nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒01‒31
sixteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy and Endogenous Financial Crises By Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
  2. Central Bank Digital Currencies: The Motivation By Van Roosebeke, Bert; Defina, Ryan
  3. Effects of Inflation Expectations on Inflation By Richhild Moessner
  4. Measuring U.S. Core Inflation: The Stress Test of COVID-19 By Laurence M. Ball; Daniel Leigh; Prachi Mishra; Antonio Spilimbergo
  5. Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach By Wenting Song; Samuel Stern
  6. High-Frequency Identification of Monetary Policy Shocks in Japan (Revised version of CARF-F-502)(Forthcoming in the Japanese Economic Review) By Hiroyuki Kubota; Mototsugu Shintani
  7. Preemptive Policies and Risk-Off Shocks in Emerging Markets By Mitali Das; Gita Gopinath; Ṣebnem Kalemli-Özcan
  8. Short-term Prediction of Bank Deposit Flows: Do Textual Features matter? By Katsafados, Apostolos; Anastasiou, Dimitris
  9. Currency Wars, Trade Wars, and Global Demand By Olivier Jeanne
  10. When government expenditure meets bank regulation: The impact of government expenditure on credit supply By Li, Boyao
  11. Are Free Market Fiduciary Media Possible? On the Nature of Money, Banking, and Money Production in the Free Market Order By Kristoffer Mousten Hansen
  12. Stablecoins: Survivorship, Transactions Costs and Exchange Microstructure By Bruce Mizrach
  13. E-Money and Deposit Insurance in Kenya By Defina, Ryan; Van Roosebeke, Bert; Manga, Paul
  14. Exchange Rate Pass-through and Wheat Prices in Russia By Yugay, Stanislav; Götz, Linde; Svanidze, Miranda
  15. The Euro Area's Pandemic Recession: A DSGE-Based Interpretation By Roberta Cardani; Olga Croitorov; Massimo Giovannini; Philipp Pfeiffer; Marco Ratto; Lukas Vogel
  16. What Drives Bitcoin Fees? Using Segwit to Assess Bitcoin's Long-Run Sustainability By Colin Brown; Jonathan Chiu; Thorsten Koeppl

  1. By: Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    JEL: E32 E44 E52
    Date: 2021–12
  2. By: Van Roosebeke, Bert; Defina, Ryan
    Abstract: A growing number of central banks are considering the issuance of central bank digital currencies (CBDCs). Upon their introduction and depending on their exact design, CBDCs may have considerable consequences for deposit insurers as well. In the first of a set of papers, this Fintech Brief sets out four of the main motivations for issuing CBDCs. Acknowledging considerable divergences across jurisdictions, we find: • CBDCs for the general public (“retail CBDCs”) would constitute a central bank liability and a form of digital cash. To the public, they would be an alternative to central bank issued cash and private money, such as bank deposits. • A large and growing share of central banks are experimenting with retail CBDCs. Some 20% of central banks indicate that they are likely to issue a retail CBDC by 2026, 40% indicate this is “possible”. • Short-term monetary policy considerations are unlikely to play a significant role in central banks’ motivation for CBDCs. • Whereas central banks in emerging markets and developing economies note that CBDCs may contribute to promoting financial inclusion, in advanced economies, CBDCs are not the most straightforward instrument in doing so. • The evolution of payments plays a pivotal role in developing CBDCs. Given the declining role of cash in some jurisdictions, CBDCs as a new form of central bank money may contribute to safeguarding trust in the public currency. However, the available CBDC amounts necessary for that purpose may cause conflicts with likely and financial-stability-related limits on the volume of CBDCs that individuals may hold. • As CBDCs would offer an alternative payment solution, they would contribute to resilience in future payment markets that may be privately dominated. However, given their digital nature, CBDCs may well be subject to similar cybersecurity and other digital risks that apply to private payment systems. • CBDCs may contribute to competition and efficiency in an otherwise oligopolistic market for payment services, dominated by BigTechs. While potentially challenging to implement, a regulatory or competition-law-based response may be possible and would be less intrusive than introducing a CBDC. • Central banks face the risk of large-scale use by the public of private or public (i.e. CBDC) digital currencies, not denominated in the domestic currency. These currencies may play a decisive role in the economy, and if foreign-based, largely out of reach of domestic legislation. CBDCs and/or private payment solutions in the domestic currency may assist in mitigating this risk, given sufficient demand for these.
    Keywords: deposit insurance; fintech; CBDC
    JEL: G21 G33
    Date: 2021–11–30
  3. By: Richhild Moessner
    Abstract: We study the effects of professionals’ survey-based inflation expectations on inflation for a large number of 36 OECD economies, using dynamic cross-country panel estimation of New-Keynesian Phillips curves. We find that inflation expectations have a significantly positive effect on inflation. We also find that the effect of inflation expectations on inflation is larger when inflation is higher. This suggests that second-round effects via the effects of higher inflation expectations on inflation are more relevant in a high-inflation environment.
    Keywords: inflation, inflation expectations, Phillips curve
    JEL: E52 E58
    Date: 2021
  4. By: Laurence M. Ball; Daniel Leigh; Prachi Mishra; 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, 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.
    JEL: E31 E58
    Date: 2021–12
  5. By: Wenting Song; Samuel Stern
    Abstract: This paper provides direct evidence of the importance of firm attention to macro-economic dynamics. We construct a text-based measure of firm attention to macro-economic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. We use the measure to calibrate a quantitative model of rationally inattentive firms with hetero-geneous costs of information. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.
    Keywords: Business fluctuations and cycles; Inflation and prices, Monetary policy
    JEL: D83 E44 E52
    Date: 2022–01
  6. By: Hiroyuki Kubota (The University of Tokyo); Mototsugu Shintani (The University of Tokyo)
    Abstract: We identify monetary policy shocks in Japan during the unconventional monetary policy period using high-frequency data for interest rate futures. Following the empirical strategy of Gürkaynak, Sack, and Swanson (2005), we conduct an event study analysis to estimate the effects of the monetary policy surprises on asset prices around the timing of policy announcements made by the Bank of Japan between 1999 and 2020. We find that a monetary policy shock can be described by two factors that have statistically significant effects on the financial market. A surprise monetary tightening has negative effects on stock returns and positive effects on government bond yields, even in the low-interest environment. We also find that the responses of the longer term yields tend to be larger than those of the shorter term yields. The response is the largest for the 10-year government bond yield, which has, in the last two decades, been effectively targeted by the Bank of Japan. This finding contrasts with those of previous studies of the conventional monetary policy period, in which responses are larger for the shorter term yields.
    Date: 2021–12
  7. By: Mitali Das; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such pre-emptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
    JEL: F3 F31 F41 F44
    Date: 2021–12
  8. By: Katsafados, Apostolos; Anastasiou, Dimitris
    Abstract: The purpose of this study is twofold. First, to construct short-term prediction models for bank deposit flows in the Euro area peripheral countries, employing machine learning techniques. Second, to examine whether textual features enhance the predictive ability of our models. We find that Random Forest models including both textual features and macroeconomic variables outperform those that include only macro factors or textual features. Monetary policy authorities or macroprudential regulators could adopt our approach to timely predict potential excessive bank deposit outflows and assess the resilience of the whole banking sector in the Euro area peripheral countries.
    Keywords: Bank deposit flows; European banks; textual analysis; short-term prediction; machine learning
    JEL: C0 C22 C5 C51 C54 E44 E47 G10
    Date: 2022–01
  9. By: Olivier Jeanne
    Abstract: This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.
    JEL: F16 F31 F33 F38 F40 F42
    Date: 2021–12
  10. By: Li, Boyao
    Abstract: I develop a banking model to examine the effects of government expenditures on the credit and money supply under Basel III regulations. Purchases of goods and services from real firms or transfer payments to households as conventional government expenditures (CGEs) inject reserves into banks. Purchases of equity from banks as unconventional government expenditures (UGEs) inject equity into banks. Three Basel III regulations are examined: the capital adequacy ratio, liquidity coverage ratio, and net stable funding ratio. My results demonstrate that the CGE or UGE causes multiplier effects on the credit supply. The multiplier greater (less) than one means that banks amplify (contract) the government expenditure. Multiplier effects on the money supply in response to the CGE or UGE are also presented. My paper sheds considerable light on how government expenditure and bank regulation simultaneously affect the credit and money supply.
    Keywords: Bank credit supply; Government expenditure; Basel III; Multiplier effect; Balance sheet
    JEL: E51 E61 E62 G21 G28
    Date: 2021–12–30
  11. By: Kristoffer Mousten Hansen (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - Institut National de l'Horticulture et du Paysage)
    Date: 2021–07–29
  12. By: Bruce Mizrach
    Abstract: Seven of the ten largest stablecoins are backed by fiat assets. The 2016 and 2017 vintages of stablecoins have failure rates of 100% and 50% respectively. More than one-third of stablecoins have failed. Tether has a 39% share of 1.77 trillion USD in 2021Q2 transactions, and USD Coin 28%. The top three stablecoins have an average velocity of 28.3. Tether transacted between 3.8 million unique addresses, 63% of the ERC-20 token network. Six of the top ten tokens have unconcentrated Herfindahl indices, but Gemini, Pax and Huobi have single holders with more than 50% of the supply. The median Tether transaction fee is similar to the cost of an ATM transaction, but they are three to four times more for Dai and USDC. Fees, which are proportional to the price of Ethereum, are rising though. Median fees for Tether rose 3,628% over the last year, and 1,897% for USD Coin. 24 hour exchange turnover in Tether is nearly $120 billion. This is comparable to the daily volume at the NYSE and almost 15 times the daily flow in money market mutual funds. Narrow bid-ask spreads and depth have attracted active HFT participation.
    Date: 2022–01
  13. By: Defina, Ryan; Van Roosebeke, Bert; Manga, Paul
    Abstract: E-money is widespread in Kenya, especially through MPESA, a form of e-money stored on mobile phones and issued by Safaricom, a mobile network operator (MNO). Integration between the MPESA platform and the traditional banking system is increasing. Given the very high use-grade of MPESA throughout the population, it has reached critical importance in Kenya. In Kenya, e-money issuers must back their e-value with bank balances at commercial banks (float), through trust accounts. Deposit insurance does not cover a default of the e-money issuer. However, the Kenya Deposit Insurance Corporation aims at offering pass-through coverage in case of a default of the deposit-taking commercial bank holding the trust accounts. Pass-through coverage is confronted with a number of challenges, including regarding data on the identity of e-money users and their balances held. Also, the critical importance of MPESA raises questions as to how to deal with a potential default of the MNO and the role of deposit insurance in such a scenario. Looking forward, there is merit in further coordination amongst safety net participants as well as in the management of trust accounts and the strengthening of data-availability requirements to e-money issuers.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2021–12–09
  14. By: Yugay, Stanislav; Götz, Linde; Svanidze, Miranda
    Keywords: International Relations/Trade, Food Security and Poverty
    Date: 2020–09–18
  15. By: Roberta Cardani; Olga Croitorov; Massimo Giovannini; Philipp Pfeiffer; Marco Ratto; Lukas Vogel
    Abstract: The COVID-19 pandemic led to a sharp contraction of economic activity in the euro area (and worldwide). Its anatomy differs strongly from other crises in recent history. We analyse the short-term economic effects of the COVID-19 shock through the lens of an estimated DSGE model. We augment the canonical DSGE set-up with “forced savings" (lockdowns, social distancing), labour hoarding (short-time work) and liquidity-constrained firms to capture salient demand and supply effects of the COVID shock and the containment and stabilisation policies. Shock decompositions with the estimated model show the dominant role of “lockdown shocks" (“forced savings", labour hoarding) in explaining the quarterly pattern of real GDP growth in 2020, complemented by a negative contribution from foreign and investment demand particularly in 2020q2 and a negative impact of persistently higher (precautionary) savings. The initial inflation response has been modest compared to the severity of the recession.
    JEL: C11 E1 E20
    Date: 2021–12
  16. By: Colin Brown; Jonathan Chiu; Thorsten Koeppl
    Abstract: Can Bitcoin remain tamper proof in the long run? We use block-level data from the Bitcoin blockchain to estimate the impact of congestion and the USD price on fee rates. The introduction and adoption of the Segwit protocol allows us to identify an aggregate demand curve for bitcoin transactions. We find that Segwit has reduced fee revenue by about 70%. Fee revenue could be maximized at a block size of about 0.6 MB when Segwit adoption remains at current levels. At this block size, maximum fee revenue would be equivalent to 1/8 of the current average block reward. Hence, large sustained price increases are required to keep mining rewards constant in the long run.
    Keywords: Digital currencies and fintech; Payment clearing and settlement systems
    JEL: E42 G2
    Date: 2022–01

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