nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒08‒15
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy in the open economy with digital currencies By Pietro Cova; Alessandro Notarpietro; Patrizio Pagano; Massimiliano Pisani
  2. Foreign monetary policy and domestic inflation in emerging markets By Marco Flaccadoro; Valerio Nispi Landi
  3. Monetary policy and endogenous financial crises By Boissay, Frédéric; Collard, Fabrice; Galí, Jordi; Manea, Cristina
  4. The augmented bank balance-sheet channel of monetary policy By Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla
  5. Does a CBDC Reinforce Inefficiencies? By Max Fuchs
  6. Product quality, measured inflation and monetary policy By Rodnyansky, Alexander; Van der Ghote, Alejandro; Wales, Daniel
  7. Monetary Policy Uncertainty and its impact on the real economy: Empirical Evidence from the Euro area By Quelhas, João
  8. Seeing the forest for the trees: Using hLDA models to evaluate communication in Banco Central do Brasil By Angelo M Fasolo; Flávia M Graminho; Saulo B Bastos
  9. Alternative monetary-policy instruments and limited credibility: an exploration By Javier Garcia-Cicco
  10. Drivers of Turkish Inflation By Hakan Yilmazkuday
  11. Forward guidance and expectation formation: A narrative approach By Christopher S Sutherland
  12. On the stabilizing role of cash for societies By Rösl, Gerhard; Seitz, Franz
  13. On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach By De Grauwe, Paul; Ji, Yuemei
  14. Does Household Behaviour Depend on Monetary Policy? Evidence from Cyprus By Nektarios Michail; Agorasti Patronidou; Ioanna Evangelou
  15. COVID-19 and Exchange Rates: Spillover Effects of U.S. Monetary Policy By Hakan Yilmazkuday
  16. Global Stagflation By Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
  17. Inflation and climate change: the role of climate variables in inflation forecasting and macro modelling By Boneva, Lena; Ferrucci, Gianluigi
  18. Was the 2021-22 Rise in Inflation Equitable? By Ruchi Avtar; Rajashri Chakrabarti; Maxim L. Pinkovskiy
  19. Foreign exchange interventions and their impact on expectations: Evidence from the USD/ILS options market By Hertrich, Markus; Nathan, Daniel
  20. The Fed’s Inaugural Conference on the International Roles of the U.S. Dollar By Ricardo Correa; Linda S. Goldberg; Robert Lerman; Bo Sun
  21. Why Have Interest Rates Been Low? By Ray C. Fair
  22. Monetary Growth and Financial Sector Wages By Michael Patrick Curran; Matthew J. Fagerstrom; Ryan Zalla
  23. Drivers of Inflation Convergence across Countries: The Role of Standard Gravity Variables By Hakan Yilmazkuday
  24. The Role of the Euro in Southern Neighbourhood Countries By Juan José Almagro Herrador; Mihai Macovei; Moritz Bizer
  25. The U.S. Dollar’s Global Roles: Revisiting Where Things Stand By Linda S. Goldberg; Robert Lerman; Dan Reichgott
  26. Corporate Debt Maturity Matters For Monetary Policy By Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott
  27. How effective is capital flow management? The Indonesian experience By Wishnu Mahraddika
  28. How Do People View Price and Wage Inflation? By Monica Jain; Olena Kostyshyna; Xu Zhang
  29. The Fed’s Inaugural Conference on the International Roles of the U.S. Dollar By Ricardo Correa; Linda S. Goldberg; Robert Lerman; Bo Sun
  30. The EU’s Response to the COVID-19 Crisis: A Game Changer for the International Role of the Euro? By Heliodoro Temprano Arroyo
  31. The Global Distributive Impact of the US Inflation Shock By Gautam Nair; Federico Sturzenegger
  32. Sustainable management of central banks’ foreign exchange (FX) reserves By Fender, Ingo; McMorrow, Mike; Zulaica, Omar
  33. An estimated open-economy DSGE model for the evaluation of central bank policy mix By Solikin M. Juhro; Denny Lie; Aryo Sasongko
  34. Exchange rate pass-through in small, open, commodity-exporting economies: lessons from Canada By Marco Flaccadoro
  35. The role of non-bank financial institutions in the intermediation of capital flows to emerging markets By Alessandro Moro; Alessandro Schiavone
  36. A community's resilience to the COVID-19 crisis - The Florain monetary community By Raphaël Didier
  38. Central banks and climate-related disclosures: applying the TCFD’s recommendations By Kyriakopoulou, Danae; Antonakaki, Theodora; Bekiari, Maria; Kartapani, Aliki; Rapti, Eleni
  39. Capital Control and Heterogeneous Impact on Capital Flows By Sanyal, Anirban
  40. Capital account openness in India and a comparison with China: Then versus now By Nidhi Aggarwal; Sanchit Arora; Rajeswari Sengupta
  41. Global Supply Chain Pressures, International Trade, and Inflation By Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
  42. Global Supply Chain Pressures, International Trade, and Inflation By Julian di Giovanni; Sebnem Kalemli-Ozcan; Alvaro Silva; Muhammed A. Yildirim
  43. Aligning financial and monetary policies with the concept of double materiality: rationales, proposals and challenges By Boissinot, Jean; Goulard, Sylvie; Salin, Mathilde; Svartzman, Romain; Weber, Pierre-François

  1. By: Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Patrizio Pagano; Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the transmission of a monetary policy shock in a two-country New Keynesian model featuring a global private stablecoin and a central bank digital currency (CBDC). In the model, cash and digital currencies are imperfect substitutes that differ as to the liquidity services they provide. We find that in a digital-currency economy, where the stablecoin is a significant means of payment, the domestic and international macroeconomic effects of a monetary policy shock can be smaller or larger than in a (benchmark) mainly-cash economy, depending on how the assets backing the stablecoin supply respond to the shock. The benchmark transmission of the monetary policy shock can nonetheless substantially be restored in the digital-currency economy 1) if the stablecoin is fully backed by cash or 2) if the CBDC is a relevant means of payment.
    Keywords: digital currency, CBDC, monetary policy, international finance.
    JEL: E51 E52 F30
    Date: 2022–04
  2. By: Marco Flaccadoro (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: We estimate the response of domestic inflation to a US interest rate shock in a sample of 27 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that pegging the exchange rate yields larger welfare losses compared to the other two monetary policy frameworks, even assuming dominant currency pricing.
    Keywords: inflation stabilization, inflation targeting, monetary policy, open economy macroeconomics
    JEL: E31 E52 F41
    Date: 2022–04
  3. By: Boissay, Frédéric; Collard, Fabrice; Galí, Jordi; Manea, Cristina
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: financial crisis,monetary policy
    JEL: E1 E3 E6 G01
    Date: 2022
  4. By: Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla
    Abstract: This paper studies how banks' balance sheets and funding costs interact in the transmission of monetary-policy rates to banks' credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank's policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks' funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks' financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks' funding costs reduces their ability to lever up and weakens their lending standards.
    Keywords: transmission of monetary policy,bank lending,bank risk taking,bank balance sheets,euro-area heterogeneity
    JEL: E44 E52 E58 E63 F45 G20 G21
    Date: 2022
  5. By: Max Fuchs (University of Kassel)
    Abstract: This paper examines whether a central bank digital currency (CBDC) reinforces inefficiencies in transactions with cash. In this case, the gap between the traded quantity and the welfare-maximizing one, which arises due to discounting or a suboptimal amount of money, increases further. To get some answers, the monetary search model of Trejos and Wright (1995) is extended by a CBDC. We show that an interest-bearing CBDC reinforces inefficiencies in transactions with cash since opportunity costs for cash holders and money supply increase. Nevertheless, a CBDC is able to increase welfare as long as the share of CBDC holders is limited.
    Keywords: CBDC, inefficiencies, welfare analysis
    JEL: E31 E41 E51
    Date: 2022
  6. By: Rodnyansky, Alexander; Van der Ghote, Alejandro; Wales, Daniel
    Abstract: This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence. JEL Classification: E31, E32, E52, E58
    Keywords: inflation indexes, monetary policy, product quality
    Date: 2022–07
  7. By: Quelhas, João
    Abstract: In this paper, we construct a proxy for uncertainty that tracks monetary policy in the Euro area by text-mining thousands of newspaper articles in the press. We calibrate a nonlinear interacted vector autoregression model to study the impact of monetary policy uncertainty on the real economy and on the effectiveness of monetary policy. We find that higher uncertainty leads to a contraction in economic activity, with a higher dampening effect in uncertain times. Uncertainty also influences how strongly movements in the policy rate affect output, investment and consumption as, in uncertain times, average responses are up to three times less powerful than in tranquil times.
    Keywords: Monetary Policy, Uncertainty, Euro Area, Textual Analysis, SEIVAR Model
    JEL: E32 E40 E50 E52
    Date: 2022–05
  8. By: Angelo M Fasolo; Flávia M Graminho; Saulo B Bastos
    Abstract: Central bank communication is a key tool in managing inflation expectations. This paper proposes a hierarchical Latent Dirichlet Allocation (hLDA) model combined with feature selection techniques to allow an endogenous selection of topic structures associated with documents published by Banco Central do Brasil's Monetary Policy Committee (Copom). These computational linguistic techniques allow building measures of the content and tone of Copom's minutes and statements. The effects of the tone are measured in different dimensions such as inflation, inflation expectations, economic activity, and economic uncertainty. Beyond the impact on the economy, the hLDA model is used to evaluate the coherence between the statements and the minutes of Copom's meetings.
    Keywords: communication, monetary policy, latent dirichlet allocation, Brazil, Central Bank
    JEL: E02 E21 E22
    Date: 2022–06
  9. By: Javier Garcia-Cicco
    Abstract: We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design.
    Keywords: monetary policy rules, credibility, inflation expectations
    JEL: E52 E31
    Date: 2022–06
  10. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the drivers of Turkish inflation by using a structural vector autoregression model, where monthly data on global oil prices, unemployment rates, inflation rates, policy rates and exchange rates are used. The empirical results show that Turkish inflation increases following a negative policy rate shock, a positive exchange rate shock, or a positive global oil price shock. The volatility of Turkish inflation is mostly explained by global oil prices and exchange rate movements in the long run, while the contribution of exchange rate shocks to Turkish inflation has continuously increased over time. As additional empirical results show that exchange rate depreciation can be reduced by positive policy rate shocks, it is implied that a conventional monetary policy increasing policy rates following an increase in inflation or a depreciation of Turkish lira would be optimal to achieve and maintain price stability in Turkey, which is the primary objective of the Central Bank of the Republic of Turkey.
    Keywords: Monetary Policy, Inflation, Unemployment, Exchange Rate, Turkey
    JEL: E31 E52 F41
    Date: 2022–03
  11. By: Christopher S Sutherland
    Abstract: How forward guidance influences expectations is not yet fully understood. To study this issue, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I describe how, when, and where forward guidance has worked. I find that forecasters revise their interest rate forecasts in the intended direction by five basis points on average following a change in forward guidance. I provide country estimates for The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand, Sveriges Riksbank, and Norges Bank. I offer preliminary evidence that commitment-based forward guidance is exceedingly rare, but can strongly amplify forward guidance. Finally, I provide estimates of the extent to which this effect may be attributable to central bank information effect.
    Keywords: forward guidance, central bank communication, information effects, expectations, survey data
    JEL: D83 D84 E37 E52 E58
    Date: 2022–06
  12. By: Rösl, Gerhard; Seitz, Franz
    Abstract: In this paper, we focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 - 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation. We find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available. However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. Consequently, it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.
    Keywords: cash,banknotes,money,crises,stabilization
    JEL: E41 E51 E58
    Date: 2022
  13. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation targeting (SIT) regime, the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime, because the first regime creates more extreme movements in output and inflation than the second one. We also find that nowcasting tends to improve the quality of monetary policy, especially in a SIT regime. Finally, we provide a case study of monetary policies in the USA and the eurozone during 2000–20.
    Keywords: OUP deal
    JEL: E30 E50
    Date: 2022–07–09
  14. By: Nektarios Michail (Central Bank of Cyprus); Agorasti Patronidou (Central Bank of Cyprus); Ioanna Evangelou (Central Bank of Cyprus)
    Abstract: The paper examines whether euro area monetary policy was able to affect the consumption and investment behaviour of households in Cyprus, using household level data for Cyprus obtained from the Household Finance and Consumption Survey. Using a panel analysis, we find that monetary policy only affects the deposit and consumption behaviour of indebted households, suggesting that the main transmission channel of monetary policy is via the change in loan instalments. Households without loans appear to be, in general, unaffected by monetary policy changes. This suggests that monetary policy can paradoxically be less effective when most needed, as, in times of financial stress, households tend to focus on deleveraging. Additional avenues with regards to the potential impact of monetary policy on investing behaviour are also explored.
    Keywords: HFCS; survey; monetary policy; interest rate; households
    JEL: C83 E52 G50
    Date: 2021–10
  15. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the spillover effects of U.S. monetary policy on exchange rates of 11 emerging markets and 12 advanced economies during the pre-COVID-19 period of 2019 versus the COVID-19 period of 2020. The investigation is achieved by a structural vector autoregression model, where year-on-year changes in weekly measures of economic activity, exchange rates and policy rates are used. The empirical results suggest evidence for the spillover effects of U.S. monetary policy for several countries during the pre-COVID-19 period, whereas they have been effective only for certain countries during the COVID-19 period that can be explained by the disease outbreak channel. It is implied that policies keeping the pandemic under control may help mitigate the unforeseen economic effects of the COVID-19 crisis.
    Keywords: COVID-19, Coronavirus, Exchange Rates, Monetary Policy, Spillover Effects
    JEL: E52 E58 F31 F42
    Date: 2022–06
  16. By: Ha, Jongrim; Kose, Ayhan M.; Ohnsorge, Franziska
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    Keywords: Inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation
    JEL: E31 E32 E52 Q43
    Date: 2022–06–07
  17. By: Boneva, Lena; Ferrucci, Gianluigi
    Abstract: Climate change is increasingly affecting the objective, conduct and transmission of monetary policy. Yet, climate-related shocks and trends are still generally absent from the canonical models used by central banks for their policy analysis and forecasting. This briefing paper reviews the potential pitfalls of using a modelling framework that omits climate-related information and provides some reflections on how central banks can integrate climate change considerations into their ‘workhorse’ models. This includes: accounting for an explicit role of the energy sector in the production structure and for specific climate change policies; improving the ability of models to cope with various sources of heterogeneity; and incorporating a more realistic representation of the financial sector, to analyse the possible stranding of assets and impairments in the transmission mechanism of monetary policy. It argues that a ‘suite-of-models’ strategy is a promising approach for central banks to cope with the climate challenge when designing a new generation of models. To complement theory with practice, several examples of central banks that have already integrated climate-related information into their analytical frameworks are provided. The paper concludes with some specific recommendations.
    JEL: F3 G3 J1
    Date: 2022–04–13
  18. By: Ruchi Avtar; Rajashri Chakrabarti; Maxim L. Pinkovskiy
    Abstract: In our previous post, we discussed how the labor market recovery—the “maximum employment” half of the Federal Reserve System’s dual mandate—featured not only a return of overall employment rates to pre-pandemic levels, but also a narrowing of racial and ethnic gaps in employment rates. In this post, we take up the second half of the dual mandate—price stability—and discuss heterogeneity in inflation rates faced by different demographic groups during the rise in inflation in 2021-22. We find that, in contrast to inequalities in employment rates, disparities in inflation rates have widened during the recent inflationary episode, with less advantaged groups experiencing more inflation.
    Keywords: equitable growth; labor market; COVID-19; recession
    JEL: J01 I14 E52
    Date: 2022–06–30
  19. By: Hertrich, Markus; Nathan, Daniel
    Abstract: Using confidential daily data, we analyse how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the Israeli new shekel (ILS) and the expectations about its future value. We find that interventions amounting to US dollar (USD) 1 billion are on average associated with a depreciation of the ILS by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. The (indirect) effect on the forward rate is smaller - the BOI's USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution of future exchange rates proxied by the scaled price quotes of USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole distribution towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.
    Keywords: exchange rate,expectations,central bank intervention,Israeli new shekel,reaction function
    JEL: E52 E58 E65 F31 G14 G15
    Date: 2022
  20. By: Ricardo Correa; Linda S. Goldberg; Robert Lerman; Bo Sun
    Abstract: The U.S. dollar has played a preeminent role in the global economy since the second World War. It is used as a reserve currency and the currency of denomination for a large fraction of global trade and financial transactions. The status of the U.S. dollar engenders important considerations for the effectiveness of U.S. policy instruments and the functioning of global financial markets. These considerations include understanding potential factors that may alter the dominance of the U.S. dollar in the future, such as changes in the macroeconomic and policy environments or the development of new technologies and payment systems.
    Keywords: dollar; international role; reserve currency
    JEL: F31 E42 F00
    Date: 2022–07–05
  21. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses an estimated interest rate rule of the Fed to argue that the low recent interest rates may be due to a change in Fed behavior. Prior to the Great Recession the Fed’s behavior is consistent with the rule. During the recession the zero lower bound was hit in 2008.4. The rule unconstrained called for negative nominal interest rates during this period, and so it became inoperative. The Fed kept the interest rate at roughly zero through 2015. This was a period of low inflation and still fairly high unemployment rates, and the rule called for essentially zero interest rates through about 2010. Beginning in 2011, however, the rule called for rising interest rates, and between 2011 and 2019 the predicted interest rates from the rule are always higher than the actual rates. Between 2011 and 2019 the Fed was more expansive than its historical behavior as estimated by the rule. The COVID experience through 2022.1 also shows the Fed setting historically low interest rates beginning in 2021 in the face of rising inflation and falling unemployment. In short, the low recent interest rates may be because of a change in Fed behavior.
    JEL: E12 E17
    Date: 2022–07
  22. By: Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University); Ryan Zalla (Economics Department, University of Pennsylvania, 133 South 36th Street, Philadelphia, PA 19104, USA.)
    Abstract: We investigate the relation between monetary growth and compensation in the financial industry since the end of the Bretton Woods system. Estimating local projections, we find that the growth of the monetary base positively associates with a higher differential between financial and average wages. Our findings indicate that the effects are short lived, lending support to the temporary non-neutrality of money argued by David Hume and against the more permanent non-neutrality argued by Richard Cantillon. Our results help clarify debates on the non-neutrality of money going back to the eighteenth century. [This is the updated version of Working Paper #41.]
    Keywords: Cantillon Effect; Inequality; Money Non-neutrality; Financial Industry
    JEL: D31 E31 E52
    Date: 2022–07
  23. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Using monthly headline inflation data covering 184 countries for the period between January 1971 and December 2020, this paper investigates the role of standard gravity variables on inflation convergence across country pairs. The convergence analysis by unit root tests is based on ten-year rolling windows to control for potential structural changes over time, whereas the corresponding results are connected to the standard gravity variables in the preceding year to investigate the drivers of inflation convergence and its speed. Regarding the existence of inflation convergence, empirical results show that having a common currency, a free trade agreement, proximity, a common border, or a colonial relationship between countries increases the probability of inflation convergence. Regarding the speed of inflation convergence, the very same gravity variables are shown to reduce the half-life of convergence. In both cases, the effects of having a common currency are shown to dominate those of other gravity variables.
    Date: 2022–07
  24. By: Juan José Almagro Herrador; Mihai Macovei; Moritz Bizer
    Abstract: This paper explores the role of the euro in the Southern neighbourhood of the EU, notably in Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco and Tunisia. Our analysis is based on a survey conducted by the European Commission in 2021 on the use of the euro and other currencies in these countries, as well as other relevant sources and is performed across five main dimensions: cross-border trade transactions, remittances, foreign exchange reserves, external public debt and the commercial banking sector. It finds that the use of the euro in Southern Neighbourhood countries is higher, on average, than in the world and in the EU’s Eastern Neighbours (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine), although the US dollar remains the foreign currency of reference in the region. The US dollar’s continued strong role reflects historical developments and monetary arrangements, as well as the greater liquidity and dominant role of the US dollar in global financial markets. The region remains a heterogeneous group, with the euro playing a more prominent role than the US dollar in Maghreb countries (i.e. Algeria, Morocco and Tunisia). The extensive use of the euro for trade invoicing across countries seems highly correlated with the depth of economic and trade relations with euro area countries and the EU at large. Around one third of inward remittances are denominated in euro and over one third of the external public debt stock is denominated in euro on average, higher than the global average. The banking sector and foreign reserves remain heavily dollarised across countries. Based on these findings, the paper highlights new areas, such as green finance and NextGenerationEU bond issuance, which together with other policy initiatives could foster a higher use of the euro in the region.
    JEL: E41 E42 E52 E58
    Date: 2022–06
  25. By: Linda S. Goldberg; Robert Lerman; Dan Reichgott
    Abstract: Will developments in technology, geopolitics, and the financial market reduce the dollar’s important roles in the global economy? This post updates prior commentary [here, here, and here], with insights about whether recent developments, such as the pandemic and the sanctions on Russia, might change the roles of the dollar. Our view is that the evidence so far points to the U.S. dollar maintaining its importance internationally. A companion post reports on the Inaugural Conference on the International Roles of the U.S. Dollar jointly organized by the Federal Reserve Board and Federal Reserve Bank of New York and held on June 16-17.
    Keywords: dollar; international role; reserve currency
    JEL: E5 F31
    Date: 2022–07–05
  26. By: Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott
    Abstract: We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll- over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). In comparison to existing models, we show that a model which accounts for the maturity of debt and its distribution across firms implies larger aggregate effects of monetary policy.
    Keywords: monetary policy, investment, corporate debt, debt maturity
    JEL: E32 E44 E52
    Date: 2022–07
  27. By: Wishnu Mahraddika
    Abstract: This paper reviews capital flow management (CFM) policy in Indonesia and examines its effectiveness from 2000 to 2019. The methodology involves constructing a new capital flow management policy restrictiveness index (CFMIX) and examining impulse responses of these flows to CFMIX adjustments through structural vector auto-regression (SVAR) estimation. The index shows that the Indonesian CFM policy stance has been more accommodative of capital inflows and restrictive on outflows over time. The results indicate that capital inflows in the form of portfolio investment are significantly responsive to CFM measures. However, there is no evidence of significant impact of CFM policy on outflows.
    Keywords: Capital flows, capital flow management, Indonesia
    JEL: F21 F32 F36 F41 G15
    Date: 2021
  28. By: Monica Jain; Olena Kostyshyna; Xu Zhang
    Abstract: This paper examines novel household-level data from the Canadian Survey of Consumer Expectations (CSCE) from 2014Q4 to 2022Q1 to understand households’ expectations about price and wage inflation, their respective links to views about labour market conditions, and their subsequent impact on households’ outlook for real spending growth. We find, consistent with recent research, that households associate higher expected price inflation with worse labour market conditions. In contrast, higher expected wage growth is linked to better labour market outcomes—an avenue not previously explored—and consistent with standard macroeconomic models. These differing supply-side and demand-side views of price inflation and wage inflation are reflected in households’ spending outlook: expected real spending is negatively linked to inflation expectations but positively linked to expected wage inflation. Finally, the link between households’ inflation expectations and wage growth expectations is weak, suggesting limited pass-through from consumers’ inflation expectations into their expected wage gains, and thus a lower likelihood of entering a wage-price spiral.
    Keywords: Inflation and prices; Monetary policy communications
    JEL: E24 E31 C83 D84
    Date: 2022–07
  29. By: Ricardo Correa; Linda S. Goldberg; Robert Lerman; Bo Sun
    Abstract: The U.S. dollar has played a preeminent role in the global economy since the second World War. It is used as a reserve currency and the currency of denomination for a large fraction of global trade and financial transactions.
    Date: 2022–07–05
  30. By: Heliodoro Temprano Arroyo
    Abstract: This paper assesses the implications of the large issuance of euro-denominated bonds under the NGEU and SURE instruments, as well as of other measures taken by the EU in response to the pandemic, for the global role of the euro. It focuses on the impact of the new facilities on the supply of safe assets in euros, highlighted by the literature as one of the main constraints so far on the internationalisation of the euro. After discussing this and other reasons why the euro is still punching internationally below the euro area’s economic weight, the paper estimates the expected quantitative impact of the new facilities and other measures, including the euro area’s national fiscal responses to the COVID-19 crisis, on the issuance of euro safe assets. It concludes that, although the NGEU and SURE facilities represent an important step, they are unlikely to sufficiently boost on their own the euro’s global role, reflecting their temporary nature and the partly offsetting acquisition of safe bonds under the ECB’s asset purchase programmes. The paper argues that, if the EU wants to achieve its objective of strengthening the euro’s global status, it should complement these efforts with other measures, as part of a comprehensive strategy. Ongoing structural changes in the world economy, including financial technology, and changes in the geopolitical environment create a more propitious context for this policy to bear its fruits because they make it more plausible that the world will move towards a true multi-polar currency system, overcoming the incumbency advantages that have protected the dollar’s hegemonic position since World War II.
    JEL: F33 F31 E5
    Date: 2022–06
  31. By: Gautam Nair (John F. Kennedy School of Government, Harvard University); Federico Sturzenegger (Universidad de San Andres and Harvard Kennedy School)
    Abstract: We study the global distributive consequences of the 'Great Reflation.' The conventional wisdom holds that the increases in interest rates resulting from high inflation in the United States will have a negative impact on the rest of the world (and developing countries in particular) due to the reversal of capital flows and higher financing costs. We show that the standard view fails to take into account an important countervailing force: the effect of higher US inflation on the changing real value of nominal US dollar assets and liabilities across countries. Decades of low inflation led to widespread use of dollar-denominated financial instruments with fixed interest rates and long maturities. Unanticipated inflation in the US diminishes the real value of dollar-denominated sovereign debt, both in the US and abroad. For sovereigns other than the US, the gains are equivalent to a debt relief that exceeds $100 billion. On the other hand, the US government benefited from the dilution of non-residents' holdings of US treasuries and dollar cash by an amount close to $600 billion.
    Date: 2022–07
  32. By: Fender, Ingo; McMorrow, Mike; Zulaica, Omar
    Abstract: Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key.
    JEL: F3 G3
    Date: 2022–07–08
  33. By: Solikin M. Juhro; Denny Lie; Aryo Sasongko
    Abstract: This paper builds and estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model suitable for the evaluation of central bank policy mix, with a particular application on the Indonesian economy. The model has a rich array of shocks and frictions, including banking and financial frictions. We illustrate how the estimated model can be used to investigate the source of aggregate fluctuations in Indonesia and to evaluate and simulate a policy mix involving monetary and macroprudential policies. Our Bayesian estimation identifies the COVID-19 pandemic shocks as being mainly a combination of adverse supply-side (technology) and demand-side (preference and foreign-output) shocks. We show that a countercyclical capital requirement rule could be a potent addition to Bank Indonesia's policy mix arsenal. Despite its rich features, the model is scalable and can be readily extended for evaluating other types of central bank policy mix.
    Keywords: central bank policy mix; integrated policy framework; countercyclical macroprudential policy rule; DSGE model for Indonesia; COVID-19 pandemic; capital requirement;
    Date: 2022–05
  34. By: Marco Flaccadoro (Bank of Italy)
    Abstract: We analyse the pass-through of exchange rates to prices in small, open, commodity-exporting economies, taking Canada as a case study. We estimate pass-through on a wide cross-section of disaggregated import, producer, and consumer prices, conditional on commodity shocks that explain a major share of the volatility in prices and exchange rates. Our pass-through measure is free from endogeneity concerns between prices and exchange rates and leads, in some cases, to opposite inference in reference to the sign of the pass-through compared with standard estimates. By focusing on industry-level producer price indexes, we show that conditional pass-through decreases with industry market power, while it increases with the degree of import penetration and the persistence of industry-specific shocks.
    Keywords: time series, factor analysis, prices, exchange rates, pass-through, commodity prices, oil shocks
    JEL: C32 C38 E31 F31 F4 Q02 Q43
    Date: 2022–04
  35. By: Alessandro Moro (Bank of Italy); Alessandro Schiavone (Bank of Italy)
    Abstract: This paper compares the behaviour of banks with that of non-bank financial institutions (NBFIs) in the intermediation of portfolio flows to emerging market economies (EMEs). Our analysis shows that investment funds, a key component of NBFIs, tend to reduce their exposure to EMEs more than banks during periods of financial turmoil, such as the Covid-19 pandemic. Moreover, passive funds and exchange-traded funds (ETFs) are more responsive to global shocks than active funds. Global funds show a lower elasticity to financial volatility than regional funds, while the behaviours of institutional and retail funds are quite similar. Regarding the currency composition of portfolio investments in EMEs, investment funds cut their assets denominated in USD in response to global shocks more than those in other currencies. Finally, the portfolio inflows to EMEs with a higher share of portfolio liabilities held by investment funds rather than by banks and other financial intermediaries tend to be more sensitive to the global financial cycle.
    Keywords: financial intermediation, investment funds, emerging markets, capital flows, financial crisis
    JEL: F32 F36 G11 G15 G23
    Date: 2022–04
  36. By: Raphaël Didier (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: In this paper, we study the resilience of the community of individual users of a French local currency in the face of an abrupt halt in exchanges during the first containment related to the covid-19 pandemic (March 17, 2020 to May 11, 2020). Our study is based on the local currency of the Nancy Basin, the Florain, for which we have a field survey conducted before the pandemic, three interviews conducted between the first and second containment in France (May 12 and October 30, 2020), observations and figures obtained during participation in the association's general assembly and publications found on the structure's blog. This allowed us to highlight sociological factors (feeling of being a consum'actor, social representations of members and existence of an identity niche among active volunteers) and organizational factors (ethos of active volunteers, sociocratic mode of governance of the association and inscription of the Florain community in a life basin) that contribute to community resilience. However, in the particular case of a local currency, we show that there is also a predominant institutional dimension, linked to its social and political nature, which makes the community of individual users a local monetary community.
    Keywords: Values,Territory,Sociocracy,Governance,SSE,Covid-19,Resilience,Crisis,Local currency,Monetary community
    Date: 2022–04–14
  37. By: Gabriel Montes-Rojas (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET); Nicolás Bertholet (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: This paper presents empirical evidence on the short- and medium-run contractionary effects of exchange rate shocks and currency devaluations for bimonetary (i. e., highly dollarized) countries. In particular, for Argentina for the period January 2004-December 2018. Using a VAR representation with quantile heterogeneity, it implements a multivariate model with four macroeconomic variables: exchange rate variations, inflation, economic activity and nominal wage growth. The empirical results show a 30% price pass-through effects and a bimodal effect on output, with both positive and negative effects. Wages adjust less than prices with the consequent effect that real wages have a negative elasticity of 0.23 with respect to exchange rate shocks. Further analysis on the multivariate responses show that the negative effect on output is associated with a decline in real wages: a 1% fall in real wages after a currency devaluation produces a 2.3% decline in output.
    Keywords: Impulse-response functions, Vector autoregressive models, Multivariate quantiles, Exchange rate, Pass-through Recession
    JEL: C13 C14 C22
    Date: 2022–06
  38. By: Kyriakopoulou, Danae; Antonakaki, Theodora; Bekiari, Maria; Kartapani, Aliki; Rapti, Eleni
    Abstract: Central banks are increasingly exploring how climate-related financial risks and opportunities impact their price and financial stability mandates, as well as their own operations. They are also beginning to consider how their own actions, and those of the financial institutions they supervise, may contribute to and exacerbate climate change risks and opportunities. Measuring and reporting – or disclosing – climate-related risks and opportunities is a key step in addressing these issues, for both individual institutions and thefinancial system as a whole. With this recognition, the Task Force on Climate-related Financial Disclosures (TCFD) was established, to guide financial institutions to make effective climate disclosures. The development of high quality, reliable, comparable and transparent climate disclosures can support decision-making and enable better understanding of the implications of climate change for central banks. Further, central banks can lead by example by demonstrating lessons learned from their own climate-related disclosures to other financial institutions and by using their influence over the financial rulebook to build the broader system architecture. This paper reviews key elements of the recommendations made by the TCFD – first released in 2017 – and their application by central banks to date. The paper also considers potential enhancements for central banks’ climate disclosures and their possible implications for the wider financial system. The fact that definitions, data, and methodologies for assessing climate-related issues are constantly evolving means that efforts to develop climate-related disclosures will need to follow a progressive approach, with the quantity and quality of disclosures improving in parallel with the progress made in these areas. A flexible framework also suits the distinct operational models and different mandates of central banks. The recommendations made in this paper can be applied to the different central bank portfolios, including monetary and non-monetary and credit facilities, as well as financial stability and physical operations. They are designed to support a wider and more practical application of the TCFD recommendations by central banks.
    JEL: F3 G3
    Date: 2022–05–12
  39. By: Sanyal, Anirban
    Abstract: Capital control is used as policy toolkit for safeguarding domestic economy from the volatility of capital flows. However, the effect of capital control is rather far fetched as the signaling effect of capital control can moderate investor's outlook about domestic economy and thereby outweighs the intended effect. The spillover effect, on the other hand, modulates the capital flows to other countries when one country increases capital account restrictions. Further, the effect of capital control can have varying impact on capital inflows to different sectors as recent studies indicate heterogeneity in the drivers and nature of capital inflows to different institutional sectors. With the background, the paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public, banks and corporate. The paper validates the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The paper observes that the direct effect of capital control moderates portfolio inflows to public sector whereas the effect is insignificant on portfolio inflows to banks and corporate sector. Further, the paper observes that the spillover effect of capital control is broad-based i.e. equally prevalent on all sectors. The paper explains the heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better returns. The paper extends the existing literature of capital controls by reviewing the sectoral heterogeneity in the capital flows.
    Keywords: Capital control,Spillover effect,Portfolio Choice,Signaling effect,Spatial Durbin Model
    Date: 2022
  40. By: Nidhi Aggarwal (Indian Institute of Management, Udaipur); Sanchit Arora (Ernst and Young); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: Existing evidence shows that over the years, India's capital account has become relatively more open, while the same cannot be said for China. However, with its rising share in the world economy, China has increasingly been pursuing its goal of RMB internationalisation, which concurrently relies on an open capital account. In this paper, we revisit the question and examine the openness of capital accounts of both India and China, the two largest emerging economies. Using more than 15 years of daily return differentials in the non-deliverable currency forward (NDF) market vis-a-vis the onshore spot market, we find that the somewhat haphazard process of capital account opening undertaken by the Indian authorities is reflected in large variations in covered interest parity (CIP) deviations across the period. In recent years the deviations have become smaller and the no-arbitrage bands have become narrower, implying greater financial integration and lower effectiveness of existing capital controls Applying our methodology to China, we find that though China has liberalised its capital account over time, its capital controls still bind. Our analysis shows that India's capital account continues to remain substantially more open than that of China's.
    Keywords: Capital account openness, Financial integration, Covered interest parity, Capital controls, Foreign exchange market
    JEL: G15 F30 F31 F32
    Date: 2022–05
  41. By: Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
    Abstract: We study the impact of the Covid-19 pandemic on Euro Area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: 1) Compositional effects – the switch from services to goods consumption – are amplified through global input-output linkages, affecting both trade and inflation. 2) Inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks. 3) Foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining Euro Area inflation over 2020-21. 4) International trade did not respond to changes in GDP as strongly as it did during the 2008-09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks.
    JEL: E00 F10
    Date: 2022–07
  42. By: Julian di Giovanni; Sebnem Kalemli-Ozcan; Alvaro Silva; Muhammed A. Yildirim (Center for International Development at Harvard University)
    Abstract: We study the impact of the Covid-19 pandemic on Euro Area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: 1) Compositional effects – the switch from services to goods consumption – are amplified through global input-output linkages, affecting both trade and inflation. 2) Inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks. 3) Foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining Euro Area inflation over 2020-21. 4) International trade did not respond to changes in GDP as strongly as it did during the 2008-09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks.
    Keywords: Macroeconomics, International Economics, Trade, COVID-19
    JEL: E00 F10
    Date: 2022–07
  43. By: Boissinot, Jean; Goulard, Sylvie; Salin, Mathilde; Svartzman, Romain; Weber, Pierre-François
    Abstract: The concept of double materiality is developing rapidly, with potential implications for monetary and financial policies. Double materiality builds on the historical accounting and auditing convention of materiality and expands it by considering that non-financial and financial corporations are not only materially vulnerable to environment-related events and risks, but also materially contribute to enabling dirty activities and environmental degradation. Three rationales that support the use of double materiality are distinguished in this paper, each with different policy implications: i) an idiosyncratic perspective – closely connected to the concept of dynamic materiality – which considers that an entity’s environmental impacts are relevant as they provide information on the institution’s own risks; ii) a systemic risk perspective – closely connected to the concept of endogeneity of financial risks – which seeks to reduce financial institutions’ contribution to negative environmental externalities because of the systemic financial risks that could result from them; and iii) a transformative perspective seeking to reshape financial and corporate practices and values in order to make them more inclusive of different stakeholders’ interests and compatible with the actions needed for an ecological transition. Each of these rationales has potential implications for monetary and financial policies, as well as possible theoretical and practical challenges. While the adoption of a double materiality perspective remains an open question, the concept proposes the opportunity to think more comprehensively about the role of the financial system in urgently addressing the ecological challenges of our times.
    JEL: F3 G3 J1
    Date: 2022–06–09

This nep-mon issue is ©2022 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.