nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒10‒11
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. What lowered inflation in India: Monetary policy or commodity prices? By Pulapre Balakrishnan; M Parameswaran
  2. Reserve tiering and the interbank market By Lucas Marc Fuhrer; Matthias Jüttner; Jan Wrampelmeyer; Matthias Zwicker
  3. Nobody’s child: the Bank of Greece in the interwar years By Andreas Kakridis
  4. Evolution of topics in central bank speech communication By Hansson, Magnus
  5. Estimating Fed’s unconventional policy shocks By Jarociński, Marek
  6. The Currency Board Debate of the 1940s-1960s By Thakkar, Parth
  7. A Toolkit for Computing Constrained Optimal Policy Projections (COPPs) By Oliver de Groot; Falk Mazelis; Roberto Motto; Annukka Ristiniemi
  8. Low Inflation Bends the Phillips Curve around the World By Kristin Forbes; Joseph Gagnon; Christopher G. Collins
  9. The Global Financial Cycle By Silvia Miranda-Agrippino; Hélène Rey
  10. Central bank communication with non-experts: a road to nowhere? By Ehrmann, Michael; Wabitsch, Alena
  11. Monetary Policy in a Low Interest Rate Environment: Reversal Rate and Risk-Taking By Heider, Florian; Leonello, Agnese
  12. Inflation in the time of Covid19 II the liquidity surge By Jean-Francois Mercier
  13. Decrypting New Age International Capital Flows By Clemens Graf von Luckner; Carmen M. Reinhart; Kenneth S. Rogoff
  14. What Quantity of Reserves Is Sufficient? By Adam Copeland; Darrell Duffie; Yilin Yang
  15. Crude Oil Price Changes and Inflation: Evidence for Asia and the Pacific Economies By Jiranyakul, Komain
  16. Do liquidity limits amplify money market fund redemptions during the COVID crisis? By Dunne, Peter G.; Giuliana, Raffaele
  17. Measuring Market Expectations By Christiane Baumeister
  18. The International Role of the U.S. Dollar By Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
  19. Has publication of a repo path provided guidance By Luchelle Soobyah; Daan Steenkamp
  20. There and Back Again: The Making of Uganda’s Mobile Money Tax By Lees, Adrienne; Akol, Doris
  21. Oil Prices, Global Demand Expectations, and Near-Term Global Inflation By Jan J. J. Groen; Adam I. Noble
  22. Inflation and Growth: The Role of Institutions By Hakan Yilmazkuday
  23. Price transmission for organic and conventional milk products in Sweden By Lindström, Hanna
  24. Liquidity Crises, Liquidity Lines and Sovereign Risk By Yasin Kürsat Önder

  1. By: Pulapre Balakrishnan (Ashoka University); M Parameswaran (Centre for Developing Studies)
    Abstract: India has seen lower inflation by historical standards, for the past five years. This has been attributed by some observers to the adoption of inflation targeting by the country’s central bank, the Reserve Bank of India. In particular, it has been asserted that the taming of inflation reflects the anchoring of expectations of it through inflation targeting. We evaluate these claims. Our estimates indicate that there is no basis to the claim that inflation has been lowered due to the anchoring of expectations. On the other hand, we are able to fully account for the trajectory of inflation in India in terms of an explanation of inflation other than the one on which inflation targeting is premised.
    Keywords: Inflation targeting, Inflation models, Monetary policy, India, Structuralist macroeconomics
    Date: 2021–10
  2. By: Lucas Marc Fuhrer; Matthias Jüttner; Jan Wrampelmeyer; Matthias Zwicker
    Abstract: Since the financial crisis, major central banks have introduced negative interest rates with the help of tiered reserve remuneration. We theoretically and empirically investigate monetary policy implementation via reserve tiering using a unique bank-level dataset from Switzerland. We find that reserve tiering can successfully be used to steer short-term interest rates. Furthermore, reserve tiering helps maintain sufficient activity in the interbank market, which is key for financial stability and reliable interest rate benchmarks. Due to frictions such as collateral constraints, trading costs, and window dressing around regulatory reporting dates, not only the aggregate level of reserves but also the reserve distribution matters for monetary policy implementation.
    Keywords: Interbank market, reserve tiering, negative rates, monetary policy
    JEL: E43 E58 G12 G21
    Date: 2021–09–27
  3. By: Andreas Kakridis (Bank of Greece and Ionian University)
    Abstract: Neither history nor economic historians have been kind to Greece’s central bank in the interwar years. Born at the behest of the League of Nations to help the country secure a new international loan, the Bank of Greece was treated with a mixture of suspicion and hostility. The onset of the Great Depression pitted its statutory objective to defend the exchange rate against the incentive to reflate the domestic economy. Its policy response has generally been criticized as either ineffectual or detrimental: the Bank is accused of having pursued an unduly orthodox and restrictive policy, both during but also after the country’s exit from the gold exchange standard, some going as far as to argue that the 1932 devaluation failed to produce genuine recovery. Relying primarily on archival material, this paper combines qualitative and quantitative sources to revisit the Bank of Greece’s birth and operation during the Great Depression. In doing so, it hopes to put Greece on the map of international comparisons of the Great Depression and debates on the role of the League of Nations, the effectiveness of money doctoring and foreign policy interventions more generally. What is more, the paper seeks to revise several aspects of the conventional narrative surrounding the Bank’s role. First, it argues that monetary policy was neither as ineffective nor as restrictive as critics suggest; this was largely thanks to a continued trickle of foreign lending, but also to the Bank’s own decision to sterilize foreign exchange outflows, thus breaking the ‘rules of the game’. Second, it revisits Greece’s attempt to cling to gold after sterling’s devaluation, a decision routinely denounced as a critical policy mistake. Last but not least, it challenges the notion that Greece constitutes an exception to the rule that wants countries who shed their ‘golden fetters’ recovering faster.
    Keywords: central bank; Greece;gold standard; Great Depression; League of Nations
    JEL: E58 E65 N14 N24
    Date: 2021–07
  4. By: Hansson, Magnus (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper studies the content of central bank speech communication from 1997 through 2020 and asks the following questions: (i) What global topics do central banks talk about? (ii) How do these topics evolve over time? I turn to natural language processing, and more specifically Dynamic Topic Models, to answer these questions. The analysis consists of an aggregate study of nine major central banks and a case study of the Federal Reserve, which allows for region specific control variables. I show that: (i) Central banks address a broad range of topics. (ii) The topics are well captured by Dynamic Topic Models. (iii) The global topics exhibit strong and significant autoregressive properties not easily explained by financial control variables.
    Keywords: Central bank communication; Monetary policy; Textual analysis; Dynamic topic models; Narratives
    JEL: C38 C55 E52 E58
    Date: 2021–10
  5. By: Jarociński, Marek
    Abstract: Fed's monetary policy announcements convey a mix of news about different kinds of conventional and unconventional policies and about the economy. Financial market responses to these announcements are very leptokurtic: often tiny, but sometimes large. I estimate the underlying structural shocks exploiting this feature of the data. I find standard monetary policy, Odyssean forward guidance, large scale asset purchases and Delphic forward guidance, and estimate their effects. JEL Classification: E52, E58, E44
    Keywords: Asset purchases, Excess kurtosis, Forward guidance, High-frequency identification, Non-Gaussianity
    Date: 2021–08
  6. By: Thakkar, Parth (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The late 1940s to the 1960s featured a sustained debate about currency boards in underdeveloped (or, in today’s parlance, developing) economies and their desirability compared to the alternative of central banking. Critics of currency boards found fault with them for the foregone cost of their “idle reserves,” their implied deflationary bias, their lack of discretionary monetary policy, and their lack of a lender of last resort, among other things. Defenders of the currency board system argued that the criticisms were either incorrect or irrelevant. After carefully reviewing the debate, I opine on it, coming down mainly on the side of the defenders of currency boards.
    Keywords: Currency board; debate
    JEL: B27 E59 F33 N10
    Date: 2021–10
  7. By: Oliver de Groot; Falk Mazelis; Roberto Motto; Annukka Ristiniemi
    Abstract: This paper presents a toolkit for generating optimal policy projections. It makes five contributions. First, the toolkit requires a minimal set of inputs: only a baseline projection for target and instrument variables and impulse responses of those variables to policy shocks. Second, it solves optimal policy projections under commitment, limited-time commitment, and discretion. Third, it handles multiple policy instruments. Fourth, it handles multiple constraints on policy instruments such as a lower bound on the policy rate and an upper bound on asset purchases. Fifth, it allows alternative approaches to address the forward guidance puzzle. The toolkit that accompanies this paper is Dynare compatible, which facilitates its use. Examples replicate existing results in the optimal monetary policy literature and illustrate the usefulness of the toolkit for highlighting policy trade-offs. We use the toolkit to analyse US monetary policy at the height of the Great Financial Crisis. Given the Fed’s early 2009 baseline macroeconomic projections, we find the Fed’s planned use of the policy rate was close to optimal whereas a more aggressive QE program would have been beneficial.
    Keywords: Optimal monetary policy, Commitment vs. discretion, Lower bound, Asset purchases, Forward guidance puzzle
    JEL: C61 C63 E52 E58
  8. By: Kristin Forbes; Joseph Gagnon; Christopher G. Collins
    Abstract: This paper finds strong support for a Phillips curve that becomes nonlinear when inflation is “low”—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative), but flat when output is below potential (slack is positive), so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.
    JEL: E31 E37 E52 E58 F62
    Date: 2021–10
  9. By: Silvia Miranda-Agrippino; Hélène Rey
    Abstract: We review the literature on the empirical characteristics of the global financial cycle and associated stylized facts on international capital flows, asset prices, risk aversion and liquidity in the financial system. We analyse the co-movements of global factors in asset prices and capital flows with commodity prices, international trade and world output as well as the sensitivity of different parts of the world to the Global Financial Cycle. We present evidence of the causal effects of the monetary policies of the US Federal Reserve, the European Central Bank and of the People's Bank of China on the Global Financial Cycle. We then assess whether the 2008 financial crisis has altered the transmission channels of monetary policies on the Global Financial Cycle. Finally, we discuss the theoretical modelling of the Global Financial Cycle and avenues for future research.
    JEL: E5 F3
    Date: 2021–10
  10. By: Ehrmann, Michael; Wabitsch, Alena
    Abstract: Central banks have intensified their communication with non-experts – an endeavour which some have argued is bound to fail. This paper studies English and German Twitter traffic about the ECB to understand whether its communication is received by non-experts and how it affects their views. It shows that Twitter traffic is responsive to ECB communication, also for non-experts. For several ECB communication events, Twitter constitutes primarily a channel to relay information: tweets become more factual and the views expressed more moderate and homogeneous. Other communication events, such as former President Draghi’s “Whatever it takes” statement, trigger persistent traffic and a divergence in views. Also, ECB-related tweets are more likely to get retweeted or liked if they express stronger or more subjective views. Thus, Twitter also serves as a platform for controversial discussions. The findings suggest that central banks manage to reach non-experts, i.e. their communication is not a road to nowhere. JEL Classification: E52, E58
    Keywords: central bank communication, monetary policy, non-experts, social media
    Date: 2021–10
  11. By: Heider, Florian; Leonello, Agnese
    Abstract: This paper develops a simple analytical framework to study the impact of central bank policy-rate changes on banks’ credit supply and risk-taking incentives. Unobservable expost bank monitoring of loans creates an external-financing constraint, which determines bank leverage. Unobservable, costly ex-ante screening of borrowers determines the level of bank risk-taking. More risk-taking tightens the external-financing constraint. The policy rate affects the external-financing constraint because it affects both the return on outside investors’ alternative investments and loan rates. In a low rate environment, a policy-rate cut reduces bank funding costs less because of a zero lower bound (ZLB) on retail deposit rates. Bank risk-taking is a necessary but not sufficient for a policy-rate cut to become contractionary ("reversal"). Reversal can occur even though banks’ net-interest margins increase. Credit market competition plays an important role for the interplay of monetary policy and financing stability. When banks have market power, a policy-rate cut can increase lending and still lead to risk-taking. We use our analytical framework to discuss the literature on how monetary policy affects the credit supply of banks, with special emphasis on low and negative rates. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank lending, deposits, equity multiplier, zero-lower bound
    Date: 2021–10
  12. By: Jean-Francois Mercier
    Abstract: Inflation in the time of Covid-19: (II) the liquidity surge
    Date: 2021–10–06
  13. By: Clemens Graf von Luckner; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper employs high frequency transactions data on the world’s oldest and most extensive centralized peer-to-peer Bitcoin market, which enables trade in the currencies of more than 135 countries. We develop an algorithm that allows, with high probability, the detection of “crypto vehicle transactions” in which crypto currency is used to move capital across borders or facilitate domestic transactions. In contrast to previous work which has used “on-chain” data, our approach enables one to investigate parts of the vastly larger pool of “off-chain” transactions. We find that, as a conservative lower bound, over 7 percent of the 45 million trades on the exchange we explore represent crypto vehicle transactions in which Bitcoin is used to make payment in fiat currency. Roughly 20 percent of these represent international capital flight/flows/remittances. Although our work cannot be used to put a price on cryptocurrencies, it provides the first systematic quantitative evidence that the transactional use of cryptocurrencies constitutes a fundamental component of their value, at least under the current regulatory regime.
    JEL: E42 E51 E58 F21 F24 F32 F38
    Date: 2021–10
  14. By: Adam Copeland; Darrell Duffie; Yilin Yang
    Abstract: A concern of the Federal Reserve is how to manage its balance sheet and whether, over the long run, the balance sheet should be small or large. In this post, we highlight results from a recent paper in which we show how, even during a period of “ample” reserves, the Fed’s management of its balance sheet had material impacts on funding markets and especially the repo market. We argue that the Fed’s “balance-sheet normalization” from March 2017 to September 2019—under which aggregate reserves declined by more than $950 billion—combined with post-crisis liquidity regulations, stressed the intraday management of reserves of large bank holding companies that are active in wholesale funding markets resulting in higher repo rates and spikes in such.
    Keywords: repo rates; reserves; Treasuries; Treasurys; payments; central bank balance sheet
    JEL: G1 E58
    Date: 2021–09–29
  15. By: Jiranyakul, Komain
    Abstract: This paper examines the influence of crude oil price on inflation in eight Asian and two of the pacific economies, which are oil-importing countries. The period of investigation is from 1987M5 to 2019M12. The results of bounds testing for cointegration reveal that there is a stable positive long-run relationship between the consumer price index and crude oil price in most of these countries during the period of low and less fluctuating oil prices. However, the stable long-run relationship is found in eight countries, but this stable relationship is found only in one country during the period of high and more fluctuating oil prices. The long-run pass-through of crude oil prices to consumer prices is partial. In the short run, the relationship between a crude oil price change and inflation indicates that the short-run pass-through is low in most cases, but this pass-through is more apparent during the period of high and more fluctuating oil prices. Therefore, the structural break seems to matter in the pass-through of crude oil price to consumer prices in both the long and short run. The findings suggest accommodative monetary policy measures to alleviate the inflation rate.
    Keywords: Crude oil price, inflation rate, structural break, oil-importing countries
    JEL: Q43
    Date: 2021–06
  16. By: Dunne, Peter G.; Giuliana, Raffaele
    Abstract: Regulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption-liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress. JEL Classification: G01, G15, G23, G28, G18, G20, F30
    Keywords: liquidity limits, money market funds
    Date: 2021–10
  17. By: Christiane Baumeister (University of Notre Dame; University of Pretoria; NBER; CEPR)
    Abstract: Asset prices are a valuable source of information about financial market participants' expectations about key macroeconomic variables. However, the presence of time-varying risk premia requires an adjustment of market prices to obtain the market's rational assessment of future price and policy developments. This paper reviews empirical approaches for recovering market-based expectations. It starts by laying out the two canonical modeling frameworks that form the backbone for estimating risk premia and highlights the proliferation of risk pricing factors that result in a wide range of different asset-price-based expectation measures. It then describes a key methodological innovation to evaluate the empirical plausibility of risk premium estimates and to identify the most accurate market-based expectation measure. The usefulness of this general approach is illustrated for price expectations in the global oil market. Then, the paper provides an overview of the body of empirical evidence for monetary policy and inflation expectations with a special emphasis on market-specific characteristics that complicate the quest for the best possible market-based expectation measure. Finally, it discusses a number of economic applications where market expectations play a key role for evaluating economic models, guiding policy analysis, and deriving shock measures.
    Keywords: futures markets, risk premia, monetary policy, commodities, market expectations, financial markets, asset pricing, return regressions, affine term structure models, risk adjustment, model uncertainty, forecasting, expectational shocks
    JEL: C52 E31 E43 E52 G14 Q43
    Date: 2021–09
  18. By: Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
    Abstract: For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.
    Date: 2021–10–06
  19. By: Luchelle Soobyah; Daan Steenkamp
    Abstract: Has publication of a repo path provided guidance?
    Date: 2021–10–06
  20. By: Lees, Adrienne; Akol, Doris
    Abstract: This paper evaluates the appropriateness of the tax policymaking process that led to the introduction, and the later adaptation, of a tax on mobile money transactions in Uganda in 2018. We examine the unusual source of the proposal, how this particular tax diverged from the usual tax policymaking process, and whether certain key stakeholders were excluded. We argue that weaknesses in the tax policymaking process undermined the quality of policy design, and resulted in a period of costly, and avoidable, policy adjustment. This case study is relevant for Uganda as well as for other low-income countries which could be exposed to similar challenges in designing effective taxes for the mobile money industry.
    Keywords: Finance,
    Date: 2021
  21. By: Jan J. J. Groen; Adam I. Noble
    Abstract: Oil prices have increased by nearly 60 percent since the summer of 2020, coinciding with an upward trend in global inflation. If higher oil prices are the result of constrained supply, then this could pose some stagflation risks to the growth outlook—a concern reflected in a June Financial Times article, “Why OPEC Matters.” In this post, we utilize the demand and supply decomposition from the New York Fed’s Oil Price Dynamics Report to argue that most of the oil price increase over the past year or so has reflected improving global demand expectations. We then illustrate what these changing global demand expectations might mean for near-term global inflation developments.
    Keywords: oil prices; global inflation
    JEL: E2 F00 G1
    Date: 2021–10–04
  22. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the effects of inflation on per capita income growth for 36 developed and developing countries by using structural vector autoregression models that are robust to the consideration of endogeneity by construction. The results show evidence for heterogeneity of such effects across countries that are shown to be further connected to the strength of their institutions. While the effects of inflation on growth are negative and significant in countries with stronger institutions, they are positive and significant in countries with weaker institutions.
    Keywords: Economic Growth, Institutions, Inflation, Structural VAR
    JEL: O11 O23 O43
    Date: 2021–09
  23. By: Lindström, Hanna (a The Department of Economics at Umeå School of Business, Economics and Statistics, Umeå University, 901 87 Umeå, Sweden)
    Abstract: Although much empirical work addresses the efficiency of food supply chains by studying price transmission, studies on quality-differentiated food are scarce, and particularly for organic food vis-á-vis conventional food. This study adds to this scarce literature by analysing wholesale to retail price transmission for organic and conventional milk in the Swedish milk sector, using time-series analysis applied to monthly price data for the period Jan 2007–Nov 2017. Estimations are performed using the non-linear ARDL model which allows for asymmetric cointegration of prices and a simultaneous analysis of short- and long-run asymmetry, the latter of which has been largely overlooked in previous studies. In the case of conventional milk, results indicate positive asymmetries both in the short-run and the long-run. For organic milk, the long-run positive asymmetry is smaller and not statistically significant in all specifications. Organic consumers are therefore likely to experience smaller differences between surplus losses and gains, following positive and negative wholesale price changes, respectively.
    Keywords: Price transmission; organic food; non-linear ARDL
    JEL: C22 L11 Q13
    Date: 2021–10–01
  24. By: Yasin Kürsat Önder (-)
    Abstract: This paper quantitatively investigates the trade-offs of introducing an extra line of credit in an emergency situation. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis.
    Keywords: sovereign default, liquidity shocks, swap lines, sudden stops
    JEL: F30 F34
    Date: 2021–10

This nep-mon issue is ©2021 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.