nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒10‒17
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma By Paul Beaudry; Thomas J. Carter; Amartya Lahiri
  2. Monetary Policy During Unbalanced Global Recoveries By Luca Fornaro; Federica Romei
  3. On the anchoring of inflation expectations in the euro area By Stefano Neri; Guido Bulligan; Sara Cecchetti; Francesco Corsello; Andrea Papetti; Marianna Riggi; Concetta Rondinelli; Alex Tagliabracci
  4. Harnessing the benefit of state-contingent forward guidance By Vivian Chu; Yang Zhang
  5. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2020 and 2021 By Corsi, Marco; Mudde, Yvo
  6. Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  7. Expectations and the Neutrality of Interest Rates By John H. Cochrane
  8. Perceptions about Monetary Policy By Michael D. Bauer; Carolin Pflueger; Adi Sunderam
  9. Optimal Monetary Policy with r* By Roberto M. Billi; Jordi Galí; Anton Nakov
  10. House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data By Denis Gorea; Oleksiy Kryvtsov; Marianna Kudlyak
  11. Biases in Survey Inflation Expectations: Evidence from the Euro Area By Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
  12. The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve By Guido Ascari; Luca Fosso
  13. Redistributive Policy Shocks And Monetary Policy With Heterogeneous Agents By Ojasvita Bahl; Chetan Ghate; Debdulal Mallick
  14. Real Effects of Financial Market Integration: Evidence from an ECB Collateral Framework Change By Pia Hüttl; Matthias Kaldorf
  15. Getting the balance right: Crypto, stablecoin and CBDC By Wilko Bolt; Vera Lubbersen; Peter Wierts
  16. Two-tier system for remunerating excess reserve holdings By Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
  17. A note on the role of monetary policy when natural gas supply is inelastic By Weichenrieder, Alfons J.
  18. Inflation and attention thresholds By Korenok, Oleg; Munro, David; Chen, Jiayi
  19. Exchange Rate Synchronization for a set of Currencies from Different Monetary Areas By António Manuel Portugal Duarte; Nuno José Henriques Baetas da Silva
  20. Monetary Policy, Labor Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers By Martina Jašová; Caterina Mendicino; Ettore Panetti; José-Luis Peydró; Dominik Supera
  21. Reducing Dollarization in the Caucasus and Central Asia By Mr. Selim Cakir; Maria Atamanchuk; Nathalie Reyes; Mazin Al Riyami; Nia Sharashidze
  22. A new optimum currency area index for the euro area By Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
  23. A model of quantitative easing at the zero lower bound By Dürmeier, Stefan
  24. What does machine learning say about the drivers of inflation? By Emanuel Kohlscheen
  25. A tale of three crises: synergies between ECB tasks By Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
  26. Introduction to weather extremes and monetary policy By Pablo Garcia Sanchez
  27. Public and private liquidity during crises times: evidence from Emergency Liquidity Assistance (ELA) to Greek banks By Antonis Kotidis; Dimitris Malliaropulos; Elias Papaioannou
  28. Housing Boom and Headline Inflation: Insights from Machine Learning By Mr. Yunhui Zhao; Yang Liu; Di Yang
  29. The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation By Freund, L. B.; Lee, H.; Rendahl, P.
  30. Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows By Rashad Ahmed; Alessandro Rebucci
  31. How Does the Phillips Curve Slope Vary with Repricing Rates? By Emmanuel de Veirman
  32. Consumer payment preferences in the euro area By Kajdi, László
  33. Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil By Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
  34. Zero-Ending Prices, Cognitive Convenience, and Price Rigidity By Avichai Snir; Haipeng (Allan) Chen; Daniel Levy
  35. Intelligent design: Stablecoins (in)stability and collateral during market turbulence By De Blasis, Riccardo; Galati, Luca; Webb, Alexander; Webb, Robert I.

  1. By: Paul Beaudry; Thomas J. Carter; Amartya Lahiri
    Abstract: Central banks in most advanced economies have reacted similarly to the increase in inflation that started in 2021. They initially looked through the rising inflation by leaving monetary policy relatively unchanged. Then, after inflation continued to increase, central banks pivoted by quickly tightening monetary policy. The pivot was explained, at least in part, as aiming to anchor drifting inflation expectations. Why might central banks want to look through supply-driven inflation sometimes and pivot away at other times? When does a change in monetary policy stance help anchor expectations? When is a strong monetary policy tightening compatible with a soft landing? In this paper we present a simple environment that helps clarify these issues by offering an optimal policy perspective on recent central bank behaviour. In particular, we examine optimal policy in an environment where there is a risk of wage-price spirals and where the central bank views wage- and price-setters as having bounded rationality. We show how this can provide a coherent explanation of many aspects of recent central bank behaviour.
    Keywords: Central bank research; Economic models; Inflation and prices; Monetary policy; Monetary policy and uncertainty; Monetary policy communications
    JEL: E12 E24 E31 E58 E65
    Date: 2022–09
  2. By: Luca Fornaro; Federica Romei
    Abstract: We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goods-driven recoveries.
    Keywords: asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages
    JEL: E32 E44 E52 F41 F42
    Date: 2022–01
  3. By: Stefano Neri (Bank of Italy); Guido Bulligan (Bank of Italy); Sara Cecchetti (Bank of Italy); Francesco Corsello (Bank of Italy); Andrea Papetti (Bank of Italy); Marianna Riggi (Bank of Italy); Concetta Rondinelli (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper assesses the anchoring of long-term inflation expectations in the euro area, a key issue from a monetary policy perspective, using a range of measures of inflation expectations and methods. The overall reading of the evidence is that long-term inflation expectations in the euro area have rapidly returned to levels close to the new 2 per cent symmetric inflation target of the ECB announced in July 2021, in a context of elevated inflationary pressures linked to the recent surge in energy prices and persistent supply-side bottlenecks. Nonetheless, the risk of an upward de-anchoring of long-term inflation expectations deserves close and continuous monitoring. This risk has to be taken into account when assessing the appropriate pace of normalization of the ECB’s monetary policy stance, acknowledging that the inflation outlook is surrounded by high uncertainty, as signalled by all types of expectations.
    Keywords: inflation expectations, survey data, professional forecasters, consumers’ expectations, market based expectations
    JEL: E31 E52 C22 G12
    Date: 2022–09
  4. By: Vivian Chu; Yang Zhang
    Abstract: A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E37 E4 E58
    Date: 2022–09
  5. By: Corsi, Marco; Mudde, Yvo
    Abstract: The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs) that are either part of the standard toolbox or are developed to deal with major economic and financial events with a potential adverse impact on price stability and/or the transmission of monetary policy. In the review period covered by this report (2020-2021), monetary policy action was dominated by the Eurosystem’s response to the negative economic effects of the outbreak of the COVID-19 pandemic. Through its action, the Eurosystem continued to expand its balance sheet, in particular by scaling up its outright asset purchases and easing the conditions of its targeted longer-term refinancing operations (TLTROs), complemented by temporary changes in the collateral framework. The accommodative monetary policy stance was preserved by maintaining the key ECB interest rates at record-low levels, reinforced by the ECB’s forward guidance on policy rates. This report provides a full overview of the Eurosystem’s monetary policy implementation over the years 2020 and 2021. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2022–09
  6. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels.
    Keywords: capital controls, macroprudential and monetary policy, carry trade, credit supply, risk-taking
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2022–02
  7. By: John H. Cochrane
    Abstract: Lucas (1972) is the pathbreaking analysis of the neutrality and temporary non-neutrality of money. But our central banks set interest rate targets, and do not even pretend to control money supplies. How is inflation determined under an interest rate target? We finally have a complete theory of inflation under interest rate targets, that mirrors the long-run neutrality and frictionless limit of monetary theory: Inflation can be stable and determinate under interest rate targets, including a k percent rule, i.e. a peg. The zero bound era is confirmatory evidence. Uncomfortably, long-run neutrality means that higher interest rates eventually produce higher inflation, other things (and fiscal policy in particular) constant. With a Phillips curve, we have some non-neutrality as well: Higher nominal interest rates raise real rates and lower output. A good model in which higher interest rates temporarily lower inflation is a harder task. I exhibit one such model. It has the Lucas property that only unexpected interest rate rises can lower inflation. A better model, and empirical understanding, is as crucial to today's agenda as Lucas (1972) was in its day. Much of this is contentious. The issues are crucial for policy: Can the Fed contain inflation without dramatically raising interest rates? Given the state of knowledge, a bit of humility is in order.
    JEL: E4 E5
    Date: 2022–09
  8. By: Michael D. Bauer; Carolin Pflueger; Adi Sunderam
    Abstract: We estimate perceptions about the Fed's monetary policy rule from micro data on professional forecasters. The perceived rule varies significantly over time, with important consequences for monetary policy and bond markets. Over the monetary policy cycle, easings are perceived to be quick and surprising, while tightenings are perceived to be gradual and data-dependent. Consistent with the idea that forecasters learn about the policy rule from policy decisions, the perceived monetary policy rule responds to high-frequency monetary policy surprises. Variation in the perceived rule impacts financial markets, explaining changes in the sensitivity of interest rates to macroeconomic announcements and affecting risk premia on long-term Treasury bonds. It also helps explain forecast errors for the future federal funds rate. We interpret these findings through the lens of a model with forecaster heterogeneity and learning from observed policy decisions.
    JEL: E03 E4 E42 E44 G12
    Date: 2022–09
  9. By: Roberto M. Billi; Jordi Galí; Anton Nakov
    Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.
    Keywords: zero lower bound, New Keynesian model, decline in r*, equilibrium determinacy, regime switching models, secular stagnation
    JEL: E32 E52
    Date: 2022–03
  10. 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 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% within two weeks—a magnitude on par with the effect on stock prices. House prices respond more strongly to the surprises to future rates as compared with the surprise changes in the federal funds rate. Sale prices are mostly predetermined by list prices and do not respond independently to monetary policy surprises.
    Keywords: Housing; Inflation and prices; Interest rates; Monetary policy transmission
    JEL: E52 R21 R31
    Date: 2022–09
  11. By: Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
    Abstract: This paper reveals new facts about inflation expectations in the euro area. By employing local projection and least squares techniques, the following five facts are documented. First, individual inflation expectations overreact to individual news. Second, the cross-section average of individual inflation expectations underreacts to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation expectations to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the US economy.
    JEL: E3 E4 E5 D83 D84
    Date: 2022–09
  12. By: Guido Ascari; Luca Fosso
    Abstract: Since 2000 U.S. inflation has remained both below target and silent to domestic slack and monetary interventions. A trend-cycle BVAR decomposition explores the role of imported intermediate goods in explaining the puzzling behaviour of inflation. The trend analysis shows that, starting from the `90s, despite very well-anchored expectations, slow-moving imported "cost-push" factors induced deflationary pressure keeping trend inflation below target. The cycle block provides evidence in favour of a flattening of the Phillips curve, mainly attributable to a weaker wage pass-through. The business cycle behaviour of inflation is determined by a shock originating abroad, which indeed generates the main bulk of volatility in the international prices of intermediate goods and is poorly connected to the domestic slack.
    Keywords: Trend-Cycle Decomposition; Trend Inflation; Global Inflation; Phillips Curve
    JEL: C11 C32 E3 E31 E52
    Date: 2021–12
  13. By: Ojasvita Bahl; Chetan Ghate (Institute of Economic Growth, Delhi University, Delhi); Debdulal Mallick
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions usually involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a tractable two-sector-two-agent NK DSGE model calibrated to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not.
    Keywords: TANK models, Inflation Targeting, Emerging Market and Developing Economies, Procurement and Redistribution, DSGE.
    JEL: E31 E32 E44 E52 E63
    Date: 2022–09–01
  14. By: Pia Hüttl; Matthias Kaldorf
    Abstract: This paper studies the effects of harmonizing collateral policy in a monetary union. In 2007, the European Central Bank replaced national collateral lists with a single list specifying which assets euro area banks can pledge as collateral. Banks holding newly eligible assets experience a reduction in their cost of funding and increase loan supply compared to banks without such assets. The effect is driven by core banks increasing credit supply to riskier and less productive firms located in periphery countries. These firms in turn experience growth in employment and investment. Our results suggest that a harmonized collateral framework facilitates cross-border lending to borrowing-constrained firms and, thereby, increases financial market integration in a monetary union.
    Keywords: Collateral policy, bank lending channel, financial integration, banking union, real effects
    JEL: E44 E52 E58 G20 G21
    Date: 2022
  15. By: Wilko Bolt; Vera Lubbersen; Peter Wierts
    Abstract: The rise of new forms of private money is reviving a long-standing debate on the appropriate balance between private and public interests in money and payments. The main aim of this paper is to explore an integrated policy analysis of various digital assets that may function as money: bank deposits, non-backed crypto’s, stablecoins and Central Bank Digital Currency (CBDC). In our view, public and private money should coexist to get the best of both worlds: trust and innovation. Getting the balance right is however not an easy task. It requires a digital update of public money and effective regulation of crypto’s and stablecoins. We argue that convertibility between public and private money should be a leading principle both for the design of CBDC and for the regulation of stablecoins that could potentially be widely adopted as a means of payment.
    Keywords: digital payments, crypto’s, stablecoins, CBDC, regulation
    JEL: D4 E4 G2
    Date: 2022–01
  16. By: Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
    Abstract: This paper reviews the experience of the ECB with the two-tier system for excess reserve remuneration that exempted a portion of banks’ excess liquidity (EL) holdings from the negative interest rate of the ECB’s deposit facility. JEL Classification: E41, E43, E52, E58, G11, G12
    Keywords: excess liquidity, exemption scheme, monetary policy transmission, negative interest rates, two-tier system
    Date: 2022–09
  17. By: Weichenrieder, Alfons J.
    Abstract: This note argues that in a situation of an inelastic natural gas supply a restrictive monetary policy in the euro zone could reduce the energy bill and therefore has additional merits. A more hawkish monetary policy may be able to indirectly use monopsony power on the gas market. The welfare benefits of such a policy are diluted to the extent that some of the supply (approximately 10 percent) comes from within the euro zone, which may give rise to distributional concerns.
    Keywords: energy crisis,monetary policy,natural gas
    JEL: E52 Q31
    Date: 2022
  18. By: Korenok, Oleg; Munro, David; Chen, Jiayi
    Abstract: One of the dangers of high inflation is that it can cause firms and households to pay close attention to it. This internalization of inflation can lead to an accelerationist regime, making inflation harder to control. We empirically assess the relationship between attention and the level of inflation for 37 countries. Our measures of attention are constructed either from internet search behavior or the popularity of inflation mentions on Twitter. We find evidence that attention thresholds do exist for the majority of countries in our sample. We also find interesting variability across countries.
    Keywords: inflation,attention,threshold
    JEL: E31 E52 E70
    Date: 2022
  19. By: António Manuel Portugal Duarte (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Nuno José Henriques Baetas da Silva (Ph.D. Student at Faculty of Economics, University of Coimbra)
    Abstract: The degree of co-movement between currencies remains an important subject for interna- tional trade and monetary integration across countries. However, the economic literature has given limited answers about the directional relationships among currencies, and whether they have a leader or a driver. Using the Hodrick-Prescott lter and the wavelet methodology, this paper analyzes exchange rate synchronization for a set of twelve currencies belonging to dierent monetary areas covering the period between January 1980 and July 2020. The empirical results reveal that: i) the U.S. dollar still plays an essential role as a foreign exchange anchor; ii) the euro shows an out-of-phase relationship with the vast majority of currencies, including with the other European currencies; iii) the British pound seems to have departed signicantly from the European single currency; iv) the Brazilian real leads the Chinese yuan for most of the sample, and both currencies record great dissimilarities with the other currencies; v) in the absence of short-term foreign exchange market frictions, average bilateral distances between currencies are smaller, and vi) during the international nancial crisis, exchange rates became more synchro- nized
    Keywords: Exchange rate, co-movements, Hodrick-Prescott lter, wavelets, synchronization.
    JEL: E31 F41 F42 C51
    Date: 2022–03
  20. By: Martina Jašová; Caterina Mendicino; Ettore Panetti; José-Luis Peydró; Dominik Supera
    Abstract: This paper documents the redistributive effects of monetary policy on labor market outcomes via the credit channel. For identification, we exploit matched administrative datasets in Portugal - employee-employer and credit registers - and monetary policy since the Eurozone creation in 1999. We find that softer monetary policy improves worker labor market outcomes (wages, hours worked and firm employment) more in small and young firms, which are more financially constrained. Within small and young firms, the wage effects accrue to incumbent workers, in line with the back-loaded wage mechanism. Consistent with the capital-skill complementarity mechanism, we document an increase in skill premium and show that financially constrained firms increase both physical and human capital investment by most. Our findings uncover a central role for both the firm-balance sheet and the bank lending channels of the monetary policy transmission to labor income inequality, with state-dependent effects that are substantially stronger during crisis times. Importantly, we do not find any redistributive effects for firms without bank credit.
    Keywords: monetary policy, labor income inequality, firm balance sheet channel, bank lending channel, capital-skill complementarity
    JEL: D22 D31 E52 G01 G21
    Date: 2022–04
  21. By: Mr. Selim Cakir; Maria Atamanchuk; Nathalie Reyes; Mazin Al Riyami; Nia Sharashidze
    Abstract: Declining but still high dollarization rates in the Caucasus and Central Asia (CCA) region affect macroeconomic stability, monetary policy transmission, and financial sector development. Although several studies have investigated the dynamics of dollarization in the CCA, the relative roles of macrofinancial policies and financial market development in the de-dollarization process have not yet been assessed empirically. This paper takes stock of de-dollarization efforts and explores the short-term drivers of financial de‐dollarization in the CCA region. It highlights that there remains significant scope to further reduce dollarization through continued progress in strengthening macroeconomic policy frameworks and in developing markets and institutions.
    Keywords: Dollarization; Foreign Currency; Foreign Exchange;FX; Monetary Policy; Central Asia; Caucasus; CCA.; deposit dollarization; De-dollarization policy; credit dollarization; dollarization to a shock; dollarization in the CCA region; Currencies; Credit; De-dollarization; Central Asia and the Caucasus; rates in the Caucasus and Central Asia; dollarization to issuance; Reserve requirements
    Date: 2022–07–29
  22. By: Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
    Abstract: We propose a new and time-varying optimum currency area (OCA) index for the euro area in assessing the evolution of the OCA properties of the monetary union from an international business cycle perspective. It is derived from the relative importance of symmetric vs. asymmetric shocks that result from a sign and zero restricted open-economy structural vector autoregression (VAR) model. We argue that the euro area is more appropriate through the lens of empirical OCA properties when the relative importance of common symmetric shocks is high, but, at the same time, is not overly dispersed across euro area member countries. We find that symmetric shocks have been the dominant drivers of business cycles across euro area countries. Our OCA index, nevertheless, shows that cyclical convergence among euro area members is not a steady process as it tends to be disrupted by crises, especially those not primarily triggered by common external shocks. In the aftermath of a crisis the OCA index embarks on a recovery trajectory catching up with its pre-crisis level. Our OCA index is slow-moving and a good reflection of changing underlying economic structures across the euro area and, therefore, informative about the ability of monetary policy to stabilise the euro area economy in the medium run. JEL Classification: F33, F44, E42
    Keywords: economic convergence, optimum currency area, symmetric and asymmetric shocks
    Date: 2022–09
  23. By: Dürmeier, Stefan
    Abstract: The research question relates to the quantitative impact of government bond purchases of the European Central Bank on inflation and other economic variables at the zero lower bound. At the core is a standard New Keynesian Dynamic Stochastic General Equilibrium model with several financial frictions. The model replicates the intended effect of Quantitative Easing regarding the drop in the government bond yield at the expense of a rise in public debt, and displays the crowding out effect on the balance sheet of the bank which spurs credit and output. Amid lower levels of wages and consumption, the overall quantitative effect is nevertheless not inflationary but deflationary. After a shock to the credit supply, Quantitative Easing is activated more if the zero lower bound on the policy rate is in place. Output after the first period, consumption as well as wages and inflation drop more in the case of the zero lower bound and Quantitative Easing does not make up for the loss. The same findings for the economic performance marked by these four variables are obtained for the analysis at the zero lower bound when a shock hits the exposure of financial intermediaries to public debt.
    Keywords: Quantitative Easing,Taylor Rule,Zero Lower Bound,Moral Hazard
    Date: 2022
  24. By: Emanuel Kohlscheen
    Abstract: This paper examines the drivers of CPI inflation through the lens of a simple, but computationally intensive machine learning technique. More specifically, it predicts inflation across 20 advanced countries between 2000 and 2021, relying on 1,000 regression trees that are constructed based on six key macroeconomic variables. This agnostic, purely data driven method delivers (relatively) good outcome prediction performance. Out of sample root mean square errors (RMSE) systematically beat even the in-sample benchmark econometric models. Partial effects of inflation expectations on CPI outcomes are also elicited in the paper. Overall, the results highlight the role of expectations for inflation outcomes in advanced economies, even though their importance appears to have declined somewhat during the last 10 years.
    Date: 2022–08
  25. By: Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
    Abstract: This paper provides a chronology of the main financial events over the last 15 years, spanning three main crises. The first is the global financial crisis in 2008-09, and the second is the euro area sovereign debt crisis in 2010-12. Both events heralded significant reforms of the EU’s governance and financial architecture. On the tail of these two crises, the ongoing COVID-19 crisis that started in early 2020 enables us to assess the working of the resulting financial framework. Two aspects stand out. The first is that the coronavirus crisis was, in its origin, exogenous from previous banking sector behaviours -which was not the case during the 2008-2012 period. The second aspect stems from the combined policy responses to the pandemic, which lacked in the 2008-2012 period. Against this background, the aim of this paper is twofold. The first is to highlight the sequence of regulatory and institutional changes, with a focus on the ECB and Eurosystem, vis-Ã -vis the unfolding events and against the background of broader financial reforms. The second aim of this paper is to investigate whether the sequence of financial reforms has improved the sector’s ability to deal with major macro-financial shocks at the EU/euro area level, reducing the sovereign-bank doom loop. We focus primarily on developments affecting the banking sector, while noting that during the same period major developments within the EU non-bank financial sector were observed. The COVID-19 crisis has been characterized by the positive interaction of rapid fiscal and monetary responses (macro polices), and joint financial and supervisory responses. In this new policy environment the message of the paper is that the sequence of financial reforms, including the acquisition of supervisory and financial stability tasks by the ECB, have been instrumental in facilitating the effective response to the COVID-19 crisis thus far, especially compared to the previous two crises. The increased resilience and resolvability of the EU banking sector has enabled it to withstand the large and unexpe JEL Classification: E42, E58, F36, G21
    Keywords: banking supervision, banking union, decision-making process., European Central Bank (ECB), financial stability, macroprudential policies, monetary policy, systemic risks
    Date: 2022–09
  26. By: Pablo Garcia Sanchez
    Abstract: I begin this note by reviewing the economic effects of past weather shocks. I explore the empirical literature and present three case studies: the fall of the Roman Empire, the French Revolution of 1848, and Kansas in the 1880s. The second part of the note discusses how more frequent and severe weather extremes could risk price stability, and offers some thoughts on the modelling of weather shocks, a crucial step in designing good monetary policy. My main message is this: even in wealthy economies, weather events will affect central banks’ ability to achieve their primary goal - keeping prices in check.
    Keywords: Extreme Weather Events, Climate Change
    JEL: A10 Q01
    Date: 2022–08
  27. By: Antonis Kotidis (Board of Governors of the Federal Reserve System); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Elias Papaioannou (London Business School and CEPR)
    Abstract: In a surprise move during a crisis, the ECB excluded Greek Government Bonds from the set of eligible collateral in monetary policy operations. In turn, Greek banks turned to Emergency Liquidity Assistance (ELA) to meet their funding needs. ELA replenished losses from all funding sources, consistent with its role as LOLR. However, in anticipation to a switch to ELA, banks reduced their interbank and corporate lending as a result of its higher cost and conditionality. Although multi-lender firms compensated for the associated credit crunch, single-lender firms that were not able to establish new lending relationships experienced a reduction in their exports.
    Keywords: Central Bank Interventions; Lender of Last Resort (LOLR); Collateral Framework; Emergency Liquidity Assistance (ELA)
    JEL: E58 G21 G28
    Date: 2022–09
  28. By: Mr. Yunhui Zhao; Yang Liu; Di Yang
    Abstract: Inflation has been rising during the pandemic against supply chain disruptions and a multi-year boom in global owner-occupied house prices. We present some stylized facts pointing to house prices as a leading indicator of headline inflation in the U.S. and eight other major economies with fast-rising house prices. We then apply machine learning methods to forecast inflation in two housing components (rent and owner-occupied housing cost) of the headline inflation and draw tentative inferences about inflationary impact. Our results suggest that for most of these countries, the housing components could have a relatively large and sustained contribution to headline inflation, as inflation is just starting to reflect the higher house prices. Methodologically, for the vast majority of countries we analyze, machine-learning models outperform the VAR model, suggesting some potential value for incorporating such models into inflation forecasting.
    Keywords: Housing Price Inflation; Rent; Owner-Occupied Housing; Machine Learning; Forecast; machine-learning model; machine learning method; housing boom; D. forecasting result; Inflation; Housing prices; Housing; Consumer price indexes; Global; Europe; Australia and New Zealand; North America; Caribbean;VAR model
    Date: 2022–07–28
  29. By: Freund, L. B.; Lee, H.; Rendahl, P.
    Abstract: This paper studies the role of macroeconomic uncertainty in a search-and-matching framework with risk-averse households. Heightened uncertainty about future productivity reduces current economic activity even in the absence of nominal rigidities. A risk-premium mechanism accounts for this result. As future asset prices become more volatile and covary more positively with aggregate consumption, the risk premium rises in the present. The associated downward pressure on current asset values lowers firm entry, making it harder for workers to find jobs and reduces supply. With nominal rigidities the recession is exacerbated, as a more uncertain future reinforces households’ precautionary behavior, which causes demand to contract. Counterfactual analyses using a calibrated model imply that unemployment would rise by less than half as much absent the risk-premium channel. The presence of this mechanism implies that uncertainty shocks are less deflationary than regular demand shocks, nor can they be fully neutralized by monetary policy.
    Keywords: inflation, search frictions, Uncertainty, Unemployment
    JEL: J64 E21 E32
    Date: 2022–09–08
  30. By: Rashad Ahmed; Alessandro Rebucci
    Abstract: This paper shows that the price impact of foreign official (FO) purchases or sales of U.S. Treasuries (USTs) is about twice as large as previously reported in the literature once critical sources of endogeneity are addressed. We also show that prevailing estimates of this price impact suffer from omitted variable bias when foreign government bond yields and Federal Reserve policies are not controlled for. By exploiting changes in the volatility of FO flows and U.S. yields after the 2008 Global Financial Crisis, we identify a FO flow shock via heteroskedasticity in a structural VAR. We estimate that a $100B flow shock moves the 5-year, 10-year, and 30-year yields by more than 100 basis points on impact, compared to the 19-44 basis points range that we estimate by assuming FO flows are price inelastic and without controlling for foreign yields and Fed actions. Our findings suggest that FO sales of USTs played a critical role during the March 2020 episode of Treasury market turmoil and that even a small reduction in the Dollar's share of China's reserves could have a significant impact on U.S. long-term interest rates.
    JEL: E4 F2 F30 G1
    Date: 2022–09
  31. By: Emmanuel de Veirman
    Abstract: In sticky price models, the slope of the Phillips curve depends positively on the probability of price adjustment. I use a series for the empirical frequency of price adjustment to test this implication. I find some evidence that the Phillips curve slope depends positively on the repricing rate. My results support the implication from New Keynesian theory with Calvo pricing that the Phillips curve slope is a convex function of the frequency of price adjustment. However, at all observed values of the frequency of price adjustment, the empirical Phillips curve relation is much flatter than the New Keynesian Phillips Curve at standard parameter values would imply.
    Keywords: Inflation, Phillips curve, price setting
    JEL: C22 E31
    Date: 2022–01
  32. By: Kajdi, László
    Abstract: Payments are a key focus of central banks, as - together with the safe, efficient operation of the payments market – wide access to cash is fundamentally important for a healthy economy. In this study, three main research areas were investigated: 1. socioeconomic characteristics that can be associated with financial inclusion; 2. factors behind consumers´ payment choices; 3. underlying factors for holding cash in a wallet (i.e. for transactional purposes). Regression results for the first research question confirmed the findings of international literature, i.e. mainly older age, lower income and lower educational level is associated with the lack of access to electronic payment options. The study pursues various approaches to investigate consumer payments choices, and the results from most models showed that those with higher level of income and education, or lower level of cash income are more likely to prefer and actually use electronic payment methods. Finally, concerning the holding of cash the initial expectations were confirmed i.e. those who do not use cash for daily transactions tend to keep less cash in their wallet, while those who indicated preference for cash payments or higher importance of cash payment option are more likely to keep higher cash amounts. JEL Classification: D11, D12, E42, J33
    Keywords: cash, financial inclusion, payments
    Date: 2022–09
  33. By: Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
    Abstract: The market turmoil in March 2020 highlighted key vulnerabilities in the EU money market fund (MMF) sector. This paper assesses the effectiveness of the EU's regulatory framework from a financial stability perspective, based on a panel analysis of EU MMFs at a daily frequency. First, we find that investment in private debt assets exposes MMFs to liquidity risk. Second, we find that low volatility net asset value (LVNAV) funds, which invest in non-public debt assets while offering a stable NAV, face higher redemptions than other fund types. The risk of breaching the regulatory NAV limit may have incentivised outflows among some LVNAV investors in March 2020. Third, MMFs with lower levels of liquidity buffers use their buffers less than other funds, suggesting low levels of buffer usability in stress periods. Our findings suggest fragility in the EU MMF sector and call for a strengthened regulatory framework of private debt MMFs. JEL Classification: G11, G15, G23, G28
    Keywords: COVID-19, financial fragility, money market funds, regulation
    Date: 2022–10
  34. By: Avichai Snir (Department of Economics, Bar-Ilan University, Israel); Haipeng (Allan) Chen (Gatton College of Business and Economics, University of Kentucky, USA); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; International School of Economics, Tbilisi State University, Georgia; International Centre for Economic Analysis; Rimini Centre for Economic Analysis)
    Abstract: We assess the role of cognitive convenience in the popularity and rigidity of 0-ending prices in convenience settings. Studies show that 0-ending prices are common at convenience stores because of the transaction convenience that 0-ending prices offer. Using a large store-level retail CPI data, we find that 0-ending prices are popular and rigid at convenience stores even when they offer little transaction convenience. We corroborate these findings with two large retail scanner price datasets from Dominick’s and Nielsen. In the Dominick’s data, we find that there are more 0-endings in the prices of the items in the front-end candies category than in any other category, even though these prices have no effect on the convenience of the consumers’ check-out transaction. In addition, in both Dominick’s and Nielsen’s datasets, we find that 0-ending prices have a positive effect on demand. Ruling out consumer antagonism and retailers’ use of heuristics in pricing, we conclude that 0-ending prices are popular and rigid, and that they increase demand at convenience settings, not only for their transaction convenience, but also for the cognitive convenience they offer.
    Keywords: Cognitive Convenience, Transaction Convenience, Price Rigidity, Price Stickiness, Sticky Prices, Rigid Prices, 0-Ending Prices, Round Prices, Convenient Prices, 9-Ending Prices, Just Below Prices, Psychological Prices, Price Points
    JEL: E31 L16 D90 E70 M30
    Date: 2022–10
  35. By: De Blasis, Riccardo; Galati, Luca; Webb, Alexander; Webb, Robert I.
    Abstract: How does stablecoin design affect market behavior in turbulent periods? Stablecoins attempt to maintain a “stable†peg to the US dollar, but do so with wildly varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing falls in value and others gaining value. Using a BEKK model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. Implications for stablecoin developers, exchanges, traders, and regulators are discussed.
    Keywords: Stablecoins, Herding, Information cascade, Volatility spillovers, Market crashes, Financial contagion
    JEL: D47 F31 F61 G14 G41
    Date: 2022–09–28

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