nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒05‒02
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Political Shocks and Inflation Expectations: Evidence from the 2022 Russian Invasion of Ukraine By Lena Dräger; Klaus Gründler; Niklas Potrafke
  2. Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth By Nittai K. Bergman; David Matsa; Michael Weber; Michael Weber
  3. A Reassessment of Monetary Policy Surprises and High-Frequency Identification By Michael D. Bauer; Eric T. Swanson
  4. Pandemic recession and helicopter money: Venice, 1629-1631 By Masciandaro, Donato; Goodhart, Charles; Ugolini, Stefano
  5. A benefit of monetary policy response to inequality By Kengo NUTAHARA
  6. The dear old holy Roman realm, how does it hold together? Monetary policies, cross-cutting cleavages and political cohesion in the age of Reformation By Volckart, Oliver
  7. Is the Impact of Digitization on Domestic Inflation Non-Linear? The Case of Emerging Markets By Emara, Noha; Zecheru, Daniela
  8. Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in China” By Franklin Allen; Xian Gu; Julapa Jagtiani
  9. Independently green? An integrated strategy for a transformative ECB By Klüh, Ulrich; Urban, Janina
  10. Credible Forward Guidance By Taisuke Nakata; Takeki Sunakawa
  11. Monetary Policy in a Model of Growth By Albert Queraltó
  12. Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment By Dikau, Simon; Volz, Ulrich
  13. Estimating Treatment Effects of Monetary Policies and Macro-prudential Policies: From the Perspectives of Macro-economic Policy Evaluation By Zeqin Liu; Zongwu Cai; Ying Fang
  14. Review of the Fiscal Theory of the Price Level By Hidekazu Niwa
  15. The Incredible Taylor Principle By Pablo Andrés Neumeyer; Juan Pablo Nicolini
  16. Network structure and fragmentation of the Argentinean interbank markets By Federico Forte; Pedro Elosegui; Gabriel Montes-Rojas
  17. The Fed’s Balance Sheet Runoff and the ON RRP Facility By Marco Cipriani; James A. Clouse; Lorie Logan; Antoine Martin; Will Riordan
  18. What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020 By Niko Hauzenberger; Daniel Kaufmann; Rebecca Stuart; Cédric Tille
  19. Is Trend Inflation at Risk of Becoming Unanchored? The Role of Inflation Expectations By Danilo Cascaldi-Garcia; J. David López-Salido; Francesca Loria
  20. What Do the Data Tell Us about Inflation Expectations? By Francesco D'Acunto; Ulrike M. Malmendier; Michael Weber; Michael Weber
  21. Hysteresis, endogenous growth, and monetary policy By Sebastián Amador
  22. Unconventional Monetary Policy in the Euro Area. Impacts on Loans, Employment, and Investment By António Afonso; Francisco Gomes Pereira
  23. (Don't Fear) The Yield Curve, Reprise By Eric C. Engstrom; Steven A. Sharpe
  24. From Low to High Inflation: Implications for Emerging Market and Developing Economies By Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
  25. Monetary policy and the racial wage gap By Edmond Berisha; Ram Sewak Dubey; Eric Olson
  26. Nonbank Finance and Monetary Policy Transmission in Asia By Beirne, John; Renzhi, Nuobu; Volz, Ulrich
  27. Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect By Ricardo J. Caballero; Alp Simsek
  28. Investor Base and Prime Money Market Fund Behavior By Lucas Epstein; Lei Li
  29. Optimal Monetary Policy Rules in the Fiscal Theory of the Price Level By Boris Chafwehé; Charles de Beauffort; Rigas Oikonomou
  30. The case for a cautiously optimistic outlook for US inflation By David Reifschneider; David Wilcox
  31. The Problems of Inflation Targeting Originate in the Monetary Theory of Knut Wicksell By Jonung, Lars
  32. The Money Multiplier and Other Measures of Financial Sector Performance By Zinn, Jesse Aaron
  33. How Money Relates to Value? An Empirical Examination on Gold, Silver and Bitcoin By José Alves; João Quental Gonçalves
  34. The Fed’s Balance Sheet Runoff: The Role of Levered NBFIs and Households By Marco Cipriani; James A. Clouse; Lorie Logan; Antoine Martin; Will Riordan

  1. By: Lena Dräger; Klaus Gründler; Niklas Potrafke
    Abstract: How do global political shocks influence individuals’ expectations about economic outcomes? We run a unique survey on inflation expectations among 145 tenured economics professors in Germany and exploit the 2022 Russian invasion in Ukraine as a natural experiment to identify the effect of a global political shock on expectations about national inflation rates. We find that the Russian invasion increased short-run inflation expectations for 2022 by 0.75 percentage points. Treatment effects are smaller regarding mid-term expectations for 2023 (0.47 percentage points) and are close to zero for longer periods. Text analysis of open questions shows that experts increase their inflation expectations because they expect supply-side effects to become increasingly important after the invasion. Moreover, experts in the treatment group are less likely to favour an immediate reaction of monetary policy to the increased inflation, which gives further evidence of the shock being interpreted primarily as a supply-side shock.
    Keywords: inflation expectations, belief formation, natural experiment, 2022 Russian invasion of Ukraine, survey, economic experts
    JEL: E31 E71 D74 D84
    Date: 2022
  2. By: Nittai K. Bergman; David Matsa; Michael Weber; 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.
    Keywords: monetary policy, labor markets, heterogeneous agents, federal reserve
    JEL: E12 E24 E31 E43 E52 E58 J24
    Date: 2022
  3. By: Michael D. Bauer; Eric T. Swanson
    Abstract: High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the “Fed response to news” channel of Bauer and Swanson (2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.
    Keywords: FOMC, policy rule, monetary transmission, SVAR, external instruments
    JEL: E43 E52 E58
    Date: 2022
  4. By: Masciandaro, Donato; Goodhart, Charles; Ugolini, Stefano
    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.
    Keywords: helicopter money; monetary policy; pandemic; Venice 1629-31
    JEL: F3 G3 N0
    Date: 2022–01–11
  5. By: Kengo NUTAHARA
    Abstract: The main objective of this paper is to investigate a monetary policy response to inequality in a Two-Agent New Keynesian (TANK) model with hand-to-mouth households. I derive the analytical condition for equilibrium determinacy and show that a monetary policy response to inequality is helpful in achieving equilibrium de terminacy. On the other hand, the impulse responses to structural shocks show that a monetary policy response to inequality does not necessarily reduce the volatilities of both inflation and output although it mitigates the volatility of inequality.
    Keywords: Inequality; monetary policy; TANK; hand-to-mouth; equilibrium in determinacy JEL classifications: E25; E31; E32; E52; E58
    Date: 2022–04
  6. By: Volckart, Oliver
    Abstract: Research has rejected Leopold von Ranke’s hypothesis that the Reformation emasculated the Holy Roman Empire and thwarted the emergence of a German nation state for centuries. However, current explanations of the Empire’s cohesion that emphasize the effects of outside pressure or political rituals are not entirely satisfactory. This article contributes to a fuller explanation by examining a factor that so far has been overlooked: monetary policies. Monetary conditions within the Empire encouraged its members to cooperate with each other and with the emperor. Moreover, cross-cutting cleavages forced actors on different sides of the confessional divide to frame coherent and fact-oriented monetary-policy arguments. This helped generate trust among the estates involved in the discussions about a common currency between the 1520s and the 1550s and contributed to the success of the negotiations. Monetary policies thus helped bridge the religious divide that had opened within the Empire, and they therefore contributed to its political cohesion.
    Keywords: Holy Roman Empire; Reformation; political cohesion; monetary policies
    JEL: N0
    Date: 2020–09–01
  7. By: Emara, Noha; Zecheru, Daniela
    Abstract: The impact of major macroeconomic factors on domestic inflation has long been theorized and analyzed by economists. Nevertheless, the literature that studies the impact of digitization as an important determinant for lower and more stable inflation in both advanced economies and emerging markets is very thin. In this paper, we use panel data from the World Bank World Development Indicators and the Digital Ecosystem Development Index developed by Katz and Callorda (2018), on a sample of 54 advanced economies and emerging markets over the period 2004-2018. Starting from a traditional Phillips Curve with inflation expectations and output gap, we estimate a System Generalized Method of Moments (GMM) panel model. In our estimation of the model, we find a negative statistically significant non-linear (quadratic) relationship between the domestic inflation rate and the digitization index, with a definite cutoff point. This result supports the hypothesis that digitization may initially lower inflation, however, once digitization reaches its cutoff level further improvement in digitization leads to an increase in the rate of inflation. We subsequently re-estimate the main model using eight specific digitization pillars for infrastructure of digital services, digital connectivity, digitization of household, digitization of production, digital industries, factors of digital production, digital competitive intensity, and regulatory framework and public policies. Notably, we find a negative statistically significant non-linear relationship between the domestic inflation rate and all eight pillars of digitization for both the full sample and the emerging markets sample. Because the highest deflationary impact of digitization is derived from the digital infrastructure and factors of digital production, the policy priorities we emphasize include expanding network coverage, increasing fixed and broadband download speed, boosting telecommunications and education investments, as well as strengthening intellectual property rights, enhancing investments in R&D, and incentivizing innovation and patenting. However, our results show that deflationary effects of the improvement in digitization are smaller in emerging markets versus the full sample and that the entire effect of digitization in emerging markets is reinforced by the investment in human capital and the improvement of governance. Hence, our policy recommendations for emerging markets are directed towards maximizing school enrollments, controlling corruption, rule of law, and voice and accountability measures to recoup the maximum benefits of the improvement in digitization on domestic inflation.
    Keywords: Digitization; System GMM; Advanced Economies; Emerging Markets
    JEL: C23 G21 O47
    Date: 2022–02–09
  8. By: Franklin Allen; Xian Gu; Julapa Jagtiani
    Abstract: Fintech and decentralized finance have penetrated all areas of the financial system and have improved financial inclusion in the last decade. In this paper, we review the recent literature on fintech, cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs). There are important implications from the rise of fintech and the introduction of stablecoins and CBDCs in recent years. We provide an overview of China’s experience in fintech, focusing on payments, digital banking, fintech lending, and the recent progress on its CBDC pilots (e-CNY). We also discuss important considerations in designing effective cryptocurrency regulations. Cryptocurrency regulations could promote growth of innovations through enhanced public confidence in this market. The e-CNY could become mainstream in the global market through effective regulations, which provide incentives and protection to market participants. A key factor to success for digital currencies has been their widespread adoption. If the Chinese e-CNY were to become a mainstream currency, the introduction of CBDC could potentially offer solutions to existing problems inherent in traditional financial systems.
    Keywords: fintech; cryptocurrency regulations; stablecoins; CBDCs; e-CNY; China
    JEL: G21 G28 G18 L21
    Date: 2022–04–11
  9. By: Klüh, Ulrich; Urban, Janina
    Abstract: What should be the role of the ECB in tackling the socio-ecological challenges related to planetary boundaries, such as climate change and loss of biodiversity? A clear answer to this question is still lacking, in spite of the strategy review of 2021. Regretfully, this review has not received the scrutiny it deserves, as the pandemic and the war in Ukraine have taken center stage. Taking these recent developments into account, we provide a critique of the new strategy. We argue that it lacks transformativity, as it subsumes climate change under the policy objective of price stability, assumes that transformations can be mastered within the structures of the past, and refrains from questioning the current institutional set up. In its main part, the paper discusses the historical relevance of what we believe is the main reason for these deficits: The fear that taking up the real issues (such as independence and accountability) would make the ECB a political football in times of rising inflation. Taking these fears seriously, we show that the institutionalization of central banking has always reflected the transformative dynamics of their time. Consequently, if planetary boundaries represent a transformative challenge, they will radically change the ECB, too. Moreover, we provide evidence that central banks' historical transformations have always reflected their peculiar position as mediators between the financial and the political realm. We argue that, at the current juncture, transforming central banking implies moving away from finance and towards politics. This involves risks. However, we argue that the historical experience offers few reasons to fear a closer integration of central banking into the public sphere, as long as the latter is dominated by democratic politics. Consequently, if one comes to the conclusion that the ECB's current corset is too narrow, it can and should be augmented. While we do not offer a blueprint for such augmentation, we conclude our analysis by sketching elements of a sustainable strategy for a transformative ECB.
    Keywords: Monetary Policy,Sustainability,Green Deal,Climate Policy,Central Bank Independence,Central Bank Accountability
    JEL: B15 B25 B26 B52 E02 E58 N2
    Date: 2022
  10. By: Taisuke Nakata (Associate Professor, Faculty of Economics, University of Tokyo (E-mail:; Takeki Sunakawa (Associate Professor, Faculty of Economics, Hitotsubashi University (E-mail:
    Abstract: How can the central bank credibly implement a "lower-for- longer" strategy? To answer this question, we analyze a series of optimal sustainable policy problems-indexed by the duration of reputational loss- in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates. We find that, even without an explicit commitment technology, the central bank can still credibly keep the policy rate at the ELB for an extended period-though not as extended as under the optimal commitment policy-and meaningfully mitigate the adverse effects of the ELB constraint on economic activity.
    Keywords: Average Inflation Targeting, Effective Lower Bound, Forward Guidance, Sustainable Plan, Time-Consistency
    JEL: E32 E52 E61 E62 E63
    Date: 2022–04
  11. By: Albert Queraltó
    Abstract: Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected future output gaps. Absent state contingency in the subsidies that correct the externalities associated with productivity growth, optimal monetary policy sets inflation above target whenever the subsidies fall short of the externalities. In the recovery from a spell at the ZLB, the optimal discretionary policy sets inflation temporarily above target, helping mitigate the long-run damage. Following a cost-push shock that creates inflationary pressure, the central bank tolerates a larger rise in inflation than in a model with exogenous productivity. The gains from commitment include the central bank's ability to make credible promises about future output gaps in a way that allows it to manipulate current productivity growth.
    Keywords: Business cycles; Growth; Optimal monetary policy; Hysteresis; Scarring
    JEL: E32 E43 E52 E58 O31 O42
    Date: 2022–04–01
  12. By: Dikau, Simon; Volz, Ulrich
    Abstract: Chinese monetary and financial authorities have been among the pioneers in promoting green finance. This article investigates the use of one specific monetary policy tool, namely window guidance, by the Peoples’ Bank of China (PBC) and the China Banking Regulatory Commission (CBRC) to encourage financial institutions to expand credit to sustainable activities and curb lending to heavy-polluting industries. ‘Window guidance’ is a relatively informal policy instrument that uses benevolent compulsion to ‘guide’ financial institutions to extend credit and allocate lending in line with official (government) targets. We investigate window guidance targets for the period 2001–2020 and find that ‘green’ targets were included by the CBRC from at least 2006 and by the PBC from 2007 to discourage lending to carbon-intensive and polluting industries and/or to increase support to sustainable activities. In 2014, both authorities stopped discouraging lending to carbon-intensive/polluting industries through window guidance. Sustainable objectives were subsequently also removed from the PBC's list of window guidance priority sectors at the start of 2019, ending the practice of green window guidance in China. Sustainability-enhancing window guidance targets were replaced and formalized through new ‘Guidelines for Establishing the Green Financial System’, reflecting efforts to move away from controls-based towards market-based policy instruments. Based on this analysis, the article draws four lessons for the design of green finance policies for other countries that seek to enhance sustainable finance and mitigate climate change and related risks.
    Keywords: sustainable finance; central banking and financial supervision; China; ES/R009708/1; ES/P005241/1; 71661137002; T&F deal
    JEL: G20
    Date: 2021–12–08
  13. By: Zeqin Liu (School of Statistics, Shanxi University of Finance and Economics, Taiyuan, Shanxi 030006, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Ying Fang (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China)
    Abstract: Since the global financial crisis in 2008, an increasing number of economists, central banks and regulators across the world has realized the occurrence of fundamental changes in the dynamics of the economy. The breakout of the global financial crisis highlights the importance of financial shocks. Aiming to maintaining financial stability, Bank for International Settlements (BIS) initialized macro-prudential policies in the early of 2009. China, as one of important countries pioneering the practice of macro-prudential policies, adopted a so called two-pillar regulatory framework of monetary policies and macro-prudential policies to safeguard the macroeconomic and financial stability. However, due to the coincidence of policy targets and the interdependence in transmission mechanisms between monetary policies and macro-prudential policies, the practice of the two-pillar regulatory framework raises some important coordination issues (Beau et al. 2012). The aim of this paper is to discuss theoretically the coordination mechanisms between monetary policies and macro-prudential policies, and then evaluate empirically the effects of the practice of the two-pillar regulatory framework on policy targets, such as economic growth, inflation, and financial stability in China. One of main contributions of this paper is to estimate the causal effects of China’s two-pillar regulatory framework from 2007 to 2017 by adopting new macroeconomic policy evaluation methods proposed by Angrist and Kuersteiner (2011) and Angrist et al. (2018). Compared to mainstream methods such as dynamic stochastic general equilibrium (DSGE) models, the macroeconomic policy evaluation methods based on Rubin’s causal model alleviate the risk of model misspecification by avoiding to specify how an economy works and how outcome variables are determined. Moreover, the concept of dynamic treatment effect developed in the framework of macroeconomic policy evaluation coincides with the nonlinear impulse function induced by structural models. In other words, the new method can complement the DSGE models by providing parallel estimates insensitive with structural model setup. Another major contribution of this paper is to extend the existing macroeconomic policy evaluation methods by adopting statistical learning methods to estimating policy propensity score functions using macroeconomic big data and proposing a new test statistic for testing the conditional unconfoundedness assumption. It is well known that a major challenge in empirical macroeconomic research is how to capture exogenous policy shocks to identify causal effects. We address this issue in two aspects. First, in order to fully use all information available at the current period, we propose to model policy-making process based on macroeconomic big data and adopt statistical learning methods to solve the high dimensional problem. Moreover, we propose a new statistic to test the exogeneity of the residuals estimated from the policy propensity scores using macroeconomic big data, which is a conditional unconfoundedness in the context of time series data. The latter actually provides a testable method of evaluating the validity of the use of the macroeconomic policy evaluation method. Finally, our empirical findings can be summarized as follows. First, when macro-prudential policies remaining neutral, monetary policies can effectively manage the aggregate demand and fulfill the output target by adjusting money supply and credit growth,while the transmission channel through interest rates does not work effectively. Second, when monetary policies remaining neutral, macro-prudential policies can maintain financial stability as expected, and at the same time, there are little effects on real economy targets. Last, when monetary policies and macro-prudential policies are jointly implemented, a same direction policy combination can further strengthen the effect on the output target and accelerate the process towards the target. However, the same direction combination has no significant exaggerating impact on financial stability variables. In addition, we find that the same direction combination may cause counteracting effects on some target outcome variables, such as the growth rate of capital adequacy ratio and the risk-weighted asset ratio. We ascribe the counteracting effect to the argument that the same direction policy combination weakens the negative correlations between monetary policies and banks’ risk-taking level.
    Keywords: Monetary Policy; Macro-prudential Policy; Two-pillar Regulatory Framework; Macro-economic Policy Evaluation
    JEL: E60 E50 G28
    Date: 2022–04
  14. By: Hidekazu Niwa (Osaka School of International Public Policy,Osaka University)
    Abstract: This study reviews the fiscal theory of the price level (FTPL). Our goal is to briefly explain the following three points. First, how is an equilibrium determined in a simple model where prices are perfectly flexible and only one-period government bonds? Second, what is the intuition for equilibrium determination? Third, how does introducing long-term bonds or nominal price rigidities change results in the simplest case?
    Keywords: Fiscal Theory of the Price Level; Fiscal-Monetary Interaction; Government Solvency
    JEL: E58 E63 E31
    Date: 2022–04
  15. By: Pablo Andrés Neumeyer; Juan Pablo Nicolini
    Abstract: This note addresses the role of the Taylor principle to solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate rule. We first study the role of imposing two additional ad-hoc restrictions on the definition of equilibrium. Imposing the equilibrium to be locally unique never delivers a unique outcome. Imposing the equilibrium to be bounded, renders the outcome unique only if the inflation target is the Friedman rule. Second, we show that the Taylor principle is strongly time inconsistent - in a sense we make very precise - and that policies that implement the Friedman rule are the only sustainable policies.
    Keywords: Taylor principle; Uniqueness of equilibrium; Time consistency
    JEL: E40 E50
    Date: 2022–01–28
  16. By: Federico Forte; Pedro Elosegui; Gabriel Montes-Rojas
    Abstract: This paper studies the network structure and fragmentation of the Argentinean interbank market. Both the unsecured (CALL) and the secured (REPO) markets are examined, applying complex network analysis. Results indicate that, although the secured market has less participants, its nodes are more densely connected than in the unsecured market. The interrelationships in the unsecured market are less stable, making its structure more volatile and vulnerable to negative shocks. The analysis identifies two 'hidden' underlying sub-networks within the REPO market: one based on the transactions collateralized by Treasury bonds (REPO-T) and other based on the operations collateralized by Central Bank (CB) securities (REPO-CB). The changes in monetary policy stance and monetary conditions seem to have a substantially smaller impact in the former than in the latter 'sub-market'. The connectivity levels within the REPO-T market and its structure remain relatively unaffected by the (in some period pronounced) swings in the other segment of the market. Hence, the REPO market shows signs of fragmentation in its inner structure, according to the type of collateral asset involved in the transactions, so the average REPO interest rate reflects the interplay between these two partially fragmented sub-markets. This mixed structure of the REPO market entails one of the main sources of differentiation with respect to the CALL market.
    Date: 2022–03
  17. By: Marco Cipriani; James A. Clouse; Lorie Logan; Antoine Martin; Will Riordan
    Abstract: A 2017 Liberty Street Economics post described the balance sheet effects of the Federal Open Market Committee’s decision to cease reinvestments of maturing securities—that is, the mechanics of the Federal Reserve’s balance sheet “runoff.” At the time, the overnight reverse repo (ON RRP) facility was fairly small (less than $200 billion for most of July 2017) and was not mentioned in the post for the sake of simplicity. Today, by contrast, take-up at the ON RRP facility is much larger (over $1.5 trillion for most of 2022). In this post, we update the earlier analysis and describe how the presence of the ON RRP facility affects the mechanics of the balance sheet runoff.
    Keywords: balance sheet; Federal Reserve; money market funds; overnight reverse repo (ON RRP)
    JEL: G2 E5
    Date: 2022–04–11
  18. By: Niko Hauzenberger; Daniel Kaufmann; Rebecca Stuart; Cédric Tille
    Abstract: We study domestic and international drivers of long-term interest rates using newly compiled financial market data for Switzerland starting in 1852. We use a time-varying parameter vector autoregressive model to estimate long-term trends in nominal interest rates, exchange rate growth, and inflation. We then decompose the Swiss long-term interest rate trend into various drivers using an interest rate accounting framework. The decline in long-term interest rates since 1970 is mainly driven by a decline in the level of inflation. Comparing Switzerland with the rest of the world, we show that while Swiss real interest rates were higher during the 19th century, the pattern reversed after World War 2 with Swiss nominal and real rates becoming lower than foreign ones. However, this Swiss “low interest rate island” has disappeared in recent years. We document a connection between inflation risk and the Swiss term spread, as well between relative inflation risk and the difference between Swiss and foreign real interest rates.
    Keywords: Natural rate of interest, exchange rate, inflation risk, term spread, uncovered interest parity, historical data
    JEL: E4 E5 F3
    Date: 2022–04
  19. By: Danilo Cascaldi-Garcia; J. David López-Salido; Francesca Loria
    Abstract: Since the start of the pandemic, views about the evolution of aggregate consumer prices moved swiftly from concerns about deflation to fears about excessive inflation. It is hard to find a parallel in the history of the U.S. economy—or the global economy more generally—to this rapid reversal of risks to the inflation outlook.
    Date: 2022–03–31
  20. By: Francesco D'Acunto; Ulrike M. Malmendier; Michael Weber; Michael Weber
    Abstract: Inflation expectations are central to economics because they affect the effectiveness of fiscal and monetary policy as well as realized inflation. We survey the recent literature with a focus on the inflation expectations of households. We first review standard data sources and discuss their advantages and disadvantages. We then document that household inflation expectations are biased upwards, dispersed across individuals, and volatile in the time series. We also provide evidence of systematic differences by gender, income, education, and race. Turning to the underlying expectations formation process, we highlight the role of individuals’ exposure to price signals in their daily lives, such as price changes in groceries, the role of lifetime experiences, and the role of cognition. We then discuss the literature that links inflation expectations to economic decisions at the individual level, including consumption-savings and financial decisions. We conclude with an outlook for future research.
    Keywords: beliefs formation, heterogeneous agents, macroeconomics with micro data, inflation exposure, experience effects, financial sophistication
    JEL: C90 D14 D84 E31 E52 E71 G11
    Date: 2022
  21. By: Sebastián Amador (Department of Economics, University of California Davis)
    Abstract: I provide evidence of substantial hysteresis (i.e., a situation in which temporary shocks have long-run effects) from monetary shocks on two sources of endogenous growth; human capital and technological adoption. This contribution is the first to test for the presence of this phenomenon in direct measures of the supply-side potential of economies, instead of indirect measures, e.g., TFP. To estimate the effects of exogenous monetary policy shocks, I improve on the the trilemma identification by incorporating a mean-unbiased instrumental variable estimator. Results show substantial hysteresis in both human capital and technological adoption. Importantly, these are found to be asymmetric, as only contractionary shocks result in long lasting responses. I evaluate the aggregate importance of monetary hysteresis with a growth accounting exercise. Across the 17 countries in sample, the accumulated average cost of monetary hysteresis ranges between 1.2 and 9.6% of TFP, for human capital and the adoption of electricity, respectively.
    Keywords: hysteresis, money non-neutrality, endogenous growth
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2022–04–20
  22. By: António Afonso; Francisco Gomes Pereira
    Abstract: Using a difference-in-differences identification strategy on a micro panel at the bank and firm level, we study the transmission effectiveness of ECB’s large-scale asset purchasing programs programs (i.e. APP and PEPP) in the Euro area. Our findings show: first, balance sheet composition of banks is an important determinant of monetary policy transmission. We tested this hypothesis by showing that banks more exposed to government debt securities had higher loan growth than less exposed banks after the APP announcement. By extension, this could lead to heterogeneous economic impacts depending on the geographical location of exposed banks. For the PEPP, contrary to the APP, we did not find a portfolio-rebalancing channel for banks that were more exposed to government debt securities. Second, using balance sheet data on corporates, we verify that firms that borrowed more increased employment and fixed capital investment, albeit to a lesser degree than before the APP announcement. Furthermore, our sample shows that corporations in countries with banks more exposed to government debt securities had higher borrowing growth and fixed capital growth versus countries with less exposed banks.
    Keywords: unconventional monetary policy, difference-in-differences, euro area, employment, investment
    JEL: C23 D22 E52 E58 G11 G20
    Date: 2022
  23. By: Eric C. Engstrom; Steven A. Sharpe
    Abstract: In recent months, financial market perceptions about the future path of short-term interest rates have evolved amidst signals from policymakers suggesting that reduced monetary policy accommodation is in the offing. As with previous episodes of policy tightening, most recently in 2018, one can hear an attendant rise in the volume of commentary about a decline in the slope of the yield curve and the risk of "inversion," whereby long-term yields fall below shorter-maturity yields.
    Date: 2022–03–25
  24. By: Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
    Abstract: Recent energy and food price surges, in the wake of Russia’s invasion of Ukraine, have exacerbated inflation pressures that are unusually high by the standards of the past two decades. High and rising inflation has prompted many emerging market and developing economy (EMDE) central banks and some advanced-economy central banks to increase interest rates. Inflation is expected to ease back towards targets over the medium-term as recent shocks unwind, but the 1970s experience is a reminder of the material risks to this outlook. As inflation remains elevated, the risk is growing that, to bring inflation back to target, advanced economies need to undertake a much more forceful monetary policy response than currently anticipated. If this risk materializes, it would imply additional increases in borrowing costs for EMDEs, which are already struggling to cope with elevated inflation at home before the recovery from the pandemic is complete. EMDEs need to focus on calibrating their policies with macroeconomic stability in mind, communicating their plans clearly, and preserving and building their credibility.
    Keywords: Global Inflation; Commodity Price; War in Ukraine; Global Recession; Great Inflation; Monetary Policy Tightening
    JEL: E31 E32 E37 Q43
    Date: 2022–03–29
  25. By: Edmond Berisha; Ram Sewak Dubey; Eric Olson
    Abstract: This paper aims to clarify the relationship between monetary policy shocks and wage inequality. We emphasize the relevance of within and between wage group inequalities in explaining total wage inequality in the United States. Relying on the quarterly data for the period 2000-2020, our analysis shows that racial disparities explain 12\% of observed total wage inequality. Subsequently, we examine the role of monetary policy in wage inequality. We do not find compelling evidence that shows that monetary policy plays a role in exacerbating the racial wage gap. However, there is evidence that accommodative monetary policy plays a role in magnifying between group wage inequalities but the impact occurs after 2008.
    Date: 2022–03
  26. By: Beirne, John (Asian Development Bank Institute); Renzhi, Nuobu (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: Focusing on Asian economies over the period 2006 to 2019, we find that while nonbank finance appears to complement rather than substitute credit provision by the traditional banking sector, weaker regulatory quality is an important driving factor. Moreover, while we find that central bank policy rates countercyclically affect credit provision by nonbanks, impulse responses to monetary policy shocks with and without nonbank finance indicate that the effectiveness of monetary policy as a transmission channel to GDP growth, inflation, house prices, and traditional bank credit is weakened in the presence of nonbank finance. Our paper has implications for monetary policy implementation, potentially incorporating nonbanks into central bank operations and liquidity provision, as well as for financial supervisors in mitigating regulatory arbitrage.
    Keywords: nonbank finance; fintech; monetary policy; Asia
    JEL: E44 E50 G20
    Date: 2022–01
  27. By: Ricardo J. Caballero; Alp Simsek
    Abstract: We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their steady-state levels consistent with current potential output). Overshooting leads to a temporary disconnect between the performance of financial markets and the real economy, but it accelerates the recovery. When there is a lower-bound constraint on the discount rate, overshooting becomes a concave and non-monotonic function of the output gap: the asset price boost is low for a deeply negative initial output gap, grows as the output gap improves over a range, and shrinks toward zero as the output gap improves further. This pattern also implies that good macroeconomic news is better news for asset prices when the output gap is more negative. Finally, we document that during the Covid-19 recovery, the policy-induced overshooting was large−sufficient to explain the high levels of stock and house prices in 2021.
    Keywords: monetary policy, aggregate demand inertia, lags, output gap, recovery, asset prices, overshooting, Wall/Main Street disconnect, Covid-19, interest rate lower bound, macroeconomic news, market bond portfolio, QE/LSAPs
    JEL: E21 E32 E43 E44 E52 G12
    Date: 2022
  28. By: Lucas Epstein; Lei Li
    Abstract: Prime money market funds (MMFs) represent a key vulnerability in the financial system. During the last 15 years, they have experienced two severe investor runs, in September 2008 and March 2020, both of which contributed to full-scale financial crises.
    Date: 2022–04–19
  29. By: Boris Chafwehé (Joint Research Centre, European Commission); Charles de Beauffort (National Bank of Belgium); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In the fiscal theory of the price level, inflation and debt dynamics are determined jointly. We derive optimal monetary policy rules that can approximate the Ramsey outcome in this environment. When the government issues a portfolio of bonds of different maturities and buys it back every period the optimal interest rate response to inflation is a simple, transparent function of the average debt maturity. This policy exploits the maturity structure to minimize the intertemporal variability of inflation in response to fiscal shocks. We then turn to the more realistic scenario of a government that does not repurchase and reissue debt in every period. In the case where debt is only long term, the optimal policy equilibrium features oscillations in inflation and simple interest rate rules may lead to explosive inflation dynamics. Issuing both short and long bonds rules out oscillations and implies that simple inflation targeting rules can approximate the Ramsey outcome. Under no repurchases a flat maturity structure of debt is optimal to reduce inflation variability.
    Keywords: Fiscal Theory, Optimal Interest Rates, Government Debt Maturity, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2022–03–28
  30. By: David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics)
    Abstract: The Federal Reserve and most other analysts failed to anticipate the surge in inflation in 2021. Considerable debate now surrounds the question of whether the Fed is too sanguine in anticipating that too-high inflation will mostly take care of itself over the next few years, even as the unemployment rate remains low and monetary policy remains accommodative. This Policy Brief concludes that although the Federal Open Market Committee (FOMC) was too optimistic in the projections it issued in December 2021, the broad contour of its baseline inflation outlook for 2022 and beyond remains sensible. The authors find the 2021 surge in inflation resulted mainly from COVID-19-related sectoral developments rather than the classic situation of aggregate demand outstripping the overall economy's long-run productive potential. The statistical analysis in this Policy Brief was conducted before Russia invaded Ukraine. As a result of the war, the inflation situation will probably get worse before it gets better, and could do so in dramatic manner if Russian energy exports are banned altogether. Nonetheless, if the key considerations identified in this Policy Brief remain in place, and if monetary policymakers respond to evolving circumstances in a sensible manner, the inflation picture should look considerably better in the next one to three years.
    Date: 2022–03
  31. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: The theoretical foundation of inflation targeting was laid out by the Swedish economist Knut Wicksell (1851-1926) in his groundbreaking treatise, Interest and Prices, published originally in German in 1898. Here he proposed price stability as the rule for monetary policy. Today, inflation targeting is considered the best-practice approach to monetary policy across the world. It has contributed to stable and low consumer price inflation since the 1990s in many countries. However, inflation targeting has recently been the subject of several objections. Most prominently, the focus on consumer price stability has fostered financial instability, as reflected in the global financial crisis of 2008-09. In addition, the sharp rise in asset prices has led to growing wealth inequality. <p> Why have these problems emerged? This paper provides an answer by comparing Wicksell’s theory of price level determination in a pure credit economy, the “cumulative process”, to the neo-Wicksellian world of today, characterized by inconvertible fiat money, floating exchange rates, advanced financial systems, unregulated interest rates and well-developed asset markets. In this way, it becomes apparent that the neglect of asset markets and asset prices is the source of the flaws of the present Wicksellian regime of unlimited finance. The shortcomings of the neo-Wicksellian approach can be remedied while remaining within a Wicksellian framework. The key is to combine the nominal anchor of price stability with a reformed financial system that maintains credit stability. The paper uses empirical evidence from Sweden and the United States.
    Keywords: Inflation targeting; price level targeting; natural rate; Knut Wicksell; Milton Friedman; financial crises; credit; asset inflation; central banking
    JEL: B10 B22 E10 E31 E40 E50 G01 G20
    Date: 2022–04–11
  32. By: Zinn, Jesse Aaron (Clayton State University)
    Abstract: This paper develops and discusses several ratios designed to assess financial intermediation overall, as well as the two steps necessary for financial intermediation: attracting funds and lending them. We find that the money multiplier is, in typical cases, positively related to all of these ratios, suggesting that it also can be interpreted as a measure of how well a financial sector is performing in its role as intermediary between savers and borrowers.
    Date: 2022–04–02
  33. By: José Alves; João Quental Gonçalves
    Abstract: The present work offers a review on two divergent schools of thought regarding the subject of money and highlights why understanding it is important to grasp the workings and nature of the concept of money. We adopt a spontaneous order perspective on social institutions, considering money as one. Such framework allows for the construction of axioms from which we formulate our problem allowing us to ask how old forms of money such as Gold and Silver hold up in today’s world regarding their hedging properties. Moreover, we also do so for Bitcoin since we consider it an appropriate asset due to its specific characteristics and its (at the time of writing) more than 10-year life span. We resort to the Autoregressive Distributed Lag (ARDL) methodology in order to study our three assets in the context of the US dollar and the US Economy for two different time periods. We analyse price dynamics from 1980 to 2020 for gold and silver resorting to annual data. Regarding bitcoin we employ quarterly data from 2009 to 2020. We conclude that the theories that explain what money is, how it comes to be so and how certain types of “money assets” may serve both as an indirect hedge against inflation in the two interpretations of the word and as a “stock of value” have merits that might deserve further investigation. .
    Keywords: money, inflation, gold, silver, bitcoin
    JEL: B25 D46 E42 E51
    Date: 2022
  34. By: Marco Cipriani; James A. Clouse; Lorie Logan; Antoine Martin; Will Riordan
    Abstract: In a Liberty Street Economics post that appeared yesterday, we described the mechanics of the Federal Reserve’s balance sheet “runoff” when newly issued Treasury securities are purchased by banks and money market funds (MMFs). The same mechanics would largely hold true when mortgage-backed securities (MBS) are purchased by banks. In this post, we show what happens when newly issued Treasury securities are purchased by levered nonbank financial institutions (NBFIs)—such as hedge funds or nonbank dealers—and by households.
    Keywords: balance sheet runoff; Federal Reserve; money market funds (MMFs); nonbank financial institutions (NBFIs); treasuries
    JEL: E5 G51
    Date: 2022–04–12

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