nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒02‒07
fourteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Financial Network Channel of Monetary Policy Transmission: An Agent-Based Model By Michel Alexandre; Gilberto Tadeu Lima, Luca Riccetti, Alberto Russo
  2. Is Money Demand Really Unstable? Evidence from Divisia Monetary Aggregates By William Barnett; Taniya Ghosh; Masudul Hasan Adil
  3. Not All Shocks Are Created Equal: Assessing Heterogeneity in the Bank Lending Channel By Luísa Farinha; Laura Blattner; Gil Nogueira
  4. Do inflation expectations improve model-based inflation forecasts? By Bańbura, Marta; Leiva-León, Danilo; Menz, Jan-Oliver
  5. The Populist Case for the Gold Standard By Kristoffer Mousten Hansen
  6. The hockey stick Phillips curve and the effective lower bound By Böhl, Gregor; Lieberknecht, Philipp
  7. Preemptive Policies and Risk-Off Shocks in Emerging Markets By Ms. Mitali Das; Ms. Gita Gopinath; Şebnem Kalemli-Özcan
  8. Heterogeneity and Monetary Policy: A Thematic Review By Felipe Alves; Christian Bustamante; Xing Guo; Katya Kartashova; Soyoung Lee; Thomas Michael Pugh; Kurt See; Yaz Terajima; Alexander Ueberfeldt
  9. Controlling Chaos in New Keynesian Macroeconomics By William Barnett; Giovanni Bella; Taniya Ghosh; Paolo Mattana; Beatrice Venturi
  10. The of role economic growth in modulating mobile connectivity dynamics for financial inclusion in developing countries By Simplice A. Asongu; Nicholas M. Odhiambo
  11. Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework By William Barnett; Unal Eryilmaz
  12. Exchange rate depreciations and local business cycles: The role of bank loan supply By Beck, Thorsten; Bednarek, Peter; te Kaat, Daniel Marcel; von Westernhagen, Natalja
  13. "Structural Change, Productive Development, and Capital Flows: Does Financial 'Bonanza' Cause Premature Deindustrialization?" By Alberto Botta; Giuliano Toshiro Yajima; Gabriel Porcile
  14. A Modigliani-Miller Theorem for the Public Finances of Globalized Economies: Theory, Policy Implications, and Keynesian Reflections By Biagio Bossone

  1. By: Michel Alexandre; Gilberto Tadeu Lima, Luca Riccetti, Alberto Russo
    Abstract: The purpose of this paper is to contribute to a further understanding of the impact of monetary policy shocks on a financial network, which we dub the “financial network channel of monetary policy transmission†. To this aim, we develop an agent-based model (ABM) in which banks extend loans to firms. The bank-firm credit network is endogenously time-varying as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. We then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, and this impact varies quantitatively and qualitatively with the sign, magnitude, and duration of the shocks.
    Keywords: Financial network; monetary policy shocks; agent-based modeling.
    JEL: C63 E51 E52 G21
    Date: 2022–01–19
  2. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Taniya Ghosh (Indira Gandhi Institute of Development Research (IGIDR), Gen. A. K. Vaidya Marg, Filmcity Road, Mumbai, 400065, India); Masudul Hasan Adil (Institute Postdoctoral Fellow, Humanities and Social Sciences-Economics, Indian Institute of Technology Bombay (IITB), Mumbai 400076, India)
    Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use a modern version of the same linear time-series macro-econometric modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship among real money balances, real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart. Our results are consistent with the large literature on the Barnett critique, which is based on a different methodological tradition that employs micro-econometric modeling of integrable consumer demand systems. That literature has never found the demand for monetary services, measured using reputable index number and aggregation theory, to be any more difficult to model or less stable than the demand for any other good or service in the economy.
    Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
    JEL: C23 E41 E52
    Date: 2022–01
  3. By: Luísa Farinha; Laura Blattner; Gil Nogueira
    Abstract: We provide evidence that the strength of the bank lending channel varies considerably across three major positive events in the European sovereign debt crisis – the Greek debt restructuring (PSI), outright monetary transactions (OMT), and quantitative easing (QE). We study how lending responds to each event combining credit registry data with security-level bank balance sheet data from Portugal, a country that was directly exposed to all three events. Even though the price of sovereign debt increased by substantially more after the PSI and OMT announcements, only QE had statistically and economically significant effects on lending to firms and households. We find that banks only realized trading gains after QE but not the other two events. These results suggest that banks’ incentives to sell bonds are an important determinant of the transmission of sovereign debt interventions to the real economy.
    JEL: E52 E58 G18 G21
    Date: 2021
  4. By: Bańbura, Marta; Leiva-León, Danilo; Menz, Jan-Oliver
    Abstract: Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB's SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019.
    Keywords: Forecasting,Inflation,Inflation expectations,Phillips curve,BayesianVAR
    JEL: C53 E31 E37
    Date: 2021
  5. 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)
    Abstract: There have been many calls for reforming the gold standard since the end of the classical gold standard and especially since the end of Bretton Woods. While these calls have somewhat abated in recent years, this article will attempt to show that the gold standard is still a superior monetary system, and that the reform of the monetary system is still a desirable policy. We will proceed by first analyzing the shortcomings of the present fiatmoney order, indicating how it distorts the market and society through inflation, redistribution, by artificially increasing the importance of financial markets, and by hampering US industrial production in international trade. Then we will show that these problems would cease to exist under the gold standard, and we will indicate a possible reform for returning to gold in the US. Finally, we will argue that such a reform in order to be successful must become a popular crusade-i.e., it must become a populist issue.
    Keywords: gold standard,monetary policy,austrian economics,populism
    Date: 2020
  6. By: Böhl, Gregor; Lieberknecht, Philipp
    Abstract: We show that if business cycles are driven by financial shocks, the interplay between the effective lower bound (ELB) and the costs of external financing can generate an additional supply-side channel, which causes a disconnect between inflation and output. In normal times, factor costs dominate firms' marginal costs and hence inflation; credit spreads and the nominal interest rate, which together constitute external financing costs, balance out in response to a financial shock. When nominal rates are constrained by the ELB, larger spreads can partly offset the effect of lower factor costs on firms' price setting. The Phillips curve is hence flat at the ELB, but features a positive slope in normal times and thus an overall hockey stick shape. This mechanism also weakens the effects of forward guidance on inflation, since such policy reduces spreads and thereby financing costs.
    Keywords: Phillips curve,financial frictions,effective lower bound,disinflation,forward guidance
    JEL: C62 C63 E31 E32 E44 E52 E58 E63
    Date: 2021
  7. By: Ms. Mitali Das; Ms. Gita Gopinath; Şebnem 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 preemptive 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.
    Keywords: Preemptive policies, UIP, external finance premia, risk-off shocks, FX debt
    Date: 2022–01–07
  8. By: Felipe Alves; Christian Bustamante; Xing Guo; Katya Kartashova; Soyoung Lee; Thomas Michael Pugh; Kurt See; Yaz Terajima; Alexander Ueberfeldt
    Abstract: The heterogeneity of businesses and households impacts aggregate economic fluctuations and, in turn, is shaped by aggregate fluctuations. This view has emerged over the last decade with strong implications for the transmission and conduct of monetary policy. Our thematic review focuses on key aspects of this new theory as well as its underlying assumptions. We place the insights in a Canadian context using relevant microeconomic and macroeconomic data.
    Keywords: Economic models; Monetary policy and uncertainty; Monetary policy transmission
    JEL: D31 E24 E50 E52 D25 E22
    Date: 2022–02
  9. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Giovanni Bella (University of Cagliari, Italy); Taniya Ghosh (Indira Gandhi Institute of Development Research, Mumbai, India); Paolo Mattana (University of Cagliari, Italy); Beatrice Venturi (University of Cagliari, Italy)
    Abstract: In a New Keynesian model, it is believed that combining active monetary policy using a Taylor rule with a passive fiscal rule can achieve local equilibrium determinacy. However, even with such policies, indeterminacy can occur from the emergence of a Shilnikov chaotic attractor in the region of the feasible parameter space. That result, shown by Barnett et al. (2021), implies that the presence of the Shilnikov chaotic attractor can cause the economy to drift towards and finally become stuck in the vicinity of lower-than-targeted inflation and nominal interest rates. The result can become the source of a liquidity trap phenomenon. We propose policy options for eliminating or controlling Shilnikov chaotic dynamics to help the economy escape from the liquidity trap or avoid drifting into it in the first place. We consider ways to eliminate or control the chaos by replacing the usual Taylor rule by an alternative policy design without interest rate feedback, such as a Taylor rule with monetary quantity feedback, an active fiscal policy rule with passive monetary rule, or an open loop policy without feedback. We also consider approaches that retain the Taylor rule with interest rate feedback and the associated Shilnikov chaos, while controlling the chaos through a well-known engineering algorithm using a second policy instrument. We find that a second instrument is needed to incorporate a long-run terminal condition missing from the usual myopic Taylor rule.
    Keywords: Shilnikov chaos criterion, Global indeterminacy, Long-term un-predictability, Liquidity trap, Long-run anchor.
    JEL: C61 C62 E12 E52 E63
    Date: 2022–01
  10. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study establishes economic growth needed for supply-side mobile money drivers in developing countries to be positively related to mobile money innovations in the perspectives of mobile money accounts, the mobile phone used to send money, and the mobile phone used to receive money. The empirical evidence is based on Tobit regressions. For the negative net relationships that are computed, minimum economic growth thresholds are established above which the net negative relationships become net positive relationships. The following minimum economic growth rates are required for nexuses between supply-side mobile money drivers and mobile money innovations to be positive: (i) 6.109% (6.193%) of GDP growth for mobile connectivity performance to be positively associated with the mobile phone used to send (receive) money and (ii) 4.590 % (4.259%) of GDP growth for mobile connectivity coverage to be positively associated with the mobile phone used to send (receive) money.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2022–01
  11. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Unal Eryilmaz (Ministry of Treasury and Finance, Ankara, Turkey)
    Abstract: We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality.
    Keywords: Bifurcation; Determinacy; Dynamic systems; New Keynesian; Stability; Open economy; Taylor Principle
    JEL: C14 C22 C52 C61 C62 E32 E37 E61 L16
    Date: 2022–01
  12. By: Beck, Thorsten; Bednarek, Peter; te Kaat, Daniel Marcel; von Westernhagen, Natalja
    Abstract: This paper uses matched bank-firm-level data and the 2014 depreciation of the euro to show that exchange rate depreciations lead to increased bank loan supply of large banks with significant net foreign asset exposure. This increase in lending can be explained by a shift in credit towards both export-intensive firms and small banks without foreign asset exposure that have a higher share of exporting firms in their credit portfolio. We also find that German regions where these reallocation effects are stronger experience higher output growth. In economic terms, we show that such regions grow by 1.2 percentage points more than less exposed regions, cumulatively, in the two years after the depreciation relative to the two pre-depreciation years.
    Keywords: Exchange Rates,Bank Lending,Interbank Markets,Real Effects,Regional Business Cycles,Germany
    JEL: E44 E52 G21 O40
    Date: 2021
  13. By: Alberto Botta; Giuliano Toshiro Yajima; Gabriel Porcile
    Abstract: The outbreak of COVID-19 brought back to the forefront the crucial importance of structural change and productive development for economic resilience to economic shocks. Several recent contributions have already stressed the perverse relationship that may exist between productive backwardness and the intensity of the COVID-19 socioeconomic crisis. In this paper, we analyze the factors that may have hindered productive development for over four decades before the pandemic. We investigate the role of (non-FDI) net capital inflows as a potential source of premature deindustrialization. We consider a sample of 36 developed and developing countries from 1980 to 2017, with major emphasis on the case of emerging and developing economies (EDE) in the context of increasing financial integration. We show that periods of abundant capital inflows may have caused the significant contraction of manufacturing share to employment and GDP, as well as the decrease of the economic complexity index. We also show that phenomena of "perverse" structural change are significantly more relevant in EDE countries than advanced ones. Based on such evidence, we conclude with some policy suggestions highlighting capital controls and external macroprudential measures taming international capital mobility as useful tools for promoting long-run productive development on top of strengthening (short-term) financial and macroeconomic stability.
    Keywords: COVID-19; Structural Change; Capital Inflows; Macroprudential Policies
    JEL: O14 O30 F32 F38
    Date: 2022–01
  14. By: Biagio Bossone
    Abstract: This article is about the economics of the power of global finance to enforce its own interests over national economies. In line with the capital structure irrelevance principle of Modigliani and Miller (1958) as applied to corporate finance, the article shows that the value of the public sector claims (money and debt) of a financially globalized economy is independent of the capital structure of the government’s finances. In particular, the article transposes the Modigliani-Miller approach (enhanced as needed) to public finances and proves a new "neutrality theorem" (and two important related corollaries) whereby, in an economy that is internationally highly financially integrated, the cost of the capital needed by governments to finance their deficits is independent of whether: i) financing originates from debt or money, ii) debt is denominated in domestic or foreign currency, and iii) money and debt are issued under floating or fixed exchange rates. The two corollaries show that governments seeking to monetize their deficits must remunerate money holdings with a return that vary inversely with credibility is lower and directly with the stock of money (eventually defying the original policy objective). The article discusses the options available for countries to approach financial globalization.
    Keywords: capital structure; credibility; debt, equity, and money; global financial investors; credibility; policy space; public sector claims
    Date: 2022–01

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