nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒05‒23
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central Bank Communication with the General Public: Promise or False Hope? By Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  2. Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand By Pongsak Luangaram; Nipit Wongpunya
  3. Price Level Targeting with Imperfect Rationality: A Heuristic Approach By Vojtech Molnar
  4. More Than Words: Fed Chairs’ Communication During Congressional Testimonies By Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
  5. The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under By David Lucca; Jonathan H. Wright
  6. Systematic Monetary Policy in a SVAR for Australia By Lance A. Fisher; Hyeon-seung Huh
  7. The cost of excess reserves and inflation in the United States during the last century By Pavon-Prado, David
  8. THE EFFECTS OF THE ECB COMMUNICATIONS ON FINANCIAL MARKETS BEFORE AND DURING COVID-19 PANDEMICAbstract:The paper aims to estimate the effects of the European Central Bank communications on the sectoral returns of STOXX Europe 600 from 2013 to 2021. Previous literature has investigated the effects of communications of central banks and checked their effects on macroeconomics and financial data. New opportunities offered by text mining analysis allow us to find new insights into these aspects. However, studies focusing on how text mining indices derived from central banks’ communications can affect different financial sectors are more limited. In this paper, we use different sentiment and topic indices derived from the European Central Bank’s speeches. The paper shows how these different topics and sentiment indices affect the returns on different financial sectors. Our results indicate that the topic of communications is more influential on returns of sectoral indices than the type of communications. Moreover, we find that monetary policy and financial stability topics are the most relevant. We also find that during the COVID-19 time, the number of negative speeches is relevant for almost all the sectoral index returns. By Luca Alfieri; Mustafa Hakan Eratalay; Darya Lapitskaya; Rajesh Sharma
  9. Monetary Policy and the Financial Cycle: International Evidence By Jaromir Baxa; Jan Zacek
  10. Pandemic Recession And Helicopter Money: Venice, 1629-1631 By Charles Goodhart; Donato Masciandaro; Stefano Ugolini
  11. Causal coupling between European and UK markets triggered by announcements of monetary policy decisions By Volta, Vittoria; Aste, Tomaso
  12. Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard By Kris James Mitchener; Gonçalo Alves Pina
  13. Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers By Ryan Defina
  14. "A politically evasive monetary theory should not be the basis for a progressive movement": Eine kritische Betrachtung der modern monetary theory By Heise, Arne
  15. How Economic, Political and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region By Najia Maraoui; Thouraya Hadj Amor; Islem Khefacha; Christophe Rault
  16. US Sanctions Reinforce the Dollar’s Dominance By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
  17. The State of Digital Financial Services in Francophone West Africa By Jenny Aker; David Carroll
  18. Margin procyclicality and the collateral cycle By Benos, Evangelos; Ferrara, Gerardo; Ranaldo, Angelo
  19. Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador By Fernando E. Alvarez; David Argente; Diana Van Patten
  20. Does mobile money services adoption foster intra-African goods trade? By Fayçal Sawadogo; Abdoul-Akim Wandaogo
  21. Turning in the widening gyre: monetary and fiscal policy in interwar Britain By Ronicle, David
  22. Fiscal dominance in India: Through the windshield and the rearview mirror By Anshuman Kamila

  1. By: Alan S. Blinder (Princeton University); Michael Ehrmann (European Central Bank); Jakob de Haan (University of Groningen); David-Jan Jansen (De Nederlandsche Bank)
    Abstract: Central banks are increasingly reaching out to the general public to motivate and explain their monetary policy actions. One major aim of this outreach is to guide inflation expectations; another is to ensure accountability and create trust. This article surveys a rapidly-growing literature on central bank communication with the public. We first discuss why and how such communication is more challenging than communicating with expert audiences. Then we survey the empirical evidence on the extent to which this new outreach does in fact affect inflation expectations and trust. On balance, we see some promise in the potential to inform the public better, but many challenges along the way.
    Keywords: Banks, Monetary Policy
    JEL: D12 D84 E52 E58 G53
    Date: 2022–03
  2. By: Pongsak Luangaram; Nipit Wongpunya
    Abstract: This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank’s endogenous reaction function.
    Keywords: Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy
    JEL: C32 E52 F41
    Date: 2022–05
  3. By: Vojtech Molnar
    Abstract: The paper compares price level targeting and inflation targeting regimes in a New Keynesian model with bounded rationality. Economic agents form their expectations using heuristics - they choose between a few simple rules based on their past forecasting performance. In the paper, two main specifications of the price level targeting model are examined - the agents form expectations either about the price level or about inflation, which is ex ante not equivalent because of the sequential nature of the model. In addition, several formulations of the forecasting rules are considered. Both regimes are assessed by performing a loss function comparison. According to the results, price level targeting is slightly preferable in case where expectations are created about the price level under the baseline calibration. It is, however, sensitive to some model parameters and there is a risk of instability. Furthermore, when expectations are created about inflation, price level targeting loses credibility over time and leads to divergence of the economy. On the other hand, inflation targeting model functions in a stable manner. Therefore, while the potential benefits of price level targeting have been confirmed under certain assumptions, the results suggest that inflation targeting constitutes a more robust choice for monetary policy.
    Keywords: Bounded rationality, heuristics, inflation targeting, monetary policy, price level targeting
    JEL: E31 E37 E52 E58 E70
    Date: 2022–04
  4. By: Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
    Abstract: We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Our measures of Fed Chairs’ emotions expressed in words, voice and facial expressions are created using machine learning. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise the SandP500 index and lower the VIX—indicating that these cues help shape market responses to Fed communications. These effects add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Markets respond most to the Chair’s emotions expressed about issues related to monetary policy.
    Keywords: Central bank research; Financial markets; Monetary policy communications
    JEL: E52 E58 E71
    Date: 2022–05
  5. By: David 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.
    JEL: C32 E43 E52 G12 G14
    Date: 2022–04
  6. By: Lance A. Fisher (Macquarie University); Hyeon-seung Huh (Yonsei Univ)
    Abstract: A SVAR is estimated over the period of conventional monetary policy in Australia. The monetary policy shock is identified by imposing sign restrictions on the coefficients in the structural equation for the cash rate. There is very high posterior probability on structural models which imply a fall in output and prices, in response to a contractionary monetary policy shock, though the posterior probability of a price puzzle is somewhat higher than for other puzzles. The posterior median estimate of the systematic response of the cash rate to inflation increases noticeably when a price puzzle is ruled out.
    Keywords: monetary policy shocks, structural equations, puzzles, identified set of responses
    JEL: C30 C51 E52
    Date: 2022–05
  7. By: Pavon-Prado, David
    Abstract: This paper proposes another factor explaining why the American banking sector accumulates reserves (the reserves-cost mechanism) and its consequences mainly on inflation (reserves-cost channel). The mechanism claims that when banks are holding reserves more expensive than those available in the market, they obtain new reserves and accumulate those unused. In addition, the cost of the sources from where banks obtain their reserves determines banks’ decisions about the loans rate. This originates the reserves-cost channel, whereby banks’ decisions about the loans rate modify the impact of Fed’s policies on final targets such as inflation. I test the validity of the mechanism and channel estimating an SVAR for the period 1922-2020. The results confirm both hypothesis and show that when banks set a loans rate lower in relation to the short-term rate of reference, there is higher demand for credit, output and inflation levels.
    Keywords: monetary policy, Federal Reserve, SVARs, excess reserves, reserves cost
    JEL: E4 E5
    Date: 2022–04–28
  8. By: Luca Alfieri; Mustafa Hakan Eratalay; Darya Lapitskaya; Rajesh Sharma
    Keywords: Monetary policy, Central banking, Text mining, COVID-19
    Date: 2022
  9. By: Jaromir Baxa; Jan Zacek
    Abstract: We evaluate to what extent inflation-targeting central banks appear to have used their interest rate policies to respond to financial imbalances beyond the reaction via the conventional Taylor-rule variables. First, we use the multivariate structural time series model to extract financial cycles for Australia, Canada, Japan, New Zealand, Sweden, the United Kingdom, and the United States. We then estimate time-varying monetary policy reaction functions extended for the financial cycle. We interpret the responses to the financial cycle as attempts to lean against the wind of financial imbalances. The historical decompositions of interest rates reveal that most central banks raised interest rates in response to asset prices and credit booms in the past, including in the years preceding the global financial crisis. The interest rate response to financial cycles is more pronounced with ex-post than with pseudo real-time data. Finally, we document that the financial crisis of 2008 had less of an impact on credit and real housing prices in countries where the interest rate responses to financial cycles were accompanied by macroprudential measures.
    Keywords: Financial cycle, model-based filters, monetary policy, reaction functions
    JEL: C32 E32 E40 E44 E52
    Date: 2022–04
  10. By: Charles Goodhart; Donato Masciandaro; Stefano Ugolini
    Abstract: This paper analyses the monetary policy of the Most Serene Republic of Venice in the years of calamities using a modern equivalent of helicopter money, namely an extraordinary issue of (base) money, coupled with capital losses for the issuer. We treat the 1629 famine and the 1630-1631 plague as a unique negative macroeconomic shock, which the government addressed using fiscal monetization, with diverse effects on its citizens. Consolidating the balance sheets of the Treasury and of the State Bank of Issue, we show that the Republic implemented what was, in effect, helicopter money, with such policies most likely driven by political reasons, to limit public disturbances and riots.
    Keywords: monetary policy, helicopter money, pandemic, Venice 1629-1631
    JEL: N1 N2 E5 E6 D7
    Date: 2022
  11. By: Volta, Vittoria; Aste, Tomaso
    Abstract: We investigate high-frequency reactions in the Eurozone stock market and the UK stock market during the time period surrounding European Central Bank (ECB) and the Bank of England (BoE)’s interest rate decisions, assessing how these two markets react and co-move influencing each other. The effects are quantified by measuring linear and nonlinear transfer entropy combined with a bivariate empirical mode decomposition from a dataset of 1 min prices for the Euro Stoxx 50 and the FTSE 100 stock indices. We uncover that central banks’ interest rate decisions induce an upsurge in intraday volatility that is more pronounced on ECB announcement days and there is a significant information flow between the markets with prevalent direction going from the market where the announcement is made towards the other.
    Keywords: markets; transfer entropy; risk spillover; causality; ES/K002309/1; (EP/P031730/1); H2020-ICT-2018-2 825215
    JEL: F3 G3
    Date: 2022–03–30
  12. By: Kris James Mitchener; Gonçalo Alves Pina
    Abstract: We estimate the causal impact of countercyclical interest rates on macroeconomic outcomes in open economies. To identify countercyclical interest rates, we construct a new database of short-term interest rates, principal exports, and international commodity prices for 40 economies from 1870 to 1913. This era of capital mobility, nominal anchors, specialization and trade integration, exposed economies to multiple exogenous demand-side shocks. Specialization and trade integration subjected economies to a “commodity lottery” in the form of price fluctuations in world markets. Capital mobility and a currency peg exposed them to interest-rate movements originating in the U.K., the largest economy and linchpin of the classical gold standard. We identify (i) positive effects of commodity-export prices on real GDP and the domestic price level and (ii) negative effects of exogenous changes in short-term interest rates on the same variables. We then show that countercyclical interest rates, defined relative to export-price shocks, stabilized both output and the domestic price level. This stabilization was more effective for the price level than for output.
    JEL: E4 E52 F33 F41 N10
    Date: 2022–04
  13. By: Ryan Defina (International Association of Deposit Insurers)
    Abstract: In this Policy Brief, we provide quantitative evidence demonstrating that the resolution toolkit has expanded considerably since the 2008 Global Financial Crisis (GFC). Purchase and assumption transactions, bridge bank facilitation and bail-in mechanisms have all become more available for bank resolution purposes. The use of such resolution tools is increasingly subject to least cost rules and to systemic failure considerations. These resolution tools may be available to different authorities, such as deposit insurers or resolution authorities, depending on the jurisdiction in question. Two of the three statistical models applied point to a significant increase in resolution powers for deposit insurers.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–08
  14. By: Heise, Arne
    Date: 2022
  15. By: Najia Maraoui; Thouraya Hadj Amor; Islem Khefacha; Christophe Rault
    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
  16. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: Recent sanctions on the use of Russia’s international reserve assets seem likely to reduce the appeal of US dollar reserves as a “shock absorber” for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investments. The “collateral” motive for holding dollar reserves has been enhanced by the demonstration that the United States is willing and able to sanction misbehavior. Geopolitically risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude that recent events will strengthen the role of the dollar as the key international reserve currency.
    JEL: F3 F33 F51
    Date: 2022–04
  17. By: Jenny Aker (Tufts University [Medford]); David Carroll (Tufts University [Medford])
    Abstract: The introduction of digital financial services (DFS) offers new opportunities to reduce the transaction costs associated with money transfers. Over the past decade, the number of DFS deployments has increased substantially, with over 300 deployments worldwide as of 2020. While there is substantial potential for such services to address the constraints to financial inclusion, especially in West Africa, widespread adoption and usage of these services remains relatively concentrated in particular markets. Economic research shows promise in terms of DFS increasing access to money transfers, smoothing consumption and reducing poverty in the long-term, but few studies have more sustained impacts. This can, in part, be explained by the agent network in several countries and the regulatory framework. We conclude by providing recommendations for the further growth of mobile money in West Africa.
    Keywords: West Africa,Digital Financial Services (DFS),Mobile money,Financial inclusion,Agents,Interoperability
    Date: 2022–04–07
  18. By: Benos, Evangelos (University of Nottingham); Ferrara, Gerardo (Bank of England); Ranaldo, Angelo (University of St. Gallen)
    Abstract: Using supervisory data from UK central counterparties (CCPs), we study a collateral cycle in which market participants raise liquidity in the repo markets to meet CCPs margin calls, before CCPs reinvest the liquidity through reverse repos as well as bond purchases. In the first leg, we find that increases in the cost of repo funding precede increases in CCP cash margin as market participants anticipate increased margin requirements. However, this effect is moderated by the return leg, where cash margin received by CCPs is returned to market participants via the repo and bond markets. The additional cash being recycled by CCPs via the repo markets alongside the increased demand for safe bonds, create counter‑cyclical effects that lower repo rates, especially at times of stress.
    Keywords: Central clearing; margin procyclicality; repo rates
    JEL: G10 G12 G14
    Date: 2022–04–13
  19. By: Fernando E. Alvarez; David Argente; Diana Van Patten
    Abstract: This paper studies the potential of a cryptocurrency to become a medium of exchange. We use evidence from a natural experiment: In September 2021, El Salvador became the first country in the world to make bitcoin legal tender, and all economic agents were required to accept bitcoin for all payments. The Salvadorean government also launched an app, “Chivo Wallet,” which allowed users to digitally trade both bitcoin and dollars, and gave major incentives to download it. We conduct a representative national face-to-face survey to obtain information on bitcoin’s usage and effects. Leveraging this data, we document how, despite the government’s “big push” and a large fraction of people downloading Chivo Wallet, usage of bitcoin for everyday transactions is low and is concentrated among the banked, educated, young, and male population. We also estimate the fixed cost of adopting the new payment technology, the importance of strategic complementarities for users, and the elasticity of substitution between mobile payments and other payment methods.
    JEL: E4 E41 E42
    Date: 2022–04
  20. By: Fayçal Sawadogo (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Abdoul-Akim Wandaogo (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: Using a propensity score matching methodology, we study the causal effect of mobile money services adoption on intra-African goods trade. We find that countries that adopted MM register a higher goods trade share in GDP of about 0.6 percent in comparison to non-adopters.
    Keywords: JEL classification : F10,O23,O33,O55 Mobile money,Goods trade,Impact analysis,Africa
    Date: 2021–02
  21. By: Ronicle, David (Bank of England and International Monetary Fund)
    Abstract: This paper brings together modern empirical techniques, a sign-restricted structural vector autoregression, with contemporary high frequency data to answer an old question – what role did macroeconomic policy play in Britain’s high unemployment and deflation in the years 1919 to 1938. Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of taxation, public spending and monetary policy to be assessed side-by-side in a coherent framework. In a period of particularly unsettled policy the paper finds that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment – and these played a central role in the two great recessions of the period, modern Britain’s most severe. Other policy choices could have delivered better outcomes for prices and unemployment – but these would have required making different choices in the face of conflicting objectives and some sharp trade-offs.
    Keywords: Monetary policy; fiscal Policy; economic history; Great Depression
    JEL: E52 E62 N14
    Date: 2022–04–13
  22. By: Anshuman Kamila (Institute of Economic Growth, Delhi)
    Abstract: Theoretical works have pointed at the potentially damaging impacts of fiscal dominance, i.e. fiscal authority’s profligacy being accommodated by the monetary authority. Recent scholarship have highlighted to the contrary the arguably positive effects of such accommodation under certain circumstances. Ergo, a surgical snipping of the cord of joint working of monetary and fiscal policy for all times is not advisable. This article argues that in the Indian context, the impact of fiscal operations or expansionary fiscal policy may have proved counter-productive in the past but the recent time period have shown a clear break from the past trend. As such, monetary accommodation of fiscal activism under conditions where other engines of economic activity have cooled down emphatically is advisable.
    Keywords: VECM, Cholesky impulse response, fiscal dominance, FRBM
    JEL: E52 E62 H62
    Date: 2021–04

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