|
on Monetary Economics |
| By: | Martin Baumgaertner (THM Business School Giessen) |
| Abstract: | This paper shows that a different communication style of the European Central Bank (ECB) affects stock prices differently. A break in the ECB’s communication from 2016 onwards makes it necessary to adjust the identification of monetary policy surprises in the euro area. By modifying the high-frequency identification of monetary policy shocks in the euro area, I can show that two quantitative easing shocks occur per decision: One during the release and one during the press conference. Although the impact on policy rates is identical, the release window shock seems to have a more pronounced effect on stock prices. |
| Keywords: | Unconventional Monetary Policy, High-Frequency Data, ECB, Communication |
| JEL: | E44 E52 E58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202203&r= |
| By: | Donato Masciandaro; Davide Romelli; Gaia Rubera |
| Abstract: | How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions. |
| Keywords: | monetary policy, central bank communication, financial markets, social media, Twitter, Federal Reserve, European Central Bank, Bank of England |
| JEL: | E44 E52 E58 G14 G15 G41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21160&r= |
| By: | Armando Marozzi |
| Abstract: | Central Bank Independence has often been praised as a "free lunch" as it lowers inflation with no costs to output. This paper, instead, claims that in a peculiar monetary union such as the European Monetary Union (EMU) defending the independence during a financial crisis can be macroeconomically costly: unconventional monetary policies may expose the European Central Bank (ECB) to the threat of fiscal dominance which, in turn, might endogenously shift the ECB’s fiscal stance toward fiscal conservatism. Fiscally hawkish signals can then depress GDP and inflation, thereby forcing the ECB to prolong the unconventional stimuli to achieve its target. This paper finds evidence of this new "doom-loop" at the core of the EMU. |
| Keywords: | ECB, monetary-fiscal interaction, CBI, unconventional monetary policy, EMU, fiscal communication |
| JEL: | E52 E58 E61 E63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21152&r= |
| By: | Philippe Andrade; Jordi Gali; Hervé Le Bihan; Julien Matheron |
| Abstract: | We address the question in this paper’s title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight-tenths the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the European Central Bank from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as a commitment to make up for recent, below-target inflation realizations. |
| Keywords: | inflation target; effective lower bound; monetary policy strategy; euro area |
| JEL: | E31 E52 E58 |
| Date: | 2021–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93688&r= |
| By: | Shang-Jin Wei; Yinxi Xie |
| Abstract: | While two strands of the literature suggest that PPI inflation, in addition to or instead of CPI inflation, should be a targeting variable in a monetary policy rule, the distinction between the two is only important when they do not co-move strongly. Our first contribution is to document that their correlation has indeed fallen substantially since the start of this century. Our second contribution is to propose a model to understand this divergence based on expanding global supply chains. Our theory produces additional predictions that are also confirmed in the data. As such changes are structural rather than temporary, the standard monetary policy rule that does not target the PPI inflation may have become increasingly problematic. |
| Keywords: | Inflation and prices; Inflation targets; International topics; Monetary policy |
| JEL: | E31 E52 E58 F11 F12 F41 F62 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-5&r= |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goodsdriven recoveries. |
| Keywords: | Asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1814&r= |
| By: | Han Gao; Mariano Kulish; Juan Pablo Nicolini |
| Abstract: | In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. If persistent changes in the monetary policy regime are accounted for, the behavior of these series maintains the close relationship predicted by standard quantity theory models. With an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver quite different high-frequency dynamics. We also show that the low-frequency component of the data derived from statistical filters does reasonably well in capturing these regime changes. We conclude that the quantity theory relationships are alive and well, and thus they are useful for policy design aimed at controlling inflation. |
| Keywords: | Money demand; Monetary aggregates; Monetary policy |
| JEL: | E41 E51 E52 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:93495&r= |
| By: | John Beirne; Yannis Dafermos; Alexander Kriwoluzky; Nuobu Renzhi; Ulrich Volz; Jana Wittich |
| Abstract: | This paper investigates the impact of natural disasters on price stability in the euro area. We estimate panel and country-specific structural vector autoregression (VAR) models by combining estimated damages of disaster events with monthly data for the Harmonised Index of Consumer Prices (HICP) for all euro area countries over the period 1996-2021. Besides estimating the effect on overall headline inflation, we examine effects on its 12 main sub-indices and further sub-categories of food price inflation. This allows us to disentangle differences in the direction and strength of price effects across consumption categories. Our results suggest significant positive effects of natural disasters on overall headline inflation, with diverging results at the sub-index level. Positive inflation effects are particularly pronounced for prices of food and beverages, while negative effects prevail for other sub-indices. Our country-specific results suggest heterogenous inflation effects of natural disasters across different countries. A key implication of our findings is that climate change is likely to make it increasingly difficult for the European Central bank to achieve its inflation target. |
| Keywords: | Natural disasters, climate, inflation, monetary policy, European Central Bank |
| JEL: | E31 E52 Q54 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1981&r= |
| By: | Donato Masciandaro |
| Abstract: | The aim of the paper is to shed light on how two factors "central bank's design and central bankers' preferences" progressively assumed a crucial role in the evolution of monetary policy economics in the last four decades. The two factors jointly identify the importance of central bank governance in influencing monetary policy decisions through their interactions with the monetary policy rules, given the assumptions about how macroeconomic systems work. |
| Keywords: | monetary policy, central bank independence, central banker conservatism, monetary policy committees, political economics, behavioural economics |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21153&r= |
| By: | Gara Afonso; Lorie Logan; Antoine Martin; Will Riordan; Patricia Zobel |
| Abstract: | In July 2021, the Federal Open Market Committee announced a new tool for monetary policy implementation: a domestic standing repurchase agreement facility. In the last post of this series, we explain what this new tool is and how it will support the effective implementation of monetary policy in the floor system through which the Fed implements policy. |
| Keywords: | standing repo facility; monetary policy implementation |
| JEL: | E52 E58 |
| Date: | 2022–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93623&r= |
| By: | Frédéric Boissay (Unknown); Fabrice Collard (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Jordi Galí (Unknown); Cristina Manea (Unknown) |
| 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: | 2022–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03509283&r= |
| By: | Gara Afonso; Lorie Logan; Antoine Martin; Will Riordan; Patricia Zobel |
| Abstract: | At its June 2021 meeting, the FOMC maintained its target range for the fed funds rate at 0 to 25 basis points, while two of the Federal Reserve’s administered rates—interest on reserve balances and the overnight reverse repo (ON RRP) facility offering rate—each were increased by 5 basis points. What do these two simultaneous decisions mean? In today’s post, we look at “technical adjustments”—a tool the Fed can deploy to keep the FOMC’s policy rate well within the target range and support smooth market functioning. |
| Keywords: | technical adjustments; monetary policy implementation |
| JEL: | E52 E58 |
| Date: | 2022–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93621&r= |
| By: | Ricardo Nunes; Ali K. Ozdagli; Jenny Tang |
| Abstract: | Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure that needs to be parsed out. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise. |
| Keywords: | monetary policy; central bank information; high-frequency identification; proxy structural VAR; external instruments |
| JEL: | C36 D83 E52 E58 |
| Date: | 2022–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93691&r= |
| By: | Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli |
| Abstract: | Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers. |
| Keywords: | Accountability; European Central Bank; politicians; European Parliament |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21159&r= |
| By: | Gara Afonso; Lorie Logan; Antoine Martin; Will Riordan; Patricia Zobel |
| Abstract: | In a series of four posts, we review key elements of the Federal Reserve’s monetary policy implementation framework. The framework has changed markedly in the last two decades. Prior to the global financial crisis, the Fed used a system of scarce reserves and fine-tuned the supply of reserves to maintain rate control. However, since then, the Fed has operated in a floor system, where active management of the supply of reserves no longer plays a role in rate control, but rather the Fed’s administered rates influence the federal funds rate. In this first post, we discuss the salient features of the implementation framework in a stylized way. |
| Keywords: | MPI; monetary policy implementation |
| JEL: | E52 E58 |
| Date: | 2022–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93610&r= |
| By: | Xing Guo; Pablo Ottonello; Diego Perez |
| Abstract: | This paper examines how monetary policy affects the asymmetric effects of globalization. We build an open-economy heterogeneous-agent New Keynesian model (HANK) in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the effects of monetary policy and external shocks in open economies? And how do alternative exchange-rate regimes compare? Our analysis yields two main takeaways. First, heterogeneity in households’ international integration is a central dimension that drives the inequality in the consumption responses to external shocks more so than do income and wealth. Second, households’ heterogeneity reveals the presence of a stabilization-inequality trade-off for the conduct of monetary policy in open economies, with fixed exchange-rate regimes leading to amplified but less unequal consumption responses to external shocks. |
| Keywords: | Monetary policy; Exchange rate regimes |
| JEL: | E32 E52 F41 F44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-6&r= |
| By: | Allen Head (Queen's University); Timothy Kam (Australian National University); Sam Ng (Australian National University); Isaac Pan (University of Sydney) |
| Abstract: | Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation)and the average in bank lending-rate markups. In a quantitative theory consistent with theseempirical observations, banks’ lending market power is determined in equilibrium and is a novelchannel of monetary policy. At low inflation, banks tend to extract higher markups from existingloan customers rather than competing for additional loans. As a result, banking activity neednot be welfare-improving if inflation is sufficiently low. This result speaks to concerns regardingmarket power in the banking sectors of low-inflation countries. Normatively, under a giveninflation target, welfare gains arise if a central bank can use additional liquidity-provision (ortax-and-transfer) instruments to offset banks’ market-power incentives |
| Keywords: | Banking; Credit; Markup Dispersion; Market Power; Stabilization Policy; Liquidity |
| JEL: | E41 E44 E51 E63 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1481&r= |
| By: | Donato Masciandaro; Jacopo Magurno; Romano Tarsia |
| Abstract: | This paper reviews the evolution of the literature on Central Bank Independence (CBI) focusing on its metrics as well as on its empirical association with macroeconomic variables. Part One describes the evolution of the CBI indicators, while Part Two analyses the econometric studies devoted to shed light on the relationships between CBI and macroeconomic performances. |
| Keywords: | Monetary Policy, Central Bank Independence, Inflation, Growth, Sacrifice Ratio, Public Finance, Financial Stability |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21151&r= |
| By: | Jacopo Bonchi (Department of Economics and Finance and School of European Political Economy, LUISS Guido Carli); Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome) |
| Abstract: | Using a tractable New Keynesian model with heterogeneous agents, we analyze the interplay between households' heterogeneity and rational bubbles, and their normative implications for monetary policy. Households are infinitely-lived and heterogeneous because of two sources of idiosyncratic uncertainty, which makes them stochastically cycle in and out of segmented asset markets, and in and out of employment. We show that bubbles can emerge in equilibrium despite the fact that households are infinitely lived, because of the structural heterogeneity that affects their activity in asset and labor markets. The elasticity of an endogenous labor supply, the heterogeneity in asset-market participation and the level of long-run monopolistic distortions are shown to affect the size of equilibrium bubbles and their cyclical implications. We also show that a central bank concerned with social welfare faces an additional tradeoff implied by bubbly fluctuations which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. |
| Keywords: | Inequality, Rational bubbles, Optimal monetary policy, HANK |
| JEL: | E21 E32 E44 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:5/22&r= |
| By: | Javier García-Cicco |
| Abstract: | We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative merits of each of them is indeed influenced by how agents form inflation-related expectations. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:822&r= |
| By: | Hinterlang, Natascha; Tänzer, Alina |
| Abstract: | This paper introduces a reinforcement learning based approach to compute optimal interest rate reaction functions in terms of fulfilling inflation and output gap targets. The method is generally flexible enough to incorporate restrictions like the zero lower bound, nonlinear economy structures or asymmetric preferences. We use quarterly U.S. data from1987:Q3-2007:Q2 to estimate (nonlinear) model transition equations, train optimal policies and perform counterfactual analyses to evaluate them, assuming that the transition equations remain unchanged. All of our resulting policy rules outperform other common rules as well as the actual federal funds rate. Given a neural network representation of the economy, our optimized nonlinear policy rules reduce the central bank's loss by over43 %. A DSGE model comparison exercise further indicates robustness of the optimized rules. |
| Keywords: | Optimal Monetary Policy,Reinforcement Learning,Artificial Neural Network,Machine Learning,Reaction Function |
| JEL: | C45 C61 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:512021&r= |
| By: | Gara Afonso; Lorie Logan; Antoine Martin; Will Riordan; Patricia Zobel |
| Abstract: | Daily take-up at the overnight reverse repo (ON RRP) facility increased from less than $1 billion in early March 2021 to just under $2 trillion on December 31, 2021. In the second post in this series, we take a closer look at this important tool in the Federal Reserve’s monetary policy implementation framework and discuss the factors behind the recent increase in volume. |
| Keywords: | overnight reverse repo (ON RRP); monetary policy implementation |
| JEL: | E52 E58 |
| Date: | 2022–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:93613&r= |
| By: | Stefán Thórarinsson |
| Abstract: | This paper seeks to determine what drives inflation variation in Iceland and examine the extent to which local currency pricing is present. To that end we define and estimate a Bayesian structural vector autoregression model. For identification we employ the method developed by Baumeister and Hamilton (2015), defining priors on the impact matrix and on the long run behaviour of the model. We find that supply shocks and exchange rate shocks are the largest contributors in short run dynamics of inflation while foreign shocks dominate the medium and long run horizons. Our results strongly suggest that local currency pricing is largely absent. A test of robustness suggests that our results w.r.t. foreign influences on domestic inflation hold. Whether foreign demand or foreign inflation plays a larger role in determining long horizon variation in inflation seems to vary considerably over the period considered. |
| JEL: | C11 C32 E31 F41 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp88&r= |
| By: | Giancarlo Bertocco; Andrea Kalajzić |
| Abstract: | To hypothesize the existence of a relationship between money and savings means questioning a fundamental pillar of the mainstream economic theory: the concept of neutrality of money. According to the traditional theory economic phenomena such as savings can be defined independently from money. The objective of this work is to show that savings cannot be defined independently from money and that savings must be considered as a monetary phenomenon. The paper consists of two parts. Starting from Adam Smith’s analysis and continuing up to the approaches developed by contemporary economists, in the first part we summarize the most significant aspects and the limitations of the mainstream theory. In the second part we specify the reasons of the non-neutrality of money and of the monetary nature of savings. |
| Keywords: | Savings, money, development, Keynes, Schumpeter |
| JEL: | B12 B13 B52 E12 E44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2206&r= |
| By: | Campos, Nauro F.; Macchiarelli, Corrado |
| Abstract: | Despite numerous studies about core-periphery in monetary unions, few focus on their dynamics. This paper (i) presents new theory-based, continuous and dynamic measures of the probability of a country being classified as core or periphery; (ii) estimates the determinants of the changes in this probability over time and across countries; and (iii) uses the Phillips-Sul convergence panel framework to investigate the behaviour of core and periphery groups over time. Our main results indicate that the post-EMU decrease of the core-periphery gap that we document was mainly driven by the adoption of the euro and by increasing competition (lower mark-ups). |
| Keywords: | competition; convergence; core-periphery; Euro; symmetry |
| JEL: | C50 E30 N10 F40 |
| Date: | 2021–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:113423&r= |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:22/013&r= |
| By: | Lokdam, Hjalte |
| Abstract: | In the wake of the Euro crisis, the mission statement on the European Central Bank's (ECB) website was changed from ‘Our mission is to serve Europe's citizens’ to ‘Our mission is to serve the people of Europe’. This article situates this discursive shift within a broader change of the ECB's self-presentation in public discourses and explores its meaning in terms of political theory and public law. The article argues that the shift represents a response to the perceived necessity of reimagining the ECB's foundation of legitimate governmental authority following its exercise of emergency powers during the Euro crisis. The discourse emphasizes an organic link between the ECB and ‘the people of Europe’ as a political subject able to authorize previously unauthorized governmental practices such as the outright monetary transactions programme. It reflects, furthermore, a new governing philosophy that stresses flexibility and discretion rather than strict adherence to rules in the ECB's exercise of power. |
| Keywords: | European Central Bank; Euro crisis; OMT; sovereignty; emergency politics |
| JEL: | F3 G3 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:111873&r= |
| By: | Österholm, Pär (Örebro University School of Business); Poon, Aubrey (Örebro University School of Business) |
| Abstract: | In this paper, we estimate trend inflation in Sweden using an unobserved components stochastic volatility model. Using data from 1995Q4 to 2021Q4 and Bayesian estimation methods, we find that trend inflation has been well-anchored during the period – although in general at a level below the inflation target – and it does not appear to have been affected much by the recent high inflation numbers. |
| Keywords: | Unobserved components model; Inflation target; Bayesian estimation |
| JEL: | C11 C32 C52 E32 |
| Date: | 2022–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oruesi:2022_002&r= |
| By: | John Caramichael; Gordon Y. Liao |
| Abstract: | Stablecoins have experienced tremendous growth in the past year, serving as a possible breakthrough innovation in the future of payments. In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress. |
| Keywords: | Stablecoins; Digital currencies; Credit intermediation; Banking; Systemic risk; Fintech; Financial innovation; Payment system |
| JEL: | E40 E50 F33 G10 G20 O30 |
| Date: | 2022–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1334&r= |
| By: | Tetteh, Godsway Korku (UNU-MERIT, Maastricht University); Goedhuys, Micheline (UNU-MERIT, Maastricht University); Konte, Maty (UNU-MERIT, Maastricht University, and Barnard College, Columbia University); Mohnen, Pierre (UNU-MERIT, Maastricht University) |
| Abstract: | Despite the contribution of previous studies to unravel the implications of mobile money in the developing world, the effect of this innovation on an important source of external finance, trade credit, has not been properly accounted for particularly in the informal sector. Using the 2016 FinAccess Household Survey, we investigate the relationship between mobile money adoption and the probability to receive goods and services on credit from suppliers based on a sample of entrepreneurs who operate informal businesses. We further explore the effect of mobile money adoption on the likelihood to offer goods and services on credit to customers. Our estimations suggest that entrepreneurs with mobile money are more likely to receive goods and sesrvices on credit from suppliers. We also find a positive and significant relationship between mobile money adoption and the likelihood to offer goods and services on credit to customers. The evidence supports the promotion of mobile money adoption among entrepreneurs in the informal sector to facilitate access to credit. |
| Keywords: | Entrepreneurship, Financial Innovation, Mobile Money, Trade Credit |
| JEL: | D14 G21 L26 O16 O33 |
| Date: | 2021–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2021043&r= |
| By: | Gerba, Eddie (Bank of England); Katsoulis, Petros (Bank of England) |
| Abstract: | This paper assesses the impact of banking regulation (Basel III) on financial market dynamics using the repo market as an important case study. To this end, we use unique proprietary data sets from the Bank of England to examine the individual and joint impact of leverage, capital and liquidity coverage ratios on participants’ trading in all collateral segments of the UK repo market. We find non-uniform effects across ratios and participants and non-linear effects across time. For instance, we find that the leverage ratio induces participants to charge lower (higher) interest margins on repo (reverse repo) trades that are non-nettable compared to the nettable ones. Second,we document a change in market microstructure under the new regulatory regime. Specifically, we evidence a substitution effect of banks’ long-term repo borrowing backed by gilts from dealers to investment funds which can be fragile during times of stress. Likewise, we find an increasing prominence of central counterparties. Third, we find evidence that participants who are jointly constrained by multiple ratios and closer to the regulatory thresholds during times of stress reduce their activity to a greater extent than those that are constrained by a single ratio or not constrained, with implications for market liquidity. |
| Keywords: | Banking regulation; repo market; market microstructure; liquidity; monetary policy transmission |
| JEL: | E44 E52 G11 G21 G28 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0954&r= |
| By: | Karsten Kohler; Engelbert Stockhammer |
| Abstract: | While flexible exchange rates are commonly regarded as shock absorbers, heterodox views suggest that they can play a pro-cyclical role in emerging markets. This article provides theoretical and empirical support for this view. Drawing on post-Keynesian and structuralist theory, we propose a simple model in which flexible exchange rates in conjunction with external shocks become endogenous drivers of boom-bust cycles, once financial effects from foreign-currency debt are accounted for. We present empirical evidence for regular cycles in nominal US-dollar exchange rates in several emerging markets that are closely aligned with cycles in economic activity. An econometric analysis suggests the presence of a cyclical interaction mechanism between exchange rates and output, in line with the theoretical model, in Chile, South Africa, and partly the Philippines. Further evidence indicates that such exchange rate cycles cannot exclusively be attributed to external factors, such as commodity prices, US monetary policy or the global financial cycle. We therefore argue that exchange rate cycles in emerging markets are driven by the interplay of external shocks and endogenous cycle mechanisms. Our argument implies that exchange rate management may be beneficial for macroeconomic stability. |
| Keywords: | Exchange rates, emerging markets, boom-bust cycles, structuralism, global financial cycle, commodity prices |
| JEL: | C32 E12 E32 F31 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2205&r= |
| By: | Lekha Chakraborty; Harikrishnan S |
| Abstract: | Against the backdrop of the COVID-19 pandemic, this paper analyzes the economic stimulus packages announced by the Indian national government and tries to identify some plausible fiscal and monetary policy coordination. The shrinking fiscal space due to revenue uncertainties has led to a theoretical plausibility of a reemergence of finite monetization of deficits in India. However, the empirical evidence confirms no direct monetization of the deficit. |
| Keywords: | Fiscal-Monetary Policy Coordination; Fiscal Deficits; Monetization; COVID-19 |
| JEL: | E58 E62 E63 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1002&r= |
| By: | Francisco Rivadeneyra; Nellie Zhang |
| Abstract: | A new wholesale payments system will launch in Canada in 2021. This real-time gross settlement system called Lynx will have two types of settlement mechanisms, one allowing offsetting and the other not. This paper studies the decision problem of the Bank of Canada: which of the two settlement mechanisms should it use to send its payments. Using extensive simulation, we show that, mainly due to the benefits of liquidity pooling, Lynx would achieve its highest liquidity efficiency—even better than that of the current Large Value Transfer System (LVTS)—if all payments (urgent and non-urgent) from all participants were sent to the mechanism allowing offsetting. The minimum amount of liquidity required to settle all payments by critical deadlines is approximately $10 billion, around half the amount of collateral that LVTS participants allocate (pre–COVID-19). Since time-critical payments sent to the offsetting mechanism could experience a delay, the high level of liquidity efficiency is accompanied by an increase in the number of participants' operational interventions (to pledge more collateral or to alter payment priorities) to ensure that those time-critical payments are never delayed. When coordination does not occur, liquidity efficiency can be far lower than in the LVTS. The results highlight that the Bank of Canada helping with coordination is more important than the specific choice of mechanism. |
| Keywords: | Payment clearing and settlement systems |
| JEL: | C C5 E42 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:22-3&r= |
| By: | Olivier de Bandt; Bora Durdu; Hibiki Ichiue; Yasin Mimir; Jolan Mohimont; Kalin Nikolov; Sigrid Roehrs; Jean-Guillaume Sahuc; Valerio Scalone; Michael Straughan |
| Abstract: | This paper reviews the different channels of transmission of prudential policy highlighted in the literature and provides a quantitative assessment of the impact of Basel III reforms using “off-the-shelf” DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk. |
| Keywords: | Basel III Reforms, DSGE Models, Solvency Requirements, Liquidity Requirements |
| JEL: | E3 E44 G01 G21 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:864&r= |
| By: | Jean-Guillaume Sahuc; Olivier de Bandt; Hibiki Ichiue; Bora Durdu; Yasin Mimir; Jolan Mohimont; Kalin Nikolov; Sigrid Roehrs; Valério Scalone; Michael Straughan |
| Abstract: | This paper (i) reviews the different channels of transmission of prudential policy highlighted in the literature and (ii) provides a quantitative assessment of the impact of Basel III reforms using "off-the-shelf" DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk. |
| Keywords: | Basel III reforms, DSGE models, solvency requirements, liquidity requirements |
| JEL: | E3 E44 G01 G21 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2022-3&r= |
| By: | Simona Malovana; Martin Hodula; Josef Bajzik; Zuzana Gric |
| Abstract: | For almost two decades, quantifying the effect of changes in bank capital and capital regulation on lending has been one of the most important research questions. Yet, the empirical literature has remained largely fragmented in terms of the estimated parameters. In this paper, we collect more than 1,600 estimates on the relationship between bank capital and lending and construct 40 variables that reflect the context in which researchers obtain such estimates. After accounting for potential publication bias, the effect of a 1 percentage point (pp) change to the capital (regulatory) ratio on annual credit growth is set at around 0.3 pp, while the effect of changes to capital requirements is about -0.7 pp. Using Bayesian and frequentist model averaging, we expose the additional layers of fragmentation observed in our results. First, we show that the relationship between bank capital and lending changes over time, reflecting the post-crisis period of increasingly demanding bank capital regulation and subdued profitability. Second, we find the reported estimates of elasticities to be significantly affected by the researchers’ choice of empirical approach. |
| Keywords: | Bank capital, bank lending, capital regulation, meta-analysis, publication bias |
| JEL: | C83 E58 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/8&r= |
| By: | Óscar Afonso (Faculty of Economics, University of Porto, CEF.UP and OBEGEF); Elena Sochirca (Department of Management and Economics, University of Beira Interior, NECE and NIPE); Pedro Cunha Neves (Faculty of Economics, University of Porto, CEF.UP and OBEGEF) |
| Abstract: | In this paper we develop a dynamic general equilibrium growth model in which robots can replace unskilled labor and: i) the government uses tax revenues to invest in social capital and compensate those who do not work; ii) there is monetary policy with cash-in-advance restrictions that impact, for example, wages; iii) social capital increases skilled-labor productivity and facilitates the technological-knowledge progress. Our results confirm that by reducing the unskilled-to-skilled-labor ratio, the robotization process increases the skill premium (and thus wage inequality between skilled and unskilled workers), stimulates economic growth and improves welfare. We also show that fiscal and monetary policies can have important roles in amplifying or mitigating these effects of the robotization process and that implementing specific policies can generate an important efficiency-equity trade-off. Despite the existence of this trade-off, the long-run economic growth is higher with than without the fiscal and monetary policies, which underlines their crucial role in attenuating the negative aspects of Industry 4.0. |
| Keywords: | Robots; Social Capital; Fiscal Policy; Monetary Policy; Growth |
| JEL: | E62 I31 I38 O30 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:2201&r= |
| By: | Manuel A. Pérez Álvarez (Banco de España) |
| Abstract: | In August 2021, the International Monetary Fund (IMF) made a new allocation of Special Drawing Rights (SDRs) equivalent to $650 billion. This significant amount has tripled the total existing stock of SDRs. For Spain it involves an increase of 16% in foreign reserves, and an increase in receivables from the IMF, which amount to 22% of the reserves on the balance sheet of the Banco de España, as compared with 10% at present. The purpose of this expansion of SDRs is to support a group of countries that are having most difficulty fighting the impact of the COVID-19 pandemic. These countries have a greater need for foreign exchange to obtain basic supplies just when they are shut out of international capital markets. The new allocation is likely to boost SDR transactions given its large amount, the urgent need for funds in some countries and the experience of the 2009 allocation. This paper explains the characteristics of the use of SDRs as an effective source of liquidity, concluding that the way in which the issuance of this instrument is made effective is by means of transactions, allocation being the formal prerequisite for their existence. Accordingly, the key to their effectiveness will be the transactions actually carried out to obtain liquidity in international business. A liquidity ratio is proposed for monitoring their use. With regard to the magnitude of the allocation and, given that it is based on the quotas of each IMF member country, the developed countries have received the bulk of the allocation, as opposed to those countries having greater difficulty accessing the markets. Accordingly, measures will have to be taken to promote the passing on of SDRs so that their purpose can be achieved and they effectively supplement the reserves available within the framework of international trade. |
| Keywords: | SDRs, allocation, IMF, COVID-19, pandemic, liquidity, reserve assets, foreign exchange, voluntary trading arrangements, international cooperation |
| JEL: | F33 F42 G15 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2201&r= |