nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒09‒12
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How to limit the spillover from an inflation surge to inflation expectations By Dräger, Lena; Lamla, Michael; Pfajfar, Damjan
  2. Central Bank communication with the general public: promise or false hope? By Blinder, Alan S.; Ehrmann, Michael; de Haan, Jakob; Jansen, David-Jan
  3. A new age of uncertainty? Implications for monetary policy By Weidmann, Jens
  4. Interest Rate Surprises: A Tale of Two Shocks By Ricardo Nunes; Ali K. Ozdagli; Jenny Tang
  5. BigTech credit and monetary policy transmission: Micro-level evidence from China By Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
  6. Does the European Central Bank speak differently when in parliament? By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
  7. The economics of central bank digital currency By Ahnert, Toni; Assenmacher, Katrin; Hoffmann, Peter; Leonello, Agnese; Monnet, Cyril; Porcellacchia, Davide
  8. On the Stabilizing Role of Cash for Societies By Seitz, Franz; Rösl, Gerhard
  9. Enjeux du projet de monnaie unique CEDEAO By Diagne, Youssoupha Sakrya
  10. The optimal quantity of CBDC in a bank-based economy By Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
  11. Monetary policy transmission in segmented markets By Eisenschmidt, Jens; Ma, Yiming; Zhang, Anthony Lee
  12. Unconventional Monetary Policy According to HANK By Eric R. Sims; Jing Cynthia Wu; Ji Zhang
  13. Preferred habitat and monetary policy through the looking-glass By Carboni, Giacomo; Ellison, Martin
  14. Monetary Policy and Risk-Taking: Evidence from Thai Corporate Bond Markets By Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
  15. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims
  16. ECB Monetary Policy and the Term Structure of Bank Default Risk By Tom Beernaert; Nicolas Soenen; Rudi Vander Vennet
  17. Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition By Chen Zhang; Ying Fang; Linlin Niu
  18. Inflation-based fiscal consolidation: a DSGE approach By Busato, Francesco; Albanese, Marina; Varlese, Monica
  19. The relationship between central bank auctions and bill market liquidity By Bats, Joost; Hoondert, Jurian J.A.
  20. Reserve Accumulation and Capital Flows: Theory and Evidence from Non-Advanced Economies By Juan Pablo Ugarte
  21. Better two eyes than one: A synthesis classification of exchange rate regimes By Carl Grekou
  22. Responses of Swiss bond yields and stock prices to ECB policy surprises By Thomas Nitschka; Diego M. Hager
  23. Did Public Debt Assets Improve the Resilience of Money Market Funds during the COVID-19 Crisis? By Dunne, Peter G.; Giuliana, Raffaele
  24. Climate change mitigation: how effective is green quantitative easing? By Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
  25. How do Members of the European Parliament (MEPs) hold the European Central Bank (ECB) accountable? A descriptive quantitative analysis of three accountability forums (2014-2021) By Massoc, Elsa Clara
  26. The current account and monetary policy in the euro area By Schuler, Tobias; Sun, Yiqiao
  27. Households’ euroization in the Republic of North Macedonia: Is it close or far from the optimal levels? By Tanja Jakimova; Milan Eliskovski; Artina Bedzeti Baftijari
  28. Fixed-income dealing and central bank interventions By David Cimon; Adrian Walton
  29. The Global Dash for Cash in March 2020 By Jordan Barone; Alain P. Chaboud; Adam Copeland; Cullen Kavoussi; Frank M. Keane; Seth Searls
  30. Theorizing dollar hegemony, Part 1: the political economic foundations of exorbitant privilege By Thomas Palley
  31. Interbank credit exposures and financial stability By Schneorson, Oren
  32. Exchange Rates and the Speed of Economic Recovery: The Role of Financial Development By Boris Fisera
  33. Business Costs and Consumer Price Inflation in Ireland By Byrne, Stephen; McLaughlin, Darragh; O'Brien, Martin
  34. Informing macroprudential policy choices using credit supply and demand decompositions By Barbieri, Claudio; Couaillier, Cyril; Perales, Cristian; Rodriguez d’Acri, Costanza

  1. By: Dräger, Lena; Lamla, Michael; Pfajfar, Damjan
    Abstract: We study the effects of forward looking communication in an environment of rising inflation rates on German consumers' inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward looking information about inflation. Among these information treatments, professional forecasters' projections seems to reduce inflation expectations by more than policymaker's characterization of inflation as a temporary phenomenon.
    Keywords: short-run and long-run inflation expectations,inflation surge,randomized control trial,survey experiment,persistent or transitory inflation shock
    JEL: E31 E52 E58 D84
    Date: 2022
  2. By: Blinder, Alan S.; Ehrmann, Michael; de Haan, Jakob; Jansen, David-Jan
    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 Classification: D12, D84, E52, E58, G53
    Keywords: central bank, communication, general public, monetary policy
    Date: 2022–08
  3. By: Weidmann, Jens
    Abstract: Central banks have faced a succession of crises over the past years as well as a number of structural factors such as a transition to a greener economy, demographic developments, digitalisation and possibly increased onshoring. These suggest that the future inflation environment will be different from the one we know. Thus uncertainty about important macroeconomic variables and, in particular, inflation dynamics will likely remain high. Discussion on what this could mean for monetary policy
    Date: 2022
  4. By: Ricardo Nunes; Ali K. Ozdagli; Jenny Tang
    Abstract: Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise.
    Keywords: Monetary policy; central bank information; high frequency identification; proxy structural VAR; external instruments
    JEL: C36 D83 E52 E58
    Date: 2022–08–22
  5. By: Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech loans tend to be smaller, and the BigTech bank grants credit to more new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. The analysis also finds that BigTech and traditional bank credits to firms that have already borrowed from these banks respond similarly to changes in monetary policy. Overall, BigTech credit amplifies monetary policy transmission mainly through the extensive margin. In addition, monetary policy has a stronger impact on the real economy through BigTech lending than traditional bank loans.
    Keywords: bank lending,financial technology,monetary policy transmission
    JEL: E52 G21 G23
    Date: 2022
  6. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
    Abstract: Parliamentary hearings are a fundamental tool to hold independent central banks accountable. However, it is not clear what type of information central banks provide when they communicate with parliaments compared to other existing information channels. In this article, we address this question by comparing the communication of the European Central Bank (ECB) in parliamentary hearings to its communication in the regular press conferences that follow monetary policy decisions. Using text analysis on the ECB President’s introductory statements in parliamentary hearings and press conferences from 1998 to 2021, we show that the ECB uses parliamentary hearings to discuss topics that are less covered in press conferences. We also find that the ECB’s policy stance in the hearings tends to reflect the stance in press conferences, and that the degree of language complexity is similar in the two fora. These findings support the view that the ECB mainly uses parliamentary hearings to further explain policy decisions first presented at press conferences but also to put them in a broader context. JEL Classification: E02, E52, E58
    Keywords: Central Bank accountability, Central Bank communication
    Date: 2022–08
  7. By: Ahnert, Toni; Assenmacher, Katrin; Hoffmann, Peter; Leonello, Agnese; Monnet, Cyril; Porcellacchia, Davide
    Abstract: This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers’ concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods. JEL Classification: E41, E42, E51, E52, E58, G21
    Keywords: Central Bank Digital Currency, digital money, financial stability, monetary policy, payments
    Date: 2022–08
  8. By: Seitz, Franz; Rösl, Gerhard
    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: 2022–06
  9. By: Diagne, Youssoupha Sakrya
    Abstract: This paper deals with challenges surrounding the upcoming single currency in the ECOWAS area. After suffering many postponements due to insufficient preparation and lack of political will, significant progress has been made recently with important decisions such as the name and symbol of the future currency being chosen and monetary policy framework for the future central bank as well as the exchange rate regime. ECOWAS shows a high degree of heterogeneity in the economic structures of its member states. Moreover, there are discrepancies between countries regarding their performances in meeting the convergence criteria. To that extent, WAEMU countries do better than WAMZ members. In order to assess the opportunity of joining a monetary union, a new Keynesian model is used to compare countries’ welfare losses as members of the future union to their current situation. Results show that ECOWAS is not an optimal monetary area confirming conclusions drawn by previous studies, shocks being highly asymmetric. Furthermore welfare losses are limited to 0.03% for the future union against 1.69% for Nigeria, 0.51% for Ghana, and 0.52% for the Gambia. WAEMU member states and Cabo Verde do better individually with respectively 0.003% and 0.002. WAMZ countries would benefit more from the future union though the welfare loss associated with single currency area is still reasonable. The single currency objective should be still pursued in light of the region’s strong potential and the important benefits from transaction costs reduction. To that extent, convergence criteria constraints should be relaxed while compensating the losers to enable a rapid entry into force.
    Keywords: Single currency, new Keynesian model, optimal currency area, welfare
    JEL: E12 E58 F36 I31
    Date: 2021–08–08
  10. By: Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
    Abstract: We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offss and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such "stabilization effect" improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. JEL Classification: E42, E58, G21
    Keywords: bank intermediation, central bank digital currency, DSGE models
    Date: 2022–07
  11. By: Eisenschmidt, Jens; Ma, Yiming; Zhang, Anthony Lee
    Abstract: We show that dealer market power impedes the pass-through of monetary policy in repo markets, which is an important first stage of monetary policy transmission. In the European repo market, most participants do not have access to trade on centralized exchanges. Rather, they rely on OTC intermediation by a small number of dealers that exhibit significant market power. As a result, the passthrough of the ECB’s policy rate to the majority of non-dealer banks and non-banks is inefficient and unequal in repo markets. Our estimates imply that a secured funding facility like the Fed’s RRP may alleviate dealer market power and improve the transmission efficiency of monetary policy to banks and non-bank financial institutions. JEL Classification: E4, E5, G2
    Keywords: market power, monetary policy, non-banks, pass-through efficiency, repo market
    Date: 2022–08
  12. By: Eric R. Sims; Jing Cynthia Wu; Ji Zhang
    Abstract: This paper studies the implications of household heterogeneity for the effectiveness of quantitative easing (QE). We consider a heterogeneous agent New Keynesian (HANK) model with uninsurable household income risk. Financial intermediaries are subject to an endogenous leverage constraint that allows QE to matter. We find that macro aggregates react very similarly to a QE shock in the HANK model compared to a representative agent (RANK) version of the model. This finding is robust across different micro- and macro- distributions of wealth.
    JEL: E12 E52
    Date: 2022–08
  13. By: Carboni, Giacomo; Ellison, Martin
    Abstract: The ability of monetary policy to influence the term structure of interest rates and the macroeconomy depends on the extent to which financial market participants prefer to hold bonds of different maturities. We microfound such preferred-habitat demand in a fully-specified dynamic stochastic general equilibrium model of the macroeconomy where the term structure is arbitrage-free. The source of preferred habitat demand is an insurance fund that issues annuities and adopts a liability-driven strategy to minimise the duration risk on its balance sheet. The optimising behaviour of the insurance fund implies a preferred-habitat demand function that is upward-sloping in bond prices and downward-sloping in bond yields, especially when interest rates are low. This supports the operation of a recruitment channel at low interest rates, whereby long-term interest rates react strongly to short-term policy rates because of complementary changes in term premia induced by preferred-habitat demand. The strong reaction extends to inflation and output in general equilibrium, a through-the-looking-glass result that challenges conventional wisdom that preferred habitat weakens the transmission of monetary policy. JEL Classification: E43, E44, E52, G21, G22
    Keywords: general equilibrium, interest rates, preferred habitat, term structure
    Date: 2022–08
  14. By: Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
    Abstract: This paper examines the risk-taking channel of monetary policy in the context of Thai corporate bond market. Based on newly-issued non-financial corporate bonds from 2001 to the third quarter of 2020, we find that low interest rates are associated with greater issuance of bonds with worse risk ratings, which is more pronounced for bonds from the property sector. In addition, these bonds tend to have longer maturity. However, we do not find evidence of compression of risk premium or underpricing of risks during these low-rate periods. We then examine whether any types of bond investors are prone to the search-for-yield behaviour. Using the Bank of Thailand's confidential debt securities holding dataset from 2013 onward, our results show that individuals, rather than banks and institutional investors, are the prime holder of high-risk bonds. Conditional on bond risk ratings, only two groups of bondholders appear to bias toward higher-yield bonds. These include individuals and other depository financial institutions, namely saving cooperatives and money market mutual funds. Our results point toward weak evidence of risk-taking among corporate bond investors during the low-rate environment.
    Keywords: Monetary policy; Interest rate; Risk taking; Search for yield; Corporate bond; Underpricing of risk; Excess bond premium
    JEL: E44 E52 G11 G12
    Date: 2022–08
  15. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero "fiscal cost" to debt. But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62
    Date: 2022–02
  16. By: Tom Beernaert; Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: Euro Area banks have been confronted with unprecedented monetary policy actions by the ECB. Monetary policy may affect bank risk profiles, but the consequences may differ for short-term risk versus long-term or structural bank risk. We empirically investigate the association between the ECB’s monetary policy stance and market-perceived shortterm and long-term bank risk, using the term structure of default risk captured by bank CDS spreads. The results demonstrate that, during the period 2009-2020, ECB expansionary monetary policy diminished bank default risk in the short term. However, we do not observe a similar decline in long-term bank default risk, since we document that monetary stimulus is associated with a steepening of the bank default risk curve. The reduction of bank default risk is most pronounced during the sovereign debt crisis and for periphery Euro Area banks. From 2018 onwards, monetary policy accommodation is associated with increased bank default risk, both short term and structurally, which is consistent with the risk-taking hypothesis under which banks engage in excessive risk-taking behavior in their loan and securities portfolios to compensate profitability pressure caused by persistently low rates. The increase in perceived default risk is especially visible for banks with a high reliance on deposit funding.
    Keywords: Monetary policy, ECB, Bank default risk, Term structure of credit risk
    JEL: C58 G21 G32 E52
    Date: 2022–08
  17. By: Chen Zhang; Ying Fang; Linlin Niu
    Abstract: China’s exchange rate reform, initiated in 2005, had the goal of switching from a fixed U.S. dollar (USD) peg to a floating mechanism with reference to a trade-weighted currency basket. Over a decade of gradual transition, the renminbi (RMB) has gained importance in the international monetary system and has shown higher flexibility in its dollar value. However, previous studies have demonstrated the inertia of the RMB in maintaining a de facto dollar peg, with little evidence of the up-to-date effectiveness of the official currency basket. We present a Bayesian time-varying coefficient regression on the currency peg or basket weight suitable for studying transition process. We show that the “8.11” reform in 2015 triggered an eventual anchor switching, driving down the dollar weight from 1 to around 0.3. Since 2016, the weight of the official basket has been double that of the USD. SVAR and TVP-VAR analysis, controlling for endogeneity, provide consistent evidence of this regime change, which has important implications for China and the global economy.
    Keywords: Renminbi, exchange rate regime, dollar peg, currency basket
    JEL: F31 F41 C11
    Date: 2022–08–24
  18. By: Busato, Francesco; Albanese, Marina; Varlese, Monica
    Abstract: This paper investigates under which conditions a permanent increase in inflation target might entail public debt reduction, in a Two Agents New Keynesian model with sticky prices and distortionary taxation. In light of that, this paper contributes to the more recent lively debate among economists and policymakers regarding whether an increase in inflation could contribute to a public debt reduction without damaging macroeconomic stability. Real and welfare effects caused by changes in the inflation target from 2% to 5% are discussed. Overall, results show that an increase in inflation affects the economy positively in the short run but negatively in the long term. Consistently, higher inflation worsens households’ welfare. Moreover, a sensitivity analysis of the model’s key parameters is carried out. Quite interestingly, it emerges that fiscal consolidation through an increase in inflation is far from obvious. A more sluggish inflation adjustment path influences households’ expectations, entailing debt-to-GDP ratio increases rather than decreases.
    Keywords: Inflation, Public debt-to-GDP ratio, Monetary policy, Welfare effects
    JEL: D6 E31 E44 E58 H63
    Date: 2022–07–16
  19. By: Bats, Joost; Hoondert, Jurian J.A.
    Abstract: This paper investigates the relationship between central bank (reverse) auctions and bill market liquidity. The analysis includes data on the purchases of bills in the auctions by the Dutch Central Bank under the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP). The results indicate that auctions contribute to smooth market functioning. Two findings stand out. First, by purchasing bills using auctions rather than bilaterally, the central bank increases the bid-to-cover ratio at bill issuance, especially in times of stress. Second, bills are offered at larger sizes and lower prices in central bank auctions near primary issuance. JEL Classification: E42, E44, E52, E58, G12
    Keywords: bills, Central bank auctions, liquidity
    Date: 2022–08
  20. By: Juan Pablo Ugarte
    Abstract: Capital flows can have destabilizing effects in economies connected to the global financial system. Research has shown that external factors tend to explain most of these movements during episodes of financial turmoil, while country-specific determinants are able to explain heterogeneity throughout the recovery. This paper seeks to understand how reserve accumulations affect real and financial variables. For this purpose, a theoretical framework based on an extended version of the Mundell-Fleming model is presented and its predictions are tested with empirical evidence. Our results suggest that, under a flexible exchange rate regime, an accumulation of reserves generates net capital inflows with limited effects on the real economy. Specifically, we find that an accumulation of reserves of 1% of GDP would increase net capital flows about 0.81%.
    Date: 2021–09
  21. By: Carl Grekou (CEPII)
    Abstract: This presentation proposes a new de facto classification of exchange rate regimes, the synthesis classification. The proposed framework has several advantages over existing de facto classifications. First, it offers a unified framework based on the most divergent classifications, the RR and LYS classifications, leading not only to a broader coverage but also to a broader spectrum of exchange systems. Second, it fits better with the known history of exchange rate regimes developments in the post-Bretton Woods era. Among other things, it brings an interesting nuance to the so-called hollowing-out hypothesis by showing that the evolution of de facto regimes—especially in emerging economies since the late 1990s—has essentially involved movement toward more tightly “managed” intermediate regimes and not a shift away from such regimes. As an illustration of the insightfulness of our classification, I empirically revisit the nexus between currency crises and exchange rate regimes. In addition to associate a higher probability of currency crisis with both intermediate and floating regimes, my classification, also displays better statistical performances than other classifications in predicting currency crises.
    Date: 2022–08–01
  22. By: Thomas Nitschka; Diego M. Hager
    Abstract: We analyse spillovers from European Central Bank (ECB) policy surprises to asset markets outside the euro area using Switzerland as a case study. Our results suggest that Swiss asset price responses to ECB policy surprises are significant. They depend on the type and nature of the surprise and change over time. Decomposing bond yields into expected short-term interest rates and the term premium reveals that both signalling and portfolio rebalancing effects explain the responses of bond yields of various maturities to surprises resulting from scheduled ECB policy decisions. ECB policy surprises are more important to Swiss government bond yields than Swiss stock prices.
    Keywords: Bond, event study, international spillovers, monetary policy, stock
    JEL: E43 E52 G15
    Date: 2022
  23. By: Dunne, Peter G. (Central Bank of Ireland); Giuliana, Raffaele (Central Bank of Ireland)
    Abstract: This paper aims to inform the debate about the reform of MMF regulation, which is currently a central theme for several prominent policy institutions. Some types of MMFs experienced challenging outflows in March 2020. This, and evidence suggesting that flows are linked with proximity to liquidity thresholds, has led to a reassessment of the adequacy of the post-GFC regulatory architecture. A suggested alternative to mandating the use of ever more complex liquidity management tools, is to require funds to hold assets that remain liquid and valuable during a crisis. Using supervisory data on Irish-domiciled non-public debt MMFs (i.e., LVNAVs and VNAVs), we provide robust graphical and econometric evidence indicating that MMFs voluntarily holding more Public-Debt Assets (PDAs) than required by MMF regulations, experienced lower outflows during the COVID-19 crisis. There is also evidence of resilience effects associated with having deposit buffers above requirements.
    Date: 2022–06
  24. By: Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
    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 per tonne of carbon is 4 times more effective. JEL Classification: E51, E62, Q54
    Keywords: 2-sector model, carbon taxation, climate change, green quantitative easing, integrated assessment model
    Date: 2022–08
  25. By: Massoc, Elsa Clara
    Abstract: The ECB is independent, but it is also accountable to the European parliament (EP). Yet, how the EP has held the ECB accountable has largely been overlooked. This paper starts addressing this gap by providing descriptive statistics of three accountability modalities. The paper highlights three findings. First, topics of accountability have changed. Climaterelated accountability has increased quickly and dramatically since 2017. Second, if the relationship between price stability and climate change remains an object of conflict among MEPs, a majority within the EP has emerged to put pressure for the ECB to take a more active stance against climate change, precisely on behalf of its price stability mandate. Third, MEPs engage with the climate topic in very specific ways. There is a gender divide between the climate and the price stability topics. Women engage more actively with climate-related topics. While the Greens heavily dominate the climate topic, parties from the Right dominate the topic of Price stability. Finally, MEPs adopt a more united strategy and a particularly low confrontational tone in their climate-related interventions.
    Keywords: accountability,European Central Bank,European Parliament,climate,price stability
    Date: 2022
  26. By: Schuler, Tobias; Sun, Yiqiao
    Abstract: We investigate the factors driving current account and monetary policy developments in the euro area. We estimate an open-economy structural vector autoregression (VAR) model with zero and sign restrictions derived from a multi-country dynamic stochastic general equilibrium (DSGE) model to identify relevant shocks and analyse their impact on the current account and interest rate. Examining the VAR impulse responses for Germany, Italy and Spain we find that investment shocks and preference shocks drive the current account and interest rates in the opposite directions. By contrast, external demand shocks and productivity shocks cause both the current account balance and interest rate to move in the same direction. We also provide evidence for spillovers to the euro area from US preference shocks and US interest rate policy shocks. JEL Classification: E32, F32, F45
    Keywords: current account, macroeconomic shocks, monetary policy
    Date: 2022–08
  27. By: Tanja Jakimova (National Bank of the Republic of North Macedonia); Milan Eliskovski (National Bank of the Republic of North Macedonia); Artina Bedzeti Baftijari (National Bank of the Republic of North Macedonia)
    Abstract: The paper deals with the challenges stemming from the phenomenon of unofficial euroization in the Republic of North Macedonia. It tries to identify the main drivers of the households` deposit euroization in the Republic of North Macedonia and contributes to the literature by providing an empirical measure of optimal level of euroization. With focus on the households` deposits, it is an additional attempt to empirically estimate the optimal level of euroisation in Republic of North Macedonia, following an already published IMF study on this issue. Looking ahead, persistence in stability-oriented macroeconomic policies and measures for promotion the use of local currency could further support the de-euroization trend in the Republic of North Macedonia.
    Keywords: euroization, local currency, financial stability, monetary policy, prudential policy, Republic of North Macedonia
    JEL: C32 E47 E58
    Date: 2022
  28. By: David Cimon; Adrian Walton
    Abstract: We summarize the theoretical model of central bank asset purchases developed in Cimon and Walton (2022). The model helps us understand how asset purchases ease pressures on investment dealers to restore market conditions in a crisis.
    Keywords: Coronavirus disease (COVID-19); Economic models; Financial institutions; Financial markets, Market structure and pricing
    JEL: G1 G10 G2 G20 L1 L10
    Date: 2022–06
  29. By: Jordan Barone; Alain P. Chaboud; Adam Copeland; Cullen Kavoussi; Frank M. Keane; Seth Searls
    Abstract: The economic disruptions associated with the COVID-19 pandemic sparked a global dash-for-cash as investors sold securities rapidly. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to a number of central bank actions. In this post, we highlight results from a recent paper in which we show that these disruptions occurred disproportionately in the U.S. Treasury market and offer explanations for why investors’ selling pressures were more pronounced and broad-based in this market than in other sovereign bond markets.
    Keywords: sovereign bond markets; financial crisis; COVID-19
    JEL: G1 E63 I1 G01
    Date: 2022–07–12
  30. By: Thomas Palley
    Abstract: This paper explores dollar hegemony, emphasizing it is a fundamentally political economic phenomenon. Dollar hegemony rests on the economic, military, and international political power of the US and is manifested through market forces. The paper argues there have been two eras of dollar hegemony which were marked by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980-Today). The 1970s were an in-between decade of dollar distress during which dollar hegemony was reseeded. The deep foundation of both models is US power, but the two models have completely different economic operating systems. Dollar hegemony 1.0 rested on the trade and manufacturing dominance of the US after World War II. Dollar hegemony 2.0 rests on the Neoliberal reconstruction of the US and global economies which have made the US the center of global capitalism and the most attractive place to hold capital. It is a financial model and intrinsically connected to Neoliberalism. Consideration of dollar hegemony leads to two further questions. One is whether there is a better way of organizing the world monetary order, which is associated with debate about the possibility of a new Bretton Woods. The other is what is the future of dollar hegemony?
    Keywords: Dollar hegemony, Neoliberalism, power, currency competition, capital mobility, Bretton Woods
    JEL: F00 F02 F30 F33
    Date: 2022–08
  31. By: Schneorson, Oren
    Abstract: This paper investigates how interbank credit exposures affect financial stability. Policy makers often see such exposures as undermining stability by exacerbating cascading losses through the financial system. I develop a model that features a trade-off between cascading losses and risk-sharing. In contrast to previous studies I find that reducing interbank connectivity may destabilize the financial system via the bank-run channel. This is because it decreases the risk-sharing benefits of interbank connectivity. A bank-run model features two islands that are connected via a long term debt claim. Varying the size of this claim (interbank connectivity), I study how the decision to `run on the bank' is affected. I run a simulation of the model, calibrated to the U.S. banking system between 1997-2007. I find that large bankruptcy costs are required to trump the risk-sharing benefits of interbank credit exposures. JEL Classification: G01, G21, G28
    Keywords: bank runs, credit risk, derivatives, financial stability
    Date: 2022–08
  32. By: Boris Fisera (Faculty of Social Sciences, Charles University, Prague & Institute of Economic Research, Slovak Academy of Sciences, Bratislava)
    Abstract: We study the influence of the exchange rate on the speed of economic recovery in a sample of 67 developed and developing economies over the years 1989-2019. First, using a cross-sectional sample of 341 economic recoveries, we study the effect of nominal depreciation and real undervaluation on the length of economic recovery. Our findings indicate that both nominal depreciation and real undervaluation increase the speed of economic recovery. However, this finding only holds for smaller depreciations/ undervaluations. Second, we use an interacted panel VAR (IPVAR) model to investigate the effect of real undervaluation on the speed of economic recovery after external shock. While we once again find evidence that undervalued domestic currency increases the speed of economic recovery, its positive effect seems limited in size. Furthermore, we also explore the role of financial development in influencing the effectiveness of undervalued domestic currency in stimulating the economic recovery. We find that the higher level of financial development seems to limit the negative effect of an overvalued currency on the speed of economic recovery, but not to influence the effect of an undervalued currency on economic recovery.
    Keywords: Economic recovery, exchange rate, currency depreciation, real undervaluation, financial development, interacted panel VAR (IPVAR)
    Date: 2022–08
  33. By: Byrne, Stephen (Central Bank of Ireland); McLaughlin, Darragh (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland)
    Abstract: How do consumer prices respond as costs for businesses in Ireland change? In this Letter, we seek to answer this question by examining macroeconomic data. The response of profits, wages and productivity levels to a given rise in other input costs determines the extent of cost-push pass-through to consumer prices. We find that output prices of domestically-dominated sectors of the economy, which captures the dynamics of businesses responses to higher input costs, typically do play a role in explaining consumer price inflation in Ireland. Recent cost increases for businesses are expected to contribute to inflation remaining above pre-pandemic levels for the foreseeable future given the likely capacity of labour costs and profits to adjust.
    Date: 2022–06
  34. By: Barbieri, Claudio; Couaillier, Cyril; Perales, Cristian; Rodriguez d’Acri, Costanza
    Abstract: Macroprudential policies should strengthen the banking sector throughout the financial cycle. However, while bank credit growth is used to capture cyclical exuberance and calibrate buffer requirements, it depends on potentially heterogeneous dynamics on the borrower and lender side. By decomposing credit growth into a common component and components capturing heterogeneity in supply and demand à la Amiti and Weinstein, 2018 applied on the euro area credit register ("AnaCredit"), we can inform the policy debates in two ways. Ex ante, we introduce a framework mapping the decomposition to different types of macroprudential instruments, specifically broad vs. targeted measures. Ex post, we also show that the resulting decomposition can be used to assess the effectiveness of adopted measures on credit supply or demand. We find evidence that buffer releases and credit guarantees increased bank credit supply during the COVID-19 pandemic and interacted positively with banks' profitability. JEL Classification: E58, E52, E44, G21
    Keywords: bank-lending channel, buffer releases, capital requirements, credit dynamics, European economy
    Date: 2022–08

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