nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒02‒21
forty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How should central banks react to household inflation heterogeneity? By Neyer, Ulrike; Stempel, Daniel
  2. Currency demand at negative policy rates By Edoardo Rainone
  3. Central bank securities and FX market intervention in a developing economy By Direye, Eli; Khemraj, Tarron
  4. The Prudential Use of Capital Controls and Foreign Currency Reserves By Javier Bianchi; Guido Lorenzoni
  5. A Tiering Rule to Balance the Impact of Negative Policy Rates on Banks By Jean-Guillaume Sahuc; Mattia Girotti; Benoît Nguyen
  6. The Most Expected Things Often Come as a Surprise: Analysis of the Impact of Monetary Surprises on the Bank's Risk and Activity By Melchisedek Joslem Ngambou Djatche
  7. On Monetary Growth and Inflation in Leading Economies, 2021-2022:Relative Prices and the Overall Price Level By Greenwood, John; Hanke, Steve
  8. Money, Credit and Imperfect Competition Among Banks By Allen Head; Timothy Kam; Sam Ng; Isaac Pan
  9. Monetary/Fiscal Interactions with Forty Budget Constraints By Marco Bassetto; Gherardo Gennaro Caracciolo
  10. Scrambling for Dollars: International Liquidity, Banks and Exchange Rates By Javier Bianchi; Saki Bigio; Charles Engel
  11. Monetary policy transmission, the labour share and HANK models By Lenney, Jamie
  12. Bank risk-taking and impaired monetary policy transmission By Koenig, Philipp J.; Schliephake, Eva
  13. Why is World Money World Money? A View from the Functions of Money By Jeremy Srouji
  14. The Signalling Channel of Negative Interest Rates By Oliver de Groot; Alexander Haas
  15. Network Structure and Fragmentation of the Argentinean Interbank Markets By Pedro Elosegui Author-Email: Author-Workplace-Name: Central Bank of Argentina; Federico Forte; Gabriel Montes-Rojas
  16. Toward a green economy: the role of central bank's asset purchases By Alessandro Ferrari; Valerio Nispi Landi
  17. The financial network channel of monetary policy transmission: An agent-based model By Michel Alexandre; Gilberto Tadeu Lima; Luca Riccetti; Alberto Russo
  18. Central Banks’ responses to the Covid-19 pandemic: The case of the Bank of Central African States By Asongu, Simplice; Ojong, Nathanael; Soumtang, Valentine
  19. Society, Politicians, Climate Change and Central Banks: An Index of Green Activism By Donato Masciandaro; Romano Vincenzo Tarsia
  20. Testing the effectiveness of unconventional monetary policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  21. The role of mobile characteristics on mobile money innovations By Simplice A. Asongu; Nicholas M. Odhiambo
  22. Unintended side effects of unconventional monetary policy By Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
  23. Duopolistic Competition and Monetary Policy By Kozo Ueda
  24. The Welfare Costs of Inflation By Luca Benati; Juan Pablo Nicolini
  25. The Global Supply Side of Inflationary Pressures By Belai Abbai; Ozge Akinci; Gianluca Benigno; Julian di Giovanni; Jan J. J. Groen; Ruth Cesar Heymann; Lawrence Lin; Adam I. Noble
  26. A Proven Solution for Lebanon’s Economic Crisis: A Currency Board By Kandasamy, Ambika
  27. Bank Credit and Money Creation on Payment Networks: A Structural Analysis of Externalities and Key Players By Li, Ye; Li, Yi; Sun, Huijun
  28. Inflationary household uncertainty shocks By Ambrocio, Gene
  29. The Exchange Rate as a Shock Absorber and Amplifier: An Analysis of the Transmission Channels and the Policy Toolbox in Small Open Economies By Ariel Dvoskin Author-Email: Author-Workplace-Name: Central Bank of Argentina; Sebastián Katz
  30. Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework By Barnett, William A.; Eryilmaz, Unal
  31. State-Contingent Forward Guidance By Valentin Jouvanceau; Julien Albertini; Stéphane Moyen
  32. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  33. The Federal Reserve's New Framework: Context and Consequences By Richard H. Clarida
  34. Inflation-Inequality Puzzle: Is it Still Apparent? By Edmond Berisha; Orkideh Gharehgozli; Rangan Gupta
  35. Monetary policy and inequality : The Finnish case By Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
  36. Inflation spike and falling product variety during the Great Lockdown By Xavier Jaravel; Martin O'Connell
  37. Heterogeneity, co-movements and financial fragmentation within the euro area By Arce-Alfaro, Gabriel; Blagov, Boris
  38. The Future of Payments Is Not Stablecoins By Rod Garratt; Michael Junho Lee; Antoine Martin; Joseph Torregrossa
  39. The integrated approach adopted by Bank of Italy in the collection and production of credit and financial data By Massimo Casa; Laura Graziani Palmieri; Laura Mellone; Francesca Monacelli
  40. Reverse matching for ex-ante policy evaluation By George Planiteros
  42. The Hedging Cost of Forgetting the Exchange Rate By Beatriz de la Flor; Javier Ojea-Ferreiro; Eva Ferreira

  1. By: Neyer, Ulrike; Stempel, Daniel
    Abstract: Empirical evidence suggests that considerable differentials in inflation rates exist across households. This paper investigates how central banks should react to household inflation heterogeneity in a tractable New Keynesian model. We include two households that differ in their consumer price inflation rates after adverse shocks. The central bank reacts to either an average of the households' consumer price inflation rates or their individual rates, respectively. After a negative demand shock, the consumer price inflation rates of both households diverge less from their steady states when the central bank only considers the individual inflation rate of the household experiencing the higher inflation rate. Furthermore, output fluctuates less under that regime. After a negative supply shock, a central bank only considering the household experiencing the higher inflation rate mitigates the immediate effects of the shock on both consumer price inflation rates more effectively. Our results imply that central banks, which react discretionarily to differing inflation experiences in an economy, lead to a more efficient attainment of an economy-wide inflation target and to lower fluctuations of all inflation rates.
    Keywords: Business cycles,inflation,inequality,household heterogeneity,New Keynesian models
    JEL: E31 E32 E52
    Date: 2022
  2. By: Edoardo Rainone (Bank of Italy)
    Abstract: Following the implementation of negative policy rates, interest rates on bank deposits reached their historic lows, with values close or equal to zero. This paper investigates the implications of such a new environment for the demand of currency. We find evidence of a structural break in the demand of currency when rates on deposits fall below 0.1 per cent. Exploiting time, bank and banknote denomination variation, as well as exogenous reforms that affected currency payments and holdings, our analysis finds that the increase of currency in circulation seems to be mostly driven by transactions instead of store-of-value demand.
    Keywords: financial stability, monetary policy, negative interest rates, deposits, zero lower bound, money demand
    JEL: E41 E42 E52 E58
    Date: 2022–02
  3. By: Direye, Eli; Khemraj, Tarron
    Abstract: The Bank of Papua New Guinea has maintained an active policy of foreign exchange market intervention. This monetary tool is associated with a depreciating currency and a worsening shortage of foreign currencies in the domestic market – suggesting that at most the policy instrument leans against existing FX market pressure. However, the one-sided sales of central bank securities (or bills) engender an appreciation of the rate and an easing of the shortage in the domestic FX market. Supported by empirical evidence, we demonstrate that the one-sided sales of central bank bills perform like an instrument of monetary policy for foreign exchange market stability in the presence of persistent non-remunerated excess bank reserves.
    Keywords: Papua New Guinea, central bank bills, one-sided sterilization, foreign exchange intervention
    JEL: E50 E52 E58 F4 F41 H63 O10
    Date: 2021–03–01
  4. By: Javier Bianchi; Guido Lorenzoni
    Abstract: We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.
    Keywords: Capital controls; Foreign exchange interventions; Monetary policy; Macroprudential policies
    JEL: F32 F33 F41 F42 G18
    Date: 2021–11–12
  5. By: Jean-Guillaume Sahuc; Mattia Girotti; Benoît Nguyen
    Abstract: Negative interest rate policy makes excess liquidity costly to hold for banks and this may weaken the bank-based transmission of monetary policy. We design a rule-based tiering system for excess reserve remuneration that reduces the burden of negative rates on banks while ensuring that the central bank keeps control of interbank interest rates. Using euro-area data, we show that under the proposed tiering system, the aggregate cost of holding excess liquidity when the COVID-19 monetary stimulus fully unfolds would be more than 36% lower than that under the ECB’s current system.
    Keywords: Negative interest rates, excess liquidity, tiering system, bank profitability, interbank market
    JEL: E43 E52 G21
    Date: 2022
  6. By: Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS)
    Abstract: In this paper, we analyse the link between monetary surprises and banks' activity and risk-taking. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk, affect credit allocation and bank's profitability. Our study adds to analyses of the monetary risk-taking channel considering monetary surprise, i.e. the impact of unexpected changes in monetary policy on bank's risk and activity. Using a dataset of US banks, we find that negative monetary surprises (higher increase or lower decrease of interest rates than expected) lead banks to take more risk, to grant more corporate loans than consumption loans, and to be more profitable. We complement the literature on the risk-taking channel and provide arguments that Central Banks can manage financial stability.
    Keywords: monetary surprise, financial stability, bank risk-taking, VAR model, dynamic panel regression
    JEL: E44 E58 G21
    Date: 2021–12
  7. By: Greenwood, John (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Hanke, Steve (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In the United States and numerous other economies, we are witnessing a flood of ad hoc explanations for inflation. These deal primarily with supply chain issues that have arisen since the Covid-19 pandemic and the re-opening of economies. There is a widespread view among officials at the Federal Reserve System, economists in the Biden Administration, academics (led by people like Paul Krugman, who claims to be a spokesman for “Team Transitory”), and even large parts of the business community that the current bout of U.S. inflation is largely the result of supply chain disruptions that will turn out to be “transitory,” and that the inflationary pressures will dissipate in 2022 as the supply chain issues are resolved. The authors argue that this consensus will prove to be wrong because of its failure to distinguish between relative price changes and changes in the overall price level. The movement of any single set of relative prices fails to convey information about the overall inflation rate. The overall inflation rate and price level are determined by changes in the money supply broadly measured. The Quantity Theory of Money (QTM) and the equation of exchange confirms this relationship. On the other hand, changes in relative prices result from changes in demand and supply conditions in the real sector of the economy. Relative price changes are, therefore, independent of changes in the money supply. So, while a doubling of the money supply will result in a doubling of all nominal prices, relative prices in the economy will remain unaffected. Due to central banks' monetary mismanagement, excess money has been produced in most countries since the Covid-19 pandemic started in early 2020. As a result of this excess money creation, the authors anticipate that the U.S. and Israel are likely to see increases in their overall price levels of approximately 28% and 20%, respectively, over the next few years, whereas the U.K. will likely see an increase of about 11% in the overall price level over a similar period. Meanwhile, for countries like China, Japan, Switzerland, and New Zealand that did not create excess money, the authors anticipate negligible increases in the rate of overall inflation.
    Date: 2021–12–01
  8. By: Allen Head; Timothy Kam; Sam Ng; Isaac Pan
    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 these empirical observations, banks’ lending market power is determined in equilibrium and is a novel channel of monetary policy. At low inflation, banks tend to extract higher markups from existing loan customers rather than competing for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or tax-and-transfer) instruments to offset banks’ market-power incentives.
    Keywords: Banking and Credit; Markups Dispersion; Market Power; Stabilization Policy; Liquidity
    JEL: E41 E44 E51 E63 G21
    Date: 2022–02
  9. By: Marco Bassetto; Gherardo Gennaro Caracciolo
    Abstract: It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized.
    Keywords: Monetary/fiscal interaction; Fiscal theory of the price level; Eurozone; TARGET2; Monetary union
    JEL: E63 E51 E58 E31 H63
    Date: 2021–12–02
  10. By: Javier Bianchi; Saki Bigio; Charles Engel
    Abstract: We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.
    Keywords: Exchange rates; Liquidity premia; Monetary policy
    JEL: E44 F31 F41 G20
    Date: 2021–11–05
  11. By: Lenney, Jamie (Bank of England)
    Abstract: I analyse the role of capital income in the transmission of demand shocks, such as monetary policy shocks, in a medium scale DSGE model that produces an empirically consistent counter-cyclical response of the labour share to monetary policy shocks. This is achieved by augmenting the one sector New Keynesian model with an alternate form of labour that seeks to expand the measure of goods available to consumers. I compare and contrast the transmissions of monetary policy shocks in the one sector ‘textbook’ model relative to the augmented model in both a representative agent (RANK) and heterogeneous agent (HANK) setting that includes a fully endogenous wealth distribution. The comparison highlights the role of capital income in the transmission of monetary policy shocks in these models. When the labour share moves counter-cyclically partial equilibrium decomposition’s of monetary policy transmission show a significant contractionary role for capital income.
    Keywords: DSGE; DCT; expansionary labour; HANK; inequality; intangible; New Keynesian; perturbation
    JEL: D31 E12 E21 E52 L29
    Date: 2022–01–07
  12. By: Koenig, Philipp J.; Schliephake, Eva
    Abstract: We consider a standard banking model with agency frictions to simultaneously study the weakening and reversal of monetary transmission and banks' risk-taking in a low-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks' net worth. The pass-through to deposit rates, the level of excess reserves and the extent of the agency problem between banks and depositors are crucial determinants of monetary transmission. If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policy rates below the reversal rate further interest rate reductions lead to a disproportionate increase in risk-taking and a contraction in loan supply. JEL Classification: G21, E44, E52
    Keywords: bank lending, monetary policy, reversal rate, risk-taking channel
    Date: 2022–02
  13. By: Jeremy Srouji (Université Côte d'Azur, France; GREDEG CNRS; International Institute of Social Studies - Erasmus University Rotterdam)
    Abstract: The literature on currency internationalization, with its focus on the essential attributes of an international currency issuer, is largely inadequate for explaining what causes the currency of a country to be adopted and to remain as world money. This paper argues that embedded within the well-known framework of the functions of money – as a medium of exchange, unit of account and store of value – are fundamental assumptions about how Economics defines and understands money. Drawing on conventional and Post Keynesian approaches, it demonstrates that current theories of currency internationalization, and questions of international money more generally, are embedded in underlying theories of money that are very specific about the process through which currencies achieve and maintain an international position. It also finds that a better understanding of the functional approach to money can bring greater theoretical clarity to the positions of various authors on questions of international money. At the same time, it argues that shortfalls in both the conventional and Post Keynesian approaches to money are inevitably also transposed to the international level. These need to be addressed before a more comprehensive theory of currency internationalization can emerge.
    Keywords: international money, international reserves, US dollar, currency internationalization, cryptocurrency
    JEL: E12 E13 E42 E52
    Date: 2021–12
  14. By: Oliver de Groot; Alexander Haas
    Abstract: Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the optimality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signalling channel dominates the costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
    Keywords: Monetary policy, Taylor rule, forward guidance, liquidity trap
    JEL: E44 E52 E61
    Date: 2022
  15. By: Pedro Elosegui Author-Email: Author-Workplace-Name: Central Bank of Argentina; Federico Forte (BBVA Research, BBVA Argentina); Gabriel Montes-Rojas (IIEP-BAIRES-UBA, CONICET)
    Abstract: This paper studies the network structure and fragmentation of the Argentine interbank market. Both the unsecured (CALL) and the secured (REPO) markets are examined. The aim of this study is to understand their actual fragmentation, as well as its potential implications for monetary policy and financial stability. Applying network analysis, different underlying segments within the market are identified. We approximate the theoretical distribution that better fits the empirical degree distribution of the interbank loan networks. Based on standard topological metrics, it is found that, although the secured market has less participants, its nodes are more densely connected than in the unsecured market. In addition, the interrelationships in the unsecured market are less stable, as it was witnessed during the 2018 currency crisis, making its structure more volatile and vulnerable to negative shocks. The analysis identifies two "hidden" underlying sub-networks within the REPO market: one based on the transactions collateralized by Treasury bonds (REPO-T) and other based on the operations collateralized by Central Bank (CB) securities (REPO-CB). The connectivity indicators were significantly more stable in the REPO-T market than in the REPO-CB segment. The changes in monetary policy stance and monetary conditions seem to have a substantially smaller impact in former than in the latter "sub-market". Hence, the connectivity levels within the REPO-T market remain relatively unaffected by the (in some period pronounced) swings in the other segment of the market. These results have implications in terms of the interpretation of the interest rates that arise from these markets.
    Keywords: network analysis, interbank market, fragmentation, central bank, monetary policy, Argentina
    JEL: C2 C12 G21 G28
    Date: 2021–12
  16. By: Alessandro Ferrari (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: In a DSGE model, we study the effectiveness of a Green QE, i.e. a program of green-asset purchases by the central bank, along the transition to a carbon-free economy. The model is characterized by green firms that produce using a clean technology and brown firms that pollute but they can pay a cost to abate emissions. The transition is driven by an emission tax. We analyze the evolution of macroeconomic variables along the transition and we compare different versions of Green QE. We show two main findings, in our baseline calibration, where the green and the brown goods are imperfect substitutes. First, Green QE helps to further reduce emissions along the transition, but its quantitative impact on the stock of pollution is small. Second, we find the largest effects when the central bank invests in green assets in the early stage of the transition. Moreover, we highlight that the elasticity of substitution between the green and the brown good is a crucial parameter: if the goods are imperfect complements (an elasticity lower than one), Green QE raise emissions.
    Keywords: central bank, monetary policy, quantitative easing, climate change
    JEL: E52 E58 Q54
    Date: 2022–02
  17. By: Michel Alexandre (Central Bank of Brazil and Institute of Mathematics and Computer Science, University of Sao Paulo, Sao Carlos, Brazil); Gilberto Tadeu Lima (Department of Economics, University of Sao Paulo, Brazil); Luca Riccetti (Department of Economics and Law, University of Macerata, Italy); Alberto Russo (Department of Management, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)
    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 transmisión”. 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
  18. By: Asongu, Simplice; Ojong, Nathanael; Soumtang, Valentine
    Abstract: This study explores the responses to the COVID-19 pandemic by the Bank of Central African States (BEAC), which is the central bank for countries in the Central African Economic and Monetary Community (CEMAC), that is, Cameroon, Chad, Gabon, Equatorial Guinea, Central African Republic, and the Republic of Congo. While hitherto, BEAC had fundamentally focused on fighting inflation and promoting monetary integration and financial stability in its member states, the COVID-19 pandemic, among other factors, has motivated it to also shift its policies towards targeted credit programmes and more economic growth. This study sheds light on four core aspects: (i) the socio-economic context of the CEMAC region prior to the COVID-19 pandemic, (ii) BEAC as a lender of last resort, (iii) historical, contemporary, and future insights surrounding targeted credit programmes, and (iv), suggestions for the path forward in terms of reforms, with emphasis on inclusive growth and monitoring economic development at the regional level.
    Keywords: Covid-19 pandemic; monetary policy; central bank responses; CEMAC, BEAC
    JEL: G2 O1 O55
    Date: 2021–08
  19. By: Donato Masciandaro; Romano Vincenzo Tarsia
    Abstract: This paper proposes an index for evaluating central bank activism in addressing climate-change issues. Consistent with a principal-agent approach, this metric assumes that the central bank’s sensibility on climate change depends on both economic and political drivers. The index has been created to include not only actual policies but also participation in green networks and initiatives that signal central bank activism on climate change.
    Keywords: Climate change, central banking, principal-agent, political pressure, monetary policy, financial stability
    Date: 2021
  20. By: Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
    Abstract: Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop an empirical test of this 'irrel evance hypothesis' based on a simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of mon etary policy. We develop a theoretical model that underpins this hypothesis, and test it empirically for Japan and the United States using a structural vector autoregressive model with the ELB. For each country, we firmly reject the hypothesis but find that UMP has had strong delayed effects.
    Date: 2021–05–04
  21. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: This study focuses on linkages between bank accounts and supply-side mobile money drivers for mobile money innovations. It seeks to understand how bank accounts can be complemented with mobile subscription and mobile connectivity dynamics (i.e., mobile connectivity coverage and mobile connectivity performance) for mobile money innovations. The empirical evidence is based on quadratic Tobit regressions. First, there are positive net relationships from the roles of mobile subscriptions and mobile connectivity coverage in modulating bank accounts for mobile money innovations. Second, mobile connectivity performance does not significantly modulate bank accounts for mobile money innovations. Third, given the negative marginal relationships associated with the positive net relationships, thresholds for complementary policies in mobile money supply factors that are worthwhile for bank accounts to stimulate mobile money innovations are provided. The thresholds are: (i) mobile subscription rates of 87.50%, 80.50%, and 98.50% of the adult population for respectively, the mobile money accounts, the mobile used to send money, and the mobile used to receive money, and (ii) mobile connectivity coverages of 64.00%, 69.33%, and 78.00% for respectively, the mobile money accounts, the mobile used to send money, and the mobile used to receive money.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2022–01
  22. By: Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian
    Abstract: Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks' purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks' quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles.
    Date: 2022
  23. By: Kozo Ueda
    Abstract: This study constructs a tractable duopoly model with price stickiness to consider the strategic pricing of duopolistic firms and its implications for monetary policy. Dynamic strategic complementarity, in which an increase in a firm's price increases the optimal price set by the rival firm in the following periods, increases steady-state price and the real effect of monetary policy. However, when temporary sales arise as a mixed strategy, the real effect of monetary policy decreases considerably.
    Date: 2022–02
  24. By: Luca Benati; Juan Pablo Nicolini
    Abstract: We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation. We use data for the United States and several other developed countries. Our computations are heavily influenced by the recent experience of very low, even negative, short-term rates observed in the countries we study. We obtain estimates that range between 0.20% and 1.5% of lifetime consumption for the United States and find even higher values for some European countries.
    Keywords: Money demand; Lower bound on interest rates
    JEL: E41 E43 E52
    Date: 2021–09–24
  25. By: Belai Abbai; Ozge Akinci; Gianluca Benigno; Julian di Giovanni; Jan J. J. Groen; Ruth Cesar Heymann; Lawrence Lin; Adam I. Noble
    Abstract: U.S. inflation has surged as the economy recovers from the COVID-19 recession. This phenomenon has not been confined to the U.S. economy, as similar inflationary pressures have emerged in other advanced economies albeit not with the same intensity. In this post, we draw from the current international experiences to provide an assessment of the drivers of U.S. inflation. In particular, we exploit the link among different measures of inflation at the country level and a number of global supply side variables to uncover which common cross-country forces have been driving observed inflation. Our main finding is that global supply factors are very strongly associated with recent producer price index (PPI) inflation across countries, as well as with consumer price index (CPI) goods inflation, both historically and during the recent bout of inflation acceleration.
    Keywords: inflation; supply; goods; CPI; PPI; euro area; OECD; GSCPI; global; demand
    JEL: F00
    Date: 2022–01–28
  26. By: Kandasamy, Ambika (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Lebanon is currently facing a financial crisis marked by rising inflation rates and a black-market exchange rate that is significantly diverging day-by-day from the official exchange rate. In this paper, the author dives into Lebanon’s financial history and what actions undertaken by the government since the civil war have led to this crisis. After a thorough examination of the current economy, the author compares Lebanon’s present day financial crisis to the one faced by Bulgaria in the 1990s and concludes that the implementation of a currency board is a viable solution for restoring the strength of the Lebanese pound and ushering in financial stability.
    Keywords: currency board; Lebanon; Bulgaria
    JEL: E51 G01
    Date: 2021–11–13
  27. By: Li, Ye (Ohio State University); Li, Yi (Board of Governors of the Federal Reserve System); Sun, Huijun (Columbia Business School)
    Abstract: This paper documents a strong connection between payment system and credit supply. The dual role of deposits as financing instruments for banks and means of payment for bank customers implies spillover effects of bank lending. After a bank finances loans with new deposits, the deposit holders' payments cause reserves and deposits to flow from the lending bank to the payees' banks. The change in liquidity conditions for both banks and their customers gives rise to two opposing forces that generate respectively strategic complementarity and strategic substitution in banks' lending decisions. We model bank lending through a linear-quadratic game on a random graph of payment flows and structurally estimate the spillover effects using Fedwire data to quantify the probability distribution of payment-flow network. Payment network externalities reduce the average level of aggregate credit supply by 9% while amplify the volatility by 20%. We identify a small subset of banks that have a disproportionately large influence on credit supply due to their special positions in the payment-flow network.
    JEL: E42 E43 E44 E51 E52 G21 G28
    Date: 2021–12
  28. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks do not universally behave like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. Further analysis, including a comparison of results across countries, suggest that factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation.These results lend support to a pricing bias mechanism as an important transmission channel.
    JEL: D84 E30 E52 E71
    Date: 2022–02–14
  29. By: Ariel Dvoskin Author-Email: Author-Workplace-Name: Central Bank of Argentina; Sebastián Katz (Central Bank of Argentina)
    Abstract: What are the most appropriate policy regimes and mix of instruments in small open economies to deal with capital flows volatility and the influence of the global financial cycle? In this article, we review the recent experience of various emerging economies and the arguments in favor of the use of various conventional and unconventional policy tools and approaches. In particular, we analyze the different reasons that prevent full exchange rate flexibility as a shock absorber, which demands, in many circumstances, the use of alternative tools, sometimes as substitutes but in many other cases as complements of FX flexibility: FX markets interventions, macroprudential regulations and capital flow management measures. Our main contribution is to present the FX transmission channels to the macro/financial performance and the tools currently used by many Central Banks to deal with FX shocks identified by an extensive literature in a systematic and orderly manner. We conclude that the most appropriate policy responses critically depend, not only on the nature and intensity of the shock, but also on the structural conditions and particular circumstances that each economy exhibits at the "starting point".
    Keywords: capital flows, capital flow management measures, exchange rate policy, FX markets interventions, macroprudential regulations, small open economies.
    JEL: E58 F31 F38 G28
    Date: 2021–12
  30. By: Barnett, William A.; Eryilmaz, Unal
    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
  31. By: Valentin Jouvanceau (Bank of Lithuania); Julien Albertini (GATE, University of Lyon); Stéphane Moyen (Deutsche Bundesbank)
    Abstract: This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.
    Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance.
    JEL: E30 J60
    Date: 2022–01–25
  32. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors’ confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    Keywords: Bank runs; Financial crises; Credit easing
    JEL: E32 E44 E58 G01 G21 G33
    Date: 2021–10–15
  33. By: Richard H. Clarida
    Abstract: This paper discusses the Federal Reserve's new framework and highlights some important policy implications that flow from the revised consensus statement and the new strategy. In particular, it first discusses the factors that motivated the Federal Reserve in November 2018 to announce it would undertake in 2019 the first-ever public review of its monetary policy strategy, tools, and communication practices. It then considers the major findings of the review as codified in our new Statement on Longer-Run Goals and Monetary Policy Strategy and highlights some important policy implications that flow from them.
    Keywords: FOMC; Monetary policy
    Date: 2022–01–13
  34. By: Edmond Berisha (Feliciano School of Business, Montclair State University, Montclair, NJ 07043); Orkideh Gharehgozli (Feliciano School of Business, Montclair State University, Montclair, NJ 07043); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: US economy is facing inflation jump, which is running at 30 year high. Using inequality and inflation data that are available at a high frequency, i.e. on a quarterly basis for over 30 years, we find evidence that inflation causes swings in income distribution rapidly. The dynamic response of inequality to changes in inflation alters over a fourquarter period. We show that the contemporaneous impact of inflation on inequality is negative; however, after three quarters the impact becomes positive and stronger in magnitude. From our results we learn that over a one year period, higher inflation would exacerbate income inequality in USA. The positive impact of inflation on income inequality is stronger when inflation rate, initially, is above the sample average.
    Keywords: Inflation, Inequality, United States
    JEL: D60 O40 O50
    Date: 2022–01
  35. By: Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
    Abstract: We use Finnish household-level registry and survey data to study the effects of ECB’s monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households’ gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90th percentile to the 50th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile.
    JEL: D31 E32 E52
    Date: 2022–01–20
  36. By: Xavier Jaravel (Institute for Fiscal Studies and London School of Economics); Martin O'Connell (Institute for Fiscal Studies and University of Wisconsin)
    Abstract: We characterize in?ation dynamics during the Great Lockdown using scanner data covering millions of transactions for fast-moving consumer goods in the United Kingdom. We show that there was a signi?cant and widespread spike in in?ation. First, aggregate month-to-month in?ation was 2.4% in the ?rst month of lockdown, a rate over 10 times higher than in preceding months. Over half of this increase stems from reduced frequency of promotions. Consumers’ purchasing power was further eroded by a reduction in product variety, leading to a further 85 basis points increase in the e?ective cost of living. Second, 96% of households have experienced in?ation in 2020, while in prior years around half of households experienced de?ation. Third, there was in?ation in most product categories, including those that expe-rienced output falls. Only 13% of product categories experienced de?ation, compared with over half in previous years. While market-based measures of in?ation expectations point to disin?ation or de?ation, these ?ndings indicate a risk of stag?ation should not be ruled out. We hope our approach can serve as a template to facilitate rapid diagnosis of in?ation risks during economic crises, leveraging scanner data and appropriate price indices in real-time.
    Date: 2020–06–12
  37. By: Arce-Alfaro, Gabriel; Blagov, Boris
    Abstract: In this article we analyse the degree of commonality across euro area countries in the bank lending rates and credit volumes. Using a time-varying two-level dynamic factor model, we disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. There is heterogeneity across member states, specifically those hit hard by the crisis. We observe high commonality in the financial variables, which increases in periods of high financial volatility.
    Keywords: Co-movements,financial fragmentation,dynamic factor model
    JEL: C11 C38 E43 E52
    Date: 2021
  38. By: Rod Garratt; Michael Junho Lee; Antoine Martin; Joseph Torregrossa
    Abstract: Stablecoins, which we define as digital assets used as a medium of exchange that are purported to be backed by assets held specifically for that purpose, have grown considerably in the last two years. They rose from a market capitalization of $5.7 billion on December 1, 2019, to $155.6 billion on January 21, 2022. Moreover, a market that was once dominated by a single stablecoin—Tether (USDT)—now boasts five stablecoins with valuations over $1 billion (as of January 21, 2022; data about the supply of stablecoins can be found here). Analysts have started to pay increased attention to the stablecoin market, and the President’s Working Group (PWG) on Financial Markets released a report on stablecoins on November 1, 2021. In this post, we explain why we believe stablecoins are unlikely to be the future of payments.
    Keywords: digital currencies; stablecoins
    JEL: E5 G21 E42
    Date: 2022–02–07
  39. By: Massimo Casa (Bank of Italy); Laura Graziani Palmieri (Bank of Italy); Laura Mellone (Bank of Italy); Francesca Monacelli (Bank of Italy)
    Abstract: The paper illustrates the phases of the process that the Bank of Italy follows to produce the statistics derived from credit and financial reporting: the identification of the information requirements; the definition of the data model; the design of the new data collection method to be used by reporting agents; cooperation between the Bank of Italy and reporting agents; data quality procedures; and dissemination of this information to internal and external users. This process takes an ‘integrated approach’ and was adopted by the Bank of Italy in the late 1980s. For the last decade, it has been a reference point for the European System of Central Banks both as regards the development of the statistical framework and for the efficiency improvements in data management and data governance on the part of the authorities. The Bank of Italy takes part in these initiatives providing a valuable contribution in terms of ideas and experience.
    Keywords: regulatory reporting, banking reporting, data model, data quality, information management, statistical production, information system
    JEL: C81 G21 M15
    Date: 2022–02
  40. By: George Planiteros
    Abstract: The paper attacks the central policy evaluation question of forecasting the impact of interventions never previously experienced. It introduces treatment effects approach into a cognitive domain not currently spanned by its methodological arsenal. Existing causal effects bounding analysis is adjusted to the ex-ante program evaluation setting. A Monte Carlo experiment is conducted to test how severe the estimates of the proposed approach deviate from the "real" causal effect in the presence of selection and unobserved heterogeneity. The simulation shows that the approach is valid regarding the formulation of the counterfactual states given previous knowledge of the program rules and a sufficiently informative treatment probability. It also demonstrates that the width of the bounds are resilient to several deviations from the conditional independence assumption.
    Keywords: Policy evaluation, forecasting, treatment e ects, hypothetical treatment group, bounding and sensitivity analysis
    Date: 2022–01–28
  41. By: Jose Santiago Mosquera (Departmento de Economía, Universidad de San Andrés)
    Abstract: By December 2017, the Argentine economy had been experiencing good figures in variables such as GDP, employment, poverty, and inflationary dynamics. However, other variables warned about the process’ sustainability (rising current account deficit and high, relatively stable fiscal deficit). According to a part of the literature, this raises the possibility of the economy being in a situation of multiple equilibria, in which expectations play a key role in determining the actual equilibrium. Since, activity stagnated, and country risk began to increase, as did the exchange rate. Was there an event that broke the trend? In this paper, I implement a robust synthetic control strategy to argue that the change of the inflation targets (on December 28th) eroded the credibility of the central bank, signaling that the government was not willing to pursue the fiscal balance as believed. Consequently, this day acted as a coordinator of expectations towards a worse equilibrium than the one in which the economy was.
    Keywords: Central Bank independence, credibility, synthetic control, multiple equilibria
    JEL: E43 E58 E61 E63 E65
    Date: 2021–12
  42. By: Beatriz de la Flor (Universidad Complutense de Madrid and ICAE (Spain).); Javier Ojea-Ferreiro (Universidad Complutense de Madrid and ICAE (Spain).); Eva Ferreira (Universidad Complutense de Madrid and ICAE (Spain).)
    Abstract: The safe-haven property of gold has been widely studied, although little attention has been paid to how exchange rate movements could affect hedging strategies. We analyse the exchange rate role in stock portfolios hedged with gold in several regions from the point of view of non-US and US investors, using vine copulas to model the relation between gold, stock and exchange rates. We find a leading role played by exchange rate hedging stock losses, which outstrips the position of gold (index) in non-US (US) portfolios. The inclusion of the exchange rate can reduce the ES between 107 and 162 bps. An out-of-sample exercise supports our results. The implications of this study go beyond risk management decisions. Regulatory and supervisory authorities might find tools to assess the performance of financial assets under market distress scenarios.
    Keywords: Exchange rate risk; Hedging strategy; Risk measures; Tail dependence; Vine copula.
    JEL: C52 C58 C61 F13 G1
    Date: 2022

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