nep-mon New Economics Papers
on Monetary Economics
Issue of 2022‒12‒19
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Limits of onetary Economics: On Money as a Latent Medium of Exchange By Ricardo Lagos; Shengxing Zhang
  2. How Abundant Are Reserves? Evidence from the Wholesale Payment System By Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
  3. Monetary Stance and Favorableness of Monetary Policy in the Media: The Case of Viet Nam By Thang, Doan Ngoc; Anh, Pham Thi Hoang; Long, Trinh; Dong, Do Phy; Dat, Luong Van
  4. Euro area inflation and a new measure of core inflation By Claudio Morana
  5. Central Bank Monetary Policy Strategies amid Turmoil in the World Economy By Michel Aglietta; Sabrina Khanniche
  6. Central Bank Information Effects in Japan : The Role of Uncertainty Channel By Matsumoto, Ryo; Morita, Hiroshi; Ono, Taiki
  7. Euro area monetary policy and TARGET balances: a trilogy By Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
  8. Monetary Policy, Firm Heterogeneity, and Product Variety By Masashige Hamano; Francesco Zanetti
  9. Should Central Banks Have an Inequality Objective? By Roberto Chang
  10. Navigating the housing channel of monetary policy across euro area regions By Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
  11. Stagflation and Topsy-Turvy Capital Flows By Julien Bengui; Louphou Coulibaly
  12. COVID-19 and Public Support for the Euro By Roth, Felix; Jonung, Lars; Most, Aisada
  13. Price setting before and during the pandemic: evidence from Swiss consumer prices By Rudolf, Barbara; Seiler, Pascal
  14. Stablecoins and Their Risks to Financial Stability By Cameron MacDonald; Laura Zhao
  15. Why Aging Induces Deflation and Secular Stagnation By R. Anton Braun; Daisuke Ikeda
  16. How Do the Financial Markets Respond to Emerging Economies’ Asset Purchase Program? Evidence from the COVID-19 Crisis By Prabheesh, K. P.; Kumar, Sanjiv
  17. Imperfect Information, Heterogeneous Demand Shocks, and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  18. Spillovers from US Monetary Shocks: Role of Policy Drivers and Cyclical Conditions By Arbatli-Saxegaard, Elif; Furceri, Davide; Gonzalez Dominguez, Pablo; Ostry, Jonathan; Peiris, Shanaka
  19. Indirect Consumer Inflation Expectations: Theory and Evidence By Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
  20. Fisher vs Keynes: Does an Interest Rate Hike Cause Inflation to Increase or Decrease? By Marieh Azizirad
  21. Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market By Rod Garratt; Sofia Priazhkina
  22. The Policy Mix in a Monetary Union: Who Bears the Burden of Asymmetric Shocks’ Stabilisation? By Christos Mavrodimitrakis
  23. Pass-Through of Cost-Push Pressures to Consumer Prices By Tomoyuki Yagi; Yoshiyuki Kurachi; Masato Takahashi; Kotone Yamada; Hiroshi Kawata
  24. How Large is the Output Cost of Disinflation? By Robert J. Tetlow
  25. A Keynesian-Minskian perspective on the transformation of industrial into financial capitalism By Heise, Arne
  26. Consumption Loan Augmented Divisia Monetary Index and China Monetary Aggregation By William Barnett; Kun He; Jingtong He
  27. Inflation risk and the labor market: beneath the surface of a flat Phillips curve By Sirio Aramonte
  28. Dollar-Yuan Battle in the World Trade Network By C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky
  29. The rise and fall of global financial flows in EU 15: new evidence using dynamic panels with common correlated effects By Mariam Camarero; Silviano Alejandro Muñoz; Cecilio Tamarit
  30. The market for short-term debt securities in Europe: what we know and what we do not know By Darpeix, Pierre-Emmanuel
  31. Nominal GDP Targeting and the Taylor Rule on an Even Playing Field By Beckworth, David; Hendrickson, Joshua
  32. Foreign Fund Flows and Equity Prices during the COVID-19 Pandemic: Evidence from India By Acharya, Viral V.; Anshuman, V. Ravi; Kumar, K. Kiran

  1. By: Ricardo Lagos (New York University); Shengxing Zhang (London School of Economics (LSE))
    Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries, and show this mechanism is operative even for sellers who never exercise the option to sell for cash. These latent money demand considerations imply that in general, in contrast to current conventional wisdom in policy-oriented research in monetary economics, monetary policy remains effective through medium-of-exchange transmission channels—even in highly developed credit economies where the share of monetary transactions is negligible.
    Keywords: Cashless, credit, liquidity, money, monetary policy
    JEL: D83 E52 G12
    Date: 2021–02
  2. By: Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
    Abstract: Before the era of large central bank balance sheets, banks relied on incoming payments to fund outgoing payments in order to conserve scarce liquidity. Even in the era of large central bank balance sheets, rather than funding payments with abundant reserve balances, we show that outgoing payments remain highly sensitive to incoming payments. By providing a window on liquidity constraints revealed by payment behavior, our results shed light on thresholds for the adequacy of reserve balances. Our findings are timely, given the ongoing shrinking of central bank balance sheets around the world in response to inflation.
    Keywords: real-time gross settlement; quantitative tightening; Balance sheet management; reserve balances
    JEL: E42 E44 E52 E58 G21
    Date: 2022–11–01
  3. By: Thang, Doan Ngoc (Asian Development Bank Institute); Anh, Pham Thi Hoang (Asian Development Bank Institute); Long, Trinh (Asian Development Bank Institute); Dong, Do Phy (Asian Development Bank Institute); Dat, Luong Van (Asian Development Bank Institute)
    Abstract: We analyze the effects of monetary stance on the media’s favorable (or otherwise) attitude to the State Bank of Viet Nam’s (SBV) monetary policy using monthly data from 2011 to 2021. Monetary stance is a multivariate index based on the growth rates of money supply and domestic credit. A large set of articles published in five Viet Nam daily newspapers is utilized to construct a view of the media’s favorableness to the monetary policy. Our main findings are that a change in monetary stance from easing to neutral/tightening, or from neutral to tightening is greatly appreciated by the media. This effect is negatively moderated by the volatility of the stock exchange index. Our findings are robust for alternative measures of media’s favorableness, monetary policy variables, and when controlling the endogeneity problem. These findings have important policy implications for implementing SBV’s monetary policy.
    Keywords: monetary policy; monetary stance; media coverage; media favorableness; communication
    JEL: E52 E58
    Date: 2022–06
  4. By: Claudio Morana (Center for European Studies, University of Milano-Bicocca, Italy; Rimini Centre for Economic Analysis; CeRP, Collegio Carlo Alberto, Italy; CES, Harvard, USA)
    Abstract: This paper introduces a new decomposition of euro area headline inflation into core, cyclical and residual components. Our new core inflation measure, the structural core inflation rate, bears the interpretation of expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been on a downward trend, landing at about 3% in 2022. Cyclical and residual inflation -associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might be lurking ahead. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.
    Keywords: headline inflation, core inflation, Russia's war in Ukraine, COVID-19 pandemic, sovereign debt crisis, subprime financial crisis, dot-com bubble, euro area, ECB monetary policy, trend-cycle decomposition
    JEL: C22 C38 E32 F44 G01
    Date: 2022–12
  5. By: Michel Aglietta; Sabrina Khanniche
    Abstract: This policy brief addresses the challenges that confronted the main central banks in the face of uncertainties arising from multiple disruptions: the waves of the Covid-19 pandemic since early 2020 to the energy crisis of 2022, to the disastrous events generated by climate change, the war in Ukraine and the real-estate crisis in China. Inflation has surged due to supply-side problems and fiscal policies fostered by socio-political rivalries both within and between countries. In this environment, the task of central banks to fight high and persistent inflation, while limiting the risk of severe or prolonged recession, is extremely difficult, and particularly so when their lack of cooperation can lead them to overbid one another in raising their policy rate. To understand better how central banks are responding to inflation surges and financial vulnerabilities, we start from reviews of monetary policy frameworks by the Fed and ECB to highlight why they have been induced to abandon their forward guidance in favor of day-to-day responses to the flow of new events. Since early 2022, the main challenge forcing central banks from easing to restrictive monetary policy has been the surge in inflation triggered by the rise in energy and food prices related to the war in Ukraine in a context of deep uncertainty. However, specific national issues remain key to central bank policies.
    Keywords: Surging inflation;Financial vulnerabilities;Yield curve inversion
    JEL: E58 E62 F31
    Date: 2022–11
  6. By: Matsumoto, Ryo; Morita, Hiroshi; Ono, Taiki
    Abstract: Central bank information effect have been analyzed in the recent literature on monetary policy. In this study, we apply the identification method by Jarocinski and Karadi (2020) to the Japanese data to empirically examine the macroeconomic effects of central bank information shock and pure monetary policy shock. These shocks are identified by combining of high-frequency identification and sign restriction. The empirical results support the presence of central bank information effects in Japan. Particularly, the central bank information shock accompanying monetary tightening decreases economic uncertainty and increases stock prices and output, suggesting that central bank’s optimistic outlook is conveyed through contractionary monetary actions. The results of the forecast error variance decomposition indicate that the central bank’s information effect may be spread through changes in uncertainty. Finally, the total effect of monetary policy and information shocks on the variables are much larger than that of the shocks identified by the conventional Cholesky decomposition. These findings are important for evaluating the true effects of monetary actions on the economy.
    Keywords: Monetary policy, Information effect, High-frequency data, VAR model
    JEL: C32 D83 E44 E52 G14
    Date: 2022–11
  7. By: Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
    Abstract: The growth in TARGET balances after 2009 has given rise to intense academic and public debate. Our paper offers a systematic exposition of the necessary conditions for TARGET balances to emerge and provides a clear link to monetary policy. We show that large TARGET balances can only arise with excess liquidity. The interpretation of TARGET balances therefore depends on the monetary policy context in which excess liquidity is created. We distinguish three phases of TARGET balances growth and propose some easy-to-derive metrics for policy makers and academics to assess developments in TARGET balances. We develop a comprehensive econometric framework to account for relevant factors driving TARGET balances in the different phases. We find that while financial market stress and economic imbalances were the drivers of TARGET balances during the great financial and sovereign debt crises, the implementation of Eurosystem asset purchases was the driving force since March 2015. As excess liquidity is likely to persist on account of higher demand for central bank reserves compared to the pre-crisis period, TARGET balances have the potential to remain sizeable in the future. JEL Classification: E42, E58, F32
    Keywords: asset purchase programme, balance of payments, excess liquidity, TARGET2
    Date: 2022–11
  8. By: Masashige Hamano (Waseda University); Francesco Zanetti (University of Oxford)
    Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts an important reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates incumbent firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data that corroborates the relevance of monetary policy for product variety resulting from firm entry and exit.
    Keywords: Monetary policy; firm heterogeneity; product variety; reallocation
    JEL: E32 E52 L51 O47
    Date: 2021–01
  9. By: Roberto Chang
    Abstract: Should central banks care about inequality? To address this question, we extend a standard model of time inconsistency in monetary policy to allow for heterogeneity. As in the standard analysis, lack of policy commitment leads to a bias towards socially excessive inflation. But the novel result is that, in the presence of heterogeneity, the bias can be offset by assigning the central bank a mandate under which agents with higher nominal wealth are given a higher relative weight than under the social welfare function. In other words, society should choose a central banker that is less egalitarian than itself, a result reminiscent of Rogoff's "conservative central banker". Our analysis underscores that including a concern for redistribution in the central bank's mandate can enhance policy credibility, but the details can be unexpected and should reflect the role of the mandate in overcoming policy distortions.
    JEL: E6 F4
    Date: 2022–11
  10. By: Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
    Abstract: This paper assesses the role of the housing market in the transmission of conventional and unconventional monetary policy across euro area regions. By exploiting a novel regional dataset on housing-related variables, a structural panel VAR analysis shows that monetary policy propagates effectively to economic activity and house prices, albeit in a heterogeneous fashion across regions. Although the housing channel plays a minor role in the transmission of monetary policy to the economy on average, its importance increases in the case of unconventional monetary policy. We also explore the determinants of the diverse transmission of monetary policy to economic activity across regions, finding a larger impact in areas with lower labour income and more widespread homeownership. An expansionary monetary policy can thus be effective in mitigating regional inequality via its stimulus to the economy. JEL Classification: D31, E32, E44, E52, R31
    Keywords: business cycles, conventional and unconventional monetary policy, housing market, regional in-equality
    Date: 2022–11
  11. 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.
    JEL: E32 E44 E52 F32 F41 F42
    Date: 2022–11
  12. By: Roth, Felix; Jonung, Lars; Most, Aisada
    Abstract: The COVID-19 pandemic had disastrous effects on health and economic activity worldwide, including in the Euro Area. The application of mandatory lockdowns contributed to a sharp fall in production and a rise in unemployment, inducing an expansionary fiscal and monetary response. Using a uniquely large macro database, this paper examines the effects of the pandemic and the ensuing economic policies on public support for the common currency, the euro, as measured by the Eurobarometer survey. It finds that public support for the euro reached historically high levels in a majority of the 19 Euro Area member states in the midst of the pandemic. This finding suggests that the expansionary fiscal policies initiated at the EU level significantly contributed to this outcome, while the monetary measures taken by the European Central Bank did not have a similar effect.
    Keywords: COVID-19,lockdowns,support for the euro,unemployment,inflation,monetary policies,fiscal policies,EU
    JEL: C23 E24 E42 E52 E62 I18
    Date: 2022
  13. By: Rudolf, Barbara; Seiler, Pascal
    Abstract: We provide new evidence on price rigidity at the product level based on microdata underlying the Swiss consumer price index from 2008 to 2020. We find that the frequency of price changes has increased over the last decade, particularly among products where collection switched to online prices, reflecting the rise of e-commerce. Furthermore, price changes tend to be synchronized within rather than across stores. Time variations in inflation can be attributed mainly to variations in the frequency of both price increases and price decreases. In the first year of the pandemic, the frequency of price adjustments changed little on average, while temporary sales responded countercyclically to the respective demand conditions across sectors. JEL Classification: E31, E5, L11
    Keywords: consumer prices, COVID-19 pandemic, inflation, price-setting behavior, price rigidity
    Date: 2022–11
  14. By: Cameron MacDonald; Laura Zhao
    Abstract: The market for fiat-referenced cryptoassets, commonly known as stablecoins, has expanded rapidly in recent years alongside the growth of the cryptoasset ecosystem. In fact, the market capitalization of stablecoins increased by more than 30 times since the beginning of 2020. What risks could stablecoins pose to the financial system? We examine price stabilization mechanisms of stablecoins as well as the current and potential use cases of stablecoins. We then analyze the risks stemming from both. We argue that the price stabilization mechanisms of current stablecoins could lead to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to risks to financial stability by facilitating the buildup of leverage and liquidity mismatches in decentralized finance. Such risks cannot be addressed by regulating the safety and soundness of stablecoins alone without adequately regulating broader activities in the crypto ecosystem. Finally, we explore the potential implications of the substitution of cash and bank deposits for stablecoins in payments and the financial system more broadly, particularly the current system of bank-intermediated credit and for monetary policy.
    Keywords: Digital currencies and fintech; Financial institutions; Financial markets; Financial stability; Financial system regulation and policies
    JEL: E44 E58 G23
    Date: 2022–11
  15. By: R. Anton Braun; Daisuke Ikeda
    Abstract: We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework, an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate, and the fiscal authority responds by allowing the public debt–gross domestic product ratio to rise.
    Keywords: monetary policy; lifecycle; portfolio choice; secular stagnation; nominal government debt; aging; Tobin effect; fiscal policy; deflation
    JEL: E52 E62 G51 D15
    Date: 2022–09–29
  16. By: Prabheesh, K. P. (Asian Development Bank Institute); Kumar, Sanjiv (Asian Development Bank Institute)
    Abstract: We examine the impacts of unconventional monetary policy on the exchange rate, stock market, and bond market during the COVID-19 economic crisis in an emerging economy. We focus particularly on the asset purchase program conducted by the Central Bank of India. The Central Bank announced an asset purchase program four times during the pandemic. By applying the EGARCH methodology, we find that (1) the asset purchase program effectively reduced the yield rate in the bond market and its volatility; (2) the first two announcements did not exert any impact on the financial market, but the third and fourth announcements helped to compress the yield and its volatility; (3) the program helped to restrain the exchange rate depreciation and volatility in the foreign exchange market; and (4) the impact of the announcements on stock returns, however, was weak.
    Keywords: unconventional monetary policy; bond market; exchange rate; stock market; EGARCH
    JEL: E44 E52 E58 E65
    Date: 2022–05
  17. By: Tatsushi Okuda (Bank of Japan); Tomohiro Tsuruga (International Monetary Fund); Francesco Zanetti (University of Oxford)
    Abstract: Using sector-level survey data for the universe of Japanese firms, we establish the positive co-movement in the firm’s expectations about aggregate and sector-specific demand shocks. We show that a simple model with imperfect information on the current aggregate and sector-specific components of demand explains the positive co-movement of expectations in the data. The model predicts that an increase in the relative volatility of sector-specific demand shocks compared to aggregate demand shocks reduces the sensitivity of inflation to changes in aggregate demand. We test and corroborate the theoretical prediction on Japanese data and find that the observed decrease in the relative volatility of sector-specific demand has played a significant role for the decline in the sensitivity of inflation to movements in aggregate demand from mid-1980s to mid-2000s.
    Keywords: Imperfect information, Shock heterogeneity, Inflation dynamics
    JEL: E31 D82 C72
    Date: 2021–02
  18. By: Arbatli-Saxegaard, Elif (Asian Development Bank Institute); Furceri, Davide (Asian Development Bank Institute); Gonzalez Dominguez, Pablo (Asian Development Bank Institute); Ostry, Jonathan (Asian Development Bank Institute); Peiris, Shanaka (Asian Development Bank Institute)
    Abstract: We provide new evidence on the spillover effects from United States (US) interest rate changes, focusing on factors that are pertinent to the current conjuncture: weak recovery prospects in emerging market and developing economies (EMDEs), and the confluence of macroeconomic shocks shaping the path of interest rates in the US. The drivers of US monetary policy matter for the nature of spillovers. With an SVAR-IV model used to identify structural monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near term, while an exogenous tightening of monetary policy would have a large negative spillover effect. Spillovers from US monetary policy shocks also depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.
    Keywords: US monetary policy; foreign spillovers
    JEL: C30 E50 F40
    Date: 2022–05
  19. By: Ina Hajdini; Edward S. Knotek; John Leer; Mathieu Pedemonte; Robert W. Rich; Raphael Schoenle
    Abstract: Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations perform well along several empirical dimensions. Exploiting the geographically detailed, high-frequency variation in the data, we then show that individual experiences matter for inflation expectations, in a nuanced way. For example, age and gender have different effects internationally, while individual inflation and local experiences are generally highly relevant. In an application to gasoline price changes, we identify large effects of experienced gasoline price changes on inflation expectations, characterized by both overreaction and persistence.
    Keywords: Inflation; Expectations; Surveys; Consumers; Heterogeneous Beliefs
    JEL: E31 D84 E37 E71
    Date: 2022–11–22
  20. By: Marieh Azizirad (Simon Fraser University)
    Abstract: To answer the question of whether an interest rate hike causes inflation to increase or decrease, I start from the Neo-Classical macroeconomic model. I discuss a challenge in estimating these models due to the discrepancy between the theoretically motivated interest rates and the observed ones. To overcome this challenge, I estimate a liquidity-augmented empirical model of interest rates and inflation using two methods: a time-varying structural vector autoregression and a system of latent variables. I find that an interest rate hike has a short-run negative effect on inflation regardless of its duration. This result contrasts with the Neo-Fisherian hypothesis prediction of a positive short-run response of inflation to a permanent shift in interest rates. At the same time, inflation and the nominal interest rate move in the same direction in the long-run, although not one-for-one. I also find that the short- and long-run interactions of macroeconomic variables including inflation and the interest and growth rates have changed across eras from the 1950s to 2016. Finally, the results reinforce the importance of the liquidity premium on near-money assets in macroeconomic analyses.
    Date: 2022–10
  21. By: Rod Garratt; Sofia Priazhkina
    Abstract: This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. The model determines the equilibrium federal funds rate as a function of the policy rates and explains the “leaky floor” phenomenon in which we observe federal funds rates that are strictly below the interest rate paid on reserves. Using the model, we explain the impact of raising government yields and tightening the Liquidity Coverage Ratio (LCR) and the Supplementary Leverage Ratio (SLR) requirements on the federal funds rates.
    Keywords: Central bank research; Economic models; Financial institutions; Financial markets; Financial stability; Financial system regulation and policies; Wholesale funding
    JEL: E42 E58 G28
    Date: 2022–11
  22. By: Christos Mavrodimitrakis (Department of Economics, University of Reading)
    Abstract: We utilise a standard reduced-form neo-Keynesian model in a monetary union, in which the monetary authority and the fiscal authorities strategically interact, to explore who, under alternative institutional arrangements (strategic and fiscal regimes) and shocks’ configurations, bears the burden of asymmetric shocks’ stabilisation. We show that in the core/periphery fiscal regime, described by an asymmetry in the sequence of moves between the core and the peripheral member-states, asymmetric shocks pass through at the union level when there are strategically significant spill-over effects and the monetary policy’s and fiscal policy’s instruments are not perfect substitutes in the stabilisation process. The monetary authority reacts to asymmetric shocks, but does not succeed in fully offsetting them. The first best implies the coordination of fiscal policies. A second best might be achieved by the fiscal leadership strategic regime (a form of implicit coordination), when there are strong interconnections in the union, and/or inducing the fiscal authorities to use fiscal policy instruments that directly decrease inflation, such as taxes, production subsidies or public investment, when there is a strong cost channel of monetary policy.
    Keywords: monetary union, strategic interactions, policy mix, core/periphery set-up, asymmetric shocks
    JEL: E52 E61 E62 E63 F45
    Date: 2022–11–30
  23. By: Tomoyuki Yagi (Bank of Japan); Yoshiyuki Kurachi (Bank of Japan); Masato Takahashi (Bank of Japan); Kotone Yamada (Bank of Japan); Hiroshi Kawata (Bank of Japan)
    Abstract: Costs of intermediate inputs as well as those for product procurement facing Japanese firms have been rising markedly against the backdrop of international commodity price increases and of the depreciation of the yen, as global economy recovers from the COVID-19 pandemic. In this paper, we quantitatively measure the so-called "pass-through rate" - that is, the impact of an increase in cost-push pressures on consumer prices (namely, prices at the final demand stage) - and examine the recent changes and their context. The estimation results yield the following two implications. First, the exchange rate pass-through rate has been increasing in recent years reflecting higher import penetration. Second, the pass-through rate of raw material and other costs, excluding those attributable to exchange rate, have somewhat increased at the intermediate demand stage and even for some items at the final demand stage. Since the pass-through rates depend on: (i) the strength of cost-push pressures; (ii) the business cycle; and (iii) the tightness of demand and supply condition due partially to the pandemic, their developments should be monitored closely.
    Keywords: Cost-Push Pressures; Intermediate Input Costs; Exchange Rates; Consumer Prices; Pass-Through; COVID-19
    JEL: E30 E31 F31
    Date: 2022–11–30
  24. By: Robert J. Tetlow
    Abstract: This paper examines estimates of, and drivers for, the sacrifice ratio in the United States. Three approaches are employed. The first reviews the literature on what sacrifice ratio might be expected. The second studies a generic disinflation experiment using 40 estimated macro models of the U.S. economy, calculating a distribution of sacrifice ratios. Those sacrifice ratios are high by historical standards and the paper discusses some stories for why this is so. The role of expectations formation and the credibility of policy is emphasized. The third approach gets under the hood of drivers of the output cost of disinflation by carrying out a selection of disinflation experiments using the FRB/US model, varying certain characteristics of the model’s expectations formation mechanism. Pinning down a precise measure for the output cost of disinflation is challenging. But the literature and policy experiments do offer some guidance on how the sacrifice ratio can be reduced.
    Keywords: Monetary policy; Disinflation; Sacrifice ratio; Expectations formation
    JEL: E40 E50 E30
    Date: 2022–11–23
  25. By: Heise, Arne
    Abstract: The capitalism John Maynard Keynes struggled to analyse was clearly an industrial capitalism in which the investor used physical capital only to end up with more money than he started with. It is particularly the post Keynesian school of 'monetary or fundamentalist Keynesianism' which elaborated Keynes's monetary theory of production into an alternative economic paradigm that replaces the exchange ontology with an ontology based on nominal obligations. As economic history reports a higher speed of financial than real asset accumulation over the past half a century - a process often dubbed "financialisation" -, doubts have been raised as to whether this transformation of industrial capitalism into financialised capitalism demands for a new macroeconomic approach.
    Keywords: John Maynard Keynes,Hyman P. Minsky,monetary production economy,industrialcapitalism,financial capitalism,Financial Instability Hypothesis
    Date: 2022
  26. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Kun He (Department of Economics, University of Kansas); Jingtong He (School of Economics, Nankai University, Tianjin, China)
    Abstract: Simple sum monetary aggregates are based on accounting conventions and have no aggregation theoretic foundations in economic theory. In contrast, Divisia monetary aggregates are directly derived from aggregation and index number theory. Credit card services cannot be included in simple sum monetary aggregates, since accounting conventions cannot aggregate over assets and liabilities. But microeconomic aggregation theory aggregates over service flows not stocks, regardless of whether from assets or liabilities. As a result, it has recently been shown that Divisia monetary aggregates can be augmented to include credit card services and are available from the Center for Financial Stability in New York City. Other sources of consumer credit cannot be included in Divisia monetary aggregates for the United States, since other sources of consumer credit in the United States are linked to specific groups of consumer goods and hence violate the weak separability condition for existence of an aggregator function. However, China produces a unique opportunity to broaden the Divisia monetary aggregates, since sources of consumer credit, not limited to credit cards, are applicable to all consumption purchase and hence do not violate the existence condition for an aggregator function. We report initial results with a broader Chinese Divisia monetary aggregate including not only credit card services but also other broadly acceptable consumer loan services.
    Keywords: Divisia Monetary Aggregates, Consumption Loans, Chinese Monetary Aggregates.
    JEL: C32 C53 E31 E47 E51
    Date: 2022–11
  27. By: Sirio Aramonte
    Abstract: While the Phillips curve appeared quiescent after the Great Financial Crisis (GFC), inflation risk, as gauged from option prices, remained sensitive to employment dynamics. Using Phillips-curve regressions centered on option-implied moments, I show that, in tight labor markets, a fall in the unemployment gap raises the risk that inflation overshoots expectations – even if realized and expected inflation remain stable. In tight labor markets, implied moments convey valuable information, as shown by their ability to anticipate future patterns in inflation breakevens and wage growth. The usefulness of inflation options in assessing risk, despite their illiquidity, is rooted in reputational incentives that dealers have to disseminate accurate quotes.
    Keywords: inflation expectations, inflation risk, inflation options, labor market
    JEL: G12 G14 G23
    Date: 2022–11
  28. By: C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky
    Abstract: From the Bretton Woods agreement in 1944 till the present day, the US dollar has been the dominant currency in the world trade. However, the rise of the Chinese economy led recently to the emergence of trade transactions in Chinese yuan. Here, we analyze mathematically how the structure of the international trade flows would favor a country to trade whether in US dollar or in Chinese yuan. The computation of the trade currency preference is based on the world trade network built from the 2010-2020 UN Comtrade data. The preference of a country to trade in US dollar or Chinese yuan is determined by two multiplicative factors: the relative weight of trade volume exchanged by the country with its direct trade partners, and the relative weight of its trade partners in the global international trade. The performed analysis, based on Ising spin interactions on the world trade network, shows that, from 2010 to present, a transition took place, and the majority of the world countries would have now a preference to trade in Chinese yuan if one only consider the world trade network structure.
    Date: 2022–11
  29. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain).); Silviano Alejandro Muñoz (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).)
    Abstract: This paper assesses capital mobility for a panel of 15 European countries for the period 1970- 2019 using dynamic common correlated effects modeling (DCCE) as proposed in Chudik and Pesaran (2015). In particular, we account for the existence of cross section dependence, slope heterogeneity, nonstationarity and endogeneity in a multifactor error correction model (ECM) that includes one homogeneous break. The analysis also identifies the heterogeneous structural breaks affecting the relationship for each of the individual countries. The ECM setting allows for a complete assessment of the domestic saving-investment relationship in the long-run as well as two other elements usually neglected: short-run capital mobility and the speed of adjustment. When we account for a single homogeneous break, this is found at the euro inception. We obtain that long-run capital mobility is high but not perfect yet. We also provide empirical evidence for the Ford and Horioka (2017)’s hypothesis, who argue that goods market integration is a necessary condition to obtain zero correlation between domestic saving-investment. Our results stress the role played by the euro as a booster for both financial and real integration. However, a complete degree of economic integration has not been fully achieved. Short-run capital was highly mobile for the whole period, with some exceptions, coinciding with turmoil episodes. Additionally, from the application of the CS-DL threshold analysis proposed by Chudik et al. (2016), we find that economic risk and openness play a key role in capital mobility.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Structural Breaks; Cross-sectional dependence; Cointegration, unit roots.
    JEL: F36 F45 O16
    Date: 2022–11
  30. By: Darpeix, Pierre-Emmanuel
    Abstract: In March 2020, against the backdrop of a worsening Covid crisis, some segments of the money market fund (MMF) industry faced severe redemption pressures. Given their central role within the short term funding market, MMFs were at the heart of financial stability concerns, and legitimately underwent careful reviews by macroprudential bodies and market supervisors to assess their vulnerabilities and propose policy options to remediate them. Yet it is clear that MMFs are only one part of a wider ecosystem. These funds collect excess cash from some economic agents, which is predominantly invested in the markets for short-term debt securities, thus providing funding to a wide array of entities in need for short-term funding (banks, non-financial corporates, States, local governments, etc.). And clearly, beyond funds, vulnerabilities were also identified both on the underlying market and on the investors’ side. In order to complement the recommendations issued in January 2022 by the ESRB ahead of the scheduled revision of the MMF Regulation, and so as to provide a better understanding of vulnerabilities still widely unaddressed, the AMF conducted a stock-take analysis of the public information available on the very fragmented and opaque market for short-term debt instruments in Europe. Thanks to a fruitful collaboration with ESRB who shared internal databases, it was able to fill in some data gaps and provide new insights on this market. In particular, this stock-take gives the first comprehensive and consolidated estimate of the outstanding in question (more than EUR 2.2 trillion as of Dec.2020), with a breakdown according to issuer types, instrument types and currencies. The analysis highlights the still unaddressed vulnerabilities such as the fragmentation of the market and of its supervision as well as the lack of a robust identification of Euro-CP and emphasizes the lack of transparency in the secondary market operations. JEL Classification: D53, E58, E65, G15, G18, G23, H63
    Keywords: Certificates of deposit, Commercial paper, Euro-CP, NEU-CP, Short term funding market, STEP, Treasury bills
    Date: 2022–12
  31. By: Beckworth, David; Hendrickson, Joshua (Mercury Publication)
    Abstract: Some economists advocate nominal GDP targeting as an alternative to the Taylor rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor rule. In parti
  32. By: Acharya, Viral V. (Asian Development Bank Institute); Anshuman, V. Ravi (Asian Development Bank Institute); Kumar, K. Kiran (Asian Development Bank Institute)
    Abstract: We study the period of the COVID-19 pandemic to assess the impact of foreign institutional investor (FII) flows on asset prices in an emerging market. Using a dataset of stock-level foreign fund flows of Indian equities, we show that stocks experiencing abnormally high innovations in foreign fund flows face a permanent price increase (an “information” effect), whereas stocks experiencing abnormally low (negative) innovations in foreign fund flows suffer a partly transient price decline. During the COVID-19 pandemic, immediate price effects were exaggerated and followed by higher transient volatility. Our methodology shows the efficacy of stabilization policies, initiated notably by the Federal Reserve, in dampening this relationship of foreign fund flows and equity prices in the immediate aftermath of the COVID-19 pandemic. We find the price effects of the FII flows in the pre-stabilization phase to be similar to those during the earlier crisis periods of the taper tantrum and the global financial crisis.
    Keywords: foreign institutional investors; foreign ownership; portfolio flows; price impact; taper tantrum; VIX; volatility
    JEL: F21 G11 G14 G15
    Date: 2022–07

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