nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒01‒10
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Political Economy of Currency Unions By Kai Arvai
  2. Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic By Mr. Maximilien Queyranne; Daniel Baksa; Azhin Abdulkarim; Vassili Bazinas; Mr. Roberto Cardarelli
  3. Permanent and temporary monetary policy shocks and the dynamics of exchange rates By Alexandre Carvalho; João Valle e Azevedo; Pedro Pires Ribeiro
  4. The exchange rate insulation puzzle By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
  5. A Model To Think About Crypto-Assets and Central Bank Digital Currency By Hernán D. Seoane
  6. Anchoring of Inflation Expectations: Do Inflation Target Formulations Matter? By Chistoph Grosse-Steffen
  7. Monetary policy communication: perspectives from former policy makers at the ECB By Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
  8. Do the Fed’s International Dollar Liquidity Facilities Affect Offshore Dollar Funding Markets and Credit? By Linda S. Goldberg; Fabiola Ravazzolo
  9. Central Bank Credibility During COVID-19: Evidence from Japan By Jens H. E. Christensen; Mark M. Spiegel
  10. Endogenous growth, downward wage rigidity and optimal inflation By Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
  11. Monetary Policy and COVID-19 By Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
  12. An ECB’s Staff Narrative of Two Decades of European Central Banking: a critical review By Sergio Cesaratto
  13. Capital Controls and Foreign Reserves against External Shocks: Combined or Alone? By Rafael Cezar; Eric Monnet
  14. Product market structure and monetary policy: evidence from the Euro Area By Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
  15. Smart Banknotes and Cryptobanknotes: Hybrid Banknotes for Central Bank Digital Currencies and Cryptocurrency Payments By Noll, Franklin; Lipkin, Andrei
  16. Information frictions in inflation expectations among five types of economic agents By Camille Cornand; Paul Hubert
  17. The Effect of Inequality on the Transmission of Monetary and Fiscal Policy By Marco Del Negro; Keshav Dogra; Laura Pilossoph
  18. An Extended Quarterly Projection Model: Credit Cycle, Macrofinancial Linkages and Macroprudential Measures: The Case of the Philippines By Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
  19. Measuring Inflation Expectations in Interwar Britain By Jason Lennard; Finn Meinecke; Solomos Solomou
  20. The Prudence Principle: A New Framework for Eurozone Fiscal Policy By Eric Lonergan; Mark Blyth
  21. Central bank's stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing By Camille Cornand; Rodolphe dos Santos Ferreira
  22. A Study of the Romer and Romer Monetary Policy Shocks Using Revised Data By Andersson, Fredrik N. G.; Kilman, Josefin
  23. The Effect of Monetary and Fiscal Policy on Inequality By Marco Del Negro; Keshav Dogra; Laura Pilossoph
  24. Regional Financial Cooperation in East Asia from a New Perspective By An, Sungbae; Kim, Subin
  25. A Double-Edged Sword – Can a Currency Board Help Stabilise the Lebanese Economy? By Uwe Böwer
  26. Functional data analysis for brazilian term structure of interest rate By Lucélia Vaz; Rodrigo Raad
  27. Sectoral exchange rate pass-through in the euro area By Osbat, Chiara; Sun, Yiqiao; Wagner, Martin
  28. The Inflation Shock of 2021 By James B. Bullard
  29. The strategic allocation and sustainability of central banks' investment By Davide Di Zio; Marco Fanari; Simone Letta; Tommaso Perez; Giovanni Secondin
  30. Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries? By Jafet Baca
  31. Distributed Ledgers and the Governance of Money By Raphael A. Auer; Cyril Monnet; Hyun Song Shin

  1. By: Kai Arvai
    Abstract: How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, i countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule with state-dependent country weights. The paper then demonstrates in a simulation that a central bank can only sustain the union for a while with this rule, but not permanently and that the best way to sustain the union is through fiscal transfers.
    Keywords: Currency union, Monetary policy, Lack of commitment, Exit option, Fiscal Policy
    JEL: E42 E52 E61 F33 F45
    Date: 2021
  2. By: Mr. Maximilien Queyranne; Daniel Baksa; Azhin Abdulkarim; Vassili Bazinas; Mr. Roberto Cardarelli
    Abstract: This paper finds that the neutral interest rate has been on a downward trajectory in Morocco since the global financial crisis and may have fallen in the wake of the pandemic. In that context, monetary policy transmission to output and prices appears relatively muted given limited exchange rate flexibility until recently. Also, monetary policy transmission to some market rates has somewhat weakened in the wake of the pandemic. A lower natural rate and low policy rates raise the question of whether further rate reductions would impair the banking system. We find that the sensitivity of cash demand to deposit rates is low, implying limited risks that banks would lose funding with further reductions. A reliance on checking and savings accounts for funding may impair monetary pass-through, however. If monetary policy reaches its effective lower bound, limited and credible recourse to an asset purchase program could usefully complement conventional measures and strengthen monetary policy transmission under an inflation-targeting regime with a flexible exchange rate.
    Keywords: Monetary policy, neutral interest rate, unconventional monetary policy.
    Date: 2021–10–21
  3. By: Alexandre Carvalho; João Valle e Azevedo; Pedro Pires Ribeiro
    Abstract: Over the short run contractionary monetary policy shocks tend to be associated with domestic currency appreciations, which goes against standard interest rate parity conditions. How can this be reconciled with the fact that these conditions tend to be restored over the long run? We show the distinction between permanent and temporary monetary policy shocks is helpful to understand the impacts of monetary policy on exchange rates in the short as well as over the long run. Drawing on monthly data for the United States, Germany, France, Great Britain, Japan, Australia, Switzerland and the euro area from 1971 to 2019, and resorting to a simple structural vector error correction (SVEC) model and mild identifying restrictions, we find that a shock leading to a temporary increase in U.S. nominal interest rates leads to a temporary appreciation of the USD against the other currencies, in line with the literature on the exchange rate effects of monetary shocks and that on the forward premium puzzle. In turn, a monetary policy shock leading to a permanent rise in nominal interest rates - e.g. one associated with a normalisation of monetary policy after a long period at the zero lower bound - has the opposite impact, i.e., in line with interest parity conditions, in the short as well as over the long run. The ensuing depreciation may also contribute to higher (not lower) inflation, also in the short run. We thus confirm, in a simpler setting and for more economies, the results of Schmitt-Grohé and Uribe (2021). This highlights the relevance of differentiating between temporary and permanent monetary policy shocks in interpreting short-run exchange rate movements.
    JEL: C32 E52 E58 F31
    Date: 2021
  4. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.; Schmidt, Sebastian
    Abstract: We confront the notion that flexible rates insulate a country from external disturbances with new evidence on spillovers from euro-area shocks to neighboring countries. We find that in response to euro-area shocks, spillovers are not smaller, and currency movements not significantly larger, in countries that float their currency, relative to those that peg to the euro—the insulation puzzle. Unconditionally, however, currency volatility is significantly higher for floaters. A state-of-the-art open-economy model can fit our conditional evidence on lack of insulation, provided monetary policy targets headline inflation, but only at the cost of missing the unconditional evidence on currency volatility. JEL Classification: F41, F42, E31
    Keywords: exchange-rate disconnect, exchange-rate regime, external shock, insulation, international spillovers
    Date: 2021–12
  5. By: Hernán D. Seoane
    Abstract: This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.
    Date: 2021
  6. By: Chistoph Grosse-Steffen
    Abstract: Inflation target formulations differ across countries and over time. Most widespread are point targets, target ranges, hybrid combinations of the two, or mere definitions of price stability. This paper proposes a novel empirical measure of expectations anchoring based on the cross-sectional distribution of private sector inflation point forecasts. Applying this to a panel of 29 countries, it finds three main results. First, a numerical target definition per se does not improve anchoring compared to a definition of price stability, while the formulation of a numerical reference point increases the degree of anchoring. Second, point targets and hybrid target formulations are associated with better anchoring than target ranges. Third, periods of persistent target deviations lead to an increase in tail risks to the inflation outlook. Conditional on such periods, point targets and hybrid targets attenuate tail risks to the inflation outlook, with a stronger quantitative effect for point targets. The results are consistent with models suggesting that targets ranges are interpreted as zones where monetary policy is less active.
    Keywords: Monetary Policy, Inflation Targeting, Expectations Anchoring, Survey Forecasts, Inflation Risk
    JEL: E42 E52 D84
    Date: 2021
  7. By: Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
    Abstract: This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Classification: E52, E58
    Keywords: central bank communication, monetary policy, survey
    Date: 2021–12
  8. By: Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: At the outbreak of the pandemic, in March 2020, the Federal Reserve implemented a suite of facilities, including two associated with international dollar liquidity—the central bank swap lines and the Foreign International Monetary Authorities (FIMA) repo facility—to provide dollar liquidity. This post discusses recent evidence showing the contributions of these facilities to financial and economic stability, highlighting evidence from recent research by Goldberg and Ravazzolo (December 2021).
    Keywords: dollar; facilities; swap lines; FEMA repo
    JEL: F3 G15
    Date: 2021–12–20
  9. By: Jens H. E. Christensen; Mark M. Spiegel
    Abstract: Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations.
    Keywords: affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection
    JEL: C32 E43 E52 G12 G17
    Date: 2021–12–21
  10. By: Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian
    Abstract: Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate. JEL Classification: E24, E3, E5, O41, J64
    Keywords: downward wage rigidity, endogenous growth, monetary policy, monetary policy invariance hypothesis, optimal inflation target, zero lower bound
    Date: 2021–12
  11. By: Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski
    Abstract: We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. According to our results, treating the observed output contraction as a standard recession leads to overly expansionary policy. Finally, we check how central banks should resolve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, despite the deep recession, optimal monetary policy is in fact contractionary. Conversely, if sufficient containment measures are introduced, central bank interventions should be expansionary and help stabilize economic activity.
    Keywords: COVID-19; Epidemics; Containment measures; Monetary policy
    Date: 2021–11–12
  12. By: Sergio Cesaratto
    Abstract: Monetary Policy in Times of Crisis (Rostagno et al. 2021) has three relevant features. The first is its criticism of the absence of an adequate European fiscal policy during the financial crisis. This left the ECB on its own. The second feature concerns the explanation of the theoretical framework that guided the ECB's action. While it is interesting that the authors point out that monetary policy acts on the demand side (and is therefore neutral neither in the short nor in the long-run), a plain explanation of the channels through which the central bank can influence demand is absent. The third feature is the chronicle of events and of the clash of positions within the ECB. This aspect would have, however, gained from a bolder and less conventional interpretative scheme. The book thus appears to be lacking both in a clear exposition of the ECB's analytical background and its evolution during the crisis, and in a comprehensive explanation of its policies. It is likely that the authors' economic training based on the neo-Keynesian mainstream model has greatly conditioned them in a technically convoluted, but too often uninspiring interpretation of events and policies. It is also possible that the difficulty of demonstrating the effectiveness of the monetary policy measures undertaken by the ECB in the absence of a proactive fiscal policy contributed to the widespread technical laboriousness of the argument in many pages of the book. Especially for academic teaching, but also for the informed public debate, a more accessible level would have been advisable. An appendix seeks to explain T-LTRO operations, the logic of which the book fails to elucidate
    JEL: E11 E12 E52 E58 N14
    Date: 2021–12
  13. By: Rafael Cezar; Eric Monnet
    Abstract: Long considered suboptimal, capital controls and FX interventions are now recognized as prudential measures. Yet, whether they should be used in combination remains an open question. Thanks to a rich dataset from 1950, we investigate how the response of FX reserves to an exogenous US monetary shock depends on capital controls. The response is insignificant with a very close capital account. By contrast, for a significant number of countries, FX interventions and capital controls are combined to tame the effects of an international financial shock. Yet, as countries open up financially, FX interventions replace capital controls. There is no one-sizes-fits-all recipe.
    Keywords: Capital Controls ; Foreign Exchange Interventions ; Foreign Exchange Reserves ; GlobalvFinancial Cycle
    JEL: F31 F32 F38
    Date: 2021
  14. By: Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
    Abstract: Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1
    Keywords: competition, credit constraints, marginal costs, monetary transmission, OMT
    Date: 2021–12
  15. By: Noll, Franklin; Lipkin, Andrei
    Abstract: We are heading for a cashless world. At some point, we will say goodbye to all those pieces of paper and polymer and switch to an electronic alternative. The only problem with these statements is that people have been saying them since the late 1960s. Banknotes have a robust technology and will be around for quite some years to come. What is needed is a transitional device that will ease the transition from nineteenth-century cash to twenty-first-century digital currency. The answer is a hybrid banknote. Basically, a hybrid banknote is a physical banknote on a paper or polymer substrate that can transfer value over an electronic network. It is denominated and has all the physical properties of a traditional banknote, allowing it to pass hand to hand. However, when the need arises, the user can access an electronic network and transfer the denominated value off the hybrid banknote. In this paper, we look at the past and present of hybrid banknotes, identifying their two basic forms—smart banknotes and cryptobanknotes—and how they differ. We also offer three hybrid banknote models that can be used to address pressing needs in payments technology.
    Keywords: hybrid banknotes, smart banknotes, cryptobanknotes, central bank digital currency
    JEL: E4 E5
    Date: 2021–09–16
  16. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Paul Hubert
    Abstract: We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations.
    Keywords: inflation expectations,information frictions,disagreement,forecast revisions,experimental forecasts,survey forecasts,central bank forecasts
    Date: 2021–12–07
  17. By: Marco Del Negro; Keshav Dogra; Laura Pilossoph
    Abstract: Monetary policy can have a meaningful impact on inequality, as recent theoretical and empirical studies suggest. In light of this, how should policy be conducted? And how does inequality affect the transmission of monetary policy? These are the topics covered in the second part of the recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy,” hosted by the new Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed on November 12.
    Keywords: inequality; monetary policy; fiscal policy
    JEL: E52
    Date: 2022–01–07
  18. By: Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich
    Abstract: We extend a modern practical Quarterly Projection Model to study credit cycle dynamics and risks, focusing on macrofinancial linkages and the role of macroprudential policy in achieving economic and financial stability. We tailor the model to the Philippines and evaluate the model’s properties along several dimensions. The model produces plausible dynamics and sensible forecasts. This along with its simplicity makes it useful for policy analysis. In particular, it should help policymakers understand the quantitative implications of responding to changes in domestic financial conditions, along with other shocks, through the joint use of macroprudential and monetary policies.
    Keywords: Philippines, Forecasting and Policy Analysis, Quarterly Projection Model, Monetary Policy, Macroprudential Policy, Credit Cycle, Leverage Ratio; credit cycle dynamics; policy analysis; projection model; model property; Quarterly Projection model; Credit; Macroprudential policy; Central bank policy rate; Credit gaps; Business cycles; Global
    Date: 2021–10–22
  19. By: Jason Lennard; Finn Meinecke; Solomos Solomou
    Abstract: What caused the recovery from the British Great Depression? A leading explanation - the “expectations channel” - suggests that a shift in expected inflation lowered real interest rates and stimulated consumption and investment. However, few studies have measured, or tested the economic consequences of, inflation expectations. In this paper, we collect high-frequency information from primary and secondary sources to measure expected inflation in the United Kingdom between the wars. A VAR model suggests that inflation expectations were an important source of the early stages of economic recovery in interwar Britain.
    Keywords: policy regime change, economic history, Great Depression
    JEL: E30 E60 N14
    Date: 2021
  20. By: Eric Lonergan (M&G Investments); Mark Blyth (Brown University)
    Abstract: This working paper is an intervention into the on-going debate over the future of fiscal rules in the European Union. It argues that rather than writing down rules and expecting the world to conform to them, a better approach is to make the concept of ‘fiscal space’ operational by tying it explicitly to rates of interest on government debt. This permits huge flexibility in the size of the deficit, in the debt/GDP ratio, leaves inflation targeting to the central bank, and guarantees debt sustainability. It would also provide clarity to the public that the government is honoring its word.
    Keywords: debt, fiscal policy, monetary policy, interest rates, functional finance
    JEL: E5 E58 E62
    Date: 2021–12
  21. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Rodolphe dos Santos Ferreira
    Abstract: Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, it is shown that the presence of firms' motivated beliefs has stark consequences for the conduct of optimal communication and stabilization policies. Under pure communication (resp. communication and stabilization policies), motivated beliefs about own private information (resp. own ability to process information) reverse the bang-bang solution of transparency (resp. opacity with full stabilization) found in the literature under objective beliefs and lead to intermediate levels of communication (and stabilization).
    Keywords: Motivated beliefs,public and private information (accuracy),overconfidence,communication policy,stabilization policy
    Date: 2021–12–07
  22. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Kilman, Josefin (Department of Economics, Lund University)
    Abstract: Romer and Romer (2004) propose a simple method to estimate monetary policy shocks using forecasts and real-time data. However, such data is not always (publicly) available, especially in a historical context. We explore the consequences of using revised data instead of the original forecast and real-time data when estimating policy shocks using the Romer and Romer framework. To this end, we estimate policy shocks for the same period as Romer and Romer. We find that using revised data has little impact on actual shock estimates, and the estimated effects of monetary policy shocks are similar.
    Keywords: Monetary policy shocks; prices; GDP
    JEL: E20 E30 E40 E50 E60
    Date: 2021–12–21
  23. By: Marco Del Negro; Keshav Dogra; Laura Pilossoph
    Abstract: How does accounting for households’ heterogeneity—and in particular inequality in income and wealth—change our approach to macroeconomics? What are the effects of monetary and fiscal policy on inequality, and what did we learn in this regard from the COVID-19 pandemic? What are the implications of inequality for the transmission of monetary policy, and its ability to stabilize the economy? These are some of the questions that were debated at a recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy” organized by the new Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed on November 12.
    Keywords: inequality; monetary policy; fiscal policy
    JEL: H30 E52
    Date: 2022–01–06
    Abstract: Following the Asian financial crisis of 1998, there was a need to improve regional financial cooperation, including liquidity support. The Chiang Mai Initiative Multilateralization (hereinafter, CMIM) and the Asian Bond Market Initiative (hereafter, ABMI) are two of the outcomes, but it is difficult to find countries that are actively using these mechanisms. Against this backdrop, we will first examine the limitations of existing systems and propose ways to overcome those limitations, as well as new ways to strengthen East Asian financial cooperation. We suggest three ways to strengthen financial coopera-tion in East Asia from a new perspective: 1) monetary cooperation through Central Bank Digital Currency (CBDC) 2) establishment of development financial institution in Northeast Asia 3) financial cooperation with Central Asia and Mongolia. Of course, more precise planning is required to implement these alternatives, and it is also recognized that the topics covered in this study represent only a subset of regional financial and monetary cooperation. However, by overcoming the limitations thus far, it is hoped that it can be a contribution that provides at least a glimmer of thought, which can hopefully become more concrete in future studies.
    Keywords: East Asia; regional financial cooperation; CMIM; CBDC
    Date: 2021–12–15
  25. By: Uwe Böwer
    Abstract: Lebanon is not defying gravity anymore. After a long period of surprising economic resilience, the Lebanese economy fell into a severe crisis in 2019, triggered by a sudden stop in life-sustaining capital inflows. The undercurrents of unsustainable public debt and twin deficits amid a weak institutional environment, however, had long been in the making. Drastic devaluation in parallel markets, high inflation and strong real GDP contractions reflect Lebanon’s deep crisis, which has only been aggravated by the COVID-19 pandemic and the devastating Beirut port explosions. The government is facing a momentous task to address the devaluation-inflation nexus, improve public governance, rebuild the electricity sector, restore sound public finances, repair the financial system and reinvigorate the private sector. This paper discusses the potential contributions of a currency board arrangement as a possible external anchor that could help stabilise Lebanon’s economy. Indeed, a currency board could end devaluation and rein in inflation, enhance discipline and governance, and, if accompanied by a broader reform agenda, help incentivise a return of capital inflows and improve private sector conditions. However, a currency board severely restricts certain macroeconomic adjustment mechanisms, requires a careful transition management and involves sizeable fiscal adjustments. While the stabilisation benefits of a currency board could be significant at Lebanon’s current juncture, getting the accompanying reforms in place, cushioning the social impact of the adjustment and ensuring solid implementation all present major challenges to make a currency board sustainable. Lebanon’s international partners stand ready to help. However, meeting these challenges first and foremost requires strong ownership by Lebanon itself.
    Keywords: Lebanon, currency board, exchange rate regime, monetary policy, inflation, Böwer.
    JEL: E52 E58 O53
    Date: 2021–12
  26. By: Lucélia Vaz (Federal Center for Technological Education of Minas Gerais); Rodrigo Raad (Federal University of Minas Gerais)
    Abstract: This paper analyzes the Brazilian nominal yield curves based on a Functional Data Anal- ysis framework. Specifically, we use functional principal component analysis to describe sources of variability of the yield curves and their related level, slope, and curvature. Addi- tionally, we present a functional linear regression model to investigate the macroeconomic determinants of the yield curves. We conclude that the level shocks strongly explain the source of variability in the interest rate curves. Moreover, the slope changes correspond to the second-largest source of variability. It is negatively affected by the nominal exchange rate and Selic reference rate and positively by Brazil’s risk and industrial capacity utilization. We also infer that the following explanatory variables expected inflation, Selic reference rate, Brazil risk, and industrial capacity utilization, have positive effects on the level of the yield curves. The variables Selic, Brazil risk, and the nominal exchange rate positively impact cur- vature. Furthermore, it is negatively impacted by industrial capacity utilization and expected inflation.
    Keywords: Functional data analysis, functional principal component analysis, term structure of interest rate.
    JEL: G1 G12
    Date: 2021–12
  27. By: Osbat, Chiara; Sun, Yiqiao; Wagner, Martin
    Abstract: We study exchange rate pass-through (ERPT), i.e., the impact of exchange rate movements on inflation, focusing on euro area import prices at a sectorally disaggregated level. Our estimation strategy is based on VAR-X models, thus incorporating both endogenous and exogenous explanatory variables. The impulse response functions not only allow to study the extent but also the dynamics of ERPT. We find that ERPT is heterogeneous in terms of magnitude across sectors. We further investigate what industry-specific characteristics affect the heterogeneity of ERPT. Across various model specifications including import penetration, market integration, competition and value chain integration, we find that higher market concentration and higher backward integration in global value chains decrease pass-through, in line with previous findings in the literature. JEL Classification: C50, F30, F40
    Keywords: euro area, exchange rates, import prices, pass-through, sectoral disaggregation
    Date: 2021–12
  28. By: James B. Bullard
    Abstract: During a presentation in Clayton, Mo., for the Missouri Bankers Association, St. Louis Fed President Jim Bullard said that there has been an unexpected inflation shock in the U.S. during 2021, and that U.S. monetary policy has so far remained very accommodative. Asset price inflation has been substantial as well, he added. He said that U.S. real GDP has fully recovered and that labor markets are quite strong and likely to get stronger. He also noted that pandemic risk remains. “These considerations suggest, on balance, that the Federal Open Market Committee (FOMC) should remove monetary policy accommodation,” he said.
    Keywords: COVID-19; inflation; monetary policy
    Date: 2021–12–03
  29. By: Davide Di Zio (Bank of Italy); Marco Fanari (Bank of Italy); Simone Letta (Bank of Italy); Tommaso Perez (Bank of Italy); Giovanni Secondin (Bank of Italy)
    Abstract: In recent years, the extensive recourse to unconventional monetary policy measures and the growing importance of the transition process towards a sustainable economy have given rise to new challenges for the Eurosystem’s central banks in managing financial risks. In this context, central banks’ investment strategies, whose goal is to reinforce capital strength, have been combined with the adoption of criteria aimed at fostering a sustainable growth model. This work describes the strategic allocation process for investment developed by the Bank of Italy and the methodology adopted for applying sustainability criteria to some of the portfolio’s asset classes.
    Keywords: central banks, investment allocation, sustainability, Bayesian VAR
    JEL: E58 G11 G17 Q56
    Date: 2021–12
  30. By: Jafet Baca
    Abstract: In light of the ongoing integration efforts, the question of whether CAPADR economies may benefit from a single currency arises naturally. This paper examines the feasibility of an Optimum Currency Area (OCA) within seven CAPADR countries. We estimate SVAR models to retrieve demand and supply shocks between 2009:01 - 2020:01 and determine their extent of symmetry. We then go on to compute two regional indicators of dispersion and the cost of inclusion into a hypothetical OCA for each country. Our results indicate that asymmetric shocks tend to prevail. In addition, the dispersion indexes show that business cycles have become more synchronous over time. However, CAPADR countries are still sources of cyclical divergence, so that they would incur significant costs in terms of cycle correlation whenever they pursue currency unification. We conclude that the region does not meet the required symmetry and synchronicity for an OCA to be appropiate.
    Date: 2021–12
  31. By: Raphael A. Auer; Cyril Monnet; Hyun Song Shin
    Abstract: Blockchain technology breathes new life into the classical analysis of money as a substitute for a ledger of all past transactions. While it involves updating the ledger through a decentralized consensus on the unique truth, the robustness of the equilibrium that supports this consensus depends on who has access to the ledger and how it can be updated. To find the optimal solution, Buterin’s “scalability trilemma” needs to be addressed, so that a workable balance can be found between decentralization, security (i.e. a robust consensus), and scale (the efficient volume of transactions). Using a global game analysis of an exchange economy with credit, we solve for the optimal ledger design that balances the three objectives of this trilemma. We characterize the optimal number of validators, supermajority threshold, fees and transaction size. When intertemporal incentives are strong, a centralized ledger is always optimal. Otherwise, decentralization may be optimal, and validators need to be selected from the set of users of the system.
    Keywords: market design, money distributed ledger technology, DLT, blockchain, decentralized finance, global game, consensus
    JEL: C72 C73 D40 E42 G20 L86
    Date: 2021

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