nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒11‒01
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Bennani, Hamza; Burgard, Jan Pablo; Neuenkirch, Matthias
  2. Retail CBDC purposes and risk transfers to the central bank By Romain Baeriswyl; Samuel Reynard; Alexandre Swoboda
  3. Negative Rates in Bilateral Repo Markets By Samuel Hempel; R. Jay Kahn
  4. Macroeconomic Effects of Quantitative Easing Using Mid-sized Bayesian Vector Autoregressions By Maciej Stefański
  5. The relationship between Financial Inclusion and Monetary Stability in Mozambique: Analysis based on an Error Correction Model (VECM) By Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
  6. Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible? By Edward N. Wolff
  7. Does information about current inflation affect expectations and decisions? Another look at Italian firms. By Alfonso Rosolia
  8. Central Banks and Inflation: Where Do We Stand and How Did We Get Here? By Karl Whelan
  9. A Bibliography of Free Banking Scholarship (2021) By Qiao, Elizabeth
  10. The International Experience of Central Bank Asset Purchases and Inflation By Gianluca Benigno; Paolo Pesenti
  11. Regional How Powerful is Unannounced, Sterilized Foreign Exchange Intervention? By Alain Naef; Jacob P. Weber
  12. A Structural Measure of the Shadow Federal Funds Rate By Callum J. Jones; Mariano Kulish; James Morley
  13. Forecasting Inflation and Output Growth with Credit-Card-Augmented Divisia Monetary Aggregates By William Barnett; Sohee Park
  14. Pecunia olet. Cash usage and the underground economy By Michele Giammatteo; Stefano Iezzi; Roberta Zizza
  15. Monetary and Financial Perspectives on Retail CBDC in the Thai Context By Thitima Chucherd; Chanokkarn Mek-yong; Nalin Nookhwun; Passawuth Nuntnarumit; Natta Piyakarnchana; Suparit Suwanik
  16. How Does International Capital Flow? By Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
  17. Collateral in bank lending during the financial crises:a borrower and a lender story. By Massimiliano Affinito; Fabiana Sabatini; Massimiliano Stacchini
  18. Experience-Based Heterogeneity in Expectations and Monetary Policy By Radke, Lucas; Wicknig, Florian
  19. Does Monetary Policy Affect Mergers and Acquisitions? By Horn, Carl-Wolfram; Fischer, Johannes J.
  20. Phase-Dependent Monetary and Fiscal Policy By Kamalyan, Hayk
  21. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  22. Are banks still 'too big to fail'? - A market perspective By Nicole Allenspach; Oleg Reichmann; Javier Rodriguez-Martin
  23. The ENSO Cycle and Forecastability of Global Inflation and Output Growth: Evidence from Standard and Mixed-Frequency Multivariate Singular Spectrum Analyses By Hossein Hassani; Mohammad Reza Yeganegi; Rangan Gupta
  24. Price Stickiness Heterogeneity and Equilibrium Determinacy By Jae Won Lee; Woong Yong Park
  25. Exchange Rate Jumps and Geopolitical Risks By Konstantinos Gkillas; Rangan Gupta; Christoforos Konstantatos; Dimitrios Vortelinos
  26. Relationship between threshold level of inflation and economic growth in Bangladesh- a multivariate quadratic regression analysis. By Asaduzzaman, Md
  27. Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization By Ayushi Bajaj; Nikhil Damodaran
  28. Where Do DeFi Stablecoins Go? A Closer Look at What DeFi Composability Really Means By Kanis Saengchote
  29. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  30. Firms' Inflation Expectations: New Evidence from France By Frédérique Savignac; Erwan Gautier; Yuriy Gorodnichenko; Olivier Coibion
  31. Inflation at Risk in Thailand By Maneerat Gongsiang; Pongpitch Amatyakul
  32. Can capital controls promote green investments in developing countries? By Alessandro Moro
  33. The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy By Klaus Adam; Erwan Gautier; Sergio Santoro; Henning Weber

  1. By: Bennani, Hamza; Burgard, Jan Pablo; Neuenkirch, Matthias
    JEL: E44 E52 E58 G21
    Date: 2021
  2. By: Romain Baeriswyl; Samuel Reynard; Alexandre Swoboda
    Abstract: The issuance of retail central bank digital currency (CBDC) entails a transfer of risk from commercial banks to the central bank. While this paper does not provide an overall assessment on whether or not to issue a retail CBDC, it analyzes how different mechanisms to limit the risk transfer, such as an unattractive interest rate on retail CBDC, a quantity ceiling or preventing convertibility of cash and reserves into CBDC, have different effects on the ability of retail CBDC to fulfil its intended purposes. In particular, these mechanisms hinder the use of CBDC as a medium of exchange. Specific aspects of demand and challenges related to a potential retail CBDC in Switzerland, namely, a small open economy with a safe-haven currency and a low level of government debt, are discussed.
    Keywords: Retail central bank digital currency
    JEL: E42 E52 E58
    Date: 2021
  3. By: Samuel Hempel (Office of Financial Research); R. Jay Kahn (Office of Financial Research)
    Abstract: Interest rates on repurchase agreements (repo) are crucial indicators of conditions in financial markets. This brief discusses negative rates in bilateral repo markets during 2021, and shows that they stemmed from two key sources: (1) broad factors that pushed down general collateral repo rates, and (2) narrower factors that pushed bilateral repo rates below comparable tri-party general collateral rates. Broad factors include increases in bank reserves and decreases in the supply of close alternatives to repo in early 2021. Narrower factors primarily concern demand for specific collateral in the bilateral market. Finally, the brief examines the effects of negative rates on the Secured Overnight Financing Rate (SOFR) and shows the existing construction of the SOFR successfully limits the impact of specific collateral demand on the reference rate.
    Keywords: Repurchase agreement, repo specials, financial markets, reference rate
    Date: 2021–09–27
  4. By: Maciej Stefański
    Abstract: The paper estimates macroeconomic effects and decomposes transmission channels of quantitative easing in the United States using 15-variable Bayesian vector autoregressive model with stochastic search variable selection prior, distinguishing between Treasury bond purchases, mortgage-backed securities purchases and Operation Twist. A positive quantitative easing shock has a strong, negative impact on unemployment and no impact on prices, with Treasury purchases and Operation Twist found to be more effective than purchases of mortgage-backed securities. Opposite to the assumptions usually made in the literature, quantitative easing transmits to the real economy mostly via the stock market instead of long-term rates. Among numerous extensions to the baseline model, spillbacks are found to account for 40% of the impact of Treasury purchases on unemployment and commercial paper purchases have similar effects on the economy as purchases of Treasury bonds and mortgage-backed securities. However, baseline estimates are not found to be very robust, and thus substantial uncertainty regarding the macroeconomic effects of QE persists.
    Keywords: unconventional monetary policy, large-scale asset purchases, QE, GDP, unemployment, United States, stochastic search variable selection, transmission channels, spillbacks, commercial paper.
    JEL: E52 E58
    Date: 2021–10
  5. By: Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
    Abstract: The present work aims to assess the existence of the relationship between financial inclusion and monetary stability in Mozambique based on the analysis of the vector correction error model (VECM) for the period from 2005 to 2020. The indicators used in the study follow the approach taken by Mbutor and Uba (2013), Lapukent (2015), Lenka and Bairwa (2016) and Hung (2016). In addition to indicators of traditional banking institutions, this article goes further by also incorporating indicators relating to services of electronic money institutions with the objective of capturing the impact of digital financial services on financial inclusion and their role in financial stability. The study presents results consistent with economic theory. The long-term VEC model proved to be statistically significant and confirmed the existence of a long-term relationship between financial inclusion and monetary stability. It also revealed that the deviation of the CPI from its long-term equilibrium is adjusted at a speed of 10.19%. The coefficients of the short-term VEC model were negative for the variables of branches and bank accounts. The coefficients of agents and EMI accounts were not positive, and their shocks are removed after 6 quarters, after which the expected negative sign is observed achieving monetary stability.
    Keywords: Financial Inclusion; Monetary Stability; VEC Model; Digital Financial Services JEL Classification: G20, G21, G28.
    Date: 2021–01
  6. By: Edward N. Wolff
    Abstract: Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This paper analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation accounted for 72.6 percent of the advance of mean wealth over 1983-2019. They also would have led to a 204.9 percent gain in median wealth, compared to the actual rise of 23.4 percent. Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this paper differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.
    JEL: D31 H31 J15
    Date: 2021–10
  7. By: Alfonso Rosolia (Bank of Italy)
    Abstract: I document the response of the inflation expectations, and pricing and labour demand decisions of Italian firms to randomly provided information about recent inflation and assess the causal effect of the former on firms’ decisions. I use a standard menu cost model to show that conventional IV2SLS estimates based on variation of agents’ inflation expectations generated by experimental manipulation of their information sets are likely devoid of casual content because in such experimental settings some assumptions required for their causal interpretation fail. I discuss alternative estimators based on assumptions more likely to be consistent with the underlying theoretical framework. Empirically, I find that randomly informed firms substantially revise their inflation expectations but do not revise pricing and hiring decisions. Causal inference from appropriate estimators consistently reveals that the lack of reduced form effects reflects absence of statistically significant effects of expected inflation on firms’ decisions rather than offsetting responses. These results cast doubts on the possibility of obtaining substantial real effects through communication strategies that reach the general public more effectively.
    Keywords: expectations, experimental data, information, communication, learning.
    JEL: E2 E3 D8 C01
    Date: 2021–10
  8. By: Karl Whelan
    Abstract: The inability of central banks to attain their target inflation rates in recent years has raised questions about the extent to which central banks can control the inflation process. This paper discusses the evolution of thought and evidence since the 1960s on the determinants of inflation and the role that should be played by central banks. The paper highlights the roles played by two streams of thought associated with Milton Friedman: Monetarist theories predicting a key role for monetary aggregates in determining inflation and the rise in popularity of the expectations-augmented Phillips curve. We discuss influence of the latter in determining the modern consensus on central bank institutions and the relative roles for fiscal and monetary policies. We conclude with a discussion of macroeconomic developments of the past decade and current policy options to stimulate the economy and restore inflation to its target levels, including the merits of “helicopter money”.
    Keywords: Inflation; Central banks; Phillips curve; Milton Friedman
    JEL: E31 E52 E58
    Date: 2021–08
  9. By: Qiao, Elizabeth (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this paper, the author provides a bibliography of major and minor scholarly writings on free banking up to mid-2021. It is helpful both for expanding knowledge of the history of free banking and for providing references that may be useful for thinking about some aspects of cryptocurrencies.
    Keywords: Bibliography; free banking
    JEL: E42 E50
    Date: 2021–10–23
  10. By: Gianluca Benigno; Paolo Pesenti
    Abstract: Recent inflationary pressures in the global economy have rekindled the debate on the link between money growth and price stability. Specifically, does rapid central bank money creation resulting from large-scale purchases of government securities fuel inflationary spending by households and firms? We argue that there are many valid reasons to be skeptical about this textbook narrative. In this post, we look at the international experience with regard to asset purchases, money growth, and inflation dynamics in the pre-COVID era in an attempt to draw lessons from the recent past. Most notably, we find that the view that large-scale purchases of sovereign debt cause unmanageable inflationary pressures is not supported by the experiences of foreign advanced economies. As a matter of fact, despite the extent and duration of the quantitative easing programs in those economies, central banks faced challenges in achieving their inflation objectives.
    Keywords: quantitative easing; inflation
    JEL: E2 E5 E31
    Date: 2021–10–20
  11. By: Alain Naef; Jacob P. Weber
    Abstract: Though most central banks actively intervene on the foreign exchange market, the literature offers mixed evidence on their effectiveness: particularly for unannounced interventions. We use new, declassified data from the archives of the Bank of England and the institutional features of the Bretton Woods era to estimate the effects of intervention on the exchange rate. We find that a purchase of pounds equivalent to 1% of the money supply causes a statistically significant, 4-5 basis point appreciation in the pound.
    Keywords: Monetary Policy, Foreign Exchange Markets, Bretton Woods System
    JEL: F3 N2
    Date: 2021
  12. By: Callum J. Jones; Mariano Kulish; James Morley
    Abstract: We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.
    Keywords: Zero lower bound; Forward guidance; Shadow rate; Monetary policy
    JEL: E52 E58
    Date: 2021–10–07
  13. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, University of Kansas)
    Abstract: This paper investigates the performance of the Credit-Card-Augmented Divisia monetary aggregates in forecasting U.S. inflation and output growth at the 12-month horizon. We compute recursive and rolling out-of-sample forecasts using an Autoregressive Distributed Lag (ADL) model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card-augmented Divisia, and the credit-card-augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability (CFS). We find that the smallest Root Mean Square Forecast Errors (RMSFE) are attained with the credit-card-augmented Divisia indices used as the forecast indicators. We also consider Bayesian vector autoregression (BVAR) for forecasting annual inflation and output growth.
    Keywords: Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Forecasting, Bayesian vector autoregression, Inflation, Output Growth.
    JEL: C32 C53 E31 E47 E51
    Date: 2021–10
  14. By: Michele Giammatteo (Bank of Italy); Stefano Iezzi (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: This paper explores the role of cash usage in feeding the underground economy by using a unique dataset that combines, at province level, official estimates of Italian firms’ underreporting with data on cash transactions drawn from the aggregate anti-money laundering reports filed to the Italian Financial Intelligence Unit (UIF) by banks. In order to derive causal evidence, we apply two different econometric strategies: an instrumental variable approach and a difference-in-difference approach, which exploits the change in the maximum threshold for cash transactions introduced in 2016, thereby providing a measure of the effect of such policy on tax evasion. We find that an increase in cash usage translates, other things being equal, into a higher level of underreporting by firms, and that raising the cash threshold in 2016 – a measure motivated by the objective of boosting spending – had the side effect of leading to a larger underground economy.
    Keywords: shadow economy, tax evasion, cash threshold, bank branches, ATM, cashless payments
    JEL: O17 H26 E26 E42
    Date: 2021–10
  15. By: Thitima Chucherd; Chanokkarn Mek-yong; Nalin Nookhwun; Passawuth Nuntnarumit; Natta Piyakarnchana; Suparit Suwanik
    Abstract: This paper explores three monetary and financial issues of retail central bank digital currency (CBDC) in the Thai context. The first insight shows that opportunities in the digital age may arise for Thai citizens and businesses to reap the benefits of a more efficient form of public money and financial innovation. It is possible for Thai citizens to quickly adopt unremunerated CBDC for transactional use within a decade. Second, we point out that there are several ways to utilize retail CBDC for enhancing monetary policy effectiveness, namely, through the bank rate channel and the introduction of new monetary policy tools. Nevertheless, monetary policy should not be the first and foremost objective for the central bank to issue CBDC as there are other factors to consider. These included impacts on the central bank balance sheet and monetary operations, especially for remunerated CBDC. Disintermediation and liquidity risks for Thai financial institutions are also key concerns, which are discussed in the third part. We assess that the risks to the banking sector are low in normal periods, but the well-designed CBDC features are necessary to prevent mounting liquidity risks in distressed periods.
    Keywords: CBDC; Digital Currency; Digital Money; Financial Landscape; Monetary Policy; Financial Stability
    JEL: E41 E42 E52 E58 G21
    Date: 2021–05
  16. By: Kumhof, Michael; Rungcharoenkitkul, Phurichai; Sokol, Andrej
    JEL: E44 E51 F41 F44
    Date: 2021
  17. By: Massimiliano Affinito (Bank of Italy); Fabiana Sabatini (Bank of Italy); Massimiliano Stacchini (Bank of Italy)
    Abstract: We analyse whether and to what extent both firm and bank soundness are associated with the use of collateral in bank lending, and whether these relationships changed during the global financial crisis and the euro-area sovereign debt crisis. By using a large dataset of 2 million observations at bank and firm level covering the years 2007-13, we find that the degree of collateralization is higher for firms that are financially stressed and have low capitalization and that it increases further for these borrowers during downturns. In addition, we find that collateral policies are tighter at sounder banks, that is, at banks that are more capitalized and have a lower burden of bad loans. This result is consistent with the existence of a negative link between bank soundness and risk-taking in bank lending.
    Keywords: bank-lending channel, collateral, financial crises.
    JEL: G01 G21 E5 E51
    Date: 2021–10
  18. By: Radke, Lucas; Wicknig, Florian
    JEL: D84 E32 E37 E52 E70
    Date: 2021
  19. By: Horn, Carl-Wolfram; Fischer, Johannes J.
    JEL: E44 E52 G34 E22
    Date: 2021
  20. By: Kamalyan, Hayk
    Abstract: This paper studies how the effects of monetary and fiscal policy vary depending on the business cycle phase. It shows that in a medium-scale DSGE model, estimated on US data, monetary policy has a stronger impact on the economy in downturns and booms. Labor and capital income taxes display similar patterns. Government expenditure shocks and consumption tax shocks, on the contrary, have a stronger impact on output in depressions and recoveries. The paper also shows that accounting for the source of business cycle fluctuations is potentially important when assessing state-dependence in policy transmission.
    Keywords: business cycle phases, phase-dependent policy, monetary policy, fiscal policy
    JEL: E31 E32 E37 E52 E62
    Date: 2021–10–24
  21. By: Nicola Amendola (DEF, Università di Roma "Tor Vergata"); Lorenzo Carbonari (CEIS & DEF, Università di Roma "Tor Vergata"); Leo Ferraris (Università di Milano-Bicocca)
    Abstract: We examine a theoretical model of liquidity with three assets {money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing.
    JEL: E40
    Date: 2021–10–14
  22. By: Nicole Allenspach; Oleg Reichmann; Javier Rodriguez-Martin
    Abstract: This paper aims at deriving the market's assessment as to whether banks worldwide still benefit from a Too Big To Fail (TBTF) subsidy. Such a subsidy reflects the market's expectation of government support in the event of a crisis and results in reduced funding costs for the benefiting bank. To capture this effect, we use two different extensions of the Merton (1974) framework. We find that large banks benefit from a TBTF subsidy, while large nonfinancial firms do not. This subsidy has declined somewhat since the Global Financial Crisis (GFC) but remains larger than before the crisis. These conclusions also hold when considering Contingent Convertible (CoCos) and bail-in bonds as fully loss-absorbing. Moreover, we find differences in the TBTF subsidy across jurisdictions and provide evidence that these can to a large extent be explained by differences in bank health.
    Keywords: Banking, too big to fail, CreditEdge, CreditGrades
    JEL: G12 G18 G21
    Date: 2021
  23. By: Hossein Hassani (The Research Institute of Energy Management and Planning (RIEMP), University of Tehran, No. 9, Ghods St., Tehran, Iran); Mohammad Reza Yeganegi (Department of Accounting, Central Tehran Branch, Islamic Azad University, Tehran, Iran); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: In this paper the role of the El Niño-Southern Oscillation (ENSO), measured by the Equatorial Southern Oscillation Index (EQSOI), is used to formally forecast the inflation and GDP growth rates of the United States (US), advanced (excluding the US) and emerging countries, as well as the world economy (barring the US). We rely on univariate and multivariate Singular Spectrum Analyses (SSA), as well as mixed-frequency version of the latter since the EQSOI is monthly, while GDP is available only at quarterly frequency unlike monthly inflation rates. We find statistically significant evidence of the ability of the EQSOI in forecasting inflation and GDP growth rates of the four economic blocs, though there are exceptions in terms of forecasting gains associated with inflation rate of emerging economies and the growth rate of the US. Our results have important implications for policymakers.
    Keywords: GDP growth, Inflation, ENSO, Forecastibility, Mixed-Frequency Multivariate SSA, Continuous Wavelet Transform
    JEL: C22 C32 E31 E32 E37 Q54
    Date: 2021–10
  24. By: Jae Won Lee; Woong Yong Park
    Abstract: This paper shows that the requirement for monetary policy to achieve equilibrium determinacy is substantially loosened when price change frequencies are heterogeneous. The result holds both in a simple sticky price model with the constant elasticity of substitution aggregator and no trend inflation and in an extended model with a variable elasticity of substitution aggregator that permits trend inflation at the historical level. With a realistic cross-sectional distribution of the price change frequency, monetary policy can achieve equilibrium determinacy with much weaker responses to inflation. We then revisit the debate on the role of monetary policy in the transition from the Great Inflation to the Great Moderation in the postwar US economy. The evidence that the US economy was subject to self-fulfilling expectations-driven fluctuations in the pre-Volcker period and that the systematic shift in the monetary policy rule has played a decisive role in stabilizing inflation is found to be much weakerthan previously concluded in the literature.
    Keywords: Heterogeneity in Price Stickiness; Equilibrium Determinacy; Sectoral Relative Price Dispersion; Monetary Policy; Great Inflation
    JEL: E12 E31 E43 E52 N12
    Date: 2021–10
  25. By: Konstantinos Gkillas (Department of Management Science & Technology, University of Patras, Megalou Aleksandrou 1, Koukouli, 26334 Patras, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Christoforos Konstantatos (Department of Business Administration, University of Patras, University Campus – Rio, P.O. Box 1391, Patras 26504, Greece); Dimitrios Vortelinos (Lincoln Business School, University of Lincoln, LN6 7TS, the UK; Hellenic Mediterranean University, Greece)
    Abstract: We study the causal relation as well as the Granger-causality and causality-in-quantiles of geopolitical risks in foreign exchange (FX) price jumps, for the period that spans from July 1, 2003, to August 28, 2015. Extended series of different currencies and quantiles are investigated considering seven exchange rates (i) Australian Dollar (AUD), (ii) British Pound (GBP), (iii) Euro (EUR), (iv) New Zealand Dollar (NZD), (v) Canadian Dollar (CAD), (vi) Japanese Yen (JPY) and (vii) Swiss Franc (CHF). We show that geopolitical risks (GPRs) help to predict FX jumps as our results demonstrate a statistically significant and of considerable magnitude relation between geopolitical risks and jumps in the foreign exchange market. The acts of geopolitical risk more severely cause FX total, upside and downside jumps; with the threats of geopolitical risk second, and the geopolitical risk last. In the highest quantiles, NZD is the currency with the highest causalities between geopolitical risks and FX jumps; the highest and lowest causalities are for geopolitical risk (GPR) and geopolitical acts (GPA), respectively. Moreover, the GPR has the highest dispersion of causalities for all FX jumps.
    Keywords: Causality, Quantile, Jumps, Foreign Exchange, Geopolitical Risks
    JEL: C22 G10 Q02
    Date: 2021–10
  26. By: Asaduzzaman, Md
    Abstract: The main objective of this study is to empirically examine the relationship between inflation and economic growth in Bangladesh and to investigate the ongoing possible threshold effect. This study draws on diverse tables and charts, correlation matrices, pair-wise Granger Causality tests, ADRL (General to Specific Approach) test, and a quadratic regression equation estimated by OLS using time series annual data covering the sample period from 1980 to 2017. The results demonstrate that the relationship between inflation and GDP growth is non-linear with a subsistence of a breakpoint, which means the inverted U-shape curve. Moreover, the Granger Causality shows that economic growth does granger cause inflation. The empirical result indicates that when the inflation level reaches the threshold level at 7.84 percent then the economic growth is in peak position. This study proposed that the Bangladesh Bank should maintain the precautious and growth-friendly monetary policy structure by keeping inflation targeting below 7.84 percent, or else the growth might be held back.
    Keywords: Threshold Inflation, GDP Growth, Quadratic Regression Model, Bangladesh Economy
    JEL: C1 C15 C3 C32 E0 E5 E52 E58 E6 O4 O42 O47
    Date: 2021–02–02
  27. By: Ayushi Bajaj (Monash University); Nikhil Damodaran (O.P. Jindal Global University)
    Abstract: Consumer payment choice is based on heterogeneous preferences, availability, usage costs, and effective taxes. We examine the consequences of this choice on consumption distribution, aggregate output, welfare and the shadow economy. We analyze India’s sudden demonetization of 86% of the cash in circulation with new notes gradually being replaced over the next several months. The welfare cost of this liquidity shock was equivalent to 1% of total consumption. Even though all consumers experienced a decline in welfare, its extent varied depending on the degree of cash dependence and the ability to switch to non-cash payments. The middle consumption deciles were disproportionately affected.
    Keywords: Money, Payments, Shadow economy, Demonetization, Monetary policy
    JEL: D83 E41 E52 E58 O17
    Date: 2021–10
  28. By: Kanis Saengchote
    Abstract: One of the benefits of decentralized finance (DeFi) – an alternative financial system built on blockchain – is composability, which means the system’s building blocks (tokens) can freely interact with one another to form new services. One example is stablecoin, a token with fixed exchange rate, which is backed by token collaterals. While stablecoins can be used to facilitate payments and exchanges, in DeFi they can be used to earn returns (“yield farming†), potentially multiplicatively. We use transaction-level blockchain data to analyze a stablecoin’s flows between protocols and provide suggestive evidence of DeFi yield-chasing behavior. We shed light on what DeFi total value locked might really measure and highlight the complexity in DeFi analysis and market surveillance.
    Keywords: DeFi; Stablecoin; Total Value Locked; Yield Farming; Systemic Risk
    JEL: E00 G00
    Date: 2021–07
  29. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    JEL: E44 E58 F34 G01 G21 G33
    Date: 2021–10
  30. By: Frédérique Savignac; Erwan Gautier; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using a new survey of firms’ inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms’ inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms’ expectations about aggregate and firm-level wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms’ inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms’ inflation expectations has no effect on their aggregate wage expectations.
    JEL: E3 E4 E5
    Date: 2021–10
  31. By: Maneerat Gongsiang; Pongpitch Amatyakul
    Abstract: Using monthly Thai data from 2003–2020, we examine the determinants of the future distribution of inflation. We evaluate how different risk factors predict 1-year- ahead future distributions of CPI inflation and its components. Risk factors come from 5 different groups of variables: inflation expectations, domestic economic activity, global economic activity, financial conditions, and component-specific factors. We obtain points on the future distributions of inflation through quantile regressions and fitting those points with skewed-t distributions. Our focus is on the outlook in the tails of the distribution, which recent literature referred to as `inflation-at-risk.' We find, as expected, that the whole inflation distribution has shifted lower, and thus the probability of negative inflation has increased markedly in recent years. There is a structural break around 2015 that affects both the distributions of inflation and their determinants. This structural break makes it challenging to make out-of-sample forecasts, thus, we focus on in-sample evaluation and explanations. For risk factors, we observe that the tightening of financial conditions and the decreasing world production are prominent sources of downside risks to inflation. Inflation expectations also play a smaller role in the lower quantiles, signaling its lower effectiveness in anchoring actual inflation during disinflationary periods. Finally, high global and domestic economic activity can be effective in decreasing downside risks in the lower tail, providing policy makers a way to counter these risks by stimulating the economy.
    Keywords: Inflation Determinants; Central Bank Policies
    JEL: E31 E52
    Date: 2021–04
  32. By: Alessandro Moro (Bank of Italy)
    Abstract: Climate change poses severe challenges to economic growth and financial stability, especially in developing countries with a more carbon-intensive economy and a greater exposure to climate-related damages. This paper proposes a simple model in which an emerging open economy, characterised by the presence of a carbon-intensive and green industry, imposes a tax on the interest paid by brown corporate bonds to foreign investors with the aim of redirecting capital to the green industry and reducing the negative environmental externality of brown firms. In this framework, capital controls have two opposite effects. On one hand, a higher tax rate has a direct negative impact on production, since it discourages capital inflows to carbon-intensive firms, thereby reducing their output. On the other hand, capital controls have an indirect positive effect through the reduction of the negative environmental externality of the carbon-intensive sector. Moreover, the analysis reveals that the optimal inflow tax is an increasing function of climate-related damage and a decreasing function of foreign and domestic investors’ environmental preferences.
    Keywords: open economy, capital controls, green investments, climate change economics.
    JEL: F21 F32 F50 F64 Q50
    Date: 2021–10
  33. By: Klaus Adam (University of Mannheim); Erwan Gautier (Banque de France); Sergio Santoro (Bank of Italy); Henning Weber (Deutsche Bundesbank)
    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 per cent, as suggested by the standard sticky price literature, to a range of 1.1-2.1 per cent in France, 1.2-2.0 per cent in Germany, 0.8-1.0 per cent in Italy, and 1.1-1.7 per cent 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 per cent of consumption in present-value terms.
    Keywords: Optimal inflation target, micro price trends, welfare
    JEL: E31 E52
    Date: 2021–10

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