nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒11‒28
forty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. What’s that noise? Analysing sentiment-based variation in central bank communication By Bernd Hayo; Johannes Zahner
  2. Unconventional Monetary Policy and Inequality By Salvatore Nisticò; Marialaura Seccareccia
  3. Partisan Bias in Inflation Beliefs: New Evidence from Korea. By Sangyup Choi; Sang-Hyun Kim; Myunghwan Andrew Lee; Siye Bae; Myungkyu Shim
  4. What drives repo haircuts? Evidence from the UK market By Julliard, Christian; Pinter, Gabor; Todorov, Karamfil; Yuan, Kathy
  5. Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  6. Collateral requirements in central bank lending By Du, Chuan
  7. A tail of labour supply and a tale of monetary policy By Cantore, Cristiano; Ferroni, Filippo; Mumtaz, Hroon; Theophilopoulou, Angeliki
  8. Are the Demand and Supply Channels of Inflation Persistent? Evidence from a Novel Decomposition of PCE Inflation By Viacheslav Sheremirov
  9. Monetary Policy, Funding Cost and Banks’ Risk-Taking: Evidence from the United States By Constantin Bürgi; Bo Jiang
  10. The historical role of energy in UK inflation and productivity and implications for price inflation in 2022 By Jennifer L. Castle; David F. Hendry; Andrew B. Martinez
  11. The European Monetary Integration Trap: incomplete sovereignty and the State-mimicking method By Costa Cabral, Nazare
  12. Estimating Treatment Effects of Monetary Policies and Macro-prudential Policies: From the Perspectives of Macro-economic Policy Evaluation By Ying Fang; Zongwu Cai; Zeqin Liu; Ming Lin
  13. Impact of Oil Price and Oil Production on Inflation in the CEMAC By Edouard Mien
  14. Monetary Policy in a World of Cryptocurrencies By Pierpaolo Benigno
  15. Fiscal Stimulus Under Average Inflation Targeting By Zheng Liu; Jianjun Miao; Dongling Su
  16. Core inflation over the COVID-19 pandemic By Mikael Khan; Elyse Sullivan
  17. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud
  18. Firming up price inflation By Bunn, Philip; Anayi, Lena; Bloom, Nicholas; Mizen, Paul; Thwaites, Gregory; Yotzov, Ivan
  19. The Dynamics of Large Inflation Surges By Andrés Blanco; Pablo Ottonello; Tereza Ranosova
  20. The Currency Composition of Asia’s International Investments By Paulo Rodelio Halili; Rogelio V. Mercado, Jr.
  21. MPC monetary communication: children of the revolution(s) By Delia Sih Chien Macaluso; Michael McMahon
  22. Dancing on the edge of stagflation By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  23. Is Inflation Uncertainty a Self-Fulfilling Prophecy? The Inflation-Inflation Uncertainty Nexus and Inflation Targeting in South Africa By Chevaughn van der Westhuizen; Renee van Eyden; Goodness C. Aye
  24. Decomposing the drivers of Global R* By Cesa-Bianchi, Ambrogio; Harrison, Richard; Sajedi, Rana
  25. Endogenous money interpretation of the operations of the Swiss central bank (2005-2020) By Simona Bozhinovska
  26. An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound By Haderer, Michaela
  27. Stagflation and Topsy-Turvy Capital Flows By Julien Bengui; Louphou Coulibaly
  28. Is the Word of a Gentleman as Good as His Tweet? Policy Communications of the Bank of England By Lamla, Michael; Vinogradov, Dmitri
  29. The relationship between Unemployment, NAIRU and Investment. Microfundations for Incomplete Nominal Adjustment By Vîntu, Denis
  30. How Deposit Insurers Account for Inflation: Practices and Existing Guidance By Bert Van Roosebeke; Ryan Defina
  31. Money and Banking with Reserves and CBDC By Dirk Niepelt
  32. Business Cycles, Inflation and Unemployment: An MMT perspective By M S, Navaneeth
  33. Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities By Andrejs Zlobins
  34. Monetary Policy and Exchange Rate Dynamics in a Behavioural Open Economy Model By Marcin Kolasa; Sahil Ravgotra; Pawel Zabczyk
  35. The Impact of U.S. Monetary Policy on Foreign Firms By Julian di Giovanni; John H. Rogers
  36. Forecasting Ination: A GARCH-in-Mean-Level Model with Time Varying Predictability. By Alessandra Canepa,; Karanasos, Menelaos; Paraskevopoulos, Athanasios; Chini, Emilio Zanetti
  37. Assessing Unconventional Monetary Policy in Japan Using Market Operation-based Monetary Policy Indices By Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
  38. Can Discounting Alone Resolve the Forward Guidance Puzzle? By Ji, Yangyang
  39. Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention By Naef, Alain
  40. Understanding U.S. Inflation During the COVID Era By Laurence M. Ball; Daniel Leigh; Prachi Mishra
  41. The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through By Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
  42. A Quantitative Evaluation of Interest Rate Liberalization Reform in China By Jing Yuan; Yan Peng; Zongwu Cai; Zhengyi Zhang

  1. By: Bernd Hayo (Marburg University); Johannes Zahner (Marburg University)
    Abstract: To which degree can variation in sentiment-based indicators of central bank communication be attributed to changes in macroeconomic, financial, and monetary variables; idiosyncratic speaker effects; sentiment persistence; and random ‘noise’? Using the Loughran and McDonald (2011) dictionary on a text corpus containing more than 10,000 speeches and press statements, we construct sentiment-based indicators for the ECB and the Fed. An analysis of variance (ANOVA) shows that sentiment is strongly persistent and influenced by speaker-specific effects. With about 80% of the variation in sentiment being due to noise, our findings cast doubt on the reliability of conclusions based on variation in dictionary-based indicators.
    Keywords: Sentiment index, monetary policy, central banks, Loughran and McDonald (2011) dictionary, information content of sentiment indices
    JEL: C55 E58 E61 Z13
    Date: 2022
  2. By: Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome); Marialaura Seccareccia (Department of Economics and Finance, LUISS Guido Carli)
    Abstract: Cyclical inequality and idiosyncratic risk imply additional channels that amplify the transmission of persistent balance-sheet policies, through their effects on private sector's expectations and consumption risk. Through these channels, unconventional monetary policy improves the central bank's ability to anchor expectations and rule out endogenous instability. Moreover, they allow the central bank to optimally complement interest-rate policy in particular in response to financial shocks that expose the economy to the effective-lower-bound on the policy rate, and can promote a swifter exit from the liquidity trap.
    Keywords: Cyclical inequality; idiosyncratic risk; optimal monetary policy; HANK; THANK, ELB.
    JEL: E21 E32 E44 E58
    Date: 2022–11
  3. By: Sangyup Choi (Yonsei University); Sang-Hyun Kim (Yonsei University); Myunghwan Andrew Lee (New York University); Siye Bae (Yonsei University); Myungkyu Shim (Yonsei University)
    Abstract: Does partisanship affect household inflation beliefs? This paper answers this question using new online survey data of South Korea, which was run between the presidential election in March 2022 and the presidential inauguration in May 2022, during which participants experienced a regime change. We find that (1) partisan bias affects both inflation expectations and perceived inflation in the past year but (2) self-reported financial literacy mitigates the bias.
    Keywords: Inflation expectations, partisan bias, household survey, Blinder-Oaxaca decomposition.
    JEL: E32 I31
    Date: 2022–11
  4. By: Julliard, Christian (London School of Economics); Pinter, Gabor (Bank of England); Todorov, Karamfil (Bank for International Settlements); Yuan, Kathy (London School of Economics)
    Abstract: Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks were backed by high-quality collateral. Banks intermediate repo liquidity among different counterparties and use CCPs to reallocate high-quality collaterals among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders’ liquidity position or default probabilities.Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks were backed by high-quality collateral. Banks intermediate repo liquidity among different counterparties and use CCPs to reallocate high-quality collaterals among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders’ liquidity position or default probabilities.
    Keywords: Repurchase agreement; systemic risk; repo market; margin; haircut;
    JEL: E44 G14 G23
    Date: 2022–06–10
  5. By: Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
    Abstract: Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop a theoretical model that underpins our empirical test of this `irrelevance hypothesis,' based on the simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of monetary policy. We test the hypothesis for Japan and the United States using a structural vector autoregressive model with the ELB. We firmly reject the hypothesis but find that UMP has had strong delayed effects.
    Keywords: Effective lower bound, unconventional monetary policy, structural VAR
    JEL: E52 E58
    Date: 2022–10
  6. By: Du, Chuan (Bank of England)
    Abstract: In periods of stress, acute liquidity squeeze can manifest in the riskier segments of the credit market, even amid a surplus of aggregate liquidity. In such scenarios, central bank interventions that directly lower the risky interest rate can be more effective than reductions in the risk-free interest rate. Specifically, the central bank lends to the market at more favourable interest rates while simultaneously reducing the haircuts imposed on eligible collateral. In doing so, the central bank takes on greater credit risk, but achieves an outcome that is more productively efficient than simply reducing the risk-free interest rate.
    Keywords: Collateral; leverage; credit conditions; monetary policy; general equilibrium
    JEL: D53 E44 E51 E52 E58
    Date: 2022–07–21
  7. By: Cantore, Cristiano (Bank of England); Ferroni, Filippo (Chicago Fed); Mumtaz, Hroon (Queen Mary, University of London); Theophilopoulou, Angeliki (Brunel University London)
    Abstract: We study the interaction between monetary policy and labour supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong income effect on labour supply in the left tail of the income distribution, following a monetary policy shock in the US and the UK. That is, while aggregate hours and labour earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with a lower intertemporal elasticity of substitution for the Hand-to-Mouth households. This setup has important implications for the impact of inequality on the transmission of monetary policy. We unveil a novel dampening effect on aggregate demand generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Therefore we show that the impact of inequality on the transmission mechanism of monetary policy is highly dependent on the different layers of heterogeneity on the household side and the different combinations of nominal and real frictions. More inequality does not necessarily generate a stronger response of aggregate demand after a monetary policy shock.
    Keywords: Monetary policy; household survey; FAVARs; TANK; hand to mouth
    JEL: C10 E32 E52
    Date: 2022–07–21
  8. By: Viacheslav Sheremirov
    Abstract: Using highly disaggregated personal consumption expenditures data, I analyze whether the recent inflation run-up is explained by supply shocks more than by demand shocks, and whether these demand and supply shocks are likely persistent or transitory. I develop a new decomposition method that enables me to classify inflation in disaggregated consumption categories as being driven predominantly by persistent supply shocks, transitory supply shocks, transitory demand shocks, or persistent demand shocks. Similar to other recent analyses, this brief finds that both demand and supply shocks are responsible for the recent inflation run-up, and that quantitatively, supply shocks have played a larger role than demand shocks. However, while supply shocks are classified as mostly transitory, for much of the recent period the demand shocks had a relatively large persistent component. In light of these results, I briefly discuss how the sources of inflation and their persistence can affect the monetary policy response to inflation and the likelihood of achieving a soft landing.
    Keywords: inflation persistence; demand and supply shocks; sectoral decomposition
    JEL: E31 E32
    Date: 2022–11–07
  9. By: Constantin Bürgi; Bo Jiang
    Abstract: How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital”. In a panel of US banks, we find strong evidence in support of our model for various risk measures.
    Keywords: bank lending, deposits, value-at-risk, pseudo capital
    JEL: E43 E52 G21
    Date: 2022
  10. By: Jennifer L. Castle; David F. Hendry; Andrew B. Martinez
    Abstract: We model UK price and wage inflation, productivity and unemployment over a century and a half of data, selecting dynamics, relevant variables, non-linearities and location and trend shifts us¬ing indicator saturation estimation. The four congruent econometric equations highlight complex interacting empirical relations. The production function reveals a major role for energy inputs ad-ditional to capital and labour, and although the price inflation equation shows a small direct impact of energy prices, the substantial rise in oil and gas prices seen by mid-2022 contribute half of the increase in price inflation. We find empirical evidence for non-linear adjustments of real wages to inflation: a wage-price spiral kicks in when inflation exceeds about 6–8% p.a. We also find an addi-tional non-linear reaction to unemployment, consistent with involuntary unemployment. A reduction in energy availability simultaneously reduces output and exacerbates inflation.
    Date: 2022–09–07
  11. By: Costa Cabral, Nazare
    Abstract: The author identifies the two main (external and internal) dimensions of incomplete sovereignty in the EMU and the respective caveats affecting the scope of the single monetary policy, here described as a ‘monetary policy integration trap’. The author details the main implications caused by this curtailed sovereignty both in its external and internal dimensions – e.g. on the one hand, the polarisation of external positions and, on the other hand, the effects of limited European fiscal/budgetary sovereignty and the atypical interaction between the latter and the single monetary policy. Finally, the way the E(M)U has in recent years addressed this integration trap is analysed, making use of a heterodox method here labelled as the ‘State-mimicking’ method.
    Keywords: Sovereignties – Balance of Payments - Monetary policy – Integration trap – State-mimicking method
    JEL: E5 E6 F12 F45
    Date: 2022–11–02
  12. By: Ying Fang (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Zeqin Liu (School of Statistics, Shanxi University of Finance and Economics, Taiyuan, Shanxi 030006, China); Ming Lin (The Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, Fujian 361005, China and Department of Statistics & Data Science, School of Economics, Xiamen University, Xiamen, Fujian 361005, China)
    Abstract: The main goal of macro prudential policies is to maintain financial stability. Macro prudential policy framework is a dynamic one, consisting of capital requirements, leverage ratio, liquidity requirements, etc. The concept of macro prudential, developed mainly after the 2008 financial crisis, is the counterpart to micro prudential. Micro prudential policies focus on individual financial institutions, believing that the stability of individual financial institutions could guarantee the stability of the entire financial system. With the outbreak of the financial crisis in 2008, people realized that the sum of micro prudential was not equal to macro prudential, and the sum of healthy micro entities could not guarantee a healthy macro whole. Therefore, many countries and international organizations began to focus on the whole financial system and the macro prudential policy framework came into being. Just as the effectiveness of monetary policies is the core issue in the research of monetary policy theory, the effectiveness of macro prudential policies is also the core issue in the research of macro prudential theory. Existing research generally believes that specific macro prudential policy is effective for the specific objective, such as macro prudential policies for credit could effectively reduce the systemic risk caused by increased credit or asset prices rise (Lim et al. (2011), Dell'Ariccia et al. (2012), Cerutti et al. (2017), Akinci and Olmstead-Rumsey (2018), Fang Yi (2016), Liang Qi et al. (2015)). However, as pointed by Lim et al. (2011) and Dell'Ariccia et al. (2012), the highly targeted characteristic of macro prudential policies would lead to the transfer of risks to sectors with weak supervision due to regulation and cross-border arbitrage, which may lead to more serious consequences. Therefore, it is of great theoretical value and practical significance to explore the effectiveness of macro prudential policies from the perspective of overall financial stability and systemic financial risk. The aim of this paper is to empirically evaluate the effects of the macro prudential policies on financial stability in China. Firstly, the paper proposes adopting the macro-econometric policy evaluation method under the Rubin causal effect framework to evaluate the impact of China's macro prudential policies on financial stability during the sample period 2007-2020. The method is a new route to empirically evaluate macroeconomic policy effects. Different from the panel data methods and micro-level data analyses used in existing studies, the method can evaluate the combined effects of various macro prudential tools for a specific country. Secondly, based on the macro prudential databases of Shim (2013) and Global Macro prudential Policy Instruments (GMPI) survey database of IMF during 2013- 2014, the paper comprehensively explores the practice of macro prudential policies in China since 2000, and constructs a monthly macro prudential policy index to quantitatively measure the intensity of China's macro prudential policies for the period from January 2000 to May 2022. Thirdly, the paper uses the systemic financial risk index, termed as SRISK proposed by Brownlees and Engle (2017), to measure China's systemic financial risk. And then evaluates the macro prudential policies' effects on the systemic financial risk, cross-sectoral contagion of systemic financial risk and important intermediate variables in the credit channel. Our empirical findings indicate that loose macro prudential policies can increase the risks of intermediate variables in the credit channel, and the risks lead to a significant rise in SRISK of house sector, but for the SRISK of financial and manufacturing sectors, the cumulative effects in 24 periods are not significant. However, in addition to a significant rise in commercial banks' capital adequacy ratio growth, tight macro prudential policies have no significant effects on the other intermediate variables in the credit channel, and further have no obvious effects on SRISK of financial, house and manufacturing sectors. Based on the conclusions, we suggest that systemic risk indicators should be further researched to provide more comprehensive and systematic targets for macro prudential authorities. Moreover, the transmission channel of macro prudential policies on financial stability should be improved to enhance the efficiency of regulation. Finally, more attentions should be paid to the cross-sectoral contagion of systemic financial risk to prevent systemic financial risk from a systemic perspective.
    Keywords: Macro prudential policies; Financial stability; Systematic risk; Macroeconomic policy evaluation; SRISK; Machine learning
    JEL: E60 E50 G28
    Date: 2022–11
  13. By: Edouard Mien (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique)
    Abstract: There are different channels through which variations in international crude oil prices translate into changes in net-oil exporting countries' domestic prices. This article identifies two of these causal mechanisms, namely the pass-through effect and the Dutch disease effect. It intends to disentangle these two effects in the five oil producers of the Central African Economic and Monetary Community: Cameroon, the Republic of Congo, Chad, Equatorial Guinea, and Gabon. It also investigates the heterogeneity across countries in the face of international oil price and domestic oil production shocks based on a multiple time-series strategy covering the period 1995-2019. Applying Dynamic Ordinary Least Squares and Autoregressive Distributed Lag models, it concludes to the presence of a pass-through effect in Cameroon, Chad, and the Republic of Congo and of a Dutch disease effect in Equatorial Guinea. This contributes to the understanding of the relationships between international commodity prices and domestic consumer price variations but can also help policymakers in the CEMAC by assessing the vulnerability of its members toward external shocks.
    Date: 2022–12
  14. By: Pierpaolo Benigno
    Abstract: Can currency competition affect central banks' control of interest rates and prices? Yes, it can. In a two-currency world with competing cash (material or digital), the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In any case, the government has full control of the inflation rate. With an interest-bearing digital currency, equilibria in which government currency loses medium-of-exchange property are ruled out. This benefit comes at the cost of relinquishing control over the inflation rate.
    Date: 2022–09
  15. By: Zheng Liu; Jianjun Miao; Dongling Su
    Abstract: The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multiplies due to intertemporal substitution. In a zero-lower-bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a nonlinear effect on fiscal multipliers because of the absence of inflation makeup and the presence of a nominal wealth effect.
    Keywords: average inflation targeting; fiscal multipliers; monetary policy rules; fiscal policy; DSGE models
    JEL: E13 E32 E44 E52 G12
    Date: 2022–11–09
  16. By: Mikael Khan; Elyse Sullivan
    Abstract: We assess the usefulness of various measures of core inflation over the COVID-19 pandemic. We find that Cpi-trim and CPI-median provided the best signal of underlying inflation. The favourable performance of these measures stems from their lack of reliance on historical experience, an especially valuable feature in unprecedented times.
    Keywords: Econometric and statistical methods; Inflation and prices; Monetary policy
    JEL: C18 E E3 E31
    Date: 2022–11
  17. By: Zsófia L. Bárány (CEU - Central European University [Budapest, Hongrie], CEPR - Center for Economic Policy Research - CEPR); Nicolas Coeurdacier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Stéphane Guibaud (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries. Our lifecycle model incorporates crosscountry differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging,Household Saving,International Capital Flows
    Date: 2022
  18. By: Bunn, Philip (Bank of England); Anayi, Lena (Bank of England); Bloom, Nicholas (Stanford University); Mizen, Paul (University of Nottingham); Thwaites, Gregory (University of Nottingham); Yotzov, Ivan (Bank of England)
    Abstract: We use data from a large panel survey of UK firms to analyze the economic drivers of price setting since the start of the Covid pandemic. Inflation responded asymmetrically to movements in demand. This helps to explain why inflation did not fall much during the negative initial pandemic demand shock. Energy prices and shortages of labor and materials account for most of the rise during the rebound. Inflation rates across firms have become more dispersed and skewed since the start of the pandemic. We find that average price inflation is positively correlated with the dispersion and skewness of the distribution. Finally, we also introduce a novel measure of subjective inflation uncertainty within firms and show how this has increased during the pandemic, continuing to rise in 2022 even as sales uncertainty dropped back.
    Keywords: Inflation; Covid-19; uncertainty
    JEL: C83 D22 D84 E31
    Date: 2022–08–19
  19. By: Andrés Blanco; Pablo Ottonello; Tereza Ranosova
    Abstract: We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation following surges tends to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit mild increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. Our findings highlight the challenges monetary authorities face in avoiding persistent inflation dynamics following large inflation surges.
    JEL: E31 E40 F40
    Date: 2022–10
  20. By: Paulo Rodelio Halili (Asian Development Bank); Rogelio V. Mercado, Jr. (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: This paper examines the importance of trade ties, macro-financial volatilities, and US dollar trade invoicing in explaining Asia’s international investment assets and liabilities denominated in world currencies, including the US dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Chinese yuan (CNY). The results show heterogeneous patterns of relevant covariates across different currencies. More importantly, the estimates offer evidence that the region hedges its currency risk by investing in US dollar denominated assets as greater US dollar trade invoicing significantly covaries with greater debt asset holdings denominated in US dollar.
    Keywords: currency composition, international investment assets and liabilities, trade invoicing, bilateral trade, macro-financial volatilities
    JEL: F31 F36 F41
    Date: 2022–11
  21. By: Delia Sih Chien Macaluso; Michael McMahon
    Abstract: The Bank of England’s Monetary Policy Committee (MPC) celebrated 25 years of existence in June 2022. This period is marked by a global trend toward greater transparency and more communication in central banks. While some of these changes took place before the Bank of England was given independent operational control of monetary policy, the Bank has played a leading role in many of these trends. This short paper takes a look back the communication of the Bank of Eng¬land, and considers the impact of current trends going forward.
    Date: 2022–10–11
  22. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: The European Central Bank (ECB) is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this trade-off would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. Unfortunately, the ECB did not follow this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB appears ineffective and subject to excessive discretion. Therefore, the ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies.
    Keywords: Stagflation; monetary policy; ECB
    JEL: E58 E44 E52
    Date: 2022–11
  23. By: Chevaughn van der Westhuizen (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria); Goodness C. Aye (Department of Economics, University of Pretoria)
    Abstract: Inflation uncertainty expedites macroeconomic ills and instability in the economy. This paper investigates if inflation uncertainty is potentially a self-fulfilling prophecy in that rising levels of uncertainty serve as a source of higher inflation outcomes and vice versa. In addition, this paper examines the impact of inflation targeting, implemented in South Africa in February 2000, on the level of inflation and inflation uncertainty. Using a generalised autoregressive conditional heteroskedasticity (GARCH) and GARCH-in-mean model and monthly data spanning the period 1970:01 to 2022:05, the empirical outcomes from this study suggest the existence of a bi-directional relationship between inflation and inflation uncertainty, with strong evidence in favour of the Friedman-Ball hypothesis and weaker evidence in support of the Cukierman-Meltzer hypothesis. This study also finds that inflation targeting has contributed significantly to reducing the level of inflation and inflation uncertainty since its adoption as policy framework. Time-varying Granger causality tests accounting for instabilities underscore the above results, namely that inflation uncertainty led to increased inflation uncertainty in the full pre-inflation targeting period, while increased uncertainty led to increased inflation only during the decade preceding inflation targeting. The results heed important policy implications, as it is imperative inflation is kept low, stable and predictable.
    Keywords: Inflation, Inflation uncertainty, Inflation targeting, Friedman-Ball hypothesis, Cukierman-Meltzer hypothesis, GARCH modelling, time-varying causality tests
    JEL: C22 E52 E58
    Date: 2022–11
  24. By: Cesa-Bianchi, Ambrogio (Bank of England); Harrison, Richard (Bank of England); Sajedi, Rana (Bank of England)
    Abstract: We use a structural overlapping-generations model to quantify the effects of five exogenous forces that drive the global trend equilibrium real interest rate, Global R*. We use data for 31 countries to extract the global trend components of the five drivers and to derive an empirical estimate of Global R*, which we use to calibrate the model. We design a recursive simulation method in which beliefs about the future path of the drivers are updated gradually. In our simulation, Global R* rises from the mid-1950s to the mid-1970s, declining steadily thereafter. The decline is driven predominantly by slowing productivity growth and increasing longevity.
    Keywords: Equilibrium interest rates; structural change; demographics
    JEL: E22 E43 J11
    Date: 2022–07–12
  25. By: Simona Bozhinovska (CEPN - Centre d'Economie de l'Université Paris Nord - LABEX ICCA - UP13 - Université Paris 13 - Université Sorbonne Nouvelle - Paris 3 - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité - Université Sorbonne Paris Nord - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord)
    Abstract: The present article deals with the evolution of the operational framework of the Swiss central bank, brought forward by its extensive official foreign exchange purchases following the outburst of the global financial crisis. It provides an endogenous money interpretation of the operations of the Swiss National Bank under both shortage and surplus in the aggregate liquidity position of the banking sector vis-à-vis the central bank, reinforcing thus the claim that the compensating movements on the central bank balance sheet in response to foreign exchange accumulation are nothing more than interest rate targeting operations. Given the rather unusual choice of a longer-term interest rate abroad as its policy rate, initially the SNB only partially compensated these movements, so as to ensure a rather generous supply of central bank reserves and bring this rate down to its targeted level, while domestic market rates were set lower. The later adoption of a floor system with ample reserves, allowed the SNB to maintain a near-perfect control over its policy interest rate while at the same time establishing a direct link between foreign reserves and the monetary base, leaving little room to assume a further quantitative effect from this expansion of central bank reserves.
    Keywords: central bank operations,foreign exchange accumulation,monetary policy implementation,Swiss National Bank
    Date: 2022–10–31
  26. By: Haderer, Michaela
    Abstract: I investigate the implications of the zero lower bound (ZLB) in a structural New-Keynesian model for the euro area. The medium-scale DSGE model accommodates forward guidance by treating the expected durations of the ZLB constraint as free parameters in estimation. Incorporating professional forecasters’ expectations about the future path of the policy rate provides well-identified estimates of the durations. These estimates indicate that unconventional monetary policy becomes increasingly important from 2018 on. Furthermore, when monetary policy is expected to be passive in its response to inflation after liftoff, forward guidance has weaker effects with deflationary pressures on the economy. Finally, including data from the Covid-19 pandemic in estimation leads to stable estimates and allows an assessment of monetary policy during that period.
    Keywords: monetary policy; zero lower bound; forward guidance; liftoff; Covid-19
    Date: 2022–11
  27. By: Julien Bengui; Louphou Coulibaly
    Abstract: Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks.
    Keywords: Inflation and prices; International financial markets; International topics; Monetary policy
    JEL: D62 E52 F38 F41
    Date: 2022–10
  28. By: Lamla, Michael; Vinogradov, Dmitri
    JEL: E52 E70
    Date: 2022
  29. By: Vîntu, Denis
    Abstract: This paper proposes a simple method to estimate a macro shock-specific Okun elasticity: it measures by how much the unemployment rate falls over a certain horizon when output increases by one percentage point over the same horizon because of a specific macroeconomic shock. Inference is based on simple instrumental variable regressions of cumulative unemployment on cumulative output. Using data for the Republic of Moldova I consider government spending, tax, monetary policy, financial, technology, and oil shocks. We obtain eight key results: • At medium horizons (2-3 years), Okun elasticities are largely stable across different kinds of shocks. • At shorter horizons, differences are more pronounced. The speed at which unemployment adjusts relative to output depends on the shock driving fluctuations. This highlights the importance to consider longer horizons. Otherwise, one could incorrectly conclude that the elasticity breaks down for some cycles. • The elasticity is larger for financial shocks. Importantly, it is larger than for monetary policy and government spending shocks. • The largest elasticity is for technological shocks followed by oil shocks. • An increase/decrease in unemployment by (0.14 p.p.) caused an increase/decrease in GDP by 1 p.p. period 2011--2015. • An increase/decrease in unemployment by (1.79 p.p.) caused an increase/decrease in money supply by 1 p.p. period 2011--2015. • An increase/decrease in unemployment by (0.17 p.p.) caused an increase/decrease in GDP by 1 p.p. period 2007--2011. • An increase/decrease in unemployment by (0.06 p.p.) caused an increase/decrease in money supply by 1 p.p. period 2007--2011.
    Keywords: Unemployment; investment; monetary policy; rational expectations; interests rates; credit index implications
    JEL: E43 E52 E61 J68
    Date: 2022–09
  30. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: IADI Guidance in place recommends a review of deposit insurance coverage levels more frequently than every five years if consumer price inflation is high. This review may not necessarily lead to a change of coverage levels. Although data availability on this topic is very limited, we find: On a self-reported basis and irrespective of inflation, only half of deposit insurers “periodically†review the coverage level. Although this share has been growing over the past decade, evidence from a sub-sample suggests that irrespective of inflation, periodic review of coverage levels by deposit insurers may regularly take place at intervals exceeding five years. Linking data on coverage review to historical inflation figures on an individual jurisdictional level, we found no substantial evidence that high inflation correlates with more regular periodic review of coverage levels. As to changes of coverage levels – which are observable, in contrast to reviews – we find some early evidence to suggest that coverage levels are adjusted more frequently in jurisdictions with higher levels of inflation.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–11
  31. By: Dirk Niepelt
    Abstract: We analyze retail central bank digital currency (CBDC) in a two-tier monetary system with bank deposit market power and externalities from liquidity transformation. Resource costs of liquidity provision determine the optimal monetary architecture and modified Friedman (1969) rules the optimal monetary policy. Optimal interest rates on reserves and CBDC differ. A calibration for the U.S. suggests a weak case for CBDC in the baseline but a much clearer case when too-big-to-fail banks, tax distortions or instrument restrictions are present. Depending on central bank choices CBDC raises U.S. bank funding costs by up to 1.5 percent of GDP
    Keywords: Central bank digital currency, reserves, two-tier system, bank, liquidity, equivalence
    JEL: E42 E43 E51 E52 G21 G28
    Date: 2022–10
  32. By: M S, Navaneeth
    Abstract: Any modern economy faces the periodic tendency of fluctuations that disrupts the macroeconomic variables leading to massive downturns in economic activity- conceptualized as business cycles. This review article examines the countercyclical policies adopted by Central Banks during recessions in light of the various arguments laid out by Modern Monetary Theory (MMT). Finally, it also looks into the assumptions behind Phillips' curve and what MMT has to offer in terms of inflation targeting
    Keywords: MMT; NAIRU; Phillip's Curve; Business Cycle
    JEL: B50
    Date: 2021–07
  33. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the interaction among non-standard monetary policy measures – the negative interest rate policy, forward guidance and quantitative easing – and their ability to substitute conventional policy rate setting when it is constrained by the effective lower bound. In this paper, the euro area serves as our laboratory since the European Central Bank has deployed all three unconventional measures in the past decade to bypass the binding effective lower bound constraint and stabilize the inflation trajectory towards the target. Our empirical setup makes use of a smooth-transition structural vector autoregression, while identification of monetary innovations is done via fusion of high frequency information with narrative sign restrictions, first introduced in Zlobins (2021b) and now further extended to isolate rate cuts in positive/negative territory, allowing to simultaneously identify the impact of both conventional and unconventional policy actions. Our findings show that unconventional measures can substitute the standard policy rate setting but their effectiveness is highly dependent on the overall policy mix and the state of the economy. However, the evidence also suggests that non-standard measures serve as complements to the conventional policy as they are particularly powerful in circumstances when standard policy rate setting loses its stabilization properties, for example, during market turbulence or when the risk of de-anchoring of inflation expectations is elevated.
    Keywords: quantitative easing, negative interest rate policy, forward guidance, monetary policy, non-linearities
    JEL: C54 E50 E52 E58
    Date: 2022–11–11
  34. By: Marcin Kolasa (International Monetary Fund); Sahil Ravgotra (University of Surrey); Pawel Zabczyk (International Monetary Fund)
    Abstract: We develop and estimate an extension of the open economy New Keynesian model in which agents are boundedly rational _a la Gabaix (2020). Our setup successfully mitigates many puzzling aspects of the relationship between exchange rates and interest rates, and remains consistent with recent empirical evidence showing that UIP puzzles vanish when actual - as opposed to rational - exchange rate expectations are used. We find that accounting for myopia dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the “FG puzzle" is decreasing in openness. We also show that bounded rationality makes positive monetary spillovers more likely, increases the persistence of the real exchange rate and net foreign assets, and exacerbates the small open economy unit root problem. Finally, the model provides arguments against using the exchange rate as a nominal anchor.
    JEL: F41 E70 E52 E58 G40
    Date: 2022–11
  35. By: Julian di Giovanni; John H. Rogers
    Abstract: This paper uses cross-country firm-level data to explore the impact of U.S. monetary policy shocks on firms’ sales, investment, and employment. We estimate a sizable impact of U.S. monetary policy on the average foreign firm, while controlling for other macroeconomic and financial variables like the VIX and exchange rate fluctuations that accompany U.S. monetary policy changes. We then quantify the role of international trade exposure and financial constraints in transmitting monetary policy shocks to firms, allowing for a better identification of the importance of external demand effects and the interest rate channel. We first exploit cross-country sector-level data on intermediate and final goods trade to show that greater global production linkages amplify the impact of U.S. monetary policy at the firm level. We then show that the impact varies along the firm-level distribution of proxies for firms’ financial constraints (for example, size and net worth), with the impact being significantly attenuated for less constrained firms.
    Keywords: U.S. monetary policy spillovers; Foreign firms; production linkages; financial constraints
    JEL: E52 F40
    Date: 2022–11–01
  36. By: Alessandra Canepa,; Karanasos, Menelaos; Paraskevopoulos, Athanasios; Chini, Emilio Zanetti (University of Turin)
    Abstract: In this paper we employ an autoregressive GARCH-in-mean-level process with variable coe¢ cients to forecast in?ation and investigate the behavior of its persistence in the United States. We propose new measures of time varying persistence, which not only distinguish between changes in the dynamics of in?ation and its volatility, but are also allow for feedback between the two variables. Since it is clear from our analysis that predictability is closely interlinked with (?rst-order) persistence we coin the term persistapredictability. Our empirical results suggest that the proposed model has good forecasting properties.
    Date: 2022–09
  37. By: Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
    Abstract: Open market operations (MOs) were not originally designed for making monetary policy changes during normal times. However, they became an integral part of the unconventional monetary policy (UMP) when the policy rates hit the effective lower bound during the 2008 global financial crisis in the major advanced countries. This study quantifies the effect of UMP carried out by MO on the macroeconomy in Japan, from 2002 to 2019, based on four market operation-based monetary policy indices (MO-MPIs), namely a broadly-defined quantitative easing index and three liquidity supply indices targeting different financial market segments. Our results indicate that there were three distinctive regimes with different policy impacts: (1) before mid-2008, (2) mid-2008 – mid-2016, and (3) after mid-2016. Moreover, UMP carried out using MO was the most effective in the second regime, with very strong effects of all MO-MPIs on almost all macroeconomic variables. Furthermore, MO-MPIs became substantially less effective in the third regime (after mid-2016) after the Bank of Japan introduced yield curve control.
    Date: 2022–11
  38. By: Ji, Yangyang
    Abstract: Numerically, we examine the expansionary effects of forward guidance at different horizons in Gabaix’s (2020) model and find that the role of discounting is limited and that unrealistic assumptions about parameter calibration are also required to resolve the forward guidance puzzle. We extend Gabaix’s (2020) model to include wage stickiness and find that discounting alone can resolve the puzzle even assuming standard calibration.
    Keywords: Forward Guidance Puzzle; Discounting; New Keynesian Model; Wage Stickiness
    JEL: E12 E21 E23 E52 E62
    Date: 2022–06–23
  39. By: Naef, Alain
    Abstract: Most countries in the world use foreign exchange intervention, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to reverse the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980s and 1990s. Some studies find that interventions work in up to 80% of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8% of cases. I use natural language processing to confirm the validity of the narrative approach. Using lasso and a VAR analysis, I investigate what makes the Bank of England intervene. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.
    Date: 2022–10–08
  40. By: Laurence M. Ball; Daniel Leigh; Prachi Mishra
    Abstract: This paper analyzes the dramatic rise in U.S. inflation since 2020, which we decompose into a rise in core inflation as measured by the weighted median inflation rate and deviations of headline inflation from core. We explain the rise in core with two factors, the tightening of the labor market as captured by the ratio of job vacancies to unemployment, and the pass-through into core from past shocks to headline inflation. The headline shocks themselves are explained largely by increases in energy prices and by supply chain problems as captured by backlogs of orders for goods and services. Looking forward, we simulate the future path of inflation for alternative paths of the unemployment rate, focusing on the projections of Federal Reserve policymakers in which unemployment rises only modestly to 4.4 percent. We find that this unemployment path returns inflation to near the Fed’s target only under optimistic assumptions about both inflation expectations and the Beveridge curve relating the unemployment and vacancy rates. Under less benign assumptions about these factors, the inflation rate remains well above target unless unemployment rises by more than the Fed projects.
    JEL: E31
    Date: 2022–10
  41. By: Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
    Abstract: Banks of different sizes respond differently to interest on reserve (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-though of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission. We explore the implications of two design features: interest rate and convenience value. Increasing the CBDC interest rate past a point where it becomes a binding floor, increases deposit rates but leads to a wider divergence of market shares in both deposit and lending markets and can reduce the responsiveness of deposit rates to changes in the IOR rate. In contrast, increasing convenience, from sufficiently high levels, increases deposit rates, causes market shares to converge and can increase the responsiveness of deposit rates to changes in the IOR rate.
    Keywords: central bank digital currency, interest on reserves, payment convenience, deposit rates, bank lending.
    JEL: E42 G21 G28 L11 L15
    Date: 2022–10
  42. By: Jing Yuan (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Yan Peng (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Zhengyi Zhang (International School of Economics and Management, Capital University of Economics and Business, Beijing, Beijing 100070, China)
    Abstract: Based on the characteristics of monetary policy and term structure of bond yields, this paper proposes an interest rate model to evaluate the consequences of interest rate liberalization in China. Our empirical results show that bench- mark interest rates and expected inflation are strongly correlated, although the relationship between expected inflation and market interest rates of all terms is relatively weak. Additionally, our model provides a superior goodness-of-fit over the predicted mean, the variance and the correlations of treasury bond yields, and the inflation estimated from the proposed model demonstrates more preferable forecasting accuracy by outperforming the results estimated from either Langrun or Baidu CPI index. Our findings suggest that adjustment of benchmark rates and reserve requirement are the most important price-based tools for the central bank to transmit the effects of monetary policy along the yield curve. The development of interest rate liberalization further requires prudential managements by the central bank to focus on short-term interest rate intervention besides policy support, in emphasizing the power of market forces to eventually link the change in market interest rates with economic fundamentals.
    Keywords: Economic fundamentals; Expected inflation rate, Interest rate term structure, Interest rate marketization reform.
    JEL: G1 E4 C5
    Date: 2022–11

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