nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒03‒21
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. State Dependent Effects of Monetary Policy: the Refinancing Channel By Martin Eichenbaum; Sergio Rebelo; Arlene Wong
  2. Measuring monetary policy transparency in Uruguay By Cecilia Dassatti; Gerardo Licandro
  3. Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay By Fernanda Cuitiño; Juan Pablo Medina; Laura Zacheo
  4. A Safe Asset Perspective for an Integrated Policy Framework By Markus K. Brunnermeier; Sebastian Merkel; Yuliy Sannikov
  5. Inflation Expectations and Their Formation: Working Paper 2022-03 By Jeffrey Schafer
  6. Robert Triffin, Japan and the quest for Asian Monetary Union By Ivo Maes; Ilaria Pasotti
  7. Ideology and monetary policy: the role of political parties’ stances in the ECB’s parliamentary hearings By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
  8. Post-COVID fiscal rules: a central bank perspective By Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
  9. Central Banks’ responses to the Covid-19 pandemic: The case of the Bank of Central African States By Simplice A. Asongu; Nathanael Ojong; Valentine B. Soumtang
  10. An equilibrium model of the international price system By Mukhin, Dmitry
  11. Monetary Architecture and the Green Transition By Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
  12. Enforcing EU labour law in the context of EU economic and monetary policy By Mélanie Schmitt; Marco Rocca
  13. Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels By Viral V. Acharya; Ryan Banerjee; Matteo Crosignani; Tim Eisert; Renée Spigt
  14. A silver transformation: Chinese monetary integration in times of political disintegration, 1898–1933 By Ma, Debin; Zhao, Liuyan
  15. The Federal Funds Market, Pre- and Post-2008 By Eric T. Swanson
  16. Belief-Dependent Pricing Decisions By Serafín Frache; Rodrigo Lluberas; Javier Turen
  17. Fundamental determinants of exchange rate expectations By Joscha Beckmann; Robert L. Czudaj
  18. Reading Between the Lines : Objective Function Estimation using RBA Communications By Gao, Robert
  19. The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times By Richard K. Crump; Stefano Eusepi; Marc Giannoni; Ayşegül Şahin
  20. A Neural Phillips Curve and a Deep Output Gap By Philippe Goulet Coulombe
  21. Who Can Tell Which Banks Will Fail? By Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
  22. Credit Booms, Financial Crises and Macroprudential Policy By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino

  1. By: Martin Eichenbaum (Northwestern University); Sergio Rebelo (Northwestern University); Arlene Wong (Princeton University)
    Abstract: This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.
    Keywords: monetary policy, state dependency, refinancing
    JEL: E52 G21
    Date: 2020–08
  2. By: Cecilia Dassatti (Banco Central del Uruguay); Gerardo Licandro (Banco Central del Uruguay)
    Abstract: The adoption of inflation targeting regimes has led central banks to devote considerable efforts to improve their transparency. Following this trend, several authors have developed tools to measure and compare the levels of transparency of central banks. This paper seeks to carry out this task for the Central Bank of Uruguay applying two different transparency indices. The first one was designed in the mid 2000s and has been applied in a sample with a significant number of countries. The second index is based on a new approach that seeks to reflect the best practices of the most advanced inflation-forecast targeting regimes.
    Keywords: monetary policy, central bank, transparency
    JEL: E0 E4
    Date: 2021
  3. By: Fernanda Cuitiño (Banco Central del Uruguay); Juan Pablo Medina (Business School, Universidad Adolfo Ibáñez, Chile); Laura Zacheo (Banco Central del Uruguay)
    Abstract: The estimation of exchange rate pass-through (ERPT) is critical for understanding and forecasting the inflation dynamics in open economies. In this work, we estimate a medium scale New-Keynesian model for the Uruguayan economy to analyze the ERPT. We compute the ERPT with the estimated model conditional on specific external shocks and on whether the monetary policy has perfect or imperfect credibility. The results show that the empirical fit is better under imperfect credibility. The estimated degree of imperfect credibility is quite significant and it shows substantial variation across shocks and over time. We find that the ERPT tends to be lower for a shock that has a higher offsetting effect in aggregate demand and when monetary policy is more credible in keeping the inflation target constant. Finally, adding the exchange rate stabilization in the monetary policy rule in the case of Uruguay has a stronger empirical role once we allow for imperfect credibility.
    Keywords: exchange rate pass-through, emerging economy, imperfect credibility, bayesian estimation
    JEL: E12 E58 F31 F41
    Date: 2021
  4. By: Markus K. Brunnermeier (Princeton University); Sebastian Merkel (Princeton University); Yuliy Sannikov (Stanford University)
    Abstract: Borrowing from Brunnermeier and Sannikov (2016, 2019) this policy paper sketches a policy framework for emerging market economies by mapping out the roles and interactions of monetary policy, macroprudential policies, foreign exchange interventions, and capital controls. Safe assets are central in a world in which financial frictions, distribution of risk, and risk premia are important elements. The paper also proposes a global safe asset for a more self-stabilizing global financial architecture.
    Keywords: Safe asset, bubbles, international capital flows, capital controls, monetary policy, macroprudential policy, FX interventions
    JEL: E52 F38
    Date: 2020–05
  5. By: Jeffrey Schafer
    Abstract: This paper reviews theory and evidence on how consumers and firms form their expectations about inflation and how monetary policymakers might influence that process; both of those factors have implications for the Congressional Budget Office's baseline projections and policy analyses. Inflation expectations are important because they affect decisions that determine actual inflation. Surveys of consumers and business managers provide especially useful data for studying the process of forming expectations. Empirical evidence suggests that
    JEL: D83 D84 E17 E31 E37
    Date: 2022–03–15
  6. By: Ivo Maes (Robert Triffin Chair, University of Louvain and Ichec Brussels Management School); Ilaria Pasotti (Consultant at the Intesa Sanpaolo Group Historical Archives)
    Abstract: Especially with the Asian financial crisis of 1997-1998, Asian countries have advocated a profound reform of the international financial architecture. Their proposals focused on two main axes: a reform of the global financial system and stronger regional monetary integration in Asia. There are here significant parallels with the ideas of Robert Triffin (1911-1993). Triffin became famous with trenchant analyses of the vulnerabilities of the international monetary system, especially his book Gold and the Dollar Crisis. Triffin put forward several proposals for reforming the global monetary system, but he also developed proposals for regional monetary integration. These were very much based on his experience with the European Payments Union, and focused on the creation of a (European) Reserve Fund and a (European) currency unit. In this paper we focus on Triffin’s proposals for an Asian payments union in the late 1960s, giving special attention to Japan (in Triffin’s time the biggest Asian economy).
    Keywords: : Triffin, Bretton Woods, international liquidity, regional monetary integration, Asian Payments Union, Japan
    JEL: A11 B22 B31 E30 E50 F02 F32
    Date: 2022–03
  7. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
    Abstract: We investigate whether ideology drives the sentiments of parliamentarians when they speak to the central bank they hold accountable. To this end, we collect textual data on the quarterly hearings of the ECB President before the European Parliament from 1999 to 2019. We apply sentiment analysis to more than 1,900 speeches of individual Members of the European Parliament (MEPs) from 128 parties. We find robust evidence that MEPs’ sentiments toward the ECB are correlated with the ideological stance predominantly on a pro-/anti-European dimension rather than on a left-right dimension. JEL Classification: E02, E52, E58
    Keywords: Central Bank Accountability, Central Bank Independence, Party Ideology, Sentiment Analysis
    Date: 2022–03
  8. By: Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
    Abstract: Regarding a prospective reform of the European Stability and Growth Pact (SGP) it seems rather consensual that a simplified framework should take account of the prevailing macroeconomic context and enhance the balancing of sustainability and stabilisation considerations. This paper provides simulation analysis for the euro area and individual countries with a view to assessing the short- and longer-term budgetary and macroeconomic implications of a move to a two-tier system with an expenditure growth rule as single operational indicator linked to a debt anchor. Compared to the status quo, our analysis suggests that expenditure growth targets which take account of the ECB’s symmetric 2% inflation target can improve the cyclical properties of the framework. Fiscal policy would be tighter when inflation is above the target but looser when inflation is below target, resulting in a better synchronisation of fiscal and monetary policies. Providing additional fiscal accommodation in a low inflation environment would enable monetary policy to operate more effectively especially in the vicinity of the effective lower bound. The link to a longer-term debt anchor at the same time ensures a transition towards the Treaty’s debt reference level. JEL Classification: E63, H50, H60
    Keywords: debt sustainability, European fiscal rules, monetary and fiscal policy interactions
    Date: 2022–03
  9. By: Simplice A. Asongu (Yaounde, Cameroon); Nathanael Ojong (York University, Toronto, Canada); Valentine B. Soumtang (Yaoundé, Cameroon)
    Abstract: This study explores the responses to the COVID-19 pandemic by the Bank of Central African States (BEAC), which is the central bank for countries in the Central African Economic and Monetary Community (CEMAC), that is, Cameroon, Chad, Gabon, Equatorial Guinea, Central African Republic, and the Republic of Congo. While hitherto, BEAC had fundamentally focused on fighting inflation and promoting monetary integration and financial stability in its member states, the COVID-19 pandemic, among other factors, has motivated it to also shift its policies towards targeted credit programmes and more economic growth. This study sheds light on four core aspects: (i) the socio-economic context of the CEMAC region prior to the COVID-19 pandemic, (ii) BEAC as a lender of last resort, (iii) historical, contemporary, and future insights surrounding targeted credit programmes, and (iv), suggestions for the path forward in terms of reforms, with emphasis on inclusive growth and monitoring economic development at the regional level.
    Keywords: Covid-19 pandemic; monetary policy; central bank responses; CEMAC, BEAC
    Date: 2021–08
  10. By: Mukhin, Dmitry
    Abstract: What explains the central role of the dollar in world trade? Will the U.S. currency retain its dominant status in the future? This paper develops a quantitative general equilibrium framework with endogenous currency choice that can address these questions. Complementarities in price setting and input-output linkages across rms generate complementarities in currency choice making exporters coordinate on the same currency of invoicing. The dollar is more likely to play this role because of the large size of the U.S. economy, a widespread peg to the dollar, and the history dependence in currency choice. Calibrated using the world input-output tables and exchange rate moments, the model can successfully replicate the key empirical facts about the use of currencies at the global level, across countries, and over time. According to the counterfactual analysis, the peg to the dollar in other economies ensures that the U.S. currency is unlikely to lose its global status because of the falling U.S. share in the world economy, but can be replaced by the renminbi in case of a negative shock in the U.S. economy. If the peg is abandoned, the world is likely to move to a new equilibrium with multiple regional currencies.
    Keywords: International Economics Section; Cowles Foundation
    JEL: D21 E31 E42 F14 F31 F33
    Date: 2022–02–01
  11. By: Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
    Abstract: How to finance the Green Transition towards net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for a Pigou tax to help markets correct themselves, or via war finance analogies that offer a ‘triad’ of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualisation of endogenous credit money creation, for instance when resorting to loanable funds theory, and disregard the systemic and procedural dimensions of financing the Green Transition. We propose that ‘monetary architecture’, which perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets, offers a more comprehensive framework to conceptualize the systemic and procedural financing challenges. Using the US as an example, we draw implications of a systemic financing view while considering a division of labor between ‘firefighting’ institutions such as the Federal Reserve and the Treasury, and ‘workhorse’ institutions such as off-balance-sheet fiscal agencies, commercial banks, and shadow banks. We argue further that financing the Green Transition must undergo three ideal-typical phases—initial balance sheet expansion, long-term funding, and possibly final contraction—that require diligent macro-financial management to avoid financial instability.
    Date: 2022–02–16
  12. By: Mélanie Schmitt (DRES - Droit, religion, entreprise et société - UNISTRA - Université de Strasbourg - L'europe en mutation : histoire, droit, économie et identités culturelles - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique - CNRS - Centre National de la Recherche Scientifique); Marco Rocca (DRES - Droit, religion, entreprise et société - UNISTRA - Université de Strasbourg - L'europe en mutation : histoire, droit, économie et identités culturelles - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique - CNRS - Centre National de la Recherche Scientifique)
    Date: 2022
  13. By: Viral V. Acharya; Ryan Banerjee; 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 fi rms just above the IG rating cutoff -- enjoyed subsidized bond fi nancing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The bene fiting fi rms used this privilege to fund risky acquisitions and increase market share, exploiting the sluggish adjustment of credit ratings in downgrading after M&A and adversely affecting competitors' employment and investment. Eventually, these fi rms suffered more severe downgrades at the onset of the pandemic.
    JEL: E44 E52 E58 G01 G20
    Date: 2022–02
  14. By: Ma, Debin; Zhao, Liuyan
    Abstract: This article provides the first systematic econometric study on the evolution of Chinese silver exchange and monetary regimes during the period 1898–1933. Using high-quality datasets of monthly and daily prices of silver dollars, we apply the threshold autoregressive models to estimate the silver points between Shanghai and 18 other cities in northern and central China. We find a noticeable improvement in monetary integration between Shanghai and Tianjin from the 1910s, which then spread to other cities in our sample throughout the 1920s and 1930s. We supplement our analysis with new datasets on volumes and costs of silver flows and with an in-depth historical narrative. This article re-evaluates the efficiency of the silver regime and China's economic performance in the Republican era.
    JEL: N15
    Date: 2020–05–01
  15. By: Eric T. Swanson
    Abstract: This chapter provides an overview of the federal funds market and how the equilibrium federal fund rate is determined. I devote particular attention to comparing and contrasting the federal funds market before and after 2008, since there were several dramatic changes around that time that completely changed the market and the way in which the equilibrium federal funds rate is determined. The size of this structural break is arguably as large and important as the period of reserves targeting under Fed Chairman Paul Volcker from 1979–82. Finally, I discuss the relationship between the federal funds rate and other short-term interest rates in the U.S. and the outlook for the federal funds market going forward.
    JEL: E43 E52 E58
    Date: 2022–02
  16. By: Serafín Frache (Universidad de Montevideo, Facultad de Ciencias Empresariales y Economía); Rodrigo Lluberas (Banco Central del Uruguay); Javier Turen (Pontificia Universidad Católica de Chile)
    Abstract: This paper studies the effects of inflation and idiosyncratic cost expectations on firms’ price-adjusting decisions. Evidence of price-settings frictions using micro data has been studied through the lens of both time-dependent and state-dependent models. Using data from a unique survey, we argue that priceadjustment decisions are also belief-dependent. While controlling for time- and state- ependent factors, we find that, for the extensive margin of price-changes, expectations of inflation do not play any role, but firms’ beliefs about their overall costs do. The expectation channel is, however, heterogeneous across firms, driven exclusively by large companies, and operates with a delay. Nonetheless, when looking at firms’ beliefs about the intensive margin of price-changes, besides costs, the relevance of current inflation expectations is recovered. Our evidence supports the presence of price rigidities at the firm level but is also consistent with theories of limited attention.
    Keywords: inflation expectations, cost expectations, firm surveys, price adjustments
    JEL: D22 D84 E31
    Date: 2021
  17. By: Joscha Beckmann (Faculty of Business Administration and Economics, FernUniversitaet in Hagen and Faculty of Economics, University of Greifswald and Kiel Institute for the World Economy); Robert L. Czudaj (Faculty of Mathematics, Computer Science and Statistics, Ludwig-Maximilians-University Munich and Faculty of Economics and Business, Chemnitz University of Technology)
    Abstract: This paper provides a new perspective on the exchange rate disconnect puzzle by referring to the expectations building mechanism in foreign exchange markets. We analyze the role of expectations regarding macroeconomic fundamentals for expected exchange rate changes. In doing so, we assess real-time survey data for 29 economies from 2002 to 2020 and consider expectations regarding GDP growth, inflation, interest rates, and current accounts. Our empirical findings show that fundamentals expectations are more important over the long run compared to the short run. We find that an expected increase in GDP growth relative to the US leads to an expected appreciation of the domestic currency while higher relative inflation expectations lead to an expected depreciation, a finding consistent with purchasing power parity. Our results also indicate that the expectation building process differs systematically across pessimistic and optimistic forecasts with the former paying more attention to expected fundamentals. Finally, we also observe that incorporating expected fundamentals tends to reduce forecast errors over the long run.
    Keywords: Exchange rates, Expectations, Forecast errors, Fundamentals, Survey data
    JEL: F31 F37 G17
    Date: 2022–03
  18. By: Gao, Robert (Monash University)
    Abstract: We use a dictionary based natural language processing approach to quantify the sentiment of RBA communications. This measure of sentiment is then used as a proxy for loss in the estimation of the RBA’s objective function. We find that RBA communications imply a target for average inflation between 2.4% to 2.7% for short run horizons of up to one year ahead, consistent with the RBA’s medium term inflation target band of 2-3%. This result is robust to different forms of communication, forecast horizons, and allowing for asymmetric preferences. We also find that the RBA’s loss improves with rising output growth, commodity prices and stock market returns, as well as an appreciating exchange rate and falling unemployment.
    Keywords: central bank ; natural language processing ; objective function ; Reserve Bank of Australia ; text analysis JEL Classification: E58 ; E5
    Date: 2021
  19. By: Richard K. Crump; Stefano Eusepi; Marc Giannoni; Ayşegül Şahin
    Abstract: We estimate the natural rate of unemployment, often referred to as u*, in the United States using data on labor market flows, short-term and long-term inflation expectations and a forward-looking New-Keynesian Phillips curve for the 1960-2021 period. The natural rate of unemployment was at around 4.5% before the onset of the pandemic and increased to 5.9% by the end of 2021. This pronounced rise was primarily informed by strong wage growth rather than changes in inflation expectations. Despite the rise in the natural rate of unemployment, the secular trend of unemployment continued to fall and stands at around 4.2% reflecting ongoing secular developments which have been pushing down the unemployment rate over the last 30 years. Our model forecasts strong wage growth to moderate only sluggishly continuing to put upward pressure on inflation in the medium-run. We project underlying inflation to remain 0.5 percentage points above its long-run trend by the end of 2023 even if long-run inflation expectations remain well anchored. Given the importance of wage growth for the inflation outlook, we examine detailed micro data on job-filling rates, posted wages for vacant positions, and workers' reservation wages. In particular, we construct a composition-bias free measure of wage growth at the employer-job level using Burning Glass Technologies data and document strong wage growth for both teleworkable and non-teleworkable jobs. Moreover, we find that workers' reservation wages increased substantially after the pandemic. Our empirical analysis suggests that the strong wage growth is likely not a one-time adjustment of additional compensation for jobs that pose health risks to workers but rather reflects a tight labor market accompanied with a changing work-leisure trade-off.
    JEL: D84 E24 E31 E32 J11 J3
    Date: 2022–02
  20. By: Philippe Goulet Coulombe
    Abstract: Many problems plague the estimation of Phillips curves. Among them is the hurdle that the two key components, inflation expectations and the output gap, are both unobserved. Traditional remedies include creating reasonable proxies for the notable absentees or extracting them via some form of assumptions-heavy filtering procedure. I propose an alternative route: a Hemisphere Neural Network (HNN) whose peculiar architecture yields a final layer where components can be interpreted as latent states within a Neural Phillips Curve. There are benefits. First, HNN conducts the supervised estimation of nonlinearities that arise when translating a high-dimensional set of observed regressors into latent states. Second, computations are fast. Third, forecasts are economically interpretable. Fourth, inflation volatility can also be predicted by merely adding a hemisphere to the model. Among other findings, the contribution of real activity to inflation appears severely underestimated in traditional econometric specifications. Also, HNN captures out-of-sample the 2021 upswing in inflation and attributes it first to an abrupt and sizable disanchoring of the expectations component, followed by a wildly positive gap starting from late 2020. HNN's gap unique path comes from dispensing with unemployment and GDP in favor of an amalgam of nonlinearly processed alternative tightness indicators -- some of which are skyrocketing as of early 2022.
    Date: 2022–02
  21. By: Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
    Abstract: We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20% 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 continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
    JEL: G20 G21
    Date: 2022–02
  22. By: Mark Gertler (New York University); Nobuhiro Kiyotaki (Princeton University); Andrea Prestipino (Federal Reserve Board)
    Abstract: We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are “good†booms as well as “bad†booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.
    Keywords: banking crisis, credit booms
    JEL: E00 G21
    Date: 2020–03

This nep-mon issue is ©2022 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.