nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒01‒17
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  2. Central bank digital currency research around the World: a review of literature By Ozili, Peterson K
  3. Inflation and conflicting claims in the open economy By Guilherme Spinato Morlin
  4. Corporate legacy debt, inflation, and the efficacy of monetary policy By Goodhart, C. A. E.; Peiris, M. U.; Tsomocos, Dimitrios P; Wang, Xuan
  5. The Determinants of Consumer Cash Usage in Turkey By Saygin Cevik; Dilan Teber
  6. Best Before? Expiring Central Bank Digital Currency and Loss Recovery By Charles M. Kahn; Maarten van Oordt; Yu Zhu
  7. Central bank digital currency can lead to the collapse of cryptocurrency By Ozili, Peterson K
  8. Words Speak as Loudly as Actions: Central Bank Communication and the Response of Equity Prices to Macroeconomic Announcements By Benjamin Gardner; Chiara Scotti; Clara Vega
  9. Fiscal regimes and the exchange rate By Enrique Alberola; Carlos Cantú; Paolo Cavallino; Nicola Mirkov
  11. Is the Word of a Gentleman as Good as His Tweet? Policy communications of the Bank of England By Michael J. Lamla; Dmitri V. Vinogradov
  12. Covid 19 and Fiscal-Monetary Policy Co-ordination: Empirical Evidence from India By Chakraborty, Lekha S; S, Harikrishnan
  13. Impact of Covid Pandemic on Foreign Exchange Reserves By Nikolova, Irena
  14. Dominant Currency Paradigm: A Review By Gita Gopinath; Oleg Itskhoki
  15. Is the Taylor Rule Still an Adequate Representation of Monetary Policy in Macroeconomic Models? By James Dean; Scott Schuh
  16. Bank risk-taking and impaired monetarypolicy transmission By Koenig, Philipp J.; Schliephake, Eva
  17. The Federal Reserve’s Market Functioning Purchases By Michael J. Fleming; Haoyang Liu; Rich Podjasek; Jake Schurmeier
  18. Predicting the Demand for Central Bank Digital Currency: A Structural Analysis with Survey Data By Jiaqi Li
  19. Debating Central Bank Mandates By Adam Tooze
  20. An Overview of Inflation Developments By Byrne, David; Zekaite, Zivile
  21. A Decentralized Central Bank Digital Currency By Rahman, Abdurrahman Arum
  22. Has COVID Changed Consumer Payment Behavior? By Claire Greene; Ellen A. Merry; Joanna Stavins
  23. Inflation Targeting and Private Domestic Investment in Developing Countries By Bao-We-Wal Bambe
  24. The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020-23 By Lutz Kilian; Xiaoqing Zhou
  25. Monetary policy and Bitcoin By Karau, Sören
  26. Overview of central banks’ in-house credit assessment systems in the euro area By Laura Auria; Markus Bingmer; Carlos Mateo Caicedo Graciano; Clémence Charavel; Sergio Gavilá; Alessandra Iannamorelli; Aviram Levy; Alfredo Maldonado; Florian Resch; Anna Maria Rossi; Stephan Sauer
  27. The Effect of the Euro Changeover on Prices: Evidence from Lithuania By Valentin Jouvanceau
  28. Monetary Policy and Endogenous Financial Crises By Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
  29. CREWS: a CAMELS-based early warning system of systemic risk in the banking sector By Jorge E. Galán
  30. The signalling channel of negative interest rates By Oliver de Groot; Alexander Haas
  31. News-Driven International Credit Cycles By Galip Kemal Ozhan
  32. Revisiting monetary policy objectives and strategies: international experience and challenges from the ELB By Martina Cecioni; Adriana Grasso; Alessandro Notarpietro
  33. Central banks - independent or almighty? By Issing, Otmar

  1. By: Lena Dräger (Leibniz University Hannover.); Michael J. Lamla (Leuphana University of Lüneburg and ETH Zurich, KOF Swiss Economic Institute); Damjan Pfajfar (Board of Governors of the Federal Reserve System)
    Abstract: Using a new consumer survey dataset, we study the role of macroeconomic preferences for expectations and economic decisions. While household expectations are inversely related to preferences, households with the same ination expectations can di_erently assess whether the level of expected ination and of nominal interest rates is appropriate or too high/too low. This `hidden heterogeneity' in expectations is correlated with sociodemographic characteristics and a_ects current and planned spending via the intertemporal elasticity of substitution. We also show that the variation in preferences can be explained with risk preferences. Overall, this adds a new dimension to the de_nition of anchored expectations.
    Keywords: Macroeconomic expectations, monetary policy perceptions, ination and interestrate preferences, risk preferences, survey microdata
    JEL: E31 E52 E58 D84
    Date: 2021–05
  2. By: Ozili, Peterson K
    Abstract: This paper reviews the recent advances in central bank digital currency research in a way that would help researchers, policy makers and practitioners to take a closer look at central bank digital currency (CBDC). The review shows a general consensus that a central bank digital currency is a liability of the issuing central bank and it has cash-like attributes. The review also presents the motivation and benefits of issuing a central bank digital currency such as the need to improve the conduct of monetary policy, the need to enhance the efficiency of digital payments and the need to increase financial inclusion. The review also shows that many central banks are researching the potential to issue CBDCs due to its many benefits. However, a number of studies have called for caution against over-optimism about the potential benefits of CBDC due to the limiting nature of CBDC design and its inability to meet multiple competing goals. Suggested areas for future research are identified such as the need to find the optimal CBDC design that meets all competing objectives, the need for empirical evidence on the effect of CBDC on the cost of credit and financial stability, the need to undertake country-specific and regional case studies of CBDC design, and the need to find a balance between limiting the CBDC holdings of users and allowing users to hold as much CBDC as they want. The implication of the findings of this review is that central bankers need to pay more attention to the design features of CBDC. Central bankers need to first identify the goals they want to achieve with CBDC, and design the CBDC to have those features. Where possible, there should be opportunities to re-design and re-invent the CBDC to meet changing central bank objectives.
    Keywords: Keywords: Digital currency, Money, Central bank digital currency, CBDC, Digital finance, Cryptocurrency, Financial inclusion, CBDC design, Blockchain, Distributed ledger technology.
    JEL: E42 E51 E52 E58 E59 G21 G28
    Date: 2022–01
  3. By: Guilherme Spinato Morlin
    Abstract: Exchange rates and international prices are fundamental to explain inflation in open economies. Conflict inflation models account for these variables by including imported inputs and, in some cases, a distributive impact of exchange rates. A different viewpoint emerges from the Classical-Keynesian theory of distribution for a price-taker open economy. Thus, we explore this alternative by developing a conflict inflation model building on Classical Keynesian approach. The paper contributes to the literature by combining the conflicting claims approach with the Classical-Keynesian open economy framework. Including tradable prices, the model considers their direct impact on distribution. Therefore, it addresses a cause of inflation overlooked in the literature. Finally, conflict inflation affects the real exchange rate, which becomes an important distributive variable
    JEL: B51 D33 E11 E31 F41
    Date: 2021–10
  4. By: Goodhart, C. A. E.; Peiris, M. U.; Tsomocos, Dimitrios P; Wang, Xuan
    Abstract: The COVID-19 pandemic has coincided with a rapid increase in indebtedness. Although the rise in public debt and its policy implications have received much attention recently, the rise in corporate debt has received less so. We argue that high levels of corporate debt may impede the transmission mechanism of monetary policy and make it less effective in controlling inflation. In an environment with working capital financing requirements, when firms’ indebtedness is sufficiently high, the income effect of higher nominal interest rates offsets or even dominates its usual negative substitution effect on aggregate demand and is quantitatively important. This mechanism is independent of standard financial and nominal frictions and enhances the trade-off between inflation and output stabilisation.
    Keywords: coronavirus; covid-19
    JEL: E31 E44 E52 G33
    Date: 2021–12–10
  5. By: Saygin Cevik; Dilan Teber
    Abstract: This paper investigates the determinants of consumer cash usage in daily transactions in Turkey using a probit model. In doing so, we use the results of the Methods of Payment Survey conducted by the Central Bank of the Republic of Turkey in 2020. The survey results indicate that cash is still the most common form of payment in Turkey, despite recent technological innovations in payment systems. The results show that the likelihood of cash usage increases for the amounts that match currency denominations and convenient prices, while it decreases for the amounts for which the consumer receives a coin change. Also, the likelihood of cash usage decreases with education and income level and increases with age and being a paid employee. As for the transaction characteristics, we find that the likelihood of cash usage decreases with an increase in transaction size and that cash is more frequently used for low-value transactions. It is also worth noting that having greater cash balances at the beginning of the day increases the probability of using cash for all transaction amounts.
    Keywords: Cash; Payment behavior; Convenient prices; Probit model
    JEL: C25 E42 E58
    Date: 2021
  6. By: Charles M. Kahn; Maarten van Oordt; Yu Zhu
    Abstract: An important feature of physical cash payments is resilience, due to their indifference to power outages or network coverage. Many central banks are exploring issuing digital cash substitutes with similar online payment functionality. Such substitutes could incorporate novel features, making them more desirable than physical cash. This paper considers introducing an expiry date for online digital currency balances to automate personal loss recovery. We show that this functionality could substantially increase consumer demand for digital cash, with the time to expiration playing an important role. Having more information available to the central bank improves accuracy of loss recovery but may decrease welfare.
    Keywords: Digital currencies and fintech
    JEL: E42
    Date: 2021–12
  7. By: Ozili, Peterson K
    Abstract: Cryptocurrencies have become popular. Economic agents use cryptocurrency such as bitcoins to make payments and it pose a threat to fiat currency. Central banks have begun to respond to this threat. They realize that they need to join the race to offer a digital currency and dominate the digital currency landscape which can lead to the collapse of most private digital currencies that are not issued by a central bank or a monetary authority. In this paper, I show how the issuance of a central bank digital currency can lead to the collapse of private digital currencies such as bitcoin. I argue that central banks will leverage on their monetary powers, and the trust that citizens have in government-backed money. This may give central banks strong incentives to issue a central bank digital currency. The issuance of a central bank digital currency can erode trust in cryptocurrencies, and lead to lack of trust in cryptocurrency, thereby leading to the collapse of cryptocurrencies although not immediately.
    Keywords: central bank digital currency, cryptocurrency, bitcoin, blockchain, distributed ledger, payment system, central banks, CBDC, digital innovation, cryptoassets, stablecoin, Covid-19, fiat digital currency
    JEL: E42 E52 E58 G21 O31
    Date: 2021
  8. By: Benjamin Gardner; Chiara Scotti; Clara Vega
    Abstract: While the literature has already widely documented the effects of macroeconomic news announcements on asset prices, as well as their asymmetric impact during good and bad times, we focus on the reaction to news based on the description of the state of the economy as painted by the Federal Open Market Committee (FOMC) statements. We develop a novel FOMC sentiment index using textual analysis techniques, and find that news has a bigger (smaller) effect on equity prices during bad (good) times as described by the FOMC sentiment index. Our analysis suggests that the FOMC sentiment index offers a reading on current and future macroeconomic conditions that will affect the probability of a change in interest rates, and the reaction of equity prices to news depends on the FOMC sentiment index which is one of the best predictors of this probability.
    Keywords: Monetary policy; Public information; Probability of a recession; Price discovery
    JEL: C53 D83 E27 E37 E44 E47 E50 G10
    Date: 2021–11–18
  9. By: Enrique Alberola; Carlos Cantú; Paolo Cavallino; Nicola Mirkov
    Abstract: In this paper, we argue that the effect of monetary and fiscal policies on the exchange rate depends on the fiscal regime. A contractionary monetary (expansionary fiscal) shock can lead to a depreciation, rather than an appreciation, of the domestic currency if debt is not backed by future fiscal surpluses. We look at daily movements of the Brazilian real around policy announcements and find strong support for the existence of two regimes with opposite signs. The unconventional response of the exchange rate occurs when fiscal fundamentals are deteriorating and markets' concern about debt sustainability is rising. To rationalize these findings, we propose a model of sovereign default in which foreign investors are subject to higher haircuts and fiscal policy shifts between Ricardian and non-Ricardian regimes. In the latter, sovereign default risk drives the currency risk premium and affects how the exchange rate reacts to policy shocks.
    Keywords: Exchange rate, monetary policy, fiscal policy, fiscal dominance, sovereign default
    JEL: E52 E62 E63 F31 F34 F41 G15
    Date: 2022
  10. By: Christian Aubin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper reconsiders the Fisherian equation of exchange by explicitly distinguishing two types of transactions associated with industrial circulation, on the one hand, and financial circulation, on the other. In this context, a formal link can be established between the financialization of the economy and the downward trend in the income velocity of money during the last decades.
    Abstract: Ce papier reconsidère l'équation fisherienne des échanges en distinguant explicitement deux types de transactions associées, d'une part, à une circulation industrielle et, d'autre part, à une circulation financière. Dans ce cadre, un lien peut être établi entre la financiarisation de l'économie et la baisse tendancielle de la vitesse-revenu de circulation de la monnaie des dernières décennies.
    Keywords: money,quantity theory of money,equation of exchange,velocity of money,financialization,monetary policy
    Date: 2021–12–19
  11. By: Michael J. Lamla (Leuphana University Lüneburg and ETH Zürich, KOF Swiss Economic Institute); Dmitri V. Vinogradov (University of Glasgow and National Research University Higher School of Economics)
    Abstract: Policy announcements by central banks affect financial markets, but their effect on consumer beliefs is limited. This paper studies the implications of using different communication channels: established media outlets versus social media. Information on the news sources comes from our original consumer surveys administered just before and right after policy announcement events, enabling a causal inference on the announce- ment effect. We focus on the Bank of England, the first central bank to actively adopt accessible language, simplified messages and new forms of communication via its Twitter account. Based on about 10 000 individual consumer responses in 2018-2019, overall we find no statistically significant effect of announcements on perceptions or expectations, yet respondents who receive news have better perceptions and expectations than those who don't. Policy announcement events trigger an increase in the share of consumers who receive monetary policy news, the share of informed consumers is higher among Twitter users, suggesting potential benefits from Twitter communication with the public. However, Twitter users tend to overestimate inflation and interest rates, make a greater expectations/perception error. In addition they report higher confidence in their estimates. In terms of expectations quality, spreading the word of the Central bank via conventional mass media appears to be more effective than tweets.
    Keywords: perceptions, expectations, central bank communication, consumer, Twitter
    JEL: E52 E58
    Date: 2021–05
  12. By: Chakraborty, Lekha S; S, Harikrishnan
    Abstract: Against the backdrop of covid-19 pandemic, the paper analyses the economic stimulus packages announced by the national government in the context of India and tries to identify the plausible fiscal and monetary policy co-ordination. The shrinking fiscal space due to revenue uncertainties has led to a theoretical plausibility of a re-emergence of finite monetisation of deficits in India. However, the empirical evidence confirms no direct monetisation of deficit.
    Keywords: Fiscal-Monetary Policy Co-ordination, Fiscal Deficits, Monetisation, Covid 19
    JEL: E58 E62 E63
    Date: 2021–08
  13. By: Nikolova, Irena
    Abstract: The foreign exchange reserves are part of the central bank tools for maintaining the stability of the national legal tender. Several issues are of great importance when analysing the foreign exchange reserves. Firstly, the structure and size of the reserves is determined by the monetary policy of the central bank. Secondly, the monetary policy is different in regards with the applied exchange rate arrangement in the country as the central bank plays a significant role in maintaining the selected exchange rate. These issues are considered when reviewing the impact of the pandemic on the foreign exchange reserves. The aim of the paper is to review the role of the foreign exchange reserves in pandemic and to analyse the opportunities for their future implementation. The statistical methods are applied to assess the present situation compared to the pre-pandemic period, and the data is from the Bank for International Settlements and the International Monetary Fund databases. The conclusion is that the foreign exchange reserves are necessary for the central banks and governments, especially in times of crises and in pandemic. They are applied as a “buffer” for maintaining the stability of the domestic currency and the whole national financial system. Moreover, in recent years the role of the foreign exchange reserves is reviewed as an additional tool of the governments and central banks for introducing new digital currencies on the market.
    Keywords: foreign exchange reserves, covid pandemic, currencies, central bank, exchange rate arrangements
    JEL: F3 F30 F31
    Date: 2021
  14. By: Gita Gopinath; Oleg Itskhoki
    Abstract: A handful of currencies, especially the US dollar, play a dominant role in international trade. We survey the active theoretical and empirical literature that documents patterns of currency use in global trade, the implications of dominant currencies for international transmission of shocks, exchange rate pass-through, expenditure switching, and optimal monetary policy. We describe advances in the endogenous currency choice literature including conditions for the emergence and persistence of dominant currency equilibria.
    JEL: F30 F40
    Date: 2021–12
  15. By: James Dean (West Virginia University, Department of Economics); Scott Schuh (West Virginia University, Department of Economics)
    Abstract: A Taylor Rule remains the consensus monetary policy specification in macroeconomic models despite unconventional monetary policies (UMP) and the policy rate stuck near zero in 2009-2015. We extend the literature by testing for structural breaks in benchmark macro models at 2007:Q3 that might reflect UMP. Significant breaks occurred altering model shocks, dynamics, and output gaps. The “shadow†funds rate proxies for UMP but has little effect on results. Deducing cause(s) of structural breaks is challenging due to changes in non-policy structure that may be unrelated to UMP and to the omission of UMP from the benchmark models.
    Keywords: Taylor Rule, Structural Break, Macroeconomic Models, Unconventional Monetary Policy
    JEL: E43 E52 E58 E12 E13 E65 E61 C50 C32
    Date: 2021–12
  16. By: Koenig, Philipp J.; Schliephake, Eva
    Abstract: We consider a standard banking model with agency frictions to simultaneously studythe weakening and reversal of monetary transmission and banks' risk-taking in alow-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks' net worth. The pass-throughto deposit rates, the level of excess reserves and the extent of the agency problembetween banks and depositors are crucial determinants of monetary transmission.If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policyrates below the reversal rate further interest rate reductions lead to a disproportionalincrease in risk-taking and a contraction in loan supply.
    Keywords: Monetary policy,Bank lending,Risk-taking channel,Reversal rate
    JEL: G21 E44 E52
    Date: 2021
  17. By: Michael J. Fleming; Haoyang Liu; Rich Podjasek; Jake Schurmeier
    Abstract: In March 2020, massive customer selling of U.S. Treasury securities and agency mortgage-backed securities (MBS) triggered by the COVID-19 pandemic overwhelmed dealers’ capacity to intermediate trades, contributing to a marked deterioration of market functioning. The Federal Reserve promptly took numerous steps to address the market disruptions, including the initiation of market functioning purchases of Treasury securities and agency MBS. Purchases quickly expanded to over $100 billion per day as the Fed announced plans to buy securities “in the amounts needed” to support market functioning and the effective transmission of monetary policy. Market liquidity improved steadily after mid-March, suggesting that the Fed’s efforts were effective, and the security purchases were scaled back accordingly.
    Keywords: Federal Reserve; asset purchases; Treasury securities; agency mortgage-backed securities; COVID-19
    JEL: E52 G01 G12 E44
    Date: 2021–12–01
  18. By: Jiaqi Li
    Abstract: This paper predicts households’ demand for central bank digital currency (CBDC) with different design attributes by applying a structural demand model to a unique Canadian survey dataset. CBDC and its close alternatives, cash and demand deposits, are viewed as product bundles of different attributes. I estimate households’ preferences towards these attributes from how they allocate their liquid assets between cash and demand deposits. The estimated preferences are used to predict the demand for CBDC with a set of design attributes and quantify the impacts of CBDC design choices on CBDC demand. Under a baseline design for CBDC, the aggregate CBDC holdings out of households’ liquid assets could range from 4 to 52%, depending on whether households would perceive CBDC to be closer to cash or deposits. I find that important design attributes include budgeting usefulness, anonymity, bundling of bank services, and rate of return.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E58
    Date: 2021–12
  19. By: Adam Tooze (Columbia University)
    Abstract: Central banks are in the crosshairs of public debate about economic policy. Every minute of every day, interest rate decisions are debated and weighed in financial markets. The risks of inflation are assessed. Trillions of dollars hinge on correctly interpreting the next move by key central bankers. Central bank appointments are avidly discussed. Public campaigns are waged for and against particular candidates. This makes guardians of central bank independence nervous. Too much public scrutiny might put that independence at risk. But it should not be surprising that people want to debate the role of central banks. It is not because they are failing. It is because they have such massive effects. Furthermore, what is provocative is not just the scale of their interventions but the things that they are doing. Their role has visibly shifted. It is hard to claim that the status quo is set in tablets of stone, when the actual experience of recent decades is that what central banks do is very much a response to circumstances. Why then should we not go back to basics and ask fundamental questions about their mandate and their role?
    Keywords: Central banks, new mandates, ECB, Fed
    JEL: E5 E58
    Date: 2021–12
  20. By: Byrne, David (Central Bank of Ireland); Zekaite, Zivile (Central Bank of Ireland)
    Abstract: Inflation rates have risen substantially in many countries over the course of this year. This has led to renewed interest in understanding the inflation process and in the outlook for inflation over the coming years. In the euro area and Ireland, inflation had been persistently low and below the ECB’s target for much of the time since the Global Financial Crisis. This Letter outlines the developments in inflation since the COVID-19 pandemic and explains the drivers of the current high inflation rates. This Letter then discusses the ongoing debate on the inflation outlook and potential monetary policy options.
    Date: 2021–11
  21. By: Rahman, Abdurrahman Arum
    Abstract: Central bank digital currency (CBDC) is a digitized fiat currency. As the nature of the central bank is centralized, the CBDC is also centralized. This paper proposes a decentralized CBDC that is controlled by many central banks together or countries in the world. It is only for international transactions between member countries. While domestic transactions continue to use the national currency of each country. A decentralized CBDC can explore the advantages of digital technologies more deeply than the centralized ones by making reconciliations between central banks in real-time. Furthermore, this system provides international liquidity for all (member) countries in the world sustainably and free of charge. This system eliminates global imbalances, makes the exchange rate more stable, and so makes the whole international monetary system naturally more stable. In doing so, the system does not require economic integration so that all countries in the world may join without many conditions.
    Keywords: Cryptocurrency, organic system, global currency, international monetary system, global imbalances.
    JEL: E40 E50 O3
    Date: 2022–01–03
  22. By: Claire Greene; Ellen A. Merry; Joanna Stavins
    Abstract: The COVID-19 pandemic has caused large changes in consumer spending, including how people make their payments. We use data from a nationally representative survey of U.S. consumers collected before COVID in 2018 and 2019 and during COVID in 2020 to analyze changes in consumer payment behavior during the pandemic. We find that compared with their payment behavior in 2019, consumers had shifted some of their purchases from in person to online by fall 2020, significantly lowered their use of cash for purchases, and shifted their person-to-person (P2P) payments away from paper (cash and checks). Those changes are consistent with what we might expect, as many people were less able or willing to shop in person. The adoption of electronic P2P increased, especially the use of payment apps such as PayPal, Venmo, and Zelle. Consumers who worked exclusively from home during COVID made significantly higher shares of their payments online or through mobile devices and were less likely to use cash at all compared with those who worked at least partly in person, even after we control for income and education levels. In contrast, payment-behavior changes that took place from 2018 to 2019 were smaller in magnitude and largely insignificant, suggesting that COVID likely accelerated any longer-term trends. Although it is too soon to determine whether these changes will persist for the longer term, we observed them several months after the onset of the pandemic, so they certainly were not just temporary shifts.
    Keywords: consumer payments; consumer surveys; payment behavior; COVID-19
    JEL: D12 D14 I12 I18 L81
    Date: 2021–10–01
  23. By: Bao-We-Wal Bambe (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: This paper analyses the effect of inflation targeting on private domestic investment in developing countries. Using the propensity scores matching method, which allows addressing the self-selection bias in the policy adoption, I find that inflation targeting has increased private domestic investment from 2.05 to 2.53 percentage points in targeting countries compared to nontargeting countries. The estimated coefficients are economically meaningful and robust to a battery of econometric tests and alternative specifications. Finally, I highlight several heterogeneities in the effect of inflation targeting, depending on various factors.
    Keywords: E51,E52,E58,590,E62,E220,Inflation targeting,Private domestic investment,Developing countries,Propensity score matching
    Date: 2021–12–14
  24. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a year-over-year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, and by 0.4 percentage points at the end of 2022. In contrast, the impact on measures of core inflation such as trimmed mean PCE inflation is only 0.4 and 0.3 percentage points in 2021 and 2022, respectively. These estimates already account for any increases in inflation expectations under the scenario. The peak response of the 1-year household inflation expectation would be 1.2 percentage points, while that of the 5-year expectation would be 0.2 percentage points.
    Keywords: scenario, inflation, expectation, oil price, gasoline price, household survey, core, pandemic, recovery
    JEL: E31 E52 Q43
    Date: 2021
  25. By: Karau, Sören
    Abstract: Bitcoin was conceptualized in response to perceived shortcomings in the monetary and financialsystem, not only related to large financial institutions but also to discretionary decision makingin monetary policy. Using high-frequency data and a weekly proxy VAR model, I study theimpact of monetary policy on Bitcoin. The paper shows that monetary shocks have sizableeffects on Bitcoin prices, but that these differ in sign: a disinflationary monetary tightening bythe ECB lowers valuations - consistent with the notion of Bitcoin as a digital gold -, whereasa Fed tightening increases Bitcoin prices. I document similar differences with respect to cen-tral bank information shocks and explore potential explanations by studying various aspects ofthe Bitcoin ecosystem. Exploiting both differences in Bitcoin valuations across currencies andblockchain transaction data, the paper shows that the increased demand for Bitcoin following aUS monetary tightening is primarily driven by emerging markets. I argue that this likely reflectsthe technological and institutional particularities of Bitcoin that make it sought after as globaldigital cashwhen international economic and financial conditions deteriorate.
    Keywords: Bitcoin,Blockchain,Monetary policy,Proxy VAR
    JEL: E42 G32 L14 O16
    Date: 2021
  26. By: Laura Auria (Deutsche Bundesbank); Markus Bingmer (Deutsche Bundesbank); Carlos Mateo Caicedo Graciano (Banque de France); Clémence Charavel (Banque de France); Sergio Gavilá (Banco de España); Alessandra Iannamorelli (Banca d’Italia); Aviram Levy (Banca d’Italia); Alfredo Maldonado (Banco de España); Florian Resch (Oesterreichische Nationalbank); Anna Maria Rossi (Banca d’Italia); Stephan Sauer (European Central Bank)
    Abstract: The in-house credit assessment systems (ICASs) developed by euro area national central banks (NCBs) are an important source of credit risk assessment within the Eurosystem collateral framework. They allow counterparties to mobilise as collateral the loans (credit claims) granted to non-financial corporations (NFCs). In this way, ICASs increase the usability of non-marketable credit claims that are normally not accepted as collateral in private market repo transactions, especially for small and medium-sized banks that lend primarily to small and medium-sized enterprises (SMEs). This ultimately leads not only to a widened collateral base and an improved transmission mechanism of monetary policy, but also to a lower reliance on external sources of credit risk assessment such as rating agencies. The importance of ICASs is exemplified by the collateral easing measures adopted in April 2020 in response to the coronavirus (COVID-19) crisis. The measures supported the greater use of credit claim collateral and, indirectly, increased the prevalence of ICASs as a source of collateral assessment. This paper analyses in detail the role of ICASs in the context of the Eurosystem’s credit operations, describing the relevant Eurosystem guidelines and requirements in terms of, among other factors, the estimation of default probabilities, the role of statistical models versus expert analysis, input data, validation analysis and performance monitoring. It then presents the main features of each of the ICASs currently accepted by the Eurosystem as credit assessment systems, highlighting similarities and differences.
    Keywords: credit assessments, credit risk models, credit claims, ratings, ICAS
    JEL: E58
    Date: 2021–11
  27. By: Valentin Jouvanceau (Bank of Lithuania)
    Abstract: At the aggregate level, I find that the euro changeover did not lead to a significant change in the overall inflation rate between 2015 and 2019 in Lithuania. When the measures are diversified, however, some inflationary effects emerge in sub-categories. I therefore analyze this heterogeneity at the disaggregated level using a large sample of prices that constitutes the CPI from 2010 to 2018. I show that significant price changes have been confined to the low-weighted components of the HICP. This explains why a spike in the overall price level did not occur at the time of the changeover.
    Keywords: Euro changeover, synthetic difference-in-differences, regression discontinuity in time, price changes.
    JEL: E31 F33 L11
    Date: 2021–10–12
  28. By: Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
    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: 2021–12–20
  29. By: Jorge E. Galán (Banco de España)
    Abstract: This document proposes an aggregate early-warning indicator of systemic risk in the banking sector. The indicator is derived from a logistic model based on the variables in the CAMELS rating system, originally developed for the US, and complemented with macroeconomic aggregate variables. The model is applied to the Spanish banking sector using bank-level data for a complete financial cycle, from 1999 to 2021. The performance of the model is assessed not only during the last global financial crisis and the subsequent sovereign crisis, but also during the recent Covid-19 shock. The proposed indicator has a macroprudential orientation, which differs from most of previous studies predicting individual bank defaults. The indicator is found to provide accurate early-warning signals of systemic risk in the banking sector within a two-year horizon. In this context, the indicator provides mid-term signals of systemic risk that complement those derived from macrofinancial indicators and from measures of the materialization of risk.
    Keywords: banks, defaults, early-warning performance, macroprudential policy, systemic risk
    JEL: C25 E32 E58 G01 G21
    Date: 2021–11
  30. By: Oliver de Groot; Alexander Haas
    Abstract: Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the opti mality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signalling channel dominates the costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
    Keywords: Monetary policy, Taylor rule, Forward guidance, Liquidity trap
    Date: 2021–12–16
  31. By: Galip Kemal Ozhan
    Abstract: How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital that turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000-2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E44 F32 F41 G15 G21
    Date: 2021–12
  32. By: Martina Cecioni (Bank of Italy); Adriana Grasso (ECB); Alessandro Notarpietro (Bank of Italy; Bank of Italy)
    Abstract: We review the experience of central banks in 12 advanced economies in formulating their price stability objectives during the last 20 years. All central banks under review target a small and positive inflation rate (typically 2%). In most cases, they set a point target, in some a range or a point with bands around it. Range and bands are more common among small open economies. We also conduct a model-based analysis of the macroeconomic performance of different monetary policy strategies when the policy rate is constrained by the effective lower bound (ELB). Under standard inflation targeting, inflation remains, on average, below target (disinflationary bias). ELB incidence and duration are higher the lower the target. A point inflation target performs better than a range, especially if compared to an asymmetric one with the focal point close to the ceiling. Makeup strategies (price level targeting and average inflation targeting) and asymmetric inflation targeting strategies, in which the central bank’s reaction to below-target inflation is stronger compared with the case of above-target inflation, reduce the disinflationary effects of the ELB and have better macroeconomic stabilization properties compared with standard inflation targeting.
    Keywords: central banking, monetary policy rules, effective lower bound
    JEL: E31 E32 E52 E58
    Date: 2021–12
  33. By: Issing, Otmar
    Abstract: Historically Central Bank Independence (CBI) was anything but the norm. CBI seems to contradict core principles of democracy. Most economists were also against CBI. After the Great Inflation of the 1970ies many empirical studies demonstrated that there is a strong negative correlation between the degree of CBI and the rate of inflation. In 1990 most major countries had endowed their central bank with the status of independence. Overburdening with elevated expectations and additional competences are threatening the reputation of central banks and undermining the case for CBI.
    Keywords: Central banks
    Date: 2021

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