nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒03‒07
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How Central Bank Mandates Influence Content and Tone of Communication Over Time By Martin T. Bohl; Dimitrios Kanelis; Pierre L. Siklos
  2. Monetary policy and endogenous financial crises By José Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
  3. Monetary Policy Communication: Perspectives from Former Policy Makers at the ECB By Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
  4. Monetary policy expectation errors By Maik Schmeling; Andreas Schrimpf; Sigurd A. M. Steffensen
  5. Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  6. Money markets, collateral and monetary policy By Fiorella De Fiore; Marie Hoerova; Harald Uhlig
  7. A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality By Joel Wagner; Tudor Schlanger; Yang Zhang
  8. Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth By Nittai Bergman; David A. Matsa; Michael Weber
  9. Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms By Andrea Ajello; Nina Boyarchenko; François Gourio; Andrea Tambalotti
  10. Transitioning Monetary Policy By Loretta J. Mester
  11. Zombies on the brink: Evidence from Japan on the reversal of monetary policy effectiveness By Gee Hee Hong; Deniz Igan; Do Lee
  12. Money Demand and Inflation: The relationship between money demand, inflation, and the risk premium By Sakib, S M Nazmuz
  13. The Expected, Perceived, and Realized Inflation of U.S. Households before and during the COVID19 Pandemic By Michael Weber; Yuriy Gorodnichenko; Olivier Coibion
  14. Central bank digital currencies (CBDCs) in Latin America and the Caribbean By Viviana Alfonso C; Steven Kamin; Fabrizio Zampolli
  15. Firms' Inflation Expectations: New Evidence from France By Savignac, Frédérique; Gautier, Erwan; Gorodnichenko, Yuriy; Coibion, Olivier
  16. E-money, Financial Inclusion and Mobile Money Tax in Sub-Saharan African Mobile Networks By Tarna Silue
  17. Taming the tides of capital: Review of capital controls and macroprudential policy in emerging economies By Norring, Anni
  18. MicroVelocity: rethinking the Velocity of Money for digital currencies By Carlo Campajola; Marco D'Errico; Claudio J. Tessone
  19. Do redemptions increase as money market funds approach regulatory liquidity thresholds? By Dunne, Peter G.; Giuliana, Raffaele
  20. On the Propagation Mechanism of International Real Interest Rate Spillovers: Evidence from More than 200 Years of Data By Juncal Cunado; David Gabauer; Rangan Gupta
  21. Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model By Ina Hajdini
  22. Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels By Viral V Acharya; Ryan Niladri; Matteo Crosignani; Tim Eisert; Renée Spigt
  23. Inflation Convergence over Time: Sector-Level Evidence within Europe By Hakan Yilmazkuday
  24. Can cryptocurrency tap the Indian market? Role of having robust monetary and fiscal policies By Palit, Biswajit; Mukherjee, Sakya
  25. Distribution of money on connected graphs with multiple banks By Nicolas Lanchier; Stephanie Reed
  26. Falling Rates and Rising Superstars By Thomas Kroen; Ernest Liu; Atif Mian; Amir Sufi
  27. Term premium dynamics and its determinants: the Mexican case By Ana Aguilar; María Diego-Fernández; Rocio Elizondo; Jessica Roldán-Peña
  28. Globalisation and financialisation in the Netherlands, 1995 - 2020 By Muysken, Joan; Meijers, Huub
  29. Detecting and Measuring Financial Cycles in Heterogeneous Agents Models: An Empirical Analysis By Filippo Gusella
  30. The Emerging Autonomy–Stability Choice for Stablecoins By Maarten van Oordt
  31. Who Can Tell Which Banks Will Fail? By Kristian Blickle; Markus Brunnermeier; Stephan Luck
  32. Politics, Institutions and Tax Revenue Mobilization in West African Economic and Monetary Union (WAEMU) Countries By Yawovi Mawussé Isaac Amedanou

  1. By: Martin T. Bohl; Dimitrios Kanelis; Pierre L. Siklos
    Abstract: In this paper, we analyze the relevance of central bank mandates on the content and tone of communication via speeches. Comparing this communication channel for mandate-related objectives between the Federal Reserve and the European Central Bank reveals similarities before the Great Financial Crisis, while notable differences emerge afterward. Furthermore, we propose a study design to examine how hawkish the tone of speeches becomes in light of current versus expected macroeconomic developments. We find that, since the GFC, expectations of unemployment drive the tone of FED speeches while inflation expectations influence the tone of ECB speeches.
    Keywords: ECB, Expectations, FED, Inflation, Central Bank Mandates, Speeches, Structural Topic Model, Unemployment
    JEL: E50 E52 E58
    Date: 2022–02
  2. By: José Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: financial crisis, monetary policy.
    JEL: E1 E3 E6 G01
    Date: 2022–01
  3. By: Ehrmann, Michael (European Central Bank and CEPR); Holton, Sarah (European Central Bank); Kedan, Danielle (European Central Bank); Phelan, Gillian (Central Bank of Ireland)
    Abstract: This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey.
    Keywords: monetary policy, central bank communication, survey
    JEL: E52 E58
    Date: 2022–01
  4. By: Maik Schmeling; Andreas Schrimpf; Sigurd A. M. Steffensen
    Abstract: How are financial markets pricing the monetary policy outlook? We use survey expectations to decompose excess returns on money market instruments into term premia and expectation errors. We find excess returns to be driven primarily by expectation errors, whereas term premia are negligible. Our findings point to challenges faced by investors in learning about the Federal Reserve's response to large, but infrequent, negative shocks in real-time. Rather than reflecting risk compensation, excess returns stem from investors underestimating by how much the central bank has eased in response to such rare shocks. We document similar results in an international sample.
    Keywords: expectation formation, monetary policy, federal funds futures, overnight index swaps, uncertainty.
    JEL: E43 E44 G12 G15
    Date: 2022–01
  5. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels.
    Keywords: Capital controls; macroprudential and monetary policy; carry trade; credit supply; risk-taking
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2022–02
  6. By: Fiorella De Fiore; Marie Hoerova; Harald Uhlig
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: money markets, collateral, monetary policy, balance sheet policies.
    JEL: E44 E52 E58
    Date: 2022–02
  7. By: Joel Wagner; Tudor Schlanger; Yang Zhang
    Abstract: We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative m2netary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E3 E4 E58
    Date: 2022–02
  8. By: Nittai Bergman; David A. Matsa; Michael Weber
    Abstract: This paper analyzes the heterogeneous effects of monetary policy on workers with differing levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show that the employment of populations with lower labor force attachment—Blacks, high school dropouts, and women—is more responsive to expansionary monetary policy in tighter labor markets. The effect builds up over time and is long lasting. We develop a New Keynesian model with heterogeneous workers that rationalizes these results. The model shows that expansionary monetary shocks lead to larger increases in the employment of less attached workers when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that, by tightening labor markets, the Federal Reserve's recent move from a strict to an average inflation targeting framework especially benefits workers with lower labor force attachment.
    JEL: E12 E24 E31 E43 E52 E58 J24
    Date: 2022–01
  9. By: Andrea Ajello; Nina Boyarchenko; François Gourio; Andrea Tambalotti
    Abstract: This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit provision, lowers asset prices, and depresses economic activity and inflation. Finally, monetary policy may affect the buildup of vulnerabilities, but the sign of the impact along some of its transmission channels is theoretically ambiguous and may vary with the state of the economy.
    Keywords: Monetary policy; Asset prices; Financial stability; Financial crises; Credit; Leverage; Liquidity
    JEL: E44 E52 E58 G20
    Date: 2022–02–15
  10. By: Loretta J. Mester
    Abstract: This year will be one of transition for monetary policy. We will be transitioning away from the extraordinarily accommodative monetary policy that was needed earlier in the pandemic and recalibrating policy to today’s economic challenges. The FOMC is taking steps to begin that process. Our main policy tool is the federal funds rate. Since March 2020, the FOMC has maintained the target range of the fed funds rate at 0 to 1/4 percent to support the economy. At our January meeting, the Committee announced that it will soon be appropriate to raise the target range.
    Keywords: Monetary Policy
    Date: 2022–02–17
  11. By: Gee Hee Hong; Deniz Igan; Do Lee
    Abstract: How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bankfirm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.
    Keywords: transmission of unconventional monetary policy, quantitative easing, reversal rate, zombie firms, corporate balance sheet, term premium, corporate investment
    JEL: E2 E5 G3
    Date: 2022–01
  12. By: Sakib, S M Nazmuz
    Abstract: In varied economics laws, inflation and interest rates are a standard reference of the economy. to place it merely, once interest rates fall, a lot of people and establishments will borrow extra money from banks and alternative lenders. Rising and rising interest rates push customers into saving mode as a result of the next come on savings. This leaves customers with less financial gain to pay that slows the economy and, as a result, lowers inflation. This relationship shapes up to date financial policies associated is that the most powerful consider the direction of an economy. this suggests that variable interest rates and inflation have a linear combination which will be shapely as economic potency.
    Date: 2021–10–31
  13. By: Michael Weber; Yuriy Gorodnichenko; Olivier Coibion
    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.
    JEL: E2 E3
    Date: 2022–01
  14. By: Viviana Alfonso C; Steven Kamin; Fabrizio Zampolli
    Abstract: The pros and cons of CBDCs have been examined in numerous writings. However, much less research has focused on the benefits, costs and implementation issues of CBDCs in specific economies or regions. This paper attempts to fill that gap for the Latin American and Caribbean (LAC) economies. It first examines the views of central banks in the region toward CBDCs, drawing on their responses to a survey conducted by the BIS in late 2020 and early 2021. Second, it examines whether the engagement of LAC central banks with CBDCs can be explained by the structural characteristics of their economies. Third, it reviews the long list of potential benefits, costs and risks of CBDCs, focusing on their relevance to the LAC economies. Finally, the paper reviews the design choices that central banks face and the actual choices made by a number of central banks in the region.
    Keywords: central bank digital currency, CBDC, payment systems, central banking, digital currency
    JEL: E42 E51 F31 G21 G28 O32 O38
    Date: 2022–01
  15. By: Savignac, Frédérique (Banque de France); Gautier, Erwan (Banque de France); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin)
    Abstract: Using a new survey of firms' inflation expectations in France, we provide novel evidence about the measurement and formation of inflation expectations on the part of firms. First, French firms report inflation expectations with a smaller, but still positive, bias than households and display less disagreement. Second, we characterize the extent and manner in which the wording of questions matters for the measurement of firms' inflation expectations. Third, we document whether and how the position of the respondent within the firm affects the provided responses. Fourth, because our survey measures firms' expectations about aggregate and firmlevel wage growth along with their inflation expectations, we are able to show that expectations about wages are even more condensed than firms' inflation expectations and almost completely uncorrelated with them, indicating that firms perceive little link between price and wage inflation. Finally, an experimental treatment indicates that an exogenous change in firms' inflation expectations has no effect on their aggregate wage expectations.
    Keywords: expectations, rational inattention, surveys, firms
    JEL: E2 E3 E4
    Date: 2022–02
  16. By: Tarna Silue (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: E-money and financial inclusion are both development challenges for developing countries, the former contributing to improving tax mobilization and the latter to achieving particular sustainable development objectives. However, one of the central financial inclusion and e-money services providers is mobile network operators using mobile money. The latter is subject to numerous taxes that can affect their operations. The paper studies the incidence of the new mobile money excise duty in the mobile networks sector on the adoption of electronic money and the advancement of financial inclusion through digital services in sub-Saharan countries. It appears that the introduction of the tax leads to an increase in user fees, which has a positive impact on demand for cash, and it is only in the presence of the latter that MM reduces the demand for cash for studied countries. In addition, the study assumes that tax administrations in these countries would raise more revenue without this excise because the tax is not conducive to the full adoption of e-money.
    Keywords: Financial inclusion,Mobile money,Tax incidence
    Date: 2021–07
  17. By: Norring, Anni
    Abstract: This paper gives an overview on the use of macroprudential policy measures (MPMs) and capital flow management measures (CFMs) by emerging economies, and reviews literature on the effectiveness of these measures in containing the effects of large and volatile capital flows. The main findings of the paper are the following: First, major EMEs tend to use both MPMs and CFMs more than AEs. Second, the empirical evidence on the effectiveness of CFMs remains mixed. Third, there is indicative evidence that MPMs can contain the effects of capital flow volatility. Lastly, there is still little research into the interaction of CFMs and MPMs.
    Keywords: capital flows,emerging economies,CFMs,MPMs
    JEL: F32 F33 F38 F42
    Date: 2022
  18. By: Carlo Campajola; Marco D'Errico; Claudio J. Tessone
    Abstract: We propose a novel framework to analyse the velocity of money in terms of the contribution (MicroVelocity) of each individual agent, and to uncover the distributional determinants of aggregate velocity. Leveraging on complete publicly available transactions data stored in blockchains from four cryptocurrencies, we empirically find that MicroVelocity i) is very heterogeneously distributed and ii) strongly correlates with agents' wealth. We further document the emergence of high-velocity intermediaries, thereby challenging the idea that these systems are fully decentralised. Further, our framework and results provide policy insights for the development and analysis of digital currencies.
    Date: 2022–01
  19. By: Dunne, Peter G. (Central Bank of Ireland); Giuliana, Raffaele (Central Bank of Ireland)
    Abstract: TRegulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress.
    Keywords: Money market funds, Liquidity limits
    JEL: G01 G15 G23 G28 G18 G20 F30
    Date: 2022–01
  20. By: Juncal Cunado (University of Navarra, School of Economics, Pamplona, Spain); David Gabauer (Data Analysis Systems, Software Competence Center Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: This paper analyzes the real interest rate transmission mechanism across the United States, Japan, France, Germany, Holland, Italy, Spain and the United Kingdom during a period of more than 200 years. Based on a time-varying parameter vector autoregressive (TVP-VAR) connectedness methodology, the empirical results suggest that the magnitude of these international spillovers ranges between 30% and 75% across the sample period. Furthermore, it is shown that international interest rate spillovers increase during crisis periods, such as the two World Wars, the Great Depression of 1929, the 1980 and 1990 recessions, and the Great Financial Crisis of 2009. More interestingly, our findings illustrate the position of each of these eight countries as net transmitters or receivers of monetary policy shocks over time. Our analysis contributes to the debate on whether the conduct of monetary policy in a country should consider its international spillovers.
    Keywords: TVP-VAR, dynamic connectedness, extended joint connectedness, real interest rate dynamics
    JEL: C32 C52 E52
    Date: 2022–02
  21. By: Ina Hajdini
    Abstract: The paper considers a New Keynesian framework in which agents form expectations based on a combination of mis-specified forecasts and myopia. The proposed expectations formation process is found to be consistent with all three empirical facts on consensus inflation forecasts, namely, that forecasters under-react to ex-ante forecast revisions, that forecasters over-react to recent events, and that the response of forecast errors to a shock initially under-shoots but then over-shoots. The paper then derives the general equilibrium solution consistent with the proposed expectations formation process and estimates the model with likelihood-based Bayesian methods, yielding three novel results: (i) The data strongly prefer the combination of autoregressive mis-specified forecasting rules and myopia over other alternatives; (ii) The best fitting expectations formation process for both households and firms is characterized by high degrees of myopia and simple AR(1) forecasting rules; (iii) Frictions such as habit in consumption, which are typically necessary for models with Full-information Rational Expectations, are significantly less important, because the proposed expectations generate substantial internal persistence and amplification to exogenous shocks. Simulated inflation expectations data from the estimated general equilibrium model reflect the three empirical facts on forecasting data.
    Keywords: Myopia; Survey of Professional Forecasters; Bayesian Estimation; Internal Propagation
    JEL: C11 C53 D84 E13 E30 E50 E70 E52
    Date: 2022–02–16
  22. By: Viral V Acharya; Ryan Niladri; Matteo Crosignani; Tim Eisert; Renée Spigt
    Abstract: We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels – risky firms just above the IG rating cutoff – enjoyed subsidised bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefiting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
    Keywords: corporate bond market, investment-grade bonds, large-scale asset purchases (LSAP), credit ratings, credit ratings inflation.
    JEL: E31 E44 G21
    Date: 2022–02
  23. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates inflation convergence among European countries by using sector-level data for the period between 1997:M1 and 2019:M12. Panel unit root tests at the country-sector level are conducted by using moving windows, which is useful for analyzing changes in inflation convergence and the corresponding speed of convergence over time. The results suggest that there is evidence for inflation convergence for the majority of sectors within Europe, although certain countries have experienced disruptions, especially during the 2008 financial crisis. Regarding the speed of inflation convergence, the average half-life across European countries decreased from about 15 months to about 8 months during the sample period. Important sector-level implications follow for European Union (EU) candidate countries and non-euro EU member countries in regard to the Maastricht Treaty.
    Keywords: Inflation Convergence, Half-Life, Sector-Level Analysis, European Union, Euro Area
    JEL: C32 E31 E58 F45
    Date: 2022–02
  24. By: Palit, Biswajit; Mukherjee, Sakya
    Abstract: The growing debate and discussions about legalizing digital currency- raises a significant question does the market have the withstanding power to include people from all segments of society for its usage. In such a nexus, India, when compared to its Asian counterparts is endowed with a booming crypto industry. However, due to many macro-economic and regulatory reasons which come parallel with the crypto trade, the Government of India is taking cognizance of regulating and rationing cryptocurrency trade. Cryptocurrency not only has prospects but at the very moment is enveloped with lots of apprehensions. Countries around the world are using blockchain technology to manoeuvre their development, coupled with swift payment modus operandi, low transaction fees absence of a mediator during transactions make the brighter side of this rapid digital currency. At the same time, unlike other currencies, cryptos are famously detached from any central banks or financial institutions and thereby received a completely decentralized status. On one side, this can free the investors from being beholden by the institution but on the flip side, there arise legal complications. Exposure to too much volatility and severe cases of fraudulent activities are prone to make investors apprehensive of this practice. We find, having a robust financial inclusion system, backed by proper monetary and fiscal policies is one of the necessary conditions to ensure that cryptocurrency taps the Indian market. By dissecting market phases into Accumulation, Pure Buy, Distribution and Pure Sell, we employ Robust Regression to test our proposition. Therefore, for crypto to finely blend in the Indian market and cause endogenous growth, the financial backbone of the economy needs to have a tremendous withstanding potential which comes when the country has vigorous financial inclusions and institutions.
    Keywords: Cryptocurrency, Regulatory Measures, Financial Inclusion.
    JEL: E2 E4 G1
    Date: 2022–02–05
  25. By: Nicolas Lanchier; Stephanie Reed
    Abstract: This paper studies an interacting particle system of interest in econophysics inspired from a model introduced in the physics literature. The original model consists of the customers of a single bank characterized by their capital, and the discrete-time dynamics consists of monetary transactions in which a random individual $x$ gives one coin to another random individual $y$, the transaction being canceled when $x$ is in debt and there is no more coins to borrow from the bank. Using a combination of numerical simulations and heuristic arguments, physicists conjectured that the distribution of money (the distribution of the number of coins owned by a given individual) at equilibrium converges to an asymmetric Laplace distribution in the large population/temperature limit. In this paper, we prove and extend this conjecture to a more general model including multiple banks and interactions among customers across banks. More importantly, our model assumes that customers are located on a general undirected connected graph (as opposed to the complete graph in the original model) where neighbors are interpreted as business partners, and transactions occur along the edges, thus modeling the flow of money across a social network. We show the convergence to the asymmetric Laplace distribution in the large population/temperature limit for any graph, thus proving and extending the conjecture from the physicists, and derive an exact expression of the distribution of money for all population sizes and money temperatures.
    Date: 2022–01
  26. By: Thomas Kroen (Princeton Unviersity); Ernest Liu (Princeton University); Atif Mian (Princeton University, NBER); Amir Sufi (University of Chicago, NBER)
    Abstract: Do low interest rates contribute to the rise in market concentration? Using data on firm financials and high frequency monetary policy shocks, we find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low. Falling rates raise the valuation of industry leaders relative to industry followers and this effect snowballs as the interest rate approaches zero. There are multiple channels through which falling rates disproportionately benefit industry leaders: (i) the cost of borrowing falls more for industry leaders, (ii) industry leaders are able to raise more debt, increase leverage, and buyback more shares, and (iii) capital investment and acquisitions increase more for industry leaders. All three of these effects also snowball as the interest rate approaches zero. The findings provide empirical support to the idea that extremely low interest rates and the rise of superstar firms are connected.
    Keywords: interest rates
    JEL: E43
    Date: 2021–10
  27. By: Ana Aguilar; María Diego-Fernández; Rocio Elizondo; Jessica Roldán-Peña
    Abstract: We estimate the term premium implicit in 10-year Mexican government bonds from 2004 to 2019, and analyze the main determinants explaining its dynamics. To do so, we decompose the long-term interest rate into its two components: the expected shortterm interest rate and the term premium. The first component is obtained using different methodologies, two affine models and data on interest rate swaps. The second component is computed as the difference between long-term interest rates and such short-term rate. The Mexican term premium is represented by the average of the three estimations. We find that the Mexican term premium increased considerably during three episodes compared to the entire dynamics of said premium: i) the Global Financial Crisis of 2008; ii) the Taper Tantrum of 2013; and iii) the U.S. presidential election of 2016. In contrast, we find that the Mexican term premium decreased, to historically low levels, during the U.S. Quantitative Easing and Operation Twist programs. Additionally, in order to identify the main determinants that explain the behavior of this premium, we run a time varying parameters regression. In this analysis, we find that the main determinants that explain the dynamics of the premium are the compensation for FX risk (as a proxy of inflationary risk premium), the real compensation, and the U.S. term premium (as a global factor).
    Keywords: term premium, short-term interest rate expectation, affine model.
    JEL: G12 E43 C12 C53
    Date: 2022–01
  28. By: Muysken, Joan (UNU-MERIT, SBE Maastricht University, and CofFEE-Europe); Meijers, Huub (UNU-MERIT, SBE Maastricht University)
    Abstract: The Dutch economy is a small open economy. Due to its persistent large current account surplus, the Dutch net foreign assets have been increasing over time. The financial sector is dominated by special purpose vehicles created for tax reasons. The financial assets and liabilities of these vehicles are issued or held abroad, amounting to around 500 per cent of GDP. The remaining part of the financial sector has almost doubled in size relative to GDP over the past 25 years. While the growth of the banking sector stagnated since the financial crisis, the financial sector continued to grow because of the presence of a funded pension system. We analyse these developments using insights from stock flow consistent models for the Dutch economy that we have developed earlier. This analysis also enables us to highlight the role monetary policy played in facilitating and stimulating the growth of financialisation.
    Keywords: globalisation, financialisation, quantitative easing, stock-flow consistent modelling
    JEL: E44 B5 E6 F45 G21 G32
    Date: 2022–02–17
  29. By: Filippo Gusella
    Abstract: This paper proposes a macroeconometric analysis to depict and measure possible financial cycles that emerge due to the dynamic interaction between heterogeneous market participants. We consider 2-type heterogeneous speculative agents: Trend followers tend to follow the price trend while contrarians go against the wind. As agents' beliefs are unobserved variables, we construct a state-space model where heuristics are considered as unobserved state components and from which the conditions for endogenous cycles can be mathematically derived and empirically tested. Further, we specifically measure the length of endogenous financial cycles. The model is estimated using the equity price index for the 1960–2020 period for the UK, France, Germany, and the USA. We find empirical evidence of endogenous financial cycles for all four countries, with the highest frequencies in the USA and the UK.
    Keywords: Heterogeneous Agent Models, Heterogeneous Expectations, Endogenous Cycles, State Space Model, Period of Cycles
    JEL: C13 C32 G10 G12 E32
    Date: 2022
  30. By: Maarten van Oordt (Vrije Universiteit Amsterdam)
    Abstract: Lawmakers have called for better stablecoin regulation, but authorities tend to have little control over the global operators of distributed ledgers that process stablecoin transactions. This chapter illustrates how peg deviations may occur when the issuer of a fiat-backed stablecoin loses its access to the traditional payment system of the jurisdiction that issues the relevant fiat currency. The need for reliable access to the traditional payment system in order to maintain a stable peg provides an important foothold for regulators to exercise control over fiat-backed stablecoins. Conditional upon regulators having little control over the operators of some distributed ledgers, an autonomy–stability choice may emerge where users of stablecoins ultimately face a choice between regulated stablecoins with a stable value but little autonomy and alternative stablecoin arrangements with more autonomy but a less stable value.
    Keywords: Stablecoins, Cryptocurrency, Exchange rate, Distributed ledgers, Regulation
    JEL: E42 G23 G28
    Date: 2022–02–15
  31. By: Kristian Blickle (Federal Reserve Bank of New York); Markus Brunnermeier (Princeton University); Stephan Luck (Federal Reserve Bank of New York)
    Abstract: We use the German Crisis of 1931, one of the largest bank runs in financial history, to study how depositors behave in the absence of deposit insurance. We find that banks lose on average around 25% of their overall deposit funding during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but it continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. We argue that since regular depositors appear uninformed it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing "discipline" via short-term funding.
    Keywords: financial crises, banks, Germany
    JEL: G01 G21 N20 N24
    Date: 2021–12
  32. By: Yawovi Mawussé Isaac Amedanou (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: This paper argues that the main determinant of differences in tax revenue collection across countries are differences in political regimes and institutions. The evidence based on the 8 members States of West African Economic and Monetary Union (WAEMU) over the period 90-2017, clearly supports that tax collection leads to better economic institutions and more democratic political system. Thus, handle the problem of tax collection will entail a reform of these institutions and a democratization of the political regimes. Institutions, political regimes, and democracy significantly increase tax collection while autocracy reduces it. The findings turn out to be robust accounting for the potential endogeneity of various institutions and aid intensity through 2SLS estimates.
    Keywords: Political regime,Democracy,Autocracy,Institutions,Tax revenue,WAEMU
    Date: 2021–06

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