nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒08‒29
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Surges and Monetary Policy By Carl E. Walsh
  2. Russia’s Monetary Policy in 2021 By Bozhechkova Alexandra; Trunin Pavel
  3. Digital Money as a Medium of Exchange and Monetary Policy in Open Economies By Daisuke Ikeda
  4. Shadow Rates as a Measure of the Monetary Policy Stance: Some International Evidence By Christina Anderl; Guglielmo Maria Caporale
  5. Central Bank Communication with the General Public: Promise or False Hope? By Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  6. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rates? By Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; Yaz Terajima
  7. Make-up Strategies with Finite Planning Horizons but Forward-Looking Asset Prices By Stéphane Dupraz; Hervé Le Bihan; Julien Matheron
  8. Pass-through from monetary policy to bank interest rates: A-symmetry analysis By Juan Francisco Martínez; Daniel Oda; Gonzalo Marivil
  9. The Term Structure of Interest Rates in a Heterogeneous Monetary Union By James Costain; Galo Nuño; Carlos Thomas
  10. The Effects of Economic Shocks on Heterogeneous Inflation Expectations By Mr. Gee Hee Hong; Yoosoon Chang; Fabio Gómez-Rodríguez
  11. A Preferred Habitat View of Yield Curve Control By Junko Koeda; Yoichi Ueno
  12. Improving Inflation Forecasts Using Robust Measures By Randal Verbrugge; Saeed Zaman
  13. Institutional Innovation and Central Bank Independence 2.0 By Kenneth S. Rogoff
  14. Fiscal and macroprudential policies in a monetary union By Jose E Bosca; Javier Ferri; Margarita Rubio
  15. Is There a Stable Relationship between Unemployment and Future Inflation? By Terry Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  16. Inflation Targeting and Private Domestic Investment in Developing Countries By Bao-We-Wal BAMBE
  17. E-Money in Ghana: A Case Study By Samuel Senyo Okae; Eugene Yarboi Mensah
  18. Cash Money as a Saving Mode By Hannu Laurila
  19. Circulation of a digital community currency By Carolina E S Mattsson; Teodoro Criscione; Frank W Takes
  20. The role of financial surveys for economic research and policy making in emerging markets By Sofía Gallardo; Carlos Madeira
  21. The Global Distributive Impact of the US Inflation Shock By Gautam Nair; Federico Sturzenegger
  22. The relationship between shipping freight rates and inflation in the Euro Area By Nektarios A. Michail; Konstantinos D. Melas; Lena Cleanthous
  23. Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves By Eduardo Levy Yeyati; Juna Francisco Gómez
  24. World Economy Summer 2022 - Inflation is curbing global growth By Gern, Klaus-Jürgen; Kooths, Stefan; Reents, Jan; Sonnenberg, Nils; Stolzenburg, Ulrich
  25. Climate Change Mitigation: How Effective is Green Quantitative Easing? By Raphael Abiry; Marien Ferdinandusse; Alexander Ludwig; Carolin Nerlich
  26. Expectations and the Rate of Inflation By Iván Werning
  27. Monetary Union, Asymmetric Recession, and Exit By Keuschnigg, Christian
  28. Managing climate change risk: a responsibility for politicians not Central Banks By Ozili, Peterson K
  29. Staple Food Prices in Sub-Saharan Africa: An Empirical Assessment By Ms. Filiz D Unsal; John A Spray; Cedric Okou
  30. A Luna-tic Stablecoin Crash By Harald Uhlig

  1. By: Carl E. Walsh (Distinguished Professor Economics Emeritus, Department of Economics, University of California, Santa Cruz, and Honorary Adviser to the IMES (E-mail:
    Abstract: Similarities between the 1960s and 1970s raise concerns that central banks are repeating mistakes that led to the Great Inflation. Two explanations for this earlier period of inflation, that it was due to shocks and special factors or that it was the result of political pressures on monetary policy, seem particularly relevant today. Major central banks such as the Federal Reserve and the ECB have been slow to react to the surge in inflation due to COVID-19 and the war in Ukraine. I investigate the consequences of policy delay and the impact of a more aggressive reaction, conditional on policy being delayed. In assessing the persistence of inflation shocks and in dealing with uncertainty about inflation dynamics, policymakers seem to be ignoring lessons from the literature on monetary policy in the face of model uncertainty.
    Keywords: Inflation, Monetary policy, COVID-19
    JEL: E31 E52 E58
    Date: 2022–07
  2. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy)
    Abstract: In 2021, the rapid acceleration of the rate of inflation and overshooting by the actual inflation of the RF Central Bank’s target were the key challenges to the monetary policy following a fast recovery of demand amid limited capacities to increase supply of numerous goods and the easing of the monetary and fiscal policies. As a result, the RF Central Bank has switched over to the tightening of the monetary policy and raised the key interest rate at all its meetings of the Board of Directors since March 2021. In 2021, the key interest rate picked up by 4.25 p.p. from 4.25% annually to 8.5% annually, a record-high since 2017. It is noteworthy that such a lengthy phase of tightening of the monetary policy was observed for the first time since 2014.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments, fiscal policy
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2022
  3. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:
    Abstract: The rise of digital money may bring about privately issued money that circulates across borders and coexists with public money. This paper uses an open-economy search model with multiple currencies to study the impact of such global money on monetary policy autonomy -- the capacity of central banks to set a policy instrument. I show that the circulation of global money can entail a loss of monetary policy autonomy, but it can be preserved if government policy that limits the amount or use of global money for transactions is introduced or if the global currency is subject to counterfeiting. The result suggests that global digital money and monetary policy autonomy can be compatible.
    Keywords: Cryptocurrency, Monetary policy autonomy, Currency counterfeiting, Government transaction policy
    JEL: D82 E4 E5 F31
    Date: 2022–07
  4. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper examines the usefulness of shadow rates to measure the monetary policy stance by comparing them to the official policy rates and those implied by three types of Taylor rules in both inflation targeting countries (the UK, Canada, Australia and New Zealand) and others that have only targeted inflation at times (the US, Japan, the Euro Area and Switzerland) over the period from the early 1990s to December 2021. Shadow rates estimated from a dynamic factor model are shown to suggest a much looser policy stance than either the official policy rates or those implied by the Taylor rules, and generally to provide a more accurate picture of the monetary policy stance during both ZLB and non-ZLB periods, since they reflect the full range of unconventional policy measures used by central banks. Further, generalised impulse response analysis based on two alternative Vector Autoregression (VAR) models indicates that monetary shocks based on the shadow rates are more informative than those related to the official policy rates, especially during the Global Financial Crisis and the recent Covid-19 pandemic, when unconventional measures have been adopted.
    Keywords: dynamic factor models, shadow rates, inflation targeting, monetary policy stance
    JEL: C38 E43 E52 E58
    Date: 2022
  5. By: Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
    Abstract: Central banks are increasingly reaching out to the general public to motivate and explain their monetary policy actions. One major aim of this outreach is to guide inflation expectations; another is to ensure accountability and create trust. This article surveys a rapidly-growing literature on central bank communication with the public. We first discuss why and how such communication is more challenging than communicating with expert audiences. Then we survey the empirical evidence on the extent to which this new outreach does in fact affect inflation expectations and trust. On balance, we see some promise in the potential to inform the public better, but many challenges along the way.
    JEL: D12 D84 E52 E58 G53
    Date: 2022–07
  6. By: Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; Yaz Terajima
    Abstract: We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies – Canada, Chile, the Czech Republic and Norway – using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies’ monetary policy when rates shift to and from the very low end of the distribution.
    Date: 2022–01
  7. By: Stéphane Dupraz (Banque de France); Hervé Le Bihan (Banque de France and Banco de España); Julien Matheron (Banque de France)
    Abstract: How effective make-up strategies are depends heavily on how forward-looking agents are. Workhorse monetary models, which are much forward-looking, find them so effective that they run into the forward-guidance puzzle. Models that discount the future further find them much less effective, but imply that agents discount the very perception of future policy rates. This only evaluates make-up strategies when financial markets do not notice them, or deem them non-credible. We build on one leading solution to the forward-guidance puzzle (Woodford’s finite planning horizons) by amending the assumption that financial markets have rational expectations on policy rates, and incorporate them into the long-term nominal interest rates faced by all. Agents still have a limited ability to foresee the consequences of monetary policy on output and inflation, making the model still immune to the forward-guidance puzzle. First, we find that make-up strategies that compensate for a past deficit of accommodation after an ELB episode have sizably better stabilization properties than inflation targeting. Second, we find that make-up strategies that always respond to past economic conditions, such as average inflation targeting, do too but that their stabilization benefits over IT can be reduced by the existence of the ELB.
    Keywords: make-up strategies, forward-guidance puzzle, finite planning horizons
    JEL: E31 E52 E58
    Date: 2022–05
  8. By: Juan Francisco Martínez; Daniel Oda; Gonzalo Marivil
    Abstract: This paper analyzes the effect of monetary policy in the credit market, by modeling the dynamics of banks’ interest rates relative to its equilibrium level. We estimate the banks’ equilibrium interest rates, which include latent spreads and/or specific margins. Additionally, we allow a gradual convergence to the target and asymmetric adjustment speeds, as it may be different for active and passive rates and it depends on whether these adjust to higher or lower levels as compared to the current one. The use of regimes based on the relative level of the rate to its objective has advantages over only differentiating between increases and decreases in the monetary policy rate (MPR), since it also recognizes changes in spreads, which exploit the heterogeneity of the banks and include the effects of specific factors. Using Chilean data from January 2004 to September 2019, we find that although there is a direct transmission of MPR on the banks’ interest rates, this is not immediate. In particular, we show that the adjustment of deposits rates to changes in the MPR is faster in a monetary easing, while, for commercial rates, banks adjust their rates more rapidly to a tightening. This result is consistent with international evidence, in particular for larger institutions, but this effect is diluted in a period of less than a year.
    Date: 2022–03
  9. By: James Costain (Banco de España); Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: The highly asymmetric reaction of euro area yield curves to the announcement of the ECB’s pandemic emergency purchase programme (PEPP) is hard to reconcile with the standard “duration risk extraction” view of the transmission of central banks’ asset purchase policies. This observation motivates us to build a no-arbitrage model of the term structure of sovereign interest rates in a two-country monetary union, in which one country issues default-free bonds and the other issues defaultable bonds. We derive an affine term structure solution, and we decompose yields into term premium and credit risk components. In an extension, we endogenise the peripheral default probability, showing that the possibility of rollover crises makes it an increasing function of bond supply net of central bank holdings. We calibrate the model to Germany and Italy, showing that it matches well the reaction of these countries’ yield curves to the PEPP announcement. A channel we call “default risk extraction” accounts for most of the impact on Italian yields. The programme’s flexible design substantially enhanced this impact.
    Keywords: sovereign default, quantitative easing, yield curve, affine model, COVID-19 crisis, ECB, pandemic emergency purchase programme
    JEL: E5 G12 F45
    Date: 2022–06
  10. By: Mr. Gee Hee Hong; Yoosoon Chang; Fabio Gómez-Rodríguez
    Abstract: In this paper, we examine how economic shocks affect the distribution of household inflation expectations. We show that the dynamics of households' expected inflation distributions are driven by three distinctive functional shocks, which influence the expected inflation distribution through disagreement, level shift and ambiguity. Linking these functional shocks to economic shocks, we find that contractionary monetary shocks increase the average level of inflation expectation with anchoring effects, with a reduction in disagreement and an increase in the share of households expecting future inflation to be between 2 to 4 percent. Such anchoring effects are not observed when the high inflation periods prior to the Volcker disinflation are included. Expansionary government spending shocks have inflationary effects on both short and medium-run inflation expectations, while an increase in personal income tax shocks is inflationary for mediumrun. A surprise increase in gasoline prices increases the level of inflation expectations, but lowers the share of households with 2 percent inflation expectations.
    Keywords: Inflation expectations; household survey; functional autoregression; transmission of economic shocks; heterogeneous beliefs; inflation expectation; expansionary government spending shock; inflation distribution; monetary policy shock; gasoline price shock; Inflation; Fuel prices; Personal income tax; Income shocks
    Date: 2022–07–01
  11. By: Junko Koeda (Waseda University); Yoichi Ueno (Bank of Japan)
    Abstract: We extend the canonical preferred habitat term structure model of Vayanos and Vila (2021) to analyze yield curve control (YCC) by treating the central bank as a preferred habitat investor allowing the price elasticity of government bond demand to depend on its targeted yield. The price elasticity captures the strictness of YCC implemented by the central bank. We calibrate the model for Japan and find that sufficiently strict YCC requires limited additional bond purchases to keep the targeted yield within the targeted range, and attenuates the impact of short-rate changes in the yield curve. In the absence of YCC, the effect of bond demand and supply on bond yields increases once again as the influence of the effective lower bound on nominal interest rates weakens.
    Keywords: monetary policy; yield curve control; preferred habitat
    JEL: E43 E52 E58 G12
    Date: 2022–08–01
  12. By: Randal Verbrugge; Saeed Zaman
    Abstract: Both theory and extant empirical evidence suggest that the cross-sectional asymmetry across disaggregated price indexes might be useful in the forecasting of aggregate inflation. Trimmed-mean inflation estimators have been shown to be useful devices for forecasting headline PCE inflation. But does this stem from their ability to signal the underlying trend, or does it mainly come from their implicit signaling of asymmetry (when included alongside headline PCE)? We address this question by augmenting a “hard to beat” benchmark inflation forecasting model of headline PCE price inflation with robust measures of trimmed-mean estimators of inflation (median PCE and trimmed-mean PCE) and robust measures of the cross-sectional asymmetry (Bowley skewness; Kelly skewness) computed using the 180+ components of the PCE price index. We also construct new trimmed-mean measures of goods and services PCE inflation and their accompanying robust skewness. Our results indicate significant gains in the point and density accuracy of PCE inflation forecasts over medium- and longer-term horizons, up through and including the COVID-19 pandemic. We find that improvements in accuracy stem mainly from the trend information implicit in trimmed-mean estimators, but that skewness is also useful. Median PCE slightly outperforms trimmed-mean PCE; both outperform core PCE. For point forecasts, Kelly skewness is preferred; but for estimating stochastic volatility, Bowley skewness is preferred. An examination of goods and services PCE inflation provides similar inference.
    Keywords: median PCE inflation; trimmed-mean PCE; disaggregate inflation; skewness; forecasting
    JEL: E31 E37 E52
    Date: 2022–08–03
  13. By: Kenneth S. Rogoff (Professor of Economics and Maurits C. Boas Chair of International Economics, Harvard University (E-mail:
    Date: 2022–07
  14. By: Jose E Bosca; Javier Ferri; Margarita Rubio
    Abstract: In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, fiscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global financial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing financial risks. This issue gives rise to an interesting research question: how do macroprudential and fiscal policies interact? By affecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a fiscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder financial effects and also influences the foreign country fiscal stance. Moreover, a discretionary government spending policy affects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the fiscal multiplier.
    Keywords: Monetary union, macroprudential policy, fiscal policy, monetary policy
    Date: 2022
  15. By: Terry Fitzgerald (Federal Reserve Bank of Minneapolis); Callum Jones (Board of Governors of the Federal Reserve System); Mariano Kulish (University of Sydney); Juan Pablo Nicolini (Federal Reserve Bank of Minneapolis/Universidad Di Tella)
    Abstract: The empirical literature on the stability of the Phillips curve has largely ignored the bias that endogenous monetary policy imparts on estimated Phillips curve coefficients. We argue that this omission has important implications. When policy is endogenous, estimation based on aggregate data can be uninformative as to the existence of a stable relationship between unemployment and future inflation. But we also argue that regional data can be used to identify the structural relationship between unemployment and inflation. Using citylevel and state-level data from 1977 to 2017, we show that both the reduced form and the structural parameters of the Phillips curve are, to a substantial degree, quite stable over time.
    Keywords: Endogenous monetary policy; Stability of the Phillips curve.
    JEL: E52 E58
    Date: 2022–07
  16. By: Bao-We-Wal BAMBE
    Abstract: This paper analyzes the effect of inflation targeting on private domestic investment in developing countries. Using propensity scores matching methods, thus mitigating tra- ditional self-selection problems, we find that inflation targeting has led to a 2.05 -2.53 percentage point increase in domestic investment in targeting countries compared to non- targeting ones. Estimates are economically meaningful and robust to various checks, notably sample changes, additional controls, alternative estimation methods, and falsifi- cation tests. A few heterogeneity features of the treatment effect are further highlighted, depending on some factors. Finally, we explore the main transmission channels and iden- tify monetary policy credibility as the key driver of the regime’s effectiveness.
    Keywords: Inflation targeting, Private domestic investment, Developing countries, Propensity score matching, Monetary policy credibility
    JEL: E51 E52 E51 E58 E62 E22
    Date: 2022–07
  17. By: Samuel Senyo Okae (Bank of Ghana); Eugene Yarboi Mensah (Ghana Deposit Protection Corporation)
    Abstract: The usage of electronic money (e-money) for transactions has grown across Ghana and has the potential to revolutionise the cash-dominant economy to become cashless. Propelling this growth are mobile money operators (MMOs), which have developed to offer a specific type of e-money, termed mobile money (MM). With the increased use of mobile-money services and growth in the payment systems sector each day, it is imperative for Ghana to design a holistic approach to the use of e-money as well as consider its operationalisation of the coverage by the deposit insurer. The Ghana Payment Systems Act, 2019 (Act 987) sets out the rules for the issuance of e-money within Ghana and the supervision of the business of e-money institutions (EMIs), which includes MMOs. There are growing concerns about safeguarding client funds held by EMIs worldwide. In Ghana, client funds held by EMIs must be placed in custodial accounts at banks. As a result, it has become necessary for Ghana's deposit insurance system to consider how to protect these funds. Funds backing the electronic value belonging to customers of MMOs are kept in a custodian account which resides with banks and hence the need for these funds to be protected in case of a bank failure is being discussed. This brief describes the distinctions between deposits and e-money and provides a description of the key features of e-money in the Ghanaian context. It discusses the factors influencing the protection of e-money wallets and the float (defined as the cash equivalent of outstanding electronic money liabilities of an electronic money issuer with partner banks) kept with commercial banks. Finally, options to be considered for the possible protection of these wallets in case of bank liquidation are presented.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–08
  18. By: Hannu Laurila
    Abstract: Cash money can be a rational devise of saving as an insurance against external uncertainty. Liquid money, controlled by a stable and trustworthy central bank, offers an insurance against stock market crashes, bankrupts and other economic turmoils that endanger the yield of illiquid saving modes. In turbulent times, the value-carrying property of money is accentuated, and the recent dark episodes including the last financial crisis, the pandemic and the war in Ukraine have made the public in Europe respond to uncertainty by increasing their cash holdings. The paper constructs a simple life cycle framework for the analysis of rational and irrational motives to save money, answers to questions about the effects of saving liquid money on illiquid saving and education and examines the inherent cost of the use of cash as a saving mode. The main findings of the paper are the following. The insurance motive to save money increases total savings by replacing deposit saving more than one-to-one. The share of deposit savings depends positively on the expected interest rate, while the share of cash savings is the higher the less there is inflation. Deposit saving correlates positively and education negatively with the expected market interest rate thus affecting their relative proportion, but education does not affect the implicit price paid for cash insurance. Incorporating money illusion adds an internal bias to life-time optimization. Misjudgment of the inflation rate makes consumers save excessively in cash at the cost of market deposits and increases the cost of using cash as rational insurance against external uncertainty.
    Date: 2022–08
  19. By: Carolina E S Mattsson; Teodoro Criscione; Frank W Takes
    Abstract: Circulation is the characteristic feature of successful currency systems, from community currencies to cryptocurrencies to national currencies. In this paper, we propose a network analysis methodology for studying circulation given a system's digital transaction records. This is applied to Sarafu, a digital community currency active in Kenya over a period that saw considerable economic disruption due to the COVID-19 pandemic. Representing Sarafu as a network of monetary flow among the 40,000 users reveals meaningful patterns at multiple scales. Circulation was highly modular, geographically localized, and occurring among users with diverse livelihoods. Network centrality highlights women's participation, early adopters, and the especially prominent role of community-based financial institutions. These findings have concrete implications for humanitarian and development policy, helping articulate when community currencies might best support interventions in marginalized areas. Overall, networks of monetary flow allow for studying circulation within digital currency systems at a striking level of detail.
    Date: 2022–07
  20. By: Sofía Gallardo; Carlos Madeira
    Abstract: This chapter reviews the role of economic and financial surveys in the academic literature and policy-making, with a broad review of applications in emerging markets and developing economies. Surveys are increasingly used both in developed economies and emerging markets, providing information on a range of economic and financial phenomena, such as the updating of inflation expectations, the future economic outlook, the evolution of credit demand and supply factors, household balance sheets, plus behavioral biases and personal finance. These studies provide feedback regarding central bank credibility, the expected impact of monetary policy and financial regulation. Surveys also help to inform some common research puzzles in finance, such as the low financial market participation, unequal financial access, credit constraints and inaccurate economic expectations.
    Date: 2022–04
  21. By: Gautam Nair (John F. Kennedy School of Government, Harvard University); Federico Sturzenegger (Harvard University/Universidad de San Andrés)
    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-denominatedsovereign 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. These gains come at the expense of private creditors and other sovereigns.
    Date: 2022–07
  22. By: Nektarios A. Michail (Central Bank of Cyprus); Konstantinos D. Melas (Metropolitan College, Greece and University of Western Macedonia, Kastoria, Greece); Lena Cleanthous (Central Bank of Cyprus)
    Abstract: Consumer inflation across the globe has rebounded during 2021, also as a result of supply side disruptions, one of which is the increase in freight costs. To elaborate on the relationship between inflation and shipping costs, we employ a Vector Error Correction Model (VECM) and use disaggregated monthly data from January 2009 to August 2021, using both constant tax and the standard price indices. Following a shock in freight rates, the most hard-hit sectors appear to be garments and major household appliances, items that have traditionally been manufactured outside the euro area. In addition, using a threshold regression methodology we show that when freight rates rise more than $1,300-$1,500 per day, the sensitivity of inflation to freight changes increases.
    Keywords: inflation, shipping, freight rates, supply shock
    JEL: E31 R4
    Date: 2022–07
  23. By: Eduardo Levy Yeyati (Universidad Torcuato Di Tella); Juna Francisco Gómez (Universidad de Buenos Aires)
    Abstract: We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor), but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).
    Keywords: Exchange rates, foreign exchange intervention, international reserves, selfinsurance
    Date: 2022–07
  24. By: Gern, Klaus-Jürgen; Kooths, Stefan; Reents, Jan; Sonnenberg, Nils; Stolzenburg, Ulrich
    Abstract: In a situation with already elevated inflation, the war in Ukraine and the zero-covid policy in China have led to additional upward pressures on prices and reinforced the global supply chain problems. Real wages are declining in many countries, dampening personal consumption expenditures even though households are often able to draw from a substantial amount of extra savings accumulated during the pandemic. Given the widespread inflationary pressures, central banks have shifted towards a more restrictive monetary policy stance. Against this backdrop, the outlook for global growth has weakened. We forecast global growth of 3.0 percent in 2022 and 3.2 percent in 2023 (measured in terms of purchasingpower parities), representing a reduction by 0.5 and 0.4 percentage points for 2022 and 2023, respectively. The forecast is based on the assumption that commodity prices have peaked, which would reduce inflationary pressures considerably going forward. However, there is the risk that inflation proves to be more persistent than central banks expect. In such a case, central banks would need to step on the brakes more than assumed, with the risk of a recession in advanced economies and a pronounced deterioration in financial conditions in emerging markets.
    Date: 2022
  25. By: Raphael Abiry (Goethe University Frankfurt (E-mail:; Marien Ferdinandusse (European Central Bank (E-mail:; Alexander Ludwig (Goethe University Frankfurt, ICIR & CEPR (E-mail:; Carolin Nerlich (European Central Bank (E-mail:
    Abstract: We develop a two sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD is 4 times more effective.
    Keywords: Climate Change, Integrated Assessment Model, 2-Sector Model, Green Quantitative Easing, Carbon Taxation
    JEL: E51 E62 Q54
    Date: 2022–07
  26. By: Iván Werning
    Abstract: What is the effect of higher expectations of future inflation on current inflation? I compute this passthrough for a series of canonical firm-pricing models, but allowing for arbitrary (non-rational) expectations. In the Calvo model, the expectational-passthrough can be made arbitrarily close to zero for sufficiently high stickiness, but in practice, for reasonable parameters, passthrough is close to its upper bound of 1. In the Taylor model, in contrast, the upper bound for passthrough is ½ instead of 1. For a general time-dependent model I show that: (i) passthrough is given by a measurable sufficient statistic: the ratio of the average duration of ongoing price spells to that of completed price spells; (ii) the lowest theoretically possible passthrough equals ½ by Taylor pricing; and (iii) passthrough can be theoretically greater than 1 with hazards that decrease over time; (iv) breaking down the passthrough across horizons, it is expectations in the near future that matters the most, expectations of long-run inflation are completely irrelevant; (v) I provide a generalized Phillips curve for current inflation as a linear function of expectations of future inflation and realized past inflations; (vi) I show that the sum of all coefficients, both past and future, sums to one, so that the long-run Phillips curve is vertical. Finally, I study state-dependent “menu cost” models and show that passthrough in these models can be extremely low or extremely high, depending on the exact specification and inflation rate. I suggest a model where firms must pay a fixed cost for changing their sS pricing policy bands. This extension gives a passthrough of 0 for small enough changes in expectations.
    JEL: E03 E31
    Date: 2022–07
  27. By: Keuschnigg, Christian
    Abstract: We propose a New Keynesian DSGE model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
    Keywords: Currency union, exchange rate flexibility, fiscal consolidation, sovereign debt, banks
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2022–08
  28. By: Ozili, Peterson K
    Abstract: This article discusses the need for climate change risk mitigation and why it is not the responsibility of Central Banks to mitigate climate change risk. The paper argues that the responsibility for managing climate change risk should lie with elected officials, other groups and institutions but not Central Banks. Elected officials, or politicians, should be held responsible to deal with the consequence of climate change events. Also, international organizations and everybody can take responsibility for climate change while the Central Bank can provide assistance - but Central Banks should not lead the climate policy making or mitigation agenda.
    Keywords: Climate change, environment, Central Bank, government, atmosphere, financial stability, risk management, climate change risk, financial sector, responsibility, financial institutions.
    JEL: G28 Q54 Q56
    Date: 2021
  29. By: Ms. Filiz D Unsal; John A Spray; Cedric Okou
    Abstract: This paper analyzes the domestic and external drivers of local staple food prices in Sub-Saharan Africa. Using data on domestic market prices of the five most consumed staple foods from 15 countries, this paper finds that external factors drive food price inflation, but domestic factors can mitigate these vulnerabilities. On the external side, our estimations show that Sub-Saharan African countries are highly vulnerable to global food prices, with the pass-through from global to local food prices estimated close to unity for highly imported staples. On the domestic side, staple food price inflation is lower in countries with greater local production and among products with lower consumption shares. Additionally, adverse shocks such as natural disasters and wars bring 1.8 and 4 percent staple food price surges respectively beyond generalized price increases. Economic policy can lower food price inflation, as the strength of monetary policy and fiscal frameworks, the overall economic environment, and transport constraints in geographically challenged areas account for substantial cross-country differences in staple food prices.
    Keywords: Food prices; inflation; food insecurity; disasters; wars; monetary policy framework
    Date: 2022–07–08
  30. By: Harald Uhlig
    Abstract: After remaining close to 1 US Dollar since its inception in November 2020, the algorithmic stablecoin UST crashed in the two weeks of May 9th to May 15th, 2022, leading to a price collapse of the underlying LUNA token and the erasure of more than 50 Billion U.S. Dollar or 90% in market value. I provide a novel theory to account for these phenomena and use it to shed light on the data. I break new ground methodologically by showing how crashes unfold gradually, and by introducing the method of quantitative interpretation. To obtain a gradual unfolding of the crash, I allow for the possibility that the market might return to normal at any moment. Suspension of convertibility happens, once the price has fallen sufficiently far. Agents price LUNA, taking into account these probabilities as well as the ongoing inflow from burning UST coins. Agents sell their UST coins when the probability of an eventual suspension of convertibility exceeds some agent-specific threshold. The implications of the theory are highlighted in an analytically tractable example. The theory is then used as a guide to examine and interpret the data, using bi-hourly observations. I use the observed data to quantify theory variables and use them in turn to interpret the data. I find that the majority of the UST coin holders waited until the probability of suspension was rather high, before deciding to burn their holdings.
    JEL: E41 F31 F32 G01 G12 G23
    Date: 2022–07

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