nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒11‒29
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Disagreement inside the FOMC: New Insights from Tone Analysis By Davide Romelli; Hamza Bennani
  2. Is Mobile Money Part of Money? Understanding the Trends and Measurement By Ms. Kazuko Shirono; Mr. Hector Carcel Villanova; Esha Chhabra; Ms. Bidisha Das; Ms. Yingjie Fan
  3. Market Power and Monetary Policy Transmission By Davide Furceri; Mr. Romain A Duval; Marina M. Tavares; Raphael Lee
  4. Fedwire Funds Service: Payments, Balances, and Available Liquidity By Anton Badev; Lauren Clark; Daniel Ebanks; Jeffrey C. Marquardt; David C. Mills
  5. The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia By Banti, Chiara; Bose, Udichibarna
  6. Taming the "Capital Flows-Credit Nexus": A Sectoral Approach By Daniel Carvalho; Etienne Lepers; Rogelio Jr Mercado
  7. Investment Response to Monetary Policy in a Low Interest Rate Environment: Evidence from the ECB's Corporate QE By Guillaume Horny; Supriya Kapoor
  8. Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound By Rachel Doehr; Enrique Martinez-Garcia
  9. Distributional Effects of Monetary Policy By Ms. Deniz O Igan; Davide Furceri; Mrs. Nina T Budina; Mr. Machiko Narita; Mr. Balazs Csonto; Mr. Luis Brandao-Marques; Philipp Engler; Rui Mano; Gurnain Kaur Pasricha; Chiara Fratto; Valentina Bonifacio; Murad Omoev; Ms. Helene Poirson
  10. Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis By Marco Airaudo; Ina Hajdini
  11. Impact of the central bank’s financial result on the transfers of benefits across sectors of the economy By Krzysztof Kruszewski; Mikołaj Szadkowski
  12. Medium- vs. short-term consumer inflation expectations: evidence from a new euro area survey By Ewa Stanisławska; Maritta Paloviita
  13. Aging, migration and monetary policy in Poland By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  14. Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe By Saungweme; Odhiambo
  15. Relative prices and pure inflation since the mid-1990s By Hie Joo Ahn; Matteo Luciani
  16. The internationalization of domestic banks and the credit channel of monetary policy By Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
  17. Limited Asset Market Participation and Monetary Policy in a Small Open Economy By Paul Levine; Stephen McKnight; Alexander Mihailov; Jonathan Swarbrick
  18. The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability? By Paolo Fegatelli
  19. Should Central Banks Issue Digital Currency? By Todd Keister; Daniel R. Sanches
  20. Okay Boomer... Excess Money Growth, Inflation, and Population Aging By Joseph Kopecky
  21. Funding liquidity, credit risk and unconventional monetary policy in the Euro area: a GVAR approach By Graziano Moramarco
  22. Inflation and Economic Growth in Kenya: An Empirical Examination By Saungweme; Odhiambo
  23. The Effects of Forward Guidance: Theory with Measured Expectations By Mirko Wiederholt; Christopher Roth; Johannes Wohlfart
  24. Scrambling for Dollars: International Liquidity, Banks and Exchange Rates By Javier Bianchi; Saki Bigio; Charles Engel
  25. Inflation Narratives By Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
  26. Addressing Spillovers from Prolonged U.S. Monetary Policy Easing By Mr. Machiko Narita; Stephen Cecchetti; Umang Rawat; Ms. Ratna Sahay
  27. Interactions between Monetary and Fiscal Policy: Yesterday, Today, and Tomorrow By Alan S. Blinder
  28. Parameter Uncertainty and Effective Lower Bound Risk By Naoto Soma
  29. Determinacy and E-stability with interest rate rules at the zero lower bound By Eo, Yunjong; McClung, Nigel
  30. Central Banking in the Time of Covid By Alan S. Blinder
  31. Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis By Saungweme; Odhiambo

  1. By: Davide Romelli (Department of Economics, Trinity College Dublin); Hamza Bennani (School of Economics and Management (IAE), University of Nantes)
    Abstract: This paper analyses the drivers of divergence in tone among Federal Open Market Committee (FOMC) members using text analysis tools. We use a financial dictionary to measure the tone of FOMC transcripts at the speaker-meeting-round level. We then relate the tone of FOMC members’ remarks with their individual projections for inflation and unemployment rate. Our results show a positive relationship between inflation projections and the tone used by FOMC members, suggesting that divergence in tone among members is mainly driven by differences in their projected levels of inflation. We also show that Federal Reserve Bank presidents and voting members are those who use a more distinct tone, in particular during the economics go-round.
    Keywords: central banks, monetary policy committees, federal reserve, fomc.
    JEL: E52 E58
    Date: 2021–09
  2. By: Ms. Kazuko Shirono; Mr. Hector Carcel Villanova; Esha Chhabra; Ms. Bidisha Das; Ms. Yingjie Fan
    Abstract: The rapid uptake of mobile money in recent years has generated new data needs and growing interest in understanding its impact on broad money. This paper reviews mobile money trends using mobile money data from the Financial Access Survey (FAS) and examines the statistical treatment of mobile money under the IMF’s Monetary and Financial Statistics (MFS) framework. MFS guidance is straightforward in most cases, as many jurisdictions have adopted regulations which ensure that mobile money is captured in the banking system and thus in the calculation of broad money. However, in cases where mobile network operators (MNOs) act as niche financial intermediaries outside the banking regulatory perimeter and are allowed to invest their customer funds in sovereign securities and other permitted assets, mobile money liabilities may remain outside the banking system as well as monetary statistics. In that case, information on mobile money liabilities need to be collected directly from MNOs to account for mobile money as part of broad money.
    Keywords: usage pattern; money account; customer funds; value chain; agent outlet; money issuer; measurement issue; monetary value; Mobile banking; Monetary base; Monetary statistics; Financial statistics; West Africa
    Date: 2021–07–01
  3. By: Davide Furceri; Mr. Romain A Duval; Marina M. Tavares; Raphael Lee
    Abstract: We show that firms’ market power dampens the response of their output to monetary policy shocks, using firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.
    Keywords: Monetary policy; interest rates; imperfect competition; market power; markups; monetary policy transmission; monetary policy shock; responses to change; firms' market power; firms' response; Central bank policy rate; Competition; Global
    Date: 2021–07–09
  4. By: Anton Badev; Lauren Clark; Daniel Ebanks; Jeffrey C. Marquardt; David C. Mills
    Abstract: We analyze the universe of payments settled through the Fedwire Funds Service--the primary U.S. real-time gross settlement service operated by the Federal Reserve--for the period January 2004 to December 2020. We report on trends in payments volume, payments value, balances, and overdrafts, in addition to documenting changes in the behavior of financial institutions transacting via the Fedwire Funds Service.
    Keywords: Fedwire; Payments; Overdrafts; Liquidity
    JEL: E58 G20
    Date: 2021–11–05
  5. By: Banti, Chiara; Bose, Udichibarna
    Abstract: This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency corporate debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy conditions in the region act as transmission channels for this effect. We show that transparent firms which have lower monitoring costs are relatively more exposed to the regional financial cycle, suggesting that affiliates of foreign banks play an important role. However, the exposure of domestic credit markets reduces once regulators institute more stringent policy actions such as macroprudential policies, selective capital controls and floating currency regimes.
    Keywords: Regional financial cycle; domestic credit markets; macroprudential policies; capital controls; emerging markets
    Date: 2021–11–19
  6. By: Daniel Carvalho (Banco de Portugal); Etienne Lepers (Organisation for Economic Co-operation and Development); Rogelio Jr Mercado (Asian Development Bank)
    Abstract: An important channel through which capital flows may lead to financial vulnerabilities is by fuelling domestic credit booms, the so-called "capital flows-credit growth nexus". This paper makes two important contributions to the study of this nexus (i) it adopts a sectoral approach to the relationship between cross-border capital flows and domestic credit growth and (ii) it studies how di erent macroprudential and financial policies affect that relationship. Using novel datasets on both sectoral flows and policy measures for 36 emerging economies for the 2000-2018 period, the results not only underscore the importance of a granular sectoral approach to identify the full range of connections between capital flows and credit growth, but also regarding the appropriate policy response. While, in general, macroprudential policies and foreign currency-based measures are more suited to mitigate the impact of banking sector flows, capital controls may be e ective in the presence of non-financial corporates (NFC) and other financial corporates flows. Breaking by borrowing sectors, within macroprudential measures, lending standards and measures targeted at household credit weaken the impact of inflows on household credit and measures aimed at household credit actually strengthen the relationship between NFC flows and NFC credit suggesting a potential shift in composition.
    Keywords: capital flows, domestic credit, sectors
    JEL: E51 F32 G15
    Date: 2021–09
  7. By: Guillaume Horny (Banque de France); Supriya Kapoor (Technological University Dublin)
    Abstract: We study how an easing in corporate bond funding conditions affect the asset structure of firms’ fixed assets. This paper employs ECB's Corporate Sector Purchase Program as a quasi-natural experiment that reduces bond yields for firms eligible to ECB purchases. We identify eligible firms using information on their bond ratings. Using consolidated balance sheet information on non-financial firms in France, we find that firms increase investment expenses but only to replace existing assets, whether tangible and intangible, instead of investing in new equipment to grow in scale. This replacement is however not homogeneous across asset classes, since intangible assets increase in importance relative to tangible ones. The shift towards intangible assets is stronger for firms with a BBB rating than for safer firms (AAA-A rating). This suggest that while BBB rated firms were to some extent constraint in their funding, they do not use the proceeding to reinforce the collateral value of their assets. These effects are robust to the inclusion of several fixed effects. We conclude that an easier access to market debt can have an effect on the mix of fixed assets used by firms to produce. This raises questions as to whether firms eligible to CSPP purchases increased their productivity since new equipment can be more efficient than the deprecated ones.
    Keywords: CSPP, bond issuances, monetary policy, credit risk, investment
    JEL: D24 E52 G01 G32
    Date: 2021–10
  8. By: Rachel Doehr; Enrique Martinez-Garcia
    Abstract: We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the initial shock. Interest rate uncertainty shocks explain a significant portion of macro fluctuations, particularly after the 2007-09 global financial crisis contributing to push the unemployment rate one percentage point higher during the early phase of the subsequent recovery. Furthermore, we find that higher interest rate uncertainty makes forward guidance shocks (but also federal funds rate shocks) less effective at moving unemployment and core inflation. We also posit a theoretical model to provide the structural backbone for our empirical results, via an “option value” channel. Theory yields sizeable real effects and a muted monetary policy transmission mechanism as firms choose to postpone investment decisions in response to heightened interest rate uncertainty.
    Keywords: Monetary Policy Transmission Mechanism; Monetary Policy Uncertainty; Forward Guidance; Business Cycle Propagation; Survey-Based Forecasts
    JEL: E30 E32 E43 E52
    Date: 2021–11–11
  9. By: Ms. Deniz O Igan; Davide Furceri; Mrs. Nina T Budina; Mr. Machiko Narita; Mr. Balazs Csonto; Mr. Luis Brandao-Marques; Philipp Engler; Rui Mano; Gurnain Kaur Pasricha; Chiara Fratto; Valentina Bonifacio; Murad Omoev; Ms. Helene Poirson
    Abstract: As central banks across the globe have responded to the COVID-19 shock by rounds of extensive monetary loosening, concerns about their inequality impact have grown. But rising inequality has multiple causes and its relationship with monetary policy is complex. This paper highlights the channels through which monetary policy easing affect income and wealth distribution, and presents some quantitative findings about their importance. Key takeaways are: (i) central banks should remain focused on macro stability while continuing to improve public communications about distributional effects of monetary policy, and (ii) supportive fiscal policies and structural reforms can improve macroeconomic and distributional outcomes.
    Keywords: asset price channel; easing affect income; A. central bank mandate; wealth channel; A. savings-redistribution channel; Income inequality; Income distribution; Income; Wages; Consumption; Global; Caribbean
    Date: 2021–07–30
  10. By: Marco Airaudo; Ina Hajdini
    Abstract: By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis - depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with i) weaker wealth effects on labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), and ii) smaller price-to-wage markups (for which the steady state is less distorted). The stabilizing properties of Taylor rules under JR preferences are scrutinized.
    Keywords: Monetary Policy; Neo-Fisherianism; Wealth Effects; Markups
    JEL: E40 E50
    Date: 2021–11–17
  11. By: Krzysztof Kruszewski (Narodowy Bank Polski); Mikołaj Szadkowski (Narodowy Bank Polski, Warsaw School of Economics)
    Abstract: This paper presents an analysis of the impact of the central bank’s financial result and its components on the inter-sectoral transfers of benefits and the creation of central bank money. Transfers of benefits depend on the structure of the central bank’s balance sheet and its financial result. The structure of its balance sheet, its financial result as well as profit distribution influence central bank money creation. If the central bank records a profit, fully transferred to the state budget, and its assets are mainly denominated in domestic currency, then the central bank’s financial result can be seen only as a tool for intermediation in the transfer of benefits between different sectors of the national economy. In such a situation, the bank’s financial result does not affect the volume of the central bank’s money. On the other hand, if the central bank records a profit, fully paid to the state budget, and its assets are mainly denominated in foreign currency, then there is a transfer from foreign entities to the domestic economy, and there is simultaneously an increase in central bank money volume. However, if the central bank incurs a loss and the loss is not covered, for example, by the government, then the central bank transfers benefits directly from itself to other sectors of the economy, and regardless of the structure of its balance sheet, there is an increase in the central bank’s money issuance.
    Keywords: central bank, financial result, balance sheet, transfers between sectors of the economy
    JEL: E51 E58
    Date: 2021
  12. By: Ewa Stanisławska (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    Abstract: Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in inflation perceptions. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy.
    Keywords: Inflation expectations, consumer survey, micro-data
    JEL: D12 D84 E31 E58
    Date: 2021
  13. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: Poland faces a particularly sharp demographic transition. The old-age dependency ratio is expected to increase from slightly above 20% in 2000 to over 60% in 2050. At the same time the country has recently witnessed a huge wave of immigration, mostly from Ukraine. In this paper we investigate how aging and migration will affect the Polish economy and what consequences these adjustments have for its monetary policy. Using a general equilibrium model with life-cycle considerations, we show that the decline in the natural rate of interest (NRI) due to demographic processes is substantial, amounting to more than 1.5 percentage points, albeit spread over a period of 40 years. The impact of migration flows is relatively small and cannot significantly alleviate the downward pressure on the NRI induced by populating aging. If the central bank is slow in learning about the declining NRI, an extended period of inflation running below the target is likely. In this case, the probability of hitting the zero lower bound (ZLB) becomes a major constraint on monetary policy while it could remain under control if the central bank uses demographic trends to update the NRI estimates in real time.
    Keywords: aging, monetary policy, migration, life-cycle models
    JEL: E43 E52
    Date: 2021
  14. By: Saungweme; Odhiambo
    Abstract: The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.
    Date: 2021–10
  15. By: Hie Joo Ahn; Matteo Luciani
    Abstract: This paper decomposes consumer price inflation into pure inflation, relative price inflation, and idiosyncratic inflation by estimating a dynamic factor model á la Reis and Watson (2010) on a data set of 146 monthly disaggregated prices from 1995 to 2019. We find that pure inflation is the trend around which PCE price inflation fluctuates, while relative price inflation and idiosyncratic inflation drive the fluctuation of PCE price inflation around the trend. Unlike Reis and Watson, we find that labor market slack is the main driver of pure inflation and that energy prices account for variation in relative price inflation.
    Keywords: Pure inflation; Relative price inflation; Phillips correlation; Dynamic factor model; Disaggregated consumer prices; Monetary policy
    JEL: C32 C43 C55 E31 E52
    Date: 2021–10–20
  16. By: Paola Morales; Daniel Osorio-Rodríguez; Juan S. Lemus-Esquivel; Miguel Sarmiento
    Abstract: How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations. **** RESUMEN: ¿Cómo afecta la expansión de los bancos domésticos en los mercados internacionales el canal del crédito bancario de la política monetaria? Usando datos a nivel de banco-firma-préstamo, este estudio encuentra que el crecimiento del crédito y las tasas de interés de los créditos otorgados por los bancos internacionales (i.e., bancos domésticos que se expandieron en los mercados internacionales) responden menos a cambios en la política monetaria y que la internacionalización mitiga parcialmente el canal de la toma de riesgos de la política monetaria. Encontramos también que los bancos con una mayor presencia internacional tienden a tolerar mejor su exposición al riesgo de crédito frente a los bancos domésticos. Además, identificamos que los bancos internacionales tienden a usar más el fondeo externo cuando cambian las tasas de política, lo que les permite aislar en mayor medida su oferta de crédito de los cambios de la política monetaria en comparación con los bancos domésticos. Este resultado es consistente con las predicciones de la hipótesis de los mercados de capital internos. Se muestra que la regulación cambiaria macroprudencial reduce el acceso al fondeo externo por parte de los bancos con alta exposición cambiaria, lo que contribuye a la transmisión de la política monetaria. En general, los resultados sugieren que la internacionalización de los bancos disminuye la potencia del canal del crédito bancario y reduce el canal de la toma de riesgos de la política monetaria dentro del límite establecido por la regulación cambiaria macroprudencial.
    Keywords: Bank-lending channel, internationalization of banks, banks’ business models, monetary policy, bank risk-taking, macroprudential FX regulation, Canal del crédito bancario, internacionalización de la banca, modelos de negocio de los bancos, política monetaria, toma de riesgos bancarios, regulación cambiaria macroprudencial.
    JEL: E43 E52 F23 F34 F44
    Date: 2021–11
  17. By: Paul Levine (University of Surrey); Stephen McKnight (El Colegio de Mexico); Alexander Mihailov (University of Reading); Jonathan Swarbrick (University of St Andrews)
    Abstract: Limited asset market participation (LAMP) and trade openness are crucial features that characterize all real-world economies. We study equilibrium determinacy and optimal monetary policy in a model of a small open economy with LAMP. With low enough participation in asset markets, the conventional wisdom concerning the stabilizing benefits of policy inertia can be overturned irrespective of the constraint of a zero lower bound on the nominal interest rate. In contrast to recent studies, in LAMP economies trade openness can play an important stabilizing role. We also show that the central bank must balance the opposing influence of openness and LAMP on the aggressiveness of optimal policy, and that the equivalence between efficient and equitable optimal allocation found in closed economies breaks down in open economies. We derive targeting rules and demonstrate the superiority of commitment over discretion in implementable optimal interest rate rules.
    JEL: E31 E44 E52 E58 E63 F41
    Date: 2021–10
  18. By: Paolo Fegatelli
    Abstract: The introduction of a general-purpose central bank digital currency (CBDC) carries the risk of bank disintermediation, potentially jeopardizing financial stability and monetary policy transmission through the bank lending channel. By adapting the theoretical framework of Dutkowsky and VanHoose (2018b, 2020) to the euro area, this study clarifies the conditions under which a digital euro could be introduced on a large scale without leading to bank disintermediation or a credit crunch. First, the central bank would need to set up proper mechanisms to manage the volume and the user cost of CBDC in circulation. Second, since some bank deposits will be converted into CBDC, the central bank should continue to facilitate access to its long-term lending facilities in order to provide banks with an alternative funding source at an equivalent cost. Depending on its design, a digital euro could improve bank profitability by absorbing large amounts of idle (and expensive) excess reserves without penalizing lending. A digital euro could also improve banks’ competitive position relative to non-bank lenders and encourage bank digitalization.
    Keywords: Central bank digital currency, cash, central bank, monetary policy, excess reserves, reserve requirements, universal central bank reserves, bank deposits, bank profitability, bank credit, inside money, collateral
    JEL: E41 E42 E51 E52 E58 G21
    Date: 2021–08
  19. By: Todd Keister; Daniel R. Sanches
    Abstract: We study how the introduction of central bank digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. We highlight an important policy tradeoff: While a digital currency tends to promote efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.
    Keywords: Monetary policy; public vs. private money; electronic payments; liquidity premium; disintermediation
    JEL: E42 E58 G28
    Date: 2021–11–03
  20. By: Joseph Kopecky (Department of Economics, Trinity College Dublin)
    Abstract: Is inflation a monetary phenomenon? In the decades since the influential work of Milton Friedman, the great moderation has seemingly put to bed the idea that monetary aggregates serve as a useful tool for policy makers. While many point to a structural change in the underlying relationship between money growth and inflation, there is limited understanding as to why this monetary transmission has broken down. In this paper, I provide evidence that population age structure has an important impact on the relationship between excess money growth and inflation. Estimating these effects using a long run sample of data, I find that the one-to-one relationship between excess money growth and inflation implied by the quantity theory appears to hold over long horizons, with short-to-medium run effects that are smaller, but significant. I then show that changes in the population age structure, particularly as the baby boomer generation has moved through it, can explain a strengthening of this transmission during the highly inflationary period of the 1970s, as well as a complete disappearance during the 1990s and early 2000s. At present demographic headwinds on this relationship seem to have abated, with their effect opening the door for a potential return to money driven inflation.
    Keywords: Inflation, Aging, Money Growth
    JEL: E31 E40 E50 E52
    Date: 2021–06
  21. By: Graziano Moramarco
    Abstract: This paper investigates the transmission of funding liquidity shocks, credit risk shocks and unconventional monetary policy within the Euro area. To this aim, a financial GVAR model is estimated for Germany, France, Italy and Spain on monthly data over the period 2006-2017. The interactions between repo markets, sovereign bonds and banks' CDS spreads are analyzed, explicitly accounting for the country-specific effects of the ECB's asset purchase programmes. Impulse response analysis signals core-periphery heterogeneity and persistent flight to quality. A simulated reduction in any ECB programme ultimately results in rising yields and bank CDS spreads in Italy and Spain, as well as in falling repo trade volumes and rising repo rates in all four countries.
    Date: 2021–11
  22. By: Saungweme; Odhiambo
    Abstract: This paper examines the relationship between inflation and economic growth in Kenya from an analytical and empirical standpoint. The paper applies the autoregressive distributed lag (ARDL) bounds testing approach and the multivariate Granger-causality test using time series data covering 1970-2019. Structural breaks in the time series were also conducted using the Perron (1997) (PPURoot) and Zivot-Andrews (1992) (ZAU Root) techniques. Incorporating structural breaks into time series increases statistical inference's overall validity. Inflation and economic growth in Kenya were found to have structural breaks in 1995 and 1991. These years are marked by Kenya's economic, financial, public sector and institutional reforms. The other findings of the study revealed that inflation has a statistically significant negative influence on long-term economic growth. The multivariate Granger-causality results showed a distinct short-run unidirectional causality from economic growth to inflation in Kenya. In order to mitigate the negative consequences of inflation and the coronavirus on the economy and welfare, the study recommends that Kenya's government should pursue prudent monetary, financial, and fiscal policies.
    Date: 2021–10
  23. By: Mirko Wiederholt (LMU Munich and Sciences Po); Christopher Roth (University of Cologne); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen)
    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 projection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respondents do not adjust their nominal income expectations. Our model-based estimates highlight a small average consumption response to forward guidance due to opposing effects from intertemporal substitution and changes in expected real income.
    Keywords: Expectation Formation, Information, Updating
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2021–11–10
  24. By: Javier Bianchi; Saki Bigio; Charles Engel
    Abstract: We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.
    JEL: F41 F44 G20
    Date: 2021–11
  25. By: Peter Andre (University of Bonn); Ingar Haaland (University of Bergen and CESifo); Christopher Roth (University of Cologne, ECONtribute, briq, CESifo, CEPR, and CAGE Warwick); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, and Danish Finance Institute)
    Abstract: We provide evidence on the stories that people tell to explain a historically no-table rise in inflation using samples of experts, U.S. households, and managers. We document substantial heterogeneity in narratives about the drivers of higher inflation rates. Experts put more emphasis on demand-side factors, such as fiscal and monetary policy, and on supply chain disruptions. Other supply-side factors, such as labor shortages or increased energy costs, are equally prominent across samples. Households and managers are more likely to tell generic stories related to the pandemic or mismanagement by the government. We also find that house-holds and managers expect the increase in inflation to be more persistent than experts. Moreover, narratives about the drivers of the inflation increase are strongly correlated with beliefs about its persistence. Our findings have implications for understanding macroeconomic expectation formation.
    Keywords: Narratives, Inflation, Beliefs, Macroeconomics, Fiscal Policy, Monetary Policy.
    JEL: D83 D84 E31 E52 E71
    Date: 2021–11
  26. By: Mr. Machiko Narita; Stephen Cecchetti; Umang Rawat; Ms. Ratna Sahay
    Abstract: There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.
    Keywords: Spillovers, prolonged monetary policy easing, financial stability, macroprudential policies, foreign-exchange intervention, capital flow management measures; U.S. monetary policy; monetary policy easing; leverage ratio; financial institution leverage; monetary policy spillover; FXI policy; Macroprudential policy; Spillovers; Capital inflows; Capital flow management; Macroprudential policy instruments; Global
    Date: 2021–07–09
  27. By: Alan S. Blinder (Princeton Unviersity)
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62 E63
    Date: 2021–09
  28. By: Naoto Soma (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Associate Professor, Yokohama National University, E-mail:
    Abstract: Uncertainty is a fact of life for central banks, and the effective lower bound (ELB) of short-term nominal interest rates has become one source of uncertainty for many of them. This paper analyzes the effects of uncertainty about monetary policy transmission on inflation in a canonical New Keynesian model with optimal discretionary monetary policy under the ELB. The main finding is that a greater degree of uncertainty enlarges the "deflationary bias" of the economy. In the model, the central bank reacts to the uncertainty by attenuating the response of the nominal interest rate to exogenous shocks. Such inactive policy response leaves the fall in inflation caused by the ELB risk partially untreated, which lowers the inflation expectations of private agents and results in undershooting of the inflation target.
    Keywords: Model Uncertainty, Effective Lower Bound, Deflationary Bias, Risky Steady State
    JEL: D81 E32 E52
    Date: 2021–11
  29. By: Eo, Yunjong; McClung, Nigel
    Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.
    JEL: E31 E47 E52 E58
    Date: 2021–11–15
  30. By: Alan S. Blinder (Princeton Unviersity)
    Keywords: Covid, banks, central banking
    JEL: E50 E58 G01
    Date: 2021–09
  31. By: Saungweme; Odhiambo
    Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contested in literature. In the main, however, it is widely recognised that whether public debts are financed in a monetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy in ensuring price stability. This study contributes to the debate by testing the dynamic causal relationship between public debt and inflation in Tanzania covering the period 1970-2020. The study applies the autoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-based Granger-causality test to explore this relationship. In order to address the omission-of-variable bias, which has been the major methodological deficiency detected in some previous studies, two monetary variables, namely money supply and interest rate, were added as intermittent variables alongside public debt and inflation. The findings from this study show that there is a consistent long-run cointegrating relationship between public debt, inflation, money supply and interest rate in Tanzania. However, the results fail to find evidence of causality between public debt and inflation in Tanzania, irrespective of whether the causality is estimated in the short run or in the long run. The findings of this study, therefore, show that Tanzania’s current debt is not inflationary; hence, policymakers may continue to pursue the desirable fiscal policies necessary for the country’s long-term optimal growth path.
    Date: 2021–10

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