nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒12‒13
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation tolerance ranges in the new keynesian model By Hervé Le Bihan; Magali Marx; Julien Matheron
  2. Monetary policy shocks and inflation inequality By Christoph Lauper; Giacomo Mangiante
  3. The Demand for Money, Near-Money, and Treasury Bonds By Krishnamurthy, Arvind; Li, Wenhao
  4. Why Central Bank Digital Currencies? By Raphael Auer; Jon Frost; Michael Junho Lee; Antoine Martin; Neha Narula
  5. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rates? By Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; Yaz Terajima
  6. Optimal Monetary Policy in a Small Open Economy with Non-tradable Goods By Jia, Pengfei
  7. Does public debt granger-cause inflation? A multivariate analysis By Saungweme, Talknice; Odhiambo, Nicholas M
  8. Setting New Priorities for the ECB's Mandate By Christophe Blot; Jérôme Creel; Emmanuelle Faure; Paul Hubert
  9. Zero Lower Bound on Inflation Expectations By Gorodnichenko, Yuriy; Sergeyev, Dmitriy
  10. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  11. 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
  12. 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
  13. Has the ECB lost its mind? By Christophe Blot; Paul Hubert
  14. Reserves Were Not So Ample after All By Copeland, Adam; Duffie, Darrell; Yang, Yilin (David)
  15. Public debt and inflation dynamics: Empirical evidence from Zimbabwe By Saungweme, Talknice; Odhiambo, Nicholas M
  16. U.S. monetary and fiscal policy regime changes and their interactions By Chang, Yoosoon; Kwak, Boreum; Qiu, Shi
  17. Young Firms and Monetary Policy Transmission By Thomas McGregor
  18. Central Bank Digital Currency: functional scope, pricing and controls By Bindseil, Ulrich; Panetta, Fabio; Terol, Ignacio
  19. The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23 By Lutz Kilian; Xiaoqing Zhou
  20. Beyond Incomplete Spanning: Convenience Yields and Exchange Rate Disconnect By Jiang, Zhengyang; Krishnamurthy, Arvind; Lustig, Hanno
  21. Mechanical analyses and derivations of money velocity By Saccal, Alessandro
  22. Overview of central banks’ in-house credit assessment systems in the euro area By Laura Auria; Markus Bingmer; Carlos Mateo Caicedo Graciano; Clémence Charavel; Sergio Gavilá; Alessandra Iannamorelli; Aviram Levy; Alfredo Maldonado; Florian Resch; Anna Maria Rossi; Stephan Sauer
  23. Determinants of European Banks’ Default Risk By Nicolas Soenen; Rudi Vander Vennet
  24. Preemptive Runs and the Offshore U.S. Dollar Money Market Funds Industry By Marco Cipriani; Gabriele La Spada
  25. Financial Instability and Banking Crises in a small open economy By Grytten, Ola Honningdal
  26. ECB Consumer Expectations Survey: an overview and first evaluation By Bańnkowska, Katarzyna; Borlescu, Ana Maria; Charalambakis, Evangelos; Da Silva, António Dias; Di Laurea, Davide; Dossche, Maarten; Georgarakos, Dimitris; Honkkila, Juha; Kennedy, Neale; Kenny, Geoff; Kolndrekaj, Aleksandra; Meyer, Justus; Rusinova, Desislava; Teppa, Federica; Törmälehto, Veli-Matti
  27. Inflation and economic growth in Kenya: An empirical examination By Saungweme, Talknice; Odhiambo, Nicholas M
  28. Economics of Block Chain and the Money Market Equilibrium By Pazhanisamy, R.; Selvarajan, E.
  29. On the stance of macroprudential policy By Cecchetti, Stephen G.; Suarez, Javier
  30. What's in the R- Stars for Korea? By Mr. Sohrab Rafiq
  31. The Term Spread as a Predictor of Financial Instability By Dean Parker; Moritz Schularick
  32. Climate change litigation and central banks By Setzer, Joana; Higham, Catherine; Jackson, Andrew; Solana, Javier
  33. Uncertainty and Disagreement of Inflation Expectations: Evidence from Household-Level Qualitative Survey Responses By Yongchen Zhao
  34. Inflation Narratives By Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
  35. Methodologies for the Assessment of Real Effective Exchange Rates By Leonor Coutinho; Nuria Mata Garcia; Alessandro Turrini; Goran Vukšić
  36. The Effect of Mobile Money on Borrowing and Saving: Evidence from Tanzania By Hisahiro Naito; Askar Ismailov; Albert Benson Kimaro
  37. Central Bank Risk Management, Fintech, and Cybersecurity By Mr. Ashraf Khan; Majid Malaika
  38. Covid-19 and capital flows: The responses of investors to the responses of governments By Goldbach, Stefan; Nitsch, Volker

  1. By: Hervé Le Bihan (Banco de España and Banque de France); Magali Marx (Banque de France); Julien Matheron (Banque de France)
    Abstract: A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range, than when it is close to the target, i.e., the central value of the band. We show that (i) a tolerance band should not be a zone of inaction: the lack of reaction within the band endangers macroeconomic stability and leads to the possibility of multiple equilibria; (ii) the trade-off between the reaction needed outside the range versus inside appears unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate for a moderately lower reaction within tolerance band; (iii) these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.
    Keywords: monetary policy, inflation ranges, inflation bands, zero lower bound (ZLB), endogenous regime switching
    JEL: E31 E52 E58
    Date: 2021–11
  2. By: Christoph Lauper; Giacomo Mangiante
    Abstract: We evaluate household-level inflation rates since 1980, for which we compute various dispersion measures, and we assess their reaction to monetary policy shocks. We find that (i) contractionary monetary policy significantly and persistently decreases inflation dispersion in the economy, and that (ii)different demographic groups are heterogeneously affected by monetary policy. Due to different consumption bundles, middle-income households experience higher median inflation rates, which at the same time are more reactive to a contractionary monetary policy shock, leading to an overall convergence of inflation rates between income groups. These results imply that (iii) the impact of monetary policy shocks on expenditure inequality is significantly more muted once we control for differences in individual inflation rates.
    Keywords: monetary policy, inflation inequality, redistributional effects
    JEL: E31 E52
    Date: 2021–11
  3. By: Krishnamurthy, Arvind (Stanford Graduate School of Business and NBER); Li, Wenhao (Stanford Graduate School of Business and NBER)
    Abstract: Bank-created money, shadow-bank money, and Treasury bonds all satisfy investor’s demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1926 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per-unit-of-asset delivered by each asset. We construct a new broad monetary aggregate based on our analysis and show that it helps resolves the money-demand instability and missing-money puzzles of the monetary economics literature. Our empirical results inform models of the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system.
    JEL: E41 E44 E63 G12
    Date: 2021–08
  4. By: Raphael Auer; Jon Frost; Michael Junho Lee; Antoine Martin; Neha Narula
    Abstract: In the past year, a number of central banks have stepped up work on central bank digital currencies (CBDCs – see map). For central banks, are CBDCs just a defensive reaction to private-sector innovations in money, or are they an opportunity for the monetary system? In this post, we consider several long-standing goals of central banks in their support and provision of retail payments, why and how central banks tackle these issues, and where CBDCs fit into the array of potential solutions.
    Keywords: CBDC; digital innovation
    JEL: E5
    Date: 2021–12–01
  5. By: Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; 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: Financial institutions; Monetary policy transmission; International topics
    JEL: E43 E58 F34 F42 G28
    Date: 2021–11
  6. By: Jia, Pengfei
    Abstract: This paper studies optimal monetary policy in a small open economy DSGE model with non-tradable goods and sticky prices. The introduction of non-traded goods is shown to have important implications for the transmission of shocks and monetary policy arrangements. First, the results show that positive technology shocks need not lead to deflation. In response to technology shocks, real exchange rates and the terms of trade depreciate. The relative price of tradable to non-tradable goods may increase or decrease, depending on the shocks. Second, based on welfare analysis, this paper evaluates the performance of different interest rate rules. The results show that if monetary policy is not very aggressive, the Taylor-type interest rate policy that targets CPI inflation performs the best. However, as monetary policy becomes relatively aggressive, the policy that targets domestic inflation is shown to yield the highest level of welfare. Third, this paper studies the Ramsey policy and optimal allocations. The results indicate that the Ramsey optimal policy stabilizes the inflation rates in both production sectors, while allowing for volatilities in CPI inflation, real exchange rates, the terms of trade, and the relative price of tradable goods. This suggests that the interest rate rules targeting CPI inflation or exchange rates are suboptimal. The results also show that in response to sector specific shocks, the Ramsey planner only cares about the inflation rate in the sector where the shock originates.
    Keywords: Optimal monetary policy; Small open economy; Non-tradable goods, Business cycles; Exchange rates
    JEL: E31 E32 E52 F31 F41
    Date: 2021–11–23
  7. By: Saungweme, Talknice; Odhiambo, Nicholas M
    Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contestedin literature. In the main, however, it is widely recognised that whether public debts are financed in amonetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy inensuring price stability. This study contributes to the debate by testing the dynamic causal relationshipbetween public debt and inflation in Tanzania covering the period 1970-2020. The study applies theautoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-basedGranger-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 monetaryvariables, namely money supply and interest rate, were added as intermittent variables alongside publicdebt and inflation. The findings from this study show that there is a consistent long-run cointegratingrelationship between public debt, inflation, money supply and interest rate in Tanzania. However, theresults fail to find evidence of causality between public debt and inflation in Tanzania, irrespective ofwhether 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 topursue the desirable fiscal policies necessary for the country?s long-term optimal growth path.
    Keywords: Public debt, inflation, ARDL, Granger-causality, Tanzania
    Date: 2021–11
  8. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Emmanuelle Faure (LADYSS - Laboratoire Dynamiques Sociales et Recomposition des Espaces - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP8 - Université Paris 8 Vincennes-Saint-Denis - UPN - Université Paris Nanterre - UP - Université de Paris, Station d'économie et de sociologie rurales de paris - INRA - Institut National de la Recherche Agronomique); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: In a statement announcing the review of its monetary policy strategy, the Euro-pean Central Bank (ECB) stated that it will, in addition to price stability, also take into account how "other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB's mandate". The key question is which precise objectives shall be taken into account and how the ECB might reach them, keeping in mind that some trade-offs vis-à-vis the primary objective may arise. [First paragraph]
    Keywords: Priorities,ECB's mandate
    Date: 2020–06–08
  9. By: Gorodnichenko, Yuriy (University of California, Berkeley); Sergeyev, Dmitriy (Bocconi University)
    Abstract: We document a new fact: in U.S., European and Japanese surveys, households do not expect deflation, even in environments where persistent deflation is a strong possibil- ity. This fact stands in contrast to the standard macroeconomic models with rational expectations. We extend a standard New Keynesian model with a zero-lower bound on inflation expectations. Unconventional monetary policies, such as forward guid- ance, are weaker. In liquidity traps, the government spending output multiplier is finite, and adverse aggregate supply shocks are not expansionary. The possibility of confidence-driven liquidity traps is attenuated.
    Keywords: inflation expectations, non-rational beliefs, survey data
    JEL: E5 E7 G4
    Date: 2021–11
  10. By: Coleman, Winnie; Nautz, Dieter
    Abstract: Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation,Online Surveys,Covid-19 Pandemic
    JEL: E31 E52 E58
    Date: 2021
  11. By: Camille Cornand; Rodolphe Dos Santos Ferreira
    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
  12. 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: 2021–01
  13. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: This Policy brief analyses the recent expansionary decisions of the ECB in September 2019, which are now under scrutiny and have even been criticized. ■ Recent facts confirm the need of an expansionary monetary policy, as inflation expectations are still decreasing and credit remains weak. ■ We pay a special attention to the three types of risk evoked in the public debate. ■ First, it has been argued that low interest rates could increase the households saving rate due to an income effect. We show that this does not materialize on recent data. We observe such a correlation only for Germany, and this already before 2008, casting some doubt on the direction of the causality. ■ Second, it is argued that the banks' profits are at risk because of low interest rates. We show that banks' profits are steady and are recovering since 2012, and that the new measures are not expected to have a negative effect on bank's profits. ■ Third, using a macro-finance assessment of financial imbalances, we do not observe the emerging of bubbles on housing and stock market. ■ Although the downside should be carefully analysed, we conclude that the critics of the recent expansionary monetary policy does not rely on sound evidence. ■ Finally, and in any case, a fiscal expansion would reduce the need for expansionary policies. A discussion of the euro area fiscal stance is needed.
    Date: 2019–12
  14. By: Copeland, Adam (FRBNY); Duffie, Darrell (Stanford GSB); Yang, Yilin (David) (Stanford GSB)
    Abstract: The Federal Reserve’s “balance-sheet normalization,†which reduced aggregate reserves between 2017 and September 2019, increased repo rate distortions, the severity of rate spikes, and intraday payment timing stresses, culminating with a significant disruption in Treasury repo markets in mid-September 2019. We show that repo rates rose above efficient-market levels when the total reserve balances held at the Federal Reserve by the largest repo-active bank holding companies declined and that repo rate spikes are strongly associated with delayed intraday payments of reserves to these large bank holding companies. Intraday payment timing stresses are magnified by early-morning settlement of Treasury security issuances. Substantially higher aggregate levels of reserves than existed in the period leading up to September 2019 would likely have eliminated most or all of these payment timing stresses and repo rate spikes.
    JEL: D47 D82 G14
    Date: 2021–07
  15. By: Saungweme, Talknice; Odhiambo, Nicholas M
    Abstract: The study seeks to empirically test the hypothesis that public debt has a significant influenceon inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recenttrends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflationrelated policy. These latest trends have started to ring alarming bells, which raises questionson the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in thecountry. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure tocointegration and an error correction mechanism (ECM), expanded by incorporatingstructural breaks, the study finds evidence in support of positive and significant impact ofpublic debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on thefindings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policycan be considered to be an important determinant of the effectiveness of monetary policy inZimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.
    Keywords: ARDL, inflation, public debt, Zimbabwe
    Date: 2021–11
  16. By: Chang, Yoosoon; Kwak, Boreum; Qiu, Shi
    Abstract: We investigate U.S. monetary and fiscal policy interactions in a regime-switching model of monetary and fiscal policy rules where policy mixes are determined by a latent bivariate autoregressive process consisting of monetary and fiscal policy regime factors, each determining a respective policy regime. Both policy regime factors receive feedback from past policy disturbances, and interact contemporaneously and dynamically to determine policy regimes. We find strong feedback and dynamic interaction between monetary and fiscal authorities. The most salient features of these interactions are that past monetary policy disturbance strongly influences both monetary and fiscal policy regimes, and that monetary authority responds to past fiscal policy regime. We also find substantial evidence that the U.S. monetary and fiscal authorities have been interacting: central bank responds less aggressively to inflation when fiscal authority puts less attention on debt stabilisation, and vice versa.
    Keywords: monetary and fiscal policy rules,endogenous regime switching,joint estimation,policy interactions,feedback channels
    JEL: C13 C32 E52 E63
    Date: 2021
  17. By: Thomas McGregor
    Abstract: We investigate the role of business dynamism in the transmission of monetary policy by exploitingthe variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.
    Keywords: firm demographics; business dynamism; monetary policy; local projections; U.S. states.; U.S. states; monetary policy shock; entry rate; population demographics; policy function; startup firm; exit rate; firm productivity; growth rate; Employment; Wages; Personal income; Credit ratings; Global
    Date: 2021–03–05
  18. By: Bindseil, Ulrich; Panetta, Fabio; Terol, Ignacio
    Abstract: Even before their deployment in major economies, one of the concerns that has been voiced about central bank digital currency (CBDC) is that it might be too successful and lead to bank disintermediation, which could intensify further in the case of a banking crisis. Some also argue that CBDC might crowd out private payment solutions beyond what would be desirable from the perspective of the comparative advantages of private and public sector money. This paper discusses success factors for CBDC and how to avoid the risk of crowding out. After examining ways to prevent excessive use as a store of value, the study emphasises the importance of the functional scope of CBDC for the payment functions of money. The paper also recalls the risks that use could be too low if functional scope, convenience or reachability are unattractive for users. Finding an adequate functional scope – neither too broad to crowd out private sector solutions, nor too narrow to be of limited use – is challenging in an industry with network effects, like payments. The role of the incentives offered to private sector service providers involved in distributing, using and processing CBDC (banks, wallet providers, merchants, payment processors, acquirers, etc.) is discussed, including fees and compensation. JEL Classification: E3, E5, G1
    Keywords: central bank digital currency, cross-border payments, financial stability, means of payment, payment solution, store of value
    Date: 2021–12
  19. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, but only by 0.4 percentage points at the end of 2022. In contrast, the impact on measures of core inflation such as trimmed mean PCE inflation is only 0.4 and 0.3 percentage points in 2021 and 2022, respectively. These estimates already account for any increases in inflation expectations under the scenario. The peak response of the 1-year household inflation expectation would be 1.2 percentage points, while that of the 5-year expectation would be 0.2 percentage points.
    Keywords: Scenario; inflation; expectation; oil price; gasoline price; household survey; core; pandemic; recovery
    JEL: E31 E52 Q43
    Date: 2021–11–19
  20. By: Jiang, Zhengyang (Northwestern University); Krishnamurthy, Arvind (Stanford University); Lustig, Hanno (Stanford University)
    Abstract: We introduce convenience yields on dollar bonds into an incomplete-market equilibrium model of exchange rates and interest rates. The convenience yield enters as a stochastic wedge in the Euler equation for exchange rate determination. The model identifies a novel safe-asset convenience yield channel by which quantitative easing impacts the dollar exchange rate. Our model addresses three exchange rate puzzles. (1) The model can rationalize the low pass-through of SDF shocks to exchange rates and hence low exchange rate volatility. (2) It helps address but does not fully resolve the exchange rate disconnect puzzle. (3) The model generates an unconditional log currency expected return on the dollar that is in line with the data.
    Date: 2021–07
  21. By: Saccal, Alessandro
    Abstract: The equation of exchange is derived from a standpoint encompassing the physics and economics thereof, whereby the maximisation of a money value function, increasing in real output and decreasing in the real money supply, while accounting for time and space, subjected to a money constraint, at the macroeconomic level, gives rise to an optimal level of real output thereby, expressing the liquidity demand coefficient as the inverse quotient of space over time. The fusion of such a liquidity demand coefficient expression with the money constraint, which is the equilibrium Cambridge equation, in turn gives rise to an equation for space, being the position of money, whose differentiation is precisely instantaneous money velocity and thence the exchange equation as presented by Fisher. The present analysis also derives money position on account of non-constant instantaneous money velocity as instantiated by Fisher, advancing a framework for the macroeconomy’s general money value function and money constraint in the process. It likewise advances simulations of non-constant average and instantaneous money velocity, with a particular application to a stylised closed macroeconomy. It finally proceeds to remodel instantaneous money velocity through the use of ordinary differential equations (ODEs) for the money equations of motion, both generally, by letting the sum of the three equal a corrected exponential random walk with drift, and through a money force model, of free accumulation with financial assets resistance. This work thus remarks in sum that money velocity as customarily calculated, taught and understood is not univocal.
    Keywords: Cambridge equation; equation of exchange; liquidity; money position; money velocity; quantity theory of money.
    JEL: A12 B59 E21 E23 E31 E41 E43 E51 Z00
    Date: 2021–11–21
  22. By: Laura Auria (Bundesbank); Markus Bingmer (Bundesbank); Carlos Mateo Caicedo Graciano (Banque de France); Clémence Charavel (Banque de France); Sergio Gavilá (Banco de España); Alessandra Iannamorelli (Banca d'Italia); Aviram Levy (Banca d'Italia); Alfredo Maldonado (Banco de España); Florian Resch (Oesterreichische Nationalbank); Anna Maria Rossi (Banca d'Italia); Stephan Sauer (European Central Bank)
    Abstract: The in-house credit assessment systems (ICASs) developed by euro area national central banks (NCBs) are an important source of credit risk assessment within the Eurosystem collateral framework. They allow counterparties to mobilise as collateral the loans (credit claims) granted to non-financial corporations (NFCs). In this way, ICASs increase the usability of non-marketable credit claims that are normally not accepted as collateral in private market repo transactions, especially for small and medium-sized banks that lend primarily to small and medium-sized enterprises (SMEs). This ultimately leads not only to a widened collateral base and an improved transmission mechanism of monetary policy, but also to a lower reliance on external sources of credit risk assessment such as rating agencies. The importance of ICASs is exemplified by the collateral easing measures adopted in April 2020 in response to the coronavirus (COVID-19) crisis. The measures supported the greater use of credit claim collateral and, indirectly, increased the prevalence of ICASs as a source of collateral assessment. This paper analyses in detail the role of ICASs in the context of the Eurosystem’s credit operations, describing the relevant Eurosystem guidelines and requirements in terms of, among other factors, the estimation of default probabilities, the role of statistical models versus expert analysis, input data, validation analysis and performance monitoring. It then presents the main features of each of the ICASs currently accepted by the Eurosystem as credit assessment systems, highlighting similarities and differences.
    Keywords: credit assessments, credit risk models, credit claims, ratings, ICAS
    JEL: E58
    Date: 2021–11
  23. By: Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: Using bank CDS spreads, we examine three types of determinants of Euro Area bank default risk in the period 2008-2019: bank characteristics related to new regulation, the bank-sovereign nexus and the monetary policy stance. We find that Basel 3 regulation improves the banks’ risk profile since higher capital ratios and more stable deposit funding contribute significantly to lower CDS spreads. We confirm the persistence of the bank-sovereign interconnectedness and find that sovereign default risk is transmitted to bank risk with an amplification factor. The ECB monetary policy stance is neutral with respect to bank risk, hence we find no evidence of perceived excessive risk-taking behavior.
    Keywords: bank default risk, CDS spreads, monetary policy, sovereign risk
    JEL: G21 G32 E52
    Date: 2021–11
  24. By: Marco Cipriani; Gabriele La Spada
    Abstract: In March 2020, U.S. dollar-denominated prime money market funds (MMFs) suffered heavy outflows as concerns about the COVID-19 pandemic increased in the United States and Europe. Investors redeemed their shares en masse not only from funds domiciled in the United States (“domestic”) but also from offshore funds. In this post, we use differences in the regulatory regimes of domestic and offshore funds to identify the impact of the redemption gates and liquidity fees recently introduced as part of MMF industry reforms in both the United States and Europe.
    Keywords: money market funds; offshore run; redemption gates; liquidity fees; weekly liquid assets (WLA)
    JEL: G1 I18
    Date: 2021–11–22
  25. By: Grytten, Ola Honningdal (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The present paper seeks to investigate the importance of financial instability during four banking crises, with focus on the small open economy of Norway. The crises elaborated on are the Post First world war crisis of the early 1920s, the mid 1920s Monetary crisis, the Great Depression of the 1930s and the Scandinavian banking crisis of 1987-1993. <p> The paper firstly offers a brief description of the financial instability hypothesis as applied by Minsky, Kindleberger, and in a new explicit dynamic financial crisis model. Financial instability creation basically happens in times of overheating, overspending and over lending, i.e., during significant booms, and have devastating effects after markets have turned into a state of crises. <p> Thereafter, the paper tests the validity of the financial instability hypothesis by using a quantitative structural time series model. The test reveals upheaval of financial and macroeconomic indicators prior to the crises, making the economy overheat and create asset bubbles due to huge growth in debt. These conditions caused the following banking crises. <p> Finally, the four crises are discussed qualitatively. The conclusion is that significant increase in money supply and debt caused overheating, asset bubbles and finally financial and banking crises which spread to the real economy.
    Keywords: Financial crises; banking crises; financial stability; macroeconomic; economic history; monetary expansion
    JEL: E44 E51 E52 F34 G15 N24
    Date: 2021–11–11
  26. By: Bańnkowska, Katarzyna; Borlescu, Ana Maria; Charalambakis, Evangelos; Da Silva, António Dias; Di Laurea, Davide; Dossche, Maarten; Georgarakos, Dimitris; Honkkila, Juha; Kennedy, Neale; Kenny, Geoff; Kolndrekaj, Aleksandra; Meyer, Justus; Rusinova, Desislava; Teppa, Federica; Törmälehto, Veli-Matti
    Abstract: The Consumer Expectations Survey (CES) is an important new tool for analysing euro area household economic behaviour and expectations. This new survey covers a range of important topical areas including consumption and income, inflation and gross domestic product (GDP) growth, the labour market, housing market activity and house prices, and consumer finance and credit access. The CES, which was launched as a pilot in January 2020, is a mixed frequency modular survey, which is conducted online. The survey structure and centralised data collection ensures the collection of harmonised quantitative and qualitative euro area information in a timely manner that facilitates direct cross-country comparisons. During the pilot phase, it was conducted for the six largest euro area countries and contained 10,000 individual respondents. In the context of the coronavirus (COVID-19) pandemic, the CES has been used to gather useful information on the impact of the crisis on the household sector and the effectiveness of policy measures to mitigate the effects of the pandemic. The CES also collects information on the public’s overall trust in the ECB, their knowledge about its objectives and the channels through which they learn about its monetary policy and other central bank-related topics. This paper describes the key features of this new ECB survey – including its statistical properties – and offers a first evaluation of the results from the pilot phase. It also identifies a number of areas where the survey can be usefully developed further. Overall, the experience with the CES has been very positive, and the pilot survey is considered to have achieved its main objectives. JEL Classification: C42, D12, D14, E21, E24, E31
    Keywords: consumer behaviour, euro area, expectations, household surveys, micro data set
    Date: 2021–12
  27. By: Saungweme, Talknice; Odhiambo, Nicholas M
    Abstract: This paper examines the relationship between inflation and economic growth in Kenya froman analytical and empirical standpoint. The paper applies the autoregressive distributed lag(ARDL) bounds testing approach and the multivariate Granger-causality test using time seriesdata covering 1970-2019. Structural breaks in the time series were also conducted using thePerron (1997) (PPURoot) and Zivot-Andrews (1992) (ZAU Root) techniques. Incorporatingstructural breaks into time series increases statistical inference's overall validity. Inflation andeconomic growth in Kenya were found to have structural breaks in 1995 and 1991. These yearsare marked by Kenya's economic, financial, public sector and institutional reforms. The otherfindings of the study revealed that inflation has a statistically significant negative influence onlong-term economic growth. The multivariate Granger-causality results showed a distinctshort-run unidirectional causality from economic growth to inflation in Kenya. In order tomitigate the negative consequences of inflation and the coronavirus on the economy andwelfare, the study recommends that Kenya's government should pursue prudent monetary,financial, and fiscal policies
    Keywords: inflation, economic growth, ARDL, Granger-causality, Kenya
    Date: 2021–11
  28. By: Pazhanisamy, R.; Selvarajan, E.
    Abstract: The overwhelming public response towards the crypto currencies like Bitcoin, Ethorium has gained serious attention among the researchers and policy makers around the various countries. The rationale behind the claim of dis-intermediary of financial system and the low transaction cost effective nature coupled with the absence of the agency problems in the financial market creates an illusion among public to take part and attempt to speculate in it. The reviews of literature on the themes of the economics of the block chain technology used in the cryptos shows that there are high degree of uncertainties of the nature and the impact it create due to the absence regulations both partial and absolute terms on the one hand, the absence of theoretical, empirical, conceptual an methodological clarity from the economic theories on the other hand calls for an enquiry into the crypto's usefulness at the gross root levels for which this present attempt is made. Using a set of realistic assumptions a conceptual framework is prepared and the future of the money market equilibrium is predicted. In the lights of the changes in the money market equilibrium with response to the changes in the crypto currencies it is found that in the long run there will be negative impact on the economy certainly which leads to the collapse the global economics if it is unnoticed to implement necessary policy adjustments at the national and global levels collectively.
    Keywords: Block Chain Economics,Crypto Currency,Money Market Equilibrium,Economics of blockchain
    JEL: G15 G32 E42 E51 E58 F30 L51
    Date: 2021
  29. By: Cecchetti, Stephen G.; Suarez, Javier
    Abstract: In this report we outline how a formulating normative measure of macroprudential policy stance requires a framework containing objectives, tools and transmission mechanisms. To complement the currently prevailing narrative approach, we apply lessons from the monetary policy to macroprudential policy. We begin with by proposing that the ultimate objective of macroprudential policy is to minimise the frequency and severity of economic losses arising from severe financial distress and then integrate the concept of growth-at-risk into the framework. Implementation of our framework for the evaluation of the macroprudential policy stance faces a series of challenges, including availability of the appropriate data, that policymakers generally have multiple objectives and tools, and the uncertain responses of economic agents to macroprudential policy actions.
    Date: 2021–12
  30. By: Mr. Sohrab Rafiq
    Abstract: Korea’s stars tell of an economy saddled with a real neutral rate (r-star) that has declined significantly in recent decades and is currently below zero. This reflects a significant decline in trend growth, and two large financial crises that triggered significant shifts in the saving-investment balance. Larger fiscal deficits and frothy financial conditions since 2012 have helped offset rising demand for safer assets, preventing the neutral rate from falling further. Nonetheless, the fall in the neutral rate, coupled with its effects on asset returns, has complicated the task of monetary policy stabilization. Korea’s neutral rate is likely to remain low over the medium-term and could fall further, reflecting a structural savings-investment imbalance owing to declining productivity and a rotation in demographics increasing the demand for precautionary saving and convenience yield, and widening the capital risk premia. The COVID pandemic risks magnifying these trends.
    Keywords: Neutral Rate; Risk Premia; Convenience; Demographics; Savings; savings-investment imbalance; author's email; Korea rate expectations decomposition; real rate of interest; Real interest rates; Output gap; Inflation; Return on investment; Global
    Date: 2021–03–26
  31. By: Dean Parker; Moritz Schularick
    Abstract: The term spread is the difference between interest rates on short- and long-dated government securities. It is often referred to as a predictor of the business cycle. In particular, inversions of the yield curve—a negative term spread—are considered an early warning sign. Such inversions typically receive a lot of attention in policy debates when they occur. In this post, we point to another property of the term spread, namely its predictive ability for financial crisis events, both internationally and in historical U.S. data. We study the predictive power of the term spread for financial instability events in the United States and internationally over the past 150 years.
    Keywords: yield curve; financial crisis
    JEL: E58 E5 N0 G01
    Date: 2021–11–24
  32. By: Setzer, Joana; Higham, Catherine; Jackson, Andrew; Solana, Javier
    Abstract: Given the urgent need to dramatically reduce greenhouse gas emissions, and concern regarding insufficient climate action and ambition across the globe, NGOs and individuals are increasingly turning to the courts to force States, public authorities, and private entities to increase their climate action and ambition and hold them accountable through climate-related litigation. The three contributions in this legal working paper discuss various aspects of such climate change litigation around the world. The papers examine the evolution of climate-related cases, the scope of such cases and the varying grounds on which they have been based. They also focus in some detail on certain key judgments addressing novel issues, as well as a recent climate-related case brought against a national central bank. The papers were originally presented at the Legal Colloquium on “Climate change litigation and central banks – Action for the environment”, organised by the European Central Bank on 27 May 2021. JEL Classification: K32, K33, K39, K41, Q54
    Keywords: Article 11 TFEU, climate-related litigation, climate change, climate risk, compilation of cases, corporate sector purchase programme, European Convention on Human Rights, financial risk, Ireland, legal standing., litigation against financial institutions, monetary policy, right to an environment, transnational legal networks
    Date: 2021–12
  33. By: Yongchen Zhao (Department of Economics, Towson University)
    Abstract: We propose a procedure that jointly estimates expectation, uncertainty, and disagreement using a flexible hierarchical ordered response model and individual-level qualitative data. Based on the Michigan survey of US consumers, our results reveal how their inflation expectations and the associated uncertainty are affected by various factors, including their perceptions of economic conditions, recollections of relevant news reports, and sociodemographic characteristics. An examination of the dynamics of inflation uncertainty and disagreement produces evidence in support of using the latter as a proxy of the former. However, our results also highlight important episodes (such as the start of the COVID pandemic) in which the two series diverge.
    Keywords: Joint estimation, Quantification, Household demographics, Subjective news shocks, Hierarchical ordered response model.
    JEL: C53 E31 D80
    Date: 2021–12
  34. By: Peter Andre (University of Bonn); Ingar Haaland (University of Bergen and CESifo); Christopher Roth (University of Cologne); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen)
    Abstract: We survey retail investors at an online bank to study beliefs about the autocorrelation of aggregate stock returns, and how these beliefs shape investment decisions measured in administrative account data. Individuals' beliefs exhibit substantial heterogeneity and predict trading responses to market movements. We inform a random half of our respondents that historically the autocorrelation of aggregate returns was close to zero, which persistently changes their beliefs. Among those initially believing in mean reversion, treated respondents buy significantly less equity during the COVID-19 crash four months later. Our results highlight how heterogeneity in subjective models causally drives trade in asset markets.
    Keywords: Narratives, Inflation, Beliefs, Macroeconomics, Fiscal Policy, Monetary Policy
    JEL: D83 D84 E31 E52 E71
    Date: 2021–11–25
  35. By: Leonor Coutinho; Nuria Mata Garcia; Alessandro Turrini; Goran Vukšić
    Abstract: This paper develops benchmarks to assess relative price developments based on the so-called behavioural equilibrium exchange rate (BEER) empirical models. Predictions from these empirical models for the determinants of real effective exchange rates allow estimating REER benchmarks consistent with the fundamentals of the economy. While relative price assessments are commonly based on REER indexes, index numbers do not permit comparisons across countries, so that benchmarks based on indexes cannot account for cross-country relations in economic fundamentals, including catching-up effects. To account for this, complementary benchmarks are also developed for the REER in levels. To this purpose, REER measures comparable across countries are constructed using purchasing power parities from the World Bank International Comparison Program, following a regression framework akin to that in Cubeddu et al. (2018), performed on a larger panel of countries and following a different criterion for the definition of the economic fundamentals to compute REER benchmarks. These benchmarks complement those based on current account gaps, already used in economic surveillance under the Macroeconomic Imbalance Procedure, to enrich the overall assessment of exchange rate positions and dynamics.
    JEL: F31 F32 F41
    Date: 2021–10
  36. By: Hisahiro Naito; Askar Ismailov; Albert Benson Kimaro
    Abstract: This study examines the effect of the use of mobile money services on borrowing and saving using data from Tanzania. We estimate the causal effect of the use of mobile money on borrowing, saving, and receiving remittances by applying a two-stage least squares estimation using the shortest distance to the border of the areas with multiple mobile networks, which is a proxy for accessibility to a mobile network, as an instrumental variable, while controlling for distance to financial institutions, population density of the residence, night light luminosity, and other important covariates. We find that when a household experiences a negative shock, mobile money non-users increase borrowing, while mobile money users do not. Further, the use of mobile money increases the probability of saving in mobile money savings accounts and receiving remittances, while it decreases the probability of saving in less liquid assets such as livestock. On the other hand, we find that the effect of the use of mobile money on receiving remittances is the same for those who experience a negative shock and those who do not. These results indicate that the use of mobile money increases the receipt of remittances regardless of negative shocks and changes the saving portfolio, allowing a household to prepare for negative shocks. Hence, a household that uses mobile money does not need to increase borrowing in the face of a negative shock. Consistent with this interpretation, we find that experiencing a negative shock does not decrease the livelihood of mobile money users, while it does reduce that of non-users.
    Date: 2021–07
  37. By: Mr. Ashraf Khan; Majid Malaika
    Abstract: Based on technical assistance to central banks by the IMF’s Monetary and Capital Markets Department and Information Technology Department, this paper examines fintech and the related area of cybersecurity from the perspective of central bank risk management. The paper draws on findings from the IMF Article IV Database, selected FSAP and country cases, and gives examples of central bank risks related to fintech and cybersecurity. The paper highlights that fintech- and cybersecurity-related risks for central banks should be addressed by operationalizing sound internal risk management by establishing and strengthening an integrated risk management approach throughout the organization, including a dedicated risk management unit, ongoing sensitizing and training of Board members and staff, clear reporting lines, assessing cyber resilience and security posture, and tying risk management into strategic planning.. Given the fast-evolving nature of such risks, central banks could make use of timely and regular inputs from external experts.
    Keywords: IMF Risk Management TA; risk landscape; B. IMF AIV; IMF surveillance; case example; Fintech; Central bank risk management; Cyber risk; Operational risk; Global; Middle East and Central Asia; Asia and Pacific; Western Hemisphere; Eastern Europe
    Date: 2021–04–23
  38. By: Goldbach, Stefan; Nitsch, Volker
    Abstract: This paper examines the effect of national government response measures to Covid-19 on German international capital flows. Analyzing highly disaggregated monthly data from the German balance of payments statistics over the period from January 2019 through January 2021, we find that bilateral financial interactions are negatively affected by stricter containment and closure policies as well as health system policies of a partner country, while German capital flows benefit from a partner's economic support policies. Moreover, to the extent that public interventions to fight the pandemic affect financial interactions, the adjustment mainly takes place along the intensive margin.
    Keywords: coronavirus,pandemic
    JEL: F36 F60 I18
    Date: 2021

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