nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒11‒22
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Deflationary Bias of the ZLB and the FED’s Strategic Response By Adrian Penalver; Daniele Siena
  2. Hitting the elusive inflation target By Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
  3. Stock Returns and Inflation Redux: An Explanation from Monetary Policy in Advanced and Emerging Markets By Mr. Zhongxia Zhang
  4. Optimal Monetary Policy with the Risk-Taking Channel By Angela Abbate; Dominik Thaler
  5. Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies By Juan Yepez
  6. What goes around comes around: How large are spillbacks from US monetary policy? By Breitenlechner, Max; Georgiadis, Georgios; Schumann, Ben
  7. Endogenous Growth, Downward Wage Rigidities and Optimal Inflation By Mr. Sebastian Weber; Mirko Abbritti; Agostino Consolo
  8. Bank Money Creation and the Payments System By Biagio Bossone
  9. O Tell Me The Truth About Central Bank Digital Currency By Riccardo De Bonis; Giuseppe Ferrero
  10. Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh By Ehsan, Zaeem-Al
  11. Quantitative easing, safe asset scarcity and bank lending By Tischer, Johannes
  12. Heterogeneous labour market response to monetary policy: small versus large firms By Singh, Aarti; Suda, Jacek; Zervou, Anastasia
  13. Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective By Ruipeng Liu; Rangan Gupta; Elie Bouri
  14. "Welfare Costs of Exchange Rate Fluctuations: Evidence from the 1972 Okinawa Reversion" By Kazuko Kano; Takashi Kano
  15. Empirical Investigation of a Sufficient Statistic for Monetary Shocks By Fernando Alvarez; Andrea Ferrara; Erwan Gautier; Hervé Le Bihan; Francesco Lippi
  16. The Effects of Forward Guidance: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  17. Climate change, central banking and financial supervision: beyond the risk exposure approach By Yannis Dafermos
  18. Forecasting with VAR-teXt and DFM-teXt Models:exploring the predictive power of central bank communication By Leonardo Nogueira Ferreira
  19. Safe asset shortage and collateral reuse By Jank, Stephan; Mönch, Emanuel; Schneider, Michael
  20. Price Stability of Cryptocurrencies as a Medium of Exchange By Tatsuru Kikuchi; Toranosuke Onishi; Kenichi Ueda
  21. The Impact of the ECB Banking Supervision Announcements on the EU Stock Market By Angelo Baglioni; Andrea Monticini; David Peel
  22. Licence to Dine: 007 and the Real Exchange Rate By Lee A. Craig; Julianne Treme; Thomas J. Weiss
  23. Evolution of Bilateral Swap Lines By Kiichi Tokuoka; Mr. Jongsoon Shin; Yudong Rao; Michael Perks
  24. Estimating the elasticity of consumer prices to the exchange rate: an accounting approach By Hadrien Camatte; Guillaume Daudin; Violaine Faubert; Antoine Lalliard; Christine Rifflart
  25. Opening Up: Capital Flows and Financial Sector Dynamics in Low-Income Developing Countries By Mr. Futoshi Narita; Sebastian Horn
  26. Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability By Yizhi Xu; Samuel Mann; Pierre Guérin; Ken Zhi Gan; Manchun Wang; Mr. Adolfo Barajas; Woon Gyu Choi
  27. Cash: A Blessing or a Curse? By Fernando Alvarez; David Argente; Rafael Jimenez; Francesco Lippi
  28. Assessing Labour Market Slack for Monetary Policy By Erik Ens; Laurence Savoie-Chabot; Kurt See; Shu Lin Wee
  29. Covid-19 and Capital Flows: The Responses of Investors to the Responses of Governments By Goldbach, Stefan; Nitsch, Volker
  30. How Sensitive Are Cost of Living Metrics to Missing Food Price Data? Evidence from a Novel Market Survey and Consumer Price Data in Rural Malawi. By Kaiyatsa, Stevier; Schneider, Kate; Masters, William A.

  1. By: Adrian Penalver; Daniele Siena
    Abstract: The paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a Zero Lower Bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank with an inflation mandate. The presence of the ZLB prevents the central bank from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a Central Bank with a symmetric dual mandate (i.e. minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.
    Keywords: Monetary Policy Strategy, Inflation-Bias, Zero Lower Bound, Inflation Expectations.
    JEL: E52 E58
    Date: 2021
  2. By: Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
    Abstract: Since the 2001 recession, average core inflation has been below the Federal Reserve's 2% target. This deflationary bias is a predictable consequence of a symmetric monetary policy strategy that fails to recognize the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias, improves welfare, and reduces the risk of deflationary spirals - a pathological situation in which inflation keeps falling indefinitely. This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range. A counterfactual simulation shows that a modest level of asymmetry would have removed the deflationary bias observed in the United States.
    Keywords: Asymmetric monetary policy,deflationary bias,deflationary spiral,target range,framework review
    JEL: E31 E52
    Date: 2021
  3. By: Mr. Zhongxia Zhang
    Abstract: Classical theories of monetary economics predict that real stock returns are negatively correlated with inflation when monetary policy is countercyclical. Previous empirical studies mostly focus on a small group of developed countries or a few countries with hyperinflation. In this paper, I examine the stock return-inflation relation under different monetary policy regimes and conditions using an expanded dataset of 71 economies. Empirical evidence suggests that the stock return-inflation relation is partially driven by monetary policy. If a country’s monetary authority conducts a more countercyclical monetary policy, the stock return-inflation relation becomes more negative. In addition, the results differ by monetary policy framework. In exchange rate anchor countries, stock markets do not respond to monetary policy cyclicality. In inflation targeting countries, stock markets react more strongly to inflation. A key contribution of this paper is to classify inflation targeters by their behaviors, and illustrate that behavior matters in shaping market perceptions: markets react to inflation and monetary policy cyclicality when central banks are able to control inflation within their target bands. In this case markets are sensitive to inflation dynamics when inflation is above the announced target bands. Finally, when monetary policy is constrained by the Zero Lower Bound (ZLB), a structural break is introduced and real stock returns no longer respond to inflation and monetary policy cyclicality.
    Keywords: monetary policy cyclicality; stock return-inflation relation; countercyclical monetary policy; market perception; inflation targeting country; Inflation; Stocks; Emerging and frontier financial markets; Inflation targeting; Central bank policy rate; Global
    Date: 2021–08–20
  4. By: Angela Abbate (Swiss National Bank); Dominik Thaler (Banco de España)
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).
    Keywords: risk-taking channel, optimal monetary policy, inertial policy rate
    JEL: E44 E52
    Date: 2021–10
  5. By: Juan Yepez
    Abstract: Dutch disease is often referred as a situation in which large and sustained foreign currency inflows lead to a contraction of the tradable sector by giving rise to a real appreciation of the home currency. This paper documents that this syndrome has been witnessed by many emerging markets and developing economies (EMDEs) as a result of surges in capital inflows driven by accommodative U. S. monetary policy. In a sample of 25 EMDEs from 2000-17, U. S. monetary policy shocks coincided with episodes of currency appreciation and a contraction in tradable output in these economies. The paper also shows empirically that the use of capital flow measures (CFMs) has been a common policy response in several EMDEs to U.S. monetary policy shocks. Against this background, the paper presents a two sector small open economy augmented with a learning-by-doing (LBD) mechanism in the tradable sector to rationalize these empirical findings. A welfare analysis provides a rationale for the use of CFMs as a second-best policy when agents do not internalize the LBD externality of costly resource misallocation as a result of greater capital inflows. However, the adequate calibration of CFMs and the quantification of the LBD externality represent important implementation challenges.
    Keywords: monetary policy shock; LBD externality; Dutch disease effect; emerging markets and developing economies; EMDEs monetary policy framework; Dutch disease; Capital inflows; Exchange rates; Exchange rate arrangements; Global
    Date: 2021–08–06
  6. By: Breitenlechner, Max; Georgiadis, Georgios; Schumann, Ben
    Abstract: We quantify spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model estimated on data for the time period from 1990 to 2019. We find that spillbacks account for a non-trivial share of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock. Our analysis suggests that spillbacks materialise as Tobin’s q/cash flow and stock market wealth effects impinge on US investment and consumption. Contractionary US monetary policy depresses foreign sales of US firms, which reduces their valuations/cash flows and thereby induces cutbacks in investment. Similarly, as contractionary US monetary policy depresses US and foreign equity prices, the value of US households’ portfolios is reduced, which triggers a drop in consumption. Net trade does not contribute to spillbacks because US monetary policy affects exports and imports similarly. Finally, spillbacks materialise through advanced rather than emerging market economies, consistent with their relative importance in US firms’ foreign demand and US foreign equity holdings. JEL Classification: F42, E52, C50
    Keywords: Bayesian proxy structural VAR models, spillbacks, spillovers, US monetary policy
    Date: 2021–11
  7. By: Mr. Sebastian Weber; Mirko Abbritti; Agostino Consolo
    Abstract: Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate.
    Keywords: NK model; inflation level; invariance hypothesis; target value; target carry welfare cost; Inflation targeting; Inflation; Wage rigidity; Wages; Wage adjustments; Global
    Date: 2021–08–06
  8. By: Biagio Bossone
    Abstract: This article investigates how the role that banks play in the payment system space affects their money creation power and process. In particular, the article analyzes how the payments market share of each bank affects its money creation power and how payment settlement technologies and rules determine the banks’ demand for funding and, hence, their money creation power. Also, as the power to create money enables money creators to extract extra-profits or rents ("seigniorage") from the economy, the article evaluates analytically how banks extract seigniorage through money creation and how bank seigniorage differs from profits from pure financial intermediation. By showing the central role that payment systems play in the context of such an important economics topic as money creation, the article seeks to emphasize the relevance of payment system analysis for macroeconomic theory and practice and points to the need for achieving better integration of the two disciplines.
    Keywords: Bank; Bank money creation; Central bank policy; Demand deposits; Financial intermediaries; Funding; Lending; Payment and settlement systems
    JEL: E51 E58 G21
    Date: 2021–11
  9. By: Riccardo De Bonis (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Keywords: central bank digital euro, history of money, payment system, digitalization, digital euro
    JEL: E42 E58
    Date: 2021–11
  10. By: Ehsan, Zaeem-Al
    Abstract: This paper set out to uncover the nexus between the propensity of mobile financial service (MFS) usage and inflation in Bangladesh, if any. This paper hypothesizes that the usage of MFS will lead to an increase in the velocity of money, i.e., the ease of using MFS in lieu of cash will lead to money transferring ownership quicker. All things constant, this will lead to inflation—as stipulated by the quantity theory of money. To this end, monthly data pertaining to the general price index, number of MFS agents, number of average daily MFS transactions, number of MFS clients and number of banks supporting MFS transactions have been used ranging from FY16 to FY20, subject to availability. The objective of the paper was to understand the relationship between usage of MFS and inflation, if any. To this end, two models were developed and subsequently tested. Upon undertaking a Johannsen co-integration test, it was found that there is indeed one long run equilibrium relationship between the variables used as per the second model. The use of the Vector Auto Regression (VAR) on model 1 failed to upholster the hypothesis of the paper. The subsequent use of a Vector-Error Correction model (VECM) on model 2 to capture the nexus between the propensity of MFS usage and inflation in Bangladesh also failed to diagnose a statistically significant relationship between MFS velocity and inflation in Bangladesh.
    Keywords: Inflation, MFS, VAR, VECM
    JEL: D4 E51
    Date: 2021–11–01
  11. By: Tischer, Johannes
    Abstract: The Eurosystem's Public Sector Purchase Programme (PSPP) increased the scarcity of safe assets, which caused significant declines and substantial dispersion in European repo rates. However, banks holding these safe assets benefited from this development: First, using the German security register, this paper shows that scarcity affects bank funding costs, as their collateral supply is determined by their ex ante securities holdings and repo rates. Second, it makes use of the German credit register to show that asset scarcity had real effects: Banks more exposed to asset scarcity increased their credit supply.
    Keywords: Quantitative easing,safe asset scarcity,repo rates,bank lending,monetary transmission
    JEL: E51 E58 G11 G21
    Date: 2021
  12. By: Singh, Aarti; Suda, Jacek; Zervou, Anastasia
    Abstract: We study the effects of monetary policy shocks on the growth rates of hiring, employment and earnings of new hires across firms of different sizes. We find that contractionary and expansionary monetary policy shocks have different effects on hiring and employment growth for small and large firms. Relative to large firms, small firms are less responsive to contractionary monetary policy shocks while they are more responsive to expansionary shocks. We also find that, as a consequence of monetary policy shocks, the earnings of new hires changes, and this wage effect depends on the sign of the shock and the size of the firms. We use a heterogeneous firm model with a working capital constraint, an upward sloping marginal cost curve and a financial accelerator effect, and augment it with the wage effect. We find that our empirical results are consistent with the model as long as the combined effect due to varying steepness of the marginal cost curve and the wage effect is stronger than the financial accelerator channel.
    Keywords: Heterogeneous firms, financing constraints, labour market, monetary policy
    Date: 2021–10
  13. By: Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Elie Bouri (School of Business, Lebanese American University, Lebanon)
    Abstract: Theory suggests the existence of a bi-directional relationship between stock market volatility and monetary policy rate uncertainty. In light of this, we forecast volatilities of equity markets and shadow short rates (SSR) - a common metric of both conventional and unconventional monetary policy decisions, by applying a bivariate Markov-switching multifractal (MSM) model. Using daily data of eight advanced economies (Australia, Canada, Euro area, Japan, New Zealand, Switzerland, the UK, and the US) over the period of January, 1995 to March, 2021, we find that the bivariate MSM model outperforms, in a statistically significant manner, not only the benchmark historical volatility and the univariate MSM models, but also the Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) framework, particularly at longer forecast horizons. This finding confirms the bi-directional relationship between stock market volatility and uncertainty surrounding conventional and unconventional monetary policies, which in turn has important implications for academics, investors and policymakers.
    Keywords: Shadow short rate uncertainty, Stock market volatility, Markov-switching multifractal model (MSM), Forecasting
    JEL: C22 C32 C53 D80 E52 G15
    Date: 2021–11
  14. By: Kazuko Kano (School of Commerce, Waseda University); Takashi Kano (Graduate School of Economics, Hitotsubashi University and CIRJE, Faculty of Economics, The University of Tokyo)
    Abstract: The main tenet of the New Keynesian (NK) paradigm is that price dispersion caused by nominal price stickiness is the primary source of allocative inefficiency. This study empirically evaluates the welfare implications of NK models by observing how internal and external price dispersion responds to two types of large aggregate shocks: high inflation and sharp currency depreciation. For this purpose, we consider the history of US military deployment on a small southern island in Japan called Okinawa following the Pacific War. We investigate unique data variations in micro-level retail prices surveyed in Okinawa and mainland Japan before and after the Okinawan reversion to Japanese sovereignty in May of 1972. By considering the Okinawan experience of three currency regimes during the high inflation period of the early 1970s as valid quasi-natural experiments, we identify statistically significant deteriorations of currency misalignment associated with the sudden exogenous large USD depreciation versus the JPY following the Nixon Shock. Furthermore, we observe that these massive aggregate shocks left the average absolute size of price changes mostly unchanged, but significantly increased the average frequency of price changes in Okinawa. Because a calibrated small open-economy menu cost model fits these empirical findings better than the Calvo model, the welfare costs of exchange rate fluctuations may be more elusive than suggested by the open-economy NK literature.
    Date: 2021–11
  15. By: Fernando Alvarez (University of Chicago and NBER); Andrea Ferrara (Northwestern University); Erwan Gautier (Banque de France); Hervé Le Bihan (Banque de France); Francesco Lippi (LUISS University and EIEF)
    Abstract: In a broad class of sticky price models the non-neutrality of nominal shocks is captured by a simple sufficient statistic: the ratio of the kurtosis of the size-distribution of price changes over the frequency of price changes. We test this theoretical prediction using data for a large number of firms representative of the French economy. We use the micro data to measure the cross sectional moments, including kurtosis and frequency, for about 120 PPI industries and 220 CPI categories. We use a Factor Augmented VAR to measure the sectoral responses to a monetary shock, as summarized by the cumulative impulse response of sectoral prices (CIRP), under three alternative identification schemes. The estimated CIRP correlates with the kurtosis and the frequency consistently with the prediction of the theory (equal coefficients with opposite signs). The analysis also shows that other moments not suggested by the theory, such as the mean, standard deviation and skewness of the size-distribution of price changes, are not correlated with the CIRP. Several robustness checks of these findings are analyzed.
    Date: 2021
  16. By: Christopher Roth (University of Cologne, ECONtribute, C-SEB, briq, CESifo, CEPR, CAGE); Mirko Wiederholt (LMU Munich and Sciences Po, CESifo, CEPR); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute)
    Abstract: We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s pro-jection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respon-dents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to oppos-ing effects from intertemporal substitution and changes in expected real income.
    Keywords: Expectation Formation, Information, Updating
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2021–11
  17. By: Yannis Dafermos (Department of Economics, SOAS University of London)
    Abstract: It is now increasingly accepted that central banks and financial supervisors can no longer ignore climate change. However, there is no consensus on how they should address climate issues. On the one hand, there is a view that central banks and financial supervisors should mainly contribute to the assessment of the exposure of the financial system to climate-related financial risks, considering at the same time the possibility of incorporating climate risks into monetary policy and financial supervision and regulation. On the other hand, it is argued that central banks and financial supervisors need to take action such that they contribute directly to the decarbonisation of our economies and the prevention of climate systemic risks. In this paper, I analyse the main premises and implications of these two approaches and I explain why a systemic risk approach is necessary in the age of climate emergency. I also discuss the challenges involved in a policy agenda aiming at the reduction of climate systemic risks and I outline how these challenges can be tackled.
    Keywords: climate change, central banking, financial supervision, macroprudential regulation, systemic risk
    JEL: E5 E12 G18 Q54 Q57
    Date: 2021–09
  18. By: Leonardo Nogueira Ferreira
    Abstract: This paper explores the complementarity between traditional econometrics and machine learning and applies the resulting model – the VAR-teXt – to central bank communication. The VAR-teXt is a vector autoregressive (VAR) model augmented with information retrieved from text, turned into quantitative data via a Latent Dirichlet Allocation (LDA) model, whereby the number of topics (or textual factors) is chosen based on their predictive performance. A Markov chain Monte Carlo (MCMC) sampling algorithm for the estimation of the VAR-teXt that takes into account the fact that the textual factors are estimates is also provided. The approach is then extended to dynamic factor models (DFM) generating the DFM-teXt. Results show that textual factors based on Federal Open Market Committee (FOMC) statements are indeed useful for forecasting.
    Date: 2021–11
  19. By: Jank, Stephan; Mönch, Emanuel; Schneider, Michael
    Abstract: The reuse of collateral can support the efficient allocation of assets in the financial system. Exploiting a novel dataset, we quantify banks' collateral reuse at the security level. We show that banks substantially increase their reuse of collateral in response to scarcity induced by central bank asset purchases. Repo rates are less sensitive to purchase-induced scarcity at low levels of reuse, when the banking system can easily supply collateral through reuse. Repo rates are more sensitive to scarcity and more volatile at high levels of reuse, highlighting the trade-off between the shock absorption and shock amplification effects of collateral reuse.
    Keywords: safe assets,government bonds,collateral reuse,rehypothecation,repo market,securities lending
    JEL: E4 E5 G1 G2
    Date: 2021
  20. By: Tatsuru Kikuchi (Faculty of Economics, The University of Tokyo); Toranosuke Onishi (Tokio Marine & Nichido Fire Insurance Co., Ltd.); Kenichi Ueda (Faculty of Economics, The University of Tokyo)
    Abstract: We present positive evidence of price stability of cryptocurrencies as a medium of exchange. For the sample years from 2016 to 2020, the prices of major cryptocurrencies are found to be stable, relative to major financial assets. Specifically, after filtering out the less-than-one-month cycles, we investigate the daily returns in US dollars of the major cryptocurrencies (i.e., Bitcoin, Ethereum, and Ripple) as well as their comparators (i.e., major legal tenders, the Euro and Japanese yen, and the major stock indexes, S&P 500 and MSCI World Index). We examine the stability of the filtered daily returns using three different measures. First, the Pearson correlations increased in later years in our sample. Second, based on the dynamic time-warping method that allows lags and leads in relations, the similarities in the daily returns of cryptocurrencies with their comparators have been present even since 2016. Third, we check whether the cumulative sum of errors to predict cryptocurrency prices, assuming stable relations with comparators’ daily returns, does not exceeds the bounds implied by 1 the Black-Scholes model. This test, in other words, does not reject the efficient market hypothesis.
    Date: 2021–11
  21. By: Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Andrea Monticini (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); David Peel
    Abstract: We study the impact of ECB’s supervisory announcements on the Bank Stock index, from 2013 through 2017. Our evidence shows that the news, related to supervisory actions, do have highly significant effects on the market price of banks, contributing to the volatility of the Bank Stock Index for Europe and Italy. Most announcements signal the need to raise more regulatory capital and lead to negative returns in the stock market, thus increasing the cost of raising new capital. Our study is related to previous ones (by Bernanke and Kuttner) focusing on the impact of monetary policy announcements on the stock exchange.
    Keywords: Banking Supervision, ECB, GARCH, Stock Market.
    JEL: G21 G28
    Date: 2021–11
  22. By: Lee A. Craig; Julianne Treme; Thomas J. Weiss
    Abstract: We constructed a time series of menu prices for the identifiable restaurants at which James Bond dined in France and the UK that yields one of the few international price series representing luxury services. This series enabled us to calculate a real exchange rate based on prices pertinent to international travelers. We also compiled a time series on the salary of workers in the British Civil Service at Grade 7, like Bond, from 1953 to 2019. Our results indicate that French restaurant prices increased faster than Grade 7 salaries over the entire period and changes in the British exchange rate were not favorable for British travelers. To dine weekly in France, during the 1950s and 1960s, Bond would have spent 18 percent of his salary; whereas over the course of the Euro era the same basket of luxury services would have required on average 26 percent of his salary. Finally, our data indicate a likely violation of the law of one price during both the Pound-Franc and Pound-Euro eras.
    JEL: D4 E3 F2 N10 N14 Z3
    Date: 2021–10
  23. By: Kiichi Tokuoka; Mr. Jongsoon Shin; Yudong Rao; Michael Perks
    Abstract: This paper makes contributions to the study of bilateral swap lines (BSLs). First, this paper fills a BSL information gap by constructing a comprehensive database of BSLs based on publicly available information, including after the onset of the COVID-19 pandemic. Second, the paper provides the results of regression analysis exploring several empirical questions that were not covered in previous studies. The paper documents the evolution of BSLs into an important part of the Global Financial Safety Net (GFSN), with some helping to stabilize financial market during both the Global Financial Crisis (GFC) and the COVID-19 pandemic. Analysis suggests that countries on the recipient side of BSLs are more likely to sign and renew BSLs designed to alleviate balance of payments needs as their external position weakens. U.S. Federal Reserve BSLs appear to have been effective at stabilizing financial market conditions during the COVID-19 pandemic.
    Keywords: Bilateral swap lines (BSLs); Global Financial Safety Net (GFSN); COVID-19 pandemic; Global Financial Crisis (GFC); BSL information gap; Federal Reserve BSL; Fed swap network; BSL network; Fed's BSLs; liquidity swap operations; information gap; Current account balance; COVID-19; Credit default swap; Currencies; Global; Asia and Pacific
    Date: 2021–08–06
  24. By: Hadrien Camatte; Guillaume Daudin (DIAL - Développement, institutions et analyses de long terme, OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Violaine Faubert; Antoine Lalliard; Christine Rifflart (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: We analyse the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate, using world input-output tables (WIOT) from 1995 to 2019. In line with the existing literature, we find a modest output-weighted elasticity of around 0.1. This elasticity is stable over time but heterogeneous across countries, ranging from 0.05 to 0.22. Such heterogeneity mainly reflects differences in foreign product content of consumption and intermediate products. Direct effects through imported consumption and intermediate products entering domestic production explain most of the transmission of an exchange rate appreciation to domestic prices. By contrast, indirect effects linked to participation in global value chains play a limited role. Our results are robust to using four different WIOT datasets. As WIOT are data-demanding and available with a lag of several years, we extrapolate a reliable estimate of the HCE deflator elasticity from 2015 onwards using trade data and GDP statistics.
    Keywords: Global value chains,Spillovers,Input-output linkages,Cost-push inflation
    Date: 2021–11–02
  25. By: Mr. Futoshi Narita; Sebastian Horn
    Abstract: Over the past two decades, many low-income developing countries have substantially increased openness towards external financing and have received large capital inflows. Using bank-level micro data, this paper finds that capital inflows have been associated with financial deepening through increases in bank loans, deposits, and wholesale funding. Domestic banks increase loans more than foreign banks. There are only modest signs of a build-up in financial vulnerabilities. Causality is examined through an instrumental variable approach and an augmented inverse-probability weighting estimator. These approaches indicate only limited evidence for global push effects, pointing towards the importance of domestic pull factors.
    Date: 2021–09–24
  26. By: Yizhi Xu; Samuel Mann; Pierre Guérin; Ken Zhi Gan; Manchun Wang; Mr. Adolfo Barajas; Woon Gyu Choi
    Abstract: After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. We investigate the empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies. We find that loose financial conditions contribute to leverage buildups and generate an intertemporal tradeoff: financial stability risk is lessened in the near term but exacerbated in the medium term. The tradeoff is amplified during credit booms, when debt service burdens are particularly high, or when the share of foreign currency debt is high in emerging markets. Selected macroprudential tools can arrest leverage buildups and mitigate the tradeoff.
    Keywords: leverage buildup; A. Macroprudential policy; loose financial conditions; Policy implication; B. Macroprudential policy; Credit booms; Macroprudential policy; Central bank policy rate; Macroprudential policy instruments; Financial sector stability; Global
    Date: 2021–08–20
  27. By: Fernando Alvarez (University of Chicago); David Argente (Pennsylvania State University); Rafael Jimenez (University of Chicago); Francesco Lippi (LUISS University and EIEF)
    Abstract: We use two quasi-natural experiments that encouraged the use of debit cards and facilitated the use of ATMs in Mexico to estimate the elasticity of crime and informality to the availability of cash as means of payment. We then construct a simple model to quantify the private costs of restricting cash-usage in the economy. Our model captures the degree of substitution between cash and other payment methods at both the intensive and the extensive margins. We estimate the welfare effects of restricting cash by means of three key inputs: i) the elasticity of substitution between cash and credit, ii) the share of expenditures in cash by type of good obtained from detailed micro data, and iii) the elasticity of crimes to the availability of cash as means of payment. The social benefits of restricting cash usage are driven by the reduction of some criminal activities. The costs arise from the distortions that the anti-cash regulation imposes on the individual choices regarding the means of payment. We find that the private costs of heavily taxing the use cash outweigh the social benefits that we identify.
    Date: 2021
  28. By: Erik Ens; Laurence Savoie-Chabot; Kurt See; Shu Lin Wee
    Abstract: We assess how rising exports of US liquefied natural gas (LNG) affect the convergence of natural gas prices worldwide. Using standard principal component analysis and cointegrating techniques, we show that the degree of co-movement between global benchmark prices for natural gas has strengthened since the United States began the large-scale export of LNG in 2016. At the same time, we find that global natural gas prices do not yet adhere to the relative law of one price. Our results also suggest that issues related to storage access in Alberta between 2017 and 2019 have limited price co-movements between major benchmarks for natural gas in the United States and Canada. In addition, we use vector error correction models to show that natural gas prices in Europe and Asia respond negatively to increased exports of US LNG. These results may have implications for the development of future LNG export capacity in Canada.
    Keywords: Business fluctuations and cycles; Coronavirus disease (COVID-19); Econometric and statistical methods; Labour markets, Monetary policy
    JEL: E24 J21 J6
    Date: 2021–10
  29. By: Goldbach, Stefan; Nitsch, Volker
    Abstract: This paper examines the effect of national government response measures to Covid-19 on German international capital flows. Analyzing highly disaggregated monthly data from the German balance of payments statistics over the period from January 2019 through January 2021, we find that bilateral financial interactions are negatively affected by stricter containment and closure policies as well as health system policies of a partner country, while German capital flows benefit from a partner’s economic support policies. Moreover, to the extent that public interventions to fight the pandemic affect financial interactions, the adjustment mainly takes place along the intensive margin.
    Date: 2021
  30. By: Kaiyatsa, Stevier; Schneider, Kate; Masters, William A.
    Keywords: Demand and Price Analysis
    Date: 2021–08

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