nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒01‒24
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Welfare gains in a small open economy with a dual mandate for monetary policy By Punnoose Jacob; Murat Özbilgin
  2. Determinants of Inflation Expectations By Richhild Moessner
  3. Identifying Monetary Policy Shocks Using the Central Bank's Information Set By Ruediger Bachmann; Isabel Gödl-Hanisch; Eric R. Sims
  4. Monetary-Fiscal Crosswinds in the European Monetary Union By Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
  5. Firm Heterogeneity, Capital Misallocation and Optimal Monetary Policy By Beatriz González; Galo Nuño; Dominik Thaler; Silvia Albrizio
  6. A Quantitative Microfounded Model for the Integrated Policy Framework By Christopher J. Erceg; Jesper Lindé; Mr. Tobias Adrian; Pawel Zabczyk; Marcin Kolasa
  7. Measuring U.S. Core Inflation: The Stress Test of COVID-19 By Mr. Daniel Leigh; Laurence M. Ball; Ms. Prachi Mishra; Mr. Antonio Spilimbergo
  8. Is rising inflation a global risk? By Abdelaaziz Ait Ali; Uri Dadush
  9. Reconsidering the Fed’s Forecasting Advantage By Amy Y. Guisinger; Michael W. McCracken; Michael T. Owyang
  10. The impact of rising oil prices on U.S. inflation and inflation expectations in 2020-23 By Kilian, Lutz; Zhou, Xiaoqing
  11. The Inflation Game By Wolfgang Kuhle
  12. Monetary Policy, External Finance and Investment By James Cloyne; Clodomiro Ferreira; Maren Froemel; Paolo Surico
  13. The Rise, Fall and Stabilization of U.S. Inflation: Shifting Regimes and Evolving Reputation By Robert G. King; Yang K. Lu
  14. Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy By Nils Gornemann; Keith Kuester; Makoto Nakajima
  15. Contracts and firms’ inflation expectations By Saten Kumar; Dennis Wesselbaum
  16. Scaling, unwinding and greening QE in a calibrated portfolio balance model By Riedler, Jesper; Koziol, Tina
  17. Does clarity make central banks more engaging? Lessons from ECB communications By Ferrara, Federico Maria; Angino, Siria
  18. Central bank swap lines: evidence on the effects of the lender of last resort By Bahaj, Saleem; Reis, Ricardo
  19. MARTIN Gets a Bank Account: Adding a Banking Sector to the RBA's Macroeconometric Model By Anthony Brassil; Mike Major; Peter Rickards
  20. Qualitative Field Research in Monetary Policy Making By Chris D'Souza; Jane Voll
  21. Better out than in? Regional disparity and heterogeneous income effects of the euro By Sang-Wook (Stanley) Cho; Sally Wong
  22. Does Macroprudential Policy Leak? Evidence from Non-Bank Credit Intermediation in EU Countries By Martin Hodula; Ngoc Anh Ngo
  23. Zombie Lending and Policy Traps By Viral V. Acharya; Simone Lenzu; Olivier Wang
  24. Understanding Persistent ZLB: Theory and Assessment By Pablo Cuba-Borda; Sanjay R. Singh
  25. Repo over the Financial Crisis By Adam Copeland; Antoine Martin
  26. News versus Surprise in Structural Forecasting Models: Central Bankers' Practical Perspective By Karel Musil; Stanislav Tvrz; Jan Vlcek

  1. By: Punnoose Jacob; Murat Özbilgin
    Abstract: In March 2019, the Reserve Bank of New Zealand was entrusted with a new employment stabilisation objective, that complements its traditional price-stability mandate. Against this backdrop, we assess whether the central bank’s stronger emphasis on the stabilisation of employment, and more broadly, resource utilisation, enhances social welfare. We calibrate an open-economy growth model to New Zealand data. In a second order approximation of the model, we evaluate how lifetime household utility is affected by a wide range of simple and implementable monetary policy rules that target both inflation and resource utilisation. We find that additionally stabilising resource utilisation always improves social welfare at any given level of inflation stabilisation. However, the welfare gains from stabilising resource utilisation get milder as the central bank is increasingly sensitive to inflation.
    Keywords: Optimal simple rules, welfare analysis, monetary policy, dual mandate
    JEL: F41 E52
    Date: 2021–10
  2. By: Richhild Moessner
    Abstract: This paper analyses the determinants of short-term inflation expectations based on surveys of professionals, using dynamic cross-country panel estimation for a large number of 34 OECD economies. We find that food consumer price inflation and depreciations of the domestic exchange rate have significant positive effects on professionals’ survey-based inflation expectations. Moreover, core consumer price inflation and the output gap have significant positive effects.
    Keywords: inflation expectations, inflation, food prices, exchange rates
    JEL: E52 E58
    Date: 2021
  3. By: Ruediger Bachmann; Isabel Gödl-Hanisch; Eric R. Sims
    Abstract: We identify monetary policy shocks by exploiting variation in the central bank’s information set. To be specific, we use differences between nowcasts of the output gap and inflation with final, revised estimates of these series to isolate movements in the policy rate unrelated to economic conditions. We then compute the effects of a monetary policy shock on the aggregate economy using local projection methods. We find that a contractionary monetary policy shock has a limited negative effect on output but a persistent negative impact on prices. In contrast to alternative identification approaches, we do not observe a price puzzle when analyzing the period from 1987 to 2008. Further, we validate the identification approach in a simple New Keynesian model, augmented by the assumption that the central bank observes the ingredients of the Taylor rule with error.
    JEL: E31 E52 E58
    Date: 2021–12
  4. By: Lucrezia Reichlin; Giovanni Ricco (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Matthieu Tarbé
    Abstract: We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany's fiscal policy during the period in which unconventional monetary policy was adopted.
    Keywords: monetary-fiscal interaction,fiscal policy,monetary policy,intertemporal government budget constraint
    Date: 2021–01–01
  5. By: Beatriz González; Galo Nuño; Dominik Thaler; Silvia Albrizio
    Abstract: We analyze monetary policy in a New Keynesian model with heterogeneous firms and financial frictions. Firms differ in their productivity and net worth and face collateral constraints that cause capital misallocation. TFP endogenously depends on the time-varying distribution of firms. Although a reduction in real rates increases misallocation in partial equilibrium, general-equilibrium effects overturn this result: a monetary expansion increases the investment of high-productivity firms relatively more than that of low-productivity ones, crowding out the latter and increasing TFP. We provide empirical evidence based on Spanish granular data supporting this mechanism. This has important implications for optimal monetary policy. We show how a central bank without pre-commitments engineers an unexpected monetary expansion to increase TFP in the medium run. In the event of a cost-push shock, the central bank leans with the wind to increase demand and reduce misallocation.
    Keywords: monetary policy, firm heterogeneity, financial frictions, misallocation
    JEL: E12 E22 E43 E52 L11
    Date: 2021
  6. By: Christopher J. Erceg; Jesper Lindé; Mr. Tobias Adrian; Pawel Zabczyk; Marcin Kolasa
    Abstract: We develop a microfounded New Keynesian model to analyze monetary policy and financial stability issues in open economies with financial fragilities and weakly anchored inflation expectations. We show that foreign exchange intervention (FXI) and capital flow management tools (CFMs) can improve monetary policy tradeoffs under some conditions, including by reducing the need for procyclical tightening in response to capital outflow pressures. Moreover, they can be used in a preemptive way to reduce the risk of a “sudden stop” through curbing a buildup in leverage. While these tools can materially improve welfare, mainly by dampening inefficient fluctuations in risk premia, our analysis also highlights potential limitations, including the possibility that their deployment may forestall needed adjustment in the external balance. Finally, our results also emphasize the power of FXIs to provide domestic stimulus in a liquidity trap.
    Keywords: Monetary Policy, FX Intervention, Capital Controls, Sudden Stops, DSGE Model
    Date: 2021–12–17
  7. By: Mr. Daniel Leigh; Laurence M. Ball; Ms. Prachi Mishra; Mr. Antonio Spilimbergo
    Abstract: Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices (XFE), has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded. Overall, we find that the case for the Federal Reserve to move away from the traditional XFE measure of core has strengthened during 2020-21.
    Keywords: Inflation, business fluctuations, central banks.
    Date: 2021–12–17
  8. By: Abdelaaziz Ait Ali; Uri Dadush
    Abstract: Mounting inflation in the major financial centers have raised concerns about the consequences on macroeconomic stability, including the Central Bank response they might trigger. In line with official views, we argue that inflation will probably wind down. We show that core inflation remains below pre-Covid levels in most large economies. We also argue that emerging markets are now less prone to “sudden stop” phenomena, in part because many have already started the exit from accommodative monetary policy. However, we also warn against complacency. If the acceleration of prices is sustained for long, nominal wages are bound to follow and feed a once-familiar vicious circle of rising prices and wages; and, if this does not happen, workers will see decline in their purchasing power and a further redistribution of income towards capital.
    Date: 2021–11
  9. By: Amy Y. Guisinger; Michael W. McCracken; Michael T. Owyang
    Abstract: Previous studies show the Fed has a forecast advantage over the private sector, either because it devotes more resources to forecasting or because it has an informational advantage in knowing the path of future monetary policy. We evaluate the Fed’s forecast advantage to determine how much of it results from the Fed’s knowledge of the conditioning path. We develop two tests—an instrumental variable encompassing test and a path-dependent encompassing test—to equalize the Fed’s information set with the private sector’s. We find that, generally, the Fed does not encompass the private sector when the latter has knowledge of the future of monetary policy. Further, we find that between 20 and 30 percent of the difference between the Fed’s average mean squared forecast error and the private sector’s can be explained by monetary policy.
    Keywords: conditional encompassing; eurodollar futures; fed information
    JEL: C36 C53 E47
    Date: 2022–01–06
  10. By: Kilian, Lutz; Zhou, Xiaoqing
    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 yearover-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
  11. By: Wolfgang Kuhle
    Abstract: We study a game where households convert paper assets, such as money, into consumption goods, to preempt inflation. The game features a unique equilibrium with high (low) inflation, if money supply is high (low). For intermediate levels of money supply, there exist multiple equilibria with either high or low inflation. Equilibria with moderate inflation, however, do not exist, and can thus not be targeted by a central bank. That is, depending on agents' equilibrium play, money supply is always either too high or too low for moderate inflation. We also show that inflation rates of long-lived goods, such as houses, cars, expensive watches, furniture, or paintings, are a leading indicator for broader, economy wide, inflation.
    Date: 2021–12
  12. By: James Cloyne (University of California Davis/NBER/CEPR); Clodomiro Ferreira (Bank of Spain); Maren Froemel (Bank of England); Paolo Surico (London Business School/CEPR)
    Abstract: In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that financial frictions play a significant role in the transmission of monetary policy to investment.
    Keywords: monetary policy, investment, firm’s debt, collateral, financial frictions
    JEL: E22 E32 E52
    Date: 2021–11
  13. By: Robert G. King; Yang K. Lu
    Abstract: The rise, fall, and stabilization of US inflation between 1969 and 2005 is consistent with a model of shifting policy regimes that features a forward-looking New Keynesian Phillips curve, policymakers that can or cannot commit, and private sector learning about policymaker type. Using model-implied inflation forecasting rules to extract state variables from the inflation forecasts in the Survey of Professional Forecasters, we provide evidence that policy regimes without commitment prevailed before 1980 and regimes with commitment prevailed afterward. With theory and quantification, we find that evolution of reputational capital is central to understanding the behavior of inflation.
    JEL: D82 D83 E52
    Date: 2021–12
  14. By: Nils Gornemann; Keith Kuester; Makoto Nakajima
    Abstract: We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth-rich or retired tend to favor inflation targeting. The wealth-poor working class, instead, favors unemployment-centric policy. One- and two-agent alternatives can show unanimous disapproval of inflation-centric policy, instead. We highlight how the political support for inflation-centric policy depends on wage setting, the tax system, and the portfolio that households have.
    Keywords: Monetary policy; Unemployment; Search and matching; Heterogeneous agents; General equilibrium; Dual mandate
    JEL: E12 E21 E24 E32 E52 J64
    Date: 2021–06–29
  15. By: Saten Kumar; Dennis Wesselbaum
    Abstract: We use novel survey data to study firms’ inventory contracts. We document facts about the usage of purchase and sale contracts. We find that firms purchase and sell inventory through three contractual arrangements: fixed price and quantity, fixed price only, and fixed quantity only. The former holds the largest share of contracts. The average duration of purchase contracts is not very different from the average duration of sale contracts. We then find that the upward bias in inflation expectations is a feature of firms that do not purchase or sell largely through contracts. Our findings are useful in the calibration of sticky price models.
    Keywords: Contracts, Inflation Expectations, Survey
    JEL: C83 D84 D86 E31 L14
    Date: 2021–10
  16. By: Riedler, Jesper; Koziol, Tina
    Abstract: We develop a portfolio balance model to analyze the impact of euro area quantitative easing (QE) on asset yields. Our model features two countries each populated by two agents representing their respective banking and mututal fund sectors. Agents, which differ in their preferences for assets, can trade currencies, bonds and equities. In simulations of the calibrated model we find that 10-year euro area bond returns decline by 31 basis points in response to €1 trillion in central bank bond purchases, which is in line with the empirical literature. QE leads to a substantial flattening of the yield curve and increasing the maturity of purchased bonds increases the average yield impact. When QE is unwound, yields increase quicker than the central bank balance sheet shrinks. This is because the yield impact scales non-linearly with increasing asset purchases. When assessing the potential impact of green QE, we find that it is slightly less effective in reducing bond yields than conventional QE. However, the spread between green and brown bond yields decreases with conventional QE while it increases with green QE.
    Keywords: euro area QE,portfolio balancing channel,yield curve,green QE
    JEL: C63 G11 E52
    Date: 2021
  17. By: Ferrara, Federico Maria; Angino, Siria
    Abstract: Despite increasing communication efforts, it may be difficult for central banks to engage the public, as their language is often too difficult to understand for most citizens. Focusing on the case of the European Central Bank (ECB), we hypothesise that greater communication clarity is conducive to stronger engagement. We rely on readability metrics to measure the clarity of ECB communications. We show that communication clarity is a significant and robust predictor of the media engagement generated by the ECB with its speeches, press conferences and tweets. Our findings are validated by a placebo test and have significant policy implications for central bank communication.
    Keywords: Central bank communication; clarity; ECB; engagement; media; readability metrics; 810356
    JEL: F3 G3
    Date: 2021–11–18
  18. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Theory predicts that central-bank lending programs put ceilings on private domestic lending rates, reduce ex post financing risk, and encourage ex ante investment. This paper shows that with global banks and integrated financial markets, but domestic central banks, then lending of last resort can be achieved using swap lines. Through them, a source central bank provides source-currency credit to recipient-country banks using the recipient central bank as the monitor and as the bearer of the credit risk. In theory, the swap lines should put a ceiling on deviations from covered interest parity, lower average ex post bank borrowing costs, and increase ex ante inflows from recipient-country banks into privately-issued assets denominated in the source-country’s currency. Empirically, these three predictions are tested using variation in the terms of the swap line over time, variation in the central banks that have access to the swap line, variation on the days of the week in which the swap line is open, variation in the exposure of different securities to foreign investment, and variation in banks’ exposure to dollar funding risk. The evidence suggests that the international lender of last resort is very effective.
    Keywords: liquidity facilities; currency basis; bond portfolio flows; 682288
    JEL: E44 F33 G15
    Date: 2021–11–08
  19. By: Anthony Brassil (Reserve Bank of Australia); Mike Major (Reserve Bank of Australia); Peter Rickards (Reserve Bank of Australia)
    Abstract: We add a simplified banking sector to the RBA's macroeconometric model (MARTIN). How this banking sector interacts with the rest of the economy chiefly depends on the extent of loan losses. During small downturns, losses are absorbed by banks' profits and the resulting effect on the broader economy is limited to that caused by the lower shareholder returns (which is already part of MARTIN). During large downturns, loan losses reduce banks' capital, and banks respond by reducing their credit supply. This reduction in supply reduces housing prices, wealth and investment; thereby amplifying the downturn (which leads to further losses). Our state-dependent approach is a significant advance on the treatment of financial sectors within existing macroeconometric models. Having a banking sector in MARTIN allows us to explore important policy questions. In this paper, we show how the effectiveness of monetary policy depends on the state of the economy. During large downturns, monetary policy is more effective than usual because it can reduce loan losses and therefore moderate any reduction in credit supply. But at low interest rates, the zero lower bound on retail deposit interest rates reduces policy effectiveness. We also investigate how one of the more pessimistic economic scenarios that could have resulted from COVID-19 might have affected the banking sector, and subsequently amplified the resulting downturn.
    Keywords: banking; financial accelerator; macroeconomic model
    JEL: E17 E44 E51 G21
    Date: 2022–01
  20. By: Chris D'Souza; Jane Voll
    Abstract: Many central banks conduct economic field research involving in-depth interviews with external parties. But very little is known about how this information is used and its importance in the formation of monetary policy. We address this gap in the literature through a thematic analysis of open-ended interviews with senior central bank economic and policy staff who work closely with policy decision-makers. We find that these central bankers consider information from field research programs not just useful but also an essential input for monetary policy making. They use this information in conjunction with quantitative tools primarily to inform their near-term forecasts. The information is considered most valuable at potential turning points in the economy when uncertainty about the pace of economic growth is heightened (in the advent of large shocks to the economy) and when timely official data are not available or are viewed as unreliable. Senior staff also place a high value on maintaining a reliable and credible sample of representative economic agents that can be accessed on an ongoing basis and very quickly when required.
    Keywords: Business fluctuations and cycles; Monetary policy; Monetary policy and uncertainty
    JEL: C83 E52
    Date: 2022–01
  21. By: Sang-Wook (Stanley) Cho; Sally Wong
    Abstract: This paper conducts a counterfactual analysis on the effect of adopting the euro on regional income and disparity within Denmark and Sweden. Using the synthetic control method, we find that Danish regions would have experienced small heterogeneous effects from adopting the euro in terms of GDP per capita, while all Swedish regions are better off without the euro with varying magnitudes. Adopting the euro would have decreased regional income disparity in Denmark, while the effect is ambiguous in Sweden due to greater convergence among noncapital regions but further divergence with Stockholm. The lower disparity observed across Danish regions and non-capital Swedish regions as a result of eurozone membership is primarily driven by losses suffered by high-income regions rather than from gains to low-income regions. These results highlight the cost of foregoing stabilisation tools such as an independent monetary policy and a floating exchange rate regime. For Sweden in particular, macroeconomic stability outweighs the potential efficiency gains from a common currency.
    Keywords: currency union, euro, synthetic control method, regional income disparity
    JEL: C21 E65 F45 O52 R1
    Date: 2021–10
  22. By: Martin Hodula; Ngoc Anh Ngo
    Abstract: We examine whether macroprudential policy actions affect shadow bank lending. We use a large dataset covering 23 European Union countries and synthesize a narrow measure of shadow banking focused on capturing credit intermediation by non-banks. To address the endogeneity bias inherent to modelling of the effects of macroprudential policy on the financial sector, we consider a novel index of the macroprudential authority's strength in pursuing its goals and use it to instrument for a macroprudential policy variable in an IV estimation framework. We robustly demonstrate that following a macroprudential policy tightening, shadow bank lending increases. We harness the cross-sectional dimension of our data to show that the effect applies especially to low-capitalized banking sectors, where macroprudential policy is expected to be more binding, leading to credit reallocation from banks to non-banks.
    Keywords: European Union, instrumental variables, macroprudential policy, non-bank lending, regulatory leakages
    JEL: G21 G23 G28
    Date: 2021–12
  23. By: Viral V. Acharya; Simone Lenzu; Olivier Wang
    Abstract: We build a model with heterogeneous firms and banks to analyze how policy affects credit allocation and long-term economic outcomes. When firms are hit by small negative shocks, conventional monetary policy can restore efficient bank lending and production by lowering interest rates. Large shocks, however, necessitate unconventional policy such as regulatory forbearance towards banks to stabilize the economy. Aggressive accommodation runs the risk of introducing zombie lending and a “diabolical sorting”, whereby low-capitalization banks extend new credit or evergreen existing loans to low-productivity firms. If shocks reduce the profitability gap between healthy and zombie firms, the optimal forbearance policy is non-monotone in the size of the shock. In a dynamic setting, policy aimed at avoiding short-term recessions can be trapped into protracted low rates and excessive forbearance, due to congestion externalities imposed by zombie lending on healthier firms. The resulting economic sclerosis delays the recovery from transitory shocks, and can even lead to permanent output losses.
    JEL: E44 E52 G01 G21 G28 G33
    Date: 2021–12
  24. By: Pablo Cuba-Borda; Sanjay R. Singh (Department of Economics, University of California Davis)
    Abstract: Concerns of prolonged stagnation periods with near-zero interest rates and deflation have become widespread in many advanced economies. We build a theoretical framework that rationalizes two theories of low interest rates: expectations-trap and secular stagnation in a unified setting. We analytically derive contrasting policy implications under each hypothesis and identify robust policies that eliminate expectations-trap and reduce the severity of secular stagnation episodes. We provide a quantitative assessment of the Japanese experience from 1998:Q1-2020:Q4. We find evidence favoring the expectations-trap hypothesis and show that equilibrium indeterminacy is essential to distinguish between theories of low interest rates in the data.
    Keywords: Expectations-driven trap, secular stagnation, zero lower bound, robust policies.
    JEL: E31 E32 E52
    Date: 2022–01–12
  25. By: Adam Copeland; Antoine Martin
    Abstract: This paper uses new data to provide a comprehensive view of repo activity during the 2007-09 financial crisis for the first time. We show that activity declined much more in the bilateral segment of the market than in the tri-party segment. Surprisingly, we find that a large share of the decline in activity is driven by repos backed by Treasury securities. Further, a disproportionate share of the decline in repo activity is connected to securities dealer’s market-making activity in Treasury securities. In particular, the evidence suggests that at least part of the decline is not driven by clients pulling away from securities dealers because of counterparty credit concerns.
    Keywords: repo; financial crisis; money markets
    JEL: G01 G23 E42
    Date: 2021–12–01
  26. By: Karel Musil; Stanislav Tvrz; Jan Vlcek
    Abstract: The paper deals with the treatment of shocks in central banks' forecasts. Within the rational expectations (RE) concept, which is widely used in structural macroeconomic models, the paper highlights the differences between news and surprise shocks and argues that most shocks in central bank forecasts should be treated as news. The paper also points out some drawbacks of news shocks under the assumption of full information from the practical point of view of forecasting and policy decision-making at central banks. As a potential solution, the paper refers to the LIRE concept as introduced in Brazdik et al. (2020). The paper discusses the properties of the LIRE concept and finds it versatile and useful in dealing with news shocks without abandoning the RE framework. The paper concludes that LIRE can be effectively used for practical structural macroeconomic modelling.
    Keywords: Anticipated shocks, conditional forecast, DSGE models, rational expectations
    JEL: D58 D84 E37 E52
    Date: 2021–12

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