nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒01‒03
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Comparative analysis of quantitative easing and money-financed fiscal stimulus By Jan Lutynski
  2. Revisiting the Monetary Sovereignty Rationale for CBDCs By Skylar Brooks
  3. Twenty Years of Unconventional Monetary Policies: Lessons and Way Forward for the Bank of Japan By Mr. Niklas J Westelius
  4. Central Bank Transparency and Disagreement in Inflation Expectations By Shunichi Yoneyama
  5. Monetary policy and endogenous financial crises By F. Boissay; F. Collard; Jordi Galí; C. Manea
  6. Zero Lower Bound on Inflation Expectations By Yuriy Gorodnichenko; Dmitriy Sergeyev
  7. Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design By Jonathan Chiu; Mohammad Davoodalhosseini
  8. Does the Central Bank of Peru Respond to Exchange Rate Movements? A Bayesian Estimation of a New Keynesian DSGE Model with FX Interventions By Gabriel Rodríguez; Paul Castillo; Harumi Hasegawa; Hernán B. Garrafa-Aragón
  9. From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective By Brent Bundick; Nicolas Petrosky-Nadeau
  10. Technology adoption and the bank lending channel of monetary policy transmission By Hasan, Iftekhar; Li, Xiang
  11. Macroprudential Policy Interlinkages By Johannes Matschke
  12. The Bureau for Economic Research's inflation expectations surveys: Know your data By Monique Reid; Pierre Siklos
  13. Imported or Home Grown? The 1992-3 EMS Crisis By Barry Eichengreen; Alain Naef
  14. Inflation Narratives By Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
  15. Unconventionally green: A monetary policy between engagement and conflicting goals By Liebich, Lena; Nöh, Lukas; Rutkowski, Felix Joachim; Schwarz, Milena
  16. Monetary Policy over the Life Cycle By R. Anton Braun; Daisuke Ikeda
  17. Capital controls and the volatility of the renminbi covered interest deviation By Jinzhao Chen; Zhitao Lin; Xingwang Qian
  18. Can Venezuelan scenario be repeated in Tunisia? The role of remittances in an inflationary context By Refk Selmi; Farid Makhlouf
  19. Remittance Flows and U.S. Monetary Policy By Immaculate Machasio; Peter Tillmann
  20. Debt Maturity Heterogeneity and Investment Responses to Monetary Policy By Minjie Deng; Min Fang
  21. Dilemma and global financial cycle: Evidence from capital account liberalisation episodes By Li, Xiang
  22. Central bank balance sheet and systemic risk By Maelle Vaille
  23. Timely measurement of real effective exchange rates By Zsolt Darvas
  24. Capital Controls and the Global Financial Cycle By Marina Lovchikova; Johannes Matschke
  25. The Distributional Implications of the Impact of Fuel Price Increases on Inflation By Mr. Kangni R Kpodar; Boya Liu
  26. Currency Wars, Trade Wars and Global Demand By Jeanne, Olivier
  27. Effects of China's Capital Controls on Individual Asset Categories By Shigeto Kitano; Yang Zhou
  28. Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment By Cooper Howes
  29. China's Easily Overlooked Monetary Transmission Mechanism:Real Estate Monetary Reservoi By Xiao Shuguang; Lai Xinglin
  30. Shadow Insurance? Money Market Fund Investors and Bank Sponsorship By Stefan Jacewitz; Haluk Unal; Chengjun Wu
  31. State-owned banks and international shock transmission By Marcin Borsuk; Oskar Kowalewski; Pawel Pisany

  1. By: Jan Lutynski (Group for Research in Applied Economics (GRAPE))
    Abstract: I study two types of unconventional monetary policy: quantitative easing (QE) and money-financed fiscal stimulus (MFFS), in a modified New Keynesian framework. I compare their effectiveness in stabilizing output and inflation when monetary policy is constrained by the effective lower bound. Money-financed fiscal stimulus performs better than quantitative easing, except the case of the TFP shock. It tends to cause lower inflation and output volatility. Nevertheless, it might be substantially more problematic in implementation as it demands cooperation between the central bank and the fiscal authority. Real reserve targeting (RRT) delivers similar outcomes as quantitative easing but is easier to implement.
    Keywords: unconventional monetary policy, quantitative easing, money-financed fiscal stimulus,
    JEL: E21 E30 E50 E58 E61
    Date: 2021
  2. By: Skylar Brooks
    Abstract: As currently articulated, the monetary sovereignty argument for central bank digital currencies (CBDCs) rests on the idea that without them, private and foreign digital monies could displace domestic currencies (a process called currency substitution), threatening the central bank’s monetary policy and lender-of-last-resort (LLR) capabilities. This rationale provides a crucial but incomplete picture of what is at stake in terms of monetary sovereignty. This paper seeks to expand and enhance this picture in three ways. The first is by looking at the consequences of currency substitution that go beyond the functions of a central bank—important considerations that have received less attention in public CBDC discussions. The second is by exploring key differences in monetary policy and LLR capabilities across currency-issuing countries or regions. More specifically, the paper highlights the variation in the degree of monetary sovereignty and the consequences that different countries face should they lose it. The third way is by assessing not only the implications but also the risks of currency substitution and showing how these are also likely to vary across countries. Contrasting the consequences and risks of substitution, the paper concludes by noting a potential inverse relationship between the impact and probability of losing monetary sovereignty.
    Keywords: Debt management; Digital currencies and fintech; Exchange rate regimes; Financial stability; Monetary policy
    JEL: E41 E42 E52 E58 H12 H63
    Date: 2021–12
  3. By: Mr. Niklas J Westelius
    Abstract: The Bank of Japan has used unconventional monetary policies to fight deflation and stabilize the financial system since the late 1990s. While the Bank of Japan’s reflation efforts have evolved over time, inflation and inflation expectations have remained stubbornly low. This paper examines the evolution of monetary policy in Japan over the past twenty years, in order to draw relevant lessons and propose ways to strengthen the Bank of Japan’s policy framework. In doing so the analysis focuses on three aspects of monetary policy: objectives and goals; policy strategies; and the communication framework. Moreover, the paper discusses coordination between monetary, fiscal, and financial policies, and how the corresponding institutional design could be strengthened.
    Keywords: Japan;unconventional monetary policy;Bank of Japan;inflation expectations;WP;BoJ staff;inflation expectation;Policy objective;price stability target;inflation target;JGB Holdings;overshooting commitment;Policy strategy; BoJ's willingness; BoJ's policy; BoJ's overshooting commitment; BoJ's inflation; Price stabilization; Inflation; Inflation targeting; Financial sector stability; Unconventional monetary policies; Global
    Date: 2020–11–08
  4. By: Shunichi Yoneyama (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper measures the transparency of the Federal Reserve Board (FRB) regarding its target inflation rate before its adoption of inflation targeting using data on the disagreement in inflation expectations among U.S. consumers. We construct a model of inflation forecasters employing the frameworks of both an unobserved components model and a noisy information model. We estimate the model and extract the transparency of the FRB regarding the target as the standard deviation of the heterogeneous noise in the inflation trend signal, where the trend proxies the FRB's inflation target. The results show a great improvement in transparency after the mid-1990s as well as its significant contribution to the decline in the disagreement in long- horizon inflation expectations.
    Keywords: Central bank transparency, forecast disagreement, inflation dynamics, imperfect information
    JEL: E50 E37 D83
    Date: 2021–12
  5. By: F. Boissay; F. Collard; Jordi Galí; C. Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis, monetary policy
    Date: 2021–12
  6. By: Yuriy Gorodnichenko; Dmitriy Sergeyev
    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 possibility. 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 guidance, 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.
    JEL: E5 E7 G4
    Date: 2021–11
  7. By: Jonathan Chiu; Mohammad Davoodalhosseini
    Abstract: Should a central bank digital currency (CBDC) be issued? Should its design be cash- or deposit-like? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions as well as a novel feedback effect from transactions to deposit creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 5.8% and capture up to 25% of the payment market. In contrast, a deposit-like CBDC can crowd out banking by up to 2.6%, thereby grabbing a market share of about 16.7%.
    Keywords: Digital currencies and fintech; Monetary policy; Monetary policy framework
    JEL: E58
    Date: 2021–12
  8. By: Gabriel Rodríguez (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Paul Castillo (Banco Central de Reserva, Pontificia Universidad Católica del Perú.); Harumi Hasegawa (Pontificia Universidad Católica de Chile); Hernán B. Garrafa-Aragón (Escuela de Ingeniería Estadística de la Universidad Nacional de Ingeniería)
    Abstract: This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru. JEL Classification-JE: C22, C52, F41.
    Keywords: Small Open Economy; Taylor Rule; Monetary Policy Rule; Exchange Rate; Bayesian Methodology; Peruvian Economy; FX interventions; New Keynesian DSGE Model.
    Date: 2021
  9. By: Brent Bundick; Nicolas Petrosky-Nadeau
    Abstract: The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy that stabilizes employment “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to firms’ expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher inflation, employment, and nominal policy rates on average and also produces better outcomes during a zero lower bound episode. Our model suggests that the FOMC’s reinterpretation of its employment mandate could alter the business cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
    Keywords: Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound
    JEL: A1 A10
    Date: 2021–07–16
  10. By: Hasan, Iftekhar; Li, Xiang
    Abstract: This paper studies whether and how banks' technology adoption affects the bank lending channel of monetary policy transmission. We construct a new measurement of bank-level technology adoption, which can tell whether the technology is related to the bank's lending business and which specific technology is adopted. We find that lending-related technology adoption significantly strengthens the transmission of the bank lending channel, meanwhile, adopting technologies that are not related to lending activities significantly mitigates that. By technology categories, the adoption of cloud computing technology displays the largest impact on strengthening the bank lending channel. Moreover, higher exposure to BigTech competition is significantly associated with a weaker reaction to monetary policy shocks.
    Keywords: bank lending channel,monetary policy transmission,technology adoption
    JEL: G21 G23
    Date: 2021
  11. By: Johannes Matschke
    Abstract: Emerging markets are concerned about sudden stops in international capital flows, which may lead to severe recessions associated with vicious spirals of currency depreciations and tightening borrowing constraints. A common prescription is to impose macroprudential policies, including prudential capital controls, to limit international borrowing especially in foreign currency. This paper analyzes the supportive role of macroprudential policies geared toward the domestic financial market, suggesting that emerging markets should resort to a wide mix of policies, even when the domestic financial market is frictionless. A simple formula provides further insights: domestic and international macroprudential policies are imperfect complements rather than substitutes, due to distinctive characteristics of foreign and domestic currency bonds. Furthermore, the relative importance of domestic macroprudential regulation increases in the return of domestic bonds.
    Keywords: Macroprudential Policies; Capital Controls; Emerging Markets; Welfare
    JEL: F34 F41 E44 D62
    Date: 2021–09–30
  12. By: Monique Reid (Department of Economics, Stellenbosch University, South Africa); Pierre Siklos (Wilfrid Laurier University, Balsillie School of International Affairs, Waterloo, Canada, and Research Fellow, University of Stellenbosch, South Africa)
    Abstract: Inflation expectations are today keenly monitored by both the private sector and policy makers. Expectations matter, but whose expectations matter and how should this unobservable be measured? Answering these questions involves a number of choices that should be transparent and explicit. In this research note, we focus on these choices with respect to the South African inflation expectations data collected by the Bureau for Economic Research. Being willing to detail the strengths and weaknesses of a particular approach is valuable as it will enable us to choose the appropriate proxy for each application and to interpret the results with insight.
    Keywords: Inflation expectations survey, Bureau for Economic Research, inflation targeting, monetary policy, survey methodology
    JEL: C83 E43 E52 E58 E71
    Date: 2021
  13. By: Barry Eichengreen; Alain Naef
    Abstract: Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System, allowing us to pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.
    JEL: F0 F3 F31
    Date: 2021–11
  14. By: Peter Andre; Ingar Haaland; Christopher Roth; Johannes Wohlfart
    Abstract: We provide evidence on the stories that people tell to explain a historically notable rise in inflation using samples of experts, U.S. households, and managers. We document substantial heterogeneity in narratives about the drivers of higher inflation rates. Experts put more emphasis on demand-side factors, such as fiscal and monetary policy, and on supply chain disruptions. Other supply-side factors, such as labor shortages or increased energy costs, are equally prominent across samples. Households and managers are more likely to tell generic stories related to the pandemic or mismanagement by the government. We also find that households and managers expect the increase in inflation to be more persistent than experts. Moreover, narratives about the drivers of the inflation increase are strongly correlated with beliefs about its persistence. Our findings have implications for understanding macroeconomic expectation formation.
    Keywords: Narratives, Inflation, Beliefs, Macroeconomics, Fiscal Policy, Monetary Policy
    JEL: D83 D84 E31 E52 E71
    Date: 2021–12
  15. By: Liebich, Lena; Nöh, Lukas; Rutkowski, Felix Joachim; Schwarz, Milena
    Abstract: In light of its recently completed strategy review, the ECB has presented a climate action plan, which schedules the consideration of climate criteria within the corporate sector purchase program (CSPP). We study the potential role of the ECB in supporting the transition to a low-carbon economy by decarbonizing the CSPP. We demonstrate that the carbon intensity of CSPP purchases is basically determined by three factors: First, by the CSPP-eligibility criteria as these tend to exclude bonds from low-emission sectors. Second, by the underlying structure of the bond market as this tends to be skewed towards carbon-intensive sectors. Third, among the eligible bonds, the ECB tends to select those from relatively emission-intensive sectors. Consequently, to decarbonize the CSPP, the ECB can theoretically act along these three lines. That is: Adjust the CSPP-eligibility criteria to expand the range of eligible low-carbon assets. Revise the principle of market neutrality to tilt the CSPP portfolio towards low-carbon companies. Or purchase so far neglected low-carbon bonds within the current eligibility and market neutrality framework. We analyze chances and discuss risks with regard to all three options. As we find that all approaches to decarbonize the CSPP have either very limited effects on the carbon intensity of the CSPP portfolio or are associated with significant theoretical and practical concerns, we conclude that the contributions to the success of an active green monetary policy that goes beyond the principle of market neutrality are not guaranteed, while at the same time risks arise for a monetary policy oriented towards price level stability. In contrast, by linking the CSPP to climate-related disclosures, the ECB can contribute to increased transparency and improved risk management and has an important and potentially climate-effective lever in hand that is independent of revising the principle of market neutrality.
    Date: 2021
  16. By: R. Anton Braun; Daisuke Ikeda
    Abstract: A tighter monetary policy is generally associated with higher real interest rates on deposits and loans, weaker performance of equities and real estate, and slower growth in employment and wages. How does a household’s exposure to monetary policy vary with its age? The size and composition of both household income and asset portfolios exhibit large variation over the lifecycle in Japanese data. We formulate an overlapping generations model that reproduces these observations and use it to analyze how household responses to monetary policy shocks vary over the lifecycle. Both the signs and the magnitudes of the responses of a household’s net worth, disposable income and consumption depend on its age.
    Keywords: monetary policy; lifecycle; portfolio choice; nominal government debt
    JEL: D15 E52 E62 G51
    Date: 2021–08–20
  17. By: Jinzhao Chen (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne); Zhitao Lin (College of Economics and Institute of Finance, Jinan University, Guangzhou); Xingwang Qian (Economics and Finance Department, SUNY Buffalo State, Buffalo, NY)
    Abstract: This paper examines how capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls amplify the volatility of RMB CID and the amplification effect becomes more prominent in more flexible RMB exchange regimes. Capital controls influence the volatility of interest rate differential (IRD) and forward premium (FP), two components of CID, differently, particularly during the U.S. Fed's QE era. In addition, using an error correction model, we show that, while capital controls magnify both the short-and longrun volatility of the CID and the IRD, they do not affect FP volatility.
    Keywords: Capital controls,RMB CID volatility,amplification effect,interest rate differential,forward premium
    Date: 2021
  18. By: Refk Selmi (ESC Pau); Farid Makhlouf (ESC Pau)
    Abstract: Over the past decade, remittances to Tunisia have increased significantly. Meantime, the Tunisian economy has grown by as little as 0.6 percent on average with inflation averaging six percent. With the harmful economic and social consequences of the COVID-19 crisis as well as the political unrest (especially after Tunisian President Kais Saied invoked Article 80 of the country's 2014 constitution to suspend parliament amid nationwide protests calling for the resignation of the government and the dissolution of the parliament), managing inflation risks seems growingly challenging. Our study is the first attempt to examine the relationship between remittances and Tunisia's inflation dynamics in the central and tail distributions over different correlation regimes. Particularly, we use a copula-based approach that sheds a new light on the dynamic dependence between inflation and remittances. This technique allows to control for possible asymmetries in the form of a high or crisis dependence and a low or a normal state dependence. Our results robustly reveal that remittances are prominent factor determining inflation in Tunisia. More interestingly, we show that remittances and inflation are more strongly correlated during high uncertainty conditions rather than low uncertainty regime. Such accurate insights on the dynamic relationship between remittances and inflation would allow the central bank to anticipate more effectively the evolution of inflation and to propose more appropriate instruments to control it in a context of high inflationary pressures and heightened political uncertainty.
    Keywords: Inflation,Remittances,Tunisia,Political instability,Copula-based approach
    Date: 2021–11–15
  19. By: Immaculate Machasio (World Bank); Peter Tillmann (University of Giessen)
    Abstract: Remittance inflows are driven by macroeconomic conditions in the home and the host economies, respectively. In this paper, we study the effect of U.S. monetary policy on remittance flows into economies in Latin American and the Caribbean. The role of Fed policy for remittances has not yet been studied. We estimate a series of panel local projections for remittance inflows into eight countries. A surprise change in U.S. monetary conditions has a strong and highly significant negative effect on inflows. Our finding remains robust if we change the sample period or include additional variables. Hence, our paper establishes a remittance-channel through which the Fed affects the business cycle abroad.
    Keywords: remittances, migration, business cycle, monetary policy, spillovers
    JEL: F24 F41 E52 O11
    Date: 2021
  20. By: Minjie Deng (Simon Fraser University); Min Fang (University of Lausanne & University of Geneva)
    Abstract: We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.
    Date: 2021–12
  21. By: Li, Xiang
    Abstract: By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows.
    Keywords: average treatment effect,capital control,global financial cycle,monetary policy autonomy,propensity score matching,trilemma
    JEL: E52 F32 F33 F42
    Date: 2021
  22. By: Maelle Vaille (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Date: 2021
  23. By: Zsolt Darvas
    Abstract: This working paper updates the earlier methodological description of the dataset published as Darvas, Z. (2012) 'Real effective exchange rates for 178 countries- A new database', Working Paper 2012/06, Bruegel Click here for the most recently updated database We demonstrate that short-run real exchange effective rate changes are dominated by nominal effective exchange rate changes, while inflation rates are sticky and contribute little to short-run real exchange rate changes. These...
    Date: 2021–12
  24. By: Marina Lovchikova; Johannes Matschke
    Abstract: Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall cost of debt. We emphasize that risk premium manipulations via capital controls are only optimal from the perspective of the individual emerging market, but not from a global perspective. This suggests that the use of capital controls may impose costs in an international context.
    Keywords: Capital Controls; Risk Aversion; Risk Premium; Volatility
    JEL: F36 F38 F41
    Date: 2021–09–08
  25. By: Mr. Kangni R Kpodar; Boya Liu
    Abstract: This paper investigates the response of consumer price inflation to changes in domestic fuel prices, looking at the different categories of the overall consumer price index (CPI). We then combine household survey data with the CPI components to construct a CPI index for the poorest and richest income quintiles with the view to assess the distributional impact of the pass-through. To undertake this analysis, the paper provides an update to the Global Monthly Retail Fuel Price Database, expanding the product coverage to premium and regular fuels, the time dimension to December 2020, and the sample to 190 countries. Three key findings stand out. First, the response of inflation to gasoline price shocks is smaller, but more persistent and broad-based in developing economies than in advanced economies. Second, we show that past studies using crude oil prices instead of retail fuel prices to estimate the pass-through to inflation significantly underestimate it. Third, while the purchasing power of all households declines as fuel prices increase, the distributional impact is progressive. But the progressivity phases out within 6 months after the shock in advanced economies, whereas it persists beyond a year in developing countries.
    Keywords: Fuel prices, inflation, local projections, household welfare
    Date: 2021–11–12
  26. By: Jeanne, Olivier (Johns Hopkins University, Department of Economics)
    Abstract: This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.
    Keywords: Tariff, exchange rate, capital control
    Date: 2021–12–17
  27. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Yang Zhou (Graduate School of Economics, Kobe University, JAPAN)
    Abstract: We empirically assess the effects of China's capital controls on individual asset categories by using the local projection method. Our results show stark differences among individual asset categories. Capital controls on equity and financial credits affect both the corresponding inflows and outflows significantly, whereas those on the other three asset categories (bonds, commercial credits, and direct investment) do not.
    Keywords: Capital controls; China; Local projection
    JEL: F38 F32 G15
    Date: 2021–12
  28. By: Cooper Howes
    Abstract: While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back.
    Keywords: Monetary Policy; Investments; Financial Frictions
    JEL: E22 E32 E52
    Date: 2021–08–27
  29. By: Xiao Shuguang; Lai Xinglin
    Abstract: While the traditional monetary transmission mechanism usually uses the equity and capital markets as monetary reservoirs, due to China's unique fiscal and financial system, the real estate sector has become China's 'invisible' non-traditional monetary reservoir for many years. Firstly, based on the perspective of the real estate sector as a monetary reservoir, this paper constructs a dynamic general equilibrium model that includes fiscal investment and financing and uses Chinese housing market data as well as central bank data on refinancing rates to financial institutions and GDP data for parameter estimation to reveal the laws of the monetary transmission mechanism of the monetary reservoir-fiscal financing investment: firstly, an asset can be financed as long as it satisfies the three criteria of a leveraged trading system:First,there is a commitment to pay and the existence of government utility; second, local governments have an incentive to carry out credit expansion and investment and also financing operations through money pool assets, and there is a financing effect when the tax return on fiscal investment is higher than fiscal financing; third, the bubble effect is greater than the financing effect and it will push the monetisation of fiscal deficits when the financing effect is greater than the bubble effect and then the economic growth masks the credit expansion of local governments.To address the problem of monetary transmission mechanism under the perspective of real estate monetary reservoir, this paper carries out the design of a de-bubble financing mechanism for monetary reservoir assets.
    Date: 2021–11
  30. By: Stefan Jacewitz; Haluk Unal; Chengjun Wu
    Abstract: We argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at non-BHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expenses ratios increased with BHCs’ financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform.
    Keywords: Bank Holding Company; Financial Crisis; Money Market Fund; Banks and banking; Bank Run
    JEL: G20 G21 G23 G28 H12 H81
    Date: 2021–08–27
  31. By: Marcin Borsuk (European Central Bank, Germany Institute of Economics, Polish Academy of Sciences, Poland School of Economics, University of Cape Town, South Africa); Oskar Kowalewski (Institute of Economics, Polish Academy of Sciences, Poland IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Économie Management, F-59000 Lille, France Univ. Lille, UMR 9221 - LEM - Lille Economie Management, France CNRS, UMR 9221 - LEM - Lille ´Economie Management, France); Pawel Pisany (Institute of Economics, Polish Academy of Sciences, Poland)
    Abstract: In this study, we employ a new dataset on bank ownership and reassess the links between domestic and foreign ownership and lending during the 1996– 2018 period. Additionally, we distinguish between privately-owned and state-controlled banks and nd that the lending activities of foreign state-controlled and privately-owned banks dier, particularly following the nancial crisis of 2008. Our analysis conrms that foreign state-controlled and privately-owned banks provided credit during domestic banking crises in host countries, whereas lending by domestic state-controlled banks contracted. Further, foreign state-controlled banks reduced their credit base during a home banking crisis, whereas foreign privately-owned banks expanded lending. Hence, we nd that the credit supply of foreign state-controlled and privately-owned banks differs in host countries because of exogenous shocks. We also nd weak evidence that foreign state control can be a transmission channel during a sovereign crisis in the home country. However, we nd no evidence that foreign banks, state-controlled or privately-owned, transmit a currency crisis to a host country. Overall, our results suggest a mixed banking sector comprising foreign and domestic state-controlled banks and privately-owned banks to contribute to nancial stability during domestic and international crises.
    Keywords: : foreign banks, state-controlled banks, private banks, credit growth, crisis
    JEL: G01 G21 G28
    Date: 2021–10

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