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

  1. Reactions of household inflation expectations to a symmetric inflation target and high inflation By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  2. Central Bank Communication with the General Public: Promise or False Hope? By Alan Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  3. Excess liquidity and the usefulness of the money multiplier By Jan Marc Berk; Jan Willem van den End
  4. Monetary Interventions and the Rise of Non-Bank Lenders By Gianluca Cafiso; Giulia Rivolta
  5. Inflation, price stability, and monetary policy: On the legality of inflation targeting by the Eurosystem By Siekmann, Helmut
  6. Monetary policy frameworks since Bretton Woods, across the world and its regions By Cobham, David
  7. Endogenous Monetary Policy Credibility in Ukraine By Kateryna Savolchuk; Anton Grui
  8. More Than Words: Fed Chairs' Communications During Congressional Testimonies By Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
  9. How QE changes the nature of sovereign risk By Dirk Broeders; Leo de Haan; Jan Willem van den End
  10. Uncertainty shocks and the monetary-macroprudential policy mix By Valeriu Nalban; Andra Smadu
  11. Choosing a Taylor Rule with Limited Data Availability: The Benchmark Approach By Anton Grui; Jeffrey Liebman; Sergiy Nikolaychuk; Alex Nikolsko-Rzhevskyy
  12. Inflation Expectations and the Supply Chain By Mr. Francesco Grigoli; Elías Albagli; Emiliano Luttini
  13. Globalisation and the Decoupling of Inflation from Domestic Labour Costs By Emanuel Kohlscheen; Richhild Moessner
  14. What analytical framework for Sovereign Money? Some insight from the 100% Money literature, and a comment on criticisms By Samuel Demeulemeester
  15. Exchange-Rate Swings and Foreign Currency Intervention By Andrew Filardo; Thomas McGregor; Mr. R. G Gelos
  16. Trade credit and the transmission of unconventional monetary policy By Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
  17. How does the Bank of Canada’s balance sheet impact the banking system? By Daniel Bolduc; Brad Howell; Grahame Johnson
  18. Foreign Reserves Management and Original Sin By Michael B. Devereux; Steve Pak Yeung Wu
  19. Demand-side mobile money drivers of financial inclusion: minimum economic growth thresholds for mobile money innovations By Simplice A. Asongu; Raufhon Salahodjaev
  20. Breaking Bad: A Disaggregated Analysis of Inflation Inertia By Mr. Serhan Cevik
  21. Immigrants and the distribution of income and wealth in the euro area: first facts and implications for monetary policy By Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
  22. Measuring the Velocity of Money By Carolina E. S. Mattsson; Allison Luedtke; Frank W. Takes
  23. How Inflation Has Affected Households at Different Income Levels Since 2019 By Congressional Budget Office
  24. US Monetary Policy and BRICS Stock Market Bubbles By Rangan Gupta; Jacobus Nel; Joshua Nielsen
  25. The Trilemma for Low Interest Rate Macroeconomics By Jean-Baptiste Michau
  26. Enhancing banknote authentication by guiding attention to security features and prevalence expectancy By Frank van der Horst; Joshua Snell; Jan Theeuwes
  27. New forecasting methods for an old problem: Predicting 147 years of systemic financial crises By du Plessis, Emile; Fritsche, Ulrich

  1. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide evidence on the reactions of the level and probability distribution of households’ expectations of inflation in the euro area to the ECB’s monetary strategy change to a symmetric inflation target in July 2021, and to the subsequent strong rise in euro area inflation above target. We use a randomised control trial within a monthly representative Dutch household survey of short and long-term inflation expectations, where half of respondents receive information about the ECB’s inflation target and actual inflation. The survey responses give rise to three main findings. First, we find that households’ median expectations of euro area inflation ten years ahead showed no reaction to the introduction of a symmetric inflation target by the ECB, and short-term expectations changed very little. Second, and by contrast, median euro area expectations rose in response to the strong increase in inflation above target, both for short- and long term expectations. Taken together, the results document that the ECB strategy revision itself did not have a material impact on household inflation expectations, but the high realisations of actual inflation did. These findings suggest that when it comes to household inflation expectations and central bank credibility, inflation outcomes speak louder than words. The third finding is that households’ expected probabilities of high inflation (4% or higher) increased as well in response to high above-target inflation, both for the short- and long term horizons. These results suggest that long-term euro area inflation expectations of households have become less well anchored as inflation has increased strongly above target in the wake of the pandemic. While the long-term expectations of households who received information remained better anchored than those who did not, the expectations of both groups became less well anchored with inflation rising strongly above target.
    JEL: E31 E58
    Date: 2022–04
  2. By: Alan Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
    Abstract: Central banks are increasingly reaching out to the general public to motivate and explain their monetary policy actions. One major aim of this outreach is to guide inflation expectations; another is to ensure accountability and create trust. This article surveys a rapidly-growing literature on central bank communication with the public. We first discuss why and how such communication is more challenging than communicating with expert audiences. Then we survey the empirical evidence on the extent to which this new outreach does in fact affect inflation expectations and trust. On balance, we see some promise in the potential to inform the public better, but many challenges along the way. (JEL D12, D84, E52, E58, G53)
    Keywords: -
    JEL: D12 D84 E52 E58 G53
    Date: 2022–05
  3. By: Jan Marc Berk; Jan Willem van den End
    Abstract: Despite being an identity, the money multiplier (MM) is also a useful summary of the financial intermediation process as it can be interpreted as the rate of substitution between inside and outside money. By modelling the supply and demand for inside and outside money, we provide this rate of money substitution with behavioural underpinnings. Our model illustrates how the creation of large outside money balances by central banks induces behavioural changes, creating an environment characterised by a low MM and low market interest rates. The outcomes of switching regressions for the US and the euro area confirm that such a low regime can be distinguished from a conventional MM regime. The low regime reflects a state in which the functioning of the financial system changes fundamentally due to excess supply of reserves. This so-called excess liquidity trap has adverse economic consequences, is persistent, and cannot be solved by monetary policy alone. We argue that government and supervisory measures taken during the pandemic provide an example of supporting policies that are effective in escaping the excess liquidity trap.
    Keywords: monetary policy; interest rates; money multipliers
    JEL: E51 E52
    Date: 2022–03
  4. By: Gianluca Cafiso; Giulia Rivolta
    Abstract: The amount of assets managed by non-bank lenders has increased significantly over the last decades. Our research aims to clarify whether such an increase has had any impact on the effectiveness of monetary policy. To this end, we consider several credit aggregates granted from bank and non-bank institutions for different scopes and developments in the US economy. Our analysis is based on the estimation of a large Bayesian VAR. The results suggest that the rise of non-bank lenders has reduced and altered the monetary policy transmission mechanism.
    Keywords: bank loans, non-bank loans, monetary interventions, Bayesian VAR
    JEL: E44 E51 G20 G21 C11
    Date: 2022
  5. By: Siekmann, Helmut
    Abstract: In the communication of the European Central Bank (ECB), the statement that "we act within our mandate" is often referred to. Also among practitioners of the Eurosystem the term "mandate" has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term "mandate". It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation.
    Date: 2022
  6. By: Cobham, David
    Abstract: The Comprehensive Monetary Policy Framework (CMPF) project, which considers de jure and de facto, domestic (money, inflation) and external (exchange rate), monetary policy targets, has now classified 179 countries/currency areas from 1974 to 2017. This means that it is now possible to track the evolution of monetary policy frameworks across the world and its regions. This paper outlines the methodology of the classification, presents the broad trends at global, regional and sub-regional levels, discusses the economic performance associated with different frameworks and the policy implications thereof, and identifies scope for further work.
    Keywords: monetary policy framework; exchange rates; inflation targeting; inflation; economic growth
    JEL: E42 E52 E58 F33
    Date: 2022–09–07
  7. By: Kateryna Savolchuk (National Bank of Ukraine); Anton Grui (National Bank of Ukraine)
    Abstract: In this paper, authors introduce endogenous monetary policy credibility into a semi-structural New Keynesian model. The model is estimated based on data for Ukraine, which de facto adopted inflation-targeting at the end of 2015. Authors model credibility as a nonlinear function of two gaps – actual and expected deviations of inflation from its target. Credibility is asymmetric as above-target inflation reduces it more than below-target. Authors show how low policy credibility can make economic stabilization more costly, and expansionary policy – counterproductive. It can also generate the price puzzle. Furthermore, we estimate the historical path of monetary policy credibility in Ukraine.
    Keywords: New Keynesian model, monetary policy credibility, inflation expectations
    JEL: C51 E52 E58
    Date: 2022–06
  8. By: Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
    Abstract: We study soft information contained in congressional testimonies by the Federal Reserve Chairs and analyze its effects on financial markets. Using machine learning, we construct high-frequency measures of Fed Chairs' and Congress members' emotions expressed via their words, voice and face. Increases in the Chair's text-, voice-, or face-emotion indices during the testimony generally raise the S&P500 index and lower the VIX. Stock prices are particularly sensitive to both the members' questions and the Fed Chair's answers about issues directly related to monetary policy. These effects add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Our findings resonate with the view in psychology that communication is much more than words and underscore the need for a holistic approach to central bank communication.
    Keywords: Central bank communications, Financial markets, High-frequency identification, Facial emotion recognition, Vocal signal processing, Textual Analysis
    JEL: E52 E58 E71
    Date: 2022–09–21
  9. By: Dirk Broeders; Leo de Haan; Jan Willem van den End
    Abstract: We examine the effect of Quantitative Easing (QE) by the ECB on the sovereign bond risks of Italy, Ireland, Spain and Portugal. First, outcomes of panel regression models suggest that QE lowered the effect of volatility on sovereign bond spreads by 1 to 2 percentage points. Compared to asset purchases aimed at easing the monetary stance, purchase programmes supporting monetary transmission by countering financial market stress most clearly reduced the effect of volatility on spreads. Second, using a contingent claims model (CCM), the values of the implicit put options provided by QE as a backstop to investors are calculated to be substantial. Our results guide policymakers on the use of backstop facilities for sovereign bond markets.
    Keywords: Quantitative Easing, Sovereign risk, Sovereign spreads, Contingent Claims Model
    JEL: E52 E58 G12
    Date: 2022–02
  10. By: Valeriu Nalban; Andra Smadu
    Abstract: How should policymakers respond to uncertainty shocks? To analyze the macroeconomic effects of uncertainty shocks associated with various conventional structural shocks, we develop a New Keynesian model with financial frictions and time-varying volatility, which features a monetary- acroprudential policy mix. We find that it matters whether the economy experiences heightened demand, supply or financial uncertainty. More specifically, the underlying source of uncertainty matters for the shocks’ propagation, aggregate economic outcomes and appropriate policy responses. Financial uncertainty shocks appear to generate stronger effects and a broad complementarity between the interest rate response and the macroprudential policy stance. Supply-side and demand-side uncertainty shocks reveal important trade-offs between price stability and financial stability objectives, despite their quantitative effects being overall modest. Importantly, simulating a financial turmoil scenario reveals that heightened financial uncertainty exacerbates the negative macroeconomic effects triggered by a first-moment financial shock. Our results underscore the importance of timely and accurate identification of uncertainty surges, which is crucial for the appropriate design and calibration of the monetary-macroprudential policy mix.
    Keywords: Uncertainty shocks, financial frictions, monetary policy, macroprudential policy
    JEL: E30 E32 E44 E47 E50
    Date: 2022–02
  11. By: Anton Grui (National Bank of Ukraine); Jeffrey Liebman (Lehigh College of Business); Sergiy Nikolaychuk (National Bank of Ukraine); Alex Nikolsko-Rzhevskyy (Lehigh College of Business)
    Abstract: In this paper, authors propose and test a new methodology that aims to select the best performing monetary policy rule when macroeconomic data are very limited, as is often the case for developing countries. The methodology is based on calculating economic losses during the periods when a country implicitly followed an assumed rule and when its central bank exercised discretion. For countries with short data spans where such analysis is not possible, authors propose adopting the rules that historically worked well for their peers. As an intermediate step, authors develop a novel approach to the calculation of the equilibrium real interest rate for developing countries that accounts for their substantial risk premia and the expected real appreciation of the domestic currency. The methodology is then applied to Czechia, Hungary, Poland, and Ukraine to construct the optimal policy rate path and contrast it with the actual one.
    Keywords: Taylor rules, monetary policy, real-time data, discretion
    JEL: E52 E58
    Date: 2022–03
  12. By: Mr. Francesco Grigoli; Elías Albagli; Emiliano Luttini
    Abstract: We show that firms rely on price changes observed along their supply chain to form expectations about aggregate inflation, and that these expectations have a complete pass-through to sales prices. Leveraging a unique dataset on Chilean firms merging expectation surveys and records from the VAT and customs registries, we document that changes in prices at which firms purchase inputs inform their forecasts of the economy’s inflation. This is the case even if changes in input costs do not determine the inflation outcome. These findings reject the full-information rational-expectations hypothesis and are consistent with firms’ disagreement about future inflation and inattention to macroeconomic news, which we document for Chile. Our results from a firm-level Phillips’ curve estimation suggest that firms’ beliefs about inflation are a key determinant for their price-setting decisions. Therefore, we argue that the channel we highlight in this paper has the potential to lead to dispersion in inflation expectations, price dispersion, and weaken the expectation channel of policies.
    Keywords: Forecast disagreement; inflation expectations; information frictions; Phillips Curve; rational inattention; supply chain; inflation expectation; inflation outcome; expectation channel; price inflation; supply chain inflation; Inflation; Export prices; Import prices; Consumer price indexes
    Date: 2022–08–12
  13. By: Emanuel Kohlscheen; Richhild Moessner
    Abstract: We provide novel systematic cross-country evidence that the link between domestic labour markets and CPI inflation has weakened considerably in advanced economies during recent decades. The central estimate is that the short-run pass-through from domestic labour cost changes to core CPI inflation decreased from 0.25 in the 1980s to just 0.02 in the 2010s, while the long-run pass-through fell from 0.36 to 0.03. We show that the timing of the collapse in the pass-through coincides with a steep increase in import penetration from a group of 10 major manufacturing EMEs around the turn of the millennium. This signals increased competition and market contestability. Besides the extent of trade openness, we show that the intensity of the pass-through also depends in a non-linear way on the average level of inflation.
    Date: 2022–08
  14. By: Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The 2007-2008 Global Financial Crisis has brought renewed interest in the 100% Money reform idea of the 1930s', the essence of which was to require 100% reserves on transaction deposits so as separate money issuance from bank loans. A modern version of this idea, the Sovereign Money proposal, has been much discussed in recent years. Some heterodox economists have harshly criticized Sovereign Money advocates for lacking a clear analytical framework, as well as for disregarding "established" literature on such topics as the causality relationship between money and prices, the accommodation of business needs, financial instability, or the seigniorage privilege. The literature on 100% Money, however, appears to have been largely overlooked by both sides of the debate-even though, as this article shows, it could have brought valuable theoretical insight to the discussion. Building upon the arguments of the 100% Money writers, this paper concludes that many of the criticisms addressed to the Sovereign Money proposal are either inconclusive or misplaced.
    Keywords: 100% money,Sovereign Money,full reserve banking,endogenous money,financial instability B26,E30,E42
    Date: 2022–08–15
  15. By: Andrew Filardo; Thomas McGregor; Mr. R. G Gelos
    Abstract: This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it assesses the effectiveness of FX intervention depending on the degree of cycle-specific misalignments for 26 advanced- and emerging market economies, covering the period 1990–2018, and using different techniques to mitigate endogeneity concerns. Evidence supports the hypothesis that central banks can lean effectively against short-run cyclical misalignments of the real exchange rate. The effects are present in quarterly data—i.e., at policy-relevant horizons. The effectiveness of intervention rises with the size of the misalignment, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.
    Keywords: Foreign exchange intervention; real exchange rates; equilibrium exchange rate; classical cycles; central banking; band spectrum regression.; exchange rate intervention; macro fundamentals; FX sale; FX purchase; FX intervention; measuring exchange rate misalignment; Exchange rates; Real effective exchange rates; Foreign assets; Global
    Date: 2022–07–29
  16. By: Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
    Abstract: We show that production networks are important for the transmission of unconventional monetary policy. Firms with bonds eligible for purchase under the European Central Bank’s Corporate Sector Purchase Program act as financial intermediaries by extending more trade credit to their customers. The increase in trade credit is more pronounced from core countries to periphery countries and for financially constrained customers. Customers increase investment and employment in response to the increase in trade financing, while suppliers expand their customer base, contributing to upstream industry concentration. Our findings suggest that trade credit redistributes the effects of monetary policy across regions and firms.
    Keywords: Monetary policy, Trade credit, Corporate bonds, Investment, Employment
    JEL: E50 G30
    Date: 2022
  17. By: Daniel Bolduc; Brad Howell; Grahame Johnson
    Abstract: The COVID‑19 pandemic caused severe stress in fixed-income markets. In response, in April 2020, the Bank of Canada launched the Government of Canada (GoC) bond purchase program. Initially, the program focused on restoring market functioning in the GoC bond market. In July 2020, that focus shifted to providing additional monetary stimulus through quantitative easing (QE).
    Keywords: Financial institutions; Financial stability; Monetary policy
    JEL: E E51 G G23 G32
    Date: 2022–09
  18. By: Michael B. Devereux; Steve Pak Yeung Wu
    Abstract: This paper studies the interaction between foreign exchange reserves and the currency composition of sovereign debt in emerging countries. Focusing on inflation targeting countries, we find that holdings of foreign reserves are associated with higher local currency sovereign debt, an exchange rate which is less sensitive to global shocks, and a lower exchange rate risk premium in local currency sovereign spreads. We rationalize these findings within a financially constrained model of a small open economy. The Sovereign values local currency debt as a hedge against endowment risk, but since the exchange rate tends to depreciate in times of global downturns, risk averse international investors charge an additional currency risk premium on this debt. When a country optimally uses foreign reserves to lean against the wind in response to global shocks, this dampens the response of the exchange rate, providing insurance for the global investor. By reducing the risk premium on local currency debt, foreign exchange reserves therefore facilitate a higher share of local currency debt in the sovereign portfolio. Quantitatively, we find the welfare benefits for the sovereign from optimal foreign reserves management can be very large.
    JEL: F30 F40
    Date: 2022–09
  19. By: Simplice A. Asongu (Yaounde, Cameroon); Raufhon Salahodjaev (Tashkent, Uzbekistan)
    Abstract: This study provides minimum economic growth (or GDP growth) critical masses or thresholds that should be exceeded in order for demand-side mobile money factors to favorably drive mobile money innovations for financial inclusion in developing countries. The considered mobile money innovations are: mobile money accounts, the mobile phone used to send money and the mobile phone used to receive money. The empirical evidence is based on Tobit regressions. For positive net relationships that are established, an extended analysis is engaged to provide minimum GDP growth levels required to sustain the positive net nexuses. From this extended analysis, in order for economic growth to modulate demand-side mobile money drivers to favorably influence mobile money innovations, minimum GDP growth rates are: (i) 3.875% for the nexus between bank accounts and the mobile phone used to send money; (ii) 3.769 % for the relationship between automated teller machine (ATM) penetration and the mobile used to send money and (iii) 3.666% for the nexus between ATM penetration and the mobile phone used to receive money.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2022–01
  20. 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 contributes to the literature by providing a granular investigation of inflation persistence at the city level in Lithuania during the period 2000–2021, as well as a comparison of inflation persistence at the country level vis-àvis the eurozone over the same period. Using disaggregate monthly data collected in five major cities, the empirical analysis finds a mixed and ambiguous picture of inflation persistence. While the headline inflation does not appear to exhibit a high degree of persistence, most consumption categories have significant persistence. As a result, shocks may not remain transitory and instead have persistent effects that could spillover across subcomponents depending on the size of the shock.
    Date: 2022–09–02
  21. By: Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
    Abstract: We use household surveys to describe differences in wages, income, wealth and liquid assets of households born in their country of residence (“natives”) vs. those born in other EU and non-EU countries (“immigrants”). The differences in wealth are more substantial than the differences in wages and incomes: immigrants earn on average about 30% lower wages than natives and hold roughly 60% less net wealth. For all variables, only a small fraction of differences between natives and immigrants—around 30%—can be explained by differences in demographics (age, gender, marital status, education, occupation, sector of employment). Immigrants are more likely to be liquidity constrained: while about 17% of natives can be labelled as “hand-to-mouth” (holding liquid assets worth less than two weeks of income), the corresponding share is 20% for households born in another EU country and 29% for those born outside the EU. Employment rates of immigrants are substantially more sensitive to fluctuations in aggregate employment. Monetary policy easing stimulates more strongly employment of individuals born outside the EU. JEL Classification: J15, D31, E52
    Keywords: distribution of income and wealth, inequality, migration, monetary policy
    Date: 2022–09
  22. By: Carolina E. S. Mattsson; Allison Luedtke; Frank W. Takes
    Abstract: The velocity of money is an important driver of inflation that is conventionally measured as an average for an economy as a whole. While easy to calculate from macroeconomic aggregates, such measures overlook possibly relevant heterogeneity between payment systems, across regions, and intrinsic to spending patterns. This paper proposes a new measurement methodology that leverages large-scale micro-level transaction data and modern computational techniques to measure the transfer velocity of money at the level of individual spenders, enabling comparison between subgroups. Notably, our definition of transfer velocity extends to payment systems where users are free to deposit and withdraw, even as the total balance fluctuates. This is a common feature of real-world payment systems that is not accounted for by previous approaches. We estimate the transfer velocity of Sarafu, a digital community currency in Kenya, using a newly available data set describing individual transactions over a period of time that includes the COVID-19 pandemic. Our analysis reveals distributional, temporal and geographical heterogeneity in spending patters. Some units of Sarafu are held for minutes, others for months. The system experienced dramatic changes in its total balance and in its average transfer velocity as the COVID-19 pandemic unfolded, and in response to known administrative operations. Moreover, transaction rhythms differed substantially between rural and urban areas, in particular, money moves faster in urban communities. Successful macroeconomic policies require understanding how individuals experience the economy and when those experiences diverge. The data-driven approach described in this paper improves our understanding of the heterogeneity underlying macroeconomic indicators, and represents an advance in measurement that stands to improve economic monitoring.
    Date: 2022–09
  23. By: Congressional Budget Office
    Abstract: Inflation affects households differently depending on the mix of goods and services that they consume and the income that they have available to pay for that consumption. In this report, CBO examines how inflation has affected households at different income levels and compares inflation since 2019 with the growth in household income over the same period.
    JEL: E20 E21 E31
    Date: 2022–09–22
  24. By: Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO ,80302, USA)
    Abstract: We use the multi-scale Log-Periodic Power Law Singularity (LPPLS) confidence indicator approach to detect both positive and negative bubbles at short-, medium- and long-run for the stock markets of the BRICS countries. We were able to detect major crashes and rallies in the five stock markets over 2nd week of February, 1999 to 2nd week of September, 2020. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the countries, suggesting interconnectedness of the extreme movements in these stock markets. Then, we utilize impulse responses obtained from the local projection method (LPM) framework to capture the effect of US monetary policy shocks on a specific-type of bubble of a particular equity market of the BRICS bloc, by controlling for lagged values of the category of bubble under consideration of all the five countries, due to the synchronicity of bubbles. In general, the effect of US monetary policy shocks on the six bubble indicators for each country is limited, with strong positive impact observed under the medium-term negative bubble indicator of Brazil, China and South Africa. Given the findings, associated policy implications are discussed.
    Keywords: Multi-Scale Bubbles, Local Projection Method, US Monetary Policy, BRICS Countries
    JEL: C22 E52 G15
    Date: 2022–09
  25. By: Jean-Baptiste Michau (Ecole Polytechnique, France)
    Abstract: Three desirable goals of macroeconomic policy are: full employment, low inflation, and a low debt level with no Ponzi scheme. This paper shows that, when the natural real interest rate is persistently depressed, at most two of these three goals can be simultaneously achieved. Depending of the parameters of the economy, each of the three possibilities can be the preferred option, resulting in a non-trivial policy trilemma.
    Keywords: Liquidity trap, Ponzi scheme, Secular stagnation.
    JEL: E12 E31 E63 H63
    Date: 2022–09–27
  26. By: Frank van der Horst; Joshua Snell; Jan Theeuwes
    Abstract: ll banknotes have security features which are intended to help to determine whether a banknote is false or genuine. Typically however, the general public has limited knowledge of where on a banknote these security features can be found. Here we tested whether counterfeit detection can be improved with the help of salient cues, designed to guide bottom-up visuospatial attention. We also tested the influence of the participant’s a priori level of trust in the authenticity of the banknote. In an online study (N=422), a demographically diverse panel of Dutch participants distinguished genuine banknotes from banknotes with one (left- or right-sided) counterfeited security feature. Either normal banknotes (without novel design elements) or banknotes that contained a salient cue (a pink rectangular frame) were presented for 1s. To manipulate the participant’s level of trust, trials were administered in three blocks, whereby at the start of each block, participants were instructed that either one third, one half, or two thirds of the upcoming banknotes were counterfeit (though the true ratio was always 1:1). We hypothesized (i) that in the presence of a salient cue, counterfeits would be better detected when the cue was valid (whereby the location of the salient element matched the location of the counterfeited security feature) than when it was invalid; and (ii) that this effect would be stronger with lower trust. Our hypotheses were partly confirmed: counterfeit detection improved with valid cues and decreasing trust, but the level of trust did not modulate the cueing effect. As the overall detection performance was rather poor, we replicated the study with a sample of university students (N=66), this time presenting stimuli until response. While indeed observing better overall performance, all other patterns were replicated. Two lessons can be learned here. Firstly, as lower trust yields better authentication accuracy, central bankers may see merit in raising awareness about the existence of counterfeit banknotes. Secondly, our findings provide a proof of concept for the idea that bottom-up saliency can be used to aid banknote authentication.
    Keywords: decision-making, gist, vision, touch, authentication, banknotes, counterfeits
    JEL: E40 E41 E50 E58
    Date: 2021–06
  27. By: du Plessis, Emile; Fritsche, Ulrich
    Abstract: A reflection on the lackluster growth over the decade since the Global Financial Crisis has renewed interest in preventative measures for a long-standing problem. Advances in machine learning algorithms during this period present promising forecasting solutions. In this context, the paper develops new forecasting methods for an old problem by employing 13 machine learning algorithms to study 147 year of systemic financial crises across 17 countries. It entails 12 leading indicators comprising real, banking and external sectors. Four modelling dimensions encompassing a contemporaneous pooled format through an expanding window, transformations with a lag structure and 20-year rolling window as well as individual format are implemented to assess performance through recursive out-of-sample forecasts. Findings suggest fixed capital formation is the most important variable. GDP per capita and consumer inflation have increased in prominence whereas debt-to-GDP, stock market and consumption were dominant at the turn of the 20th century. Through a lag structure, banking sector predictors on average describe 28 percent of the variation in crisis prevalence, real sector 64 percent and external sector 8 percent. A lag structure and rolling window both improve on optimised contemporaneous and individual country formats. Nearly half of all algorithms reach peak performance through a lag structure. As measured through AUC, F1 and Brier scores, top performing machine learning methods consistently produce high accuracy rates, with both random forests and gradient boosting in front with 77 percent correct forecasts. Top models contribute added value above 20 percentage points in most instances and deals with a high degree of complexity across several countries.
    Keywords: machine learning,systemic financial crises,leading indicators,forecasting,early warning signal
    JEL: C14 C15 C32 C35 C53 E37 E44 G21
    Date: 2022

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