nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒12‒20
forty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Can central bank digital currency increase financial inclusion? Arguments for and against By Ozili, Peterson K
  2. "Still Flying Blind after All These Years: The Federal Reserve's Continuing Experiments with Unobservables" By Dimitri B. Papadimitriou; L. Randall Wray
  3. Exchange Rates and Monetary Policy When Tradable and Nontradable Goods are Complements By William Craighead
  4. Some Alternative Monetary Facts By Mr. Manmohan Singh; Mr. Peter Stella
  5. The Prudential Use of Capital Controls and Foreign Currency Reserves By Javier Bianchi; Guido Lorenzoni
  6. Macroeconomic reversal rate in a low interest rate environment By van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
  7. Optimal Bank Reserve Remuneration and Capital Control Policy By Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe
  8. Central Bank Digital Currencies and The Emerging Markets: The Currency Substitution Challenge By Sebastian Edwards
  9. Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy By Tsang, Andrew
  10. Assessing the fiscal-monetary policy mix in the euro area By Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
  11. Spillovers of US Interest Rates: Monetary Policy & Information Effects By Santiago Camara
  12. The Evolution of Monetary Policy Focal Points By Alexis Stenfors; Ioannis Chatziantoniou; David Gabauer
  13. The role of systemic risk spillovers in the transmission of Euro Area monetary policy By Skouralis, Alexandros
  14. Global spillovers of the Fed information effect By Pinchetti, Marco; Szczepaniak, Andrzej
  15. Dollar Not So Dominant: Dollar Invoicing Has Only a Small Effect on Trade Prices By Joseph E. Gagnon; Madi Sarsenbayev
  16. Empirical Investigation of a Sufficient Statistic for Monetary Shocks By Fernando E. Alvarez; Andrea Ferrara; Erwan Gautier; Hervé Le Bihan; Francesco Lippi
  17. Could transaction-based financial benchmarks be susceptible to collusive behaviour? By Lilian Muchimba
  18. Unconventional Monetary Policies in Emerging Markets and Frontier Countries By Ms. Helene Poirson
  19. Prudential policy with distorted beliefs By Dávila, Eduardo; Walther, Ansgar
  20. The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses By Mr. Shanaka J Peiris; Miss Sanaa Nadeem; Mr. Pragyan Deb
  21. Zombies on the Brink: Evidence from Japan on the Reversal of Monetary Policy Effectiveness By Ms. Deniz O Igan; Mr. Gee Hee Hong; Do Lee
  22. Monetary policy implications of deviations in inflation targeting: the need for a global cooperative, coordinated and correlated response By Ojo, Marianne; Dierker, Theodore
  23. Assessing Banking and Currency Crisis Risk in Small States: An application to the Eastern Caribbean Currency Union By Kotaro Ishi; Carlo Pizzinelli; Tariq Khan
  24. Financial constraints, risk sharing, and optimal monetary policy By Zaretski, Aliaksandr
  25. Quarterly Projection Model for the National Bank of Rwanda By Mr. Jan Vlcek; Mikhail Pranovich
  26. CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective By Philippe Bacchetta; Elena Perazzi
  27. Feeling the heat: extreme temperatures and price stability By Faccia, Donata; Parker, Miles; Stracca, Livio
  28. Cash demand in times of crises By Rösl, Gerhard; Seitz, Franz
  29. Price Stability of Cryptocurrencies as a Medium of Exchange By Tatsuru Kikuchi; Toranosuke Onishi; Kenichi Ueda
  30. Recognizing Reality—Unification of Official and Parallel Market Exchange Rates By Mr. Simon T Gray
  31. How did the Complementary Deposit Facility affect commercial bank fs demand for reserve? Empirical analysis using bank fs financial data By Katsutoshi Takehana; Hisashi Tanizaki
  32. Developments in Banknotes in Circulation since the Start of the Pandemic By Kento Yoshizawa; Kohei Maehashi; Hiroaki Yanagihara; Yoichi Kadogawa; Masakazu Inada
  33. Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers By Defina, Ryan
  34. Fan charts 2.0: flexible forecast distributions with expert judgement By Sokol, Andrej
  35. Macroprudential Policy, Bank Competition and Bank Risk in East Asia By E Philip Davis; Ka Kei Chan; Dilruba Karim
  36. Some issues related to the Japanese financial system raised by the amendment of Payment Act in 2020 By Katsutoshi Takehana; Hisashi Tanizaki
  37. Credit, crises and inequality By Bridges, Jonathan; Green, Georgina; Joy, Mark
  38. Rounding the corners of the trilemma: A simple framework By Jeanne, Olivier
  39. The Welfare Costs of Inflation By Luca Benati; Juan-Pablo Nicolini
  40. On the systemic nature of global inflation, its association with equity markets and financial portfolio implications By Nick James; Kevin Chin
  41. Effect of Fiscal and Monetary Policies on Economic Activities in South Africa: The Role of Policy Uncertainty By Aye, Goodness
  42. Price transmission along the Turkish poultry and beef supply chains By Mehmet Guncavdi; Murat Kors; Elif Ozcan Tok
  43. Competition and regulation in the Finnish ATM industry By Markkula, Tuomas; Takalo, Tuomas
  44. Can Sticky Portfolios Explain International Capital Flows and Asset Prices? By Philippe Bacchetta; Margaret Davenport; Eric van Wincoop

  1. By: Ozili, Peterson K
    Abstract: This paper presents the arguments for and against central bank digital currency increasing financial inclusion. Financial inclusion is arguably one of the many reasons for issuing a central bank digital currency. The arguments in support of CBDC increasing financial inclusion are that CBDC can digitize value chains, CBDCs can improve access to digital financial services, CBDC can help to enlarge the digital economy, CBDC can enhance the efficiency of digital payments, CBDC can be used offline when there is no internet coverage, and CBDC offer low transaction costs. The arguments against CBDC increasing financial inclusion are that CBDC may not prioritize financial inclusion, the high cost to purchase digital devices for holding a CBDC, non-interest bearing CBDC, the strong preference for cash over digital currency, the burdensome identification and regulatory requirements, and the imposition of transaction costs. The arguments presented in this paper shows that there is still disagreement over whether a central bank digital currency can increase financial inclusion. Nevertheless, in the light of recent events, many central banks are determined to issue a central bank digital currency for many reasons. Even though a central bank digital currency does not achieve the intended financial inclusion objective, at least, the other objectives for issuing a central bank digital currency can be achieved such as the reduction in cash management costs and the effective conduct of monetary policy.
    Keywords: financial inclusion, central bank digital currency, CBDC, debate, arguments, digital currency, monetary policy, cash.
    JEL: E42 E50 E51 E52 E58 E59 G2 G21 I31 I38 I39
    Date: 2022
  2. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: Institute President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray contend that the prevailing approach to monetary policy and inflation is influenced by a set of concepts that are a poor guide to action. In this policy brief, they examine two previous cases in which the Federal Reserve misread the data and raised rates too soon, as well as the evolution of the Fed's thought and practice over the past three decades--a period in which the central bank has increasingly turned to unobservable indicators that are supposed to predict inflation. Noting that their criticisms have now been raised by the Fed's own members and research staff, the authors highlight the ways in which we need to rethink our overall framework for monetary and fiscal policy. The Fed has far less control over inflation than is presumed, they argue, and, at worst, might have the whole inflation-fighting strategy backwards. Managing inflation, they conclude, should not be left entirely in the hands of central banks.
    Date: 2021–12
  3. By: William Craighead (Department of Economics and Geosciences, US Air Force Academy)
    Abstract: This paper examines the implications of complementarity between tradable and nontradable goods for exchange rates and monetary policy in a two-country general equilibrium model. In doing so, it revisits well-known findings in the New Open Economy Macroeconomics literature that exchange rates are proportional to national money supplies and that optimal monetary policies respond only to domestic shocks. These results depend on a number of simplifying assumptions, including a unitary elasticity of substitution between tradable and nontradable goods. When this assumption is replaced by a more-realistic one of complementarity, exchange rates depend on relative productivity in addition to money supplies when prices are flexible. When prices are sticky, complementarity amplifies the effect of relative money supplies on the exchange rate and creates additional spillover effects from changes of the foreign money supply on domestic consumption. With complementarity, optimal monetary policies respond to external as well as internal shocks.
    Keywords: Complementarity, New Open Economy Macroeconomics, Exchange Rates, Monetary Policy, Nontradable Goods
    JEL: F42 E52
    Date: 2021–08
  4. By: Mr. Manmohan Singh; Mr. Peter Stella
    Abstract: In this paper, we discuss the modern history of monetarism and its alternatives, as well as the changing empirical relationship of various measures of money and inflation. After demonstrating that previous naïve correlations between money and inflation as established in the 20th century literature have largely disappeared, we explain why this cannot be taken as support for an increased reliance on permanent monetary finance. Rather, we argue that rapid technological innovation in payments systems—both public and private—including in global pledged collateral markets, portends a declining demand for central bank liabilities.
    Keywords: money aggregates;monetary financing;central bank balance sheet;WP;bank reserves;interest rate;financial market;balance sheet expansion;money demand
    Date: 2021–01–08
  5. By: Javier Bianchi; Guido Lorenzoni
    Abstract: We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.
    JEL: F32 F33 F41 F42 G18
    Date: 2021–11
  6. By: van den End, Jan Willem; Konietschke, Paul; Samarina, Anna; Stanga, Irina M.
    Abstract: This paper investigates how the monetary policy transmission channels change once the economy is in a low interest rate environment. We estimate a nonlinear model for the euro area and its five largest countries over the period 1999q2-2019q1 and allow for the effects of monetary policy shocks to be state dependent. Using smooth transition local projections, we examine the impulse responses of investment, savings, consumption, and the output gap to an expansionary monetary policy shock under normal and low interest rate regimes. We find evidence for a macroeconomic reversal rate related to the substitution effects becoming weaker relative to the income effects in a low interest rate regime. In this regime the effects of monetary policy shocks are either less powerful or reverse sign compared with a normal rate regime. JEL Classification: E21, E22, E43, E52
    Keywords: low interest rate environment, monetary policy, reversal rate
    Date: 2021–12
  7. By: Chun-Che Chi; Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper studies optimal capital-control and bank-reserve remuneration policy in an open economy with a banking channel and a collateral constraint that limits household debt by a fraction of income. It finds that the unregulated economy borrows too little relative to what is optimal (underborrowing). This finding contrasts with the standard overborrowing result obtained in the absence of a banking channel. Under optimal policy, the central bank injects bank reserves during recessions. In this way, the monetary authority is able to uncouple household deleveraging from economy-wide deleveraging, thereby ameliorating the severity of the financial crisis. The paper documents that in emerging and developed economies the lending spread (lending rate minus deposit rate) displayed a muted response during the 2007-2009 financial crisis. This fact is consistent with a decline in the demand rather than in the supply of loans and gives credence to models in which the collateral constraint is placed at the level of the nonfinancial sector as opposed to at the level of the bank.
    JEL: E58 F38 F41
    Date: 2021–11
  8. By: Sebastian Edwards
    Abstract: In this paper, I discuss the implications for emerging countries of the adoption of central bank digital currencies (CBDCs) in advanced jurisdictions, such as the United States, the United Kingdom, and the Euro Zone. The analysis identifies benefits as well as costs. Among the former, one of the most important is lower costs for migrants’ remittances. Some of the costs of global CBDCs are associated with currency substitution, sudden currency depreciations, and lower seigniorage. At the global level, a smooth rollout of CBDCs in center countries requires international coordination. In addition, emerging countries will benefit from the implementation of stronger macroprudential regulations
    JEL: E31 E41 E58 F31 F36
    Date: 2021–11
  9. By: Tsang, Andrew
    Abstract: This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.
    Keywords: China, monetary policy, regional heterogeneity, machine learning, shadow banking
    JEL: C54 C61 E52 R11
    Date: 2021–07–28
  10. By: Bańkowski, Krzysztof; Christoffel, Kai; Faria, Thomas
    Abstract: This paper attempts to gauge the effects of various fiscal and monetary policy rules on macroeconomic outcomes in the euro area. It consists of two major parts – a historical assessment and an assessment based on an extended scenario until 2030 – and it builds on the ECB-BASE –a semistructural model for the euro area. The historical analysis (until end-2019, `pre-pandemic´) demonstrates that a consistently countercyclical fiscal policy could have created a fiscal buffer in good economic times and it would have been able to eliminate a large portion of the second downturn in the euro area. In turn, the post-pandemic simulations until 2030 reveal that certain combinations of policy rules can be particularly powerful in reaching favourable macroeconomic outcomes (i.e. recovering pandemic output losses and bringing inflation close to the ECB target). These consist of expansionary-for-longer fiscal policy, which maintains support for longer than usually prescribed, and lower-for-longer monetary policy, which keeps the rates lower for longer than stipulated by a standard reaction function of a central bank. Moreover, we demonstrate that in the current macroeconomic situation, fiscal and monetary policies reinforce each other and mutually create space for each other. This provides a strong case for coordination of the two policies in this situation. JEL Classification: E32, E62, E63
    Keywords: fiscal rules, joint analysis of fiscal and monetary policy, model simulations, monetary policy rules
    Date: 2021–12
  11. By: Santiago Camara
    Abstract: This paper quantifies the spillovers of US monetary policy in Emerging Market economies by exploiting the high-frequency movement of multiple financial assets around FOMC announcements. I show that identifying a US monetary policy tightening using only the high-frequency surprises of the Fed Funds Futures leads to puzzling dynamics: an economic expansion, an exchange rate appreciation and laxer financial conditions in Emerging Markets, in line with a recent literature. I challenge these results by using the identification methodology introduced by Jarocinski & Karadi (2020) which exploits both the high frequency movements of the FFF and the S&P 500. This methodology allows me to quantify the spillovers of two FOMC shocks: a pure US monetary policy and an information disclosure shock. On the one hand, a US tightening caused by a pure US monetary policy shock leads to an economic recession, an exchange rate depreciation and tighter financial conditions. On the other hand, a tightening of US monetary policy caused by the FOMC disclosing positive information about the state of the US economy is able to explain the recent puzzling dynamics. Augmenting the benchmark model with additional variables I show that the financial channel is the main propagation mechanism of US interest rates into Emerging Markets across the two FOMC shocks. Furthermore, the quantitative impact of these FOMC shocks depend on the Emerging Market's exchange rate regime and its dependency on commodity good exports.
    Date: 2021–11
  12. By: Alexis Stenfors (University of Portsmouth); Ioannis Chatziantoniou (Hellenic Mediterranean University); David Gabauer (Software Competence Center Hagenberg)
    Abstract: With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the 10-year Japanese government bond (JGB) yield institutionalised this process – by effectively creating a new monetary policy focal point. In this paper, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from 1 to 30 years has affected other benchmark maturities over time. We find that the 10-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the 10-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.
    Keywords: Bank of Japan; bonds; focal points; monetary policy; yield curve control
    JEL: C32 C5 E43 E52 G15
    Date: 2021–12–14
  13. By: Skouralis, Alexandros
    Abstract: This paper empirically investigates the transmission of systemic risk across the Euro Area by employing a Global VAR model. We find that a union aggregate systemic risk shock results in a sharp decline in output, with two thirds of the response to be attributed to cross-country spillovers. The results indicate that peripheral economies have a disproportionate importance in spreading systemic risk compared to core countries. Then, we incorporate high-frequency monetary surprises into the model and we find evidence of the risk-taking channel of monetary policy. However, the relationship is reversed in the period of the ZLB, when expansionary shocks mitigate systemic risk. Cross-country spillovers account for a significant fraction (17.4%) of systemic risk responses’ variation. We also show that near term guidance reduces systemic risk, whereas the initiation of the QE program has the opposite effect. Finally, the effectiveness of monetary policy exhibits significant asymmetries, with core countries driving the union response. JEL Classification: C32, E44, F36, F45
    Keywords: Eurozone, global VAR model, systemic risk
    Date: 2021–12
  14. By: Pinchetti, Marco (Bank of England); Szczepaniak, Andrzej (Ghent University)
    Abstract: This paper sheds lights on the open economy dimension of the Fed information effect, by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal Funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. We show that this phenomenon occurs because Fed announcements affect investors’ risk appetite. Expansionary Fed information shocks increase investors’ risk appetite and drive capital towards foreign markets in pursuit of higher yields. Conversely, contractionary Fed information shocks decrease investors’ risk appetite and drive capital towards safe-haven currencies, causing an appreciation of the dollar and safe-haven currencies vis-à-visforeign currencies. We provide evidence that the Fed information effect is associated with large spillovers onto global safe-haven currencies, risk premia, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.
    Keywords: Monetary policy; information effects; international spillovers; flight to quality; high-frequency identification; sign restrictions; bayesian VAR
    JEL: E52 F31 F32 F41 F44
    Date: 2021–11–26
  15. By: Joseph E. Gagnon (Peterson Institute for International Economics); Madi Sarsenbayev (Peterson Institute for International Economics)
    Abstract: This paper estimates and tests four models of the effects of exchange rate changes on export prices. It supports the Goldberg and Knetter (1997) canonical result that exporters adjust their prices by about half of any movement in exchange rates. A new twist is that exchange rate movements against importing countries account for only three-fifths of this price adjustment, while exchange rate movements against a dominant currency account for the other two-fifths. The dominant currency is the euro in Europe and Africa and the US dollar in Asia and the Western Hemisphere. The recent claim that the dollar is the most important driver of export prices (Gopinath et al. 2020) is shown to be valid only for the smallest exporting economies. For the bulk of international trade, the extra effects of the dollar (or the euro) beyond their effects as exporter or importer currencies are relatively modest.
    Keywords: Exchange rate pass-through, pricing to market, dominant currency paradigm, local currency pricing, producer currency pricing
    JEL: F14 F32 F41
    Date: 2021–12
  16. By: Fernando E. Alvarez; Andrea Ferrara; Erwan Gautier; Hervé Le Bihan; Francesco Lippi
    Abstract: In a broad class of sticky price models the non-neutrality of nominal shocks is encoded by a simple sufficient statistic: the ratio of the kurtosis of the size-distribution of price changes over the frequency of price changes. We test this theoretical prediction using data for a large number of firms representative of the French economy. We use the micro data to measure the cross sectional moments, including kurtosis and frequency, for about 120 PPI industries and 220 CPI categories. We use a Factor Augmented VAR to measure the sectoral responses to a monetary shock, as summarized by the cumulative impulse response of sectoral prices (CIRP ), under three alternative identification schemes. The estimated CIRP correlates with the kurtosis and the frequency consistently with the prediction of the theory (i.e. they enter the relationship as a ratio). The analysis also shows that other moments not suggested by the theory, such as the mean, standard deviation and skewness of the size-distribution of price changes, are not correlated with the CIR . Several robustness checks are discussed
    JEL: E31 E5
    Date: 2021–11
  17. By: Lilian Muchimba (University of Portsmouth)
    Abstract: Prior to the series of manipulation scandals, financial benchmarks were perceived as a competitive and objective reflection of underlying money markets (Stenfors and Lindo 2018). For example, the manipulation of the London Interbank Offered Rate (LIBOR), underpinning financial contracts worth trillions of dollars was unthinkable. To prevent manipulation, financial market regulators around the world have recommended a paradigm shift from estimation-based to transaction-based financial benchmarks. This shift is based on the mainstream economic view that financial benchmarks anchored on actual transactions are not susceptible to anticompetitive behaviour. However, unlike auction markets, underlying interbank money markets have unique features. As most activity takes place over-the-counter, they are opaque and are governed by conventions, trust and reciprocity. This complicates the achievement of competitive pricing. Using a novel dataset from Bank of Zambia, this paper makes an empirical investigation into transaction-based benchmarks’ susceptibility to anticompetitive behaviour. Additionally, it contributes to the theoretical understanding of transaction-based financial market benchmarks. The study reflects on financial market regulators’ recommendation to transit from estimation-based to transaction-based financial market benchmarks. Further, the study is of interest to central bankers, as short-term interbank rates are the first stage of the monetary transmission mechanism.
    Keywords: Bank of Zambia; banks; collusion; LIBOR; monetary transmission mechanism; reference rates
    JEL: B52 E43 E52 G15 G28
    Date: 2021–12–14
  18. By: Ms. Helene Poirson
    Abstract: The COVID-19 crisis induced an unprecedented launch of unconventional monetary policy through asset purchase programs (APPs) by emerging market and developing economies. This paper presents a new dataset of APP announcements and implementation from March until August 2020 for 27 emerging markets and 8 small advanced economies. APPs’ effects on bond yields, exchange rates, equities, and debt spreads are estimated using different methodologies. The results confirm that APPs were successful in significantly reducing bond yields in EMDEs, and these effects were stronger than those of policy rate cuts, suggesting that such UMP could be important tools for EMDEs during financial market stress.
    Keywords: Unconventional monetary policy;emerging markets;COVID-19;local currency bond markets.;WP;market dysfunctionalities;app announcement;CB transparency;market functioning;markets query;tackling market dysfunctionality;transparency Index; exchange rates; market mechanism; CB credibility; market participant; CB intervention; CB monetary policy stance; Sovereign bonds; Bond yields; Yield curve; Securities; Bonds; Africa; Global
    Date: 2021–01–22
  19. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors’ and creditors’ beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors’ or creditors’ optimism (pessimism). JEL Classification: G28, G21, E61, E52
    Keywords: bailouts, distorted beliefs, leverage regulation, monetary policy, prudential policy
    Date: 2021–12
  20. By: Mr. Shanaka J Peiris; Miss Sanaa Nadeem; Mr. Pragyan Deb
    Abstract: Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.
    Keywords: Spillovers;international financial cycle;balance sheet;transmission channels;foreign exchange intervention;monetary policy;macroprudential measures;capital flows measures;WP;investment EMs;EM investment;transmission mechanism;exchange rate channel;EM growth
    Date: 2021–01–08
  21. By: Ms. Deniz O Igan; Mr. Gee Hee Hong; Do Lee
    Abstract: How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.
    Keywords: Transmission of unconventional monetary policy;Quantitative easing;Reversal rate;Zombie firms;Corporate balance sheet;Term premium;Corporate investment;WP;zombie firm;firm level;capital structure;coverage ratio
    Date: 2021–02–19
  22. By: Ojo, Marianne; Dierker, Theodore
    Abstract: It is argued that “much of the variation in inflation is due to global factors such as imported goods and energy prices” and that much of that variation is expected to be transitory. However there are growing signs that such transitory nature of inflation may not be as transitory as was initially considered. As rightly argued, the extent and deviations of current inflationary levels necessitates extraordinary intervention – such as cannot be easily compared to previous experiences. To which it has to be added that the prevailing nature of inflation also necessitates a coordinated, cooperative global approach which incorporates the harnessing of similarities and expertise in historical supervisory and regulatory practices in facilitating a harmonized and correlated result. In order to better appreciate the magnitude of the issue at hand, reference needs to be made to past and current levels of energy prices, as well as other major contributors to current inflationary levels, and their implications for inflationary targeting and monetary policy. The nature and relationships involved in the inflationary dynamics is also not as straightforward and clear cut as it used to be and as it may appear to be – other previously absent variables having been incorporated into the equation. This paper aims to provide a clearer picture of the nature and relationships involved in the inflation dynamics – as well as illustrate the complexity of the relationships involved. Further, by highlighting similarities in the review frameworks and approaches by several major central banking economies and regulators, the paper also aims to highlight and illustrate that whilst coordination and cooperation may prove to be a daunting task, several approaches can be adopted to facilitate harmonization and coordination.
    Keywords: inflation, energy prices; imports, wage rates; monetary policy; central bank independence; the Global Financial Crisis (GFC); the Global Pandemic Collapse (GPC); the Effective Lower Bound (ELB); flexible average inflation targeting
    JEL: E5 F1 F16 F18 G2 G3 G38 K2
    Date: 2021–12–02
  23. By: Kotaro Ishi; Carlo Pizzinelli; Tariq Khan
    Abstract: To complement the early warning signals literature, we study the determinants of banking and currency crises for small states and currency boards. Building on the crisis dataset by Laeven and Valencia (2020), we estimate a binominal logit model to identify the determinants of crises, and as a case study, we apply our models to the Eastern Caribbean Currency Union (ECCU). Our findings largely confirm past studies’ results that both external and domestic fundamentals matter in predicting crisis likelihood, but we find that small states and fixed exchange rate regimes are more sensitive to these fundamentals, compared to larger economies. Our empirical results also suggest that for currency board economies, keeping a high level of the foreign reserve cover—the “backing ratio” defined as official foreign reserves as a share of central bank demand liabilities—is critical to reduce the likelihood of both banking and currency crises. The backing ratio is particularly important during years of global economic downturn.
    Keywords: Banking crises, currency crises, early warning signals, currency boards, small states
    Date: 2021–11–19
  24. By: Zaretski, Aliaksandr
    Abstract: I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy.
    Keywords: constrained efficiency; effective lower bound; financial constraints; leverage limits; optimal monetary policy; Ramsey equilibrium
    JEL: E32 E44 E52 E63 G28
    Date: 2021–05–16
  25. By: Mr. Jan Vlcek; Mikhail Pranovich
    Abstract: National Bank of Rwanda (BNR) modernized monetary policy and transited to the price-based policy framework in January 2019. The Forecasting and Policy Analysis System (FPAS) is the cornerstone for the new forward-looking framework, which mobilizes and organizes resources and sets processes for regular forecasting rounds. The core of this system is a structural macroeconomic model for macroeconomic analysis and projections to support the BNR staff’s policy recommendations to the monetary policy committee. This paper documents the quarterly projection model (QPM) at the core of the FPAS at the BNR. The model is an extension of the canonical structure in Berg et al (2006) to reflect specifics of the interest-rate-based policy framework with a managed exchange rate, the effect of agricultural sector and harvests on prices, and the role of fiscal policies and aid flows.
    Keywords: Rwanda;Forecasting and Policy Analysis;Quarterly Projection Model;Monetary Policy;Managed Exchange Rate;Fiscal Impulse;Aid;WP;food price inflation;central bank;floating exchange rate;money market; nominal exchange rate depreciation; headline inflation; depreciation target; depreciation rate; demand shock; transmission mechanism; energy price inflation; inflation deviation; food inflation; real world oil price gap; price gap; Inflation; Food prices; Agricultural production; Exchange rates; Central bank policy rate; Global
    Date: 2020–12–21
  26. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Elena Perazzi (Ecole Polytechnique Fédérale de Lausanne)
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a small open economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Date: 2021–12
  27. By: Faccia, Donata; Parker, Miles; Stracca, Livio
    Abstract: We contribute to the debate surrounding central banks and climate change by investigating how extreme temperatures affect medium-term inflation, the primary objective of monetary policy. Using panel local projections for 48 advanced and emerging market economies (EMEs), we study the impact of country-specific temperature shocks on a range of prices: consumer prices, including the food and non-food components, producer prices and the GDP deflator. Hot summers increase food price inflation in the near term, especially in EMEs. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, being more significant for larger shocks and at higher absolute temperatures. We also provide simulations from a two-country model to understand the rationale behind the results. Overall, our results suggest that temperature plays a non-negligible role in driving medium-term price developments. Climate change matters for price stability. JEL Classification: E03, E31, Q51, Q54
    Keywords: climate change, extreme temperatures, inflation, panel local projections
    Date: 2021–12
  28. By: Rösl, Gerhard; Seitz, Franz
    Abstract: In this paper, we focus on the role of different types of crises (technological crises, financial market crises, natural disasters) and their effects on the demand for cash in an international context. It becomes evident that over the past 30 years cash demand always increased in times of crises, independent of the nature of the crisis itself.However, the type of crises determines whether small or large banknote denominations are affected more. In case of payment uncertainties, we find a crisis-related increased demand for small denominations, probably reflecting an increased demand for transaction balances. In times of uncertainties regarding the financial and/or general economic development (also possibly driven by natural disasters), large banknote denominations were comparatively more in demand indicating that the crises-related need for non-transaction balances was the dominant driver.
    Keywords: Cash,banknotes,crises,Covid
    JEL: E41 E51 E58
    Date: 2021
  29. By: Tatsuru Kikuchi; Toranosuke Onishi; Kenichi Ueda
    Abstract: We present positive evidence of price stability of cryptocurrencies as a medium of exchange. For the sample years from 2016 to 2020, the prices of major cryptocurrencies are found to be stable, relative to major financial assets. Specifically, after filtering out the less-than-one-month cycles, we investigate the daily returns in US dollars of the major cryptocurrencies (i.e., Bitcoin, Ethereum, and Ripple) as well as their comparators (i.e., major legal tenders, the Euro and Japanese yen, and the major stock indexes, S&P 500 and MSCI World Index). We examine the stability of the filtered daily returns using three different measures. First, the Pearson correlations increased in later years in our sample. Second, based on the dynamic time-warping method that allows lags and leads in relations, the similarities in the daily returns of cryptocurrencies with their comparators have been present even since 2016. Third, we check whether the cumulative sum of errors to predict cryptocurrency prices, assuming stable relations with comparators' daily returns, does not exceeds the bounds implied by the Black-Scholes model. This test, in other words, does not reject the efficient market hypothesis.
    Date: 2021–11
  30. By: Mr. Simon T Gray
    Abstract: Some central banks have maintained overvalued official exchange rates, while unable to ensure that supply of foreign exchange meets legitimate demand for current account transactions at that price. A parallel exchange rate market develops, in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, price levels in the economy typically reflect the parallel market exchange rate. “Recognizing reality” by allowing economic agents to use a market clearing rate benefits economic activity without necessarily leading to more inflation. But a unified, market-clearing exchange rate will not stabilize without a supportive fiscal and monetary context. A number of country case studies are included; my thanks to Jie Ren for pulling together all the data for the country case studies, and the production of the charts.
    Keywords: exchange rate unification;parallel markets;WP;market-clearing rate;market rate;exchange rate weakness;managed float;market-clearing exchange rate
    Date: 2021–02–05
  31. By: Katsutoshi Takehana (Graduate School of Economics, Osaka University); Hisashi Tanizaki (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we investigated how the Complementary Deposit Facility, interest on excess reserves, introduced by the Bank of Japan in Oct. 2008 affected commercial bank fs demands for reserves by empirical analysis using bank fs financial data. Our main findings are summarized as follows. First, interest on excess reserves has the significant impact on the commercial bank fs demand for reserves. Second, although the holdings of reserve with precautionary demand that was clarified in the previous researches w as confirmed in this study as well, the reasons why commercial banks have precautionary demand for reserve were not the same as these papers.
    Keywords: reserve demand, the Complementary Deposit Facility , bank fs financial data
    JEL: C23 E52
    Date: 2021–11
  32. By: Kento Yoshizawa (Bank of Japan); Kohei Maehashi (Bank of Japan); Hiroaki Yanagihara (Bank of Japan); Yoichi Kadogawa (Bank of Japan); Masakazu Inada (Bank of Japan)
    Abstract: In recent years, a phenomenon referred to as the gparadox of banknotes h has been observed worldwide: despite reduced opportunities to pay in cash due to the increase in cashless payments such as payment by credit card, the amount of banknotes in circulation has increased. Reasons that have been highlighted include the decline in the opportunity costs of holding cash amid the low interest rate environment as well as increased precautionary demand due to heightened economic uncertainty. Since the onset of the COVID-19 pandemic, this paradox has become more pronounced: cash in circulation has jumped even though opportunities to use cash have dropped sharply due to the economic downturn and the increase in e-commerce due to stay-at-home consumption. Our empirical analysis suggests that public health measures led to a significant increase in cash in circulation, with the effect being greatest immediately after the outbreak of pandemic and waning thereafter. It thus appears that developments in banknotes in circulation have been affected by precautionary demand for cash due to the heightened uncertainty brought about by the pandemic.
    Keywords: Banknotes; Cashless payments; COVID-19
    JEL: E41 E50 E51 E58
    Date: 2021–12–10
  33. By: Defina, Ryan
    Abstract: In this Policy Brief, we provide quantitative evidence demonstrating that the resolution toolkit has expanded considerably since the 2008 Global Financial Crisis (GFC). Purchase and assumption transactions, bridge bank facilitation and bail-in mechanisms have all become more available for bank resolution purposes. The use of such resolution tools is increasingly subject to least cost rules and to systemic failure considerations. These resolution tools may be available to different authorities, such as deposit insurers or resolution authorities, depending on the jurisdiction in question. Two of the three statistical models applied point to a significant increase in resolution powers for deposit insurers.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2021–08–20
  34. By: Sokol, Andrej
    Abstract: I propose a new model, conditional quantile regression (CQR), that generates density forecasts consistent with a specific view of the future evolution of some variables. This addresses a shortcoming of existing quantile regression-based models, for example the at-risk framework popularised by Adrian et al. (2019), when used in settings, such as most forecasting processes within central banks and similar institutions, that require forecasts to be conditional on a set of technical assumptions. Through an application to house price inflation in the euro area, I show that CQR provides a viable alternative to existing approaches to conditional density forecasting, notably Bayesian VARs, with considerable advantages in terms of flexibility and additional insights that do not come at the cost of forecasting performance. JEL Classification: C22, C53, E37, R31
    Keywords: at-risk, conditional forecasting, density forecast evaluation, house prices, quantile regression
    Date: 2021–12
  35. By: E Philip Davis; Ka Kei Chan; Dilruba Karim
    Abstract: Studies of the effect of macroprudential policy on bank risk tend to disregard the potential complementary role of bank competition, which could influence policy's effectiveness in achieving its financial stability objectives. Accordingly, we assess the relation of macroprudential policy and competition to bank risk jointly from a sample of 1373 banks from 13 East Asian countries, using the latest IMF dataset of macroprudential policy from 1990 to 2018. Among our results, we have found that whereas macroprudential policies did commonly have a beneficial effect on risk at a bank level controlling for competition, there are a number of cases where policies were deleterious through increased risk. Notably in the developing and emerging East Asian countries and in the short term, the interactions between competition and macroprudential measures often show a lesser response in terms of risk reduction for banks with more market power, a form of "competition-stability". We suggest that this links in turn to ability of such banks to undertake risk-shifting in response to macroprudential policy. On the other hand, we find for banks in advanced East Asian countries some tendency in the long term for banks facing intense competition to take relatively more risks in face of macroprudential measures, i.e. "competition fragility". These findings provide important implications for regulators.
    Keywords: Macroprudential policy, bank risk, Z score, bank competition
    JEL: E44 E58 G17 G28
    Date: 2021–12
  36. By: Katsutoshi Takehana (Graduate School of Economics, Osaka University); Hisashi Tanizaki (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we tried to evaluate the changes about the Funds Transfer Service that have been changed by the amendment of Payment Acts in 2020 and extract issues suggested by this change. In particular, the newly introduced gregulation on the retention of user fs money h can be evaluated as being consistent with the actual situation of funds transfer service providers and existing legal systems such as Investment Law. On the other hand, it can be also evaluated that this changes raised substantial issue related to the legal aspect of financial system how sustainable the current boundary between banks and fund transfer service provider is.
    Keywords: Payment Act, Funds transfer service provider, Bank, regulation on the retention of user fs money
    JEL: E42
    Date: 2021–11
  37. By: Bridges, Jonathan (Bank of England); Green, Georgina (Bank of England); Joy, Mark (Bank of England)
    Abstract: Using a panel dataset of 26 advanced economies over the five decades preceding the Covid crisis, we show that inequality rises following recessions and that rapid credit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.
    Keywords: Recessions; local projections; inequality; macroprudential policy
    JEL: D63 G01 N10
    Date: 2021–11–12
  38. By: Jeanne, Olivier (Johns Hopkins University, Department of Economics)
    Keywords: Keywords, Exchange rate regime, capital controls, foreign exchange interventions
    Date: 2021–10–26
  39. By: Luca Benati; Juan-Pablo Nicolini
    Abstract: We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation. We use data for the United States and several other developed countries. Our computations are heavily influenced by the recent experience of very low, even negative, short term rates observed in the countries we study. We obtain estimates that are close to those obtained by Lucas (2000), and an order of magnitude higher than those in Ireland (2009).
    Date: 2021–08
  40. By: Nick James; Kevin Chin
    Abstract: This paper uses new and recently introduced mathematical techniques to undertake a data-driven study on the systemic nature of global inflation. We start by investigating country CPI inflation over the past 70 years. There, we highlight the systemic nature of global inflation with a judicious application of eigenvalue analysis and determine which countries exhibit most "centrality" with an inner-product based optimization method. We then turn to inflationary impacts on financial market securities, where we explore country equity indices' equity robustness and the varied performance of equity sectors during periods of significant inflationary pressure. Finally, we implement a time-varying portfolio optimization to determine which asset classes were most beneficial in increasing portfolio Sharpe ratio when an investor must hold a core (and constant) allocation to equities.
    Date: 2021–11
  41. By: Aye, Goodness
    Keywords: Agricultural Finance, Agricultural and Food Policy
    Date: 2021–08
  42. By: Mehmet Guncavdi; Murat Kors; Elif Ozcan Tok
    Abstract: In this study, we examine the price transmission in terms of magnitude and speed along the supply chains of Turkish poultry and beef markets. We develop a two-step model. In the first step, we employ indicator saturation method to identify the structural breaks of impulse-indicator saturation (IIS), step-indicator saturation (SIS) and trend-indicator saturation (TIS) types in the data. In the second step, we construct an autoregressive distributed lag-error correction model (ARDL-ECM) introducing the structural breaks into the analysis. The main findings indicate that the magnitudes of pass through of a price shock between different levels of supply chains are considerably large, and the largest effect is observed from wholesale prices to retail prices. The convergence to the long run equilibrium is also fast.
    Keywords: Conditional ECM, Food supply chain, Vertical price transmission
    JEL: E31 E37 Q11 Q18
    Date: 2021
  43. By: Markkula, Tuomas; Takalo, Tuomas
    Abstract: Declining ATM numbers pose a challenge for competition policy and financial regulatory authorities. In this report we review the Finnish experience of regulating the competition in the ATM industry. To analyze the Finnish developments we extend the model of Kopsakangas-Savolainen and Takalo (2014), and draw on the existing literature and benchmarks from the selected other countries. We document how changes in the ATM market regulation and market structure has decoupled the ATM network size from the declining cash use in Finland. The Finnish regulation has almost exclusively focused on foreign fees, while in general it would be better to regulate interchange fees. If the optimal fee regulation is not feasible, the authorities could also consider quantity regulation.
    Keywords: ATM industry,cash,competition policy,optimal regulation,retail payments
    Date: 2021
  44. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Margaret Davenport (University of Lausanne); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER))
    Abstract: Recently portfolio choice has become an important element of many DSGE open economy models. Yet, a substantial body of evidence is inconsistent with standard frictionless portfolio choice models. In this paper we introduce a quadratic cost of changes in portfolio allocation into a two-country DSGE model. We investigate the level of portfolio frictions most consistent with the data and the impact of portfolio frictions on asset prices and net capital flows. We find the portfolio friction accounts for (i) micro evidence of portfolio inertia by households, (ii) macro evidence of the price impact of financial shocks and related disconnect of asset prices from fundamentals, (iii) a broad set of moments related to the time series behavior of saving, investment and net capital flows, and (iv) other phenomena relating to excess return dynamics. Financial and saving shocks each account for close to half of the variance of net capital flows.
    Date: 2021–12

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