nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒10‒24
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor
  2. Foreign exchange reserves, imperfect substitutability of financial assets and the monetary policy quadrilemma By Thibault Laurentjoye
  3. Monetary Policy and Endogenous Financial Crises By Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
  4. Central bank digital currency and cryptocurrency in emerging markets By Le, Anh H.
  5. Central Bank Digital Currency: Financial Inclusion vs. Disintermediation By Jeremie Banet; Lucie Lebeau
  6. Monetary Policy for the Climate? A Money View Perspective on Green Central Banking By Jakob Vestergaard
  7. Trust in the ECB in turbulent times By Carin van der Cruijsen; Anna Samarina
  8. Gini in the Taylor Rule: Should the Fed Care About Inequality? By Eunseong Ma; Kwangyong Park
  9. Market Effects of Central Bank Credit Markets Support Programs in Europe By Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
  10. Q-Monetary Transmission By Priit Jeenas; Ricardo Lagos
  11. Short-Dated Term Premia and the Level of Inflation By Richard K. Crump; Charles Smith; Peter Van Tassel
  12. A Model of the Gold Standard By Jesús Fernández-Villaverde; Daniel Sanches
  13. Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework By Markus Brueckner
  14. Economic research at central banks: Are central banks interested in the history of economic thought? By Ivo Maes
  15. Exchange rate pass-through in India By Prashant Parab
  16. Monetary Policy Shocks for Sweden By Kilman, Josefin
  17. Monetary Policy Cyclicality in Emerging Economies By Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
  18. Monetary Policy and Inequality: How Does One Affect the Other? By Eunseong Ma
  19. Real Wage Cyclicality and Monetary Policy. By Eunseong Ma
  20. Monetary Policy in the Age of Automation By Luca Fornaro; Martin Wolf
  21. What drives Indian inflation? Demand or supply By Ashima Goyal; Abhishek Kumar
  22. Quantifying "Quantitative Tightening" (QT): How Many Rate Hikes Is QT Equivalent To? By Bin Wei
  23. Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries By Don Bredin; Stilianos Fountas
  24. Decomposing Supply and Demand Driven Inflation By Adam Hale Shapiro
  25. Monetary, fiscal and demographic interactions in Japan: impact and a comparative assessment By Pierre L Siklos
  26. The Transmission of US Monetary Policy Shocks: The Role of Investment & Financial Heterogeneity By Santiago Camara; Sebastian Ramirez Venegas
  27. Soaring demand is driving double-digit import price inflation in the United States By Caroline Freund
  28. Capital Controls, Corporate Debt and Real Effects By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  29. Non-Linearity between Price Inflation and Labor Costs: The Case of Central European Countries By Alena Pavlova
  30. Assessment of the Nature of the Pandemic Shock: Implications for Monetary Policy By Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
  31. The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework By Kirstin Hubrich; Daniel F. Waggoner
  32. Classifying Exchange Rate Regimes: 20 Years Later By Eduardo Levy-Yeyati; Federico Sturzenegger

  1. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09
  2. By: Thibault Laurentjoye (EHESS Paris (FR))
    Abstract: In this paper, I investigate how the use of foreign exchange reserves can turn the monetary policy trilemma into a quadrilemma. After surveying recent developments in international macroeconomics literature, including the dilemma vs trilemma debate and the dominant currency paradigm, I make a twofold contribution to support the case for the quadrilemma. The first contribution is a logical characterisation of the quadrilemma in the form of a single equation which includes exchange rate variations, interest rate differential, capital controls and the level of reserves. The second contribution consists of a nominal stock-flow consistent model with two countries, characterised by perfect capital mobility and imperfect asset substitutability, to study the pure effect of international investors’ portfolio reallocation following unanticipated changes in the policy rate of the domestic economy. The model is run several times, varying the direction of the monetary policy shock and the relative size of the two countries. Two constraints on reserves are highlighted, one in the short run and one in the long run – albeit less significant – which define the limit between the classical trilemma and the quadrilemma.
    Keywords: International reserves, foreign exchange intervention, monetary policy trilemma, quadrilemma, stock-flow consistent modelling
    JEL: E43 E58 F31 F32 F36 F41
    Date: 2022–10
  3. By: Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: financial crisis, monetary policy
    JEL: E32 E52
    Date: 2021–12
  4. By: Le, Anh H.
    Abstract: Blockchain technology has opened up the possibility of digital currency, smart contracts and much more applications including the launch of central bank digital currencies (CBDC). However, literature about the effect of CBDC with the presence of cryptocurrency for an emerging market economy seems to be left behind. In this paper, we introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDC and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDC is introduced as a payment and saving instrument. We find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is deeply important for emerging markets. We also conduct optimal monetary policy under different scenarios. Hence, we uncover that a flexible rate in CBDC can affect the responses of the monetary rate and can reinforce the conventional monetary policy to achieve the central bank's targets.
    Keywords: Central bank digital currency, Cryptocurrency, Open-economy, Financial frictions, Optimal monetary policy
    JEL: E50 F30 F31 G15 G18 G23
    Date: 2022–09–20
  5. By: Jeremie Banet; Lucie Lebeau
    Abstract: An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the U.S. income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.
    Keywords: central bank digital currency; financial inclusion; payments; monetary policy
    JEL: E42 E51 E58 G21
    Date: 2022–09–24
  6. By: Jakob Vestergaard (Roskilde University, Denmark.)
    Abstract: Central banks can potentially influence the investment decisions of private financial institutions, which in turn will create incentives towards green technology adoption and development of lower emission business models. This paper examines how monetary policies can be deployed to promote a greening of finance. To guide the efforts, the paper mobilizes the Money View literature. This enables a comparative assessment of different monetary policy options. The main finding is that a promising way forward for green monetary policy is to adopt a strategy of expanding collateral eligibility through positive screening and widening haircut spreads to change relative incentives in favor of green over brown assets.
    Keywords: Climate change, green central banking, monetary policy, collateral policy, haircuts.
    JEL: E42 E52 E58 G18 G28
    Date: 2022–07–02
  7. By: Carin van der Cruijsen; Anna Samarina
    Abstract: Trust in the European Central Bank (ECB) is vital. Although it is important to study its level, drivers and effects especially in turbulent times, little is known about trust in the ECB during the COVID-19 pandemic. We use the pilot data from the ECB Consumer Expectations Survey during 2020-2021 to shed light on trust in the ECB during the pandemic. This is a new rich monthly dataset covering six key euro area countries. We find that there is ample room to improve consumers’ trust in the ECB. Trust is the lowest in Italy and Spain. Moreover, personal COVID-19 experiences play a role: respondents who reduced the number of hours worked due to COVID-19 have lower trust in the ECB than those with unchanged working hours. Trust in the ECB varies also within countries. It is highest among males and people with a good financial situation. It increases with financial knowledge, education, income, wealth, and trust in other people. Trust in the ECB and financial knowledge contribute to better anchoring of consumers’ inflation expectations three years ahead around the ECB’s medium-term inflation goal. Lastly, we show that consumers with higher inflation expectations are more likely to increase their household spending and buy a large item.
    Keywords: European Central Bank; trust; financial knowledge; COVID-19 crisis; inflation expectations; spending decisions
    JEL: D83 E58 E52 G53
    Date: 2021–07
  8. By: Eunseong Ma (Yonsei University); Kwangyong Park (Bank of Korea)
    Abstract: This study investigates whether the Federal Reserve (Fed) should care about inequality. We develop a Heterogeneous Agent New Keynesian (HANK) model, which generates empirically realistic inequalities and business cycle properties observed in the U.S. data. We consider the income Gini coefficient in a monetary policy rule to see how an inequality-targeting monetary policy affects aggregate and disaggregate outcomes, as well as economic welfare. We find that a monetary policy rule with an explicit inequality target can be welfare improving, even if inequality becomes volatile. In particular, the policy reform can improve the welfare of the poorest the most. Finally, we demonstrate the feasibility of a subgroup targeting monetary policy as a tool for an implementable inclusive monetary policy.
    Keywords: Monetary Policy; Inequality; Welfare; Taylor Rule; Nonconvexity.
    JEL: E52 D31 D52 D63 J21
    Date: 2022–08
  9. By: Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
    Abstract: Using responses of credit default swap indexes to ECB monetary policy announcements, we isolate a novel credit policy component of monetary policy surprises. We examine how such unconventional monetary policy surprises affect investor perceptions of credit risk and the functioning of primary corporate debt markets. Favorable credit surprises cause declines in uncertainty about credit risk and suggest a more stable outlook on its dynamics over the following months. Both net and gross corporate bond issuance increase as a result of favorable credit surprises, with the largest response in investment grade issuance. We argue that this provides evidence for the efficacy of a local channel of unconventional monetary policy.
    Keywords: CDS; Central banks; Credit derivatives; Credit programs; Debt issuance; Uncertainty
    JEL: E58 G10
    Date: 2022–08–30
  10. By: Priit Jeenas; Ricardo Lagos
    Abstract: We study the effects of monetary-policy-induced changes in Tobin's q on corporate investment and capital structure. We develop a theory of the mechanism, provide empirical evidence, evaluate the ability of the quantitative theory to match the evidence, and quantify the relevance for monetary transmission to aggregate investment.
    Keywords: monetary transmission, stock prices, Tobin's q, investment, capital structure
    JEL: D83 E22 E44 E52 G12 G31 G32
    Date: 2022–05
  11. By: Richard K. Crump; Charles Smith; Peter Van Tassel
    Abstract: Since the advent of derivatives trading on short-term interest rates in the 1980s, financial commentators have often interpreted market prices as directly reflecting the expected path of future interest rates. However, market prices generally embed risk premia (or “term premia” in reference to measures of risk premia over different horizons) reflecting the compensation required to bear the risk of the asset. When term premia are large in magnitude, derivatives prices may differ substantially from investor expectations of future rates. In this post, we assess whether term premia have increased with the recent rise in inflation, given the historically positive relationship between the two series, and what this means for the interpretation of derivatives prices.
    Keywords: term premia; inflation; monetary policy expectations; Federal Open Market Committee (FOMC)
    JEL: E52 G1
    Date: 2022–09–28
  12. By: Jesús Fernández-Villaverde; Daniel Sanches
    Abstract: The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery.
    JEL: E42 E58 G21
    Date: 2022–09
  13. By: Markus Brueckner
    Abstract: This paper provides an econometric model and estimation framework that enables to obtain estimates of causal effects of monetary policy in a small open economy. The model and estimation framework explicitly takes into account the endogeneity of monetary policy: i.e. if the central bank has an target inflation, then monetary policy itself is a function of economic shocks that affect inflation and other macroeconomic outcomes of interest. This is the standard simultaneity problem, which to date has not been satisfactorily addressed in the empirical monetary policy literature. The simultaneity problem can only be addressed if one has a valid instrument for monetary policy. In this paper I provide a local projections instrumental variables framework that enables to provide causal estimates of the dynamic effects that monetary policy in a small open economy has on inflation, the output gap, credit growth, and the exchange rate in the presence of external shocks.
    JEL: C3 E3 E4 E6
    Date: 2022–10
  14. By: Ivo Maes (: Robert Triffin Chair, University of Louvain and ICHEC Brussels Management School)
    Abstract: With central banks becoming monetary authorities, research departments have become a core element of a modern central bank. Crucial elements of a central bank research department are contributing to monetary policymaking and sustaining a dialogue with the academic community. The importance of historical research (and central banks do not really make a difference between economic history and the history of economic thought) varies a lot. The historical curiosity of influential central bankers and the commemoration of anniversaries are important factors hereby. Historical research can allow central banks to take more distance and can help to avoid a “this time is different” view.
    Keywords: : central banking, economic research, economic history, history of thought.
    JEL: E42 E58 G28 N10
    Date: 2022–09
  15. By: Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: Investigating exchange rate fluctuations is important to understand their influence on domestic inflation dynamics of the country as well as to study the stabilisation role played by the monetary policy. Understanding exchange rate pass-through (ERPT) is important especially from emerging markets' perspective since they tend to be net importers. This study examines ERPT for India from 2005Q2 to 2021Q2, i.e., the effects of the nominal effective exchange rate (NEER) on the domestic inflation captured using CPI and WPI. Using linear and non-linear ARDL models, we discover less than perfect exchange rate pass-through for India. The influence is higher for WPI than CPI on account of inelastic crude oil imports. This study also finds a higher influence of exchange rate appreciation than that of depreciation due to the policy measures to limit the pass-through effect of exchange rate depreciation but allowing appreciation to have a complete pass-through.
    Keywords: Exchange rate pass-through, ARDL, NARDL, Nominal effective exchange rate, Inflation dynamics
    JEL: C32 E31 E32 F31
    Date: 2022–08
  16. By: Kilman, Josefin (Department of Economics, Lund University)
    Abstract: This paper estimates monetary policy shocks for Sweden between 1996-2019. I employ the Romer and Romer (2004) (R&R) approach and use annual forecasts of output growth and inflation to estimate monetary policy shocks. I complement the analysis with shocks from a recursive VAR including output, prices, and the repo rate, as well as a set of high-frequency shocks. A comparison of the three sets of shocks shows that the R&R and VAR shocks are similar, while the high-frequency shocks are fewer and smaller in size. Local projections show expected impulse responses on most economic variables, regardless of data frequency, but responses to the recursive VAR shocks are more in line with textbook findings compared to responses to the R&R and high-frequency shocks. Overall, results are robust to alternative model specifications and lag lengths in local projections.
    Keywords: Monetary policy; monetary policy shocks; vector autoregression; local projections
    JEL: C22 C32 E32 E43 E52 E58
    Date: 2022–09–15
  17. By: Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: Conventional wisdom holds that monetary policy in emerging economies is procyclical, unlike in advanced economies. Using a large sample of countries from the mid-1990s onwards, we show that the conduct of monetary policy is not fundamentally different across these two groups of countries. Emerging and advanced economies alike lower their policy rates when economic activity decelerates, both unconditionally and following exogenous U.S. monetary policy tightening. We show that the common practice of using market rates, such as government bond rates, to proxy for the stance of monetary policy leads one to draw inaccurate conclusions about emerging economies’ monetary policy cyclicality due to inherent risk premia in those market rates.
    JEL: E0 F0 F3
    Date: 2022–09
  18. By: Eunseong Ma (Yonsei University)
    Abstract: This paper studies a labor-supply-side channel affecting the relationship between monetary policy and income inequality. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. First, I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. Second, a more equal economy is associated with more effective monetary policy in terms of output. I document supporting empirical evidence for the key mechanism of the model using micro-level data and state-level data in the U.S.
    Keywords: Monetary policy; Inequality; Labor supply elasticity; Indivisible labor.
    JEL: E52 D31 D52 J21
    Date: 2022–09
  19. By: Eunseong Ma (Yonsei University)
    Abstract: Conventional wisdom based on many empirical studies has long held that real wages are procyclical conditional on a monetary policy shock. This paper challenges this conventional view by developing a quantitative heterogeneous-agent New Keynesian economy with sticky wages. I find that true real wages may be countercyclical conditional on a monetary policy shock, but the data may predict the wrong direction of the real wage dynamics due to the inconsistent definition. This result implies that the predictions of New Keynesian models with wage rigidities are consistent with the data.
    Keywords: Monetary policy; Real wages; Labor share; Earnings inequality.
    JEL: E52 J31 D31
    Date: 2022–08
  20. By: Luca Fornaro; Martin Wolf
    Abstract: We provide a framework in which monetary policy affects firms' automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary expansions can increase output by inducing firms to invest and automate more, while having little impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Running the economy hot, through expansionary monetary and fiscal policies, may have a positive long run impact on labor productivity and wages. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.
    Keywords: monetary policy, automation, fiscal expansions, hysteresis, liquidity traps, secular stagnation, endogenous productivity, wages
    JEL: E32 E43 E52 O31 O42
    Date: 2021–09
  21. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar
    Abstract: Understanding the drivers of inflation is an important issue in business cycle research and has been a matter of debate. In this paper, using data from a large emerging economy, we identify a structural shock (inflation shock) that explains the maximum forecast error variance of consumer prices. The inflation shock explains more than 80 per cent of the forecast error variance of consumer price up to 40 quarters. This shock increases prices and decreases output, implying that it is a supply shock. We also show that the food inflation shock is the primitive shock, which makes the inflation shock a supply shock and also feeds into non-food inflation. A large interest rate reaction to this shock leads to a prolonged decline in credit, investment, and output. Using the shocks obtained from a medium-scale new Keynesian model, we provide additional evidence that most of the variance of estimated inflation and food inflation shocks is explained by model-based supply shocks. These results suggest that central banks in emerging economies need to be more pragmatic in implementing inflation-targeting policies.
    Keywords: Inflation, India, SVAR, FEV, supply shock, demand shock
    JEL: E43 E44 E52
    Date: 2022–09
  22. By: Bin Wei
    Abstract: How many interest rate hikes is quantitative tightening (QT) equivalent to? In this paper, I examine this question based on the preferred-habitat model in Vayanos and Vila (2021). I define the equivalence between rate hikes and QT such that they both have the same impact on the 10-year yield. Based on the model calibrated to fit the nominal Treasury data between 1999 and 2022, I show that a passive roll-off of $2.2 trillion over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times. However, during a crisis period with risk aversion being doubled, it is equivalent to a 74 basis point increase. I also quantify the effect of QT implemented by active sales. Lastly, based on the model-based estimates, I show that if the Treasury were to issue bills to offset maturing securities, the resulting equivalent rate hikes in the current federal funds rate would decrease dramatically to 7.4 (12.6) basis points during normal (crisis) periods.
    Keywords: monetary policy; quantitative tightening; QT; quantitative easing; QE; rate hikes; preferred-habitat; reserves; reverse repo
    JEL: E43 E44 E52 E58 G12
    Date: 2022–07–15
  23. By: Don Bredin (Graduate School of Business, University College Dublin); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over a forty-year period. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman’s belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., with short-run inflation uncertainty.
    Keywords: Inflation, Inflation uncertainty, Markov process, regime-switching heteroskedasticity
    JEL: C22 C51 C52 E0
    Date: 2022–03
  24. By: Adam Hale Shapiro
    Abstract: The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply- and demand-driven components. I generate two new data series, the supply and demand-driven contributions to personal consumption expenditures (PCE) inflation, which quantify the degree to which either demand or supply is driving inflation in a current month. The series show expected time-series patterns. The demand-driven contribution tends to decline during recessions, while the supply-driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand-driven contribution of inflation. Oil-supply shocks act to increase the supply driven contribution, but decrease the demand-driven contribution of inflation. The decompositions can be used to test theory or by policymakers and practitioners to track inflation drivers in real time.
    Keywords: supply and demand; inflation; decomposition
    Date: 2022–09–22
  25. By: Pierre L Siklos (WLU - Wilfrid Laurier University, Balsillie School of International Affairs)
    Abstract: Macroeconomic models used to downplay demographic and fiscal factors. For Japan, narratives suggest that its experience is unlike that of other large economies persisted. I revisit how demographic and fiscal shocks impact Japan, the Euro Area and the US since 1990. Several models and methodologies are used to investigate macro-financial factors, including demographic and fiscal variables. Many, but not all, of the shocks examined have comparable impact across all three economies considered. This is true for monetary policy and the response of global inflation to ageing and demographic shocks. The response of real economic activity to several of the shocks considered is also comparable. Perhaps most notably, demographic and fiscal factors have significant real economic impact although the size of the response does differ across the three economies examined. Japan may not be like other systemically important economies in all respects but it does offer lessons for other large economies.
    Keywords: Japan,monetary and fiscal policy,Eurozone,USA,demographic and global factors,panel VAR,local projections JEL classifications: E31
    Date: 2022–07–31
  26. By: Santiago Camara; Sebastian Ramirez Venegas
    Abstract: This paper studies the transmission of US monetary policy shocks into Emerging Markets emphasizing the role of investment and financial heterogeneity. First, we use a panel SVAR model to show that a US interest tightening leads to a persistent recession in Emerging Markets driven by a sharp reduction in aggregate investment. Second, we study the role of firms' financial heterogeneity in the transmission of US interest rate shocks by exploiting detailed balance sheet dataset from Chile. We find that more indebted firms experience greater drops in investment in response to a US tightening shock than less indebted firms. This result is at odds with recent evidence from US firms, even when using the same identification strategy and econometric methods. Third, we rationalize this finding using a stylized model of heterogeneous firms subject to a tightening leverage constraint. Finally, we present evidence in support of this hypothesis as well as robustness checks to our main results. Overall, our results suggests that the transmission channel of US monetary policy shocks within and outside the US differ, a result novel to the literature.
    Date: 2022–09
  27. By: Caroline Freund (Peterson Institute for International Economics)
    Abstract: At a time of soaring price increases in the United States, inflation in the US import sector has been soaring the most. Import price inflation in the first half of 2022 was in the double digits, above US consumer price index and personal consumption expenditures inflation. Excess demand for certain imported goods is playing a big role, but so are supply shortages caused by temporary business closures overseas and shipping delays associated with the COVID-19 pandemic. Correctly identifying the culprit for misaligned demand and supply, and hence rising prices, is central to understanding the type and extent of policy intervention needed. Using movements in prices and quantities of specific goods, the analysis presented in this Policy Brief shows that the increase in import price inflation has been driven to the same or a greater extent by demand compared with supply constraints. The results have important implications for policies to help reduce the supply and demand imbalance and thus tame inflation.
    Date: 2022–10
  28. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
    Keywords: capital controls, corporate FX-debt, real effects, macroprudential, capital inflows
    JEL: F3 F38 F4 F6 G01 G15 G21 G28
    Date: 2022–04
  29. By: Alena Pavlova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This article explores the relationship between labor costs and price inflation under two conditions. Firstly, with linear assumption and classical techniques. Secondly, without assuming linearity, by a novel non-parametric machine learning method, namely gradient boosting. With quarterly data from 1996 to 2022 for V4 countries, we find linear and non-linear dependency between labor cost and price inflation. However, the magnitude of the connection is country-specific and changes over time. Our findings indicate that a significant linear relationship between considered variables does not lead to the higher predictability power of labor cost in a non-parametric model, which predicts inflation. Even opposed, the Czech Republic, the country with the highest correlation between unit labor cost(ULC) and deflator, shows better prediction in a case when the ULC is not in the set of independent variables. This fact highlights the importance of non-linearity for the inflation model.
    Keywords: inflation, labor cost, non-linear model, V4 countries
    JEL: E24 E31 E37
    Date: 2022–10
  30. By: Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
    Abstract: The coronavirus pandemic and the related anti-epidemic measures represented an unprecedented negative shock to the global economy in the form of a dramatic fall in economic activity. Since the onset of the pandemic, the question has been to what extent the contraction of economic activity, largely related to anti-epidemic measures (lockdowns), can be interpreted as a negative anti-inflationary shock to demand and, conversely, what proportion of the observed decline in GDP can be attributed to a negative (cost) inflationary shock on the supply side. To contribute to the debate, we have set out our own narrative and conducted model analyses. We have focused on the world's two largest advanced economies - the US and the euro area. An empirical comparison of the pandemic-induced crisis with the global financial and economic crisis and model simulations indicate that the sharp economic downturn observed in 2020 bears, for the most part, the hallmarks of a supply shock. The combination of a negative supply shock, worldwide accommodative monetary policy and large fiscal stimuli led to strong inflationary overheating across the globe. The Czech National Bank reassessed the macroeconomic story from a demand to supply driven economic downturn. This reassessment, together with a gradual, but steady, recovery of economic activity, enabled the CNB - as one of the first central banks in the world to do so - to appropriately tighten its monetary policy from mid-2021 onwards.
    Keywords: E31, E32, F47
    Date: 2022–09
  31. By: Kirstin Hubrich; Daniel F. Waggoner
    Abstract: We conduct a novel empirical analysis of the role of leverage of financial institutions for the transmission of financial shocks to the macroeconomy. For that purpose, we develop an endogenous regime-switching structural vector autoregressive model with time-varying transition probabilities that depend on the state of the economy. We propose new identification techniques for regime switching models. Recently developed theoretical models emphasize the role of bank balance sheets for the build-up of financial instabilities and the amplification of financial shocks. We build a market-based measure of leverage of financial institutions employing institution-level data and find empirical evidence that real effects of financial shocks are amplified by the leverage of financial institutions in a financial-constraint regime. We also find evidence of heterogeneity in how depository financial institutions, global systemically important banks, and selected nonbank financial institutions affect the transmission of shocks to the macroeconomy. Our results confirm the leverage ratio as a useful indicator from a policy perspective.
    Keywords: regime switching; time-varying transition probabilities; financial shocks; leverage; bank and nonbank financial institutions; heterogeneity
    JEL: C11 C32 C53 C55 E44 G21
    Date: 2022–06–02
  32. By: Eduardo Levy-Yeyati (Universidad Torcuato Di Tella); Federico Sturzenegger (Universidad de San Andrés/ Harvard Kennedy School)
    Abstract: Twenty years ago, in Levy-Yeyati and Sturzenegger (2001) we proposed a de facto classification of exchange rate regimes which contrasted with the –at the time, standard– de jure classifications based on self-reporting by monetary authorities. This paper extends our original classification through 2021 more than doubling the number of country-year observations (from 3335 to 8491). It also introduces an updating methodology to keep the classification updated in real time. Also, based on this extension, the paperdocuments the main stylized facts about exchange rate regime choices in the past two decades, which shows a jump in the prevalence of flexible regimes in the early 2000s and a gradual convergence between de jure and de facto groupings over time.
    Keywords: Exchange rate regimes; fear of floating; fear of appreciation
    JEL: F30 F33
    Date: 2022–10

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