nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒06‒13
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Managing Monetary Policy Normalization By Gianluca Benigno; Pierpaolo Benigno
  2. Why bank money creation? By Gersbach, Hans; Zelzner, Sebastian
  3. Technological progress and institutional adaptations: the case of the Central Bank Digital Currency (CBDC) By Riccardo De Bonis; Giuseppe Ferrero
  4. Central bank digital currency and bank intermediation By Adalid, Ramón; Álvarez-Blázquez, Álvaro; Assenmacher, Katrin; Burlon, Lorenzo; Dimou, Maria; López-Quiles, Carolina; Martín Fuentes, Natalia; Meller, Barbara; Muñoz, Manuel A.; Radulova, Petya; Rodriguez d’Acri, Costanza; Shakir, Tamarah; Šílová, Gabriela; Soons, Oscar; Veghazy, Alexia Ventula
  5. Exercise Based Pedagogy to transition to Today's Implementation of Monetary Policy in Macroeconomics Principles By James K. Self; Kim P. Kuynh
  6. Central Bank Digital Currencies: The Motivation By Bert Van Roosebeke; Ryan Defina
  7. Implications for Determinacy with Average Inflation Targeting By Ahmad, Yamin; Murray, James
  8. Monetary and macroprudential policy interactions in a model of the European Union By Richard Dennis; Pelin Ilbas
  9. Q-Monetary Transmission By Priit Jeenas; Ricardo Lagos
  10. The Fed's International Dollar Liquidity Facilities: New Evidence on Effects By Linda S. Goldberg; Fabiola Ravazzolo
  11. Government Spending between Active and Passive Monetary Policy By Collin Philipps; Sebastian Laumer
  12. Output Divergence in Fixed Exchange Rate Regimes: Is the Euro Area Growing Apart? By Yao Chen; Felix Ward
  13. The Chronology of Brexit and UK Monetary Policy By Martin Geiger; Jochen Güntner
  14. Normalizing the central bank’s balance sheet: Implications for inflation and debt dynamics By Begoña Domínguez; Pedro Gomis-Porqueras
  15. Exploring the Trade-Off Between Leaning Against Credit and Stabilizing Real Activity By Luca Benati
  16. Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard By Kris James Mitchener; Gonçalo Pina
  17. What drove the rise in bank lending rates in Lithuania during the low-rate era? By Jaunius Karmelavičius; Ieva Mikaliūnaitė-Jouvanceau; Andrius Buteikis
  18. Central Bank Digital Currency: Stability and Information By Todd Keister; Cyril Monnet
  19. heterogeneous Information, Subjective Model Beliefs, and the Time-Varying Transmission of Shocks By Alistair Macaulay
  20. Effectiveness of Monetary Policy in Stimulating Economic Growth in Nigeria By Igbafe, Timothy
  21. The digital economy, privacy, and CBDC By Ahnert, Toni; Hoffmann, Peter; Monnet, Cyril
  22. The Implication of Exchange Rate Volatility on Nigeria’s External Reserves: 1980-2020 By Soro, Garbobiya Tuwe; Aras, Osman Nuri
  23. E-Money and Deposit Insurance in Kenya By Bert Van Roosebeke; Ryan Defina; Paul Manga
  24. Is Pakistan Entering into the Digital Currency Ecosystem? By Saddam Hussein; Abdul Jalil
  25. Does Fixing High Minimum Support Price (MSP) Of Wheat A Source Of Inflation Or High Prices Itself A Victim Of Inflation? By Abedullah
  26. E-Money in the United Kingdom - A Case Study By Paola Crosetta
  27. Don’t Fall in Love with Parity: Understanding Exchange Rate Depreciation By Abdul Jalil
  28. The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic By J. Scott Davis; Andrei Zlate
  29. Optimal bank capital requirements: What do the macroeconomic models say? By Gulan, Adam; Jokivuolle, Esa; Verona, Fabio
  30. State-owned banks and international shock transmission By Borsuk, Marcin; Kowalewski, Oskar; Pisany, Pawel
  31. Uncertainty Shocks, Capital Flows, and International Risk Spillovers By Ozge Akinci; Sebnem Kalemli-Ozcan; Albert Queraltó
  32. Alternative Measures for the Global Financial Cycle: Do They Make a Difference? By Xin Tian; Jan Jacobs; Jakob de Haan
  33. Cryptocurrencies and Decentralized Finance (DeFi) By Igor Makarov; Antoinette Schoar

  1. By: Gianluca Benigno; Pierpaolo Benigno
    Abstract: We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.
    Keywords: reserve management; central bank balance sheet; quantitative tightening; quantitative easing; interest on reserves
    JEL: E31 E43 E52 E58
    Date: 2022–05–01
  2. By: Gersbach, Hans; Zelzner, Sebastian
    Abstract: We provide a rationale for bank money creation in our current monetary system by investigating its merits over a system with banks as intermediaries of loanable funds. The latter system could result when CBDCs are introduced. In the loanable funds system, households limit banks' leverage ratios when providing deposits to make sure they have enough "skin in the game" to opt for loan monitoring. When there is unobservable heterogeneity among banks with regard to their (opportunity) costs from monitoring, aggregate lending to bank-dependent firms is inefficiently low. A monetary system with bank money creation alleviates this problem, as banks can initiate lending by creating bank deposits without relying on household funding. With a suitable regulatory leverage constraint, the gains from higher lending by banks with a high repayment pledgeability outweigh losses from banks which are less diligent in monitoring. Bank-risk assessments, combined with appropriate risksensitive capital requirements, can reduce or even eliminate such losses.
    Keywords: monetary system,banking,money creation,loanable funds,capitalrequirements,leverage constraint,asymmetric information,moral hazard,CBDC
    JEL: E42 E44 E51 G21 G28
    Date: 2022
  3. By: Riccardo De Bonis (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: The paper summarizes the debate about the proposed introduction of a Central Bank Digital Currency (CBDC). We place the CBDC in the wider context of the different types of money used in market economies. We explore the most important ideas on why economic agents use money, on the history of money and on the distinction between public and private money. We then discuss the digitalization of the payment system and the main characteristics of cryptoassets. We conclude the paper by explaining the reasons for introducing a CBDC as well as the associated risks.
    Keywords: central bank digital currency, history of money, payment system, digitalization, digital euro
    JEL: E42 E58
    Date: 2022–04
  4. By: Adalid, Ramón; Álvarez-Blázquez, Álvaro; Assenmacher, Katrin; Burlon, Lorenzo; Dimou, Maria; López-Quiles, Carolina; Martín Fuentes, Natalia; Meller, Barbara; Muñoz, Manuel A.; Radulova, Petya; Rodriguez d’Acri, Costanza; Shakir, Tamarah; Šílová, Gabriela; Soons, Oscar; Veghazy, Alexia Ventula
    Abstract: In July 2021 the Eurosystem decided to launch the investigation phase of the digital euro project, which aims to provide euro area citizens with access to central bank money in an increasingly digitalised world. While a digital euro could offer a wide range of benefits, it could prompt changes in the demand for bank deposits and services from private financial entities (ECB, 2020a), with knock-on consequences for bank lending and resilience. By inducing bank disintermediation, a central bank digital currency, or CBDC, could in principle alter the transmission of monetary policy and impact financial stability. To prevent this risk, options to moderate CBDC take-up are being discussed widely.In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area.Based on assumptions about the degree of substitution between different forms of money in normal times, several take-up scenarios are calculated to illustrate how the potential demand for a digital euro might shape up. The paper then analyses the mechanisms through which commercial banks and the central bank could react to the introduction of a digital euro. Overall, effects on bank intermediation are found to vary across credit institutions in normal times and to be potentially larger in stressed times. Further, a potential digital euro’s capacity to alter system-wide bank run dynamics appears to depend on a few crucial factors, such as CBDC remuneration and usage limits. JEL Classification: E42, E51, G21
    Keywords: bank intermediation, bank runs, CBDC, digital euro
    Date: 2022–05
  5. By: James K. Self (Indiana University, Department of Economics); Kim P. Kuynh (Bank of Canada and Indiana University, Department of Economics)
    Abstract: The process by which most Central Banks target nominal interest rates and implement monetary policy has changed considerably in the last 20 years. Today, the use of interest payments on reserves and the decoupling of rate targets (e.g., the Fed Funds Rate) from reserve targets now play a crucial role in Central Banks policy decisions. However, in introductory macroeconomics textbooks, monetary policy implementation focuses on the relation of reserves in the system to the deposit multiplier and money stock, which leads to a discussion of interest rate targeting resulting from effective adjustments to the money supply. The main problem with that focus is that the target rate is not dependent on the money multiplier or strict control of the money stock. Instead, the current policy uses interest payments on reserves to create a floor that sets the target rate. This process leaves the system's reserves mostly independent of the targeting process. As a result, the current pedagogy leaves students unaware of the actual process used to target rates and an unrealistic interpretation of money multipliers' importance. We survey commonly used introductory macroeconomic books to highlight current pedagogy. Moreover, we show how it can be changed to reflect a Central Bank’s current practice to implement monetary policy. We also provide key learning objectives to transform outdated monetary policy implementation pedagogy consistent with existing Federal Reserve Bank practices.
    Keywords: monetary policy implementation, excess reserves, pedagogy
    Date: 2022–05
  6. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: A growing number of central banks are considering the issuance of central bank digital currencies (CBDCs). Upon their introduction and depending on their exact design, CBDCs may have considerable consequences for deposit insurers as well. In the first of a set of papers, this Fintech Brief sets out four of the main motivations for issuing CBDCs. Acknowledging considerable divergences across jurisdictions, we find: CBDCs for the general public (“retail CBDCs†) would constitute a central bank liability and a form of digital cash. To the public, they would be an alternative to central bank issued cash and private money, such as bank deposits. A large and growing share of central banks are experimenting with retail CBDCs. Some 20% of central banks indicate that they are likely to issue a retail CBDC by 2026, 40% indicate this is “possible†. Short-term monetary policy considerations are unlikely to play a significant role in central banks’ motivation for CBDCs. Whereas central banks in emerging markets and developing economies note that CBDCs may contribute to promoting financial inclusion, in advanced economies, CBDCs are not the most straightforward instrument in doing so. The evolution of payments plays a pivotal role in developing CBDCs. Given the declining role of cash in some jurisdictions, CBDCs as a new form of central bank money may contribute to safeguarding trust in the public currency. However, the available CBDC amounts necessary for that purpose may cause conflicts with likely and financial-stability-related limits on the volume of CBDCs that individuals may hold. As CBDCs would offer an alternative payment solution, they would contribute to resilience in future payment markets that may be privately dominated. However, given their digital nature, CBDCs may well be subject to similar cybersecurity and other digital risks that apply to private payment systems. CBDCs may contribute to competition and efficiency in an otherwise oligopolistic market for payment services, dominated by BigTechs. While potentially challenging to implement, a regulatory or competition-law-based response may be possible and would be less intrusive than introducing a CBDC. Central banks face the risk of large-scale use by the public of private or public (i.e. CBDC) digital currencies, not denominated in the domestic currency. These currencies may play a decisive role in the economy, and if foreign-based, largely out of reach of domestic legislation. CBDCs and/or private payment solutions in the domestic currency may assist in mitigating this risk, given sufficient demand for these.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–11
  7. By: Ahmad, Yamin; Murray, James
    Abstract: We use a standard New Keynesian model to explore implications of backward- and forward-looking windows for monetary policy with average inflation targeting and investigate the conditions for determinacy. A unique equilibrium rules out sunspot shocks that can lead to self-fulfilling shocks for inflation expectations. We find limitations for the length of the forward window and demonstrate how this depends on other parameters in the model, including parameters governing monetary policy and expectations formation.
    Keywords: Average Inflation Targeting, Determinacy, Monetary Policy
    JEL: E50 E52 E58
    Date: 2022–05–13
  8. By: Richard Dennis; Pelin Ilbas
    Abstract: We use the two-country euro-area model developed by Quint and Rabanal (2014) to study policymaking in the European Monetary Union (EMU). We focus on strategic interactions: 1) between an EMU-level monetary authority and an EMU-level macro-prudential authority, and; 2) between an EMU-level monetary authority and regional macro-prudential authorities. In the former, price stability and financial stability are pursued at the EMU level, while in the latter each macro-prudential authority adopts region-specific objectives. We compare cooperative and non-cooperative equilibria in simultaneous-move and leadership environments, each obtained assuming discretionary policymaking. Further, we assess the effects on policy performance of assigning shared objectives across policymakers and of altering the relative importance attached to different policy objectives. In the three-policymaker setting, we find that regional macro-prudential policymakers play an important role in achieving regional stability.
    Keywords: Monetary policy, macro-prudential policy, policy coordination
    JEL: E42 E44 E52 E58 E61
    Date: 2022–04
  9. By: Priit Jeenas; Ricardo Lagos
    Abstract: We study the effects of monetary-policy-induced changes in Tobin's q on corporate investment and capital structure. We develop a theory of the mechanism, provide empirical evidence, evaluate the ability of the quantitative theory to match the evidence, and quantify the relevance for monetary transmission to aggregate investment.
    Keywords: Monetary transmission, stock prices, Tobin's q, investment, capital structure
    JEL: D83 E22 E44 E52 G12 G31 G32
    Date: 2022–05
  10. By: Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: In March 2020, the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. We provide new evidence on how the central bank swap lines and FIMA repo facility reduce strains in global dollar funding markets and US Treasury markets during extreme stress events. These facilities are found to contribute to the narrowing of foreign exchange swap basis spreads and to reduce the sensitivity of global funding strain metrics to risk sentiment deterioration. Cross border flows through banks for excess liquidity support purposes are reduced in the near term, and the risk sensitivity of equity and bond fund flows declines. However, access to these facilities leave longer-term patterns of liquidity and capital flows across borders broadly unchanged. While official sector liquidity hoarding and “dash for cash” type of activity is expected to be lower with access to these facilities, initial evidence does not show general differential changes in foreign exchange reserve holdings by foreign central banks in line with the type of liquidity access.
    JEL: F31 F33 F42 G01 G15
    Date: 2022–04
  11. By: Collin Philipps (Department of Economics and Geosciences, US Air Force Academy); Sebastian Laumer (Department of Economics, University of North Carolina Greensboro)
    Abstract: Theory suggests that the government spending multiplier is larger when monetary policy is passive. We find instead that, regardless of the monetary policy regime at the time of a spending shock, the central bank responds actively towards inflation quickly after the shock. This rapid monetary policy response leaves multipliers ultimately unaffected by whether the initial regime was active or passive. Our analysis highlights the necessity of accounting for the monetary policy reaction to spending shocks. Failure to do so ignores the central bank’s ability to respond to shocks, potentially leading to a misrepresentation of how multipliers depend on monetary policy.
    Keywords: Fiscal Multiplier, Monetary Policy, Nonlinear SVARs
    JEL: C32 E32 E62
    Date: 2022–05
  12. By: Yao Chen (Erasmus University Rotterdam); Felix Ward (Erasmus University Rotterdam)
    Abstract: Can fixed exchange rate regimes cause output divergence among member states? We show that such divergence is a long-run equilibrium characteristic of a two-region model with fixed exchange rates, heterogeneous labor markets, and endogenous growth. Under flexible exchange rates, monetary policy closes output gaps and realizes the associated maximum TFP growth in both regions. Upon fixing exchange rates, the region with higher structural wage inflation falls into a low-growth trap. When calibrated to the euro area, the model implies a slowdown in the TFP growth rate of the euro areaÕs periphery relative to its core. An empirical analysis confirms that the peripheryÕs higher structural wage inflation rate contributed to its lower TFP growth in the aftermath of joining the euro.
    Keywords: Exchange rate, growth, monetary policy
    JEL: E50 F31 O40
    Date: 2022–04–28
  13. By: Martin Geiger (Liechtenstein Institute); Jochen Güntner
    Abstract: The outcome of the referendum on the UK’s membership of the European Union in June 2016 was largely unanticipated by politicians and pundits alike. Even after the “Leave†vote, the uncertainty surrounding the withdrawal process might have affected the UK economy. We draw on an official list of political events published by the House of Commons Library and daily data on UK stock prices, exchange rates, and economic policy uncertainty to construct a novel instrument for Brexit shocks. Including a monthly aggregate of this time series into a vector-autoregressive model of the UK economy, we find that Brexit shocks were quantitatively important drivers of the business cycle in the aftermath of the referendum that lowered gross domestic product, consumer confidence, and monetary policy rates while raising CPI inflation. A counterfactual experiment, in which we shut down the endogenous response of UK monetary policy to Brexit shocks, reveals that the Bank of England fended off a stronger contraction of output in 2016 and 2018.
    Keywords: Brexit, business cycle, economic policy uncertainty, high-frequency identification, monetary policy
    JEL: E02 E31 E32 E44 E58 F15
    Date: 2022–05
  14. By: Begoña Domínguez; Pedro Gomis-Porqueras
    Abstract: We explore the effects of reducing the overall size of the central bank’s balance sheet and lowering its maturity structure. To do so, we consider an environment where fiscal policy is traditionally passive and the central bank follows the Taylor principle. In addition, the monetary authority has also explicit size and compositional rules regarding its balance sheet. Agents in this economy face limited commitment in some markets and government bonds can be used as collateral. When short and long-term public debt exhibit premia, changes in the central bank’s balance sheet have implications for long-run inflation and real allocations. To ensure a unique locally stable steady state, the central bank should target a low enough maturity composition of its balance sheet. In our numerical exercise, calibrated to the United States, we find that long-term debt holdings by the central bank should be less than 0.5 times of their short-term positions. Moreover, the process of balance sheet normalization should aggressively respond to the total debt issued in the economy relative to its target. These findings depend on the degree of liquidity of long-term bonds. The more liquid long-term bonds are, the lower is the value of the composition threshold and the parameter space consistent with unique and stable equilibria is smaller. In addition, we consider a modified Taylor rule that takes into account the premium. Such rule increases the prevalence of multiplicity of steady states and delivers lower welfare. Thus, we argue that the traditional Taylor rule is appropriate for managing interest rates in the presence of premia.
    Keywords: Inflation, Government Bonds, Liquidity, Spreads, Maturity, Balance Sheet.
    JEL: E40 E61 E62 H21
    Date: 2022–05
  15. By: Luca Benati
    Abstract: Evidence from monetary VARs for ten countries points towards an unfavorable trade-off between leaning against credit fluctuations and stabilizing real economic activity. Results are robust both across countries, and based on two alternative approaches, i.e. either (i) focusing on the impact of monetary policy shocks, which I identify based on a combination of zero and sign restrictions, or (ii) analyzing ‘modest’ policy interventions in which the central bank reacts weakly, but systematically, to credit fluctuations. In particular, a modest intervention suggests that in the U.S. during the years leading up to the financial crisis a 1% shortfall in real GDP would have been associated with a decrease in credit leverage by 2.5 percentage points.
    Keywords: Credit; structural VARs; sign restrictions; zero restrictions; Lucas critique
    Date: 2022–05
  16. By: Kris James Mitchener; Gonçalo 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.
    Keywords: countercyclical interest rates, stabilization, gold standard, commodity lottery
    JEL: E52 E32 F33 F41 F62 N10
    Date: 2022
  17. By: Jaunius Karmelavičius (Bank of Lithuania); Ieva Mikaliūnaitė-Jouvanceau (Bank of Lithuania); Andrius Buteikis (Bank of Lithuania)
    Abstract: While Euro area interest rates were responding to accommodative monetary policy and 201519, in stark contrast, Lithuania’s bank lending rates increased. decreasing throughout Although the rates have slightly dropped around t he onset of the pandemic, they are still question, what were the elevated and well above the EA figures. This paper calls into drivers of such interest rate dynamics in Lithuania? By analysing the historical events and practical aspects of loan pricing in Lithuania’s banking industry, we build an empirical lending rate variation across banks, time and lending segments, and model that exploits maps it to different drivers of pricing. We find that the recent changes in lending rates in response to changes can be attributed to avera ge bank margins, which moved largely in market concentration.
    Keywords: interest rates, loan pricing, banking, concentration, capital requirements
    JEL: D22 D40 E43 G21 L11
    Date: 2022–05–20
  18. By: Todd Keister (Rutgers University); Cyril Monnet (University of Bern, Study Center Gerzensee, Swiss National Bank)
    Abstract: We study how the introduction of a central bank digital currency (CBDC) would affect the stability of the banking system. We present a model that captures a concern commonly raised in policy discussions: the option to hold CBDC can increase the in- centive for depositors to run on weak banks. Our model highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to depositor runs. Second, monitoring the flow of funds into CBDC allows policymakers to more quickly identify weak banks and take appropriate action, which also decreases the incentive for depositors to run. Our results suggest that a well-designed CBDC may decrease rather than increase financial fragility.
    Date: 2022–05
  19. By: Alistair Macaulay
    Abstract: Using a novel decomposition, I show that systematic relationships between information and subjective models across agents distort the aggregate transmission of shocks in a general class of macroeconomic models. I document evidence of such a systematic correlation between household information and subjective models around inflation using unique features of the Bank of England Inflation Attitudes Survey: on average, households with more negative beliefs about the impacts of inflation obtain more information about inflation. A model in which acquiring information about inflation is costly, and observed information affects the perceived relationship of inflation and real incomes, can explain the empirical variation in information and subjective models in the cross-section and over time. The model generates time-varying shock transmission, and a selection effect that weakens the role of information frictions in aggregate dynamics. Through a novel channel, transitory spikes in inflation may become ‘baked in’ to inflation expectations, but only among those with the most positive subjective models of the effects of inflation.
    Keywords: information frictions, subjective models, heterogeneous agents, expectations, shock transmission
    JEL: D83 D84 E31 E71
    Date: 2022
  20. By: Igbafe, Timothy
    Abstract: This study examined the effectiveness of monetary policy in stimulating economic growth in Nigeria between 1990 and 2019. Secondary data were sourced mainly from CBN publications. The theoretical framework was based on the Keynesian transmission mechanism. In the cause of empirical investigation, various advanced econometric techniques like Augmented Dickey Fuller Unit Root Test, ARDL Bounds Test and Error Correction Mechanism (ECM) were employed and the result revealed that all the variables were stationary at first difference except monetary policy rate that was stationary at level, meaning that the variables were integrated of different order justifying ARDL Bounds Test and error correction mechanism test. The ARDL Bounds Test result indicated that there is long run relationship among the variables with the lower bound and upper bound less than the calculated at 5% level of significant. The result of the error correction mechanism (ECM) test indicates an 88% adjustment back to equilibrium. It is therefore recommended that since economic growth in Nigeria is greatly influenced in the long-run by interest rate and reserve requirement making monetary policy an effective tool in stimulating economic growth. Nigerian government through its monetary authorities should unveil other policies that will stimulate economic growth not only in the long run but also, in the short run period.
    Keywords: Monetary policy Economic Growth Time Series Dat Error Correction Model.
    JEL: G00
    Date: 2022–01
  21. By: Ahnert, Toni; Hoffmann, Peter; Monnet, Cyril
    Abstract: We study a model of financial intermediation, payment choice, and privacy in the digital economy. Cash preserves anonymity but cannot be used for more efficient online transactions. By contrast, bank deposits can be used online but do not preserve anonymity. Banks use the information contained in deposit flows to extract rents from merchants in need of financing. Payment tokens issued by digital platforms allow merchants to hide from banks but enable platforms to stifle competition. An independent digital payment instrument (a CBDC) that allows agents to share their payment data with selected parties can overcome all frictions and achieves the efficient allocation. JEL Classification: D82, E42, E58, G21
    Keywords: central bank digital currency, digital platforms, financial intermediation, payments, privacy
    Date: 2022–05
  22. By: Soro, Garbobiya Tuwe; Aras, Osman Nuri
    Abstract: Given the volatile nature of the exchange rate in Nigeria and the dynamics in the external reserves of the nation which are kept in foreign currency (dollar), this paper examined the impact of exchange rate shocks on the Nigerian external reserves using annual data from 1980 to 2019. Employing the Autoregressive Distributed Lag model, the results of the study indicates that exchange rate has an asymmetric impact on reserves, suggesting that the partial sum of exchange rate differ in magnitude and size relative to reserves in both positive and negative direction. The impact of a positive shock in exchange rate on reserves is statistically significant while the effect of a negative shock in exchange on reserve is statistically insignificant in the long-run. The same relationship holds for the short-run effect, although, both the positive and the negative short-run effects are statistically insignificant. The study therefore recommends that monetary authority should strengthens the exchange rate by adopting a flexible exchange floating and making it to thrives in order to boost reserves. Some of these policies could include allowing the market forces to determine the exchange rate and harmonizing the exchange rate position of the country.
    Keywords: Exchange Rate, External Reserves, Non-Linear Autoregressive Distributed Lag Model, Nigeria.
    JEL: F31
    Date: 2021–05–01
  23. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers); Paul Manga (Kenya Deposit Insurance Corporation)
    Abstract: E-money is widespread in Kenya, especially through MPESA, a form of e-money stored on mobile phones and issued by Safaricom, a mobile network operator (MNO). Integration between the MPESA platform and the traditional banking system is increasing. Given the very high use-grade of MPESA throughout the population, it has reached critical importance in Kenya. In Kenya, e-money issuers must back their e-value with bank balances at commercial banks (float), through trust accounts. Deposit insurance does not cover a default of the e-money issuer. However, the Kenya Deposit Insurance Corporation aims at offering pass-through coverage in case of a default of the deposit-taking commercial bank holding the trust accounts. Pass-through coverage is confronted with a number of challenges, including regarding data on the identity of e-money users and their balances held. Also, the critical importance of MPESA raises questions as to how to deal with a potential default of the MNO and the role of deposit insurance in such a scenario. Looking forward, there is merit in further coordination amongst safety net participants as well as in the management of trust accounts and the strengthening of data-availability requirements to e-money issuers.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–12
  24. By: Saddam Hussein (Pakistan Institute of Development Economics); Abdul Jalil (Pakistan Institute of Development Economics)
    Abstract: Digital currency is defined as any currency available exclusively in electronic form. For instance, you could go to an Auto Teller Machine (ATM) or a bank and turn an electronic record of your currency holdings into physical dollars. However, it never takes physical form. It always remains on a computer network and is exchanged via digital means. For example, instead of using physical Rupee notes, you would make purchases by transferring digital currency to retailers using your mobile device. Digital currency is the future because of faster payments, less expensive, smooth international transactions, efficiency, lesser corruption, and maximum financial inclusion.
    Keywords: Pakistan, Digital Currency, Ecosystem
    Date: 2022
  25. By: Abedullah (Pakistan Institute of Development Economics)
    Abstract: Wheat is politically sensitive crop and Government of Pakistan (GoP) heavily intervene in the wheat market by purchasing about 70% of marketable surplus at the Minimum Support Price (MSP). Without realizing that inflation, itself is a culprit of increase in wheat prices, it is argued that fixing high wheat prices as a minimum support price is contributing in surging inflation. The analysis reveal that MSP of wheat has increased less sharply than its cost of production during the last four years—leading to decline the profitability of wheat growers overtime. Hence, wheat farmers are the victims of inflation. Comparison further demonstrate that profitability of other crops (Rice, Maize and Cotton) has increased overtime—implying that inflation has benefited the growers of these crops. Because input-output prices adjust through market mechanism which automatically account for inflationary effect while it is not in case of wheat.
    Keywords: Fixing, Minimum Support Price, Wheat, Inflation,
    Date: 2022
  26. By: Paola Crosetta (Financial Services Compensation Scheme)
    Abstract: The Financial Services Compensation Scheme (FSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms. It is an integrated compensation scheme covering not only deposits but also investment and insurance provision and intermediation, debt management, pensions, and home finance. FSCS is a statutory body created under the Financial Services and Markets Act 2000 (FSMA). FSCS does not provide coverage for electronic money (e-money). There is consumer protection for e-money and payment services via regulatory rules, but they are related to safeguarding requirements for customer funds. Any decision to extend FSCS coverage would be as a result of a legislative change and/or changes to regulatory rules and would be subject to public consultation. As of December 2020, there are around 1200 e-money and payments services firms operating in the UK. The growing presence of these players in the UK market brings challenges and opportunities for both consumers, who are increasingly dealing with these products, and regulators, as questions arise on how to best protect consumers if these providers, or the underlying institution holding the safeguarded funds, fail.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2021–09
  27. By: Abdul Jalil (Pakistan Institute of Development Economics)
    Abstract: The Pakistani rupee has depreciated, against the US dollar, around 10 per cent, since May 2021 (see Figure 1). This is a natural response of the exchange rate parity to swelling trade deficit, mounting inflation, and negative real interest rates. Considering the macroeconomic fundamentals of the Pakistani economy, it is expected that the rupee will remain under pressure and will continue on the fall. This situation raises several questions. What should be the response of the State Bank of Pakistan (SBP)? Should SBP intervene in the forex market or not save the parity? If yes, then how much? If not, then why? What should be the course of action of the government and the SBP in the long run?
    Keywords: Understanding, Exchange Rate, Depreciation
    Date: 2021
  28. By: J. Scott Davis; Andrei Zlate
    Abstract: We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 48 advanced and emerging market economies. We begin by estimating the global financial cycle at a weekly frequency with data through 2021 and observe the two standard deviation fall in our global financial cycle index over a period of four weeks in March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the global financial cycle. We show how during the pandemic crisis, high-frequency COVID-19 fundamentals like infection and vaccination rates—which differed in timing and intensity across our sample countries—were just as important as traditional, slow-moving macroeconomic fundamentals, such as the net external asset position and the current account balance, in explaining the cross-country heterogeneity in exchange rates and capital flows.
    Keywords: COVID-19; global financial cycle; capital flows; exchange rates
    JEL: F3 F4
    Date: 2022–05–13
  29. By: Gulan, Adam; Jokivuolle, Esa; Verona, Fabio
    Abstract: The optimal level of banks' capital requirements has been a key research topic since at least the introduction of the Basel rules in the late 1980s. In this paper, we review the literature, focusing on recent findings from quantitative structural macroeconomic models. While dynamic stochastic general equilibrium models capture second-round (general equilibrium) effects such as the feedback effects from macroeconomic outcomes back to financial intermediation and the dynamic evolution of the economy following regulatory changes, they suffer from tractability issues, including treatment of nonlinear effects, that typically force modeling simplifications. Additionally, studies tend to be concerned with determining the optimal level of fixed capital requirements. Only a handful offer estimates of the optimal size of the dynamic buffers. Since optimal dynamic macroprudential policies depend heavily on the nature of the underlying shocks, questions arise regarding the robustness and potential side effects of such plicies. Despite progress, the optimal level of bank capital requirements - in either fixed or dynamic form - remains largely an open research question.
    Date: 2022
  30. By: Borsuk, Marcin; Kowalewski, Oskar; Pisany, Pawel
    Abstract: In this study, we reassess the links between commercial bank ownership and lending growth during the 1996–2019 period. We find evidence that the lending activities of foreign state-controlled and foreign privately owned banks differ, particularly during different crisis type periods and origins. Foreign state-controlled banks’ loan growth rates are higher than those of foreign private-owned banks during host banking crises. By contrast, foreign state-controlled banks reduce their credit growth during a home banking crisis, while foreign private-owned banks increase lending in the host countries. Moreover, we find evidence that bank-specific characteristics were more important determinants of credit growth than ownership structure during the global financial crisis of 2008 and gain in importance in the post-crisis period. JEL Classification: G01, G21, G28
    Keywords: credit growth, crisis, foreign banks, internal capital market, state-controlled banks
    Date: 2022–05
  31. By: Ozge Akinci; Sebnem Kalemli-Ozcan; Albert Queraltó
    Abstract: Foreign investors’ changing appetite for risk-taking has been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of uncovered interest parity (UIP) premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries that operate under financial frictions and act as global intermediaries in that they take on foreign asset risk. In this setup, an exogenous increase in U.S.-specific uncertainty, modeled as higher volatility in U.S. assets, leads to higher risk premia in both countries. This occurs because higher uncertainty leads to deleveraging pressure on U.S. intermediaries, triggering higher global risk premia and lower global asset values. Moreover, when U.S. uncertainty rises, the exchange rate in the foreign country vis-a-vis the dollar depreciates, capital flows out of the foreign country, and the UIP premium increases in the foreign country and decreases in the U.S., as in the data.
    Keywords: financial frictions; risk premia; time-varying uncertainty; intermediary asset pricing; financial spillovers; global financial cycle
    JEL: E32 E44 F41
    Date: 2022–05–01
  32. By: Xin Tian; Jan Jacobs; Jakob de Haan
    Abstract: We construct several measures for the global financial cycle using dynamic factor models and data for 25 advanced and emerging countries over 1980-2019. Our results suggest that global cycles in asset prices and capital flows are highly similar and synchronized, especially during crisis episodes. Our measures for asset-specific global cycles suggest that cycles in credit and house prices are less volatile and have a longer duration than cycles in equity and bond prices. Finally, we find significant co-movement of our global financial cycle measures and two measures as suggested in the literature that are based on top-down and bottom-up approaches.
    Keywords: global financial cycle, national financial cycle, dynamic factor analysis, capital flows, asset prices
    JEL: E44 F32 F36
    Date: 2022
  33. By: Igor Makarov; Antoinette Schoar
    Abstract: The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.
    JEL: G1 G2 G20 G21 G23 G3
    Date: 2022–04

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