nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒10‒03
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The impact of providing information about the ECB's instruments on inflation expectations and trust in the ECB. Experimental evidence By Nils Brouwer; Jakob de Haan
  2. Inflation-at-Risk in in the Middle East, North Africa, and Central Asia By Mr. Maximilien Queyranne; Romain Lafarguette; Kubi Johnson
  3. Anchoring of consumers’ long-term euro area inflation expectations during the pandemic By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  4. Making Sense of Consumer Inflation Expectations: The Role of Uncertainty By Lovisa Reiche; Aidan Meyler
  5. Inflation Measured Every Day Keeps Adverse Responses Away: Temporal Aggregation and Monetary Policy Transmission By Margaret M. Jacobson; Christian Matthes; Todd B. Walker
  6. The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets? By Tomás Carrera de Souza; Tom Hudepohl
  7. Firm liquidity and the transmission of monetary policy By Margherita Bottero; Stefano schiaffi
  8. Nr. 4 (2022): On the capitalisation of central banks By Dirk Broeders; Paul Wessels
  9. On the Empirical Relevance of the Exchange Rate as a Shock Absorber at the Zero Lower Bound By David Finck; Mathias Hoffmann; Patrick Huertgen
  10. The Rise and Fall of Paper Money in Yuan China, 1260-1368 By Hanhui Guan; Nuno Palma; Meng Wu
  11. The ECB and the Ukraine war: threats to price, economic and financial stability By Luigi Bonatti,; Roberto Tamborini
  12. House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data By Denis Gorea; Oleksiy Kryvtsov; Marianna Kudlyak
  13. Inflation Targeting and Developing countries’ Performance: Evidence from Firm-Level Data By Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
  14. 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
  15. Cost-Push and Demand-Pull Inflation in India ? A Frequency Domain Analysis By Ishita Ghoshal
  16. A New Approach to Estimating the Natural Rate of Interest By Luca Benati
  17. New facts on consumption 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
  18. Banks’ Seasoned Equity Offerings Announcements and Central Bank Lending Operations By Massimo Giuliodori; Jan Kakes; Dimitris Mokas
  19. An analysis of objective inflation expectations and inflation risk premia By Sara Cecchetti; Adriana Grasso; Marcello Pericoli
  20. What triggers consumer adoption of CBDC? By Michiel Bijlsma; Carin van der Cruijsen; Nicole Jonker; Jelmer Reijerink
  21. Cross-Selling in Bank Household Relationships. Implications for Deposit Pricing, Loan Pricing, and Monetary Policy. By Christoph Basten; Ragnar Juelsrud
  22. “Green†fiscal policy measures and non-standard monetary policy in the euro area By Anna Bartocci; Alessandro Notarpietro; Massimiliano Pisani
  23. How Inflation Impacts Deposit Insurance: Real Coverage and Coverage Ratio By Van Roosebeke, Bert; Defina, Ryan
  24. Mind the Gap: City-Level Inflation Synchronization By Mr. Serhan Cevik
  25. Inflation and Wage Growth Since the Pandemic By Òscar Jordà; Fernanda Nechio
  26. The Heterogeneous Impact of Inflation on Households’ Balance Sheets By Miguel Cardoso; Clodomiro Ferreira; José Miguel Leiva; Galo Nuño; Álvaro Ortiz; Tomasa Rodrigo
  27. Labour market and inflation relationship indicator By Evgeny Postnikov; Dmitry Orlov
  28. Heterogeneous Expectations and the Business Cycle at the Effective Lower Bound By Tolga Özden
  29. Central Bank Policy Mix: Policy Perspectives and Modeling Issues By Juhro, Solikin M.; Sahminan, Sahminan; Wijoseno, Atet; Waluyo, Jati; Bathaluddin, M. Barik
  30. LINVER: The Linear Version of FRB/US By Flint Brayton; David L. Reifschneider
  31. Rise of NBFIs and the Global Structural Change in the Transmission of Market Shocks By Yoshihiko Hogen; Yoshiyasu Koide; Yuji Shinozaki
  32. Cyber risk in central banking By Sebastian Doerr; Leonardo Gambacorta; Thomas Leach; Bertrand Legros; David Whyte
  33. The ECB?s Financial Stability impact on Credit Default Swaps Market By Georgios Alexopoulos

  1. By: Nils Brouwer; Jakob de Haan
    Abstract: We use a random controlled trial among Dutch households to analyze whether communication about monetary policy instruments impacts inflation expectations and trust in the ECB. All participants in the survey receive information about the ECB's goal, but only a subset also receives information about how the ECB tries to achieve this. Our results suggest that individuals who are informed about policy instruments have inflation expectations closer to the ECB's target inflation than individuals who only receive information about the ECB's objective. Our evidence also indicates that communication about the ECB's instruments does not impact average trust in the ECB.
    Keywords: central bank; communication; general public; trust; RCT
    JEL: D12 D84 E52 E58
    Date: 2021–03
  2. By: Mr. Maximilien Queyranne; Romain Lafarguette; Kubi Johnson
    Abstract: This paper investigates inflation risks for 12 Middle East and Central Asia countries, with an equal share of commodities exporters and importers. The empirical strategy leverages the recent developments in the estimation of macroeconomic risks and uses a semi-parametric approach that balances well flexibility and robustness for density projections. The paper uncovers interesting features of inflation dynamics in the region, including the role of backward versus forward-looking drivers, non-linearities, and heterogeneous and delayed exchange rate pass-through. The results have important implications for the conduct of monetary policy and central bank communication in the Middle East and Central Asia and emerging markets in general.
    Keywords: Emerging markets; inflation; inflation expectations; Phillips Curve; monetary policy; central bank communication; Middle East; North Africa; Central Asia
    Date: 2022–09–02
  3. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: This paper analyses the results from a new monthly survey of consumers’ euro area inflation expectations before and during the pandemic. We find that consumers’ longterm euro area inflation expectations have remained elevated above the ECB’s inflation aim throughout the pandemic. Moreover, their distributions have continuously shown a greater probability of high inflation (2pp above the ECB’s inflation aim of 2%) than of deflation during the pandemic. These results suggest that during the pandemic consumers’ long-term euro area inflation expectations have been de-anchored on the upside rather than on the downside. This is in contrast to concerns by ECB policymakers about a de-anchoring on the downside during the pandemic. We find that during the pandemic consumers’ expected probabilities in the long term of deflation in the euro area have been above those from the ECB Survey of Professional Forecasters, and below those implied by options. We also find based on consumers’ point inflation expectations and on three measures calculated directly from their individual expected probability distribution, that consumers’ long-term euro area inflation expectations have been better anchored for higher education levels and for higher net household income.
    Keywords: Inflation expectations
    JEL: E31 E52 E58
    Date: 2021–06
  4. By: Lovisa Reiche; Aidan Meyler
    Abstract: Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand what they are and how they are formed. In this paper we introduce the (un)certainty channel as means to shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. These include the apparent overestimation of inflation by consumers as well as the negative correlation observed between the economic outlook and inflation expectations. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with socio-demographic characteristics and economic sentiment.
    JEL: D11 D12 D84 E31 E52
    Date: 2022–02
  5. By: Margaret M. Jacobson; Christian Matthes; Todd B. Walker
    Abstract: Using daily inflation data from the Billion Prices Project [Cavallo and Rigobon (2016)], we show how temporal aggregation biases estimates of monetary policy transmission. We argue that the information mismatch between private agents and the econometrician —the source of temporal aggregation bias —is equally important as the more studied mismatch between private agents and the central bank (the “Fed information effect”). We find that the adverse response of daily inflation to high-frequency monetary policy shocks is short-lived, if present at all, in impulse responses from both local projections and an unobserved components model of inflation dynamics. To reconcile how one can obtain a sizable adverse response with monthly or quarterly data when only a limited adverse response exists at a higher frequency, we appeal to a simple monetary policy model and show how temporal aggregation bias can exacerbate initial impulse response functions. Because our modeling results are generic and macroeconomic indicators are published with a lag, we argue that temporal aggregation bias will be a key feature of the nascent field of high-frequency macroeconomics.
    Keywords: Disaggregated inflation; Billion prices project; High-frequency macroeconomics; Monetary policy transmission; Temporal aggregation bias
    JEL: E00 E52 E31
    Date: 2022–08–16
  6. By: Tomás Carrera de Souza; Tom Hudepohl
    Abstract: In this paper we study the link between central bank asset purchases and the repo market, to examine the impact of the Eurosystem’s increased footprint in financial markets resulting from the response to the Covid-19 crisis. To do so, we exploit different highly granular data on government bond purchases and money market transactions. We find that both marginal purchases (flow effect) and aggregate holdings (stock effect) have a significant downward impact on repo rates. The stock effect is nonlinear, and is amplified when the central bank’s holdings are larger. Finally, we find that the Eurosystem’s Securities Lending Facility alleviates the downward pressure on repo rates for scarce bonds, but it does not fully compensate for the downward pressure created by purchases. This collateral scarcity may hamper a smooth functioning of repo and underlying bond markets.
    Keywords: Asset purchases; Unconventional monetary policy; Money Market; Repo Market; Specialness
    JEL: E52 E58 G10 G15
    Date: 2022–05
  7. By: Margherita Bottero (Bank of Italy); Stefano schiaffi (Bank of Italy; Bank of Italy)
    Abstract: We study how firms’ cash balances affect the supply of bank credit and the transmission of monetary policy via the bank-lending channel in Italy using bank- and firm-level data. From a theoretical perspective, there is no agreement on whether, for a given level of credit demand, cash-rich companies enjoy better access to credit, as an abundance of cash may reveal both positive and negative information about the firm. According to our analysis, based on a sample of 430,000 Italian non-financial corporations over the period 2006-2018, banks view firm liquidity favourably since it is associated, on average, with cheaper bank funding and with a credit composition tilted towards term loans, at all maturities and non-collateralized. We also show that firms reallocate their liquidity in and out of their deposits following changes in the slope of the yield curve, which proxies the opportunity cost of cash. For this reason, changes in monetary policy that alter the slope of the term structure impact the cost of credit not only via the traditional channels but also indirectly, as they prompt a reallocation of firm liquidity that banks anticipate and price into the credit contracts they offer.
    Keywords: firm liquidity, bank financing, monetary policy transmission
    JEL: E51 E52
    Date: 2022–07
  8. By: Dirk Broeders; Paul Wessels
    Abstract: In contrast to commercial banks, there are no rules or clear guidelines for central banks’ capital adequacy. Although central banks cannot default as long as they have the right to issue legal tender, capital adequacy is important to be a credible, independent monetary authority over a medium-term horizon. Central banks face several challenges in determining their capital adequacy. First, the amount of capital only plays an auxiliary role in central banks’ effectiveness. Second, central banks face “latent risks†in addition to the regular calculable financial risks. These latent risks are difficult to quantify because they stem from contingent policy measures such as quantitative easing and lending of last resort. Latent risks are related to GDP and the size of the financial sector in the economy. We argue that a central bank’s target level of capital (1) can be calibrated with a confidence level that is lower than that used for commercial banks and (2) is proportional to for instance GDP as a proxy for the latent risks. We propose a set of guidelines to arrive at such a central bank capital policy. Capital adequacy will get significant attention over the comming years as many central banks have to draw on their buffers following rising interest rates in response to higher inflation.
    Date: 2022–07
  9. By: David Finck (University of Giessen); Mathias Hoffmann (Deutsche Bundesbank); Patrick Huertgen (Deutsche Bundesbank)
    Abstract: The open economy New Keynesian model with flexible exchange rates postulates that the real exchange rate appreciates in response to an asymmetric negative demand shock in a zero lower bound (ZLB) scenario and exacerbates the adverse macroeconomic effects. However, when monetary policy is able to accommodate the adverse effects of the negative demand shock via unconventional measures, the model can generate a real depreciation at the ZLB. This paper examines these counteracting exchange rate channels empirically. We estimate the effect of a negative asymmetric demand shock on the real exchange rate and inflation expectations as well as output and prices by employing state-dependent and sign-restricted local projection methods for the euro area vis-Ã -vis the United States, Canada, and Japan. We find that the real exchange rate depreciates when interest rates are not at the ZLB but also when they are. Furthermore, our empirical results show that the real exchange rate can absor considerable variations in output, confirming its shock-absorbing capacity before but also during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECBs balance sheet in the ZLB period, while it remained unaffected in the pre-ZLB period. Overall, our empirical results favor the open economy New Keynesian model with unconventional measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects
    JEL: F31 E31 E37 C54
    Date: 2022
  10. By: Hanhui Guan; Nuno Palma; Meng Wu
    Abstract: Following the Mongol invasion of China, the Yuan (1260–1368) dynasty was the first political regime in history able to deploy paper money as the sole legal tender. Drawing on a new dataset on money issues, imperial grants, and prices, we show that a silver standard initially consolidated the Chinese currency market. However, persistent fiscal pressures eventually compelled rulers to ease the monetary standard, and a fiat standard was adopted, leading to inflation levels which doubled the price level in less than a decade. We show that military pressure generated fiscal demands which led to over-issuance, and we reject the role of excessive imperial grants in triggering the over-issue of money.
    Keywords: Paper money; silver standard; fiat money; Yuan China
    JEL: E42 N15 N45
    Date: 2022–09
  11. By: Luigi Bonatti,; Roberto Tamborini
    Abstract: As a consequence of the Ukraine war, in the aftermath of the COVID-19 pandemic, monetary policy in the euro area is severely challenged by the convergent threats to price, economic, and financial stability. After examining them, we argue that the burden of the euro area stability cannotbeleftentirelyontheshouldersofthecentralbank.Thesuccessful synergic coordination of monetary policy with central and national fiscal policies inaugurated in response to the pandemic should be strengthened. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 20 June 2022.
    Date: 2022
  12. By: Denis Gorea; Oleksiy Kryvtsov; Marianna Kudlyak
    Abstract: Existing literature documents that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. We present new evidence of a much faster response. We exploit information contained in listings for the residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency measures of monetary policy shocks, we document that a one standard-deviation contractionary monetary policy surprise lowers housing list prices by 0.2–0.3 percent within two weeks—a magnitude on par with the effect on stock prices. House prices respond stronger to the surprises to future rates as compared to the surprise changes in the federal funds rate. Sale prices are mostly pre-determined by list prices and do not independently respond to monetary policy surprises.
    Keywords: house prices; monetary policy; monetary policy transmission; house sales
    JEL: E52 R21 R31
    Date: 2022–08–05
  13. By: Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
    Keywords: , Inflation targeting , Manufacturing firm performance , Entropy balancing, Monetary policy credibility
    Date: 2022
  14. 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: 2022–07
  15. By: Ishita Ghoshal (Fergusson College (Autonomous), Pune)
    Abstract: The study checks for causal effects of supply-side and demand-side instruments on domestic inflation in the frequency domain for India. The representatives for the cost push and demand pull factors for the study are international energy prices and domestic food prices (cost push) and output gap (demand pull). Domestic food price is found not to cause core inflation in the bivariate spectral method however in a multivariate framework there is significant causal effect. International energy price is found to cause core inflation only in the long run but output gap causes core inflation in the short run mostly. This signifies the differences in the supply side and demand side transmission mechanisms for causing inflation. The policy implications of the results show that a rise in the cost push inflation should be targeted with a long run perspective in mind, while inflation caused through demand pull channel should receive more attention in the short run.
    Keywords: Inflation, Causality, Spectral analysis, Frequency-domain analysis, Policy-making, Long-run, Short-run
    JEL: C32 C49 E00
    Date: 2022–07
  16. By: Luca Benati
    Abstract: Building upon the insight that M1 velocity is the permanent component of nominal interest rates–see Benati (2020)–I propose a novel, and straightforward approach to estimating the natural rate of interest, which is conceptually related to Cochrane’s (1994a) proposal to estimate the permanent component of GNP by exploiting the informational content of consumption. Under monetary regimes (such as inflation-targeting) making inflation I(0), the easiest way to implement the proposed approach is to (i) project the monetary policy rate onto M1 velocity–thus obtaining an estimate of the nominal natural rate–and then (ii) subtract from this inflation’s sample average (or target), thus obtaining the real natural rate. More complex implementations based on structural VARs produce very similar estimates. Compared to existing approaches, the one proposed herein presents two key advantages: (1) under regimes making inflation I(0), M1 velocity is equal, up to a linear transformation, to the real natural rate, so that the natural rate is, in fact, observed; and (2) based on a high-frequency estimate of nominal GDP, the natural rate can be computed at the monthy or even weekly frequency. In the U.S., Euro area, and Canada the natural rate dropped sharply in the months following the collapse of Lehman Brothers. Likewise, the 1929 stock market crash was followed in the U.S. by a dramatic decrease in the natural rate.
    Keywords: Natural rate of interest; money velocity; structural VARs; unit roots; cointegration
    Date: 2022–08
  17. By: Erwan Gautier; Cristina Conflitti; Riemer P. Faber; Brian Fabo (National Bank of Slovakia); Ludmila Fadejeva; Valentin Jouvanceau; Jan-Oliver Menz; Teresa Messner; Pavlos Petroulas; Pau Roldan-Blanco; Fabio Rumler; Sergio Santoro; Elisabeth Wieland; Hélène Zimmer
    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.
    JEL: D40 E31
    Date: 2022–09
  18. By: Massimo Giuliodori; Jan Kakes; Dimitris Mokas
    Abstract: This paper studies the influence of central bank lending operations on the announcement effects of European banks’ seasoned equity offerings (SEOs). We find that larger participation in lending operations is associated with more negative cumulative abnormal returns following the announcement. This result supports the hypothesis that SEOs made by banks that rely more on central bank lending facilities show more negative signaling effects. However, these effects are short-lived and fade away after two trading days following the SEO announcement. Further, we find that offerings motivated by capital strengthening are more likely to signal overpriced equity.
    Keywords: Banks; Bank capital; Seasoned equity offerings; Unconventional monetary policy
    JEL: E52 E58 G14 G21
    Date: 2022–07
  19. By: Sara Cecchetti (Bank of Italy); Adriana Grasso (European Central Bank); Marcello Pericoli (Bank of Italy)
    Abstract: We study euro-area risk-adjusted expected inflation and the inflation risk premium at different maturities, leveraging inflation swaps, inflation options and survey-based forecasts. We introduce a model that features time-varying long-term average inflation and time-varying inflation volatility and we anchor market-based risk-adjusted measures of expected inflation to survey-based inflation forecasts. The results show that medium-term risk-adjusted expected inflation was close to the ECB's aim from 2010 to mid-2014, has since fallen to a low in March 2020 and has risen significantly since the second half of 2021. The medium-term inflation risk premium was positive until 2014 and turned negative since 2015 despite a sharp rise at the end of 2021. The risk-adjusted probabilities of exceeding the ECB's inflation aim and of seeing deflation over the medium term have been low on average.
    Keywords: inflation density, inflation risk premium, objective probability
    JEL: C22 C58 G12 E31 E44
    Date: 2022–07
  20. By: Michiel Bijlsma; Carin van der Cruijsen; Nicole Jonker; Jelmer Reijerink
    Abstract: Central banks around the world are examining the possibility of introducing Central Bank Digital Currency (CBDC). The public’s preferences concerning the usage of CBDC for paying and saving are important determinants of the success of CBDC. Using data from a representative panel of Dutch consumers we find that roughly half of the public would open a CBDC current account. The same holds for a CDBC savings account. Thus, we find clear potential for CBDC in the Netherlands. This suggests that consumers perceive CBDC as distinct from current and savings accounts offered by traditional banks. Intended adoption is positively related to respondents’ knowledge of CBDC and trust in banks and in the central bank. Price incentives matter as well. The amount respondents want to deposit in the CBDC savings account depends on the interest rate offered. Furthermore, intended usage of the CBDC current account is highest among people who find privacy and security important and among consumers with low trust in banks in general. These results suggest that central banks can steer consumers’ adoption of CBDC via the interest rate, by a design of CBDC that takes into account the public’s need for security and privacy, and by clear communication about what CBDC entails.
    Keywords: CBDC; consumers; public money; private money; bank accounts; trust; interest rates
    JEL: D12 D14 E58 G21
    Date: 2021–04
  21. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)); Ragnar Juelsrud (Norges Bank)
    Abstract: Using administrative data on deposits and loans of every Norwegian with every Norwegian bank, we show that an existing deposit account makes a household more likely to hold deposits at the same bank later despite better alternatives and more likely to borrow there. Consistent with this, banks pay higher deposit rates to potential future borrowers. Then they charge existing depositors a premium on loans compared to other households, suggesting that cross-selling is driven by demand rather than supply complementarities. Finally, discounting future cross-selling profits motivates lower deposit spreads in times of lower policy rates and contributes to monetary policy transmission.
    Keywords: switching costs, customer lifetime value (clv), cross-selling, relationship banking, supply complementarities, demand complementarities, deposit pricing, deposit channel of monetary policy
    JEL: D14 D43 E52 E58 G12 G21 G51
    Date: 2022–08
  22. By: Anna Bartocci (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of increasing taxes on fossil fuels (“carbon tax†) and subsidies for renewable energy and reducing labor income tax in the euro area, and the interaction of these effects with domestic monetary policy. The tax increase is announced, gradually implemented and fully anticipated by agents (thus it is conceptually different from a sudden and unexpected positive shock affecting the international prices of fossil fuels). The analysis makes use of a New Keynesian two-country model with an energy sector, calibrated to the euro area and the rest of the world. The main results are the following. First, an increase in the carbon tax generates recessionary effects. Second, higher subsidies for green energy and a lower labor tax can limit the macroeconomic cost of increasing the carbon tax. Third, if the monetary policy rate is at its effective lower bound, the fiscal policy mix generates short-run recessionary effects, which can be offset if the central bank, for monetary policy purposes, purchases long-term sovereign bonds in the secondary market, thus keeping long-term interest rates low.
    Keywords: environmental policy, energy policies, dynamic general equilibrium model, fiscal policy, monetary policy, euro area
    JEL: D58 E52 E62 Q43
    Date: 2022–07
  23. By: Van Roosebeke, Bert; Defina, Ryan
    Abstract: The recent emergence of inflationary pressures across the globe has presented an additional consideration for deposit insurers. This Policy Brief considers how inflation may impact on two key concepts of deposit insurance: coverage levels and coverage ratios. We introduce the concept of “real coverage” and using IADI data, we illustrate that the cumulative impact of inflation over the years on coverage levels may be significant as increases in general price levels erode coverage and lead to a decrease in the real terms of unchanged nominal coverage levels. Using this metric in reviewing historic increases in nominal coverage levels by a limited number of deposit insurers only, we find some indications for consideration of real coverage levels in setting policy. Inflation affects coverage ratios, which are a prominent element of deposit insurers’ policy. The impact of inflation is highly complex and may depend on a number of variables, including the duration and sudden nature of inflation and its distributional impact on wealth and savings. Using IADI Annual Survey data from the past seven years, we investigate the correlation between inflation and both eligible and covered deposits in nominal terms. We find evidence for both nominal covered and eligible deposits to grow at rates below inflation rates. Ignoring distributive effects of inflation on saving rates across income groups, this implies that all else equal, to hold an existing coverage ratio, deposit insurers can increase coverage levels at a ratio below inflation. An upcoming policy brief will cover the inflation considerations in international deposit insurance standards and governance arrangements.
    Keywords: deposit insurance; bank resolution; inflation
    JEL: G21 G33
    Date: 2022–08
  24. By: Mr. Serhan Cevik
    Abstract: The post-pandemic rise in consumer prices across the world has renewed interest in inflation dynamics after decades of global disinflation. This paper provides a spatial investigation of inflation synchronicity at the city level in Lithuania using disaggregated monthly data during the period 2000–2021. The empirical analysis provides strong evidence that (i) the co-movement of city-level inflation rates—estimated using the instantaneous quasi-correlation approach—is significantly weaker than the extent of synchronization suggested by the simple correlation analysis; (ii) there is substantial heterogeneity in the instantaneous quasi-correlation of inflation subcomponents between city pairs; and (iii) there are significant changes in the degree of city-level synchronization over time, reflecting important economic developments in history such as the global financial crisis, the adoption of euro, and the COVID-19 pandemic.
    Keywords: Inflation synchronization; subnational; transition economies; Lithuania
    Date: 2022–09–02
  25. By: Òscar Jordà; Fernanda Nechio
    Abstract: Following the worst of the COVID-19 pandemic, inflation has surged to 1980s levels in advanced economies. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and the feedback to wages. We exploit these differences to identify the effect these programs had on inflation and to examine the link between wages and inflation. Our empirical approach is based on a novel dynamic difference-in differences method based on local projections. Our estimates suggest that an increase of 5% in direct transfers (relative to trend) peaked at about an average 3 percentage points boost to the rate of inflation and wage growth after one year the support measures are introduced, with their effect waning by the second year. Moreover, since the pandemic and under a high-inflation environment, the role of inflation expectations on wage-setting dynamics have increased and become longer lasting.
    Keywords: inflation; wages; fiscal transfers; covid19
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2022–09–06
  26. By: Miguel Cardoso (BBVA Research); Clodomiro Ferreira (Banco de España); José Miguel Leiva (BBVA Research); Galo Nuño (Banco de España); Álvaro Ortiz (BBVA Research); Tomasa Rodrigo (BBVA Research)
    Abstract: We identify and study three key channels that shape how inflation affects wealth inequality: (i) the traditional Fisher channel through which inflation redistributes from lenders to borrowers; (ii) a nominal labour income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels for Spain in 2021 using public surveys on households’ wealth, income, and consumption, as well as a novel proprietary bank dataset that includes detailed information on clients’ assets and liabilities, credit and debit card payments, bills and labour related income. Results show that the Fisher and labour income channels are one order of magnitude larger than the relative consumption channel. Middle-aged individuals were roughly unaffected by inflation while older ones suffered the most its consequences.
    Keywords: inflation inequality, net nominal positions, nominal wage rigidities.
    JEL: E31 E21 D31
    Date: 2022–09
  27. By: Evgeny Postnikov (Bank of Russia, Russian Federation); Dmitry Orlov (Bank of Russia, Russian Federation)
    Abstract: The labour market is closely connected to inflation processes, and is therefore a key factor to consider in monetary policy decisions. Russian regions differ substantially in terms of employment, wages, migration flows and the age structure of their population. Therefore, the effects of regional changes in the labour market on prices may be different. Since the Central bank’s inflation targeting policy is pursued nationwide, it is important for a regulator to factor in regional heterogeneity when assessing the impact of changes in the labour market on inflation growth. This paper brings forward a composite indicator of the contribution of labour market changes to inflation increase – the Labour Market Indicator (LMI). To capture regional heterogeneity in terms of market labour indicators, regions are grouped into four clusters with different social, demographic and economic characteristics. We make the case that the impact of unemployment on inflation can be described as slight or moderate in Russia. The calculated quarterly LMI values are overall consistent with the actual effect of the labour market on inflation processes over the entire time horizon under study, which suggests that the estimates are reliable. The important benefit of the LMI is that it is possible to interpret and allows to assess the future impact of labour market on inflation one quarter ahead of available statistical data – which helps make better informed monetary policy decisions.
    Keywords: impact of the labour market on inflation, regional heterogeneity, clustering, principal component analysis, unemployment, wages, regression analysis.
    JEL: C32 C38 E24 E31
    Date: 2022–09
  28. By: Tolga Özden
    Abstract: We analyze the empirical relevance of heterogeneous expectations at the effective lower bound (ELB) in the canonical New Keynesian model. Agents are allowed switch between an anchored Rational Expectations (RE) rule and an adaptive learning rule, where the latter may generate a de-anchoring of expectations. The structural change in monetary policy during ELB episodes, and the heterogeneity of private sector expectations are both captured in a unifled framework of endogenous regime switching. An application to the US economy over the period 1982Q1-2019Q4 shows that expectations are characterized as a mixture of RE and learning over the pre-GFC period, while a larger fraction of expectations remain anchored at the RE during the ELB period after 2008Q4. Model projections over both post-GFC and post-pandemic periods show that, a larger fraction of learning agents and a higher intensity of learning can both generate deflationary spirals and prolonged periods of recession, which highlights the importance of keeping expectations anchored during periods of uncertainty.
    Keywords: Adaptive Learning; Heterogeneous Expectations; Endogenous-Switching Models; Bayesian Estimation of DSGE Models; Effective Lower Bound.
    JEL: E37 E65 C11 C32
    Date: 2021–05
  29. By: Juhro, Solikin M.; Sahminan, Sahminan; Wijoseno, Atet; Waluyo, Jati; Bathaluddin, M. Barik
    Abstract: This paper discusses the core model of Bank Indonesia policy mix (BIPOLMIX), a macroeconomic modeling breakthrough designed for economic and financial projections and policy simulations. The BIPOLMIX model captures the integrated central bank policy responses, e.g. monetary, macroprudential, and payment system policies, and considers the role of fiscal policy. The strategy of developing the model is flexible, dynamic, and forward-looking to make the model relevant as the basis for Bank Indonesia policy transformation in coping with challenges in a rapidly changing environment. In this regard, the model takes into account various economic dynamics and policy instrument mix in optimizing the achievement of macroeconomic and financial system stability. Amid main issues related to the model parameter consistency, in line with theoretical and technical considerations, the modeling framework is believed to be useful as a pivotal reference by the central banks in EMEs in developing core models to support optimal policy responses.
    Keywords: Central Bank Policy Mix, Policy Modeling, Projections and Simulations, Bank Indonesia.
    JEL: C51 E37 E58
    Date: 2022–09
  30. By: Flint Brayton; David L. Reifschneider
    Abstract: FRB/US, a large-scale, nonlinear macroeconomic model of the U.S., has been in use at the Federal Reserve Board for 25 years. For nearly as long, the FRB/US “project” has included a linear version of the model known as LINVER. A key reason that LINVER exists is the vast reduction in the computational costs that linearity confers when running experiments requiring large numbers of simulations under the assumption that expectations are model-consistent (MC). The public has been able to download FRB/US simulation code, documentation, and data from the Federal Reserve Board’s website since 2014. To further expand access to and understanding of the FRB/US project, a package devoted to LINVER is now available on the website. In this paper, we provide both a general introduction to LINVER and an overview of the contents and capabilities of its package. We review the ways that LINVER has been used in past research to study key policy issues; describe the package’s comprehensive set of programs for running simulations with MC expectations, with or without imposing the effective lower bound (ELB) on the federal funds rate and other nonlinear constraints; and illustrate how LINVER deterministic and stochastic simulations can be used to gauge the implications of the ELB for macroeconomic performance and to assess different strategies for mitigating its adverse effects.
    Keywords: Interest rates; Simulation; Econometric modeling; Monetary policy; Effective lower bound
    JEL: E52 E37 E58 E32
    Date: 2022–08–16
  31. By: Yoshihiko Hogen (Bank of Japan); Yoshiyasu Koide (Bank of Japan); Yuji Shinozaki (Bank of Japan)
    Abstract: The March 2020 market turmoil raised concerns over vulnerabilities associated with the increasing market interconnectedness with Non-Bank Financial Intermediaries (NBFIs), most notably investment funds, in the global financial system (GFS). Studies on the measurement of fire sale vulnerabilities in part those associated with NBFIs in a financial system are often conducted at the jurisdiction level using fire-sale (FS) models. While existing studies use granular data to analyze details of fire sale dynamics; in most of these cases, the scope of analysis is focused on a certain jurisdiction or asset class, leaving the cross-jurisdiction or cross-asset spillover dimension out of the scope. To address these points, this paper measures cross-border and cross-asset spillovers of market shocks ("interlinkage effect") in the GFS using a standard FS model, specifically focusing on the role of NBFIs. With the help of existing FS models, we construct measures of the interlinkage effect across different types of financial institutions, including banks and various types of NBFIs, in Japan's financial system as well as those for the foreign financial system (the U.S. and Euro area) using flow of funds data of these jurisdictions. We find that the interlinkage effect has increased substantially, not only for Japan's financial system, but also for the overseas financial system since the Global Financial Crisis (GFC). These increasing interlinkages of NBFIs with various types of entities suggest there has been a global structural change in the transmission of market shocks.
    Keywords: Interconnectedness; NBFI; cross-border spillovers; fire sales; systemic risk
    JEL: G10 G11 G21 G23
    Date: 2022–09–05
  32. By: Sebastian Doerr; Leonardo Gambacorta; Thomas Leach; Bertrand Legros; David Whyte
    Abstract: The rising number of cyber attacks in the financial sector poses a threat to financial stability and makes cyber risk a key concern for policy makers. This paper presents the results of a survey among members of the Global Cyber Resilience Group on cyber risk and its challenges for central banks. The survey reveals that central banks have notably increased their cyber security-related investments since 2020, giving technical security control and resiliency priority. Central banks see phishing and social engineering as the most common methods of attack, and the potential losses from a systemically relevant cyber attack are deemed to be large, especially if the target is a big tech providing critical cloud infrastructures. Generally, respondents judge the preparedness of the financial sector for cyber attacks to be inadequate. While central banks in most emerging market economies provide a framework for the collection of information on cyber attacks on financial institutions, less than half of those in advanced economies do. Cooperation among public authorities, especially in the international context, could improve central banks' ability to respond to cyber attacks.
    Keywords: cyber risk, central banks, financial institutions, cloud services, cyber regulation
    JEL: E5 E58 G20 G28
    Date: 2022–09
  33. By: Georgios Alexopoulos (University of Peloponnese, Paris)
    Abstract: This paper studies the value of ECB?s announcement and the impact on Stock and Credit Default Swaps Market during 2008?2018.We examine the relationship between ECB announcements, and systematic risk and unsystematic risk of 29 European countries? financial markets through the CAPM regression. Those 29 countries divided into 3 clusters of liquid markets, accordingly the experienced stress during the sovereign debt crisis and their Liquidity Coverage Ratio (LCR). The results indicate that ECB?s announcements tend to show more impact on stock markets than CDS markets especially in 1st cluster of liquid market. Furthermore, these two types of financial markets in 29 European countries exhibit more significant market reaction to Financial Sector news and Money Market news while Financial Stability news and Monetary Policy bring more risk and volatility to 2 and 3 cluster of liquid markets. We found that there is a 3 clusters of liquid markets so that in turn reshapes an unequal distribution of systemic risk and help the spread of a financial crisis. The results also reveal financial markets of Finland, Sweden, Austria, Ireland, Spain and Turkey take on more risk and volatility than other sample countries when ECB announcements published.
    Keywords: European Central Bank, Investment, Monetary Policy, Announcements
    JEL: G21 O11 E17
    Date: 2022–07

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