidity needs of mutual funds, foreign official agencies, and hedge funds that were unaffected by the March 15 Treasury-QE announcement.
    JEL: E5 G12
    Date: 2021–08
  7. By: Raul Anibal Feliz
    Abstract: The 11th edition of The Fed Explained: What the Central Bank Does (formerly The Federal Reserve System Purposes & Functions) details the structure, responsibilities, and work of the U.S. central banking system. The Federal Reserve System performs five functions to promote the effective operation of the U.S. economy and, more generally, to serve the public interest. It includes three key entities: the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.
    Date: 2021–08–11
  8. By: Atoi, Ngozi Victor; Nwambeke, Chinedu G.
    Abstract: This study examines money market and foreign exchange market dynamics in Nigeria by estimating the dynamic correlation and volatility spillovers between Nigeria Naira/US Dollar Bureau De Change (BDC) exchange rate and interbank call rate with data from January 2007 to August 2019. The study employs a dynamic conditional correlation form of GARCH model (DCC-GARCH) to access the nature of correlation, while an unrestricted bivariate BEKK-GARCH (1, 1) form of multivariate GARCH model is utilized to investigate shocks and volatility spillover of the rates. The estimated DCC-GARCH (1, 1) reveals that interest rate and exchange rate are dynamically linked negatively, suggesting that exchange rate (or interest rate) is inversely sensitive to interest rate (or exchange rate) in Nigeria. This result was substantiated by the estimated BEKK-GARCH(1, 1) model. Furthermore, the effects of news (shocks spillover) are bi-directional across the markets. However, volatility spillover is unidirectional, from exchange rate to interest rate, suggesting that, calming the volatility in foreign exchange market does guarantee moderation of volatility in the money market, whereas the reverse is not the case. The results underscore the growing influence of foreign exchange market in the financial space of the Nigerian economy. Thus, the study recommends that foreign exchange policies aimed at maintaining exchange rate stability should be sustained, having found exchange rate to be more effective in moderating interest rate volatility in Nigeria.
    Keywords: Exchange rate, interest rate, multivariate GARCH, volatility spillover
    JEL: C4 E52 F31 G10
    Date: 2021–08–16
  9. By: Francis Breedon; Thórarinn G. Pétursson; Paolo Vitale
    Abstract: We analyse how capital controls affect FX microstructure, using as a case study the introduction and subsequent removal of controls in Iceland. We use a VAR of private order flow, Central Bank order flow and EURISK that allows for contemporaneous feedback effects to analyse the impact and information content of trades and find that controls have profound effects. When controls were introduced, volume plummeted, the information content of trading activity declined and became less responsive to macro news. While there was no recovery of trading volume after controls were abolished, the information content and responsiveness of trading activity increased sharply.
    JEL: C32 F31 F32 G14 G15
    Date: 2021–06
  10. By: Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright
    Keywords: Money; mechanism design; experimental economics
    JEL: E4 E5
    Date: 2021–06–30
  11. By: Nizam, Ahmed Mehedi
    Abstract: Although government transfer is a well-known fiscal variable, it can significantly influence the overall supply of money in the economy. Beneficiaries of government transfer program will consume a portion of it while the rest is saved and these initial savings will then be amplified inside the economy through the multiplier effect. Apart from consumption and savings a portion of government transfer will return to government in the form of taxes. Here, in the first place, we intuitively calculate the contribution of government transfer on private consumption, households' savings, government tax revenue and money supply. In the next step we provide a micro-foundation for our intuitive reasoning using a simple endowment economy with finitely lived households. Finally, we empirically calculate our proposed multipliers using impulse response analysis under structural panel VAR framework. Response of money supply to changes in government transfer uncovers a channel through which monetary and fiscal policy may interact. Moreover, variance decomposition of money supply indicates that a significant portion of variance in money supply can be explained in terms of government transfer under structural panel VAR framework.
    Keywords: Government transfer; money supply; fiscal policy; monetary policy; interaction between monetary and fiscal policy
    JEL: E52 E62
    Date: 2021–08–26
  12. By: Nizam, Ahmed Mehedi
    Abstract: Contrary to existing literature, here we consider the foreign exchange reserve balance of a particular country as an indicator of how much goods, services and/or physical asset the country has transferred to the rest of the world in exchange of some fiat foreign currencies. On the other hand, the reserve balances of the rest of the world denominated in the currency of that particular country can be considered as the amount of goods, services and/or physical assets that the particular country has received from the rest of the world in exchange of its own fiat currencies. Hence, if we subtract the second quantity from the first one, we get an estimate of the extent of net non-monetary wealth that the particular country has transferred so far to the rest of the world in exchange of some fiat foreign money. We calculate the amount of net non-monetary wealth (thus defined) transferred to and from some major economies stemming from cross border financial transactions and analyze their long term and short term dynamics using VECM. The main objective of this study is to give a new perspective to what we conventionally mean by foreign exchange reserve of a country: Instead of assuming the reserve balance of a country as an asset we consider it as a measure of gross wealth (i.e., goods, services and physical asset) the country has transferred so far to other countries around the globe in exchange of some paper currencies with no intrinsic value.
    Keywords: Cross border trade, wealth redistribution, hard currencies
    JEL: E01 E21 F14 F41
    Date: 2021–08–25
  13. By: Leslie Sheng Shen
    Abstract: This paper proposes a "double adverse selection channel" of international transmission. It shows, theoretically and empirically, that financial systems with both global and local banks exhibit double adverse selection in credit allocation across firms. Global (local) banks have a comparative advantage in extracting information on global (local) risk, and this double information asymmetry creates a segmented credit market where each bank lends to the worst firms in terms of the unobserved risk factor. Given a bank funding (e.g., monetary policy) shock, double adverse selection affects firm financing at the extensive and price margins, generating spillover and amplification effects across countries.
    Keywords: Adverse selection; Global banking; Information asymmetry; International transmission; Monetary policy
    JEL: G21 F30
    Date: 2021–08–10
  14. By: Ye Li; Simon Mayer
    Abstract: Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.
    Date: 2021
  15. By: Goyal, Ananya (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy); Sane, Renuka (National Institute of Public Finance and Policy)
    Abstract: A study of inflation requires a fixed consumption basket. The last publicly available data on household consumption baskets is from Consumer Expenditure Survey (CES) 2011-12. A more recent source of data has been the CMIE Consumer Pyramid Household Survey (CPHS). In this paper we compare the weights of various commodities in the Consumer Price Index (CPI) series with the CES 2011-12 and the CPHS 2019. We first document the methodology of construction of the Consumer Price Index (CPI) including details on commodity classification, reference and recall periods. We find that while CPI is based on CES 2011-12, CPI weights closely match those of CES 2011-12 only once the sub-group `Housing' is excluded from the total consumption expenses. For comparison with CPHS, we first map the CPHS commodities to CPI to make them comparable. We find the differences in some categories such as food, household goods and services are less than 2 percentage points. Differences in the shares of commodities such as transport and communication, health, education and intoxicants are larger.
    Date: 2021–08
  16. By: Marouane Daoui; Bouchra Benyacoub (FSJES-Fès - Faculté des Sciences Juridiques, Economiques et Sociales de Fès)
    Abstract: In response to the empirical anomalies relating to the use of VAR models in analysing the impact of monetary policy shocks, the Factor-Augmented VAR (FAVAR) models attempt to provide a practical solution. Moreover, these models, based on dynamic factor models (DFM), make it possible to summarize the information present in a large database into a small number of factors common to all the variables. In this paper, we analyse the effects of monetary policy shocks on economic growth using the FAVAR model on a large number of Moroccan macroeconomic time series (117 quarterly time series from 1985Q1 to 2018Q4). First, we present the econometric framework of the FAVAR model, then the data used and their necessary transformations. Next, we determine the number of factors before estimating the model. Then, we focus on the analysis of the impulse response functions of some indicators of economic growth in Morocco. The results of the analysis indicate that, the overall decline in GDP in response to monetary policy shocks suggests that they have a clearly negative impact on economic growth.
    Abstract: En réponse aux anomalies empiriques liées à l'utilisation des modèles VAR dans l'analyse de l'impact des chocs de politique monétaire, les modèles VAR augmentés de facteurs (FAVAR) tentent d'apporter une solution pratique. De plus, ces modèles, basés sur des modèles factoriels dynamiques (DFM), permettent de résumer l'information présente dans une grande base de données en un petit nombre de facteurs communs à toutes les variables. Dans ce papier, nous analysons les effets des chocs de politique monétaire sur la croissance économique en utilisant le modèle FAVAR sur un grand nombre de séries temporelles macroéconomiques marocaines (117 séries temporelles trimestrielles de 1985Q1 à 2018Q4). Dans un premier temps, nous présentons le cadre économétrique du modèle FAVAR, puis les données utilisées et leurs transformations nécessaires. Ensuite, nous déterminons le nombre de facteurs avant d'estimer le modèle. Ensuite, nous nous concentrons sur l'analyse des fonctions de réponse impulsionnelle de certains indicateurs de la croissance économique au Maroc. Les résultats de l'analyse indiquent que, la baisse globale du PIB en réponse aux chocs de politique monétaire suggère que ceux-ci ont un impact clairement négatif sur la croissance économique.
    Keywords: Monetary policy shocks,Economic growth,Dynamic factor model,FAVAR,Morocco
    Date: 2021–03–04
  17. By: Buckmann, Marcus (Bank of England); Haldane, Andy (Bank of England); Hüser, Anne-Caroline (Bank of England)
    Abstract: Is human or artificial intelligence more conducive to a stable financial system? To answer this question, we compare human and artificial intelligence with respect to several facets of their decision-making behaviour. On that basis, we characterise possibilities and challenges in designing partnerships that combine the strengths of both minds and machines. Leveraging on those insights, we explain how the differences in human and artificial intelligence have driven the usage of new techniques in financial markets, regulation, supervision, and policy making and discuss their potential impact on financial stability. Finally, we describe how effective mind-machine partnerships might be able to reduce systemic risks.
    Keywords: Artificial intelligence; machine learning; financial stability; innovation; systemic risk
    JEL: C45 C55 C63 C81
    Date: 2021–08–20
  18. By: Andreas Thiemann (European Commission - JRC)
    Abstract: This paper sheds light on the scarce empirical evidence on cryptocurrency users and use types. Based on the only available empirical estimate (shared by Chainalysis), this paper simulates the revenue potential from taxing Bitcoin capital gains in the EU. Total estimated Bitcoin capital gains in the EU amount to 12.7 billion EUR in 2020, including 3.6 billion EUR of realized gains. Applying national tax rules on capital gains from shares to those from Bitcoin yields a simulated tax revenue of about 850 million EUR in 2020. This paper is the first to empirically assess the tax revenue potential of capital gains from Bitcoin in the EU. While most of the empirical cryptocurrency literature is based on time-series data, this paper relies on dis-aggregated country-level data. The findings show that revenue from taxing cryptocurrencies is non-negligible and will be if the market of cryptocurrencies continues to grow.
    Keywords: Capital gains taxation, cryptocurrencies, Bitcoin.
    JEL: G19 G23 H24
    Date: 2021–08

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