nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒09‒05
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation target credibility in times of high inflation By Coleman, Winnie; Nautz, Dieter
  2. Capital flows and monetary policy trade-offs in emerging market economies By Paolo Cavallino; Boris Hofmann
  3. Individual Trend Inflation By Toshitaka Sekine; Frank Packer; Shunichi Yoneyama
  4. Fiscal deficits and inflation risks: the role of fiscal and monetary policy regimes By Ryan Niladri Banerjee; Valerie Boctor; Aaron Mehrotra; Fabrizio Zampolli
  5. Shadow Rate Models and Monetary Policy By Ethan Struby; Michael F. Connolly
  6. Debt sustainability and monetary policy: the case of ECB asset purchases By Enrique Alberola-Ila; Gong Cheng; Andrea Consiglio; Stavros A. Zenios
  7. Connectedness of money market instruments: A time-varying vector autoregression approach By Lilian Muchimba
  8. Quarterly Projection Model for Vietnam: A Hybrid Approach for Monetary Policy Implementation By Mr. Natan P. Epstein; Lucyna Gornicka; Karel Musil; Valeriu Nalban; Nga Ha
  9. The Term Structure of Interest Rates in a Heterogeneous Monetary Union By James Costain; Galo Nuño; Carlos Thomas
  10. Is globalization the root cause of declining inflation? By Juhana Hukkinen; Matti Viren
  11. New facts on consumer price rigidity in the euro area By Erwan Gautier; Cristina Conflitti; Riemer P. Faber; Brian Fabo; Ludmila Fadejeva; Valentin Jouvanceau; Jan-Oliver Menz; Teresa Messner,; Pavlos Petroulas; Pau Roldan-Blanco; Fabio Rumler; Sergio Santoro; Elisabeth Wieland; Hélène Zimmer
  12. How Robust are Robust Measures of PCE Inflation? By Sergio Ocampo; Raphael Schoenle; Dominic A. Smith
  13. Introducing New Forms of Digital Money: Evidence from the Laboratory By Gabriele Camera
  14. Labor Market Shocks and Monetary Policy By Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
  15. World Economy Summer 2022 - Inflation is curbing global growth By Gern, Klaus-Jürgen; Kooths, Stefan; Reents, Jan; Sonnenberg, Nils; Stolzenburg, Ulrich
  16. Pictures of a Revolution: Analyzing the Transition from Global Bimetallism to the Gold Standard in the 1860s and 1870s By Mr. Johannes Wiegand
  17. Persistência e Volatilidade do Gap de Inflação By Sidney Caetano; Nelson da Silva; Guilherme Moura
  18. FTPL and the Maturity Structure of Government Debt in the New Keynesian Model By Max Ole Liemen; Olaf Posch
  19. New Pricing Models, Same Old Phillips Curves? By Adrien Auclert; Rodolfo D. Rigato; Matthew Rognlie; Ludwig Straub
  20. The Labor Earnings Gap, Heterogeneous Wage Phillips Curves, and Monetary Policy By Mario Giarda
  21. Machine Learning Methods for Inflation Forecasting in Brazil: new contenders versus classical models By Wagner Piazza Gaglianone; Gustavo Silva Araujo
  22. The Role of Industrial Composition in Driving the Frequency of Price Change By Christopher D. Cotton; Vaishali Garga
  23. Optimal deficit‑spending in a liquidity trap with long‑term government debt By Charles de Beauffort
  24. Monetary Policy Under Labor Market Power By Miss Anke Weber; Rui Mano; Mr. Yannick Timmer; Anastasia Burya
  25. Pandemic Preference Shocks and Inflation in a New Keynesian Model By William Craighead
  26. Forecasting euro area inflation using a huge panel of survey expectations By Florian Huber; Luca Onorante; Michael Pfarrhofer
  27. The macroeconomic effects of Basel III regulations with endogenous credit and money creation By Li, Boyao
  28. Application of machine learning models and interpretability techniques to identify the determinants of the price of bitcoin By José Manuel Carbó; Sergio Gorjón
  29. What drives repo haircuts? Evidence from the UK market By Christian Julliard; Gabor Pinter; Karamfil Todorov; Kathy Yuan
  30. Towards the holy grail of cross-border payments By Bindseil, Ulrich; Pantelopoulos, George
  31. Pattern Analysis of Money Flow in the Bitcoin Blockchain By Natkamon Tovanich; R\'emy Cazabet
  32. Risk capacity, portfolio choice and exchange rates By Boris Hofmann; Ilhyock Shim; Hyun Song Shin
  33. Bank of Japan's ETF purchase program and equity risk premium: a CAPM interpretation By Mitsuru Katagiri; Koji Takahashi; Junnosuke Shino
  34. Reflections on the Disinflationary Methods of Poincaré and Thatcher By James B. Bullard
  35. Social Protection and Social Distancing During the Pandemic: Mobile Money Transfers in Ghana By Dean Karlan; Matt Lowe; Robert Darko Osei; Isaac Osei-Akoto; Benjamin N. Roth; Christopher R. Udry
  36. Fear of Appreciation and Current Account Adjustment By Paul Bergin; Kyunghun Kim; Ju H. Pyun

  1. By: Coleman, Winnie; Nautz, Dieter
    Abstract: We use a representative online survey to investigate the inflation expectations of German consumers and the credibility of the ECB's inflation target during the recent high inflation period. We find that credibility has trended downwards since summer 2021, reaching an all-time low in April 2022. The high correlation between inflation expectations and the actual rate of inflation strongly indicate that inflation expectations have been de-anchored from the inflation target. With increasing inflation, German consumers are more convinced that - in contrast to the ECB's inflation target - inflation will be well above 2% over the medium term.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation
    JEL: C83 E31 E52 E58
    Date: 2022
  2. By: Paolo Cavallino; Boris Hofmann
    Abstract: We lay out a small open economy model incorporating key features of EME economic and financial structure: high exchange rate pass-through to import prices, low pass-through to export prices and shallow domestic financial markets giving rise to occasionally binding leverage constraints. As a consequence of the latter, a sudden stop with large capital outflows can give rise to a financial crisis. In the sudden stop, the central bank faces an intratemporal trade-off as output declines while inflation rises. In normal times, there is an intertemporal trade-off as the risk of a future sudden stop forces the central bank to factor financial stability considerations into its policy conduct. The optimal monetary policy leans against capital flows and domestic leverage. Macroprudential, capital flow management and central bank balance sheet policies can help to mitigate both intra- and intertemporal trade-offs. Fiscal policy also plays a key role. A higher level of public debt and a weaker fiscal policy imply greater leverage and hence greater tail risk for the economy.
    Keywords: capital flows, monetary policy trade-offs, emerging market economies
    JEL: E5 F3 F4
    Date: 2022–07
  3. By: Toshitaka Sekine (Hitotsubashi University and CAMA); Frank Packer (Bank for International Settlements); Shunichi Yoneyama (Bank of Japan)
    Abstract: This paper extends the recent approaches to estimate trend inflation from the survey responses of individual forecasters. It relies on a noisy information model to estimate the trend inflation of individual forecasters. Applying the model to the recent Japanese data, it reveals that the added noise term plays a crucial role and there exists considerable heterogeneity among individual trend inflation forecasts that drives the dynamics of the mean trend inflation forecasts. Divergences in forecasts as well as moves in estimates of trend inflation are largely driven by a identifiable group of forecasters who see less noise in the inflationary process, expect the impact of transitory inflationary shocks to wane more quickly, and are more flexible in adjusting their forecasts of trend inflation in response to new information.
    Keywords: inflation forecast, disagreement, unobserved components model, noisy information, inflation target, quantitative and qualitative monetary easing, Bank of Japan
    JEL: E31 E52 E58
    Date: 2022–08
  4. By: Ryan Niladri Banerjee; Valerie Boctor; Aaron Mehrotra; Fabrizio Zampolli
    Abstract: Using data from a panel of advanced economies over four decades, we show that the inflationary effect of fiscal deficits crucially depends on the prevailing fiscal-monetary policy regime. Under fiscal dominance, defined as a regime in which the government does not adjust the primary balance to stabilise debt and the central bank is less independent or puts less emphasis on price stability, the average effect on inflation of higher deficits is found to be up to five times larger than under monetary dominance. Under fiscal dominance, higher deficits also increase the dispersion of possible future inflationary outcomes, especially the probability of high inflation. Based on forecasts from our model, the high inflation experienced by many countries during the recovery from the Covid-19 pandemic appears more consistent with a regime of fiscal dominance than monetary dominance.
    Keywords: fiscal deficit, inflation, fiscal policy regime, monetary policy regime, monetary policy independence
    JEL: E31 E52 E62 E63
    Date: 2022–07
  5. By: Ethan Struby (Carleton College); Michael F. Connolly (Colgate University and Boston College)
    Abstract: We examine the channels and efficacy of monetary policy at the zero lower bound (ZLB) through the lens of shadow rate models. We compare estimates across models with various factor structures and different assumptions about interest rate forecasts. We confirm that calendar-based forward guidance discretely shifted the implied duration of the ZLB and that large scale asset purchases (LSAPs) primarily lowered term premia. However, we find that the real effects of monetary policy are more muted relative to prior estimates: a 1 standard deviation fall in the shadow rate causes a peak decline in the unemployment rate of 0.003-0.01%.
    JEL: E43 E44 E52 G12
    Date: 2022–08
  6. By: Enrique Alberola-Ila; Gong Cheng; Andrea Consiglio; Stavros A. Zenios
    Abstract: We incorporate monetary policy into a model of stochastic debt sustainability analysis and evaluate the impact of unconventional policies on sovereign debt dynamics. The model optimizes debt financing to trade off financing cost with refinancing risk. We show that the ECB pandemic emergency-purchase programme (PEPP) substantially improves debt sustainability for euro area sovereigns with a high debt stock. Without PEPP, debt would be on an increasing (unsustainable) trajectory with high probability, while, with asset purchases, it is sustainable and the debt ratio is expected to return to pre-pandemic levels by about 2030. The improvement in debt dynamics extends beyond the PEPP and is larger for more gradual unwinding of the Central Bank balance sheet. Optimal financing under PEPP induces an extension of maturities reducing the risk without increasing costs. The analysis also shows that inflation surprises have relatively little impact on debt dynamics, with the direction and magnitude of the effect depending on the monetary policy response.
    Date: 2022–07
  7. By: Lilian Muchimba (University of Portsmouth)
    Abstract: The heightened volatility of LIBOR rates relative to other money market funding rates following the 2012 manipulation scandal and the 2007/2008 global financial crisis led to financial regulators’ recommendation to transit to more robust rates. During this period, uncertainty and heightened credit risks led to the drying up of liquidity in underlying money markets, especially for the longer-dated money market instruments. The need to shift to alternative rates was reinforced during the covid-19 crisis in March 2020 when the LIBOR rates’ vulnerability to short-term liquidity, and therefore volatility was amplified. This paradigm shift has economic and financial consequences. While connectedness studies exist for various financial markets and/or instruments, studies on money markets are limited. This is despite the uniqueness of money markets. This study fills the gap by investigating the volatility connectedness of overnight index swaps, LIBOR rates, and foreign exchange swaps using the time-varying vector autoregressive model. Specifically, the study measures the extent and dynamic connectedness of three major currencies (EUR, GBP, and JPY) in three maturity categories (1-month, 3-month and 6-month), for the period 2007-2020. The findings show that the connectedness of instruments is time-varying, event dependent for these currencies, with a high integration during crisis periods. However, the integration reduces when markets are calm. Notably, the bi-directional volatility connectedness of instruments varies across currencies. This is not surprising considering the domestic institutional and monetary policy specificities affecting these currencies.
    Keywords: LIBOR; foreign exchange swaps; overnight index swaps; volatility connectedness; monetary transmission mechanism
    JEL: E43 E52 G15 F3 C5
    Date: 2022–08–12
  8. By: Mr. Natan P. Epstein; Lucyna Gornicka; Karel Musil; Valeriu Nalban; Nga Ha
    Abstract: We present a newly developed Quarterly Projection Model (QPM) for Vietnam. This QPM represents an extended version of the canonical New Keynesian semi-structural model, accounting for Vietnam-specific factors, including a hybrid monetary policy framework. The model incorporates the array of policy instruments, specifically interest rates, indicative nominal credit growth guidance, and exchange rate interventions, that the authorities employ to meet the primary objective of price stability. The calibrated model embeds a theoretically consistent monetary transmission mechanism and demonstrates robust in-sample forecasting accuracy, both of which are important prerequisites for the richer analysis and forecast-based narratives that support a forward-looking monetary policy regime.
    Keywords: Vietnam; Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Transmission Mechanism; sample forecasting accuracy; impulse response; projection model; monetary policy implementation; forward-looking monetary policy regime; Inflation; Nominal effective exchange rate; Exchange rates; Exchange rate adjustments; Real exchange rates; Global
    Date: 2022–06–24
  9. By: James Costain; Galo Nuño; Carlos Thomas
    Abstract: We build a no-arbitrage model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a “default risk extraction” channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective.
    Keywords: sovereign default, quantitative easing, yield curve, affine model, Covid-19 crisis, ECB, pandemic emergency purchase programme
    JEL: E50 G12 F45
    Date: 2022
  10. By: Juhana Hukkinen (Monetary Policy and Research Department of Bank of Finland); Matti Viren (Monetary Policy and Research Department of Bank of Finland & Economics Department of University of Turku)
    Abstract: This paper examines the reasons for the declining path of inflation since the 1970s. In particular, it focusses on the role of globalization â covering both changes in the global market structure and technical and structural developments in trade and production. In addition, the paper deals with changes in the basic transmission mechanisms of price and wage inflation. The paper makes use of different data from individual countries and panel of countries. These data show that the dispersion of inflation and the behavior of relative prices follow a pattern that is consistent with several globalization indicators. Also estimation results show that these indicators are useful in tracing the developments of trend inflation after the 1960s. Moreover, it is shown that the basic relationships between prices and costs are nonlinear depending on the level of inflation.
    Keywords: Inflation, globalization, Phillips curve, trade unions
    JEL: E31 E52 E58 F02 F41 F42 F62
    Date: 2022–08
  11. By: Erwan Gautier (Banque de France); Cristina Conflitti (Banca d’Italia); Riemer P. Faber (National Bank of Belgium); Brian Fabo (National Bank of Slovakia); Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Jan-Oliver Menz (Deutsche Bundesbank); Teresa Messner, (Oesterreichische Nationalbank); Pavlos Petroulas (Bank of Greece); Pau Roldan-Blanco (Banco de España); Fabio Rumler (Oesterreichische Nationalbank); Sergio Santoro (European Central Bank); Elisabeth Wieland (Deutsche Bundesbank); Hélène Zimmer (National Bank of Belgium)
    Abstract: Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
    Keywords: : price rigidity, inflation, consumer prices, micro data.
    JEL: D40 E31
    Date: 2022–06
  12. By: Sergio Ocampo; Raphael Schoenle; Dominic A. Smith
    Abstract: Time series data for robust inflation measures, such as median and trimmed mean inflation, only start in 1977. We extend these series back to 1960 for Personal Consumption Expenditure (PCE) inflation, providing additional episodes of high and rising inflation. We evaluate the robustness of the series along multiple dimensions: First, we find that robust inflation measures tend to diverge in periods of low inflation, but agree when headline inflation is high. The range between the robust measures averages 0.76 percentage points. Second, using yearly instead of monthly inflation when trimming or computing median inflation produces markedly different time series. Third, by contrast, variation in the number of PCE categories used in calculation and trim points for trimmed means do not have significant effects. Finally, we compare the performance of 61 robust inflation measures in predicting (current and future) trend inflation. Trimmed mean measures that trim based on yearly inflation perform best overall, while core inflation performs well when inflation is low, and median inflation consistently underperforms.
    Date: 2022–07
  13. By: Gabriele Camera (Economic Science Institute, Chapman University)
    Abstract: Central banks may soon issue currencies that are entirely digital (CBDCs) and possibly interest-bearing. A strategic analytical framework is used to investigate this innovation in the laboratory, contrasting a traditional “plain†tokens baseline to treatments with “sophisticated†interest-bearing tokens. In the experiment, this theoretically beneficial innovation precluded the emergence of a stable monetary system, reducing trade and welfare. Similar problems emerged when sophisticated tokens complemented or replaced plain tokens. This evidence underscores the advantages of combining theoretical with experimental investigation to provide insights for payments systems innovation and policy design.
    Keywords: digital currency, endogenous institutions, repeated games, CBDC
    JEL: C70 C90
    Date: 2022
  14. By: Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
    Abstract: We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which a change in EE transitions affects inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but the direct effect is partially mitigated by the equilibrium decline in market tightness through aggregate demand that exerts downward pressure on the marginal cost. Finally, we study the normative implications of job mobility for monetary policy responding to inflation and labor market variables according to a Taylor rule, and find that the welfare cost of ignoring the EE rate in setting the nominal interest rate is 0.2 percent in additional lifetime consumption.
    Keywords: job mobility; monetary policy; Heterogeneous-agent New Keynesian (HANK) model; job search
    JEL: E12 E24 E52 J31 J62 J64
    Date: 2022–08
  15. 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
  16. By: Mr. Johannes Wiegand
    Abstract: In the early 1870s, the global monetary system transitioned from bimetallism—a regime in which gold and silver currencies were tied at quasi-fixed exhange ratios—to the gold standard that was characterized by the use of (only) gold as the main currency metal by the largest and most advanced economies. The transition ocurred against the backdrop of both large supply shifts in global bullion markets in the 1850s and 60s and momentous political events, such as the Franco-Prussian war of 1870/71 and the subsequent foundation of the German empire. The causes for the transition have long been a matter of intense debate. This article discusses three separate but interrelated issues: (i) assessing the robustness of the pre-1870 bimetallic system to shocks—which includes a discussion of the appropriate use of Flandreau’s (1996) reference model; (ii) analyzing the transition from bimetallism to gold as a multi-stage currency game played by France and Germany; and (iii) evaluating the monetary debates at the German Handelstag conferences in the 1860s, to present a more complete narrative of the German discussion in the run-up to the transition.
    Keywords: Bimetallism; Gold Standard; France; Germany; Gold share; Bimetallism's robustness; estimating specie demand; structural limit; share of silver coin; Gold; Silver; Currencies; Currency reform; Stocks; Global
    Date: 2022–06–17
  17. By: Sidney Caetano; Nelson da Silva; Guilherme Moura
    Abstract: In this article, we estimate a trend for Brazilian inflation in order to present an alternative measure of long-term inflation and provide a complement to the traditional core inflation measures. In addition to the economic analysis of the behavior of this estimation, a pseudo real-time predictive capability assessment is applied. Obtaining the trend also allowed us to verify the dynamics of the persistence and volatility of the inflation gap during the current monetary regime. In the period under review, the results are correlated with the Brazilian situation, with positive contributions from the trend in the inflation prediction process. Still, they show a resistance convergence of the inflation rate to the levels pre-established by the National Monetary Council (CMN, in Portuguese), in view of a considerable persistence of the inflation gap. The volatility of the gap, on the other hand, corroborates and identifies, at the same time, the great oscillations present in the domestic and external economic scenario.
    Date: 2022–07
  18. By: Max Ole Liemen; Olaf Posch
    Abstract: In this paper, we revisit the fiscal theory of the price level (FTPL) within the New Keynesian (NK) model. We show in which cases the average maturity of government debt matters for the transmission of policy shocks. The central task of this paper is to shed light on the theoretical predictions of the maturity structure on macro dynamics with an emphasis on model-implied expectations. In particular, we address the transmission channels of monetary and fiscal policy shocks on the interest rate and inflation dynamics. Our results illustrate the role of the maturity of existing debt in the wake of skyrocketing debt-to-GDP ratios and increasing government expenditures. We highlight our results by quantifying the effects of the large-scale US fiscal packages (CARES) and predict a surge in inflation if the deficits are not sufficiently backed by future surpluses.
    Keywords: NK models, FTPL, government debt, maturity structure, CARES
    JEL: E32 E12 C61
    Date: 2022
  19. By: Adrien Auclert; Rodolfo D. Rigato; Matthew Rognlie; Ludwig Straub
    Abstract: We show that, in a broad class of menu cost models, the dynamics of aggregate inflation in response to arbitrary shocks to aggregate costs are nearly the same as in Calvo models with suitably chosen Calvo adjustment frequencies. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that, in any plausible parameterization, this mixture is well-approximated by a single Calvo model. This close numerical fit carries over to other standard specifications of menu cost models. Thus, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve, but with a higher slope.
    JEL: E31 E52
    Date: 2022–07
  20. By: Mario Giarda
    Abstract: We study the role of household heterogeneity in skills over the business cycle in the U.S. We document that the ratio of labor income of skilled to unskilled workers (the earnings gap) is coun-tercyclical and increases in response to contractionary monetary policy. This result is due to the higher rigidity in unskilled workers’ wages and gross substitution between skills in production. We find that in a calibrated New Keynesian model, when the earnings gap is countercyclical and un-skilled workers are more financially constrained, the impact of monetary policy shocks can be twice as strong as with homogeneous wage rigidities.
    Date: 2021–12
  21. By: Wagner Piazza Gaglianone; Gustavo Silva Araujo
    Abstract: In this paper, we explore machine learning (ML) methods to improve inflation forecasting in Brazil. An extensive out-of-sample forecasting exercise is designed with multiple horizons, a large database of 501 series, and 50 forecasting methods, including new machine learning techniques proposed here, traditional econometric models and forecast combination methods. We also provide tools to identify the key variables to predict inflation, thus helping to open the ML black box. Despite the evidence of no universal best model, the results indicate machine learning methods can, in numerous cases, outperform traditional econometric models in terms of mean-squared error. Moreover, the results indicate the existence of nonlinearities in the inflation dynamics, which are relevant to forecast inflation. The set of top forecasts often includes forecast combinations, tree-based methods (such as random forest and xgboost), breakeven inflation, and survey-based expectations. Altogether, these findings offer a valuable contribution to macroeconomic forecasting, especially, focused on Brazilian inflation.
    Date: 2022–07
  22. By: Christopher D. Cotton; Vaishali Garga
    Abstract: We analyze the impact of shifts in the industrial composition of the economy on the distribution of the frequency of price change and its consequences for the slope of the Phillips curve for the United States. By combining product-level microdata on the frequency of price change with data on industry shares from 1947 through 2019, we document that shifts in industrial composition led to a gradual reduction in the median monthly frequency of price change from 9.2 percent in 1947 to 6.9 percent in 2019. Other percentiles of the distribution of the frequency of price change show similar reductions. These declines were broadly driven by a shift in the industrial composition of the economy from primary and secondary industries toward service industries. In a calibrated multisector general equilibrium menu cost model, we find that this effect flattened the Phillips curve by 28.5 percent from 1947 to 2019. However, despite a flatter Phillips curve, persistent shocks to aggregate demand still can cause significant inflation.
    Keywords: industrial composition; inflation; services; price rigidity; Phillips curve
    JEL: E31 E32 E52
    Date: 2022–06–01
  23. By: Charles de Beauffort (Economics and Research Department, NBB)
    Abstract: When the government issues long-term bonds, the optimal time-consistent fiscal and monetary policy is to consolidate debt in a liquidity trap by increasing taxes and by taming public spending. This prescription is at odds with large deficit-spending undertaken in the US during previous liquidity trap episodes. In this article, I show that accumulating debt turns optimal with long-term bonds and flexible wages if labor taxes are kept constant or if monetary policy is conducted non optimally. Moreover, even when labor taxes fluctuate and policy is fully coordinated, optimal deficit-spending in a liquidity trap emerges in a medium-scale model with sticky wages and rule-of-thumb consumers. In this case, debt consolidation occurs only after the nominal interest rate has lifted-off the zero lower bound, in accordance with conventional wisdom that a government should fix the roof while the sun is shining.
    Keywords: : Optimal Time-Consistent PolicyDistortionary TaxationLiquidity TrapFiscal and Monetary PolicySticky WagesRule-of-Thumb Consumers.
    JEL: E43 E52 E62 E63
    Date: 2022–07
  24. By: Miss Anke Weber; Rui Mano; Mr. Yannick Timmer; Anastasia Burya
    Abstract: Using the near universe of online vacancy postings in the U.S., we study the interaction between labor market power and monetary policy. We show empirically that labor market power amplifies the labor demand effects of monetary policy, while not disproportionately affecting wage growth. A search and matching model in which firms can attract workers by either offering higher wages or posting more vacancies can rationalize these findings. We also find that vacancy postings that do not require a college degree or technology skills are more responsive to monetary policy, especially when firms have labor market power. Our results help explain the “wageless” recovery after the 2008 financial crisis and the flattening of the wage Phillips curve, especially for the low-skilled, who saw stagnant wages but a robust decline in unemployment.
    Keywords: Labor market power; Monetary Policy; Vacancies; Wages; vacancy posting; wage Phillips curve; technology skill; monetary policy shock; Labor markets; Labor demand; Labor share; Unemployment rate; Global
    Date: 2022–07–01
  25. By: William Craighead (Department of Economics and Geosciences, US Air Force Academy)
    Abstract: This paper examines two types of preference shocks - shocks to the disutility of working and to demand for goods relative to services - in an otherwise standard New Keynesian model. Model-based processes for both shocks are constructed using postwar US data, and both show movements of unprecedented magnitude that coincide with the COVID-19 pandemic. In the model, the relative demand shock leads to opposite movements in inflation and labor between the two sectors, while the shock to labor disutility is stagflationary, with inflation rising and output decreasing. A pandemic-motivated experiment with simultaneous large shocks to both labor disutility and relative goods demand generates divergences between the sectors in inflation and labor, but higher inflation and reduced output overall.
    Keywords: preference shocks, labor supply, relative demand, COVID-19
    JEL: E10 E52
    Date: 2022–08
  26. By: Florian Huber; Luca Onorante; Michael Pfarrhofer
    Abstract: In this paper, we forecast euro area inflation and its main components using an econometric model which exploits a massive number of time series on survey expectations for the European Commission's Business and Consumer Survey. To make estimation of such a huge model tractable, we use recent advances in computational statistics to carry out posterior simulation and inference. Our findings suggest that the inclusion of a wide range of firms and consumers' opinions about future economic developments offers useful information to forecast prices and assess tail risks to inflation. These predictive improvements do not only arise from surveys related to expected inflation but also from other questions related to the general economic environment. Finally, we find that firms' expectations about the future seem to have more predictive content than consumer expectations.
    Date: 2022–07
  27. By: Li, Boyao
    Abstract: When banks create credit and money endogenously, how do Basel III regulations affect the macroeconomy? This study develops a simple monetary circuit model based on the stock-flow consistent framework. It analytically solves for the equilibrium where banks comply with the capital adequacy ratio or net stable funding ratio. The growth rates can decompose into the money creation processes. The primary component is lending, which depends on bank spreads (or profitability) and regulatory rules. Moreover, this study reveals a channel through which credit and money creation affect economic growth. Debt ratios of firms are related to their animal spirits and the economy’s growth rates, and this relationship implies conditions for firms using debt and going bankrupt. Finally, results reveal that regulations can transfer risk from banks to firms. These findings shed new light on banks’ macroeconomic roles and the effects of bank regulations.
    Keywords: Money creation; Basel III; Economic growth; Leverage; Banking macroeconomics
    JEL: E12 E51 G28
    Date: 2022–07–15
  28. By: José Manuel Carbó (Banco de España); Sergio Gorjón (Banco de España)
    Abstract: So-called cryptocurrencies are becoming more popular by the day, with a total market capitalization that exceeded $3 trillion at its peak in 2021. Bitcoin has emerged as the most popular among them, with a total valuation that reached an all-time high of $68,000 in November 2021. However, its price has historically been subject to large and abrupt fluctuations, as the sudden drop in the months that followed once again proved. Since bitcoin looks all set to continue growing while largely concentrating its activity in unregulated environments, concerns have been raised among authorities all over the world about its potential impact on financial stability, monetary policy, and the integrity of the financial system. As a result, building a sound and proper regulatory and supervisory framework to address these challenges hinges upon achieving a better understanding of both the critical underlying factors that influence the formation of bitcoin prices and the stability of such factors over time. In this article we analyse which variables determine the price at which bitcoin is traded on the most relevant exchanges. To this end, we use a flexible machine learning model, specifically a Long Short Term Memory (LSTM) neural network, to establish the price of bitcoin as a function of a number of economic, technological and investor attention variables. Our LSTM model replicates reasonably well the behaviour of the price of bitcoin over different periods of time. We then use an interpretability technique known as SHAP to understand which features most influence the LSTM outcome. We conclude that the importance of the different variables in bitcoin price formation changes substantially over the period analysed. Moreover, we find that not only does their influence vary, but also that new explanatory factors often seem to appear over time that, at least for the most part, were initially unknown.
    Keywords: Bitcoin, machine learning, LSTM, interpretability techniques
    JEL: C40 C45 G12 G15
    Date: 2022–04
  29. By: Christian Julliard; Gabor Pinter; Karamfil Todorov; Kathy Yuan
    Abstract: Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks are backed by high-quality collateral. Banks intermediate repo liquidity among different counterparties and use central counterparties to reallocate high-quality collateral among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders' liquidity position or default probabilities.
    Keywords: repurchase agreement, systemic risk, repo market, margin, haircut
    JEL: G01 G12 G21 G23
    Date: 2022–07
  30. By: Bindseil, Ulrich; Pantelopoulos, George
    Abstract: The holy grail of cross-border payments is a solution allowing cross-border payments to be immediate, cheap, universal, and settled in a secure settlement medium. The search for such a solution is as old as international commerce and the implied need to pay. This paper describes current visions how to eventually find this holy grail within the next decade, namely through (i) modernized correspondent banking; (ii) emerging cross-border FinTech solutions; (iii) Bitcoin; (iv) global stablecoins; (v) interlinked instant payment systems with FX conversion layer; (vi) interlinked CBDC with FX conversion layer. For each, settlement mechanics are explained, and an assessment is provided on its potential to be the holy grail of cross-border payments. Several solutions are suitable for improving cross-border payments significantly, and some could even be the holy grail. JEL Classification: E42, E58, F31
    Keywords: bitcoin, CBDC, correspondent banking, cross-currency payments, interlinking, stablecoins
    Date: 2022–08
  31. By: Natkamon Tovanich; R\'emy Cazabet
    Abstract: Bitcoin is the first and highest valued cryptocurrency that stores transactions in a publicly distributed ledger called the blockchain. Understanding the activity and behavior of Bitcoin actors is a crucial research topic as they are pseudonymous in the transaction network. In this article, we propose a method based on taint analysis to extract taint flows --dynamic networks representing the sequence of Bitcoins transferred from an initial source to other actors until dissolution. Then, we apply graph embedding methods to characterize taint flows. We evaluate our embedding method with taint flows from top mining pools and show that it can classify mining pools with high accuracy. We also found that taint flows from the same period show high similarity. Our work proves that tracing the money flows can be a promising approach to classifying source actors and characterizing different money flow patterns
    Date: 2022–07
  32. By: Boris Hofmann; Ilhyock Shim; Hyun Song Shin
    Abstract: We lay out a model of risk capacity for global portfolio investors in which swings in exchange rates can affect their risk-taking capacity in a Value-at-Risk framework. Exchange rate fluctuations induce shifts in portfolio holdings of global investors, even in the absence of currency mismatches on the part of the borrowers. A currency appreciation for an emerging market borrower that is part of a broad-based appreciation of emerging market currencies leads to larger bond portfolio inflows than the equivalent appreciation in the absence of a broad-based appreciation. As such, the broad dollar index emerges as a global factor in bond portfolio flows. The empirical evidence strongly supports the predictions of the model.
    Keywords: bond spread, capital flow, credit risk, emerging market, exchange rate
    JEL: G12 G15 G23
    Date: 2022–07
  33. By: Mitsuru Katagiri; Koji Takahashi; Junnosuke Shino
    Abstract: In this paper, we investigate the effects of the Bank of Japan's (BOJ) exchange-traded fund (ETF) purchase program on equity risk premia. We first construct a unique panel dataset for the amount of individual stock that the BOJ has indirectly purchased in the program. Then, utilizing the cross-sectional and time-series variations in purchases associated with the BOJ's policy changes, the empirical analysis reveals that: (i) the BOJ's ETF purchases instantaneously support stock prices on the days of purchases, and (ii) the instantaneous positive effects on stock prices, combined with the countercyclical nature of the BOJ's purchases, have decreased the market beta and coskewness of Japanese stocks, thus leading to an economically significant decline in risk premia.
    Keywords: large-scale asset purchases (LSAP), ETF purchase program, capital asset pricing model (CAPM), Bank of Japan
    JEL: E58 G12 G14
    Date: 2022–07
  34. By: James B. Bullard
    Abstract: St. Louis Fed President Jim Bullard talked about the academic literature related to “credible” versus “incredible” disinflation and how that may apply to current conditions. He spoke before the Money Marketeers of New York University. Current inflation in the U.S. and the euro area (EA) is near 1970s levels, Bullard said. The disinflation under former Fed Chair Paul Volcker was costly, he added, but it was not credible initially—Volcker had to earn credibility. Nobel laureate and economist Thomas Sargent initiated a literature on costless disinflation (“soft landings”) that emphasized inflation expectations as the key variable, not the Phillips curve, Bullard noted. Subsequent literature illustrated how credibility might be earned in models that depart from rational expectations, he said. “The Fed and the ECB [European Central Bank] have considerable credibility compared with their 1970s counterparts, suggesting that a soft landing is feasible in the U.S. and the EA if the post-pandemic regime shift is executed well,” Bullard concluded.
    Keywords: inflation; disinflation; soft landings; costless disinflation
    Date: 2022–08–02
  35. By: Dean Karlan; Matt Lowe; Robert Darko Osei; Isaac Osei-Akoto; Benjamin N. Roth; Christopher R. Udry
    Abstract: We study the impact of mobile money transfers to a representative sample of low-income Ghanaians during the COVID-19 pandemic. The announcement of the upcoming transfers affects neither consumption, well-being, nor social distancing. Once disbursed, transfers increase food expenditure by 8%, income by 20%, and a social distancing index by 0.08 standard deviations. Over 40% of the transfers were spent on food. The positive effects on income mostly persist at final measurement, eight months after the last transfer. Together, we learn that cash transfers can support households economically while also promoting adherence to public health protocols during a pandemic.
    JEL: H51 H84 O12
    Date: 2022–07
  36. By: Paul Bergin; Kyunghun Kim; Ju H. Pyun
    Abstract: This paper finds that limited exchange rate flexibility in the form of “fear of appreciation” significantly slows adjustment of current account imbalances, providing novel support for Friedman’s conjecture regarding exchange-rate flexibility. We present a new stylized fact: floaters have faster convergence than peggers for current account deficits, but not so for surpluses. A striking implication is that current account surpluses are more persistent than deficits on average. We provide evidence that this asymmetry is associated with a one-sided muting of exchange rate appreciations. We develop a multi-country DSGE model augmented with an asymmetric exchange rate policy to represent fear of appreciation; when solved to a third-order approximation, it can explain greater persistence of current account surpluses compared to deficits.
    JEL: F31 F33 F44
    Date: 2022–07

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