nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒09‒26
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How the Federal Reserve’s Quantitative Easing Affects the Federal Budget By Congressional Budget Office
  2. Average Inflation Targeting and Macroeconomic Stability By Piergallini, Alessandro
  3. The post-covid monetary hangover By Mario Teijeiro
  4. Flexible Average Inflation Targeting: How Much Is U.S. Monetary Policy Changing? By Jarod Coulter; Roberto Duncan; Enrique Martinez-Garcia
  5. Inflation as a Fiscal Limit By Francesco Bianchi; Leonardo Melosi
  6. Monetary policy and risk-taking: evidence from China's corporate bond market By Yang, Zheyu
  7. Monetary Policy and Inequality By Asger Lau Andersen; Niels Johannesen; Mia Jørgensen; José-Luis Peydró
  8. Milton Friedman: An Early Advocate of Dollarization? By Emilio Ocampo
  9. Shipping Prices and Import Price Inflation By Maggie Isaacson; Hannah Rubinton
  10. The Impacts of Crises on the Trilemma Configurations By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  11. Community currency systems: Basic income, credit clearing, and reserve-backed. Models and design principles By Criscione, Teodoro; Guterman, Eve; Avanzo, Sowuelu; Linares, Julio
  12. Big data forecasting of South African inflation By Byron Botha; Rulof Burger; Kevin Kotze; Neil Rankin; Daan Steenkamp
  13. Making a virtue out of necessity: the effect of negative interest rates on bank cost efficiency By Avignone, Giuseppe; Girardone, Claudia; Pancaro, Cosimo; Pancotto, Livia; Reghezza, Alessio
  14. Capital Control and Heterogeneous Impact on Capital Flows By Sanyal, Anirban
  15. Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907 By Matthew Jaremski; David C. Wheelock
  16. Existence of Monetary Equilibrium for Overlapping Generations Economies with Satiated Agents By Ken Urai; Hiromi Murakami; Takahiro Moriya
  17. An increasing sense of urgency: The Inflation Perception Indicator (IPI) to 30 June 2022 - a research note By Müller, Henrik; Rieger, Jonas; Schmidt, Tobias; Hornig, Nico
  18. Short Term Cost of Cash and Mobile Financial Services: Evidence from a natural experiment in India By Costa, Helia; Pisu, Mauro; Shreeti, Vatsala
  19. New Dimensions and Frontiers in Central Banking Summary of the 2022 BOJ-IMES Conference By Takuji Fueki; Yutaka Soejima; Shunichi Yoneyama
  20. Does bank competition matter for the effects of macroprudential policy on procyclicality of lending? By Ma³gorzata Olszak; Iwona Kowalska

  1. By: Congressional Budget Office
    Abstract: In this report, CBO examines the mechanisms by which quantitative easing (QE)—large asset purchasing programs conducted by the Federal Reserve— affects the federal budget deficit. The report also describes the two large expansions of the Federal Reserve’s balance sheet that resulted from QE policies instituted in response to the 2007–2009 and 2020 recessions and discusses the risks involved when the Federal Reserve uses QE to achieve its monetary policy objectives.
    JEL: E44 E52 E58 E63 H68
    Date: 2022–09–08
  2. By: Piergallini, Alessandro
    Abstract: I study the dynamic consequences of average inflation targeting in a tractable monetary model with sticky prices. I demonstrate that in the case in which the central bank attaches a relatively high weight on the distant past, average inflation targeting not only ensures local determinacy of equilibrium but is also capable of eradicating the liquidity trap problem—differently from standard Taylor rules. Specifically, I show the existence of a saddle connection from the deflationary steady state to the target steady state, along which reflation occurs in equilibrium due to limited and gradual increases in expected nominal interest rates.
    Keywords: Average Inflation Targeting; Local and Global Dynamics; Liquidity Traps.
    JEL: E31 E52
    Date: 2022–05–10
  3. By: Mario Teijeiro
    Abstract: When the Covid started, the Federal Reserve reduced interest rates to zero and increased the money supply unprecedentedly. It was a reckless policy whose consequences have been inflation of 7% in 2021, of 9.1% in the 12 months to June 2022 and it reached an annualized rate of 13% in the first half of 2022. The purpose of this note is to discuss how inflation could evolve after past mistakes and under current policies. It starts by discussing the magnitude of the monetary shock, the monetary imbalances that remain after the recent inflation run off and finally, a discussion on the chances for success in bringing inflation back to the 2% target.
    Date: 2022–08
  4. By: Jarod Coulter; Roberto Duncan; Enrique Martinez-Garcia
    Abstract: One major outcome of the Federal Reserve’s 2019–20 framework review was the adoption of a Flexible Average Inflation Targeting (FAIT) strategy in August 2020. Using synthetic control methods, we document that U.S. inflation rose post-FAIT considerably more than predicted had the strategy not changed (an average of 1.18 percentage points during 2020:M8-2022:M2). To explore the extent to which targeting average inflation delayed the Fed’s response and contributed to post-FAIT inflation, we adopt a version of the open-economy New Keynesian model in Martínez-García (2021) and document the economic consequences of adopting alternative measures of average inflation as policy objectives. We document three additional major findings using this general equilibrium setup: First, depending on how far back and how much weight is assigned to past inflation misses, the policy outcomes under FAIT are similar to those under the pre-FAIT regime. Secondly, we find that the implementation of FAIT can have large effects over short periods of time as it tends to delay action. However, over longer periods of time—such as the 1984:Q1-2019:Q4 pre-FAIT period—its effects wash out and appear negligible. Finally, we find that different average inflation measures explain an average of 0.5 percentage points per quarter of the post-FAIT inflation surge, indicating that targeting average inflation by itself can only explain part of the inflation spike since August 2020.
    Keywords: Open-Economy New Keynesian Model; Monetary Policy; Flexible Average Inflation Targeting; Survey Expectations
    JEL: F41 F42 F47 E52 E58 E65
    Date: 2022–07–30
  5. By: Francesco Bianchi; Leonardo Melosi
    Abstract: Low and stable inflation requires an appropriate fiscal framework aimed at stabilizing government debt. Historically, trend inflation is critically influenced by actual or perceived changes to this framework, while cost-push shocks only account for short-lasting movements in inflation. Before the pandemic, a moderate level of fiscal inflation has counteracted deflationary pressures, helping the central bank to avoid deflation. The recent fiscal interventions in response to the Covid pandemic have altered the private sector’s beliefs about the fiscal framework, accelerating the recovery, but also determining an increase in fiscal inflation. This increase in inflation could not have been averted by simply tightening monetary policy. The conquest of post-pandemic inflation requires mutually consistent monetary and fiscal policies to avoid fiscal stagflation.
    Keywords: fiscal limits; Monetary policy; Fiscal policy; Inflation (Finance) - United States; Government Debt; fiscal staglation
    JEL: E50 E62 E30
    Date: 2022–08–29
  6. By: Yang, Zheyu
    Abstract: I study the effects of monetary policy shocks on corporate bond prices in China. Using high-frequency comovement of interest rates and stock prices surprises around People’s Bank of China’s (PBoC) policy announcements on Reserve Requirements and a Bayesian structural vector autoregression, I disentangle the true monetary policy shocks from the central bank’s informational surprises. This paper documents a strong positive effect of monetary easings shocks on secondary market bond prices. More importantly, it shows that the effect is increasing with the credit risks of the bonds, i.e., risky bonds outperform safer bonds following monetary easings while underperform following monetary tightening, which is consistent with search for yield. The findings raise implications for financial stability and macroprudential policy.
    Keywords: risk-taking,monetary policy,asset price,China
    JEL: C11 E43 E52 G12
    Date: 2022
  7. By: Asger Lau Andersen (University of Copenhagen, CEBI and DFI); Niels Johannesen (University of Copenhagen, CEBI, DFI and CEPR); Mia Jørgensen (University of Copenhagen and CEBI); José-Luis Peydró (Imperial College, UPF-BSE-CREI-ICREA and CEPR)
    Abstract: We analyze the distributional effects of monetary policy on income, wealth and consumption. We use administrative household-level data covering the entire population in Denmark over the period 1987-2014 and exploit a long-standing currency peg as a source of exogenous variation in monetary policy. We consistently find that gains from softer monetary policy in terms of income, wealth and consumption are monotonically increasing in the ex-ante income level. The distributional effects reflect systematic differences in exposure to the various channels of monetary policy, especially non-labor channels (e.g. leverage and risky assets). Our estimates imply that softer monetary policy increases income inequality.
    Keywords: Monetary policy, Inequality, Household heterogeneity, Risky assets, Leverage
    JEL: E2 E4 E5 G1 G2 G5
    Date: 2022–08–22
  8. By: Emilio Ocampo
    Abstract: Milton Friedman’s longstanding advocacy in favor of floating exchange rates has contributed to a mistaken belief that he opposed currency board regimes or outright dollarization. Nothing could be further from the truth. Over a period of almost five decades Friedman consistently made it clear that he favored floating exchange rates for advanced nations but not for developing nations. In fact, he was one of the earliest advocates of dollarization for countries suffering from high and chronic inflation such as Argentina. Interestingly, it is rarely known that one of the earliest debates on the advantages and disadvantages of dollarization and currency boards took place in 1973 in Washington, D.C., during a Congressional Hearing which pitted Friedman against Argentine economist Ricardo Arriazu. The purpose of this brief note is to trace the evolution of Friedman’s thinking on the subject from the mid 1950s until his death and the events that influenced it.
    Keywords: Milton Friedman, Foreign Exchange Rate Regimes, Currency Boards, Dollarization, Monetary Policy, Argentina
    JEL: B2 B17 B3 B22 B27 F31 F32 O24
    Date: 2022–08
  9. By: Maggie Isaacson; Hannah Rubinton
    Abstract: During the pandemic there have been unprecedented increases in the cost of shipping goods accompanied by delays and backlogs at the ports. At the same time, import price inflation has reached levels unseen since the early 1980s. This has led many to speculate that the two trends are linked. In this article, we use new data on the price of shipping goods between countries to analyze the extent to which increases in the price of shipping can account for the increase in U.S. import price inflation. We find that the pass-through of shipping costs is small. Nevertheless, because the rise in shipping prices has been so extreme, it can account for between 3.60 and 5.87 percentage points per year of the increase in import price inflation during the post-Pandemic period.
    Keywords: inflation; shipping; trade
    JEL: E31 F15
    Date: 2022–08–30
  10. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: The “monetary trilemma” – the hypothesis that full monetary policy autonomy, exchange rate stability, and financial openness cannot simultaneously be achieved – has long been studied. Recently, holding international reserves (IR) has become an important policy instrument, insuring against liquidity shortages. We find that countries’ policy mixes are diverse, and have varied over time, sometimes in response to crises. We illustrate how the policy combinations changed drastically after the Asian Financial Crisis (AFC). In contrast, the Global Financial Crisis did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increased IR holding, post-AFC. Countries that had negative growth during the crisis also tended to pursue greater exchange rate flexibility and financial openness. This finding is true for commodity, but not manufactured goods, exporters. Countries with large current account deficits tend to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tended to hold more IR. In general, countries increased their IR holdings after the GFC, but did not otherwise respond concurrently to crisis conditions.
    JEL: F33 F38
    Date: 2022–08
  11. By: Criscione, Teodoro; Guterman, Eve; Avanzo, Sowuelu; Linares, Julio
    Abstract: This paper briefly introduces models and basic design principles of community currency systems from economic and network analytical perspectives. Policymakers, grassroots organizations, and activists can find in this paper the necessary analytical and practical tools to start and enhance their own community currency projects.
    Keywords: community currency systems,complementary currency systems,basic income,monetary innovation,economic network analysis,circulation analysis,currency analysis,currency systems
    Date: 2022
  12. By: Byron Botha (Codera Analytics); Rulof Burger (Department of Economics, University of Stellenbosch, Stellenbosch, 7601, South Africa.); Kevin Kotze (School of Economics, University of Cape Town); Neil Rankin (Predictive Insights, 3 Meson Street, Techno Park, Stellenbosch, 7600, South Africa.); Daan Steenkamp (Codera Analytics and Research Fellow, Department of Economics, Stellenbosch University.)
    Abstract: We investigate whether the use of statistical learning techniques and big data can enhance the accuracy of inflation forecasts. We make use of a large dataset for the disaggregated prices of consumption goods and services, which we partially reconstruct, and a large suite of different statistical learning and traditional time series models. We find that the statistical learning models are able to compete with most benchmarks over medium to longer horizons, despite the fact that we only have a relatively small sample of available data, but are usually inferior over shorter horizons. Our findings suggest that this result may be attributed to the ability of these models to make use of relevant information, when it is available, and may be particularly useful during periods of crisis, when deviations from the steady state are more persistent. We find that the accuracy of the central bank's near-term inflation forecasts compare favourably with those of other models, while the inclusion of off-model information, such as electricity tariff adjustments and other sources of within-month data, provides these models with a competitive advantage. Lastly, we also investigate the relative performance of the different models as we experienced the effects of the pandemic.
    JEL: C10 C11 C52 C55 E31
    Date: 2022
  13. By: Avignone, Giuseppe; Girardone, Claudia; Pancaro, Cosimo; Pancotto, Livia; Reghezza, Alessio
    Abstract: Do negative interest rates affect banks’ cost efficiency? We exploit the unprecedented introduction of negative policy interest rates in the euro area to investigate whether banks make a virtue out of necessity in reacting to negative interest rates by adjusting their cost efficiency. We find that banks most affected by negative interest rates responded by enhancing their cost efficiency. We also show that improvements in cost efficiency are more pronounced for banks that are larger, less profitable, with lower asset quality and that operate in more competitive banking sectors. In addition, we document that enhancements in cost efficiency are statistically significant only when breaching the zero lower bound (ZLB), indicating that the pass-through of interest rates to cost efficiency is not effective when policy rates are positive. These findings hold important policy implications as they provide evidence on a beneficial second-order effect of negative interest rates on bank efficiency. JEL Classification: E43, E44, E52, G21, F34
    Keywords: bank cost efficiency, difference-in-differences, NIRP, Stochastic frontier approach
    Date: 2022–09
  14. By: Sanyal, Anirban
    Abstract: This paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public sector, banks and corporate. The paper examines the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The empirical findings indicate that the direct effect of capital control moderates portfolio inflows to public sector whereas the portfolio inflows to banks and corporate sector does not respond to the capital control measures. The spillover effect of capital control increases capital inflows to all sectors in other countries. The paper explains the observed heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better yield.
    Keywords: Capital control, Spillover effect, Portfolio Choice, Signaling effect, Spatial Durbin Model
    JEL: C21 F32 F42
    Date: 2022–08–15
  15. By: Matthew Jaremski; David C. Wheelock
    Abstract: This paper provides quantitative evidence on the interbank network’s role in transmitting the Panic of 1907 across the United States. Originating in a few New York City banks and trust companies, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of correspondent relationships shows that i) suspensions were more likely in cities whose banks had closer ties to New York, ii) banks with correspondents at the Panic’s center were more likely to close, and iii) banks responded to the panic by rearranging their correspondent relationships, with implications for network structure.
    Keywords: banking panics; interbank networks; contagion; bank closures; panic of 1907
    JEL: E42 E44 G01 G21 N11 N21
    Date: 2022–09
  16. By: Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (Faculty of Economics, Otemon Gakuin University); Takahiro Moriya (Department of Economics, Stony Brook University)
    Abstract: This paper treats a general equilibrium existence problem on overlapping generations (OLG) economies with satiated agents and fiat money. The setting is important because it allows the analysis to incorporate Pareto optimality problems of the type where the value functions do not necessarily converge. For example, this is the case for optimal allocations such as a basic income under a budget deficit, which can only be realized with policies that require non-negative wealth transfers for all agents. Because of the existence of satiated agents, our argument can be identified with a dividend equilibrium (Aumann and Dreze 1986) or an equilibrium with slack (Mas-Colell 1992). For OLG settings, however, some conditions (like arguments for strictly positive endowments, resource relatedness and minimum wealth conditions with negative prices, and limit arguments for dividends) must be reconsidered. We note that by considering the OLG framework together with satiated agents, not only can the existence of a monetary equilibrium be assumed in advance, but the existence of a monetary equilibrium based on an arbitrary money supply is guaranteed. Taking into account that our setting includes production (without discount factor), the model here provides a basis for a wide range of difficult problems, including the player’s (equilibrium-dependent) survival problem, multi-sectoral capital accumulation, bequests, firm formation, and so on.
    Keywords: Dividend Equilibrium, Monetary Equilibrium, Overlapping Generations Economy, Satiation, Basic Income.
    JEL: C62 D51 E40
    Date: 2022–08
  17. By: Müller, Henrik; Rieger, Jonas; Schmidt, Tobias; Hornig, Nico
    Keywords: latent Dirichlet allocation,inflation,expectations,narratives,text mining,computational methods,behavioral economics
    Date: 2022
  18. By: Costa, Helia; Pisu, Mauro; Shreeti, Vatsala
    Date: 2022–08
  19. By: Takuji Fueki (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yutaka Soejima (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Shunichi Yoneyama (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Date: 2022–08
  20. By: Ma³gorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management)
    Abstract: Competition is an inherent and natural environment under which banks operate and extend loans. Despite the extensive debate on the impact of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. Using over 70,000 bank-level observations in 109 countries in 2004-2015 we find that increased competition strengthens the countercyclical effects of MPI in terms of reduced loans’ growth. Bank lending is procyclical in perfectly competitive industry. However, any decrease in the intensity of competition in countries not applying macroprudential policy instruments is related with increased procyclicality of lending. Sensitivity of lending to business cycle in countries implementing macroprudential policy depends on the type of macroprudential policy instrument and on the length of the use of instruments. We show that extended duration of use of cyclical macroprudential instruments is associated with increased procyclicality of lending. In a perfectly competitive environment we find increased procyclicality of credit in countries using cyclical instruments and decreased procyclicality of credit in countries applying balance-sheet oriented instruments. Under imperfectly competitive banking sector we find the opposite effects of macroprudential instruments on procyclicality of credit.
    Keywords: loans growth, macroprudential policy, competition intensity, procyclicality of lending
    JEL: E32 G21 G28 G32
    Date: 2021

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