nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒07‒25
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Household Expectations and Dissent Among Policymakers By Moritz Grebe; Peter Tillmann
  2. New Facts on Consumer Price Rigidity in the Euro Area By Erwan Gautier; Cristina Conflitti; Riemer P. Faber; Brian Fabo; Ludmila Fadejeva; Valentin Jouvanceau; Jan-Oliver Menz; Teresa Messner; Pavlos Petroulas; Pau Roldan-Blanco; Fabio Rumler; Sergio Santoro; Elisabeth Wieland; Helene Zimmer
  4. Output Gap Estimation and Monetary Policy with Imperfect Knowledge By Pei Kuang; Kaushik Mitra; Li Tang
  5. Monetary Policy and Exchange Rate Dynamics in a Behavioral Open Economy Model By Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
  6. The spillover of euro area shocks to the Maltese economy By William Gatt; Germano Ruisi
  7. Economic, technological and social drivers of cryptocurrency market evolution and its managerial impact By Holtfort, Thomas; Horsch, Andreas; Schwarz, Joachim
  8. Inflation Dynamics in Advanced Economies: A Decomposition into Cyclical and Non-Cyclical Factors By Weicheng Lian; Andreas Freitag
  9. Do Monetary Policy Outcomes Promote Stability in Fragile Settings? By Patrick A. Imam; Oumar Diallo; Steve Loris Gui-Diby
  10. The Brexit vote, inflation and UK living standards By Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
  11. Voting Right Rotation, Behavior of Committee Members and Financial Market Reactions: Evidence from the U.S. Federal Open Market Committee By Michael Ehrmann; Robin Tietz; Bauke Visser
  12. Digital Money and Central Bank Operations By Mr. Charles M. Kahn; Jihad Alwazir; Mr. Manmohan Singh
  13. Getting to the Core: Inflation Risks Within and Across Asset Classes By Xiang Fang; Yang Liu; Nikolai Roussanov
  14. How Could Oil Price and Policy Rate Hikes Affect the Near-Term Inflation Outlook? By Jan J. J. Groen; Adam I. Noble
  15. Lessons Learned from Mortgage Borrower Policies and Outcomes during the COVID-19 Pandemic By Kristopher S. Gerardi; Lauren Lambie-Hanson; Paul S. Willen
  16. Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility By Ms. Adina Popescu
  17. Advancing the Monetary Policy Toolkit through Outright Transfers By Sascha Buetzer
  18. The local supply channel of QE: evidence from the Bank of England’s gilt purchases By Froemel, Maren; Joyce, Michael; Kaminska, Iryna
  19. Quantitative Easing and Credit Rating Agencies By Nordine Abidi; Matteo Falagiarda; Ixart Miquel-Flores
  20. Interest Rates Expectations and Flow Dynamics in High Yield Corporate Debt Mutual funds By Ayelen Banegas; Christopher Finch
  21. Tracking Economic and Financial Policies During COVID-19: An Announcement-Level Database By Ms. Prachi Mishra; Mr. Divya Kirti; Yang Liu; Jan Strasky; Soledad Martinez Peria
  22. On the Welfare Costs of Perceptions Biases By Hugh Montag
  23. Monetary policy transmission during QE times: role of expectations and term premia channels By Kaminska, Iryna; Mumtaz, Haroon
  24. Statistics for economic analysis: the experience of the Bank of Italy By Giovanni D’Alessio; Riccardo De Bonis; Matteo Piazza; Luigi Infante; Giorgio Nuzzo; Silvia Sabatini; Francesca Zanichelli; Romina Gambacorta; Guido de Blasio; Stefano Federico; Juri Marcucci; Laura Bartiloro; Elena San Martini
  25. Cyclical Activity and Inflation under Secular Stagnation: Empirical Evidence Using Data on Japan's Lost Decades By Masahiko Shibamoto
  26. Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations By Alexander Dietrich; Edward S. Knotek; Kristian Ove R. Myrseth; Robert W. Rich; Raphael Schoenle; Michael Weber
  27. Considerations on the Monetary Policy Framework of the European Central Bank By Andrea Giorgio Tosato
  28. The credit channel of monetary transmission in the US: Is it a bank lending channel, a balance sheet channel, or both, or neither? By Sophocles N. Brissimis; Michalis-Panayiotis Papafilis
  29. Hidden Stagflation By Takahashi, Yuta; Takayama, Naoki

  1. By: Moritz Grebe (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: This paper studies the impact of dissent in the ECB's Governing Council on uncertainty surrounding households' inflation expectations. We conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative. Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households' uncertainty about inflation. This effect is statistically significant once we allow for the interaction between the treatments and individual characteristics of respondents. The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. Our findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
    Keywords: central bank communication, disagreement, inflation expectations, randomized controlled trial, survey
    JEL: E52 E43 E32
    Date: 2022
  2. By: Erwan Gautier (Banque de France); Cristina Conflitti (Banca d’Italia); Riemer P. Faber (National Bank of Belgium); Brian Fabo (National Bank of Slovakia); Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Jan-Oliver Menz (Deutsche Bundesbank); Teresa Messner (Oesterreichische Nationalbank); Pavlos Petroulas (Bank of Greece); Pau Roldan-Blanco (Banco de Espana); Fabio Rumler (Oesterreichische Nationalbank); Sergio Santoro (European Central Bank); Elisabeth Wieland (Deutsche Bundesbank); Helene Zimmer (National Bank of Belgium)
    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.
    Keywords: price rigidity, inflation, consumer prices, micro data
    JEL: D40 E31
    Date: 2022–06–30
  3. By: Diana Gabrielyan; Lenno Uusküla
    Abstract: We extract measures of inflation expectations from online news to build real interest rates that capture true consumer expectations. The new measure is infused to various Euler consumption models. While benchmark models based on traditional risk-free returns rates fail, models built with novel news-driven inflation expectations indices improve upon benchmark models and result in strong instruments. Our positive findings highlight the role played by the media for consumer expectation formation and allow for the use of such novel data sources for other key macroeconomic relationships.
    Keywords: Euler equation, expectations, media, machine learning
    Date: 2022
  4. By: Pei Kuang (University of Birmingham); Kaushik Mitra (University of Birmingham); Li Tang (Middlesex University)
    Abstract: We analyze stability of a large number of recommended output gap estimation methods and their monetary policy implications – not studied in the existing literature – in a New Keynesian model where the policymaker estimates the output gap over time. A sufficiently large response to inflation and small response to output gap estimates robustly delivers good welfare performance, irrespective of the choice of detrending methods. Across all methods, while the optimal response to inflation is similar in magnitude, that to output gap estimates varies considerably. Methods that intrinsically produce large and volatile output gap estimates are prone to self-reinforcing deflation spirals with large welfare loss; the optimal response to output gap estimates in these methods is small.
    Keywords: Detrending, Monetary policy, Expectations, Learning, Inflation, Welfare
    JEL: C18 E17 E32 E52
    Date: 2022–07
  5. By: Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
    Abstract: We develop an extension of the open economy New Keynesian model in which agents are boundedly rational à la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many “puzzling” aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate.
    Keywords: Monetary Policy; Exchange Rates; Bounded Rationality
    Date: 2022–06–03
  6. By: William Gatt; Germano Ruisi (Central Bank of Malta)
    Abstract: This paper develops a two-block Structural Vector Autoregression (SVAR) to estimate the spillover of external shocks to the Maltese economy. The model focuses on five broad macroeconomic shocks hitting the euro area; an aggregate demand shock, two aggregate supply shocks which respectively proxy better overall productivity and more favourable conditions on the global market for oil, a generic monetary policy shock encompassing both conventional and unconventional interventions, and a financial stress shock. The model is estimated using Bayesian methods over a sample that goes from 2003Q1 to 2019Q4 and considers a number of Maltese variables that are representative of both the real and the financial side of the economy. The results point toward a relevant role of the identified shocks in explaining the fluctuations of the Maltese economy with particular regard to the aggregate demand and financial stress shocks. Overall, shocks hitting the euro area are estimated to contribute to around one third of the fluctuations of the Maltese output and prices in the long run.
    JEL: C11 C32 E32 F41
    Date: 2022
  7. By: Holtfort, Thomas; Horsch, Andreas; Schwarz, Joachim
    Abstract: Cryptocurrencies, such as Bitcoin, have caused intense discussions during recent years among market participants according to new options (such as payment or financing alternatives) and new risks (such as price volatility) involved. Despite being considered by various actors of private households, companies, financial, monetary, and political institutions, a theory-based understanding of this innovation and knowledge of their evolution is still limited. On a basic level, this holds for differences between cryptocurrencies on the one hand and traditional currencies, like paper money, gold or special assets, on the other. On a market level, factors driving the prices of cryptocurrencies appear to be of seminal meaning, in particular against the backdrop of recent market turmoil. Therefore, the paper conducts an empirical analysis of the five biggest cryptocurrencies (measured by market capitalization) with regard to their evolutionary development, price behaviour, and their impact for managers
    Keywords: cryptocurrencies,innovation,evolutionary economics
    JEL: E42 O30
    Date: 2022
  8. By: Weicheng Lian; Andreas Freitag
    Abstract: Inflation and unemployment rate were largely disconnected between 2000 and 2019 in advanced economies. We decompose core inflation into two parts based on the cyclical sensitivity of CPI components and document several salient facts: (i) both the cyclical and non-cyclical parts had surges across advaced economies in 2011, when unemployment rates had limited changes; (ii) the non-cyclical part had a downward trend between 2012 and 2019, which existed across countries, sectors, goods, and services; (iii) global indexes such as oil price, shipping costs, and a global supply chain pressure index do not explain the downward trend; and (iv) the cyclical part, after controlling for the impact of economic slack, also had a downward trend between 2012 and 2019. These patterns help disentangle competing explanations for the disconnect between inflation and unemployment rate. The approach has potential to help understand forces shaping price pressures during the pandemic and in the post-pandemic period ahead.
    Keywords: Inflation dynamics; Slack; Phillips curve; Missing Disinflation; Missing Reflation; pressure index; shipping cost; inflation surge; core cyclical inflation; inflation expectation; Inflation; Unemployment rate; Oil prices; Consumer price indexes; Global financial crisis of 2008-2009; Global
    Date: 2022–05–13
  9. By: Patrick A. Imam; Oumar Diallo; Steve Loris Gui-Diby
    Abstract: This paper assesses how monetary policy outcomes affect fragility. Diving into the universe of the most prominent combinations of pursued monetary policy objectives across fragile settings, we examine the relationships between monetary policy outcomes and fragility and find the combination of reduction of inflation and lower unemployment to be the one that delivers the highest payoff in terms of promoting peace and cohesion. Setting aside challenges of monetary policy transmission, results from our analysis broadly confirm the above “winning” combination, with low inflation as a primary desired outcome and low unemployment rate as a secondary one. We also carry out a series of robustness tests, which confirm our findings. Overall, our results lend credence to the importance of paying attention—in the context of reducing fragility—to monetary policy outcomes.
    Keywords: Fragility; monetary policy; objectives; monetary policy outcome; pursued monetary policy objective; monetary policy transmission; Fragile settings; outcome variable; Inflation; Unemployment rate; Exchange rates; Monetary policy frameworks; Price stabilization; Global
    Date: 2022–05–20
  10. By: Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
    Abstract: This paper studies how voting to leave the European Union affected living standards in the United Kingdom. Using heterogeneity in exposure to import costs across product groups, we analyze how the depreciation of sterling caused by the referendum affected consumer prices. We find the Brexit depreciation led to higher inflation in product groups with greater import shares in consumer expenditure. Our results are consistent with complete pass-through of the cost of imports to consumer prices and imply aggregate exchange rate pass-through of 0:29. We estimate the Brexit depreciation increased consumer prices by 2:9 percent, costing the average household £870 per year.
    Keywords: Brexit; economic disintegration; import costs; inflation; trade policy
    JEL: N0 L81
    Date: 2021–09–03
  11. By: Michael Ehrmann; Robin Tietz; Bauke Visser
    Abstract: Which Federal Reserve Bank presidents vote on the U.S. monetary policy committee depends on a mechanical, yearly rotation scheme. Rotation is without exclusion: nonvoting presidents do attend and participate in the meetings of the committee. We test two hypotheses about the dependence of presidents' behavior on voting status. (i) Loss compensation: presidents compensate the loss of the right to vote with an increased use of speeches and contributions. (ii) Motivation: presidents complement the right to vote with an increased use of speeches and contributions. The evidence favors the motivation hypothesis. Also, in years that presidents vote, their speeches move financial markets less than in years they do not vote. We argue that this vote discount is consistent with presidents’ communication behavior.
    Keywords: voting right rotation; monetary policy committee; central bank communication; FOMC; financial market response; motivation hypothesis; communication behavior; presidents vote; FOMC meeting; Fed president; voting status; Unemployment; Unemployment rate; Inflation; Financial sector; Asset prices
    Date: 2022–05–27
  12. By: Mr. Charles M. Kahn; Jihad Alwazir; Mr. Manmohan Singh
    Abstract: The rise of new and proposed monetary vehicles, including CBDC, stablecoins, payment service providers etc., are unprecedented. An important question for central banks is the extent to which these innovations upend the role of and implementation of monetary policy. The paper focuses on the interest rate channel and if digital money (especially CBDC) will change monetary policy and central bank operations. We argue that new policy instruments make sense only to the extent that there is limited substitutability between the various payment sectors. We analyze trends in currency-in-circulation, and how it may impact central bank’s seigniorage, monetary base, and transactional velocity of digital money if money demand declines. Liquidity outside the monetary base will also be important to understand.
    Keywords: Base money; CBDC; central banking operations; currency in circulation; digital money; mobile phone operators; seigniorage; central bank operations Charles Kahn; jihad Alwazir; lender-of-last-resort facilities; payments assets; phone company payments account; central bank profits; central bank regulation; Monetary base; Digital currencies; Central Bank digital currencies; Currencies; Commercial banks
    Date: 2022–05–06
  13. By: Xiang Fang; Yang Liu; Nikolai Roussanov
    Abstract: Do “real” assets protect against inflation? Core inflation betas of stocks are negative while energy betas are positive; currencies, commodities, and real estate also mostly hedge against energy inflation but not core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, uniquely among macroeconomic risk factors. While high core inflation tends to be followed by low real output, consumption, and dividend payouts, it impacts asset prices through both cash-flow and discount rate channels. The relative contribution of core and energy changes over time, helping explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian model qualitatively accounts for these facts and implies that the changing stock-bond correlation can be attributed to the shifting importance of supply and demand shocks in driving energy inflation over time.
    JEL: E31 E44 E5 F31 G12 G15
    Date: 2022–06
  14. By: Jan J. J. Groen; Adam I. Noble
    Abstract: Since the start of the year, oil prices have risen sharply owing to worsening expectations regarding global oil supply. We’ve also had an acceleration of inflation in the United States and the euro area, as well as a sharp steepening of the expected paths of policy rates in both economies. These factors, combined with the potential for a slowdown in growth, have made the inflation outlook quite uncertain. In this post, we combine the demand and supply oil price decomposition from the New York Fed’s Oil Price Dynamics Report with yield curve data to quantify the likely path of inflation in the United States and the euro area over the next twelve months. Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy.
    Keywords: inflation; oil prices; interest rates; forecasting
    JEL: E2 G1
    Date: 2022–06–24
  15. By: Kristopher S. Gerardi; Lauren Lambie-Hanson; Paul S. Willen
    Abstract: This article reviews the aid offered to the roughly 50 million homeowners with mortgages included in a forbearance program, and the Federal Reserve’s actions that pushed down mortgage rates, allowing many mortgage holders to reduce their monthly payments by refinancing. We deem these policies to be quite effective in relieving financial distress and allowing homeowners to stay in their homes, especially in contrast with the policies pursued during the Great Recession. We emphasize that these policies in part worked because of rising housing prices and home equity, before and during the pandemic, and note that such conditions might not hold in future downturns. We observe that minority mortgage borrowers were much more likely to miss mortgage payments, so forbearance was particularly important to them. Black and Hispanic borrowers, however, were less likely than white or Asian borrowers to refinance.
    Keywords: mortgage refinancing; mortgage repayment; home equity; racial inequality
    JEL: G21 G51 E52 J15
    Date: 2022–07–07
  16. By: Ms. Adina Popescu
    Abstract: Central banks around the world are increasingly exploring central bank digital currencies (CBDCs). This paper investigates the possible impacts of cross-border CBDCs on capital flows and financial stability in a simple open economy extension of a classical model of bank runs, augmented with the presence of a credible foreign central bank, which issues an account-based interest bearing CBDC available to nonresidents. The paper finds that the presence of a foreign CBDC which acts as an international safe asset may increase the risk of financial disintermediation in the domestic banking sector, which can be accompanied by higher and more volatile capital flows.
    Keywords: Central bank digital currency; CBDC; capital flows; open-economy; financial stability; deposit contract; capital flows volatility; cross-border CBDCs; model of bank runs; CBDC deposit; CBDC issuer; Central Bank digital currencies; Commercial banks; Foreign banks; Bank deposits; Capital account; Global
    Date: 2022–05–06
  17. By: Sascha Buetzer
    Abstract: This paper argues that in reserve currency issuing economies at the effective lower bound, outright transfers from the central bank to households are both more equitable and more effective in achieving monetary policy objectives than asset purchases or negative interest rates. It shows that concerns pertaining to central banks’ policy solvency and equity position can be addressed through a careful assessment of a central bank's loss absorbing capacity and, if need be, tiered reserve remuneration policies. It also spells out key differences to a debt or money financed fiscal stimulus, which are particularly pronounced in a currency union without a central fiscal capacity. The paper concludes by discussing broader institutional, political, and legal considerations.
    Keywords: Monetary Policy; Outright Transfers; Central Bank Balance Sheet; Central Bank Solvency; Central Bank Equity; Helicopter Money; Inequality; policy solvency; equity position; revaluation account; Unconventional monetary policies; Financial statements; Global
    Date: 2022–05–06
  18. By: Froemel, Maren (Bank of England); Joyce, Michael (Bank of England); Kaminska, Iryna (Bank of England)
    Abstract: One way quantitative easing (QE) purchases of government bonds by central banks may affect the yield curve is by creating scarcity in the purchased securities, leading to an increase in their prices or equivalently a reduction in their yields. We analyse and compare the importance of this so-called 'local supply' (or scarcity) channel across all of the Bank of England’s QE government bond purchase programmes during 2009 to 2020. We find strong evidence overall for the role of the local supply channel in explaining gilt yield reactions both to QE announcements ('ex ante'), as well as after purchases have begun ('ex post'). The largest impact on the yield curve through local supply seems to have been in response to the initial QE1 announcements in 2009, both in terms of total impact (the impact of the announced programme), marginal impact (the impact of a given amount of purchases) and relative impact (the proportion of the total change in yields explained). Our findings also imply there may have been an increase in the relative importance of other channels and/or policies over time.
    Keywords: QE; local supply; preferred habitat; yield curve; monetary policy.
    JEL: E43 E52 E58 E65 G11 G12
    Date: 2022–05–13
  19. By: Nordine Abidi; Matteo Falagiarda; Ixart Miquel-Flores
    Abstract: This paper investigates the behaviour of credit rating agencies using a natural experiment in monetary policy. We exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating activity was concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Our findings contribute to better assessing the consequences of the explicit reliance on CRAs ratings by central banks when designing monetary policy. They also support the Covid-19 monetary stimulus, and in particular the waiver of private credit rating eligibility requirements applied to recently downgraded issuers.
    Keywords: Credit Rating Agencies; Monetary Policy; Quantitative Easing; eligibility requirement; rating activity; behaviour of credit rating agencies; rating Agency Disclaimer; eligibility frontier; Bonds; Bond ratings; Corporate bonds; Credit ratings; Unconventional monetary policies; Global; Middle East and Central Asia
    Date: 2022–06–03
  20. By: Ayelen Banegas; Christopher Finch
    Abstract: Fixed-income mutual funds saw massive outflows during the onset of the COVID-19 crisis, with funds investing primarily in high yield debt markets experiencing the largest redemptions, as a percentage of assets. In March 2020 alone, high yield bond (HYB) and bank loan (BL) mutual fund withdrawals reached an estimated 4.1 and 13.6 percent of assets under management (AUM), accounting for close to $10.4 and $11.4 billion, respectively. Following interventions from the Federal Reserve that helped restore credit market conditions and brought U.S. interest rates back to new lows, flow dynamics of HYB and BL funds began to diverge substantially.
    Date: 2022–06–17
  21. By: Ms. Prachi Mishra; Mr. Divya Kirti; Yang Liu; Jan Strasky; Soledad Martinez Peria
    Abstract: We introduce a new comprehensive announcement-level database tracking the extraordinary fiscal, monetary, prudential, and other policies that countries adopted in response to Covid-19. The database provides detailed information, including sizes where available, for 28 granular policies adopted by 74 countries during 2020. About 5,500 policy measures were announced during this period. Importantly, the database is organized and presented in a format easy for researchers to use in empirical analyses. Announcements were highly correlated across the broad fiscal, monetary, and prudential categories and at more granular levels. Advanced economies (AEs) introduced larger fiscal measures than emerging and developing economies (EMDEs) and relied primarily on large unconventional monetary policies. Bank capital requirements were relaxed widely in both AEs and EMs, while relaxation of provisioning requirements was more common among EMs. Supervisory expectations and reporting requirements were widely relaxed.
    Keywords: Monetary policy; Fiscal policy; Macroprudential policy; Covid-19; Advanced economies; policy measure; bank capital requirement; granular policy; asset purchase; Reserve requirements; Central bank policy rate; Countercyclical capital buffers; Global
    Date: 2022–06–03
  22. By: Hugh Montag
    Abstract: Are households significantly harmed by inaccurate beliefs about inflation? This paper analyzes two established inflation perceptions biases and evaluates their welfare effects. The first bias is the frequency bias, where households overweight goods that they purchase frequently but are a small share of their consumption basket. In my French sample, I find that households fixate on bread prices. The second bias is that households consistently overestimate the current inflation rate, which I call the level bias in this paper. I estimate the magnitude of these biases using a confidential French household survey. To evaluate the welfare losses of the two biases, I incorporate biased inflation perceptions into a partial-equilibrium model where households save in a single nominal bond subject to inflation risk. The level bias significantly reduces welfare and asset accumulation, while the frequency bias has negligible effects. The welfare loss shrinks if I remove the perceptions bias while keeping the expectations bias, which suggest that inaccurate perceptions can harm households beyond the effect on forecasts.
    Date: 2021
  23. By: Kaminska, Iryna (Bank of England); Mumtaz, Haroon (Queen Mary University of London)
    Abstract: This paper studies monetary policy transmission mechanisms during QE. Using high frequency yield curve event studies of monetary policy announcements in combination with a dynamic term structure model, we can identify four types of monetary policy surprises: action, signalling (working through expected policy rates), policy uncertainty and QE‑specific gilt supply (both working through term premia). Applying the method to the case of the UK, we find that these channels have often operated together. Importantly, their transmission mechanisms into financial markets and macroeconomy differ, as do their relative strengths. These findings emphasize that for a proper evaluation of QE macroeconomic effects, it is key to identify yield curve channels operating during a particular QE programme.
    Keywords: Monetary policy; quantitative easing; monetary transmission mechanism; high frequency data; dynamic term structure model; local projection model
    JEL: C58 E43 E52 E58 G12
    Date: 2022–05–13
  24. By: Giovanni D’Alessio (Bank of Italy); Riccardo De Bonis (Bank of Italy); Matteo Piazza (Bank of Italy); Luigi Infante (Bank of Italy); Giorgio Nuzzo (Bank of Italy); Silvia Sabatini (Bank of Italy); Francesca Zanichelli (Bank of Italy); Romina Gambacorta (Bank of Italy); Guido de Blasio (Bank of Italy); Stefano Federico (Bank of Italy); Juri Marcucci (Bank of Italy); Laura Bartiloro (Bank of Italy); Elena San Martini (Bank of Italy)
    Abstract: The paper provides an overview of the main statistics produced by the Bank of Italy: financial accounts, monetary statistics, balance of payments, household and business surveys. The volume discusses the problems related to the measurement of economic phenomena, how statistics can be used for policy evaluation, the challenges for official statistics posed by globalization, the digital economy and big data. Finally, we show the policy adopted by the Bank of Italy for the dissemination of statistics and the role of the Research Data Center.
    Keywords: central bank statistics, financial accounts, monetary and banking statistics, balance of payment, household surveys, business surveys, financial literacy, policy evaluation, official statistics, globalization, digital economy, big data, dissemination
    JEL: C40 C80
    Date: 2022–06
  25. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration and Center for Computational Social Science, Kobe University, JAPAN)
    Abstract: This paper disputes the suspicions about the existence and stability of the trade-off between nominal inflation and the real economy when missing deflation and reinflation under secular stagnation by providing empirical evidence of the stability of this short-run trade-off. To this end, we construct a simple measure of demand-pull pressures, namely the cyclical activity index, using time-series data for a period that includes Japan's secular stagnation. We then quantitatively examine the relationship between inflation and the measured cyclical activity. The empirical results support that the cyclical activity index has a stable and economically meaningful relationship with short-term inflation.
    Keywords: Inflation; Cyclical activity; Phillips curve; Economic slack; Secular stagnation; Japan
    JEL: E31 E32
    Date: 2022–06
  26. By: Alexander Dietrich; Edward S. Knotek; Kristian Ove R. Myrseth; Robert W. Rich; Raphael Schoenle; Michael Weber
    Abstract: Using novel survey evidence on consumer inflation expectations disaggregated by personal consumption expenditure (PCE) categories, we document the paradox that consumers' aggregate inflation expectations usually exceed any individual category expectation. We explore procedures for aggregating category inflation expectations, and find that the inconsistency between aggregate and aggregated inflation expectations rises with subjective uncertainty and is systematically related to socioeconomic characteristics. Overall, our results are inconsistent with the notion that consumers' aggregate inflation expectations comprise an expenditure-weighted sum of category beliefs. Moreover, aggregated inflation expectations explain a greater share of planned consumer spending than aggregate inflation expectations.
    Keywords: Household expectations; Survey; Sectoral expectations; Inflation expectations
    JEL: C83 E52 E31
    Date: 2022–06–22
  27. By: Andrea Giorgio Tosato (Central Bank of Malta)
    Abstract: This working paper offers some considerations on the monetary policy framework of the European Central Bank. The trade-offs arising from adopting a point target configuration over a range target one are assessed in terms of their flexibility vs. inflation anchoring properties. This layout is then confronted with the policy framework in use in the euro area prior to the adoption of the new monetary strategy, which is interpreted as leaning on the side of flexibility. The increased likelihood of dis-anchoring of long-term inflation expectations experienced in the euro area since 2013, however, suggests that the policy framework could benefit from a rebalancing towards a formulation with stronger anchoring properties. The inflation aim of the ECB could thus be reformulated with the introduction of a symmetric 2%-point target. By evaluating this arrangement in terms of the price stability definition, two regions emerge where either the policy aim (symmetric 2%-point target) or the price stability definition (between 0% and 2%) are satisfied, but not both. To avoid any inconsistency in the policy framework, an inflation aim centred at 2% requires an amendment of the price stability definition.
    JEL: E42 E52 E58
    Date: 2022
  28. By: Sophocles N. Brissimis (University of Piraeus and Bank of Greece); Michalis-Panayiotis Papafilis (University of Piraeus)
    Abstract: We develop a theoretical framework that extends the Bernanke and Blinder (1988) model to incorporate imperfect substitution between internal and external finance of firms in order to study the operation of both the bank lending and the balance sheet channels of monetary transmission in the US. Our model is used to quantify the financial accelerator effects due to the operation of these channels. Empirically, we employ multivariate cointegration techniques to identify the equilibrium relationships included in our model, and we provide evidence that only the balance sheet channel is operational for the period before and after the global financial crisis.
    Keywords: Monetary transmission mechanism; bank lending channel; balance sheet channel; financial structure; multivariate cointegration
    JEL: C32 C52 E44 E51 E52
    Date: 2022–07
  29. By: Takahashi, Yuta; Takayama, Naoki
    Abstract: We present evidence that the rise in inflation in Japan since 2014 is a result of a hidden stagflation: the relative prices of durable consumption and ICT investment goods stopped declining, reflecting technology stagnation and exerting an inflationary pressure on the economy and; the real side of the Japanese economy simultaneously started stagnating even further. We construct a multi-good monetary model to account for these facts together and quantify the impact of the technology stagnation on the aggregate inflation rate. We develop a new sign restriction approach to construct informative lower bounds to the impact of the technology stagnation on long-run inflation without relying on the exact Euler equation and some of the balanced growth path properties. By using the lower bounds, we find that inflation would be close to 0% or even negative without the technology stagnation. Moreover, the technology stagnation explains a sizable fraction of the observed slowdown in the real GDP and consumption growth. Our findings challenge the conventional view that Japan emerged from long-lasting deflation owing to the unconventional monetary policies. Finally, we apply our analysis to European countries and uncover the hidden stagflation there as well.
    JEL: E31 E43 E52 E58
    Date: 2022–07

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