nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒05‒16
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. European Exchange Rate Adjustments in Response to COVID-19, Containment Measures and Stabilization Policies By Jens Klose
  2. A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers By Pierre-Olivier Gourinchas; Walker D. Ray; Dimitri Vayanos
  3. Fiscal and Monetary Policies in an Agent-Based Model By Pongpitch Amatyakul; Nutnicha Theppornpitak
  4. Economic Policy Uncertainty and the Yield Curve By Markus Leippold; Felix Matthys
  5. Monetary Policy and Bank Liquidity Creation: A Multivariate Markov Switching Approach By Mustafa Caglayan; Kostas Mouratidis
  6. A Central Bank Digital Currency for India? By Barry Eichengreen; Poonam Gupta; Tim Marple
  7. The Taper This Time By Eichengreen, Barry; Gupta, Poonam; Choudhary, Rishabh
  8. What should the inflation target be? Views from 600 economists By Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim
  9. New Financial Technologies, Sustainable Development, and the International Monetary System By Prasad, Eswar
  10. Can unconventional monetary policy contribute to climate action? By Alice Eliet-Doillet; Andrea Maino
  11. Crisis Liquidity Facilities with Nonbank Counterparties: Lessons from the Term Asset-Backed Securities Loan Facility By Ralf R. Meisenzahl; Karen M. Pence
  12. Joined at the Hip: Monetary and Fiscal Policy in a Liquidity-Dependent World By Guillermo A. Calvo; Andrés Velasco
  13. Assessing the Effects of Borrower-Based Macroprudential Policy on Credit in the EU Using Intensity-Based Indices By Lara Coulier; Selien De Schryder
  14. Money Market Fund Vulnerabilities: A Global Perspective By Antoine Bouveret; Antoine Martin; Patrick E. McCabe
  15. Does the Level of Inflation Matter in the Inflation-Growth Nexus in Ghana? By Prempeh, Kwadwo Boateng; Kyeremeh, Kwadwo; Peprah-Amankona, Godfred
  16. Shipping Costs and Inflation By Davide Furceri; Mr. Yan Carriere-Swallow; Mr. Pragyan Deb; Daniel Jimenez; Mr. Jonathan David Ostry
  17. Monetary Policy in Disaster-Prone Developing Countries By Mr. Chris Papageorgiou; Mr. Giovanni Melina; Mr. Alessandro Cantelmo; Nikos Fatouros
  18. Crypto, Corruption, and Capital Controls: Cross-Country Correlations By Nikolay Gueorguiev; Mr. Dmitriy L Rozhkov; Mr. Jiro Honda; Keyra Primus; Ms. Marwa Alnasaa; Eslem Imamoglu; Mr. Paolo Mauro
  19. Developing an Income-Distribution- Sensitive Taylor Rule: An Application to South Africa By Capazario, Michele
  20. The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies By Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
  21. The new inflationary environment: How persistent are the current inflationary dynamics and how is monetary policy expected to respond? By Demary, Markus; Herforth, Anna-Lena; Zdrzalek, Jonas
  22. Central Bank Digital Currency (CBDC): Critical Issues and the Indian Perspective By D. Priyadarshini; Sabyasachi Kar
  23. The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under By David O. Lucca; Jonathan H. Wright
  24. Emerging economies, global inflation, and growth deceleration By Otaviano Canuto
  25. Country-Based Investing with Exchange Rate and Reserve Currency By Galvani, Valentina
  26. A Reassessment of Monetary Policy Surprises and High-Frequency Identification By Michael D. Bauer; Eric T. Swanson
  27. Inflation Targeting in India : An Interim Assessment By Gupta, Poonam; Eichengreen, Barry; Choudhary, Rishabh
  28. Forecasting Inflation with a Zero Lower Bound or Negative Interest Rates: Evidence from Point and Density Forecasts By Christina Anderl; Guglielmo Maria Caporale
  29. Inflation expectations and climate concern By Meinerding, Christoph; Poinelli, Andrea; Schüler, Yves
  30. The Relationship between Fiscal and Monetary Policies in Colombia: An Empirical Exploration of the Credit Risk Channel By Ignacio Lozano-Espitia; Fernando Arias-Rodríguez
  31. How Economic, Political and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region By Maraoui, Najia; Amor, Thouraya Hadj; Khefacha, Islem; Rault, Christophe
  32. Effects of Carbon Pricing on Inflation By Richhild Moessner
  33. Does monetary policy affect the net interest margin of credit institutions? Evidence from Colombia By Javier Eliecer Pirateque-Niño; Daniela Rodríguez-Novoa; José Hernán Piñeros-Gordo
  34. The Natural Rate of Interest Through a Hall of Mirrors By Phurichai Rungcharoenkitkul; Fabian Winkler
  35. Inflation Persistence: How Much Is There and Where Is It Coming From? By Martín Almuzara; Argia M. Sbordone

  1. By: Jens Klose (THM Business School Giessen)
    Abstract: This paper estimates the effects of nine exchange rates for european countries vis-a-vis the Euro in the COVID pandemic. Using data on COVID cases, three containment and two stabilization measures relative to the euro area counterparts, it is shown that a more severe spread of the virus leads to a depreciation of the domestic currency. The same holds with respect to stricter movement restrictions, health care measures and more supportive monetary policies. More expansionary fiscal policies by the domestic country on the other hand lead to an appreciation of the currency. Two extensions show that the results differ with respect to whether the country is a scandinavian or eastern european country and whether the euro area countries or the other european countries introduce the measures.
    Keywords: Exchange rates, COVID-19, Europe, stabilization policies, containment measures, panel VAR
    JEL: E44 E52 E62
    Date: 2022
  2. By: Pierre-Olivier Gourinchas; Walker D. Ray; Dimitri Vayanos
    Abstract: We develop a two-country model in which currency and bond markets are populated by different investor clienteles, and segmentation is partly overcome by global arbitrageurs with limited capital. Our model accounts for the empirically documented violations of Uncovered Interest Parity (UIP) and the Expectations Hypothesis, and for how UIP violations depend on bond maturity, investment horizon, and yield curve slope differentials. Large-scale purchases of long-maturity bonds lower domestic and foreign bond yields, and depreciate the currency. Conventional monetary policy is transmitted to domestic and international bond yields as well, but its international transmission is weaker than for unconventional policy.
    JEL: F31 F41 F42 G11 G12
    Date: 2022–03
  3. By: Pongpitch Amatyakul; Nutnicha Theppornpitak
    Abstract: In this paper, we aim to assess the impacts of using monetary policies and fiscal transfers on the economy using an agent-based model. The model used is based on the original model developed by Ashraf et al. (2017), where agents endogenously develop trading networks of goods and labor, to study the impacts of the banking sector, and extended by Popoyan et al. (2017) to include different policy rate rules and macroprudential policy. We evaluate different fiscal policies and their interactions with monetary policy on how the economy performs based on aggregates such as total output and inflation, as well as based on granular data such as the wealth and consumption of the agents at specific percentiles. The findings are that consumption-based policies are best for reducing the aggregate effects on GDP, targeted policies are efficient if the government's goal is to help a specific group, and unconditional transfers are the least efficient of the three. In addition, we analyze the effects of implementing monetary and fiscal policies synchronously after a COVID-19-like crisis, and we do not find conclusive evidence that combining the two policies are better than the sum of the individual effects, but it is likely to be necessary to do both in order to get the economy back to its original path in a timely manner.
    Keywords: Monetary policy; Fiscal policy; Simulation
    JEL: E52 E62
    Date: 2022–04
  4. By: Markus Leippold (University of Zurich; Swiss Finance Institute); Felix Matthys (ITAM)
    Abstract: This paper analyzes the impact of economic policy uncertainty on the term structure of real and nominal interest rates. We derive a general equilibrium model where the real side of the economy is driven by government policy uncertainty and the central bank sets money supply endogenously following a Taylor rule. We analyze the impact of government and monetary policy uncertainty on nominal yields, short rates, bond risk premia and the term structure of bond yield volatility. Furthermore, we show that our standard affine yield curve model is able to capture both, the shape of the term structure of interest rates as well as the hump-shaped bond yield volatility curve. Finally, the empirical analysis shows that, whereas higher government policy uncertainty leads to a decline in yields, and an increase in bond yield volatility, monetary policy uncertainty does not have a significant contemporaneous effect on movements in the yield or volatility but is however an important predictor for bond risk premia.
    Keywords: Term structure modeling, yield volatility curve, policy uncertainty, bond risk premia
    Date: 2022–04
  5. By: Mustafa Caglayan (Edinburgh Business School, Heriot–Watt University, UK); Kostas Mouratidis (Department of Economics, University of Sheffield, UK)
    Abstract: Despite its importance, there is little empirical research on how monetary policy affects bank-liquidity creation. We propose a general Markov switching framework to examine the effects of monetary policy on liquidity creation while accounting for endogenous regime switches and capturing the idea that financial crises could be due to a regime switch from information-insensitive debt to information-sensitive debt. Using total liquidity creation and its components for different bank-size categories, we show that monetary policy has a regime dependent impact. Furthermore, based on the filter probabilities, our analysis also raises the possibility of a future financial turmoil.
    Keywords: Liquidity creation; bank size; monetary policy; policy trade-off; asymmetric effects; Markov switching
    JEL: E32 E52
    Date: 2022–03
  6. By: Barry Eichengreen (University of California, Berkeley); Poonam Gupta (National Council of Applied Economic Research); Tim Marple (University of California, Berkeley)
    Abstract: We review arguments for CBDC issuance in India. These include facilitating payments,enhancing financial inclusion, enabling the central bank and government to retain control of the payments system, facilitating cross-border payments, reducing dependence on the dollardominatedglobal payments system, providing an encompassing platform for digital financial innovation. We then compare progress in India with other countries. In setting an end 2022 target date for issuance, India is in line with the other BRICS, but not with other countries with comparable levels of per capita GDP, which have been more reluctant to commit to a date. Nor is it in line with other countries with comparably independent central banks, which have been more cautious about setting a deadline. Finally, we sketch a roadmap and timeline for India’s CBDC project going forward.
    Keywords: Central Bank, Digital Currency, India, Monetary Systems, Payment Systems
    JEL: E40 E42 E51 E50 E58 G21
    Date: 2022–05–03
  7. By: Eichengreen, Barry; Gupta, Poonam; Choudhary, Rishabh
    Abstract: On November 3, 2021, the Federal Open Market Committee announced that it would reduce the scale of its asset purchases by $15 billion a month starting immediately. Do emerging markets, such as India, need to prepare for a replay of the taper tantrum of 2013? We show that emerging markets, including India, have strengthened their external economic and financial positions since 2013. At the same time, fiscal deficits are much wider, and public debts are much heavier. As U.S. interest rates now begin moving up, servicing existing debts and preventing the debt-to-GDP ratio from rising still further will become more challenging. Either taxes have to be raised or public spending must be cut to generate additional revenues for debt servicing.
    Keywords: Capital Flows, Emerging Markets, Monetary Policy, Tapering, India
    JEL: F32 F41 F42 F62
    Date: 2022–01–14
  8. By: Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim
    JEL: C38 E31 E52 E58
    Date: 2022–05–09
  9. By: Prasad, Eswar (Asian Development Bank Institute)
    Abstract: New financial technologies—including those underpinning cryptocurrencies—herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs. Domestic and cross-border payment systems are on the threshold of transformation, with significant gains in speed and lowering of transaction costs on the horizon. For emerging market and developing economies, the digitization of finance carries a number of potential benefits, including broadening of financial inclusion, quicker and cheaper cross-border remittances, and increased convenience of domestic payments. But some of these developments could also increase these countries’ exposure to volatile capital flows. Governments, central banks, and regulatory agencies will face difficult challenges in striking the right balance between fostering innovations and mitigating risks arising from them.
    Keywords: fintech; payment systems; international payments; financial inclusion; capital flows; financial regulation
    JEL: E50 G00
    Date: 2021–07
  10. By: Alice Eliet-Doillet (Ecole Polytechnique Fédérale de Lausanne); Andrea Maino (University of Geneva)
    Abstract: This paper investigates the impact of central banks when supporting policies aiming at greening the financial system. The July 2021 Monetary Policy Strategy Review of the European Central Bank unexpectedly dedicated a whole workstream to climate change. The announcement had a significant effect on the pricing and issuance of green bonds in the Eurozone. We find that ECB eligible green bonds’ Yield-to-Maturity decreased following the announcement when compared to equivalent conventional bonds. Firms incorporated in the Eurozone reacted to the announcement by increasing the amount of green bond issued, for both the segments of ECB-eligible and non-ECB-eligible green bonds.
    Keywords: Climate Change, Central Banks, Green Bonds, Carbon Emissions, Quantitative Easing, Monetary Policy, ESG
    JEL: Q58 E52 E58 G12
    Date: 2022–04
  11. By: Ralf R. Meisenzahl; Karen M. Pence
    Abstract: In response to immense strains in the asset-backed securities market in 2008 and 2020, the Federal Reserve and the U.S. Treasury twice launched the Term Asset-Backed Securities Loan Facility (TALF). TALF was an unusual crisis facility because it provided loans to a wide range of nonbank financial institutions. Using detailed loan-level data unexplored by previous researchers, we study the behavior of nonbank borrowers in TALF. We find the extent to which the actions of these borrowers supported key program goals--stabilizing markets quickly, winding down the program when it was no longer needed, providing liquidity to a wide range of assets, and having borrowers internalize credit risk rather than shift it to the government--were related to institutional differences across nonbanks. Since all TALF borrowers faced the same program terms and conditions, our study is able to highlight the role of these institutional constraints.
    Keywords: Non-Bank Financial Institutions; Securitization; Lender of Last Resort; Term Asset-Backed Securities Loan Facility; TALF
    JEL: E52 E53 G12 G23
    Date: 2022–04–13
  12. By: Guillermo A. Calvo; Andrés Velasco
    Abstract: We study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods, and this is one important reason why money is liquid and attractive. By contrast, the price of government bonds is free to jump and often does, especially in response to news about changes in fiscal policy and the supply of bonds. Those movements in government bond prices affect available liquidity, and therefore aggregate demand, inflation and output. Under these conditions, bond-financed fiscal expansions can be contractionary, causing deflation and a temporary recession. To avoid those effects, changes in bond supply must be matched by changes in money supply and in the interest rate on money. We conclude that in a liquidity-dependent world, fiscal and monetary policies are joined at the hip.
    JEL: E12 E4 E42 E44 E52 E58 E62
    Date: 2022–03
  13. By: Lara Coulier; Selien De Schryder (-)
    Abstract: We construct new data-driven intensity-adjusted indices for a broad set of macroprudential policy announcements in the European Union (EU) that are able to capture the restrictiveness and bindingness of the macroprudential policy actions. The indices are used to assess the effectiveness of borrower-based macroprudential policy in reducing credit in the EU from 1995 to 2019. Our results indicate that these instruments have successfully reduced household, housing, and to a smaller extent consumption credit, especially in the long run. Moreover, we find that standard dummy approaches used to measure macroprudential policy signal different effects of borrower-based policies in our sample and are more sensitive to outliers, resulting in deceptive and incomplete results.
    Keywords: Macroprudential policy, intensity-adjustment, household credit, panel data analysis
    JEL: E58 C23 G18 G28
    Date: 2022–04
  14. By: Antoine Bouveret; Antoine Martin; Patrick E. McCabe
    Abstract: Money market funds (MMFs) are popular around the world, with over $9 trillion in assets under management globally. From their origins in the 1970s, MMFs have operated in a niche between the capital markets and the banking system, as investment funds that offer private money‐like assets with features similar to those of bank deposits. Hence, they are vulnerable to runs that arise from liquidity transformation and from sudden changes in investor perceptions of the funds’ ability to serve as money‐like assets. Since 2000, MMF runs have occurred in many countries and under many regulatory regimes. The global pattern of runs and crises shows that MMF vulnerabilities are not unique to a particular set of governing arrangements, and that mitigating these vulnerabilities requires fundamental reforms that either place MMFs more clearly within the investment‐fund sector or establish protections for MMFs similar to those for deposits.
    Keywords: Money market funds; Liquidity transformation; Runs; Nonbank financial institutions; Short-term funding markets; Information‐insensitive assets; Financial stability
    JEL: G20 F30 G23
    Date: 2022–03–22
  15. By: Prempeh, Kwadwo Boateng; Kyeremeh, Kwadwo; Peprah-Amankona, Godfred
    Abstract: The study uses a threshold regression model to provide new evidence that the deleterious effects of inflation on growth only “kick in” once inflation hits a certain level. Until then, inflation is beneficial to growth.
    Keywords: Inflation; economic growth; threshold; Ghana
    JEL: C54 G28
    Date: 2022–03–07
  16. By: Davide Furceri; Mr. Yan Carriere-Swallow; Mr. Pragyan Deb; Daniel Jimenez; Mr. Jonathan David Ostry
    Abstract: The Covid-19 pandemic has disrupted global supply chains, leading to shipment delays and soaring shipping costs. We study the impact of shocks to global shipping costs—measured by the Baltic Dry Index (BDI)—on domestic prices for a large panel of countries during the period 1992-2021. We find that spikes in the BDI are followed by sizable and statistically significant increases in import prices, PPI, headline, and core inflation, as well as inflation expectations. The impact is similar in magnitude but more persistent than for shocks to global oil and food prices. The effects are more muted in countries where imports make up a smaller share of domestic consumption, and those with inflation targeting regimes and better anchored inflation expectations. The results are robust to several checks, including an instrumental variables approach in which we instrument changes in shipping costs with an indicator of closures of the Suez Canal.
    Keywords: Price shocks, shipping cost, inflation pass-through, monetary policy.; shipping cost; inflation pass-through; inflation expectation; import intensity; import share; Inflation; Import prices; Oil prices; Output gap; Producer prices; Global; Baltics
    Date: 2022–03–25
  17. By: Mr. Chris Papageorgiou; Mr. Giovanni Melina; Mr. Alessandro Cantelmo; Nikos Fatouros
    Abstract: This paper analyzes monetary policy regimes in emerging and developing economies where climate-related natural disasters are major macroeconomic shocks. A narrative analysis of IMF reports published around the occurrence of natural disasters documents their impact on important macroeconomic variables and monetary policy responses. While countries with at least some degree of monetary policy independence typically react by tightening the monetary policy stance, in a sizable number of cases monetary policy was accommodated. Given the lack of consensus on best practices in these circumstances, a small-open-economy New-Keynesian model with disaster shocks is leveraged to evaluate welfare under alternative monetary policy rules. Results suggest that responding to inflation while allowing temporary deviations from its target is the welfare maximizing policy. Alternative regimes such as strict inflation targeting, exchange rate pegs, or Taylor rules explicitly responding to economic activity or the exchange rate would be welfare-detrimental. With climate change projected to expand the list of disaster-prone countries, these findings are likely to be soon relevant also for richer or larger economies.
    Keywords: Natural Disasters, Climate Change, DSGE, Monetary Policy, Exchange Rate Regimes.
    Date: 2022–04–01
  18. By: Nikolay Gueorguiev; Mr. Dmitriy L Rozhkov; Mr. Jiro Honda; Keyra Primus; Ms. Marwa Alnasaa; Eslem Imamoglu; Mr. Paolo Mauro
    Abstract: Empirical investigation of the factors underlying the growing usage of crypto-assets is in its infancy, owing to data limitations. In this paper, we present a simple cross-country analysis drawing on recently released survey-based data. We explore the correlation of crypto-asset usage with indicators of corruption, capital controls, a history of high inflation, and other factors. We find that crypto-asset usage is significantly and positively associated with higher perception of corruption and more intensive capital controls. Notwithstanding the data limitations, the results support the case for regulating crypto-assets, including know-your-customer approaches, as opposed to taking a laissez-faire stance.
    Keywords: cypto-assets, cryptocurrency, corruption, capital controls; crypto-asset usage; Pairwise correlation; data limitation; capital control; crypto-asset adoption; capital openness; Capital controls; Virtual currencies; Corruption; Global
    Date: 2022–03–25
  19. By: Capazario, Michele
    Abstract: This research has attempted to derive a new Taylor-type monetary policy rule which is sensitive to changes in the functional distribution of income proxied for by the labourer’s share of national income. I then apply this new policy rule to South African data between quarter 4 of 2001 and quarter 4 of 2021. This rule, once applied, yields favorable results in terms of goodness of fit relative to other such rules applied to South African data. The application of this rule to South Africa also yields an interesting finding- the South African Reserve Bank, most likely as a means to stabilise the South African macroeconomic system, reacts more to changes in the functional distribution of income than to an equivalent change in the inflation rate or output growth. I suggest that this formulation of the Taylor rule, and others like it, be used and developed further in future research.
    Keywords: Taylor Rule; Structuralist; Labour Share
    JEL: C26 E00 E5
    Date: 2022–04–13
  20. By: Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
    Abstract: We document a decline in the dollar share of international reserves since the turn of the century. This decline reflects active portfolio diversification by central bank reserve managers; it is not a byproduct of changes in exchange rates and interest rates, of reserve accumulation by a small handful of central banks with large and distinctive balance sheets, or of changes in coverage of surveys of reserve composition. Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies and units that, along with the dollar, have historically comprised the IMF’s Special Drawing Rights. Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies. A characterization of the evolution of the international reserve system in the last 20 years is thus as ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies. These observations provide hints of how the international system may evolve going forward.
    Keywords: International reserves, currency composition, dollar; USD share; dollar dominance; currency share; dollar share; share of foreign exchange; Reserve currencies; Currencies; International reserves; Reserves management; Asset valuation; Global; Africa
    Date: 2022–03–24
  21. By: Demary, Markus; Herforth, Anna-Lena; Zdrzalek, Jonas
    Abstract: We argue that the period of low inflation has come to an end based on six structural factors, which define the new inflationary environment: [...] How high will inflation rise? How long will the new inflationary environment last? How challenging is it for central banks to counteract these inflationary pressures? A stagflation like in the 1970ies seems possible given these trends. The energy-crisis made the transformation of our energy systems necessary, which is, however, progressing slowly, thereby contributing to a longer lasting energy-triggered inflation. The highest risk will be an energy embargo, resulting in a deep recession together with high inflation. In this case monetary policy might be forced to inject high amounts of liquidity into markets despite high inflation.
    JEL: E31 E32 E52
    Date: 2022
  22. By: D. Priyadarshini; Sabyasachi Kar (Institute of Economic Growth, Delhi)
    Abstract: A large number of Central Banks around the world are planning to introduce Central Bank Digital Currencies (CBDCs) as a legal tender in their countries. The Reserve Bank of India (RBI) has also revealed similar plans with an Indian CBDC expected in the near future. Any evaluation of such a major change in the nature of money requires a broader understanding of the opportunities and challenges arising from the adoption of CBDCs. In this paper, we discuss these issues at the conceptual level and specifically in the Indian context. We show that the conceptual issues can be characterised in three ways – monetary sovereignty issues, issues from the point of view of national sovereignty, and developmental issues. In the Indian context, we analyse these issues from the perspective of the rapid digitalization taking place in the country.
    Keywords: CBDC, Monetary Sovereignty, Disintermediation, Dollarization, Financial Inclusion, Cryptocurrencies
    JEL: E42 E51 E58 G21 G28 O33
    Date: 2021–09
  23. By: David O. Lucca; Jonathan H. Wright
    Abstract: We study the recent Australian experience with yield curve control (YCC) of government bonds as perhaps the best evidence of how this policy might work in other developed economies. We interpret the evidence with a simple model in which YCC affects prices of both government and other bonds via “broad” transmission channels, but only government bond prices through “narrow” liquidity channels. YCC seemingly worked well in 2020 while the market expected short rates to stay at zero for long. But as the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the outstanding amount of the targeted government bond, and its yield dislocated from other financial market instruments. The model and empirical evidence point to narrow transmission channels playing more prominent roles than broad channels considered in prior studies of quantitative easing (QE), such as portfolio balance effects and signaling about short term rates. We argue that asset-specific narrow channels may be primary transmission mechanisms of quantity-based QE policies as well.
    Keywords: monetary policy; yield curve control; quantitative easing
    JEL: E4 E5 G1
    Date: 2022–04–01
  24. By: Otaviano Canuto
    Abstract: Emerging market and developing economies (EMDE) face a common set of external shocks: rising energy and food prices; tightening in global financial conditions caused by the prospect of sharper interest rate hikes and anticipation of "quantitative tightening"; and return of restrictions on mobility in China, on account of the Covid zero policy, leading to slumping in growth and weakening one of the primary growth drivers for the other EMDE. However, the impacts of those common shocks on EMDE have been heterogeneous.
    Date: 2022–04
  25. By: Galvani, Valentina (University of Alberta, Department of Economics)
    Abstract: This study examines how style investing impacts correlations in a small and large economy, with exchange rate risk, and a reserve currency. The results show that style investing increases correlations in both economies, but more so in the smaller market. The impact of style investing on either country's correlations depends nonlinearly on the volatility of the exchange rate and the strength of the reserve currency effect. Higher levels of risk aversion amplify the impact of style investing on correlations. Imprecise signals and country preferences increase correlation distortions. The results have risk management implications for portfolio diversification.
    Keywords: Style investing; International Markets; Portfolio Diversification; Return Correlations; International Markets
    JEL: G10 G11 G12
    Date: 2022–03–24
  26. 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 doubles the number and importance of announcements; 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 that pre-date the announcement. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on asset prices are largely unchanged; Second, estimates of the effects on the macroeconomy are substantially larger and more significant than what previous studies using high-frequency data have typically found.
    JEL: E43 E52 E58
    Date: 2022–04
  27. By: Gupta, Poonam; Eichengreen, Barry; Choudhary, Rishabh
    Abstract: This paper provides an assessment of India’s inflation-targeting regime. It shows that the Reserve Bank of India is best characterized as a flexible inflation targeter: contrary to criticism, it does not neglect changes in the output gap when setting policy rates. The paper does not find that the Reserve Bank of India became more hawkish following the transition to inflation-targeting; to the contrary, adjusting for inflation and the output gap, policy rates became lower, not higher. Some evidence suggests that inflation has become better anchored: increases in actual inflation do less to excite inflation expectations, indicative of improved anti-inflation credibility. The question is whether the shift to inflation-targeting has enhanced the credibility of monetary policy such that the Reserve Bank of India is in a position to take extraordinary action in response to the Covid-19 crisis. The paper argues that the rules and understandings governing inflation-targeting regimes come with escape clauses allowing central banks to shelve their inflation targets temporarily, under specific circumstances satisfied by the Covid-19 pandemic. The paper provides evidence that inflation-targeting central banks were able to respond more forcefully to the Covid-19 crisis, consistent with the idea that inflation expectations were better anchored, providing more policy room for maneuver.
    Keywords: Inflation targeting, Monetary policy, India
    JEL: E5 E52
    Date: 2021–01
  28. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the Wu-Xia (2016) and the Krippner (2015a) ones) and for different lower bound parameters we compare the out-of-sample forecasting performance of an inflation model including a shadow rate interaction term with a benchmark one excluding it. Both specifications are estimated by OLS (Ordinary Least Squares) and includes a range of macroeconomic factors computed by means of principal component analysis. Both point and density forecasts of the inflation rate are evaluated. The models including the shadow rate interaction term are found to outperform the benchmark ones according to both sets of criteria except in countries operating an official inflation targeting regime. The presence or absence of a zero lower bound affects which type of shadow rate produces more accurate inflation forecasts.
    Keywords: shadow interest rates, zero lower bound, inflation forecasting, density forecasts
    JEL: C38 C53 E37 E43 E58
    Date: 2022
  29. By: Meinerding, Christoph; Poinelli, Andrea; Schüler, Yves
    Abstract: Using survey data from German households, we find that individuals with lower climate concern tend to have higher inflation expectations up to five years ahead. This correlation is most pronounced among individuals with extremely high inflation expectations. Evaluating candidate explanations, we find that part of the link between climate concern and inflation expectations can be associated with individuals' perceived exposures to climate-related risks and with their distrust in the central bank. Overall, our results suggest that climate change perceptions matter for inflation expectations.
    Keywords: climate change,inflation expectations,physical risk,transition risk,central bank distrust,household surveys
    JEL: E31 E50 Q54 Q58
    Date: 2022
  30. By: Ignacio Lozano-Espitia; Fernando Arias-Rodríguez
    Abstract: This paper aims to provide evidence on the relationship between fiscal and monetary policy in Colombia through an empirical exploration of the credit risk channel. Under this approach, fiscal policy plays an important explanatory role in the sovereign risk premium, which, in turn, could affect the exchange rate and inflation expectations. The Central Bank reacts to inflation expectations using the policy interest rate; consequently, such reaction could be indirectly influenced by fiscal behavior. Using monthly data from January 2003 to December 2019, we estimate both jointly and independently the reduced-form core equations of a system that describes the credit risk channel in a small open economy. Our findings are in line with the model predictions. Fiscal policy affected the country’s sovereign risk during this period, but only slightly. Hence, there is insufficient evidence to sustain the idea that monetary policy has been significantly influenced by government fiscal management. **** Este documento analiza la relación entre las políticas fiscal y monetaria en Colombia, mediante la evaluación empírica del canal de riesgo crediticio. En este enfoque, la política fiscal explicaría la prima de riesgo soberano la cual, a su vez, puede afectar la tasa de cambio nominal y las expectativas de inflación. El Banco Central reacciona a las expectativas de inflación usando la tasa de interés de política; así, dicha reacción estaría influenciada indirectamente por la política fiscal. Utilizando información mensual de 2003 a 2019 se estima, de manera conjunta e independiente, un sistema de ecuaciones que describe de forma reducida el funcionamiento del canal de riesgo de crédito en una economía pequeña y abierta. Nuestros resultados son coherentes con las predicciones del modelo teórico. Se encuentra que la política fiscal afectó el riesgo soberano del país durante el período de estudio, aunque de manera modesta. Sin embargo, no hay suficiente evidencia para afirmar que la política monetaria haya sido influenciada de manera importante por la política fiscal, descartándose situaciones de dominancia fiscal.
    Keywords: Policy interaction, fiscal policy, monetary policy, sovereign credit risk, Interacción de políticas, política fiscal, política monetaria, riesgo de crédito soberano.
    JEL: E61 E63 E62 E52
    Date: 2022–04
  31. By: Maraoui, Najia (Monastir University); Amor, Thouraya Hadj (Monastir University); Khefacha, Islem (Monastir University); Rault, Christophe (University of Orléans)
    Abstract: In this paper, we investigate how economic, political and institutional factors affect the choice of exchange rate regimes, using data on eight MENA (Middle East and North Africa) countries over the 1984-2016 period. Specifically, we run random-effects ordered probit regressions of the likelihood of exchange rate regimes on potential determinants of exchange rate regimes. Three important findings emerge from the analysis. i) Political and institutional factors play an important role in determining the exchange rate regime in MENA countries: a democratic political regime and a low level of corruption increases the probability to opt for a fixed regime. While, strong governments, political stability such as less internal conflicts and more government stability, more law and order enforcement and left-wing Government decreases the probability to opt for a fixed regime. ii) Bureaucracy, independent central banks, elections, terms of trade as well as the monetary independence have no effect on the choice of exchange rate regimes. iii) Financial development is not a robust determinant of the choice of exchange rate regimes. Our results still hold when considering alternative specifications and have important implications for policy makers in MENA countries.
    Keywords: exchange rate regimes, country risk, political and institutional factors, panel data, ordered probit regression, MENA
    JEL: C23 F33 F55 H80
    Date: 2022–04
  32. By: Richhild Moessner
    Abstract: We study how carbon pricing has affected inflation ex-post, using dynamic panel estimation of New-Keynesian Phillips curves for 35 OECD economies from 1995 to 2020. As carbon pricing we consider prices of emissions trading systems (ETS) and carbon taxes. We find that an increase in prices of ETS by $10 per ton of CO2 equivalents increases energy CPI inflation by 0.8 percentage points (pp), and headline inflation by 0.08pp, but has no significant effects on food and core CPI inflation. We also find that an increase in carbon taxes by $10 per ton of CO2 equivalents increases food CPI inflation by 0.1pp, but has no significant effects on energy CPI inflation, headline and core CPI inflation.
    Keywords: climate policies, carbon tax, carbon emission trading system, climate change, inflation
    JEL: E31 E52 E58 Q48 Q58
    Date: 2022
  33. By: Javier Eliecer Pirateque-Niño; Daniela Rodríguez-Novoa; José Hernán Piñeros-Gordo
    Abstract: This paper analyzes empirically the relationship between monetary policy interventions and the net interest margin of Colombian credit institutions for the 2003 – 2019 period. Considering the endogeneity problem that arises when analysing this relationship, we calculate a series of monetary policy shocks as the residuals of regressing the monetary policy rate on a set of quantifiable variables that the Central Bank of Colombia’s Board of Directors had at each of its monetary policy meetings. Thereafter, we conduct a panel regression analysis in which we relate these shocks, and a set of macroeconomic and bank-specific variables to the net interest margin. Through a non-linear approach, we find a significant quadratic relationship, which reflects that once the endogeneity problem is overcome, the net interest margin increases to policy shocks. The net interest margin increases to positive policy shocks due to the different dynamics of deposits and loans, and increases to negative policy shocks given the higher sensitivity of banks’ funding costs compared to the one of interest income. **** Este documento analiza empíricamente la relación entre las intervenciones de política monetaria y el margen neto de interés de los establecimientos de crédito en Colombia entre 2003 y 2019. Con el fin de controlar por la endogeneidad que subyace a esta relación, se calcula una serie de choques de política monetaria. Estos choques corresponden a los residuales de una regresión entre la tasa de política monetaria y un conjunto de variables cuantificables disponibles para la Junta Directiva del Banco de la República al momento de cada una de sus reuniones de política monetaria. Seguido de esto, se realiza un análisis de panel de datos en el que se utilizan como variables explicativas del margen neto de interés la serie de choques, algunas variables macroeconómicas y algunas propias de cada entidad. Mediante una aproximación no lineal, se encuentra una relación cuadrática significativa, la cual indica que una vez se supera el problema de endogeneidad, el margen neto de interés se incrementa ante choques de política monetaria. Ante choques positivos de política monetaria, el aumento en el margen neto de interés obedece al comportamiento asimétrico de los préstamos y los depósitos. Por su parte, ante choques negativos de política monetaria el margen neto de interés incrementa dada la mayor sensibilidad de los costos de fondeo bancarios frente a los ingresos por intereses.
    Keywords: net interest margin, monetary policy shock, credit intensity, interest rates, margen neto de interés, choques de política monetaria, intensidad del crédito, tasas de interés
    JEL: E43 E44 E52 G21
    Date: 2022–04
  34. By: Phurichai Rungcharoenkitkul; Fabian Winkler
    Abstract: Prevailing explanations of persistently low interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, possibly leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this `hall-of-mirrors' effect can explain much of the decline in real interest rates since 2008.
    Keywords: Natural rate of interest; Learning; Misperception; Overreaction; Dispersed information; Long-term rates; Demand shocks; Monetary policy shocks
    JEL: E43 E52 E58 D82 D83
    Date: 2022–03–18
  35. By: Martín Almuzara; Argia M. Sbordone
    Abstract: The surge in inflation since early 2021 has sparked intense debate. Would it be short-lived or prove to be persistent? Would it be concentrated within a few sectors or become broader? The answers to these questions are not so clear-cut. In our view, one should ask how much of the inflation is persistent and how much of it is broad-based. In this post, we address this question through a quantitative lens. We find that the large ups and downs in inflation over the course of 2020 were largely the result of transitory shocks, often sector-specific. In contrast, sometime in the fall of 2021, inflation dynamics became dominated by the trend component, which is persistent and largely common across sectors.
    Keywords: trend inflation; sectoral inflation; common persistence
    JEL: E2 B22
    Date: 2022–04–20

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