nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒01‒02
forty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Influencing public trust in central banks: Identifying who is open to new information By Bernd Hayo; Pierre-Guillaume Méon
  2. Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India By Vaishali Garga; Aeimit Lakdawala; Rajeswari Sengupta
  3. Determinacy and E-stability with interest rate rules at the zero lower bound By Eo, Yunjong; McClung, Nigel
  4. Central Bank Control over Interest Rates: The Myth and the Reality By Hummel, Jeffrey Rogers
  5. Medium- vs. short-term consumer inflation expectations: Evidence from a new euro area survey By Stanisławska, Ewa; Paloviita, Maritta
  6. The effects of monetary policy across fiscal regimes By Roben Kloosterman; Dennis Bonam; Koen van der Veer
  7. What should the inflation target be? Views from 600 economists By Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim
  8. Euro area inflation and a new measure of core inflation By Claudio Morana
  9. The bias and efficiency of the ECB inflation projections: A state dependent analysis By Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
  10. The Banco de Portugal balance sheet expansion during the last two decades: a monetary policy perspective By Joana Sousa-Leite; Diana Correia; Cristina Coutinho; Carmen Camacho
  11. Interest-Rates-Free Monetary Policy Rule By Raffinot, Thomas
  12. Monetary policy in a two-country model with behavioral expectations By Michał Brzoza-Brzezina; Paweł Galiński; Krzysztof Makarski
  13. Forward guidance with unanchored expectations By Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
  14. Monetary Regimes, Money Supply, and the US Business Cycle since 1959: Implications for Monetary Policy Today By Hollander, Hylton; Christensen , Lars
  15. The rebalancing channel of QE: New evidence at the security level in the euro area By Tom Hudepohl
  16. Central Bank Communication about Climate Change By David M. Arseneau; Alejandro Drexler; Mitsuhiro Osada
  17. Monetary policy rules and the effective lower bound in the Euro area By Haavio, Markus; Laine, Olli-Matti
  18. Climate Actions, Market Beliefs, and Monetary Policy By : Annicciarico, Barbara; : Di Dio, Fabio; : Dilusio, Francesca
  19. The pass-through of the monetary policy rate into lending rates in Mexico By Alessandro Maravalle; Alberto González Pandiella
  20. The People versus the Markets: A Parsimonious Model of Inflation Expectations By Ricardo Reis
  21. Inflationary household uncertainty shocks By Ambrocio, Gene
  22. Inflation dynamics and forecast: Frequency matters By Martins, Manuel Mota Freitas; Verona, Fabio
  23. Money, E-money, and Consumer Welfare By Carli, Francesco; Uras, Burak
  24. Undesired monetary policy effects in a bubbly economy By Giuseppe Ciccarone; Francesco Giuli
  25. The Puzzling Change In The International Transmission Of U.S. Macroeconomic Policy Shocks By Ethan Ilzetzki; Keyu Jin
  26. Policy preference at central banks: Quantifying monetary policy signals using keyword topic models By Diaf, Sami
  27. Price setting before and during the pandemic: evidence from Swiss consumer prices By Barbara Rudolf; Pascal Seiler
  28. Demand Shocks, Hysteresis and Monetary Policy By Jae W. Sim
  29. Monetary Policy, Labor Force Participation, and Wage Rigidity By Hiroyuki Kubota; Ichiro Muto; Mototsugu Shintani
  30. On robustness of average inflation targeting By Honkapohja, Seppo; McClung, Nigel
  31. The Myth of Central Bank Independence By Cargill, Thomas
  32. Inflation Hedging on Main Street? Evidence from Retail TIPS Fund Flows By Stefan Nagel; Zhen Yan
  33. Inflation Expectations and Survey Design By Junichi Kikuchi
  34. National Culture and the Demand for Physical Money During the First Year of the COVID-19 Pandemic By Radoslaw Kotkowski
  35. Perception of the Balance of Payments and Monetary Policy in the Late 1960s: Focusing on the Bank of Japan's Viewpoint before and after the Monetary Policy Shift By Hidekatsu Kamio; Yasuko Morita
  36. Human frictions in the transmission of economic policy By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  37. The Monetary Policy Origins of the Eurozone Crisis By Beckworth, David
  38. 3 Lessons from Hyperinflationary Periods By Bergen, Mark; Bergen, Thomas; Levy, Daniel; Semenov, Rose
  39. Monetary policy and inequality: The Finnish case By Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
  40. Money Demand and Seignorage Maximization before the End of the Zimbabwean Dollar By Miller, Steph; Ndhlela, Thandinkosi
  41. Investor monitoring, money-likeness and stability of money market funds By Järvenpää, Maija; Paavola, Aleksi
  42. Money, E-money, and Consumer Welfare By Carli, Francesco; Uras, Burak
  43. What drives bank lending policy? The evidence from bank lending survey for Poland By Ewa Wróbel

  1. By: Bernd Hayo (Philipps-Universitaet Marburg); Pierre-Guillaume Méon (Université libre de Bruxelles (U.L.B.))
    Abstract: Using a randomized controlled trial in a 2018 survey of a representative sample of the German population, we study whether providing information about the European Central Bank’s (ECB) inflation record in comparison to its inflation target affects people’s trust in the central bank. In the treatment, administered to half of the roughly 2000 respondents, a graph of the annual inflation rate in the euro area from 1999 to 2017 and the ECB’s 2% inflation target was shown to respondents. We find that the treatment has, on average, no significant effect on the level of trust respondents have in the ECB or on the distribution of survey answers. However, the treatment increases trust in the ECB among respondents who report no preference for any political party. Within this group, the effect is strongest among those who reported biased beliefs about the inflation rate but knew that price stability is the ECB’s objective and those who reported a low level of subjective and objective knowledge about monetary policy.
    Keywords: Central bank trust, European Central Bank, Central bank communication, Monetary policy, Germany, Household survey, RCT.
    JEL: E52 E58 Z1
    Date: 2022
  2. By: Vaishali Garga (Federal Reserve Bank of Boston); Aeimit Lakdawala (Wake Forest University); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: We propose a novel framework to gauge the credibility of central banks' commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India's adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation targeting. Both approaches indicate that the market perceives a larger response to inflation in the monetary policy reaction function since the adoption of inflation targeting. This evidence suggests that the market viewed the shift to inflation targeting as a credible commitment by the Reserve Bank of India.
    Keywords: Macroeconomic forecasts, Financial markets, Credibility, Inflation Targeting, Inflation expectations
    JEL: E44 E47 E52 E58
    Date: 2022–10
  3. By: Eo, Yunjong; McClung, Nigel
    Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.
    Keywords: Zero Lower Bound,Markov-Switching,Expectations,Price level targeting,Average inflation targeting,Nominal income targeting
    JEL: E31 E47 E52 E58
    Date: 2021
  4. By: Hummel, Jeffrey Rogers (Mercury Publication)
    Abstract: Many believe that central banks, such as the Federal Reserve (Fed), have almost total control over some critical interest rates. Serious monetary economists are more sophisticated. They realize that central bank control over interest rates is very far fro
  5. By: Stanisławska, Ewa; Paloviita, Maritta
    Abstract: Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in perceptions of current inflation. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy.
    Keywords: Inflation expectations,consumer survey,micro-data
    JEL: D12 D84 E31 E58
    Date: 2021
  6. By: Roben Kloosterman; Dennis Bonam; Koen van der Veer
    Abstract: We estimate the effects of monetary policy shocks across contractionary and expansion- ary fiscal regimes in the euro area. An expansionary monetary policy shock leads to an increase in inflation and output growth, but only when it occurs in the expansionary fiscal regime. In a contractionary fiscal regime, the responses to a monetary easing are insignificant or even negative. Similarly, a monetary tightening only reduces inflation and output in the contractionary fiscal regime. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the monetary transmission mechanism.
    Keywords: regime-dependent effects of monetary policy; fiscal policy regimes, local projection methods
    JEL: E52 E62 E63
    Date: 2022–12
  7. By: Ambrocio, Gene; Ferrero, Andrea; Jokivuolle, Esa; Ristolainen, Kim
    Abstract: In a survey of more than 600 economists, most respondents prefer their central bank to have an explicit inflation target. Roughly half want the central bank to keep its current target. Two thirds of the rest want to raise the target, with a median preferred change of one percentage point. In a hypothetical scenario in which the central bank has no prior history of inflation targeting, an additional 12% of the respondents would prefer a different (typically higher) target than the current one. This result suggests that the costs of changing the current target hold some respondents back from wanting an actual target change. Respondents who are worried about the central bank credibility are less likely to support a target raise. Conversely, preference for a target raise is more likely to come from those who are concerned about the zero lower bound on the nominal interest rate. The average estimate of the equilibrium real interest rate in the sample is 0.6%. However, personal views about the equilibrium real interest rate do not predict a preference for a target raise.
    Keywords: expert survey,inflation target,monetary policy
    JEL: C38 E31 E52 E58
    Date: 2022
  8. By: Claudio Morana
    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 in‡ation, core in‡ation, 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
  9. By: Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    Keywords: Forecast Evaluation,Forecast Efficiency,Inflation Forecasts,Central Bank Communication
    JEL: C12 C22 C53 E31 E52
    Date: 2021
  10. By: Joana Sousa-Leite; Diana Correia; Cristina Coutinho; Carmen Camacho
    Abstract: This paper analyses the evolution dynamics of the Banco de Portugal balance sheet since the beginning of the Stage III of the EMU. Following the global financial crisis, the evolution of the Banco de Portugal balance sheet was initially driven by an increase in liabilities, namely in intra-Eurosystem liabilities related to TARGET and current accounts, reflecting the liquidity provided through monetary policy refinancing operations, which was either deposited in the central bank or transferred to euro area banks outside of Portugal. Since 2015, broader monetary policy decisions regarding the asset side of the balance sheet were designed to support economic growth and bring inflation back to the 2% target. Between 1999 and 2021, the Banco de Portugal balance sheet expansion was mostly driven by the asset purchase programmes and significant increases in central bank funding to banks and in intra-Eurosystem claims, the latter aggregate being explained by the inflow of banknotes related to the tourism activity in Portugal.
    JEL: E41 E44 E51 E52 E58
    Date: 2022
  11. By: Raffinot, Thomas (Mercury Publication)
    Abstract: Interest rates are unreliable indicators of appropriate monetary policy; low nominal rates do not indicate easy money. This paper attempts to assess the stance of monetary policy without relying on interest rates. A new monetary policy rule is developed b
  12. By: Michał Brzoza-Brzezina (Narodowy Bank Polski); Paweł Galiński (Narodowy Bank Polski); Krzysztof Makarski (Narodowy Bank Polski)
    Abstract: We study the working of monetary policy in an estimated two-country model with behavioral expectations(BE). We first show that the data favors this setting compared with the standard rational expectations assumption. Then we document several findings related to monetary policy in the open-economy framework. First, under BE the Taylor principle depends on the size of the economy - determinacy regions are larger for the small country. Second, both in the small and large economies, monetary policy is less powerful when agents are behavioral. Third, the sacrifice ratio faced by the central bank increases with agents becoming more behavioral (more in the small country). Fourth, BE help to partly solve the puzzles of excess foreign currency returns (UIP puzzle) and of international monetary independence.
    Keywords: behavioral agents, monetary policy, open-economy model
    JEL: E30 E43 E52 E70
    Date: 2022
  13. By: Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
    Abstract: We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. The optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock's realised persistence. The insurance property distinguishes our paper from other bounded rationality papers that solve the forward guidance puzzle and generates important quantitative differences.
    Keywords: Optimal Monetary Policy,Learning Dynamics,Expectations Stabilization,Forward Guidance
    JEL: E32 D83 D84
    Date: 2021
  14. By: Hollander, Hylton; Christensen , Lars (Mercury Publication)
    Abstract: Abstract not available.
  15. By: Tom Hudepohl
    Abstract: This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (APP). Search for yield via portfolio rebalancing is one of the possible channels through which Quantitative Easing (QE) may affect real economic activity. This paper shows that during QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies. In addition, a significant rebalancing has taken place within the euro area, as investors increased their relative holdings of debt issued by vulnerable European countries. This increase has been driven by investors located in peripheral countries, while investors in other countries were net sellers. QE thus has a heterogeneous impact on security holdings across euro area countries and sectors. These findings are relevant for policymakers to assess the (side-)effects of QE and the potential impact of monetary tightening.
    Keywords: Portfolio rebalancing; Quantitative Easing, Asset purchases; Unconventional monetary policy;Heterogeneity
    JEL: E52 E58 G10 G11 G15
    Date: 2022–12
  16. By: David M. Arseneau; Alejandro Drexler; Mitsuhiro Osada
    Abstract: This paper applies natural language processing to a large corpus of central bank speeches to identify those related to climate change. We analyze these speeches to better understand how central banks communicate about climate change. By all accounts, communication about climate change has accelerated sharply in recent years. The breadth of topics covered is wide, ranging from the impact of climate change on the economy to financial innovation, sustainable finance, monetary policy, and the central bank mandate. Financial stability concerns are touched upon, but macroprudential policy is rarely mentioned. Direct central bank action largely revolves around identifying and monitoring potential risks to the financial system. Finally, we find that central banks tend to use speculative language more frequently when talking about climate change relative to other topics.
    Keywords: Financial stability; Transparency; Central bank mandate; Green finance; Natural language processing; Central bank speeches
    JEL: E58 E61 Q54
    Date: 2022–05–27
  17. By: Haavio, Markus; Laine, Olli-Matti
    Abstract: We analyze the economic performance of di§erent monetary policy strategies, or rules, in a low interest rate environment, using simulations with a DSGE model which has been estimated for the euro area. We study how often the e§ective lower bound of interest rates (ELB) is likely to bind, and how much forgone monetary policy accommodation this entails. Macroeconomic outcomes are measured by the mean levels and the volatility of output (gaps), unemployment and ináation. We present three sets of results. First, the macroeconomic costs of the ELB are likely to grow in a non-linear manner if the monetary policy space (the di§erence between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point ináation target appears to outperform a target range. Third, the (relative) performance of low-for-long (L4L) monetary policy rules depends on the size of the monetary policy space. The L4L rules tend to perform well, if the monetary space is small, but if the space is larger these rules, while stabilizing ináation, may lead to more volatility in the real economy than áexible ináation targeting.
    Keywords: monetary policy rules,effective lower bound,euro area
    JEL: E31 E32 E52 E58
    Date: 2021
  18. By: : Annicciarico, Barbara (Universita degli Studi di Roma Tor Vergata); : Di Dio, Fabio (European Commission); : Dilusio, Francesca (Bank of England)
    Abstract: This paper studies the role of expectations and monetary policy on the economy’s response to climate actions. We show that in a stochastic environment and without the standard assumption of perfect rationality of agents, there is more uncertainty regarding the path and the economic impact of a climate policy, with a potential threat to the ability of central banks to maintain price stability. Market beliefs and behavioural agents increase the trade-offs inherent to the chosen mitigation tool, with a carbon tax entailing more emissions uncertainty than in a rational expectations model and a cap-and-trade scheme implying a more pronounced pressure on allowances prices and inflation. The impact on price stability is worsened by delays in the implementation of stringent climate policies, by the lack of confidence in the ability of central banks to keep inflation under control, and by the adoption of monetary rules tied to expectations rather than current macroeconomic conditions. Central banks can implement successful stabilization policies that reduce the uncertainty surrounding the impact of climate actions and support the greening process while staying within their mandate.
    Keywords: Monetary policy; climate policy; expectations; inflation; market sentiments; business cycle
    JEL: D58 Q50 E32 E71
    Date: 2022–09
  19. By: Alessandro Maravalle; Alberto González Pandiella
    Abstract: This paper estimates the pass-through of monetary policy rates into five lending rates in Mexico using auto regressive distributed lags models (ARDLs) and taking into account several financial market characteristics. Results show that the pass-through of monetary policy into the average short-term lending rate is full and fast, as it takes around 3 months to be fully transmitted. However, the pass-through is heterogeneous across credit markets, being especially weak in the mortgage and automotive credit markets. A higher market concentration in the credit sector is associated with a higher level of the corresponding lending rate. Other financial market characteristics, such as the measure of bank profitability and the ratio of capital to bank assets, are also found to affect the long-run level of one or more lending rates. Higher competition in credit markets and reducing asymmetric information would improve the transmission of monetary policy and contribute to reduce the level of lending rates.
    Keywords: bank lending rates, interest rate pass-through, monetary policy, transmission mechanism
    JEL: E4 E52 G21
    Date: 2022–12–08
  20. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy.
    Date: 2020–12
  21. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks do not universally behave like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. Further analysis, including a comparison of results across countries, suggest that factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. These results lend support to a pricing bias mechanism as an important transmission channel.
    Keywords: uncertainty,inflation,surveys of expectations
    JEL: D84 E30 E52 E71
    Date: 2022
  22. By: Martins, Manuel Mota Freitas; Verona, Fabio
    Abstract: Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.
    Keywords: inflation dynamics,inflation forecast,New Keynesian Phillips Curve,frequency domain,wavelets
    JEL: C53 E31 E37
    Date: 2021
  23. By: Carli, Francesco; Uras, Burak (Tilburg University, Center For Economic Research)
    Keywords: E-money; M-Pesa; Risk-sharing; welfare; Monetary Policy
    Date: 2022
  24. By: Giuseppe Ciccarone (Sapienza University of Rome); Francesco Giuli
    Abstract: Monetary policy can be responsible for asset price bubble episodes under specific monetary- financial conditions. We evaluate the effects of monetary policy shocks on asset price bubbles by estimating a Markov-switching Bayesian Vector Autoregression on US 1960-2019 data, where states fortheinteractionofassetpricesandmonetaryoutcomesaffecttherealizationofbubbles. WerationalizetheevidencewithaMarkov-switchingOverlappingGenerationsmodel,generating a bubblyandano-bubblyeconomywitharegime-specific monetary policy. By matching the empirical impulse responses,we find that the monetary-financial states of the economy can generate amplifiedinstabilityunderhighequitypremiaandassetpricebubble. In abubbly economy, a monetary tightening is ineffective in reducing stockprices, increasing real rates and inflating bubbles. Expectations to switch to a nobubbly scenario produce stabilizing effects.
    Keywords: monetary policy, assetpricebubble, Markov-switching, monetary-financial inter-action, policy credibility
    JEL: C32 D50 E42 E52 E65 G10
    Date: 2022–07
  25. By: Ethan Ilzetzki (London School of Economics (LSE)); Keyu Jin (London School of Economics (LSE))
    Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
    Date: 2020–12
  26. By: Diaf, Sami
    Abstract: This work analyzes central banking information flow and proposes a novel strategy to estimate individual-level policy preferences, toward monetary policy objectives, by quantifying the narratives within its different communication channels for the case of the United States. While most of the literature related to central banking corpora used unsupervised topic models to quantify narrative signals, we propose a semi-supervised, keyword-based approach built upon groups of words linked to monetary objectives in order to have a coherent, dynamic estimation of topic prevalence, whose scores could determine individual policy preferences for inflation and unemployment rates. The corpus of Federal Reserve governors' speeches (1996-2020) identified three non-keyword topics matching financial stability, financial innovation and the banking regulation, whose dynamics follow the Chairman's tenure, considered as informative policy signals toward financial markets. Governors' preferences toward monetary policy objectives were better estimated using FOMC transcripts (1994-2016) whose narratives strictly match monetary policy practices and help ranking members on a partisanship scale, with a spectrum linked to the members' educational background. Though released with a five-year delay, the FOMC transcripts, as a proxy of internal communicaton, offer a better picture of the partisanship prevailing within monetary policy committees in the United States, that cannot be learned from Governors' addresses, but remain unable to capture non-conventional, but not less important topics.
    Date: 2022
  27. By: Barbara Rudolf; Pascal Seiler
    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.
    Keywords: Price rigidity, price-setting behavior, consumer prices, inflation, COVID-19 pandemic
    JEL: E31 E5 L11
    Date: 2022
  28. By: Jae W. Sim
    Abstract: This paper builds a micro-founded general equilibrium model of hysteresis in which changing composition of firms with heterogeneous qualities in response to demand shocks alter the total factor productivity of the economy through a process of "creative destruction". Hysteresis fundamentally challenges existing consensus on stabilization policies: the complete stabilization of demand shocks becomes suboptimal as demand creates its own supply; fiscal multiplier can be substantially larger than 1; an opportunistic monetary policymaker, who adopts a lenient policy reaction to positive demand shocks, but provides decisive monetary stimulus in response to negative demand shocks, can bring large welfare gains.
    Keywords: Demand shocks; Monetary policy; Hysteresis
    JEL: E31 E32 E52 E58
    Date: 2022–11–29
  29. By: Hiroyuki Kubota (University of California, Los Angeles (E-mail:; Ichiro Muto (Associate Director-General, Institute for Monetary and Economic Studies (currently, General Manager, Aomori Branch), Bank of Japan (E-mail:; Mototsugu Shintani (The University of Tokyo (E-mail:
    Abstract: To understand the role of monetary policy in determining the labor force participation rate, we present empirical evidence for Japan and the US. The data suggests that labor force participation declines in Japan but increases in the US in response to a monetary tightening. To inspect the mechanism, we develop and estimate a New Keynesian model of endogenous labor force participation decisions incorporating wage rigidity. We find that the opposite response of labor force participation can be attributed to a difference in the degree of wage rigidity. Counterfactual analysis based on the estimated models shows that the large-scale monetary easing in recent years helped boost the labor force participation rate in Japan, while its effect was almost neutral in the US.
    Keywords: Labor force participation, Monetary policy, Unemployment, Wage rigidity
    JEL: E24 E32 E52 E58
    Date: 2022–11
  30. By: Honkapohja, Seppo; McClung, Nigel
    Abstract: This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.
    Keywords: Adaptive Learning,Inflation Targeting,Zero Interest Rate Lower Bound
    JEL: E31 E52 E58
    Date: 2021
  31. By: Cargill, Thomas (Mercury Publication)
    Abstract: The Federal Reserve frequently emphasizes its independence from government, stresses the importance of independence as the foundation for accountability to the “dual mandate,†and frequently invokes an “independence defense†when confronted with any propo
  32. By: Stefan Nagel; Zhen Yan
    Abstract: Households participating in financial markets pay attention to inflation news when making their investment decisions, even in an environment of mostly low and stable inflation. ETFs and open-ended mutual funds holding Treasury Inflation-Protected Securities (TIPS) receive inflows from retail investors, and nominal Treasury ETF experience outflows, when long-horizon market-based inflation expectations measures increase. Changes in household survey expectations or in measures of inflation uncertainty do not contribute much in explaining retail TIPS fund flows. Retail flows into TIPS funds are asymmetric, with strong reactions only to positive inflation news, and sticky, with flow responses to news gradually playing out over several months. Retail investors appear to pay some attention to regular Federal Reserve announcements, but major events such as the ``taper tantrum'' in May 2013, the presidential election in November 2016, and the COVID-19 crisis in March 2020 are associated with particularly large retail TIPS fund flows.
    JEL: E31 G23 G5
    Date: 2022–11
  33. By: Junichi Kikuchi
    Abstract: We examine whether inflation expectations obtained by open- and closed-ended questions lead to different inflation expectations through a randomized controlled trial. We find that different questionnaires measure significantly different inflation expectations, especially in the short term. We further investigate whether inflation expectations induce consumers to change the intertemporal allocation of consumption via the consumption Euler equation. Our results suggest that actual expenditures are significantly responsive to inflation expectations. The EIS of the sample in the closed-ended questionnaire was higher than that of the open-ended questionnaire.
    Date: 2022–12
  34. By: Radoslaw Kotkowski (Nicolaus Copernicus University in Toruń)
    Abstract: There was a significant increase in the demand for physical money during the COVID-19 pandemic. This stood in stark contrast to the decline in demand witnessed during previous pandemics. However, the change was not uniform and varied significantly between countries. By employing the “national culture” framework to identify the drivers of this variation, this study found that uncertainty avoidance, as well as social norms regarding gratification, played a major role. This suggests that some central banks should hold larger cash reserves to mitigate the risk of uncertainty and that the national culture framework may prove useful in researching the international differences in past, present, and future money demand.
    Keywords: COVID-19 pandemic; money demand; currency in circulation; national culture; uncertainty avoidance
    JEL: E41 E51 I12
    Date: 2022
  35. By: Hidekatsu Kamio (Hidekatsu Kamio: Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yasuko Morita (Yasuko Morita: Formerly Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: In the latter half of the 1960s, Japan's trade balance broke away from its traditional pattern of worsening during economic upturns. The decision to tighten monetary policy, implemented in September 1969, was made in the midst of a continuing balance of payments surplus, unlike previous tightenings aimed at improving the positions in the balance of payments. Previous studies have assessed that this tightening further increased the balance of payments surplus and led to the Nixon Shock. They have pointed out the delay in policy makers' recognition of the fundamental changes in balance of payments trends and the need to change the exchange rate. Focusing on the perspective of the Bank of Japan ( hereafter BOJ) before and after this monetary tightening, this paper examines how the BOJ came to recognize trends in the balance of payments and the policy challenges of being a "surplus country," based on contemporaneous sources. In mid-1969, Japan was "for the first time in her history, experiencing the problems of surplus countries." During this period, the policy of restraining the growth of foreign exchange reserves had begun. However, foreign countries demanded more aggressive removal of import restrictions and the liberalization of capital exports on the premise that surpluses would be established. Domestically, this was perceived as the pursuit of responsibility of a surplus country. The BOJ tightened monetary policy with this responsibility in mind. At that time, the core of the responsibility of surplus countries for Japan was " getting out of the restrictive system," especially import liberalization and capital export liberalization. In this sense, the BOJ's awareness of the policy response at this point was not necessarily out of step with international standards.
    Keywords: Balance of payment, Monetary policy, Responsibility of a surplus country
    JEL: F68 N45
    Date: 2022–11
  36. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Abstract: Many consumers below the top of the distribution of a representative population by cognitive abilities barely react to monetary and fiscal policies that aim to stimulate consumption and borrowing, even when they are financially unconstrained and despite substantial debt capacity. Differences in income, formal education levels, economic expectations, and a large set of registry-based demographics do not explain these facts. Heterogeneous cognitive abilities thus act as human frictions in the transmission of economic policies that operate through the household sector and might imply redistribution from low- to high-cognitiveability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.
    Keywords: Cognition,Behavioral Macroeconomics,Heterogeneous Agents,Fiscal and Monetary Policy,Beliefs,Redistribution,Inequality,Survey Data,Household Finance
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2021
  37. By: Beckworth, David (Mercury Publication)
    Abstract: The Eurozone crisis represents one of the greatest economic tragedies of the past century. It has caused immense human suffering, which continues to this day. The standard view attributes the economic crisis to an earlier buildup of public and private deb
  38. By: Bergen, Mark; Bergen, Thomas; Levy, Daniel; Semenov, Rose
    Abstract: Inflation is painful, for firms, customers, employees, and society. But careful study of periods of hyperinflation point to ways that firms can adapt. In particular, companies need to think about how to change prices regularly and cheaply — because constant price changes can ultimately be very, very expensive. And they should consider how to communicate those price changes to customers. Providing clarity and predictability can increase consumer trust and help firms in the long run.
    Keywords: Inflation; Hyperinflation; Pricing; Price Setting; Price Adjustment; Menu Cost; Cost of Price Adjustment; Implicit Contract; Long-Term Relationship
    JEL: E31 L16 M30
    Date: 2022–11–11
  39. By: Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
    Abstract: We use Finnish household-level registry and survey data to study the effects of ECB's monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households' gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90th percentile to the 50th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile.
    Keywords: monetary policy,income inequality,wealth inequality
    JEL: D31 E32 E52
    Date: 2022
  40. By: Miller, Steph; Ndhlela, Thandinkosi (Mercury Publication)
    Abstract: Abstract not available.
  41. By: Järvenpää, Maija; Paavola, Aleksi
    Abstract: An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets-like prime money market fund (MMF) shares-are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014-2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs' regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.
    Keywords: Money market funds,money markets,money market fund reform,money-likeness,information sensitivity,monitoring
    JEL: G01 G23 G28
    Date: 2021
  42. By: Carli, Francesco; Uras, Burak (Tilburg University, School of Economics and Management)
    Date: 2022
  43. By: Ewa Wróbel (Narodowy Bank Polski)
    Abstract: Based on aggregate data from the lending survey for Poland and using a series of structural vector autoregressive models, we show that credit market sentiments, bank capital position and quality of banks’ balance sheets are the most important drivers of bank lending standards, terms and conditions for the corporate sector. Also, we demonstrate that albeit with some delay, monetary policy shocks affect bank lending policy and additionally have some bearing on credit market sentiments, quality of bank balance sheets and competition. Innovations to the business sector activity and to demand for credit play a minor role for bank lending policy.
    Keywords: bank credit, lending standards, terms and conditions, structural vector autoregressive model
    JEL: E44 E51 G21
    Date: 2022
  44. By: Pavel Trunin (Russian Presidential Academy of National Economy and Public Administration); Sergey Narkevich (Russian Presidential Academy of National Economy and Public Administration); Chembulatova Maria (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The global financial crisis of 2008-09 patently demonstrated that ensuring price stability by central banks does not guarantee the achievement of financial stability and is not a sufficient condition for it. It also showed how destructive the result of accumulating imbalances in the financial sector can be.
    Date: 2021–01

This nep-mon issue is ©2023 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.