nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒02‒28
47 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency By Max Fuchs; Jochen Michaelis
  2. 'As one dies, so dies the other' ? On local complementary currencies as two-sided platforms By Jean-Baptiste Desquilbet; Etienne Farvaque
  3. Inflation-Forecast Targeting: A New Framework for Monetary Policy? By PINSHI, Christian P.
  4. Bank capital, credit risk and financial stability in Kenya By Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
  5. Is Better Access to Mobile Networks Associated with Increased Mobile Money Adoption? Evidence from the Micro-data of Six Developing Countries By Hisahiro Naito; Shinnosuke Yamamoto
  6. What ails bank deposit mobilization and credit creation in Kenya? By Maturu, Benjamin
  7. Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy By Jakob Vestergaard; Daniela Gabor
  8. Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing By Ding Ding; Mr. Yannick Timmer
  9. "Time to Celebrate Modern Money Theory?" By Yeva Nersisyan; L. Randall Wray
  10. Do Conservative Central Bankers Weaken the Chances of Conservative Politicians? By Maxime Menuet; Hugo Oriola; Patrick Villieu
  11. Liquidity, Liquidity Everywhere, Not a Drop to Use - Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity By Viral V. Acharya; Raghuram Rajan
  12. Macroprudential regulation and bank stability: The credit market signal By Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
  13. The Common Currency Effect on International Trade: Evidence from an Accidental Monetary Union By Roger Vicquéry
  14. This Is What's in Your Wallet...and Here's How You Use It By Tamás Briglevics; Scott Schuh
  15. Revisiting the Monetary Transmission Mechanism Through an Industry-Level Differential Approach By Sangyup Choi; Tim Willems; Seung Yong Yoo
  16. Inflationary redistribution, trading opportunities and consumption inequality By Timothy Kam; Junsang Lee
  17. Decomposing LIBOR in Transition: Evidence from the Futures Markets By David Skovmand; Jacob Bjerre Skov
  18. Influence of Hong Kong RMB offshore market on effectiveness of structural monetary policy in the Mainland China By Qin, Weiguang; Bhattarai, Keshab
  19. Big data forecasting of South African inflation By Byron Botha; Rulof Burger; Kevin Kotz; Neil Rankin; Daan Steenkamp
  20. Climate Risk Measurement of Assets Eligible as Collateral for Refinancing Operations – Focus on Asset Backed Securities (ABS) By Klodiana Istrefi; Florens Odendahl; Giulia Sestieri
  21. A Medium-Scale DSGE Model for the Integrated Policy Framework By Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
  22. Average Inflation Targeting: Time Inconsistency and Intentional Ambiguity By Chengcheng Jia; Jing Cynthia Wu
  23. Central Bank Digital Currency: What Basis Should be Taken for Crypto Assets? By PINSHI, Christian P.
  24. Money, credit and imperfect competition among banks By Allen Head; Timothy Kam; Sam Ng; Isaac Pan
  25. Monetary Policies, US influence and other Factors Affecting Stock Prices in Japan By Allen, David; Mizuno, Hiro
  26. Sovereign Debt Sustainability and Central Bank Credibility By Tim Willems; Mr. Jeromin Zettelmeyer
  27. What’s ahead for euro money market benchmarks? By Daniela Della Gatta
  28. A Smooth Shadow-Rate Dynamic Nelson-Siegel Model for Yields at the Zero Lower Bound By Daan Opschoor; Michel van der Wel
  29. The Imperialism of International Currency By Rahman, Abdurrahman Arum
  30. Falling Use of Cash and Demand for Retail Central Bank Digital Currency By Mr. Tanai Khiaonarong; David Humphrey
  31. Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information By Lorenzo Carbonari; Fabrizio Mattesini; Robert J. Waldmann
  32. Impact of Interest Rate Cap Policies on the Lending Behavior of Microfinance Institutions: Evidence from Millions of Observations in the Credit Registry Database By Daiju Aiba; Sovannroeun Samreth; Sothearoath Oeur; Vanndy Vat
  33. Forecasting Returns of Major Cryptocurrencies: Evidence from Regime-Switching Factor Models By Elie Bouri; Christina Christou; Rangan Gupta
  34. Monetary Policy Frameworks: An Index and New Evidence By Mr. Chris Papageorgiou; Hendre Garbers; D. Filiz Unsal
  35. A Lawyer's Perspective on U.S. Payment System Evolution and Money in the Digital Age By Jess Cheng; Joseph Torregrossa
  36. Security Considerations for a Central Bank Digital Currency By Katya Delak; Tarik Hansen
  37. Usability of Bank Capital Buffers: The Role of Market Expectations By Antonio Garcia Pascual; José Abad
  38. Asserting Independence: Optimal Monetary Policy When the Central Bank and Political Authority Disagree By Justin Svec; Daniel L. Tortorice
  39. Lessons from the Early Establishment of Banking Supervision in Italy (1926-1936) By Dario Pellegrino; Marco Molteni
  40. Pandemic Recession and Helicopter Money: Venice, 1629--1631 By Charles Goodhart; Donato Masciandaro; Stefano Ugolini
  41. The Expected, Perceived, and Realized Inflation of U.S. Households before and during the COVID-19 Pandemic By Weber, Michael; Gorodnichenko, Yuriy; Coibion, Olivier
  42. Shocks to Inflation Expectations By Jonathan J Adams; Philip Barrett
  43. Make-up Strategies with Finite Planning Horizons but Forward-Looking Asset Prices By Stéphane Dupraz; Hervé Le Bihan; Julien Matheron
  44. Making Money By Gary B. Gorton; Chase P. Ross; Sharon Y. Ross
  45. A Note on the Natural Rate of Dollarization: Mathematical Approximation of Limits By PINSHI, Christian P.
  46. Is money demand really unstable? Evidence from Divisia monetary aggregates By Barnett, William A.; Ghosh, Taniya; Adil, Masudul Hasan
  47. The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? By Jean Barthélemy; Eric Mengus; Guillaume Plantin

  1. By: Max Fuchs (University of Kassel); Jochen Michaelis (University of Kassel)
    Abstract: The coexistence of cash and digital currencies constitutes a system of parallel currencies. This paper tackles the question whether a new (digital) currency is essential: Does a new currency allow for a better resource allocation even if a fully accepted currency is in circulation and still remains in circulation? Using the dual currency search model of Kiyotaki and Wright (1993), we show how the introduction of a secondary currency affects average utility. There is some scope for a welfare improvement, the welfare effect depends on differences in returns and costs, and, in particular, the fraction of cash traders who will be replaced by digital money traders.
    Keywords: digital money, dual currency regime, welfare comparison
    JEL: E41 E42 E51
    Date: 2022
  2. By: Jean-Baptiste Desquilbet (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Etienne Farvaque (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Are local complementary currencies doomed? We analyse the conditions underlying the existence of these alternative monetary arrangements from the perspective of the two-sided platform theory. Considering their benefits to depend on the cross-externality generated by the presence of buyers and sellers using the alternative means of payment, we show that the possibility of the sustainability of such arrangements is weak. The result is established in a very general setting and with few restrictions on the parameters. Except in the presence of subsidies, the odds are low for local complementary currencies to survive.
    Keywords: Community currency,Complementary currency,Local exchange systems,Two-sided platforms,Means of payment JEL Classification: D42,E41,E42,E59,L11
    Date: 2022–01–10
  3. By: PINSHI, Christian P.
    Abstract: This article provides an overview of inflation-forecast targeting (IFT) to build credibility and maintain stability. We show how inflation-forecast targeting is a transparent approach and an ideal strategy for monetary policy. In addition, public understanding would be essential to foster confidence and ensure the effectiveness of monetary policy. To this end, adequate management of expectations and transparent communication are important.
    Keywords: Inflation-Forecast Targeting, Expectations, Communication, Monetary policy
    JEL: E47 E52 E58
    Date: 2022–01
  4. By: Kiemo, Samuel; Talam, Camilla; Rugiri, Irene W.
    Abstract: The paper sought to explore the role of bank capital in mitigating credit risk and promoting financial stability. To achieve this, we constructed a Financial Soundness Index to evaluate financial stability conditions. A Panel Vector Auto Regression Model was employed using annual bank-level data from 2001-2020 for 37 banks, to examine the effect of bank capital on credit risk and financial stability. Overall, financial stability index long-term trend shows banks remain resilient, despite the downward trend from 2011 and instability margins since 2016. The findings also reveal that bank capital, lowers credit risk and strengthens financial stability. The paper conclude that bank capital supports financial stability through mitigating credit risks, and recommends that authorities continue adopting and implementing appropriate capital policies to foster financial stability and promote bank lending.
    Keywords: Bank Capital,Credit Risk,Financial Stability,Panel Vector Auto Regression model
    Date: 2022
  5. By: Hisahiro Naito; Shinnosuke Yamamoto
    Abstract: In several developing countries in Sub-Saharan Africa, accessibility to digital financial services is increasing because of the development of mobile money services. People previously excluded from the financial system have started to have access to financial services such as receiving and sending remittances, saving, and borrowing. This study examines the effect of network accessibility on the use of mobile money in six developing countries (Bangladesh, Kenya, Nigeria, Pakistan, Tanzania, and Uganda) using GPS information on each household and mobile phone network coverage maps. We find that among these six countries, network accessibility is associated with the use of mobile money in a robust way only in Pakistan and Tanzania. In those two countries, when a household location becomes 10 km closer to the center of the area with multiple mobile networks, the probability of using mobile money increases by 10 percent. In the other countries, we did not find a robust relationship between the use of mobile money and network accessibility. This suggests that increasing network accessibility may not be an efficient method for increasing mobile money adoption in certain countries. The fact that mobile money use rates differ between Tanzania and Pakistan also suggests that the effect of mobile networks is unrelated to the overall level of mobile money adoption.
    Date: 2022–01
  6. By: Maturu, Benjamin
    Abstract: We estimate a proposed core financial intermediation model built upon an extended classical quantity theory using Bayesian econometric techniques. The findings suggest that the persistent deceleration in bank deposits, bank credit and domestic final output during the most of the second half of the decade ending in Dec. 2019 is due to a downward spiral (or a vicious circle) of bank deposits, bank credit and domestic final output caused by a reversal of hitherto accommodative economic and financial policies meant to revitalise the economy following the 2007 post-election disturbances and to check adverse contagion effects from the global economic and financial crises. With accommodative economic and financial policies including relaxed compliance with provisioning for non-performing bank loans, the gross non-performing bank loans accumulated to unprecedented levels thereby adversely affecting effective demand for and supply of bank credit in the private sector. This situation was aggravated by tightening monetary policy stance using the central bank rate amid tighter requirements for compliance with provisioning for non-performing loans.
    Date: 2021
  7. By: Jakob Vestergaard (Roskilde University); Daniela Gabor (University of West England)
    Abstract: Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg`s critique of the ECB`s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg`s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.
    Keywords: Central banks, collateral policy, fiscal disciplining, financial stability, haircuts.
    JEL: E42 E58 F45
    Date: 2021–12–01
  8. By: Ding Ding; Mr. Yannick Timmer
    Abstract: We estimate a variety of exchange rate elasticities of international tourism. We show that, in addition to the bilateral exchange rate between the tourism origin and destination countries, the exchange rate vis-à-vis the US dollar is also an important driver of tourism flows and pricing. The effect of US dollar pricing is stronger for tourism destination countries with higher dollar borrowing, indicating a complementarity between dominant currency pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role for the average country, but are important for tourism-dependent countries and those with a high concentration of tourists. The importance of the dollar exchange rate represents a strong piece of evidence of dominant currency pricing (DCP) in the international trade of services and suggests that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought.
    Keywords: International tourism; trade of services; exchange rate elasticity; dominant currency pricing; dominant currency financing
    Date: 2022–02–04
  9. By: Yeva Nersisyan; L. Randall Wray
    Abstract: A recent article in the New York Times asks whether Modern Money Theory (MMT) can declare victory after its policies were (supposedly) implemented during the response to the COVID-19 pandemic. The article suggests yes, but for the high inflation it sparked. In the view of Yeva Nersisyan and Senior Scholar L. Randall Wray, the federal government's response largely validated MMT's claims regarding public debt and deficits and questions of sovereign government solvency--it did not, however, represent MMT policy.
    Date: 2022–02
  10. By: Maxime Menuet (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Hugo Oriola (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours); Patrick Villieu (LEO - Laboratoire d'Économie d'Orleans - UO - Université d'Orléans - UT - Université de Tours)
    Abstract: In this paper, we challenge the claim that an independent conservative central bank strengthens the likelihood of a conservative government. In contrast, if an election is based on the comparative advantages of the candidates, an inflation-averse central banker can deter the chances of a conservative candidate because once inflation is removed, its comparative advantage in the fight against inflation disappears. We develop a theory based on a policy-mix game with electoral competition, predicting that the chances of a conservative (i.e., inflation-averse) party is reduced in the presence of tighter monetary policy. To test this prediction, we examine monthly data of British political history between 1960 and 2015. We show that a 1 percentage point increase in the interest rate in the 10 months prior to a national election decreases the popularity of a Tory government by approximately 0.75 percentage points relative to its trend.
    Keywords: monetary policy,elections,United Kingdom,comparative advantage
    Date: 2021–12–14
  11. By: Viral V. Acharya; Raghuram Rajan
    Abstract: Central bank balance sheet expansion is financed by commercial banks. It involves not just a substitution of liquid central bank reserves for other assets held by commercial banks, but also a counterpart alteration in commercial bank liabilities, such as in short-term deposits issued to finance reserves and in off-balance-sheet encumbrances pledged against reserves, which are also claims on liquidity. In ordinary times, when these claims are not called on, central bank balance sheet expansion will typically enhance the net availability of liquidity to the system. However, in times of stress when these offsetting claims on liquidity are exercised, the demand for liquidity can be significantly more. Furthermore, liquid commercial banks, desiring to maintain unimpeachable balance sheets, may provide only limited re-intermediation of liquidity and contribute significantly to liquidity shortages. Commercial banks do not fully internalize prospective stress ex ante or take sufficient steps to avoid it. Consequently, central bank balance sheet expansion need not eliminate episodes of stress; it may even exacerbate them. This may also attenuate any positive effects of central bank balance sheet expansion on economic activity.
    JEL: E0 G0
    Date: 2022–01
  12. By: Kiemo, Samuel; Kamau, Anne; Rugiri, Irene W.; Talam, Camilla
    Abstract: This paper examines the effectiveness of macroprudential regulations in promoting bank stability and credit in the Kenyan financial system. The study uses bank-level and nonbank credit data for the period 2001-2019 and applies a panel estimation methodology to achieve its objectives. The study finds that bank stability has remained high, though downward trending. The findings also reveal that capital-based and asset-side macroprudential regulations effectively promote bank stability, while the liquidity-related macroprudential regulation is ineffective. Additionally, there is evidence of dampened bank credit market and domestic leakage associated with macroprudential regulations. The paper cautions policymakers to implement macroprudential policies that balance the objectives of bank stability and credit conditions. Furthermore, policymakers should note that implementing the new macroprudential measures may cause financial intermediaries to adjust their behaviour and therefore, should be implemented systematically while observing their impact at each stage.
    Keywords: Macroprudential Regulation,Stability,Lending,Banks
    JEL: E44 E51 G21
    Date: 2021
  13. By: Roger Vicquéry
    Abstract: I rely on a historical natural experiment to provide, for the first time, a causal estimate of the effect of currency unions on international trade. Since the seminal paper by Rose (2000), a large literature has developed around currencies as a trade cost. However, self-selection and endogeneity bias implied by membership of a currency union are likely to be pervasive and might explain the large pro-trade effect of currency union found in the literature. I offer a quasi-experimental contribution by exploiting an exogenous variation in currency union membership, driven by an unexpected geopolitical shock – the 1861 Italian unification - and involving a French franc pan-European zone that existed throughout the 19th century. I employ original data and structural gravity equations to estimate an effect in the order of 35%, consistent with a large - if heterogenous - effect of common currencies on trade.
    Keywords: Currency Unions, Common Currency, Trade, Natural Experiment, Gravity Regressions.
    JEL: F15 F33 F54 N73
    Date: 2021
  14. By: Tamás Briglevics (Magyar Nemzeti Bank); Scott Schuh (West Virginia University)
    Abstract: Consumer wallets have more means of payment yet cash still is used most. We develop a dynamic structural model blending cash inventory management and payment instrument choice. For each expenditure, consumers endogenously pay with cash, debit card, or credit card with an option to withdraw cash beforehand. The model is estimated with transaction-level data from a daily consumer payment diary and reveals that utility from payment services exceed cash management costs. For payment card owners, optimal cash holdings are about $50 and jointly determined with the share of cash payments. Eliminating either cash or payment cards reduces consumer welfare significantly.
    Keywords: Money demand, cash inventory management, payment demand, debit cards, credit cards, structural estimation, discrete-continuous choice, Diary of Consumer, Payment Choice
    JEL: E41 E42 D12 D14
    Date: 2020–04
  15. By: Sangyup Choi; Tim Willems; Seung Yong Yoo
    Abstract: By combining industry-level data on output and prices with monetary policy rates for a panel of 88 countries, this paper analyzes how the effects of monetary policy vary with certain industry characteristics. Next to being interesting in their own right, our results are informative on the importance of various transmission mechanisms (as they are expected to vary systematically with the included characteristics). Rather than relying on standard monetary policy shock identification, we overcome the endogeneity problem by taking a differential approach (interacting our monetary policy measure with industry-level characteristics). Our results suggest that monetary contractions reduce output by more in industries featuring assets that are more difficult to collateralize (as predicted by the balance sheet channel) and in industries more reliant on international trade (as predicted by the exchange rate channel). Consistent with the financial accelerator mechanism, we find that the balance sheet channel becomes stronger during bad times. At the same time, we do not find evidence supporting the traditional interest rate channel of monetary policy; the same goes for the cost channel.
    Keywords: Monetary policy transmission; Industry growth; Financial frictions; Asymmetry in transmissions
    Date: 2022–01–28
  16. By: Timothy Kam; Junsang Lee
    Abstract: We study competitive search in goods markets in a heterogeneous-agent monetary model. The model accounts for three stylized facts connecting inflation to consumption inequality, to price dispersion, and to the speed of monetary payments. With competitive search, individuals’ endogenous probabilities on trading events give rise to a trading-opportunity (extensive-margin) force that works in opposite direction to well-known redistributive (intensive-margin) effect of inflation. This implies a new trade-off in response to long run inflation targets. Welfare falls but liquid-wealth inequality falls and then rises with inflation as an extensive margin of trade dominates the redistributive intensive margin, when inflation is sufficiently high.
    Keywords: Competitive Search, Inflation, Policy Trade-offs, Redistribution, Computational Geometry
    JEL: E0 E4 E5 E6 C6
    Date: 2022–02
  17. By: David Skovmand; Jacob Bjerre Skov
    Abstract: Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Fed Funds, and Eurodollar futures rates as well as spot USD LIBOR and term repo rates. The framework endogenously models basis spreads between each of the benchmark rates and allows for the decomposition of spreads. Modelling the LIBOR-OIS spread as credit and funding-liquidity roll-over risk, we find that the spike in the LIBOR-OIS spread during the onset of COVID-19 was mainly due to credit risk, while on average credit and funding-liquidity risk contribute equally to the spread.
    Date: 2022–01
  18. By: Qin, Weiguang; Bhattarai, Keshab
    Abstract: We find that the monetary policy in the mainland China will underestimate the volatility of major macro variables when it fails to consider the influence of capital flows to and from the Hong Kong RMB offshore market. Analyses of SVAR model reveals that the Hong Kong RMB offshore market affects money market in the mainland China through changes in the financial flows and exchange rates. In the early stage of the implementation of structural monetary policy (SMP) for macroeconomic stability, the cross-border flows of capital occurs due to changes in arbitrage behavior from the Hong Kong RMB offshore market, which affects not only money supply but also expectations of households and firms about actual interest rate and exchange rates that often produce opposite of intended effects in the price and output. Scenario one of SVAR simulations, that ignored the Hong Kong RMB offshore market came with lower volatilities of the target macro variables but the model generated values of variables did not match well to the actual data. Scenario two of the simulation of the same SVAR model including the Hong Kong RMB offshore market, had model values of model variables closely matching to the actual data though with slightly higher volatilities of those variables.
    Keywords: RMB offshore market, monetary policy, macroeconomic volatility, exchange rate
    JEL: E58 E61 O38
    Date: 2022–01–30
  19. By: Byron Botha; Rulof Burger; Kevin Kotz; Neil Rankin; Daan Steenkamp
    Abstract: BigdataforecastingofSouthAfricaninflatio n
    Date: 2022–02–22
  20. By: Klodiana Istrefi; Florens Odendahl; Giulia Sestieri
    Abstract: Using an extensive dataset on public speaking events by ECB and euro area National Central Bank (NCB) officials, we show that communication outside of ECB regular monetary policy meeting days has a significant effect on daily movements in Eonia rates, market-based inflation expectations and sovereign bond rates. The remarks of ECB presidents are most important and market reactions to them are comparable in size to those on ECB meeting days. In addition, ECB presidents’ remarks given ahead of meetings with policy changes have a significant effect on Eonia rates of the same sign as the subsequent policy decision. Our results suggest that communication outside of regular meeting days contain a monetary policy signal and, thus, highlight the importance of this communication when studying the effects of monetary policy.
    Keywords: Monetary Policy, ECB, Communication, Financial Markets, Event Study
    JEL: E03 E50 E61
    Date: 2022
  21. By: Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
    Abstract: This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
    Keywords: Monetary Policy, Foreign Exchange Intervention, Fiscal Policy, Macroprudential Policy, Capital Flow Management, Dynamic Stochastic General Equilibrium Model, Small Open Economy
    Date: 2022–01–28
  22. By: Chengcheng Jia; Jing Cynthia Wu
    Abstract: We study the implications of the Fed’s new policy framework of average inflation targeting (AIT) and its ambiguous communication. The central bank has the incentive to deviate from its announced AIT and implement inflation targeting ex post to maximize social welfare. We show two motives for ambiguous communication about the horizon over which the central bank averages inflation as a result of time inconsistency. First, it is optimal for the central bank to announce different horizons depending on the state of the economy. Second, ambiguous communication helps the central bank gain credibility.
    JEL: E31 E52
    Date: 2022–01
  23. By: PINSHI, Christian P.
    Abstract: This note sparks a debate and a state of play in the age of the digital revolution, on the adoption of central bank digital currencies (CBDCs) for central banks.
    Keywords: central bank digital currencies
    JEL: E58
    Date: 2022–01
  24. 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
  25. By: Allen, David; Mizuno, Hiro
    Abstract: This paper explores the influence of monetary policies, US influences, and other factors affecting stock prices in Japan from the beginning of the 1980s. The data set consists of monthly time series, largely taken from the Federal Bank of St. Louis (FRED) database in the USA. A variety of modelling and statistical techniques are applied which include regression analysis (OLS), cointegration and VECM analysis, plus the application of ARDL analysis and simulations. The results suggest that the adoption of QQE policy by the Japanese monetary authorities led to an upswing in Japanese share prices in the post-GFC period, whereas no such effect was apparent in the pre-GFC period
    Keywords: QQE, Japanese Share Prices,, Cointegration, VECM, ARDL, Simulations.
    JEL: E52 G1 G12
    Date: 2021–12–24
  26. By: Tim Willems; Mr. Jeromin Zettelmeyer
    Abstract: This article surveys the literature on sovereign debt sustainability from its origins in the mid-1980s to the present, focusing on four debates. First, the shift from an “accounting based” view of debt sustainability, evaluated using government borrowing rates, to a “model based” view which uses stochastic discount rates. Second, empirical tests focusing on the relationship between primary balances to debt. Third, debt sustainability in the presence of rollover risk. And fourth, whether government borrowing costs below rates of growth (“r
    Keywords: sovereign debt, debt sustainability, fiscal policy, debt crises, fiscal-monetary interactions, central bank credibility
    Date: 2022–01–28
  27. By: Daniela Della Gatta (Banca d'Italia)
    Abstract: This paper illustrates the state of play of the interest rate benchmark reform process. Overnight rates that can be considered risk-free, such as the €STR in the euro area, have been introduced in the main currency areas. The production of rates with a maturity of more than one day, which can replace traditional benchmarks, will depend on the availability of money market data and the different indexing needs. It is reasonable to expect that several types of benchmarks will coexist in the future; this could also entail a risk of market liquidity fragmentation.
    Keywords: riforma dei tassi benchmark, tassi privi di rischio, tassi a scadenza, clausole di riserva
    JEL: E43 D47 G21 G23
    Date: 2022–02
  28. By: Daan Opschoor (Erasmus University Rotterdam); Michel van der Wel (Erasmus University Rotterdam)
    Abstract: We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield curve expression. The model easily permits the implementation of readily available DNS extensions such as time-varying loadings, integration of macroeconomic variables and time-varying volatility. Using U.S. Treasury data, we provide clear evidence of a smooth tran- sition of the yields entering and leaving the ZLB state. Moreover, we show that the smooth shadow-rate DNS model dominates the baseline DNS model in terms of fitting and forecasting the yield curve, while being competitive with a shadow-rate affine term structure model.
    Keywords: Yield curve, zero lower bound, shadow-rate model, Nelson-Siegel curve
    JEL: E43 E47 C53 C58 G12
  29. By: Rahman, Abdurrahman Arum
    Abstract: Our international monetary system is neither symmetrical nor democratic. Some countries create international payment instruments while others buy them. This gives rise to imperialism. Countries that create international money can benefit at the cost of the world. Countries in the world give up resources and wealth to countries that own international currencies from hundreds of billions of dollars to trillions every year for free. Countries that own international currencies create and regulate the international monetary system for their domestic interests, not for the world's interests. The current international currency system is the greatest empire of the modern age.
    Keywords: International monetary system, money empire, exploitation, dollar, euro,
    JEL: A1 B5 F0
    Date: 2022–01–14
  30. By: Mr. Tanai Khiaonarong; David Humphrey
    Abstract: Cash use in most countries is falling slowly. On the margin, younger adults favor cash substitutes over cash. For older adults it is the reverse. Revealed preference tied to a changing population age structure seems to be the main influence on the demand for cash and why it is falling. Cash use may continue to fall, and card use (the main cash substitute) may fall by more, if CBDC is issued. The extent of this reduction depends on the demand for retail CBDC and the incentives (primarily transaction fees) that can play a determining role in CBDC adoption and use.
    Keywords: Cash, card payments, payment substitution, central bank digital currency
    Date: 2022–02–04
  31. By: Lorenzo Carbonari (Università di Roma “Tor Vergata”, Italy); Fabrizio Mattesini (Università di Roma “Tor Vergata”, Italy; EIEF); Robert J. Waldmann (Università di Roma “Tor Vergata”, Italy)
    Abstract: We study an economy characterized by competitive search and asymmetric information. Money is essential. Buyers decide their cash holdings after observing the contracts posted by firms and experience match-specific preference shocks which remain unknown to sellers. Firms are allowed to post general contracts. In the baseline model with indivisible goods, we show that, when the number of potential buyers is fixed, inflation decreases markups. This, in turn, increases aggregate output and ex ante welfare. When goods are divisible the negative effect of inflation on markups holds for unconstrained agents but is ambiguous for constrained agents. Still, optimal monetary policy implies a positive nominal rate. When there is buyers' free entry, asymmetric information causes a congestion effect that can be corrected by monetary policy.
    Date: 2022–02
  32. By: Daiju Aiba; Sovannroeun Samreth; Sothearoath Oeur; Vanndy Vat
    Abstract: In April 2017, the Cambodian central bank introduced an interest rate cap (IR cap) policy relating to lending by microfinance institutions (MFIs). There was no restriction on lending rates before the policy implementation and many of the MFIs was lending at a rate of more than 18%. Thus, there was some concern about the negative effects the IR cap policy may have on outreach efforts by MFIs. This paper explores the impact of the IR cap on MFIs, by accessing granular data from the credit registry database in Cambodia. We use 6,897,168 individual loans from all regulated financial institutions, including commercial banks, specialized banks, and microfinance institutions in the period from January 2016 to March 2019. We find that both the average size per loan and the probability of requiring collateral increased after the IR cap policy was introduced for MFIs, as small-sized loans and non-collateral loans are typically costly for microfinance institutions to extend. In addition, we found that the borrowers of small-sized loans before the IR cap were likely to be excluded from the formal financial market after the IR cap. Those findings suggest that the IR cap did have an impact on the outreach of financial systems.
    Keywords: Interest Rate Cap, Microfinance, Cambodia, Regulation, Bank Lending
    Date: 2022–01
  33. By: Elie Bouri (School of Business, Lebanese American University, Lebanon); Christina Christou (School of Economics and Management, Open University of Cyprus, 2252, Latsia, Cyprus); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: The returns of cryptocurrencies tend to co-move, with their degree of co-movement being contingent on the (bullish- or bearish-) states. Given this, we use standard factor models and regime-switching factor loadings to forecast the returns of a specific cryptocurrency based on its lagged information and informational contents of 14 other cryptocurrencies, with these 15 together constituting 65% of the market capitalization. Considering top five cryptocurrencies namely, Bitcoin, Ethereum, Ripple, Dogecoin, and Litecoin, we find significant forecastability and evidence that factor models, in general, outperform the benchmark random-walk model, with the regime-switching versions standing out in the majority of the cases.
    Keywords: Cryptocurrencies, Factor Model, Markov-switching, Forecasting
    JEL: C22 C53 G15
    Date: 2022–02
  34. By: Mr. Chris Papageorgiou; Hendre Garbers; D. Filiz Unsal
    Abstract: We provide a multidimensional characterization of monetary policy frameworks across three pillars: Independence and Accountability, Policy and Operational Strategy, and Communications (IAPOC). We construct the IAPOC index by analyzing central banks’ laws and websites for 50 advanced economies, emerging markets, and low-income developing countries, from 2007 to 2018. Due to its scope and granularity, our index provides a holistic view of monetary policy frameworks which goes beyond existing measures of transparency or independence, as well as monetary policy or exchange rate regime classifications. Comparing the IAPOC index across countries and over time, we find that monetary policymaking is varied, fast-changing, and eclectic across the Policy and Operational Strategy and Communications pillars, especially in emerging markets and low-income developing countries.
    Keywords: Monetary Policy, Monetary Policy Regime, Exchange Rate Regime, Central Banks, Central Bank Independence, Central Bank Transparency
    Date: 2022–01–28
  35. By: Jess Cheng; Joseph Torregrossa
    Abstract: Take a close look at something that is widely used by the general public as "money"—a Federal Reserve note, a deposit with a bank, a balance with a nonbank payment company (such as PayPal or Venmo), or perhaps even a cryptocurrency—and ask what it means to use it as a store of value and a medium of exchange. That question is, in essence, a legal one.
    Date: 2022–02–04
  36. By: Katya Delak; Tarik Hansen
    Abstract: The concept of a central bank digital currency (CBDC) has gained traction in recent years, with an increasing number of central banks announcing efforts to explore CBDC use cases and designs. Institutions are in various stages of research and development, with some just beginning their research and others already entering pilot testing or even production, albeit on a limited scale.
    Date: 2022–02–03
  37. By: Antonio Garcia Pascual; José Abad
    Abstract: Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.
    Keywords: Capital Buffers, Basel III, Capital Regulation, Financial Institutions, Macropru
    Date: 2022–01–28
  38. By: Justin Svec (College of the Holy Cross); Daniel L. Tortorice (College of the Holy Cross)
    Abstract: A central bank has preferences that differ from the political authority. While the central bank is independent, i.e. it maximizes its own preferences, households do not know this. Instead, households observe the interest rate choices of the central bank and update their beliefs regarding central bank independence using Bayesian learning. We solve for the optimal interest rate policy in a New-Keynesian model where the central bank considers the effect of its policy decision on the households’ beliefs that it is independent. The model provides a theoretical measure of central bank independence and a mapping from this level of independence to expected future losses for the central bank. Because the central bank suffers large losses when it is not perceived as independent, the central bank may choose a policy that is quite distant from its rational expectations counterpart to bolster the perception of its independence. We show that productivity shocks provide greater scope for the central bank to demonstrate its independence than do demand shocks, leading the central bank to deviate more aggressively from the benchmark rational expectations policy choice for the former shock than for the latter. Finally, varying perceptions of independence over time generate time varying volatility in interest rate policy and macroeconomic outcomes.
    Keywords: Monetary Policy, Central Bank Independence, Learning
    JEL: E52 E58 D83
    Date: 2022–02
  39. By: Dario Pellegrino (Bank of Italy); Marco Molteni (Pembroke College, University of Oxford)
    Abstract: In this paper we describe the establishment and assess the relevance of banking supervision in Italy between 1926 and 1936. This case is particularly interesting from the international perspective, Italy having been the first European country to assign substantial supervision to its central bank, a few years before the 1929 crisis. Notwithstanding insufficient regulation and a light touch concerning the four major mixed banks, we document considerable enforcement of the law, which went beyond the initial provisions, thanks to the rather proactive supervisory approach adopted by the Bank of Italy. We point out a significant impact on the banking system: systematic archival analysis reveals that supervision fostered capital accumulation and mitigated lending concentration. Preliminary evidence suggests that supervision information enhanced effective lending of last resort during the crisis. Our educated guess is that, in the absence of the new supervisory set-up, the severity of the financial turmoil in the early 1930s in Italy would have been much fiercer, especially for small and medium-sized banks.
    Keywords: banking supervision, capital requirements, banking history, lending of last resort
    JEL: N20 N24
    Date: 2021–10
  40. By: Charles Goodhart (LEREPS); Donato Masciandaro (LEREPS); Stefano Ugolini (LEREPS)
    Abstract: We analyse the money-financed fiscal stimulus implemented in Venice during the famine and plague of 1629--31, which was equivalent to a 'net-worth helicopter money' strategy -- a monetary expansion generating losses to the issuer. We argue that the strategy aimed at reconciling the need to subsidize inhabitants suffering from containment policies with the desire to prevent an increase in long-term government debt, but it generated much monetary instability and had to be quickly reversed. This episode highlights the redistributive implications of the design of macroeconomic policies and the role of political economy factors in determining such designs.
    Date: 2022–01
  41. By: Weber, Michael (University of Chicago); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin)
    Abstract: As the pandemic spread across the U.S., disagreement among U.S. households about inflation expectations surged along with the mean perceived and expected level of inflation. Simultaneously, the inflation experienced by households became more dispersed. Using matched micro data on spending of households and their macroeconomic expectations, we study the link between the inflation experienced by households in their daily shopping and their perceived and expected levels of inflation both before and during the pandemic. In normal times, realized inflation barely differs across observable dimensions but low income, low education, and Black households experienced a larger increase in realized inflation than other households did. Dispersion in realized and perceived inflation explains a large share of the rise in dispersion in inflation expectations.
    Keywords: inflation expectations, COVID-19, surveys
    JEL: E02 E03
    Date: 2022–01
  42. By: Jonathan J Adams (Department of Economics, University of Florida); Philip Barrett (International Monetary Fund)
    Abstract: The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations: we run a structural VAR, where the expectation shock is the single dimension in the time series that causes forecasts to depart from those implied by rational expectations. We measure these shocks for inflation expectations, label them ``sentiment shocks", and study their effects on the macroeconomy. Using data on several measures of inflation expectations and other time series for the United States, we find that a positive sentiment shock causes output and interest rates to fall, but barely affects inflation. These results are a puzzle, incompatible with the standard New Keynesian model which predicts inflation and interest rates should increase.
    JEL: D84 E31 E32 E52
    Date: 2022–02
  43. By: Stéphane Dupraz; Hervé Le Bihan; Julien Matheron
    Abstract: How effective make-up strategies are depends heavily on how forward-looking agents are. Workhorse monetary models, which are much forward-looking, find them so effective that they run into the so-called “forward-guidance puzzle”. Models that discount the future further find them much less effective, but imply that agents discount the very perception of future policy rates. This only evaluates make-up strategies when financial markets do not notice them, or deem them non-credible. We amend one leading solution to the forward-guidance puzzle -namely Woodford's finite planning horizons -to the assumption that financial markets have rational expectations on policy rates, and incorporate them into the long-term nominal interest rates faced by all. Agents still have a limited ability to foresee the consequences of monetary policy on output and inflation, making the model still immune to the forward-guidance puzzle. First, we find that make-up strategies that compensate for a past deficit of accommodation after an ELB episode have sizably better stabilization properties than inflation targeting. Second, we find that make-up strategies that always respond to past economic conditions, such as average inflation targeting, do too but that their stabilization benefits over IT can be reduced by the existence of the ELB.
    Keywords: Make-up Strategies, Forward-Guidance Puzzle, Finite Planning Horizons
    JEL: E31 E52 E58
    Date: 2022
  44. By: Gary B. Gorton; Chase P. Ross; Sharon Y. Ross
    Abstract: It is difficult for private agents to produce money that circulates at par with no questions asked. We study two cases of privately-produced money: pre-Civil War U.S. private banknotes and modern stablecoins. Private monies are introduced when there are no better alternatives, but they initially carry an inconvenience yield. Over time, these monies may become more money-like, but they do not always achieve a positive convenience yield. Technology advances and reputation formation pushed private banknotes toward a positive convenience yield. We show that the same forces are at work for stablecoins.
    JEL: E02 E4 E41 E42 E51 G1 G21
    Date: 2022–01
  45. By: PINSHI, Christian P.
    Abstract: This reflection attempts to explain the issue of dollarization in a different and innovative way with new recipes for ideas to understand how dollarization works and slow down its pace. Proceeding by a mathematical reflection of limits, we show that in a period of stability, when the rate of dollarization approaches very closely but is not equal to the total dollarization, all monetary policy interventions limit the rate of dollarization in order to that it does not achieve full dollarization. And when monetary policy interventions aim to de-dollarize the economy, the rate of dollarization becomes equilibrium or natural, so we obtain a natural rate of dollarization
    Keywords: Dollarization, Monetary policy
    JEL: C0 E52 F30
    Date: 2022–01
  46. By: Barnett, William A.; Ghosh, Taniya; Adil, Masudul Hasan
    Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use a modern version of the same linear time-series macroeconometric modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship among real money balances, real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart. Our results are consistent with the large literature on the Barnett critique, which is based on a different methodological tradition that employs microeconometric modeling of integrable consumer demand systems. That literature has never found the demand for monetary services, measured using reputable index number and aggregation theory, to be any more difficult to model or less stable than the demand for any other good or service in the economy.
    Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
    JEL: C23 E41 E52
    Date: 2022–01–03
  47. By: Jean Barthélemy; Eric Mengus; Guillaume Plantin
    Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between a fiscal authority, a monetary authority, and investors in government bonds and reserves. The ''unpleasant monetarist arithmetic'' whereby aggressive fiscal expansion forces the monetary authority to chicken out and inflate away public liabilities may be contained by market forces: Monetary dominance prevails if such fiscal expansion is met with a higher real interest rate on public liabilities, due for example to the crowding out of private investment opportunities. The model delivers empirical implications regarding the joint dynamics of public liabilities and price level, and policy implications regarding the management of central banks' balance sheets.
    Keywords: Fiscal-Monetary Interactions, Game of Chicken
    JEL: E63 E50 E42 E31
    Date: 2021

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