nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒09‒13
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward guidance with unanchored expectations By Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
  2. The Macro-Economics of Crypto-Currencies: The Role of Private Moneys in Monetary Policy By Noam, Eli
  3. Monetary Policy Surprises in Chile: Measurement & Real Effects By Boragan Aruoba; Andrés Fernández; Daniel Guzmán; Ernesto Pastén; Felipe Saffie
  4. Estimating the Effect of Monetary Policy with Dissenting Votes as Instrument By Balazs Vonnak
  5. Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity By Chengcheng Jia; Jing Cynthia Wu
  6. The case for a positive euro area inflation target: Evidence from France, Germany and Italy By Adam, Klaus; Gautier, Erwan; Santoro, Sergio; Weber, Henning
  7. Central bank balance sheet and systemic risk By Maëlle VAILLE
  8. One Currency, Two Markets: China's Attempt to Internationalize the Renminbi By Edwin L.-C. Lai
  9. Bitcoin An Inflation Hedge but Not a Safe Haven By Sangyup Choi; Junhyeok Shin
  10. Revisiting the macroeconomic effects of monetary policy shocks By Firmin Doko Tchatoka; Qazi Haque
  11. Another reason to raise the Fed's inflation target: An employment and output boom By David Reifschneider; David Wilcox
  12. The Real Effects of Monetary Shocks: Evidence from Micro Pricing Moments By Gee Hee Hong; Matthew Klepacz; Ernesto Pasten; Raphael Schoenle
  13. An assessment of the Phillips curve over time: evidence for the United States and the euro area By Marente Vlekke; Martin Mellens; Siem Jan Koopmans
  14. Commodity Prices and Global Inflation, 1851-1913 By Stefan Gerlach; Rebecca Stuart
  15. Wages and prices of foreign goods in the inflationary process in Iceland By Asgeir Danielsson
  16. Exchange rate fluctuations and the financial channel in emerging economies By Beckmann, Joscha; Comunale, Mariarosaria
  17. Globalisation and the Decoupling of Inflation from Domestic Labour Costs By Emanuel Kohlscheen; Richhild Moessner
  18. Are Collateral-Constraint Models Ready for Macroprudential Policy Design? By Pablo Ottonello; Diego J. Perez; Paolo Varraso
  19. Price Change Synchronization within and between Firms By Øivind Anti Nilsen; Håvard Skuterud; Ingeborg Munthe-Kaas Webster
  20. Pandemics and cryptocurrencies By Salisu, Afees; Ogbonna, Ahamuefula; Oloko, Tirimisiyu
  21. Asset encumbrance in euro area banks: analysing trends, drivers and prediction properties for individual bank crises By Berthonnaud, Pierre; Cesati, Enrico; Drudi, Maria Ludovica; Jager, Kirsten; Kick, Heinrich; Lanciani, Marcello; Schneider, Ludwig; Schwarz, Claudia; Siakoulis, Vasileios; Vroege, Robert
  22. Decomposing the yield curve with linear regressions and survey information By Halberstadt, Arne

  1. By: Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
    Abstract: We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. The optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realised persistence. The insurance property distinguishes our paper from other bounded rationality papers that solve the forward guidance puzzle and generates important quantitative differences.
    JEL: E32 D83 D84
    Date: 2021–08–31
  2. By: Noam, Eli
    Abstract: Cryptocurrencies provide an important dimension of innovation to the evolution of the exchange medium we call money. There are now over 4,000 such currencies, and their potential and volume is growing. The impact of such currencies for money laundering, law enforcement, and banking supervision have been extensively discussed on the transaction level. But this is the "micro" level of analysis. What has been rare is a "macro" level discussion of the impact on the monetary system of a country. Central banks, which are institutions tasked with providing monetary stability, will see their problems rise while the power of their traditional tools to control money supply and interest rates - such as reserve requirements and the discount rates - is declining. But the new digital technologies - such as distributed ledgers - and new approaches provide regulatory bodies also with new and potentially powerful tools. The task for central banks and policy makers is to create new approaches to use, regulate, and incent them in shaping the macro-economic path of their economy. The paper will propose several of these approaches. This is of particular importance in an economic recovery post coronavirus. In the process, central banks will also, predictably, issue their own digital currencies, and a tiny number of those will become global super-currencies. This will create a new type of issues.
    Date: 2021
  3. By: Boragan Aruoba; Andrés Fernández; Daniel Guzmán; Ernesto Pastén; Felipe Saffie
    Abstract: This paper accomplishes two goals: First, it proposes a way to compute monetary policy surprises in Chile based on a survey of financial market participants regularly conducted by Bloomberg. We argue this is the most suitable one among alternatives. Second, we use these monetary policy surprises as input in a Bayesian Vector Auto Regression analysis to estimate the effect of contractionary monetary policy. Output and inflation tend to fall while funding costs tend to increase. Expected inflation a has hump-shaped response and nominal exchange rates tend to depreciate instead of appreciating. We argue the latter two effects are consistent with an "information channel" embedded in monetary policy decisions.
    Date: 2021–08
  4. By: Balazs Vonnak (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper a new instrument for monetary policy shocks is presented. Exogenous variation of the policy rate may come from frictions of collective decision-making. Dissenting votes indicate how far the final decision of the decision making body is from the mean of the members’ individually preferred interest rates and thus correlate with the policy shocks caused by the decision-making frictions. Measures of dissent are used as external instrument in a structural VAR. Results for the U.S. show significant effect of the Fed’s interest rate policy on real variables with the expected sign. On the other hand, the estimated effect on nominal variables is reminiscent of the price puzzle. Usual remedies, such as inclusion of commodity prices, inflation expectations or starting the sample in the middle of the eighties do not change the qualitative results casting doubt on the usual interpretation that the price puzzle is a statistical artifact.
    Keywords: monetary policy, structural vector autoregression, instrumental variable, price puzzle.
    JEL: C32 C36 E52
    Date: 2021
  5. By: Chengcheng Jia; Jing Cynthia Wu
    Abstract: We study the implications of the Fed's new policy framework of average inflation targeting (AIT) and its ambiguous communication. We show that AIT improves the trade-off between inflation and real activity by tilting the Phillips curve in a favorable way. To fully utilize this feature and maximize social welfare, the central bank has the incentive to deviate from AIT and implement inflation targeting ex post. Next, we rationalize the central bank's ambiguous communication about the horizon over which it averages inflation. Ambiguous communication, together with uncertainty about economic fundamentals, helps the central bank to gain credibility and improve welfare in the long run, in spite of the time-inconsistent nature of AIT.
    Keywords: average inflation targeting; time inconsistency; ambiguous communication
    JEL: E31 E52 E58
    Date: 2021–09–09
  6. 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 in ation 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.
    Keywords: Optimal inflation target,micro price trends,welfare
    JEL: E31 E52
    Date: 2021
  7. By: Maëlle VAILLE
    Abstract: Central banks’ balance sheet policies, while intended to address ?nancial market dislocations and stimulate the economy, may have unintended persistent e?ects on systemic risk. Using a structural bayesian vector autoregressive model, this paper estimates the impacts of exogenous innovations to the central banks’ balance sheet on the aggregate systemic risk in the euro area, the United States and Japan. Our results suggest that these policies have positive e?ects on ?nancial stability in the short and medium term and seems to have no e?ects in the long term. Moreover, we study the e?ects of central balance sheet policies shocks on ?nancial institutions’ systemic risk through a panel VAR and highlight the role of leverage in the transmission of unconventional monetary policy to ?nancial ?rms’ systemic risk.
    Keywords: balance sheet policies, srisk, structural BVAR, zero and sign restrictions, leverage
    JEL: C32 C33 E44 E52 E58
    Date: 2021
  8. By: Edwin L.-C. Lai (Professor of Economics, Hong Kong University of Science and Technology, Director of the Center for Economic Development Technology.Author-Email:
    Abstract: The global financial crisis in 2007-2009 caused a shortage of the US dollar all over the world. This sounded an alarm, reminding China that the dollar-based international monetary system (IMS) could be quite unreliable. In response, China began to accelerate the pace of RMB internationalization so as to eventually escape from the "dollar trap" i.e. become independent of the US, the USD, and an international monetary system (IMS) dominated by the USD. In order for the RMB to be a significant international currency, it has to be largely convertible in the capital account and China's financial market must be sufficiently deep, broad and liquid.
    Date: 2021–09
  9. By: Sangyup Choi (Yonsei University); Junhyeok Shin (Yonsei University)
    Abstract: During the recent COVID-19 pandemic, many commonalities shared by Bitcoin and gold raise the question of whether Bitcoin can hedge inflation or provide a safe haven as gold often does. By estimating a Vector Autoregression (VAR) model, we provide systematic evidence on the relationship among inflation, uncertainty, and Bitcoin and gold prices. Bitcoin appreciates against inflation (or inflation expectation) shocks, confirming its inflation-hedging property claimed by investors. However, unlike gold, Bitcoin prices decline in response to financial uncertainty shocks, rejecting the safe-haven quality. Interestingly, Bitcoin prices do not decrease after policy uncertainty shocks, partly consistent with the notion of Bitcoin’s independence from government authorities. We also find an interesting asymmetry in the drivers of Bitcoin price dynamics between the bullish and bearish markets. The main findings hold with or without the COVID-19 pandemic episode.
    Keywords: Cryptocurrencies; Bitcoin; inflation-hedging; safe-haven; gold; COVID-19
    JEL: E41 E44 F31 G10
    Date: 2021–08–16
  10. By: Firmin Doko Tchatoka (School of Economics & Public Policy, University of Adelaide); Qazi Haque (School of Economics & Public Policy, University of Adelaide)
    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 disination period is left out and one focuses on the post-1984 period, monetary policy shocks have no signfcant effects on output, despite large movements in credit costs. Our finding is robust to weak identfcation and alternative measure of economic activity.
    Keywords: Monetary policy shocks,Proxy-SVAR, Weak identifcation, Output dynamics.
    Date: 2021–08
  11. By: David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics)
    Abstract: In 2012, the Federal Reserve formally adopted an inflation target and set it at 2 percent, in line with the level chosen by many other central banks. In hindsight, this setting left policymakers with too little room to cut interest rates when they want to fight recessions. Many researchers have noted that if central banks raised their inflation targets—either individually or in concert—they could do a better job in the long run of keeping inflation near its target and the workforce fully employed. Reifschneider and Wilcox highlight an additional and less-noted consequence of raising the inflation target modestly: The economy could enjoy a temporary but substantial boom in employment and output as it adjusted to the increase in the target. Critical to generating this favorable outcome would be decisive action by monetary policymakers to ensure that the higher inflation target is achieved in a reasonably timely manner. In light of substantial transition benefits, as well as the long-run improvement in economic performance, the authors recommend that the Federal Reserve raise its inflation target to 3 percent as part of its next framework review.
    Date: 2021–08
  12. By: Gee Hee Hong; Matthew Klepacz; Ernesto Pasten; Raphael Schoenle
    Abstract: This paper evaluates the informativeness of eight micro pricing moments for monetary non-neutrality. Frequency of price changes is the only robustly informative moment. The ratio of kurtosis over frequency is significant only because of frequency, and insignificant when non-pricing moments are included. Non-pricing moments are additionally informative about monetary non-neutrality, indicating potential omitted variable bias and the inability of pricing moments to serve as sufficient statistics. In contrast to existing theoretical work, this ratio has an ambiguous relationship with monetary non-neutrality in a quantitative menu cost model. We show which modeling ingredients explain this discrepancy, providing guidance on modeling choices.
    Keywords: Price-setting; menu cost; micro moments; sufficient statistics
    JEL: E13 E31 E32
    Date: 2021–09–02
  13. By: Marente Vlekke (CPB Netherlands Bureau for Economic Policy Analysis); Martin Mellens (CPB Netherlands Bureau for Economic Policy Analysis); Siem Jan Koopmans (VU)
    Abstract: We assess the stability of the coefficient on the unemployment gap in various linear dynamic Phillips curve models. We allow the coefficient on the unemployment gap and the other variables in our model to be time-varying, so that we can monitor the importance of the Phillips curve over time. We compare the effects of different measures for inflation and inflation expectations on our estimation results. In our analysis, we use state space methods and adopt a practical approach to Bayesian estimation with feasible testing and diagnostic checking procedures. Empirical results are presented for the United States and the five largest euro area economies. Our main conclusion is that in the United States the Phillips curve for headline inflation has remained empirically relevant over the years while there are periods when its impact has been low. For measures of core inflation we find a declining Phillips curve. In the euro area the strength of the relationship differs per country and over time, but has overall been weak and volatile in the past three decades. For both the United States and the euro area countries, we find little evidence of the “anchored expectations"-hypothesis.
    JEL: C18 C32 C52 E24 E31
    Date: 2020–09
  14. By: Stefan Gerlach; Rebecca Stuart
    Abstract: This paper uses annual data to study the interaction of consumer and commodity prices in 15 economies over the period 1850-1913. We find that consumer price inflation in all 15 countries co-moves with a broad measure of changes in commodity prices. Consumer prices comove most strongly with changes in metal prices, in particular pig iron prices. Furthermore, changes in pig iron prices and production, which have attracted much attention in the literature on 19th century US business cycles, co-move with the international business cycle, suggesting that pig iron prices offer a transmission channel through which international business cycle movements affect inflation.
    Keywords: commodity prices, Gold standard, global inflation, pig iron
    JEL: E31 F40 N10
    Date: 2021–09
  15. By: Asgeir Danielsson
    Abstract: In this paper we discuss the relationships between the CPI in Iceland, the unit labour cost, and the price of foreign goods, and their role in equations for forecasting inflation. We find that the logs of these variables are cointegrated, the cointegrating vectors are stable over many different data periods, and the coefficients satisfy the homogeneity condition. On the other hand, the coefficients in regressions of log difference of the CPI on log differences of the other variables, and a constant, are unstable, and for data for the last two decades, the homogeneity condition is always rejected. The coefficient for changes in unit labour cost, the price of the most important cost item, is often insignificant, while the constant, which shouldn‘t be in the equation, is frequently highly significant. It is shown that the estimates of coefficients in the equation in log differences of the variables depend on the coefficients of correlations between the variables, and their standard deviations, which have diverged very much since the turn of the century. Large standard deviations of changes in unit labour cost, and especially of changes in the price of foreign goods, compared to standard deviations of changes in the CPI, contribute to lower coefficient estimates, and to the significance of the constant. In the paper we discuss how the long-run, cointegrated, relationship between the logs of the variables can be used to obtain valuable information for forecasting the rate of inflation. We also present estimation of an equation for the log difference in CPI where the error-correction term is the estimated error of an AR-equation for the errors from the equation in logs.
    JEL: C13 E31 E44 E52 E65
    Date: 2021–09
  16. By: Beckmann, Joscha; Comunale, Mariarosaria
    Abstract: This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyze whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks’ transmission covering 11 emerging market countries for the period 2000Q1–2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand regarding foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to apeiation) decreases GDP. The financial channel works mostly in the short run except for Brazil, Malaysia, and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rate.
    JEL: F31 F41 F43 G15
    Date: 2021–08–30
  17. By: Emanuel Kohlscheen; Richhild Moessner
    Abstract: We provide novel systematic cross-country evidence that the link between domestic labour markets and CPI inflation has weakened considerably in advanced economies during recent decades. The central estimate is that the short-run pass-through from domestic labour cost changes to core CPI inflation decreased from 0.25 in the 1980s to just 0.02 in the 2010s, while the longrun pass-through fell from 0.36 to 0.03, with the estimates in the 2010s no longer significant. We show that the timing of the collapse in the pass-through coincides with a steep increase in import penetration from a group of major manufacturing EMEs around the turn of the millennium, which signals increased competition and market contestability.
    Keywords: competition, globalisation, import penetration, inflation, labour market, pass-through, wage
    JEL: E31 E50 F10 F60 J30
    Date: 2021
  18. By: Pablo Ottonello; Diego J. Perez; Paolo Varraso
    Abstract: We study the design of macroprudential policies based on quantitative collateral-constraint models. We show that the desirability of macroprudential policies critically depends on the specific form of collateral used in debt contracts: While inefficiencies arise when current prices affect collateral---a frequent benchmark used to guide policies---they do not when only future prices affect collateral. Since the microfoundations and quantitative predictions of models with future-price collateral constraints do not appear less plausible than those using current prices, we conclude that additional empirical work is essential for the use of these models in macroprudential policy design.
    JEL: E32 E44 F32 F36 F38 G01
    Date: 2021–09
  19. By: Øivind Anti Nilsen; Håvard Skuterud; Ingeborg Munthe-Kaas Webster
    Abstract: This paper provides evidence on price rigidity at the product- and firm-level in Norway. A strong within-firm synchronization is found supporting the theory of economies of scope in menu costs. The industry synchronization effects are found to be small suggesting that firms either have some monopoly power, or that a firm’s costs of changing their own prices may be larger than the benefit of responding to their competitors’ price changes. These findings have potentially important implications for the micro-foundations of macroeconomic models, and thus the policy advice derived from such models.
    Keywords: price setting, monthly micro data, selection effects
    JEL: E31 D43 C35
    Date: 2021
  20. By: Salisu, Afees; Ogbonna, Ahamuefula; Oloko, Tirimisiyu
    Abstract: This study examines the effect of a pandemic-induced uncertainty on cryptocurrencies (specifically, Bitcoin, Ethereum and Ripple). It employs a predictive model by Westerlund and Narayan (2012, 2015) to examine the predictability of a pandemic-induced uncertainty as a predictor, as well as the forecast performance of our predictive model for cryptocurrency returns. We examine the role of asymmetry in uncertainty and the sensitivity of our results to alternative measures of uncertainty due to pandemics, using the recently developed Global Fear Index (GFI) by Salisu and Akanni (2020). Our results indicate that cryptocurrencies could act as hedge against uncertainty due to pandemics, albeit with reduced hedging effectiveness in the COVID-19 period. Accounting for asymmetry is found to improve the predictability and forecast performance of the model, which indicates that failure to account for asymmetry in modeling the effect of a pandemic-induced uncertainty on cryptocurrency may lead to incorrect conclusion. The results seem to be sensitive to the choice of measure of pandemic-induced uncertainty.
    Keywords: COVID-19; Cryptocurrency; Distributed Lag Model; Pandemic; Uncertainty
    JEL: C5 G1
    Date: 2020–07–12
  21. By: Berthonnaud, Pierre; Cesati, Enrico; Drudi, Maria Ludovica; Jager, Kirsten; Kick, Heinrich; Lanciani, Marcello; Schneider, Ludwig; Schwarz, Claudia; Siakoulis, Vasileios; Vroege, Robert
    Abstract: Asset encumbrance is a central concept in the context of banks’ liquidity crises, as it is associated with their capacity to obtain secured funding. This occasional paper summarises the work carried out by the task force on asset encumbrance, bringing together analyses by the ECB and those national competent authorities working on the topic. First, we describe how asset encumbrance has evolved in euro area banks, focusing on country and business model aggregates. Second, we conduct an econometric analysis of the driving factors of banks’ asset encumbrance, highlighting the relevance of credit risk, the availability of high quality collateral suitable for encumbrance, capital and sovereign funding conditions. Third, we turn our focus to the asset encumbrance dynamics of banks that have experienced a crisis. The outcome of this event study analysis indicates that asset encumbrance increases in the lead-up to a crisis, partly to offset early deposit outflows. Building on these findings, we show that asset encumbrance indicators carry predictive information for bank-specific crises as part of a multivariate early warning model. JEL Classification: G21, G01, G28, C23, C49
    Keywords: asset encumbrance, bank crisis, bank funding, collateral, early warning model, liquidity, panel econometrics
    Date: 2021–08
  22. By: Halberstadt, Arne
    Abstract: The decomposition of bond yields into term premiums and average expected future short rates is impaired by the limited availability of information about the dynamics of the expectations component. Therefore, many studies require the model-implied average expected future short rates to be close to short rate expectations from surveys. In this paper, I restrict the variance of changes in model-implied average expected future short rates to match the variance of changes in short rate expectations from surveys. The variance of changes in survey expectations is relatively similar across markets and thus provides a reliable source of additional information about the expectation formation of investors. Technically, I impose a nonlinear restriction to the term structure model of Adrian, Crump, and Moench (2013). I show that typical small sample problems of term structure estimations can be mitigated if the restriction on the variance of changes is imposed. However, the analysis also makes a case for unrestricted estimations if they are based on a dataset with a typical sample length in macro finance, though.
    Keywords: Affine Term Structure Models,Empirical Finance
    JEL: E43 E44
    Date: 2021

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