nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒12‒06
forty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The implementation and the rationale of the new inflation target of the ECB By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  2. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rates? By Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
  3. Back to the future: intellectual challenges for monetary policy By Claudio Borio
  4. Navigating by r*: safe or hazardous? By Claudio Borio
  5. Monetarist arithmetic at Covid-19 time: a take on how not to misapply the quantity theory of money By Julien Pinter
  6. The Price of Money: How Collateral Policy Affects the Yield Curve By Kjell G. Nyborg; Jiri Woschitz
  7. On the Time-varying Effects of the ECB's Asset Purchases By Andrejs Zlobins
  8. Revisiting the Properties of Money By Isaiah Hull; Or Sattath
  9. Losing traction? The real effects of monetary policy when interest rates are low By Rashad Ahmed; Claudio Borio; Piti Disyatat; Boris Hofmann
  10. Inflation Targeting Mattered: a multivariate synthetic control approach By Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
  11. To be or not to be “green”: how can monetary policy react to climate change? By Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
  12. Markups and inflation cyclicality in the euro area By Kouvavas, Omiros; Osbat, Chiara; Reinelt, Timo; Vansteenkiste, Isabel
  13. Dampening the financial accelerator? Direct lenders and monetary policy By Ryan Niladri Banerjee; José María Serena Garralda
  14. Heterogeneity, convergence and imbalances in the Euro area By Stéphane Auray; Aurélien Eyquem
  15. A Quantitative Evaluation to Interest Rate Marketization Reform in China By Jing Yuan; Yan Peng; Zongwu Cai; Zhengyi Zhang
  16. An Empirical Assessment of the Exchange Rate Pass-through in Mozambique By Felix F. Simione; Edson Manguinhane
  17. Social Capital and Monetary Policy By Rustam Jamilov
  18. Do term premiums matter? Transmission via exchange rate dynamics By Mitsuru Katagiri; Koji Takahashi
  19. Discount Rates, Debt Maturity, and the Fiscal Theory By Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
  20. Financial Dominance in the Pandemic and Post-Pandemic European Economy By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  21. International Measures of Common Inflation By Danilo Cascaldi-Garcia; Flora Haberkorn; Eli Nir
  22. Precautionary saving and un-anchored expectations By Grimaud, Alex
  23. Payment Risk and Bank Lending By Li, Ye; Li, Yi
  24. Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis By Takushi Kurozumi; Willem Van Zandweghe
  25. The natural rate of interest through a hall of mirrors By Phurichai Rungcharoenkitkul; Fabian Winkler
  26. What does machine learning say about the drivers of inflation? By Emanuel Kohlscheen
  27. What does digital money mean for emerging market and developing economies? By Erik Feyen; Jon Frost; Harish Natarajan; Tara Rice
  28. Quantitative easing and corporate innovation By Grimm, Niklas; Laeven, Luc; Popov, Alexander
  29. Heterogeneity in Exchange Rate Pass-through to Import Prices in Thailand: Evidence from Micro Data By Tosapol Apaitan; Pym Manopimoke; Nuwat Nookhwun; Jettawat Pattararangrong
  30. Central Banks’ responses to the Covid-19 pandemic: The case of the Bank of Central African States By Simplice A. Asongu; Nathanael Ojong; Valentine B. Soumtang
  31. The Effects of Macroprudential and Monetary Policy Shocks in BRICS economies By Kaelo Mpho Ntwaepelo
  32. Exchange Rate Determination in Asia By Chavan, Sumit Sunil; Shafighi, Najla
  33. The ECB's policy measures during the COVID-19 crisis By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  34. Central bank digital currencies: motives, economic implications and the research frontier By Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
  35. Central bank’s stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing By Camille Cornand; Rodolphe Dos Santos Ferreira
  36. Policy Uncertainty Shocks and Small Open Economies in Monetary Union: a Case Study of Ireland By Jonathan Rice
  37. “Impossible Trinity” Hypothesis: The causal Relation between Trilemma and Macro Policy Performance By Zhai, Weiyang
  38. Potential output, the Taylor Rule and the Fed By Omar Licandro; Francesca Vinci
  39. On the Validity of Purchasing Power Parity (PPP): The Case of Sierra Leone By Jabbie, Mohamed; Jackson, Emerson Abraham
  40. Macroeconomic Impact of Foreign Exchange Intervention: Some Cross-country Empirical Findings By Mr. Zhongxia Jin; Haobin Wang; Yue Zhao
  41. Credit growth, the yield curve and financial crisis prediction: evidence from a machine learning approach By Bluwstein, Kristina; Buckmann, Marcus; Joseph, Andreas; Kapadia, Sujit; Şimşek, Özgür

  1. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: In July 2021, the ECB's target has been revised specifying that the threshold of 2% inflation rate has to be applied symmetrically and with a medium-term orientation. We argue that a symmetric inflation target can offer a strong contribution to anchoring inflation expectations and to limiting the risks due to the zero and effective lower bound constraints. The monetary policy strategy revision plays a key role in the policy mix between fiscal and monetary policies for the post pandemic recovery.
    Keywords: Secular stagnation; zero-lower bound; monetary policy
    JEL: E31 E51 E58
    Date: 2021–11
  2. By: Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
    Abstract: We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies - Canada, Chile, the Czech Republic and Norway - using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies' monetary policy when rates shift to and from the very low end of the distribution.
    Keywords: Cross-border monetary policy spillover, international bank lending channel, low and negative interest rate environment (LNIRE), portfolio channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2021–11
  3. By: Claudio Borio
    Abstract: The central banking community is facing major challenges – economic, intellectual and institutional. A key economic challenge is the need to rebuild room for policy manoeuvre, which has fallen drastically over time. This lecture focuses on the intellectual challenge, ie facts on the ground are increasingly testing the longstanding analytical paradigms on which central banks can rely to inform their policies. It argues that certain deeply held beliefs underpinning those paradigms can complicate the task of regaining policy headroom.
    Keywords: monetary policy, business cycle, financial cycle, inflation, deflation, natural interest rate
    JEL: E43 E51 E52 E58 E31
    Date: 2021–11
  4. By: Claudio Borio
    Abstract: The concept of the natural rate of interest, or r*, has risen to prominence in monetary policy following the Great Financial Crisis. No doubt a key reason for the concept's newfound prominence has been the further decline of real and nominal interest rates to new lows, which has further constrained monetary policy's room for manoeuvre. This lecture explores the extent to which the concept can be a useful guide to policy. It concludes that, depending on how it is employed, the concept has the potential of leading policy astray and of complicating the task of regaining the needed policy headroom. If so, within a credible policy regime, there is a premium on flexibility in the pursuit of tightly defined inflation targets – on tolerance for transitory, but possibly persistent, shortfalls of inflation from target.
    Keywords: natural interest rate, central banking, monetary policy
    JEL: E40 E43 E52 E58
    Date: 2021–11
  5. By: Julien Pinter (NIPE - University of Minho)
    Abstract: The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks’ unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called "monetarist" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a "desired velocity". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies. Third, we review the channels and assumptions underlying the asserted quantity theory link between money growth and inflation. In light of our analysis, we conclude that the high money growth rates seen since the Covid-19 outbreak are not likely to automatically translate into higher inflation rates.
    Keywords: quantity theory of money; quantity equation; money growth; inflation; velocity of money
    JEL: B00 E41 E50 E58
    Date: 2021
  6. By: Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (University of Zurich)
    Abstract: Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy.
    Keywords: Yield curve, central bank, collateral policy, monetary policy, haircuts, repo, asset prices, liquidity, central-bank money, government bonds
    JEL: G12 E43 E52
    Date: 2021–11
  7. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper (re-)evaluates the effectiveness of central bank asset purchases in the euro area given their prominent role in the ECB's response to the pandemic as well as the evidence from the US suggesting diminishing returns of this policy measure over time. We analyse their macroeco- nomic impact in the euro area using a time-varying parameter structural vector autoregression with stochastic volatility and perform identification via sign and zero restrictions of Arias et al. (2018), their fusion with high frequency information approach akin to Jarocinski and Karadi (2020) and a novel method which merges high frequency identification with narrative sign re- strictions of Antolin-Diaz and Rubio-Ramirez (2018). We find that the potency of the ECB's asset purchases to lift inflation has indeed considerably declined over time with several factors contributing to a more muted response of prices to central bank asset purchases. Our results show that the reanchoring channel is no longer active while the counterproductive effects via the mechanism outlined in Boehl et al. (2020), which we dub the capacity utilization channel, have emerged lately and are further complemented with disinflationary effects stemming from the cost channel. Also, the effects passed through more standard transmission channels of central bank asset purchases like portfolio rebalancing and signalling, while still significant, appear to be less persistent recently. Overall, our findings point to a diminishing returns of the ECB's asset purchases to stabilize inflation and its expectations in the euro area.
    Keywords: quantitative easing, central bank asset purchases, monetary policy, euro area, non-linearities
    JEL: E50 E52
    Date: 2021–10–28
  8. By: Isaiah Hull; Or Sattath
    Abstract: The properties of money commonly referenced in the economics literature were originally identified by Jevons (1876) and Menger (1892) in the late 1800s and were intended to describe physical currencies, such as commodity money, metallic coins, and paper bills. In the digital era, many non-physical currencies have either entered circulation or are under development, including demand deposits, cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), in-game currencies, and quantum money. These forms of money have novel properties that have not been studied extensively within the economics literature, but may be important determinants of the monetary equilibrium that emerges in the forthcoming era of heightened currency competition. This paper makes the first exhaustive attempt to identify and define the properties of all physical and digital forms of money. It reviews both the economics and computer science literatures and categorizes properties within an expanded version of the original functions-and-properties framework of money that includes societal and regulatory objectives.
    Date: 2021–11
  9. By: Rashad Ahmed; Claudio Borio; Piti Disyatat; Boris Hofmann
    Abstract: Are there limits to how far reductions in interest rates can boost aggregate demand? In particular, as interest rates fall to very low levels, does the effectiveness of monetary policy in boosting the economy wane? We provide evidence consistent with this hypothesis. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold even when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. We also find evidence that the effectiveness of monetary policy wanes the longer interest rates stay low. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a corresponding steepening of the IS curve. Monetary policy trade-offs may have become more challenging.
    Keywords: monetary policy, low interest rates, monetary transmission mechanism
    JEL: E20 E52 E58
    Date: 2021–11
  10. By: Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
    Abstract: We use a multivariate synthetic control method that matches the price and output dynamics jointly to evaluate the effects of the inflation targeting regime (IT) on the inflation and output growth of its early adopters (the ITers) – New Zealand, Canada, the United Kingdom, Sweden, and Australia. Once accounting for the inflation-output tradeoff in the conduct of monetary policy, the ITers enjoyed lower inflation and/or higher output growth than their counterfactuals. These performances were economically important to justify IT central banks’ optimism with IT, both case-by-case and on average.
    Keywords: Inflation targeting; Multivariate synthetic control
    JEL: E52 E58
    Date: 2021–11–18
  11. By: Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
    Abstract: Climate change has profound effects not only for societies and economies, but also for central banks’ ability to deliver price stability in the future. This paper starts by documenting why climate change matters for monetary policy: it impacts the economic variables relevant to setting the monetary policy stance, it interacts with fiscal and structural responses and it can generate dislocations in financial markets, which are impossible for monetary policy to ignore. Next, we survey several possible ways central banks can respond to climate change. These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to sustainable growth. We also discuss the constraints and trade-offs faced by central banks as they respond to climate risks. Finally, focusing on the specific challenges faced by inflation-targeting central banks, we consider how certain design features of this regime might interact with, and evolve in response to, the climate challenge. JEL Classification: E52, E58, Q54
    Keywords: climate change, environmental economics, green finance, monetary policy, sustainable growth economics
    Date: 2021–11
  12. By: Kouvavas, Omiros; Osbat, Chiara; Reinelt, Timo; Vansteenkiste, Isabel
    Abstract: Price inflation in the euro area has been stable and low since the Global Financial Crisis, despite notable changes in output and unemployment. We show that an increasing share of high markup firms is part of the explanation of why inflation remained stubbornly stable and low in the euro area over the past two decades. For this purpose, we exploit a rich firm-level database to show that over the period 1995–2018 the aggregate markup in the euro area has been on the rise, mainly on account of a reallocation towards high-markup firms. We document significant heterogeneity in markups across sectors and countries and, by linking these markup developments to the evolution of sectoral level producer and consumer price inflation, we find that (i) inflation in high-markup sectors tends to be less volatile than in low-markup sectors and (ii) inflation in high-markup sectors responds significantly less to oil supply, global demand and euro area monetary policy shocks. JEL Classification: D2, D4, N1, O3
    Keywords: firm markups, inflation, price setting
    Date: 2021–11
  13. By: Ryan Niladri Banerjee; José María Serena Garralda
    Abstract: Direct lenders, non-bank credit intermediaries with low leverage, have become increasingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers' net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy.
    Keywords: direct lending, monetary policy, financial accelerator, credit channel
    JEL: G21 G32 F32 F34
    Date: 2021–11
  14. By: Stéphane Auray; Aurélien Eyquem (UL2 - Université Lumière - Lyon 2)
    Abstract: The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially offset by lower inflation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in inflation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple setup accounts for the bulk of post-euro fluctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade.
    Keywords: monetary union,inflation convergence,current account imbalances,borrowing constraints
    Date: 2021–06
  15. By: Jing Yuan (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Yan Peng (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Zhengyi Zhang (International School of Economics and Management, Capital University of Economics and Business, Beijing, Beijing 100070, China)
    Abstract: The structure of market yield curve and the relationship between term structure of market interest rates and economic fundamentals are of great concerns to the Chinese economy. Based on the characteristics of monetary policy and bond interest rate term structure, this paper proposes an interest rate model to evaluate quantitatively interest rate liberalization in China. The empirical findings suggest that treasury bond yield react prominently to both benchmark deposit/lending rates and the deposit reserve rate adjustment, while other monetary policy operations have little influence on the change in the yield. Benchmark rates and inflation rate have a high correlation, but the relation between expected inflation rate and market interest rates among all maturities is weak. The proposed model fits well the mean, the variance and the correlations of yields in Chinese bond market, and the fitted value estimated by inflation rate provides better calibration than the results estimated by Langrun Forecast or Baidu consumer price index.
    Keywords: Economic fundamentals; Expected inflation rate, Interest rate term structure, Interest rate marketization reform.
    JEL: G1 E4 C5
    Date: 2021–11
  16. By: Felix F. Simione; Edson Manguinhane
    Abstract: Determining the magnitude and speed of the exchange rate passthrough (ERPT) to inflation has been of paramount importance for policy-makers in developed and emerging economies. This paper estimates the exchange rate passthrough in Mozambique using econometric techniques on a sample spanning from 2001 to 2019. Results suggest that the ERPT is assymetric, sizable and fast, with 50 percent of the exchange rate variations passing through to prices in less than six months. Policy-makers should continue to pursue low and stable inflation and develop a strong track record of prudent macroeconomic policies for the ERPT to decline.
    Keywords: inflation environment; Philips-perron unit root test; long-run ERPT elasticity; CPI response; speed of the exchange rate passthrough; Exchange rate pass-through; Exchange rates; Inflation; Monetary policy frameworks; Nominal effective exchange rate; Global; Africa; Sub-Saharan Africa
    Date: 2021–05–06
  17. By: Rustam Jamilov
    Abstract: This paper studies the social capital channel of monetary non-neutrality in the United States. Empirically, identification is achieved by combining state-level local projections and high-frequency monetary surprises with survey data on trust, historical accounts of slavery from the 1860 Census, and the Trump vote. I find that states with high social capital - as measured by high trust towards institutions, low slavery intensity, or low Trump vote - are more responsive to monetary policy shocks. Theoretically, I embed a micro-founded circle of trust block into the New Keynesian model in continuous time. Equilibrium reduces to a four-equation NK model with distrust dampening the potency of monetary policy shocks, like in the data, and reducing the possibility of determinate equilibria. The framework also formalizes an equilibrium interaction between social capital, monetary policy and populism cycles - an exogenous decline in institutional trust boosts scepticism and weakens monetary policy.
    Keywords: Social capital, trust, monetary policy, central banking, macroeconomics, populism
    Date: 2021–10–22
  18. By: Mitsuru Katagiri; Koji Takahashi
    Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing on the empirical observation that uncovered interest parity holds better for longer-term interest rate differentials. A quantitative exercise using Japanese and U.S. data shows that changes in term premiums, particularly those made by the central bank's bond purchases, have sizable effects on Japanese inflation rates via exchange rate dynamics.
    JEL: E31 E52 E58
    Date: 2021–10
  19. By: Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
    Abstract: This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect the expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. In a calibrated macro-finance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.
    Keywords: Fiscal policy; Interest rates; Monetary policy
    JEL: E44 E63 G12
    Date: 2021–11
  20. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: Differently from past episodes, the European institutions responded to the pandemic shock with an appropriate policy mix. However, the expansionary convergence between monetary and fiscal policies is strengthening the role and the possible distortionary effects of financial dominance. Due to the consequent growing imbalances in financial markets, European institutions could deem it necessary to abandon the current policy approach and to re-attribute the function of the "only game in town" to monetary policy. However, in the post-pandemic context, the ECB could hardly act again as a last-resort player. Hence, it is convenient to pursue the policies that are compatible with sustainable post-pandemic development.
    Keywords: Fiscal dominance; ECB; Monetary policy
    JEL: E31 E51 E58
    Date: 2021–11
  21. By: Danilo Cascaldi-Garcia; Flora Haberkorn; Eli Nir
    Abstract: A key challenge for monetary policymakers in achieving their inflation goals—particularly important at the current juncture—is to be able to distinguish between persistent inflationary changes and short-term idiosyncratic shocks. The most common approach for filtering out short-term price shocks from inflation is to focus on measures of "core" inflation, traditionally defined as the change in the consumer price index (CPI) excluding food and energy prices.
    Date: 2021–11–05
  22. By: Grimaud, Alex
    Abstract: This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations.
    Keywords: Adaptive learning, precautionary saving, restricted perception equilibrium heterogeneous expectations, heterogeneous agents
    JEL: E25 E31 E52
    Date: 2021–07–05
  23. By: Li, Ye (Ohio State University); Li, Yi (Board of Governors of the Federal Reserve System)
    Abstract: Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission.
    JEL: E42 E43 E44 E51 E52 G21 G28
    Date: 2021–11
  24. By: Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: Recent studies indicate that, since 1980, the US economy has undergone increases in the average markup and the profit share of income and decreases in the labor share and the investment share of spending. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of individual differentiated goods, a decline of trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, adding a rise of highly productive "superstar firms" to the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms' markups, including the flat median markup.
    Keywords: Average markup; Profit share; Labor share; Trend inflation; Non-CES aggregator; Superstar firm hypothesis
    JEL: E52 L16
    Date: 2021–11–22
  25. By: Phurichai Rungcharoenkitkul; Fabian Winkler
    Abstract: Prevailing justifications of low-for-long interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector must learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this 'hall of mirrors' effect can explain much of the decline in real interest rates since 2008.
    JEL: E43 E52 E58 D82 D83
    Date: 2021–11
  26. By: Emanuel Kohlscheen
    Abstract: This paper examines the drivers of CPI inflation through the lens of a simple, but computationally intensive machine learning technique. More specifically, it predicts inflation across 20 advanced countries between 2000 and 2021, relying on 1,000 regression trees that are constructed based on six key macroeconomic variables. This agnostic, purely data driven method delivers (relatively) good outcome prediction performance. Out of sample root mean square errors (RMSE) systematically beat even the in-sample benchmark econometric models, with a 28% RMSE reduction relative to a naïve AR(1) model and a 8% RMSE reduction relative to OLS. Overall, the results highlight the role of expectations for inflation outcomes in advanced economies, even though their importance appears to have declined somewhat during the last 10 years.
    Keywords: expectations, forecast, inflation, machine learning, oil price, output gap, Phillips curve
    JEL: E27 E30 E31 E37 E52 F41
    Date: 2021–11
  27. By: Erik Feyen; Jon Frost; Harish Natarajan; Tara Rice
    Abstract: Proposals for global stablecoins have put a much-needed spotlight on deficiencies in financial inclusion and cross-border payments and remittances in emerging market and developing economies (EMDEs). Yet stablecoin initiatives are no panacea. While they may achieve adoption in certain EMDEs, they may also pose particular development, macroeconomic and cross-border challenges for these countries and have not been tested at scale. Several EMDE authorities are weighing the potential costs and benefits of central bank digital currencies (CBDCs). We argue that the distinction between token-based and account-based money matters less than the distinction between central bank and non-central bank money. Fast-moving fintech innovations that are built on or improve the existing financial plumbing may address many of the issues in EMDEs that both private stablecoins and CBDCs aim to tackle.
    JEL: E42 E51 E58 F31 G28 O33
    Date: 2021–10
  28. By: Grimm, Niklas; Laeven, Luc; Popov, Alexander
    Abstract: To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt financing conditions induced by corporate debt purchases under the ECB’s Corporate Sector Purchase Program. Companies eligible for the program increase significantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained firms. JEL Classification: E5, G10, O3
    Keywords: corporate innovation, productivity growth, quantitative easing, unconventional monetary policy
    Date: 2021–11
  29. By: Tosapol Apaitan; Pym Manopimoke; Nuwat Nookhwun; Jettawat Pattararangrong
    Abstract: We use transaction-level customs data and show that there is significant heterogeneity in exchange rate pass-through (ERPT) to import prices at the Thai border. Our findings uncover significant variations in ERPT across time as well as across disaggregated sectors. By studying several structural determinants of ERPT, we find that (i) prices of homogenous goods are more sensitive to exchange rate changes compared to differentiated goods; (ii) firms with a higher degree of market power face lower ERPT; and (iii) ERPT crucially hinges upon the currency of invoice in the trade transaction. For goods invoiced in a foreign currency, the effect of ERPT is significantly higher than those priced in Thai baht. We also find that for the large majority of Thai imports that are invoiced in the US dollar under the dominant currency pricing (DCP) paradigm, price responses to the US dollar are much higher than those associated with the bilateral exchange rate vis-Ã -vis the exporters' currency, but only in the short run. In the medium run, both exchange rates become equally relevant. Finally, by investigating state-dependent properties of ERPT, we find that while Thai import prices are equally sensitive to small versus large exchange rate changes, the degree of pass-through is stronger during episodes of depreciations rather than appreciations, particularly for goods that practice DCP.
    Keywords: Invoice Currency; Exchange Rate Pass-through; Directional Asymmetry; Differentiated Products; Firm Market Power; Local Currency Pricing; Producer Currency Pricing; Dominant Currency Pricing
    JEL: E31 F14 F31 L11
    Date: 2021–11
  30. By: Simplice A. Asongu (Yaounde, Cameroon); Nathanael Ojong (York University, Toronto, Canada); Valentine B. Soumtang (University of Yaoundé II, Cameroon)
    Abstract: This study explores the responses to the COVID-19 pandemic by the Bank of Central African States (BEAC), which is the central bank for countries in the Central African Economic and Monetary Community (CEMAC), that is, Cameroon, Chad, Gabon, Equatorial Guinea, Central African Republic, and the Republic of Congo. While hitherto, BEAC had fundamentally focused on fighting inflation and promoting monetary integration and financial stability in its member states, the COVID-19 pandemic, among other factors, has motivated it to also shift its policies towards targeted credit programmes and more economic growth. This study sheds light on four core aspects: (i) the socio-economic context of the CEMAC region prior to the COVID-19 pandemic, (ii) BEAC as a lender of last resort, (iii) historical, contemporary, and future insights surrounding targeted credit programmes, and (iv), suggestions for the path forward in terms of reforms, with emphasis on inclusive growth and monitoring economic development at the regional level.
    Keywords: Covid-19 pandemic; monetary policy; central bank responses; CEMAC, BEAC
    Date: 2021–08
  31. By: Kaelo Mpho Ntwaepelo
    Abstract: This paper examines the macroeconomic effects of the macroprudential and monetary policy shocks, in a framework where the policies target both the price and financial stability objectives. I employ the system-generalised method of moments (system-GMM) technique in a dynamic panel data model, over the 1990-2016 period. The study uses the novel integrated macroprudential policy dataset (iMaPP) in the context of the five major emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). The results indicate that a contractionary monetary policy shock eliminates the excessive growth of credit and house prices but increases the price levels (price puzzle). The presence of a price puzzle after a contractionary monetary policy shock indicates that there is a trade-off between the financial stability and price stability objectives. Similarly, the impulse response function analysis reveals the presence of a negative correlation between the financial variables and output, after a contractionary macroprudential policy shock. Overall, the empirical findings suggest that there is a policy conflict when the policies respond to additional objectives beyond their primary targets. It is therefore beneficial for each policy to focus on its primary objective while considering the spillover effects of the other policy.
    Keywords: emerging markets, macroprudential policy, financial stability, monetary policy, price stability
    JEL: E58 E61 G28
    Date: 2021–11–10
  32. By: Chavan, Sumit Sunil; Shafighi, Najla
    Abstract: The main aim of this paper is to validate the Sticky Price Monetary Model in India and China. This aim will be achieved by the investigation of the major determinants of exchange rate in these two economies. One of the main reasons of conducting this research is because the last 25 years were crucial years in developing Asia (especially India and China) after Globalisation. Another reason is because exchange rate is an element of attracting Foreign Direct Investment which has started in India in 1991 and in China mainly after 1980. In this study, we take exchange rate as the dependant variable and money supply, interest rate, Consumer price index and GDP as independent variables based on the sticky price monetary model. A Quantitative Method with the help of regression is implemented for data analysis and to obtain the results. The data from year 1995 to year 2020 for India and China has been collected from the World Bank database. This study will help to understand and identify the major determinants of exchange rate behaviour in the two countries. The empirical results indicate that for the case of China, money supply, GDP, and CPI are found to be significant in the model. The coefficient of money supply and CPI are positive while GDP found to be negative. For the case of India, interest rate, money supply and GDP found to be significant. The coefficient of interest rate and money supply are positive, and GDP is negative. The GDP impact in both economies is negative, an increase in GDP results in a decrease in the exchange rate. More specifically, when GDP increases, the value of the local currency will increase as locals will pay less to get the same amount of foreign currency ($US). These findings will have important information for the policy makers.
    Keywords: Keywords: Exchange rate, money supply, Interest rate, GDP, CPI
    JEL: G0
    Date: 2021–08
  33. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper illustrates the ECB's monetary policies, implemented in response to the Covid-19 crisis, and discusses their macroeconomic impact. By using an event-based analysis, it argues that these policies have stabilised the economic and financial system by incentivising banks' lending to households and businesses and by indirectly creating short-term fiscal capacity for those euro-area member states characterised by high government debt/GDP ratio.
    Keywords: Covid-19; ECB policy announcements; Financial market volatility; ECB policy reaction; Event-study analysis; Bank and Government borrowing costs
    JEL: E58 E44 E52
    Date: 2021–11
  34. By: Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
    Abstract: In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the "reserves for all" aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy. A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier.
    JEL: C72 C73 D4 E42 E58 G21 O32 L86
    Date: 2021–11
  35. By: Camille Cornand (Univ Lyon, CNRS, GATE. Address: LSE UMR 5824, F-69130 Ecully, France); Rodolphe Dos Santos Ferreira (BETA, University of Strasbourg, 61 avenue de la Forˆet Noire, 67085 Strasbourg Cedex, France and Cat ´olica Lisbon School of Business and Economics)
    Abstract: Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, it is shown that the presence of firms’ motivated beliefs has stark consequences for the conduct of optimal communication and stabilization policies. Under pure communication (resp. communication and stabilization policies), motivated beliefs about own private information (resp. own ability to process information) reverse the bang-bang solution of transparency (resp. opacity with full stabilization) found in the literature under objective beliefs and lead to intermediate levels of communication (and stabilization).
    Keywords: Motivated beliefs, public and private information (accuracy),overconfidence, communication policy, stabilization policy
    JEL: D83 D84 E52 E58
    Date: 2021
  36. By: Jonathan Rice (Department of Economics, Trinity College Dublin)
    Abstract: This paper explores the implications of policy uncertainty shocks for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real activity, only when monetary policy does not counteract these shocks. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.
    Keywords: Small Open Economy, Uncertainty, Investment, Consumption, Interest Rates, Monetary Policy.
    JEL: E2 E3 E4
    Date: 2020–01
  37. By: Zhai, Weiyang
    Abstract: This paper investigates how trilemma policy and economic performance mutually affected each other in developing and emerging countries between 1990 and 2017. We find that higher capital openness lowers output volatility and the inflation rate. However, trilemma policy decisions are also affected by economic performance. Under a high inflation regime, a country is pressured to reduce its financial integration by restricting its capital openness. During periods of heightened global risk and financial crisis, a country is pressured to reduce its exchange rate stability.
    Keywords: financial crisis; financial liberalization; impossible trinity; trilemma policy
    JEL: F15 F31 F36 O24
    Date: 2021–11–14
  38. By: Omar Licandro; Francesca Vinci
    Abstract: The Taylor Rule is widely considered a useful tool to summarise the Fed's policy, but the information set employed in practice to assess the state of economic activity is still an object of debate. The contribution of this paper is to provide evidence in favour of the following hypotheses. First, the original Taylor Rule is a valid representation of the actual working of the Fed's monetary policy. Second, the real time beliefs of the Fed concerning potential output can be proxied by the estimates published by the Congressional Budget Office. Third, potential output estimates were revised down following the Great Recession.
    Keywords: monetary policy, Taylor Rule, Great Recession, Economic recovery
    Date: 2021
  39. By: Jabbie, Mohamed; Jackson, Emerson Abraham
    Abstract: This paper attempts to empirically validate the purchasing power parity (PPP) theory in the context of Sierra Leone. To achieve this objective, cointegration and error correction techniques were utilised to account for both long and short-run dynamics over the period 2007Q1 to 2019Q1. The Engel-Granger cointegration technique was utilised to ascertain the long-run relationship between the exchange rate and the price differential between Sierra Leone and the United States of America, while the redundant variable test was used to attain the parsimonious short-run error correction model. The results indicated a cointegrating relationship, while the coefficient on the price differential was greater than one (1), reflecting that the PPP does not hold for Sierra Leone. Moreover, the short-run results showed a rejection of the theory and rather endorses the presence of depreciation inertia, where past depreciation of the exchange rate is a major determinant of its current depreciating trend.
    Keywords: Purchasing Power Parity, Exchange Rate, Inflation, Cointegration, Sierra Leone
    JEL: C32 E41 F31
    Date: 2020–01–01
  40. By: Mr. Zhongxia Jin; Haobin Wang; Yue Zhao
    Abstract: Based on VAR analyses across 26 countries, we show that, although foreign exchange intervention (FXI) is effective in stabilizing the nominal exchange rate in the short run, its impacts on the real exchange rate are less significant: Limitations on nominal exchange rate flexibility may induce adjustments to the real exchange rate through domestic prices. We find that countries that intervene more heavily in response to external shocks experience greater general and asset price volatility, which is not conducive to countering the impact of external shocks. We show that China’s macroeconomic responses to external shocks are broadly consistent with international experiences among intervening countries. The simple methodological framework adopted in this paper is meant to examine a broad set of macroeconomic variables and bears limitations; our findings serve to motivate more structural analysis on FXI’s macroeconomic impacts going forward.
    Keywords: nominal exchange rate IRF; asset price volatility; housing price IRF; floaters IRF; stock price IRF; Real exchange rates; Nominal effective exchange rate; Asset prices; Real interest rates; Exchange rates; Global
    Date: 2021–04–30
  41. By: Bluwstein, Kristina; Buckmann, Marcus; Joseph, Andreas; Kapadia, Sujit; Şimşek, Özgür
    Abstract: We develop early warning models for financial crisis prediction by applying machine learning techniques to macrofinancial data for 17 countries over 1870–2016. Most nonlin-ear machine learning models outperform logistic regression in out-of-sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering nonlinear relationships between the predic-tors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high. JEL Classification: C40, C53, E44, F30, G01
    Keywords: credit growth, machine learning, Shapley values, yield curve, financial crises, financial stability
    Date: 2021–11

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