nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒07‒11
sixteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Demand for Money, Near-Money, and Treasury Bonds By Arvind Krishnamurthy; Wenhao Li
  2. Would households understand average inflation targeting? By Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
  3. Will the U.S. Dollar Continue to Dominate World Trade? By Mary Amiti; Oleg Itskhoki; Jozef Konings
  4. Central Banks and Climate Policy: Unpleasant Trade–Offs? A Principal–Agent Approach By Donato Masciandaro; Riccardo Russo
  5. Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy By Tsang, Andrew
  6. The Anatomy of Single-Digit Inflation in the 1960s By Jeremy B. Rudd
  7. Exchange rate pass-through to Inflation: Symmetric and Asymmetric Effects of Monetary Environment in Nigeria By Tiamiyu, Kehinde A.
  8. Unconventional credit policy in an economy under zero lower bound By Jorge Pozo; Youel Rojas
  9. Political Shocks and Inflation Expectations: Evidence from the 2022 Russian Invasion of Ukraine By Lena Dräger; Klaus Gründler; Niklas Potrafke
  10. Who Killed the Phillips Curve? A Murder Mystery By David Ratner; Jae W. Sim
  11. What is the Effect of Domestic Demand Shocks on Inflation in a Small Open Economy? Chile 2000-2021 By Ramon Lopez; Kevin Sepulveda
  12. The Lightning Network: Turning Bitcoin into Money By Anantha Divakaruni; Peter Zimmerman
  13. Criptomonedas: ¿beneficio o maleficio para los ecuatorianos? By Barragán-Tandapilco, Jonathan Xavier
  14. The Effects of Capital Controls on Housing Prices By Yang Zhou
  15. Why has the Norwegian krone exchange rate been persistently weak?. A fully simultaneous VAR approach By Andreas Benedictow; Roger Hammersland
  16. The Empirical Performance of Financial Frictions since 2008 By Gregor Boehl; Felix Strobel

  1. By: Arvind Krishnamurthy; Wenhao Li
    Abstract: Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1934 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per unit delivered by each asset. Treasury bonds and bank deposits are imperfect substitutes, in contrast to the findings of perfect substitutes of Nagel (2016). This result is directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.
    JEL: E41 E43 G21 G23
    Date: 2022–05
  2. By: Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
    Abstract: Yes, they would. In a randomized control trial, we provide groups of respondents from the Bundesbank Online Panel Households with information about a hypothetical alternative ECB monetary policy regime akin to the Federal Reserve's flexible average inflation targeting (AIT). Inflation expectations significantly increase for the treated individuals. When provided with additional information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. We assess the economic significance of our findings by comparing two model economies under different monetary policy strategies, calibrated to match the difference in medium-term inflation expectations from our survey results. Under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is considerably reduced.
    Keywords: Monetary Policy Strategy,Household Inflation Expectations,Randomized Control Trial,Survey Data
    JEL: F33 E31 E32
    Date: 2022
  3. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: There are around 180 currencies in the world, but only a very small number of them play an outsized role in international trade, finance, and central bank foreign exchange reserves. In the modern era, the U.S. dollar has a dominant international presence, followed to a lesser extent by the euro and a handful of other currencies. Although the use of specific currencies is remarkably stable over time, with the status of dominant currencies remaining unchanged over decades, there have been decisive shifts in the international monetary system over long horizons. For example, the British pound only lost its dominant currency status in the 1930s, well after Britain stopped being the leading world economy. In a new study, we show that the currency that is used in international trade transactions is an active firm-level decision rather than something that is just fixed. This finding raises the question of what factors could augment or reduce the U.S. dollar’s dominance in world trade.
    Keywords: currency invoicing; exporters; trade; US dollar
    JEL: E2 F0
    Date: 2022–06–21
  4. By: Donato Masciandaro; Riccardo Russo
    Abstract: This paper focuses on the trade–offs that central banks would face if they were to start tackling climate change. Disruptive natural events can hamper growth and capital accumulation, thereby affecting price and financial stability – elements for which central banks are responsible. Yet, the array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates. By leveraging a principal–agent setting, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. We also examine the corresponding effects in terms of climate risks. Our results show that central banks’ effectiveness in this regard depends on the degree of their independence from governments’ climate preferences and on their ability to calibrate their “green” easing, either monetary and/or regulatory, on the realised level of abatement and emissions.
    Keywords: monetary policy, macroprudential policy, fiscal policy, climate change, delegation, independence
    JEL: D02 E52 E58 E61 E63
    Date: 2022
  5. By: Tsang, Andrew
    Abstract: This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional impacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the "one size fits all" monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.
    Keywords: China,monetary policy,regional heterogeneity,machine learning,shadow banking
    JEL: E52 C54 R11 E61
    Date: 2021
  6. By: Jeremy B. Rudd
    Abstract: Recently, the experience of the 1960s—when the U.S. inflation rate rose rapidly and persistently over a comparatively short period—has been invoked as a cautionary tale for the present. An analysis of this period indicates that the inflation regime that prevailed in the 1960s was different in several key regards from the one that prevailed on the eve of the pandemic. Hence, there are few useable lessons to be drawn from this experience, save that monetary policymaking remains a difficult undertaking.
    Keywords: Great Inflation; Martin Fed; Volcker disinflation; Inflation dynamics
    JEL: E52 N12 E31
    Date: 2022–05–20
  7. By: Tiamiyu, Kehinde A.
    Abstract: Abstract: This study investigates symmetric, asymmetric, and structural models of exchange rate pass-through to inflation in Nigeria over the monthly period of 2000: Month 01- 2021: Month 05. The percentage change in the price of import-competing goods (traded goods) that is ascribed to a particular percentage change in the exchange rate (which is the price of one country's currency in terms of another country's currency) is referred to as exchange rate pass-through. This paper is set out to examine the impact of monetary environment in exchange rate pass-through to inflation in Nigeria using monthly time series data. The method adopted included inter-alia the use of both the Augmented Dickey-Fuller (ADF) unit root test and the Breaking point unit root test for relative comparison. The results of unit root tests from both ends indicate the existence of both stationary and non-stationary variables which made adoption of bounds cointegration test plausible and Nonlinear Autoregressive Distributed Lag(NARDL) methodologies applicable, this method allows the incorporation of possible asymmetric effects of positive and negative changes in explanatory variables on dependent variable unlike the conventional Autoregressive Distributed Lag (ARDL) models where the possible impact of explanatory variable changes remain unaccounted for on dependent variable. Further, the results from cointegration test confirm the existence of short-run situations among the variables of interest in all the models considered. Also, three models were estimated under the framework of linear and nonlinear Autoregressive Distributed Lag (ARDL) models. The model estimate findings revealed that inflation modeling in Nigeria is both autoregressive and adaptive in character. In the short run, pass-through estimates are larger, though declining, due to asymmetric behaviours of exchange rate changes as confirmed by Wald test. This justifies the existence of asymmetric effect in the behavour of exchange rate over times. It was also discovered that inflation is seldom a monetary phenomenon in this new normal as industrial production index was found to reduce consumer prices drastically and exchange rate found to explain inflation better than money supply. However, structural policy of land border closure exerts positive but insignificant pressure on inflation in Nigeria during the period under investigation, this may be because of lag effect between the policy stance and reaction of economic agents in the economy. Finally, by policy recommendation, Nigerian government is thus advised to invest heavily in productive sectors of economy, specifically, by building capacities of local producers.
    Keywords: Exchange rate pass-through; Inflation; Money supply; Land border closure; Non-linear ARDL
    JEL: E31 E42 E51 F0
    Date: 2022–03–08
  8. By: Jorge Pozo; Youel Rojas
    Abstract: In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium inefficiently low levels of credit and stronger reductions of the real and nominal interest rates, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank liquidity injection to banks provided they commit to issue loans (indirect central bank loans) that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since indirect central bank (CB) loans cannot be diverted by banks and are governmentguaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans, and due to that the relative cost reduction from having access to cheaper indirect CB loans is smaller.
    Keywords: unconventional credit policy, asymmetric information, moral hazard, zero lower bound
    JEL: E44 E5 G21 G28
    Date: 2022–05
  9. By: Lena Dräger; Klaus Gründler; Niklas Potrafke
    Abstract: How do global political shocks influence individuals’ expectations about economic outcomes? We run a unique survey on inflation expectations among 145 tenured economics professors in Germany and exploit the 2022 Russian invasion in Ukraine as a natural experiment to identify the effect of a global political shock on expectations about national inflation rates. We find that the Russian invasion increased short-run inflation expectations for 2022 by 0.75 percentage points. Treatment effects are smaller regarding mid-term expectations for 2023 (0.47 percentage points) and are close to zero for longer periods. Text analysis of open questions shows that experts increase their inflation expectations because they expect supplyside effects to become increasingly important after the invasion. Moreover, experts in the treatment group are less likely to favor an immediate reaction of monetary policy to the increased inflation, which gives further evidence of the shock being interpreted primarily as a supply-side shock.
    Keywords: Inflation expectations, belief formation, natural experiment, 2022 Russian invasion of Ukraine, survey, economic experts
    JEL: E31 E71 D74 D84
    Date: 2022
  10. By: David Ratner; Jae W. Sim
    Abstract: Is the Phillips curve dead? If so, who killed it? Conventional wisdom has it that the sound monetary policy since the 1980s not only conquered the Great Inflation, but also buried the Phillips curve itself. This paper provides an alternative explanation: labor market policies that have eroded worker bargaining power might have been the source of the demise of the Phillips curve. We develop what we call the "Kaleckian Phillips curve", the slope of which is determined by the bargaining power of trade unions. We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence.
    Keywords: Bargaining power; Profits; Inflation dynamics
    JEL: E31 E32 E52
    Date: 2022–05–20
  11. By: Ramon Lopez; Kevin Sepulveda
    Abstract: This study decomposes the factors that determined inflation in Chile during the period 2000-2021. We find that the main determinants of domestic inflation are variables of external origin and the exchange rate. Domestic demand has played a rather limited role as an inflationary factor. In general, in normal periods, increases in domestic demand explain no more than 20% of observed inflation. The average monthly inflation observed during the 2000-2021 period reached 0.3%, which means that domestic demand increases in normal periods explain a monthly inflation of 0.06%. Surprisingly, the extraordinary periods of rapid acceleration in demand as a result of highly expansionary fiscal policies and/or of the large withdrawals from pension retirement savings had a rather modest effect on the acceleration of inflation. Only in the last 5 months of 2021 we can detect some effects of the expansion in domestic demand on inflation. This study corroborates an expected fact in a small and open economy like Chile's: most domestic price changes are determined by foreign price changes.
    Date: 2022–05
  12. By: Anantha Divakaruni; Peter Zimmerman
    Abstract: The Lightning Network (LN) is a means of netting Bitcoin payments outside the blockchain. We find a significant association between LN adoption and reduced blockchain congestion, suggesting that the LN has helped improve the efficiency of Bitcoin as a means of payment. This improvement cannot be explained by other factors, such as changes in demand or the adoption of SegWit. We find mixed evidence on whether increased centralization in the Lightning Network has improved its efficiency. Our findings have implications for the future of cryptocurrencies as a means of payment and their environmental footprint.
    Keywords: bitcoin; blockchain; cryptocurrency; Lightning Network; payments
    JEL: E42 G10
    Date: 2022–06–21
  13. By: Barragán-Tandapilco, Jonathan Xavier
    Abstract: An introduction to the field of cryptocurrencies is made, to later develop the central idea, which deals with whether cryptocurrencies are a benefit or a curse for Ecuadorians, analyzing together with what the ECB and the Monetary and Financial Code tell us about this matter. Finally, a conclusion is made that adapts to the new era of new technological and financial innovation, without the desire to infer personal financial decisions, and as explained in this article, due to price volatility, there may be large losses. economic, so all the information compiled is left to the free interpretation of the readers.
    Keywords: Cryptocurrencies, Digital Economy, DAO, Crypto-Economy
    JEL: A22 G33 O16 Z00
    Date: 2022
  14. By: Yang Zhou (Graduate School of Economics, Kobe University and Junir Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Policymakers increasingly use capital control policies (i.e., capital flow management) to manage capital flows. However, whether the implementation of such policies can effectively affect housing prices and to what extent is less discussed. In this paper, we study the effects of four types of granular capital control polices on housing prices using a large cross-country panel of 53 economies from 1995 to 2017. We find that the estimated effects of capital controls are distinct for different capital flow types and flow directions, but most capital control indices appear to reduce housing prices. Specifically, we find that capital controls have asymmetric effects on housing prices for advanced and emerging economies. The negative effects of capital controls on housing prices are mainly driven by pre-crisis subsample. This means that capital controls have been in effect several times before Global Financial Crisis. We also estimate the effects for boom and slump periods respectively and find that capital control policies are implemented in an acyclical way. Since there exists endogeneity for capital control on real estate transactions, we further use inverse probability weights to rebalance capital control actions and find that this method can weaken the negative effects on housing prices, and the attenuation effects can be attributed to endogenous factors.
    Keywords: Capital control policy; Housing price; Local projections; Inverse probability; Weighted regression adjusted estimator
    JEL: F21 F32 F38 F41 G28
    Date: 2022–06
  15. By: Andreas Benedictow; Roger Hammersland (Statistics Norway)
    Abstract: We identify variables that help explain the persistent weakness of the Norwegian krone since 2016 within a fully simultaneous model of the underlying process driving the krone-euro exchange rate. In addition to a set of fundamental variables we consider non-traditional explanatory variables related to an exchange rate premium, inspired by several claims to insights made by market participants. The weak Norwegian krone seems to be largely attributable to factors related to the risk premium, such as the declining importance of petroleum in the Norwegian economy, a relative reduction in FDI in Norway and a fall in oil industry-specic share prices.
    Keywords: Exchange rate; Foreign exchange rate premium; Cointegration; VAR-analysis
    JEL: C22 C32 F31 F41 G15
    Date: 2022–05
  16. By: Gregor Boehl; Felix Strobel
    Abstract: We use nonlinear Bayesian methods to evaluate the performance of financial frictions `a la Bernanke et al. (1999) during and after the Global Financial Crisis. We find that, despite the attention received in the literature, including these frictions in the canonical medium-scale DSGE model does not improve the model’s ability to explain macroeconomic dynamics in the US during the Great Recession. The reason is that in the estimated model with financial frictions, the firms’ leverage declines in response to the post-2008 collapse of investment, which in turn implies a narrowing of the credit spread. Hence, the estimated model predicts financial decelerator effects. Associated financial shocks play only a minor role for macroeconomic dynamics. Our estimates account for the binding effective lower bound on nominal interest rates, and confirm our findings independently for US and euro area data.
    Keywords: Financial Frictions, Great Recession, Business Cycles, Effective Lower Bound, Nonlinear Bayesian Estimation
    JEL: C11 C63 E31 E32 E44
    Date: 2022–06

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