nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒07‒18
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. ECB monetary policy and commodity prices By Shahriyar Aliev; Evžen Kočenda
  2. Elusive Unpleasantness By Carlos Goncalves; Mauro Rodrigues, Fernando Genta
  3. Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits By John H. Cochrane
  4. The limited power of monetary policy in a pandemic By Antoine Lepetit; Cristina Fuentes-Albero
  5. International Inflation and Trade Linkages in Brazil under Inflation Targeting By Guilherme Spinato Morlin
  6. Escaping Secular Stagnation with Unconventional Monetary Policy By Luba Petersen; Ryan Rholes
  7. The State of Pakistan’s Economy and the Ineffectiveness of Monetary Policy By Abdullah, Muhammad; Gul, Zarro; Waseem, Faiza; Islam, Tanweer
  8. Liquidity coverage ratios and monetary policy credit in the time of Corona By Gocheva, Viktoriya; Mudde, Yvo; Tapking, Jens
  9. Monetary Policy and Lending Interest Rates: evidence from Mexico By Pablo Cotler; Rodrigo Carrillo
  10. It takes two: Fiscal and monetary policy in Mexico By Ana Aguilar; Carlos Cantú; Claudia Ramírez
  11. When Could Macroprudential and Monetary Policies Be in Conflict? By Jose Garcia Revelo; Grégory Levieuge
  12. International monetary policy and cryptocurrency markets: dynamic and spillover effects By Elsayed, Ahmed H.; Sousa, Ricardo M.
  13. Monetary Policy and Bubbles in G7 Economies: Evidence from a Panel VAR Approach By Petre Caraiani; Rangan Gupta; Jacobus Nel; Joshua Nielsen
  14. Comparing Past and Present Inflation By Marijn A. Bolhuis; Judd N. L. Cramer; Lawrence H. Summers
  15. Trend inflation and an empirical test of real rigidities By Marenčák, Michal
  16. Information Frictions Across Various Types of Inflation Expectations By Cornand Camille; Hubert Paul
  17. The Inflation-Economic Growth Relationship: Estimating the Inflation Threshold in Vietnam By Mai, Nhat Chi
  18. New facts on consumer price rigidity in the euro area By Gautier, Erwan; Conflitti, Cristina; Faber, Riemer P.; Fabo, Brian; Fadejeva, Ludmila; Jouvanceau, Valentin; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Wieland, Elisabeth; Zimmer, Hélène
  19. A Monetary Policy Asset Pricing Model By Ricardo J. Caballero; Alp Simsek
  20. State-dependent Central Bank Communication with Heterogeneous Beliefs By Herbert Sylvérie
  21. European Stabilization Policy After the Covid-19 Pandemic: More Flexible Integration or More Federalism? By Andersson, Fredrik N. G.; Jonung, Lars
  22. Prices and inflation in a pandemic - a micro data approach By Richard Davies
  23. Risk Sharing and the Adoption of the Euro By Alessandro Ferrari; Anna Rogantini Picco
  24. Electronic Money Sebagai Alat Transaksi Dalam Pandangan Islam By Mufidah, Zahra Aulia; Kurniawan, Rachmad Risqy
  25. The Currency Channel of the Global Bank Leverage Cycle By Justine Pedrono
  26. The Real Effects of Invoicing Exports in Dollars By Antoine Berthou; Guillaume Horny; Jean-Stéphane Mésonnier
  27. Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ? By Bruno Thiago Tomio; Guillaume Vallet
  28. Robust Optimal Macroprudential Policy By Federico Bennett; Giselle Montamat; Francisco Roch
  29. Central Bank Digital Currencies, Internet of Things, and Islamic Finance: Blockchain Prospects and Challenges By Al-Ansari, Khalid Ahmed; Aysan, Ahmet Faruk
  30. Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation By Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
  31. The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market By Davies, Martin; Schröder, Marcel
  32. Cash in the Pocket, Cash in the Cloud: Cash Holdings of Bitcoin Owners By Daniela Balutel; Christopher Henry; Kim Huynh; Marcel Voia
  33. Cash-in-advance Payments and Transaction Size: Cash-constrained importers By YOSHIDA Yushi; Kemal TÜRKCAN; YOSHIMI Taiyo
  34. Exchange rate disconnect in general equilibrium By Itskhoki, Oleg; Mukhin, Dmitry
  35. The case of financial and banking integration of Central, Eastern and South Eastern European countries: a gravity model approach By Léonore Raguideau-Hannotin
  36. Multilateral index number methods for Consumer Price Statistics By Kevin Fox; Peter Levell; Martin O'Connell

  1. By: Shahriyar Aliev; Evžen Kočenda
    Abstract: We assess the impact of ECB monetary policy on global aggregate and sectoral commodity prices over 2001-2019. We employ a SVAR model and separately assess periods before and after the global financial crisis. Our key results indicate that contractionary monetary policy shocks have positive effects on commodity prices during both conventional and unconventional monetary policy periods, indicating the effectiveness of unconventional monetary policy tools. The largest impact is documented on fuel and food commodities. Our results also suggest that the effect of ECB monetary policy on commodity prices transmits through the exchange rate channel, which influences European market demand.
    Keywords: European Central Bank, commodity prices, short-term interest rates, M2 stock, monetary aggregate, unconventional monetary policy, Structural Vector Autoregressive model, exchange rates
    JEL: C54 E43 E58 F31 G15 Q02
    Date: 2022–06–21
  2. By: Carlos Goncalves; Mauro Rodrigues, Fernando Genta
    Abstract: As first argued in Sargent and Wallace (1981), under certain conditions a tighter monetary policy today might give rise to higher expected inflation if the public perceives that the worsened debt dynamics could end up in debt monetization. This channel is arguably stronger in countries featuring high debt and interest rates, along with weaker economic institutions. Brazil is a large emerging economy that fits the profile. Yet, using a high-frequency identification strategy, we show that higher interest rates lead to unequivocally lower inflation expectations (and local currency appreciation) around Brazil’s Central Bank monetary policy meetings.
    Keywords: monetary policy; inflation expectations; Brazil
    JEL: E52 E31 E43
    Date: 2022–06–24
  3. By: John H. Cochrane
    Abstract: Our current inflation stemmed from a fiscal shock. The Fed is slow to react. Why? Will the Fed's slow reaction spur more inflation? I write a simple model that encompasses the Fed's mild projections and its slow reaction, and traditional views that inflation will surge without swift rate rises. The key question is whether expectations are forward looking or backward looking. If expectations are forward looking, the Fed is right, and inflation will eventually fade without a period of high real interest rates. Price stickiness means inflation will persist past an initial shock. To reduce inflation, fiscal and monetary policy must be coordinated. Without fiscal contraction, an unpleasant arithmetic holds: The Fed can reduce inflation now, but only by increasing inflation later. If the Fed wishes to lower inflation durably via interest rate rises, those must come with fiscal support to pay higher costs on the debt and a windfall to bondholders. Coordinated fiscal, monetary and microeconomic reforms can, and have, swiftly eliminated inflation without the major recession of the early 1980s. Nonetheless, in the very long run, the central bank controls the price level.
    JEL: E31 E52 E58 E63 E65
    Date: 2022–05
  4. By: Antoine Lepetit; Cristina Fuentes-Albero
    Abstract: We embed an extension of the canonical epidemiology model in a New Keynesian model and analyze the role of monetary policy as a virus spreads and triggers a sizable recession. In our framework, consumption is less sensitive to real interest changes in a pandemic than in normal times because individuals have to balance the benefits of taking advantage of intertemporal substitution opportunities with the risk of becoming sick. Accommodative monetary policies such as forward guidance result in large increases in inflation but have only limited effects on real economic activity as long as the risk of infection is large. The optimal design of monetary policy hinges on how other tools used to limit virus spread, such as lockdowns, are deployed. If the lockdown policy is conducted optimally, monetary policy should focus on keeping inflation on target. However, if the lockdown policy is not optimal, the central bank faces a trade-off between its objective of stabilizing inflation and the necessity to minimize the inefficiencies associated with virus spread.
    Keywords: COVID-19, SIR macro model, statedependent effects of monetary policy, forward guidance, monetary policy trade-offs, optimal monetary policy
    JEL: E5 E1 E11
    Date: 2022–05
  5. By: Guilherme Spinato Morlin
    Abstract: We assess the connection between global and domestic inflation in Brazil during the period from 1999 to 2020. Input-output linkages have been shown to be an important cause of inflation synchronization of inflation for advanced and emerging economies. International cost shocks are less studied in the case of Brazil. We therefore estimate a Structural VAR model with an index for producer prices (PPI) of Brazilian trade partners, in addition to the other relevant determinants of inflation. Estimates show a positive effect of the Foreign PPI on Brazilian Consumer Price Index, constituting a relevant explanation for domestic inflation in Brazil during the period 1999-2020. Impulse Response functions show that the Exchange Rate is the main determinant of domestic CPI in Brazil. The results are in line with the literature’s empirical findings showing the overall relevance of international variables in the explanation of inflation. Overall, our results reveal the dominance of shocks related to the external sector (Exchange Rate, Foreign PPI, and Commodity Prices) over domestic shocks (GDP and Interest Rate) to explain inflation in Brazil. The importance of international shocks and of Foreign PPI in particular has important implications for monetary policy. International shocks are not affected by the policy rate pegged by the Central Bank of Brazil. However, the impact of these shocks on Brazilian prices also depend on the exchange rate. Therefore, our results seem to confirm that the inflation targeting regime relied mainly on the exchange rate effect of interest rate increases. Finally, this paper provides an additional variable explaining the effect of external shocks on domestic inflation in Brazil.
    Keywords: inflation, monetary policy, global inflation, exchange rate.
    JEL: E31 E52 F41 O54
    Date: 2022
  6. By: Luba Petersen; Ryan Rholes
    Abstract: We design a new experimental framework to study policy interventions to combat secular stagnations and liquidity traps in an overlapping-generations environment where participants form expectations and make real economic decisions. We observe that participants can learn to coordinate on high inflation full-employment equilibria. Permanent deleveraging shocks induce pessimistic, backward-looking expectations and considerable consumption heterogeneity as the economies experience persistent deflation. We explore the ability of unconventional monetary policy to lead economies out of deflationary traps. Permanently increasing the central bank's inflation target is insufficient to generate inflationary expectations due to low central bank credibility. Negative interest rates stimulate spending and generate the necessary inflation for the economies to escape the zero lower bound. Negative interest rates are more potent than raising the inflation target at shifting consumption to the present.
    JEL: C92 E03 E52 E70
    Date: 2022–06
  7. By: Abdullah, Muhammad; Gul, Zarro; Waseem, Faiza; Islam, Tanweer
    Abstract: Purpose: Higher interest rate policy by the State Bank of Pakistan (SBP) has not only been failed to control inflation in Pakistan but adversely impacted public and private investment. High cost of doing business retarded economic growth as well. Therefore, the aim of this study is to inspects the ineffectiveness of monetary policy measures in Pakistan and suggest possible actions to improve effectiveness of the monetary policy. Method: This study utilizes the monthly data from 2007(4)-2019(8) to compute the variance decomposition and impulse responses using VAR modelling. Findings: The impulse response analysis from the VAR model clearly highlights the ineffectiveness of interest rate channel in trying to control inflation in Pakistan. The empirical results indicate that both domestic food price and exchange rate channels are effective means of managing price levels in the country. It is, therefore, recommended that Pakistan should switch from demand side to supply-side policies when forming strategies to control economic vices like inflation.
    Keywords: Inflation, Impulse response functions, Variance decomposition
    JEL: C53 C54 E52 E58
    Date: 2021
  8. By: Gocheva, Viktoriya; Mudde, Yvo; Tapking, Jens
    Abstract: When a bank receives credit from the central bank, its Liquidity Coverage Ratio (LCR) changes. In most cases, the LCR increases. We investigate how this LCR boost from central bank credit affects banks’ behaviour, looking at the euro area during the Corona year 2020. Our theoretical and empirical analyses suggest that banks that get strong LCR boosts from central bank credit tend to take actions that reduce their LCRs. In this sense, banks consume their LCR boosts. In terms of policy conclusions, our analysis suggests that central bank credit operations can provide strong incentives for banks to take actions that reduce their LCRs. Such actions, which could include the provision of additional credit and a shortening of the maturity structure of the liabilities of the banks, plausibly have an impact on the real economy. As such, our analysis reveals what may be called a “LCR channel” of monetary policy transmission. JEL Classification: E52, E58, G28
    Keywords: central bank credit operations, Corona pandemic, Liquidity Coverage Ratio, monetary policy transmission
    Date: 2022–06
  9. By: Pablo Cotler (Department of Economics - Universidad Iberoamericana Ciudad de Mexico); Rodrigo Carrillo (Department of Economics, Universidad Iberoamericana Ciudad de Mexico)
    Abstract: Whenever the Central Bank modifies its interest rate, it is generally thought that all lending interest rates for new loans will follow. Perhaps for this reason, it is seldom analyzed whether changes in the monetary stance have a similar effect on borrowers’ expenditure across the entire income distribution. In this paper we examine this hypothesis by looking at what happened in the personal and payroll loan markets when the Central Bank of Mexico varied its reference rate during the period 2011-2019. Since it is possible that banks may have pricing policies that may differ according to the loan size, our pass-through estimations are done at an aggregate and disaggregate level. Using an autoregressive model with distributed lags that incorporates asymmetric effects, we find two major results. First, changes in the reference rate do not imply that lending rates will move in the same direction. Typically, the pass-through is either zero or negative. Thus, the interest rate channel arising from the markets for personal and payroll loans may not be helpful to reduce the inflation rate. Second, estimations using aggregate data may be misleading since they do not necessarily reflect what happens within loans of different sizes. Finally, the exclusion of control variables may bias the results. However, it also has consequences, one of them being that asymmetric pricing may no longer detected.
    JEL: E43 E52 G21
    Date: 2022–06–21
  10. By: Ana Aguilar; Carlos Cantú; Claudia Ramírez
    Abstract: We model the interaction between fiscal and monetary policy and qualify their effects in a semi-structural small open economy model calibrated for Mexico. In our model, fiscal and monetary policy follow rules tied to specific targets. We estimate how fiscal policy, through deficits and public debt accumulation, and monetary policy, through the interest rate, directly affect the economy. We study the nature of the feedback between policy decisions and examine their indirect effects through the sovereign risk channel. We find that the response of monetary policy to stabilise the economy after a shock depends on how strict is the fiscal rule. A loose fiscal stance pushes a tighter monetary policy stance. Instead, the economy recovers faster when monetary and fiscal policy complement each other.
    Keywords: monetary policy, fiscal policy, sovereign risk premium, policy rules
    JEL: E52 E58 H5 H63
    Date: 2022–05
  11. By: Jose Garcia Revelo; Grégory Levieuge
    Abstract: This paper aims to provide a comprehensive analysis of the potential conflicts between macroprudential and monetary policies within a DGSE model with financial frictions. The identification of conflicts is conditional on different types of shocks, policy instruments, and policy objectives. We first find that conflicts are not systematic but are fairly frequent, especially in the case of supply-side and widespread shocks such as investment efficiency and bank capital shocks. Second, monetary policy and countercyclical capital requirements generate conflicts in many circumstances. By affecting interest rates, they both “get in all the cracks”, albeit with their respective targets generally moving in opposite directions. Nonetheless, monetary policy could reduce its adverse financial side effects by responding strongly to the output gap. Third, countercyclical loan-to-value caps, as sector-specific instruments, cause fewer conflicts. Thus, they can be more easily implemented without concerns about generating spillovers, whereas smooth coordination is required between state-contingent capital requirements and monetary policy.
    Keywords: Macroprudential Policy, Loan-to-Value, Countercyclical Buffer, Monetary Policy, Conflicts, DSGE Model
    JEL: E44 E58 E61
    Date: 2022
  12. By: Elsayed, Ahmed H.; Sousa, Ricardo M.
    Abstract: Using daily data over the period August 5, 2013–September 27, 2019, this study investigates the dynamic spillovers between international monetary policies across four major economies (i.e. Eurozone, Japan, UK and US) and three key cryptocurrencies (i.e. Bitcoin, Litecoin and Ripple). In doing so, we apply a Time-Varying Parameter Vector Auto-Regression (TVP-VAR) model, a dynamic connectedness approach and network analysis. The empirical results indicate that cryptocurrency returns and monetary policy spillovers were particularly large when shadow policy rates became negative, moderated during the Fed's ‘tapering process’, and sharpened again more recently as cryptocurrency buoyancy returned. Gross directional spillovers suggest that shadow policy rates have more ‘to give than to receive’, while those from and to cryptocurrency returns are naturally volatile. There is also strong interconnectedness between monetary policy in either the US or the Eurozone and the UK, and between Bitcoin and Litecoin. However, the spillovers across monetary policy and cryptocurrencies tend to be muted. Finally, spillovers were only slightly larger during the Fed's ‘unconventional’ policy compared to the ‘standard’ era, but their composition qualitatively changed over time.
    Keywords: cryptocurrency; interconnectedness; international transmission; Monetary policy; spillovers; time-variation
    JEL: F3 G3
    Date: 2022–05–16
  13. By: Petre Caraiani (Institute for Economic Forecasting, Romanian Academy, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL, 32601, USA); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA)
    Abstract: We use the LPPLS Multi-Scale Confidence Indicator approach to detect both positive and negative bubbles at short-, medium- and long-run for the stock markets of the G7 countries. We were able to detect major crashes and rallies in the seven stock markets over the monthly period of 1973:02 to 2020:09. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the G7 countries, suggesting synchronized extreme movements in these stock markets. Given this, to obtain an overall picture of the G7, we used a panel VAR model to analyze the impact of monetary policy shocks on the six indicators of bubbles. We found that monetary policy not only impact the bubble indicators, but also responds to them, with the nature of the underlying responses contingent on whether bubbles are positive or negative in nature, as well as the time-scale we are analyzing. In light of these findings, our results have serious implications for monetary authorities of these developed markets. But in general, we can conclude that central banks of the G7 can indeed ``lean against the wind", and they have also been doing so under both conventional and unconventional monetary policy periods.
    Keywords: Multi-Scale Bubbles, Panel VAR, Monetary Policy, G7 Countries
    JEL: C22 C32 E52 G15
    Date: 2022–06
  14. By: Marijn A. Bolhuis; Judd N. L. Cramer; Lawrence H. Summers
    Abstract: There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this paper constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics. To return to 2 percent core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker.
    JEL: C43 E21 E31 E37
    Date: 2022–06
  15. By: Marenčák, Michal
    Abstract: Positive trend inflation resolves the observational equivalence of various sources of real rigidities which are first-order equivalent under zero trend inflation. This paper builds on this observation to assess the empirical performance of three widely used types of real rigidities — firm-specific capital, firm-specific wages and a kinked-demand curve — in matching the U.S. inflation dynamics. Firm-specific wages outperform the kinked-demand curve and firm-specific capital in terms of empirical fit. We document that positive trend inflation might reduce the ability of firm-specific factors to prolong the real affects of monetary disturbances.
    Keywords: trend inflation, real rigidity, Calvo pricing, price dispersion, monetary policy, inflation persistence
    Date: 2022–05
  16. By: Cornand Camille; Hubert Paul
    Abstract: Understanding how the degree of information frictions varies among economic agents is of utmost importance for macroeconomic dynamics. We document and compare the frequency of forecast revisions and cross-sectional disagreement in inflation expectations among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. First, we provide evidence of a heterogeneous frequency of forecast revisions across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households revise less frequently. Second, all categories exhibit cross-sectional disagreement. There is however a strong heterogeneity: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. Our analysis suggests that the nature of information frictions is closer to noisy information model features. We also explore the external validity of experimental expectations.
    Keywords: Disagreement, Forecast Revisions, Experimental Forecasts, Survey Forecasts, Central Bank Forecasts
    JEL: E3 E5 E7
    Date: 2022
  17. By: Mai, Nhat Chi
    Abstract: Utilizing annual data over the period 1990–2015 and employing the threshold model developed by Sarel (1996) with some modifications, this paper estimates the inflation threshold in Vietnam and simultaneously examines the linkage between inflation and economic growth. The findings show that the estimated inflation threshold stays at 3%–4%, above which the positive effect of inflation on economic growth vanishes, and this effect starts fading at 5.5%–7.5%. The findings of this paper regarding the inflation threshold and the inflation-economic relationship are expected to help the State Bank of Vietnam (SBV) in conducting its monetary policy, especially the inflation policy. Moreover, the findings also help the government evaluate the role of the gross domestic product’s determinants in promoting the economic growth.
    Date: 2021–12–19
  18. By: Gautier, Erwan; Conflitti, Cristina; Faber, Riemer P.; Fabo, Brian; Fadejeva, Ludmila; Jouvanceau, Valentin; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Wieland, Elisabeth; Zimmer, Hélène
    Abstract: Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks. JEL Classification: D40, E31
    Keywords: consumer prices, inflation, micro data, price rigidity
    Date: 2022–06
  19. By: Ricardo J. Caballero; Alp Simsek
    Abstract: We propose a model where monetary policy is the key determinant of aggregate asset prices (financial conditions). Spending decisions are made by a group of agents ("households") that respond to aggregate asset prices, but with noise, delays, and inertia. Asset pricing is determined by a different group of forward-looking agents ("the market"). The central bank ("the Fed") targets asset prices to close the output gap. Our model explains several facts, including why the Fed stabilizes asset price fluctuations driven by financial market shocks ("the Fed put/call"), but destabilizes asset prices in response to aggregate demand or supply shocks that induce macroeconomic imbalances (as in the late stages of the Covid-19 recovery). Although the Fed targets asset prices, it "cooperates" with the market to achieve its desired asset price. When the market and the Fed have different beliefs, the market perceives monetary policy "mistakes" that influence the policy rate the Fed needs to set. These perceived "mistakes" induce a policy risk premium and may generate a "behind the curve" phenomenon.
    JEL: E32 E43 E44 E52 G12
    Date: 2022–06
  20. By: Herbert Sylvérie
    Abstract: This paper studies how state-contingent central bank communication can improve welfare when externalities are at play. In the model, a central banker (CB) wants to influence the private sector beliefs, which are heterogeneous, to generate an upward bias in their action. The CB can engender such welfare-improving bias by providing public information, choosing a signalling strategy that is a function of fundamentals. To study this optimal communication strategy, I introduce heterogeneous priors in an otherwise standard Bayesian persuasion model à la Gentzkow and Kamenica (2011) and characterize the dependence of optimal disclosure on the heterogeneity of beliefs. I show that heterogeneity matters in two ways: (i) it is optimal to send moderating signals, which implies sending signals with positive error probabilities in both states, and constitutes a non-trivial departure from the homogeneous beliefs case; (ii) higher dispersion in beliefs leads the monetary authority to send signals with lower error probabilities. I apply my framework to a central bank communication problem in which the policy maker communicates about aggregate conditions to influence firms' investment decisions in presence of investment externalities. I empirically validate the model's predictions by showing that the FOMC unemployment rate forecasts are systematically biased in opposite directions in recessions and expansions. Also in line with the model's predictions, the forecast biases are decreasing in the degree of private sector disagreement for each state.
    Keywords: Central Bank Communication, Bayesian Persuasion, Expectations, Forecasts
    JEL: E52 E58 D83
    Date: 2022
  21. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: Crises are a major driving force behind cooperation in the European Union. This holds also for monetary and fiscal policy. During severe crises, cooperation has been enlarged and intensified. The recent covid-19 pandemic is a clear example of this pattern. The pandemic has had huge impact on the conduct of stabilization policies in the EU. Public debt has grown rapidly in many EU member states. The ECB has carried out a highly expansionary monetary policy. In this paper, we discuss the implications for the EU of a move towards increased fiscal federalism following the pandemic. First, the role of crises as a driver of political change is analysed. Next, we examine in greater detail, the effect of crises on the design of stabilisation policies in the EU since the introduction of the euro, the common currency. Finally, we discuss the significance of the recent pandemic-induced steps towards increased federalism for the EU. We raise the question as to whether this is a desirable path for the future of European cooperation.
    Keywords: Monetary policy; fiscal policy; fiscal rules; stabilization policy; European Union; ECB; crises
    JEL: E60 F42 H60
    Date: 2022–06–21
  22. By: Richard Davies
    Abstract: The Covid-19 lockdowns and recession are the most exceptional economic events in living memory and will impact the economy for years to come. One vital channel is via price changes. Price rises and cuts alter real wages, influencing consumer spending power. They have knock-on effects, via the official consumer price index (CPI) on regulated payments and costs including pensions, inflation-protected bonds and utilities. The degree of price flexibility in an economy also influences the impact of monetary policy. The way prices are evolving is thus a vital question in understanding the economic impact of pandemic. While some Covid-19 related questions will take years to answer, the availability of 'micro' data for the UK means that the impact on prices is something we can track in close to real time. The price data used in this briefing come from monthly records collected and published by the Office for National Statistics (ONS). The monthly 'price quote' files track the item sold, the shop selling it, and the UK region in which it is located. Data are available between February 1988 and December 2020. The final clean dataset contains 36m observations.
    Keywords: Covid-19, inflation, firm size, price changes
    Date: 2021–02–04
  23. By: Alessandro Ferrari; Anna Rogantini Picco
    Abstract: This paper empirically evaluates whether adopting a common currency has changed the level of consumption smoothing of euro area member states. We construct a counterfactual dataset of macroeconomic variables through the synthetic control method. We then use the output variance decomposition of Asdrubali, Sorensen and Yosha (1996) on both the actual and the synthetic data to study if there has been a change in risk sharing and through which channels. We find that the euro adoption has reduced risk sharing and consumption smoothing. We further show that this reduction is mainly driven by the periphery countries of the euro area who have experienced a decrease in risk sharing through private credit.
    Date: 2022–05
  24. By: Mufidah, Zahra Aulia; Kurniawan, Rachmad Risqy
    Abstract: The revolution in information and communication technology facilitated the expansion of electronic payment systems and new forms of payment instruments with the emergence of a payment instrument known as electronic money (e-money). The use of e-money as an alternative to non-cash payment instruments in several countries shows that there is considerable potential to reduce the growth rate of cash use, especially for payments that are micro to retail. The development of the digital economy is very important, almost the economy uses information, communication and digital technology. Both in product packaging or product marketing. The purpose of writing this article is to examine e-money when viewed from Islamic law and to examine what contracts exist in transactions using e-money. E-Money, which has now become part of technological advancements among the halal community and has complied with sharia principles as a means of transaction and muamalah. The author wants to see E-Money from a sharia perspective, is it in accordance with Islamic law, what contracts are contained in depositing E-Money accounts belonging to apprenticeships and refills. This article tries to examine departing from these two problems.
    Date: 2022–05–17
  25. By: Justine Pedrono
    Abstract: The amplitude of leverage procyclicality is heterogeneous across banks and across countries. This paper introduces international diversification of bank balance sheet as a factor of this observed heterogeneity, with a special emphasis on currency diversification. Based on a new theoretical framework, it shows that the impact of international diversification on leverage procyclicality depends on the relative performance of economies, the global business cycle and the exchange rate regime. By altering the distribution of global bank portfolio, international diversification adds a currency channel to the risk channel of the global leverage cycle. Using granular data on banks located in France, the paper shows that the pre-crisis international diversification of banks increased leverage procyclicality during the 2008-2009 crisis. Focusing on the currency channel, namely the valuation effect of currency diversification, results show that it had a negative effect on leverage procyclicality during this period, hence decreasing procyclicality. The currency channel contributed to offset part of the increased risk due to the crisis and the risk channel. These findings draw attention to the specific role of balance sheet currency diversification in financial stability risk.
    Keywords: Bank, Financial Cycles, Leverage, Internationalization, International Portfolio, Currency
    JEL: E32 F34 F36 F44 G15 G20
    Date: 2022
  26. By: Antoine Berthou (Centre de recherche de la Banque de France - Banque de France, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Guillaume Horny (Centre de recherche de la Banque de France - Banque de France); Jean-Stéphane Mésonnier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)
    Abstract: Exporting firms face foreign exchange risk when the export contract is invoiced in a foreign currency. For instance, for firms located outside of the United States, the US dollar is often used as a vehicle currency. The cost of hedging against this risk represents an additional trade cost for exporters, which is specific to the targeted destination. In this paper, we exploit an episode of heightened tensions in the USD/EUR foreign exchange market in July 2011, which increased the cost of hedging against US dollar fluctuations for French exporters. Using disaggregated information on bank balance sheets, bank-firm relationships and individual export flows for France, we show that exporters with a higher propensity to use hedging instruments reduced more their exports to "US dollar destinations" after this shock. For the average "treated" individual export flow in our sample, the increased hedging cost is equivalent to a counterfactual rise in trade costs by about 3 percentage points.
    Keywords: Dollar invoicing,Trade finance,Firm-level exports
    Date: 2022–03
  27. By: Bruno Thiago Tomio (CREG - Centre de recherche en économie de Grenoble - UGA - Université Grenoble Alpes); Guillaume Vallet (CREG - Centre de recherche en économie de Grenoble - UGA - Université Grenoble Alpes)
    Abstract: This article uses data from hedge funds to investigate the behavior of the Swiss franc carry trade in the period of negative interest rate policy in Switzerland. In an effort to disentangle the funding currency and safe haven effects embedded in the Swiss carry trade activity with four target currencies (U.S. dollar, euro, Japanese yen, and British pound), we estimate structural vector autoregressive models with financial variables. Along with evidence for the funding currency and safe haven effects, results also show that: (i) the uncovered interest rate parity is violated for the U.S. dollar, euro and Japanese yen models, (ii) hedge funds are able to move asset prices, and (iii) an increased systemic risk is linked to a higher Swiss franc carry trade activity.
    Keywords: Carry trade,Negative interest rate policy,Market volatility,Swiss franc,SVAR model
    Date: 2021–10–28
  28. By: Federico Bennett (Duke University); Giselle Montamat (Uber); Francisco Roch (IMF)
    Abstract: We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). In this setup, the decentralized equilibrium may differ from the social planner’s equilibrium both because of the pecuniary externalities associated with the collateral constraint and because of the paternalistic imposition of the planner’s beliefs when designing policy. When robust agents have doubts about the model, they create endogenous worst-case beliefs by assigning a high probability to low-utility events. The ratio of worst-case beliefs of the planner over the household’s captures the degree of paternalism. We show that this novel channel could render the directions of welfare gains from a policy intervention ambiguous. However, our quantitative results suggest that doubts about the model need to be large in order to make a “laissez-faire regime” better than an intervention regime.
    Keywords: Robust Control, Model Uncertainty, Optimal Taxation, Sudden Stops, Financial Crises
    JEL: D62 E32 E44 E62 F32 F41 G01 H21
    Date: 2022–05
  29. By: Al-Ansari, Khalid Ahmed; Aysan, Ahmet Faruk
    Abstract: This paper introduces the need for blockchain technology integration for Islamic financial institutions. The paper presents three main applications of blockchain technology. It explains how such technology can be used in the banking and financial sectors by providing examples for each application. Given its relevancy, the paper expands on Central Bank Digital Currencies (CBDCs) as one of the blockchain applications. The paper then discusses salient points on how the banking sector would be affected by what is described as the future of money. Subsequently, an analysis of the use of blockchain in financial services and, in particular, the use for Islamic financial services is provided by examining examples of past successful implementations. The paper then introduces the Internet of Things (IoT) and illustrates the possible technology implementation in financial institutions. The inherent security weakness of IoT is summarized by the potential elimination of that weakness if combined with blockchain (BIoT). The paper concludes by providing a handful of suggestions and recommendations on the urgency of considering CBDCs for future daily operations, integrating Distributed Ledger technology, and using BIoT to safeguard the financial and clients' transaction records.
    Keywords: Blockchain, CBDCs, Internet of Things, IoT
    JEL: F30 G21 G23 L17 O31
    Date: 2022–04–19
  30. By: Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
    Abstract: Using a novel experimental setup, we study the direction of causality between consumers’ inflation expectations and their income growth expectations. In a large, nationally representative survey of US consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20 percent. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socioeconomic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is still incomplete. Higher inflation expectations also cause consumers to report a higher probability that they will search for a new job that pays more. Using our survey findings to calibrate a search-and-matching model, we find that dampened responses of real wages to demand and supply shocks translate into greater fluctuations in output. Taken together, the survey results and model exercises provide a labor market channel to explain why people dislike inflation.
    Keywords: inflation; wage-price spiral; expectations; randomized controlled trial
    JEL: E31 E24 E71 C83
    Date: 2022–06–23
  31. By: Davies, Martin (Washington and Lee University); Schröder, Marcel (Asian Development Bank)
    Abstract: Papua New Guinea (PNG) has faced a foreign exchange (forex) shortage since 2015. To protect reserves, the Bank of PNG has resorted to forex rationing that led to a large backlog of orders and import compression. This paper surveys the structure of PNG’s forex market and analyzes recent market conditions. We argue that the various policy proposals being discussed currently in PNG are inadequate to restore currency convertibility. For this, a real exchange rate depreciation is required instead. We develop a forex market model that features a backlog of unmet orders, which suggests that a frontloaded depreciation is preferred to an often-favored gradual adjustment. Empirical results indicate that the government’s large budget deficits have contributed to the forex shortage, which highlight the need for greater fiscal restraint. In the longer term, we argue for more exchange rate flexibility and forex allocation through competitive auction.
    Keywords: foreign exchange shortage; foreign exchange rationing; currency convertibility; Papua New Guinea
    JEL: F31 O23 Q32
    Date: 2022–06–03
  32. By: Daniela Balutel; Christopher Henry; Kim Huynh; Marcel Voia
    Abstract: We estimate the effect of Bitcoin ownership on the level of cash holdings of Canadian consumers. Bitcoin ownership positively correlates with cash holdings even after accounting for selection into ownership via a control function approach. On average, Bitcoin owners hold 83 percent (in 2018) to 95 percent (in 2017) more cash than non-owners. Focusing on the quantiles of cash holdings, we find that Bitcoin ownership has a highly nonlinear effect. For example, the difference in cash holdings between Bitcoin owners and non-owners in 2017 varies from 63 percent at the 25th quantile of cash to 176 percent at the 95th quantile of cash. Our results provide some evidence to reject the hypothesis that new digital currencies or technologies, such as Bitcoin, will lead to a decline in cash holdings.
    Keywords: Bank notes; Digital currencies and fintech; Econometric and statistical methods
    Date: 2022–06
  33. By: YOSHIDA Yushi; Kemal TÜRKCAN; YOSHIMI Taiyo
    Abstract: A high-productivity exporter can gain a stronger position over an importer in determining how and when payment is made. With the lower risk associated with exporters, cash-in-advance (CIA) payment is their preferred method of payment. However, a baseline probit regression for the Turkish export dataset at the transaction level did not find a positive relationship between exporters' productivity and CIA. This puzzling finding is reconciled when we consider the financial conditions of importers, which may not allow for advance payment, especially for a large cash transaction. We find that increasing transaction size discourages the use of CIA payments. We also find that the productivity of exporters is associated non-linearly, i.e., in an inverted-U shape, with the use of CIA payments.
    Date: 2022–05
  34. By: Itskhoki, Oleg; Mukhin, Dmitry
    Abstract: We propose a dynamic general equilibrium model of exchange rate determination that accounts for all major exchange rate puzzles, including Meese-Rogoff, Backus-Smith, purchasing power parity, and uncovered interest rate parity puzzles. We build on a standard international real business cycle model with home bias in consumption, augmented with shocks in the financial market that result in a volatile near-martingale behavior of exchange rates and ensure their empirically relevant comove-ment with macroeconomic variables, both nominal and real. Combining financial shocks with conventional productivity and monetary shocks allows the model to reproduce the exchange rate disconnect properties without compromising the fit of the business cycle moments.
    JEL: F3 G3 J1
    Date: 2021–08–01
  35. By: Léonore Raguideau-Hannotin (Université Paris Nanterre)
    Abstract: The motivation of this article is to better understand the determinants of international banking integration of non-Euro CESEE EU Members. One stylized fact for these economies is the building up of external financial vulnerabilities since the beginning of the Transition period, with a large weight of cross-border banking,particularly with the European Union. In relation with the literature on the impact of gross financial flows on financial stability, we therefore estimate the long-term historical, geographical and cultural determinants of cross-border banking claims with a bilateral financial gravity model. We then analyze the impact of domestic(pull), foreign (push) and global factors using the gravity framework. Our results first show that cross-border banking in these economies is significantly driven by geographical proximity and common historical links, particularly with EU Member States. Second, we find that banking sector health variables are more significant as push factors, while structural banking system variables are more significant as pull factors. These results provide evidence in favor of an impact of European banking systems on financial liabilities in this region, in relation with the very high level of EU ownership of banking assets. Finally, US global liquidity factor matters more than exchange rate stability, which points towards policy dilemma effect in the region.
    Keywords: Gravity model, cross-border banking, Central Eastern and South EasternEuropean countries, European Union, push factors
    JEL: F
    Date: 2022
  36. By: Kevin Fox; Peter Levell; Martin O'Connell
    Abstract: The increasing availability of supermarket scanner data covering expenditures and prices on a wide range of products has created new opportunities for national statistical institutes, including the possibility of publishing more reliable indicators of monthly price changes. We discuss and evaluate the properties of different multilateral index numbers for measuring high frequency price changes, drawing on household scanner data. We find that use of the Caves-Christensen-Diewert-Inklaar (CCDI) index, updated using the mean splice, is to preferred for both theoretical and empirical reasons.
    Keywords: consumer price index, multilateral indices, scanner data
    JEL: C43 E31
    Date: 2022–04

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