nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒01‒09
sixty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Conditional Path of Central Bank Asset Purchases By Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
  2. Optimal Robust Monetary Policy in a Small Open Economy By André Marine Charlotte; Medina Espidio Sebastián
  3. How Abundant Are Reserves? Evidence from the Wholesale Payment System By Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
  4. Central Bank Digital Currencies, an Old Tale With a New Chapter By Michael D. Bordo; William Roberds
  5. Understanding Post-COVID Inflation Dynamics By Martin Harding; Jesper Lindé; Mathias Trabandt
  6. Does bank efficiency affect the bank lending channel in China? By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  7. Monetary Stability and Regional Currency Board: towards a two-tier system to accelerate regional integration in the Horn of Africa. (A Policy Proposal) By Aman, Moustapha; Nenovsky, Nikolay
  8. External Shocks and FX Intervention Policy in Emerging Economies By Carrasco, Alex; Florian Hoyle, David
  9. A Theory of Dynamic Inflation Targets By Clayton, Christopher; Schaab, Andreas
  10. Inflation Risks in Israel By Michael Gurkov; Osnat Zohar
  11. Is the Slope of the Euro Area Phillips Curve Steeper than It Seems? Heterogeneity and Identification By Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
  12. Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data By Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
  13. Optimal Monetary Policy and Liquidity with Heterogeneous Households By Florin Bilbiie; Xavier Ragot
  14. Inflation Structure in Vietnam Economy By Ly Dai Hung
  15. New Facts on Consumer Price Rigidity in the Euro Area By Gautier Erwan; Conflitti Cristina; Faber Riemer P.; Fabo Brian; Fadejeva Ludmila; Jouvanceau Valentin; Menz Jan-Oliver; Messner Teresa; Petroulas Pavlos; Roldan-Blanco Pau; Rumler Fabio; Santoro Sergio; Wieland Elisabeth; Zimmer Hélène
  16. Quantifying the Costs and Benefits of Quantitative Easing By Andrew T. Levin; Brian L. Lu; William R. Nelson
  17. Inflation Hedging on Main Street? Evidence from Retail TIPS Fund Flows By Stefan Nagel; Zhen Yan
  18. Bank risk-taking and monetary policy transmission: Evidence from China By Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
  19. Delayed Overshooting Puzzle: Does Systematic Monetary Policy Matter? By Efrem Castelnuovo; Giovanni Pellegrino; Giacomo Ranzato
  20. Consumer Savings Behaviour at Low and Negative Interest Rates By Marco Felici; Geoff Kenny; Roberta Friz
  21. A Fiscal Theory of Trend Inflation By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  22. Monetary Communication Rules By Gáti, Laura; Handlan, Amy
  23. Monetary Policy, Credit Constraints and SME Employment By Julien Champagne; Émilien Gouin-Bonenfant
  24. What drives inflation? Disentangling Demand and Supply Factors By Sandra Eickmeier; Boris Hofmann
  25. CBDC as Imperfect Substitute to Bank Deposits: a Macroeconomic Perspective By Perazzi, Elena; Bacchetta, Philippe
  26. Does monetary policy impact CO2 Emissions? A GVAR analysis By Luccas Assis Attilio; Joao Ricardo Faria, Mauro Rodrigues
  27. Exchange rate fluctuations and the financial channel in emerging economies By Beckmann, Joscha; Comunale, Mariarosaria
  28. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  29. An Exchange Rate History of the United Kingdom, 1945–1992 By Naef, Alain
  30. (Un)Conventional Monetary and Fiscal Policy By Jing Cynthia Wu; Yinxi Xie
  31. Foreign Exchange Interventions and their Impact on Expectations: Evidence from the USD/ILS Options Market By Markus Hertrich; Daniel Nathan
  32. Inflation in Japan: Changes during the Pandemic and Issues for the Future By Shuichiro Ikeda; Haruhiko Inatsugu; Yui Kishaba; Takuji Kondo; Kenichi Sakura; Kosuke Takatomi; Takashi Nakazawa; Kotone Yamada
  33. Effectiveness of Capital Controls: Gates versus Walls By Yang Zhou; Shigeto Kitano
  34. Price rigidities, input costs, and inflation expectations: understanding firms’ pricing decisions from micro data By Marianna Riggi; Alex Tagliabracci
  35. Leaning against the global financial cycle By Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  36. Endogenous Product Adjustment and Exchange Rate Pass-Through By Andreas Freitag; Sarah M. Lein; Sarah Marit Lein
  37. The Effects of Firm and Bank Balance Sheet Conditions to Net Interest Margins: Evidence from Loan-level Firm Survey Data By Tomoko AIZAWA-Tanemura; Shin-Ichi Nishiyama
  38. 3 Lessons from Hyperinflationary Periods By Mark Bergen; Thomas Bergen; Daniel Levy; Rose Semenov
  39. Optimalinterestrategapsforflexibleinflationtargeting By Eric Schaling; Kgotso Morema
  40. Energy shocks in the Euro area: disentangling the pass-through from oil and gas prices to inflation By Casoli, Chiara; Manera, Matteo; Valenti, Daniele
  41. Climate change mitigation: How effective is green quantitative easing? By Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
  42. A cost-of-living squeeze? Distributional implications of rising inflation By Orsetta Causa; Emilia Soldani; Nhung Luu; Chiara Soriolo
  43. Monetary Uncertainty as a Determinant of the Response of Stock Market to Macroeconomic News By Mykola Pinchuk
  44. Shift Balance of Centralized Banking System — Saving Democracy from Populism By Pachankis, Yang
  45. Emotion in Euro Area Monetary Policy Communication and Bond Yields: The Draghi Era By Dimitrios Kanelis; Pierre L. Siklos
  46. Optimal trend inflation, misallocation and the pass-through of labour costs to prices By Santoro, Sergio; Viviano, Eliana
  47. From Central Counter to Local Living: Pass-Through of Monetary Policy to Mortgage Lending Rates in Districts By Jiri Gregor; Jan Janku; Martin Melecky
  48. Goodbye Capital Controls, Hello IMF Loans, Welcome Back Financial Repression. Notes on Argentina’s 2018/2019 Currency Crash By Emilian Libman; Leonardo Stanley
  49. Potential benefits and key risks of fiat-referenced cryptoassets By Hugh Ding; Natasha Khan; Bena Lands; Cameron MacDonald; Laura Zhao
  50. Different Motives for Holding Cash in France: an Analysis of the Net Cash Issues of the Banque de France By Franz Seitz; Lucas Devigne; Raymond de Pastor
  51. Dominant Drivers of National Inflation By Jan Ditzen; Francesco Ravazzolo
  52. Easier said than done: why Italians pay in cash while preferring cashless By Alberto Di Iorio; Giorgia Rocco
  53. A Theory of Gross and Net Capital Flows over the Global Financial Cycle By J. Scott Davis; Eric van Wincoop
  54. PUMA cooperation between the Bank of Italy and the intermediaries for the production of statistical, supervisory and resolution reporting By Massimo Casa; Marco Carnevali; Silvia Giacinti; Roberto Sabatini
  55. Buy Now Pay Later: market overview and outlook By Lorenzo Gobbi
  56. Misdirected Money Transfers in Korea By Sangjae Lee; Jeongeun Park
  57. Capital Controls Checkup: Cases, Customs, Consequences By Goldbach, Stefan; Nitsch, Volker
  58. Borrowing in Unsettled Times and Cash Holdings Afterwards By Masanori Orihara; Yoshiaki Ogura; Yue Cai
  59. DSGE Nash: solving Nash Games in Macro Models With an application to optimal monetary policy under monopolistic commodity pricing By Massimo Ferrari Minesso; Maria Sole Pagliari
  60. The demand and supply of information about inflation By Massimiliano Marcellino; Dalibor Stevanovic

  1. By: Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
    Abstract: We investigate the financial market effects of central bank asset purchases by exploiting the unique setting provided by ECB’s PSPP and PEPP policies. These programs consist in purchases of identical assets. The PSPP aimed to reduce deflationary risks, while the PEPP was announced to alleviate sovereign risks. We assess the effects of both policies on these two intermediate objectives. We find that the PSPP positively affects inflation swaps whereas the PEPP negatively impacts sovereign spreads. We explore the reasons for these differentiated effects. Making the rationale of a policy clear and credible influences its transmission to asset prices.
    Keywords: Monetary Policy, Asset Prices, Central Bank Communication, Central Bank Reaction Function, Intermediate Objectives
    JEL: G12 E52 E58
    Date: 2022
  2. By: André Marine Charlotte; Medina Espidio Sebastián
    Abstract: We study an optimal robust monetary policy for a small open economy. The robust control approach assumes that economic agents cannot assign probabilities to a set of plausible models and rather focuses on the worst possible misspecification from a benchmark model. Our findings suggest that, first, conducting a global robust optimal monetary policy is limited as deviations from the benchmark model lead to multiple equilibria. Second, when the central bank considers uncertainty only in the IS Curve or in the UIP, the space of unique solutions is expanded. In fact, the central bank reacts more aggressively to demand and real exchange rate shocks when it is robust to misspecifications in the IS curve only. Finally, our results suggest that the global robust optimal monetary policy is limited due to inflation persistency and the low exchange rate pass-through. The importance of anchoring inflation expectations is highlighted.
    Keywords: Robust control;optimal monetary policy;model uncertainty;small open economy
    JEL: C62 D83 D84 E52 E58
    Date: 2022–12
  3. 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.
    JEL: E42 E44 E52 E58 G22
    Date: 2022–12
  4. By: Michael D. Bordo; William Roberds
    Abstract: We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs.
    JEL: E42 E58 N10
    Date: 2022–12
  5. By: Martin Harding; Jesper Lindé; Mathias Trabandt
    Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that central banks face a more severe trade-off between inflation and output stabilization when inflation is high.
    Keywords: Business fluctuations and cycles; Central bank research; Coronavirus disease (COVID-19); Economic models; Inflation and prices; Inflation: costs and benefits; Monetary policy; Monetary policy implementation
    JEL: E37 E44 E52
    Date: 2022–12
  6. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 175 Chinese banks over the period 2006-2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank's efficiency. While bank efficiency does not exert an impact on the effectiveness of monetary policy transmission overall, it does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. In addition, the expansion of shadow banking activities has been associated with a positive impact of bank efficiency on monetary policy transmission. These results suggest that bank efficiency may influence the bank lending channel in certain cases.
    Keywords: Chinese banks,monetary policy,bank efficiency,bank lending channel
    JEL: E52 G21
    Date: 2021
  7. By: Aman, Moustapha; Nenovsky, Nikolay
    Abstract: The last few decades have been marked by a proliferation of currency union projects in Africa. In a context of exchange rate instability and poorly convertible currencies, the authorities in most of the countries of the Horn of Africa are looking for an exchange rate regime that can stabilise and develop their economies. To achieve monetary stability in this sub-region, which is at the crossroads of some of the busiest sea and land routes, this paper reflects on the potential benefits of a monetary system that is characterised by a two-tiered architecture: national currencies and a common currency governed by a regional Currency Board.
    Keywords: monetary regime, Currency board, Central Bank, Horn of Africa
    JEL: E58 F45
    Date: 2022–09–16
  8. By: Carrasco, Alex; Florian Hoyle, David
    Abstract: This paper discusses the role of sterilized foreign exchange (FX) interventions as a monetary policy instrument for emerging market economies in response to external shocks. We develop a model for a commodity-exporting small open economy in which FX intervention is considered as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and their creditors. The severity of banks agency problem depends directly on a bank-level measure of currency mismatch. Endogenous deviations from the standard UIP condition arise at equilibrium. In this context, FX interventions moderate the response of financial and macroeconomic variables to external shocks by leaning against the wind with respect to real exchange rate pressures. Our quantitative results indicate that, conditional on external shocks, the FX intervention policy successfully reduces credit, investment, and output volatility, along with substantial welfare gains when compared to a free-floating exchange rate regime. Finally, we explore distinct generalizations of the model that eliminate the presence of endogenous UIP deviations. In those cases, FX intervention operations are considerably less effective for the aggregate equilibrium.
    Keywords: Foreign exchange intervention;External shocks;Financial dollarization;Monetary policy
    JEL: E32 E44 E52 F31 F41
    Date: 2021–08
  9. By: Clayton, Christopher; Schaab, Andreas
    Abstract: Should central banks’ inflation targets remain set in stone? We study a dynamic mechanism design problem between a government (principal) and a central bank (agent). The central bank has persistent private information about structural shocks. Firms learn the state from the central bank’s reports and form inflation expectations accordingly. A dynamic inflation target implements the full-information commitment allocation: the central bank is delegated the authority to adjust its own target as long as it does so one period in advance. Both the level and flexibility of the dynamic inflation target respond to persistent shocks. Target flexibility is set to correct the time consistency problem, while the target level provides the correct incentives for target adjustments. An informational divine coincidence arises: the central bank’s incentives to misreport its persistent private information to manipulate firm and government beliefs exactly offset each other under the mechanism. We apply our theory to study lower bound spells, a declining natural interest rate, and a flattening Phillips curve. We leverage our framework to study longer-horizon time consistency problems and speak to practical policy questions of inflation target design.
    Keywords: inflation targeting; persistent private information; dynamic mechanism design; monetary policy; time consistency; dynamic inflation targets; informational divine coincidence
    JEL: E52 D82
    Date: 2022–12–12
  10. By: Michael Gurkov (Bank of Israel); Osnat Zohar (Bank of Israel)
    Abstract: We examine how inflation risks in Israel evolved over time. We find that until 2013, inflation uncertainty was stable, and risks were moderately skewed downwards. However, since 2014, uncertainty decreased, and downside risks to inflation became much more dominant. The model attributes these developments to the decline in the inflation environment, as it is captured by realized inflation and long-term expectations, and to changes in oil prices. However, we cannot rule out that the monetary rate approaching the effective lower bound also contributed to these changes.
    Keywords: inflation at risk, density forecasts, quantile regressions, effective lower bound.
    JEL: E31 E37 E58
    Date: 2022–12
  11. By: Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
    Abstract: Heterogeneity in Phillips Curve slopes among members of a monetary union can lead to downward biases to estimates of the union-wide slope in reduced form regressions. The intuition is that in a monetary union with heterogeneous regional Phillips Curve slopes, the central bank, aiming at stabilizing demand shocks, will react stronger to shocks in regions with steep slopes compared to shocks in regions with flat slopes. Using a simple New-Keynesian model of a monetary union that omitting controls for this heterogeneity, we show that reduced form estimates of the union-wide slope suffer from a substantial bias towards zero. Empirically, we show that controlling for slope heterogeneity in Euro Area data increases reduced form estimates of the slope in the period since 2009.
    Keywords: Phillips curve, heterogeneity, monetary meeting
    JEL: E24 E31 E58
    Date: 2022
  12. By: Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
    Abstract: We show that U-shaped monetary policy rate dynamics are strongly associated with financial crisis risk. This finding holds both in long-run cross-country macro data covering many crises and monetary policy cycles, and in detailed micro, administrative data covering the post-1995 period in Spain. In the macro data, we find that pre-crisis monetary policy follows a U shape, with policy rates first cut and then increased over the 7 years before the onset of the crisis. This U shape holds across a wide variety of crisis definitions, short-term rate measures, and becomes stronger after World War 2. Differently, even though inflation and real rates show some of these dynamics before a crisis, these results are much less robust. The patterns are also much weaker when it comes to long-term rates and non-crisis recessions. We show that monetary policy rate hikes (both raw, and instrumented using the trilemma IV of Jordà et al, 2020) increase crisis risk, but, different to previous studies, we show that this effect is driven by rate hikes which were preceded by a series of cuts. To understand why U-shaped monetary policy is linked to crises, we show that the initial loosening of policy is followed by high growth in credit and asset prices, putting the economy into a vulnerable financial "red zone''. After the subsequent monetary tightening these vulnerabilities materialize, leading to larger-than-usual declines in credit, asset prices, and real activity. To dig into the underlying mechanisms, we use administrative data on the universe of bank loans and defaults during the 1990s and 2000s boom-bust cycles in Spain. Consistently, we find that U-shaped monetary policy increases the probability of ex-post loan defaults, but effects are much stronger for ex-ante riskier firms and for banks with weaker balance sheets. Overall, our paper shows that monetary policy dynamics have important implications for financial stability.
    Keywords: monetary policy, financial stability, financial crises, credit, asset prices, banks, macro-finance
    JEL: E51 E52 E44 G01 G21 G12
    Date: 2022–12
  13. By: Florin Bilbiie (UNIL - Université de Lausanne = University of Lausanne, CEPR - Center for Economic Policy Research - CEPR); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity ("money") to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small.
    Keywords: Optimal (Ramsey) Monetary Policy,Heterogeneous Households,Incomplete Markets,Money,Inequality,Helicopter Drops
    Date: 2021–07
  14. By: Ly Dai Hung (Vietnam Institute of Economics, Hanoi, Vietnam)
    Abstract: The paper investigates the structure of inflation in the Vietnam economy, as a developing economy with a strong record of low inflation and high economic growth rate over recent years, even during the recent Covid-19 pandemic. Methodology: The paper uses a quantitative analysis which investigates the quarterly dataset of inflation for the Vietnam economy over 1990-2021. The inflation is decomposed into three main components including core inflation, energy inflation and food inflation. Findings: The evidence records that the main driver of inflation in the Vietnam economy is the food inflation. Moreover, both energy and food inflation tends to have a large deviation over time. This illustrates the impact of the world commodity market on domestic inflation. The core inflation, however, is quite stable over time, reflecting the effectiveness of monetary policy in the Vietnam economy. Implications: The results implies that the food inflation can be a prioritized objective for the Vietnam economy to stabilize the domestic inflation. Moreover, the monetary policy, which affects the core inflation, needs to be combined with the fiscal policy, which affects the energy inflation.
    Keywords: Inflation Rate,Economic Growth,Pandemic,Quantitative Analysis,Qualitative Analysis,Vietnam economy
    Date: 2022–08
  15. By: Gautier Erwan; Conflitti Cristina; Faber Riemer P.; Fabo Brian; Fadejeva Ludmila; Jouvanceau Valentin; Menz Jan-Oliver; Messner Teresa; Petroulas Pavlos; Roldan-Blanco Pau; Rumler Fabio; Santoro Sergio; Wieland Elisabeth; Zimmer Hélène
    Abstract: Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change (vs 19.3% in the United States); when we exclude price changes due to sales, this proportion drops to 8.5% in the euro area vs. 10% in the United States; (ii) differences in price rigidity are rather limited across countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) and 6.7% (8.7%) when excluding sales; (iv) the distribution of price changes is highly dispersed: 14\% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
    Keywords: Negative Interest Rates, Portfolio Rebalancing, Search for Yield, term spreads, Banks
    JEL: D40 E31
    Date: 2022
  16. By: Andrew T. Levin; Brian L. Lu; William R. Nelson
    Abstract: We conduct a systematic analysis of the costs and benefits of large-scale securities purchases, using the Federal Reserve’s QE4 program as a concrete example. This program was initiated at the onset of the pandemic in March 2020 and continued for two years, leading to a doubling of the Fed’s securities holdings to about $8.5 trillion as of March 2022. QE4 was initially aimed at mitigating strains in markets for Treasuries and agency mortgage-backed securities but was subsequently aimed more broadly at supporting market functioning and providing monetary stimulus. Nonetheless, QE4 did not have any notable benefits in reducing term premiums. Moreover, since the securities purchases were financed by expanding the Fed’s short-term liabilities, QE4 amplified the interest rate risk associated with the publicly-held debt of the consolidated federal government. Our simulation analysis indicates that QE4 is likely to reduce the Federal Reserve’s remittances to the U.S. Treasury by about $760 billion over the next ten years.
    JEL: E42 E52 E58 E63
    Date: 2022–12
  17. 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 ow 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.
    Keywords: inflation, market-based expectations, fund flows, inflation hedging
    JEL: E31 E44 G11 G23
    Date: 2022
  18. By: Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
    Abstract: We study the impact of China's 2013 implementation of Basel III on bank risk-taking and its responses to monetary policy shocks using confidential loan-level data from a large Chinese bank. Guided by theory, we use a difference-in-difference identification, exploiting cross-sectional differences in lending behaviors between highrisk and low-risk bank branches before and after the new regulations. We find that, through a risk-weighting channel, changes in regulations significantly reduced bank risktaking, both on average and conditional on monetary policy easing. However, banks reduce risk-taking by increasing lending to ostensibly low-risk state-owned enterprises (SOEs) under government guarantees, despite their low average productivity.
    Keywords: bank risk-taking,banking regulations,risk-weighting,monetary policy,difference-in-difference,China
    JEL: E52 G21 G28
    Date: 2021
  19. By: Efrem Castelnuovo (University of Padova, CESifo, and CAMA); Giovanni Pellegrino (Aarhus University); Giacomo Ranzato (University of Padova)
    Abstract: We propose a novel identification strategy based on a combination of sign, zero, and policy coefficient restrictions to identify the exchange rate response to a US monetary policy shock. Our strategy crucially hinges upon imposing a sign on the policy response to exchange rate fluctuations, i.e., monetary policy tightens after a depreciation of the US dollar. We support this restriction with narrative evidence as well as empirical evidence from the extant literature. We find an unexpected increase in the policy rate to generate an immediate appreciation followed by a persistent depreciation. This evidence is consistent with the overshooting hypothesis. Importantly, we show that our identification strategy implies robust impulse responses across samples characterized by different monetary policy conducts. Differently, restrictions imposed only on impulse responses return evidence that is subsample specific and associate Volcker’s regime with a delayed overshooting.
    Keywords: delayed overshooting, vector autoregressions, monetary policy rule, exchange rate dynamics, Volcker policy regime
    JEL: C32 E44 E52 F31 F41
    Date: 2022–06
  20. By: Marco Felici; Geoff Kenny; Roberta Friz
    Abstract: We study interest rates transmission to savings at low and negative rates. Exploiting cohorts of consumers from a data-rich multi-country survey, we show how the strength of interest rate transmission to savings varies with the level of nominal interest rates. This response is positive when interest rates are high but declines steadily at lower levels. At very low levels, there is evidence that the savings response may even reverse sign. Such a “savings’ reversal” is consistent with the behavioural evidence on money illusion as well as with a negative signalling effect from policy announcements in a liquidity trap and may weaken the direct stimulatory effects from very low and negative rates. Consistent with this, the reversal appears to be causally related to central bank information shocks and concentrated among older consumers and consumers with lower educational attainment.
    JEL: D12 D84 E21 E31 E52
    Date: 2022–10
  21. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of trend inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal trend inflation accounts for the bulk of inflation dynamics. As external validation, we show that the model predicts the post-pandemic increase in inflation. Unfunded fiscal shocks sustain the recovery and cause an increase in trend inflation that counteracts deflationary non-policy shocks.
    JEL: E30 E50 E62
    Date: 2022–12
  22. By: Gáti, Laura; Handlan, Amy
    Abstract: Is there a systematic mapping between the Federal Reserve’s expectations of macro variables and the words it uses to talk about the economy? We propose a simple framework that allows us to estimate communication rules in the United States based on text analysis with regularized regressions. We find strong evidence for systematic communication rules that vary over time, with changes in the rule often being associated with changes in the economic environment or with the introduction of a new Fed chair. In the case of the fed funds rate, we also estimate the market’s perception of the Fed’s communication rule and use it to investigate how much of the disagreement between the market and the Fed come from disagreement about the communication rule. JEL Classification: E52, E58, C49
    Keywords: communication, expectations, monetary policy, NLP, text analysis
    Date: 2022–12
  23. By: Julien Champagne; Émilien Gouin-Bonenfant
    Abstract: Do financial constraints amplify or dampen the transmission of monetary policy to the real economy? To answer this question, we propose a simple empirical strategy that combines (i) firm-level employment and balance sheet data, (ii) identified monetary policy shocks and (iii) survey data on financing activities. The key novelty of our approach is a new proxy for the likelihood of being credit constrained, which is constructed using survey data on realized outcomes of financing requests. Leveraging cross-sectional heterogeneity in the proxy and the sensitivity of employment to monetary policy shocks, we find that credit constraints amplify the transmission of monetary policy. In the aggregate, credit constraints account for roughly a third of the employment response. Our findings are consistent with a strong financial accelerator, whereby accommodative monetary policy has the indirect effect of improving the ability of firms to obtain credit.
    Keywords: Credit and credit aggregates; Econometric and statistical methods; Firm dynamics; Labour markets; Monetary policy
    JEL: E2 E3 E4 E43 E5 E52 G3
    Date: 2022–12
  24. By: Sandra Eickmeier; Boris Hofmann
    Abstract: We estimate indicators of aggregate demand and supply conditions based on a structural factor model using a large number of inflation and real activity measures for the United States. We identify demand and supply factors by imposing theoretically motivated sign restrictions on factor loadings. The results provide a narrative of the evolution of the stance of demand and supply over the past five decades. The most recent factor estimates indicate that the inflation surge since mid-2021 has been driven by a combination of extraordinarily expansionary demand conditions and tight supply conditions. We obtain similar results for the euro area, but with a somewhat greater role for tight supply consistent with the greater exposure of the euro area to recent adverse global energy price shocks. We further find that tighter monetary policy and financial conditions dampen both demand and supply conditions.
    Keywords: inflation, aggregate demand and supply, factor model, sign restrictions, monetary policy
    JEL: E3 E5 E6 C3
    Date: 2022–12
  25. By: Perazzi, Elena; Bacchetta, Philippe
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a closed-economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Keywords: CBDC, Welfare, Substitutability
    JEL: E5
    Date: 2022–12–08
  26. By: Luccas Assis Attilio; Joao Ricardo Faria, Mauro Rodrigues
    Abstract: This paper studies the relationship between monetary policy and CO2 emissions. Our contribution is twofold: (i) we present a stylized dynamic AD-AS model with Global Value Chains (GVC) and carbon emissions to illustrate this relationship, (ii) we estimate the effect of monetary policy on emissions using the GVAR methodology, which explicitly considers the interconnection between regions instead of treating them as isolated economies. We focus on CO2 emissions in four regions: U.S., U.K., Japan and the Eurozone, but we use data from 8 other countries to characterize the international economy. Our results show that a monetary contraction in a country is associated with lower domestic emissions both in the short- and the long-run. Although we do not find evidence of cross-region effects concerning monetary policy, variance decomposition suggests that external factors are relevant to understanding each region's fluctuations in emissions.
    Keywords: Pollution; monetary policy; international linkages
    JEL: E52 E43 Q50
    Date: 2022–12–13
  27. By: Beckmann, Joscha; Comunale, Mariarosaria
    Abstract: This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyze whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks' transmission covering 11 emerging market countries for the period 2000Q1- 2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand regarding foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to appreciation) decreases GDP. The financial channel works mostly in the short run except for Brazil, Malaysia, and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rates.
    Keywords: emerging markets,financial channel,exchange rates,global liquidity
    JEL: F31 F41 F43 G15
    Date: 2021
  28. By: Christopher Roth (University of Cologne); Mirko Wiederholt (LMU - Ludwig-Maximilians University [Munich], ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Johannes Wohlfart (CEBI - Center for Economic Behavior and Inequality - UCPH - University of Copenhagen = Københavns Universitet, UCPH - University of Copenhagen = Københavns Universitet)
    Abstract: We study the effects of monetary policy on aggregate consumption with a general equilibrium model but without making assumptions about expectation formation. The key idea is to express consumption of non-hand-to-mouth households as a function of expectations only and to elicit all expectations appearing in the consumption functions for alternative policy scenarios with a tailored survey. We illustrate this approach by computing aggregate consumption for alternative policies before the March 2021 and March 2022 FOMC meetings. We find that a modest forward guidance statement in the March 2021 FOMC meeting would have reduced aggregate consumption by 0.17% on impact and an interest rate hike of 50 basis points in the March 2022 FOMC meeting would have reduced aggregate consumption by 0.15% on impact.
    Keywords: Monetary Policy, Expectation Formation, Aggregate Consumption
    Date: 2022–07–21
  29. By: Naef, Alain
    Abstract: How did the Bank of England manage sterling crises? This book steps into the shoes of the Bank's foreign exchange dealers to show how foreign exchange intervention worked in practice. The author reviews the history of sterling over half a century, using new archives, data and unseen photographs. This book traces the sterling crises from the end of the War to Black Wednesday in 1992. The resulting analysis shows that a secondary reserve currency such as sterling plays an important role in the stability of the international system. The author goes on to explore the lessons the Bretton Woods system on managed exchange rates has for contemporary policy makers in the context of Brexit. This is a crucial reference for scholars in economics and history examining past and current prospects for the international financial system.
    Date: 2022–12–02
  30. By: Jing Cynthia Wu; Yinxi Xie
    Abstract: We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
    JEL: E5 E62 E63
    Date: 2022–12
  31. By: Markus Hertrich (Deutsche Bundesbank); Daniel Nathan (Bank of Israel)
    Abstract: Using confidential daily data, we analyze how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the ILS and the expectations about its future value. We find that interventions amounting to USD 1 billion are on average associated with a depreciation of the USD/ILS and the Nominal Effective Exchange Rate (NEER) by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. We stress that an intervention of USD 1 billion does not reflect the average daily intervention by the BOI and it serves as a benchmark to compare to other research papers in the field of FX interventions. The (indirect) effect on the forward rate is smaller - the BOI’s USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution (RND) of future exchange rates extracted from USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole RND towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.
    Keywords: Exchange rate, expectations, central bank intervention, Israeli new shekel, reaction function
    JEL: E42 E58 F31 G14 G15
    Date: 2022–06
  32. By: Shuichiro Ikeda (Bank of Japan); Haruhiko Inatsugu (Bank of Japan); Yui Kishaba (Bank of Japan); Takuji Kondo (Bank of Japan); Kenichi Sakura (Bank of Japan); Kosuke Takatomi (Bank of Japan); Takashi Nakazawa (Bank of Japan); Kotone Yamada (Bank of Japan)
    Abstract: As the impact of COVID-19 pandemic eased and economic activity resumed, prices have risen sharply in the U.S. and Europe, partly due to the impact of rising commodity prices. Although not to the same extent as the U.S. and Europe, in Japan inflation rates have also been rising, especially for goods prices. In order to further develop the discussion on the nature of these recent price developments in Japan and their outlook, this paper (1) summarizes the characteristics of inflation dynamics in Japan before the spread of COVID-19, mainly using the framework of the Phillips curve, (2) confirms the recent changes and characteristics of price developments, and (3) summarizes the issues for the future. Based on the fact-finding of this paper, we conclude it is important to accumulate analyses on the stickiness of service prices, nominal wage rigidity, and uncertainty in inflation expectations, which are characteristic of Japan, in order to further deepen the discussion on these recent price developments.
    Keywords: Phillips curve; Cost push; Price rigidity; Inflation expectations; Wages
    JEL: E30 E31 J30
  33. By: Yang Zhou (Graduate School of Economics, Kobe University and Junir Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN)
    Abstract: This study analyzes the effectiveness of capital controls on international debt flows using data of 81 economies, including both advanced and emerging economies, over the period from 1995 to 2019. The analysis using the total sample shows that, although they are in the expected directions, the impulse responses of capital controls are statistically insignificant. Making various distinctions among samples (such as advanced and emerging economies and pre- and post-crisis periods), we still find that most results are statistically insignificant. However, the canonical distinction between the "gate" and "wall" economies indicates that the effectiveness of capital controls is relevant for the "wall" emerging economies.
    Keywords: Capital flows; Capital controls; Local projection
    JEL: E69 F32 F38 F41
    Date: 2022–12
  34. By: Marianna Riggi (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: Using a rich survey panel of Italian businesses, this paper provides new empirical evidence on the drivers of firms’ pricing decisions over the last six years. We document a set of interesting results. First, the share of firms adjusting their prices in each period co-moves with current inflation. Moreover, firms’ choices are consistent with a hybrid framework that lies between time- and state-dependent models of price setting. Second, firms’ pricing decisions respond to past pricing choices, changes in input costs and beliefs about future developments of their own prices, rather than expectations on aggregate inflation. Third, firms’ price changes are also connected to their observable characteristics: size class, sector of activity and exposure to foreign markets. Fourth, the heterogeneity in price changes depends strongly on the dispersion of beliefs concerning future price variations, while input prices only explain a limited part. Our results shed light on the presence of different channels in the formation of firms’ prices, pointing toward the need of considering them together to understand their pricing decisions and the dynamics of inflation.
    Keywords: firms’ pricing decisions, price rigidities, input costs pass-through, expectations, survey data
    JEL: D22 D24 E31
    Date: 2022–11
  35. By: Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study the role and the interaction of the quality of institutions and of counter-cyclical policies in leaning against the Global Financial Cycle (GFC) in Emerging Economies (EMEs). We show that heteroegeneity in institutional strength is a key determinant of the different effects of the GFC on EME domestic financial conditions. Institutional strength also shapes the response in terms of counter-cyclical policies to sudden changes in global financial conditions as well as the effectiveness of such policies. We illustrate in a simple stylised model that countries may in fact decide to undertake ex ante costly structural reforms that reduce their vulnerability to the GFC or react ex post to the financial s hock. However, we also find that the Covid-19 episode seems to deviate somewhat from the general pattern of EME reaction to shifts in the GFC. JEL Classification: F32, F38, E52, G28
    Keywords: capital controls, emerging markets, foreign-exchange intervention, Global Financial Cycle, institutions., macro-prudential policies, monetary policy
    Date: 2022–12
  36. By: Andreas Freitag; Sarah M. Lein; Sarah Marit Lein
    Abstract: We document how product quality responds to exchange rate movements and quantify the extent to which these quality changes affect the aggregate pass-through into export prices. We analyze the substantial sudden appreciation of the Swiss franc post removal of the 1.20-CHF-per-euro lower bound in 2015 using export data representing a large share of the universe of goods exports from Switzerland. We find that firms upgrade the quality of their products after the appreciation. Furthermore, they disproportionately remove lower-quality products from their product ranges. This quality upgrading and quality sorting effect accounts for a substantial share of the total pass-through one year after the appreciation. We cross-check our results with the microdata underlying the Swiss export price index, which includes an adjustment factor for quality based on firms’ reported product replacements, and obtain similar results.
    Keywords: large exchange rate shocks, exchange rate pass-through, quality adjustment
    JEL: E30 E31 E50 F14 F41
    Date: 2022
  37. By: Tomoko AIZAWA-Tanemura (College of Commerce, Nihon University); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Abstract: This paper uses the interpretation of the monetary transmission channel model in Japan under low interest rates to clarify the factors that determine the net interest margin (NIM). An analysis using Loan-level data from the Tohoku region from 2012 to 2015 shows that the Capital-to-Asset Ratio of a firm is an important factor in determining NIM. Even if we consider that firms and banks have suffered Nuclear Damage, Bad reputation Damage, and Supplier Damage due to the Great East Japan Earthquake as control variables, the channel through the agency cost of the borrower is effective. Even if we put the policy response of Rents and leases Subsidy, Interest or guarantee fee Subsidy, Interest reductions, and Group Subsidy into the estimation formula as a control variable, the channel through the agency cost of the borrower is effective. On the other hand, the existence of a channel through banks' agency costs, funding costs of capital and borrowing, and liquidity costs cannot be shown to be stable. In other words, financial institutions can earn high NIMs when they lend to firms that have relatively small net worth and depend on banks for funding. Financial institutions in Japan's Tohoku region that wish to profit from lending need to face the agency problem between borrower firms and lender banks.
    Keywords: Net Interest Margin, Capital-to-Asset Ratio, Balance Sheet Channel, Loan-level Data
    JEL: E43 E51 E52 G21
    Date: 2022–11
  38. By: Mark Bergen (University of Minnesota); Thomas Bergen (University of Minnesota); Daniel Levy (Ber-Ilan University, Emory University, ISET at TSU, ICEA, and RCEA); Rose Semenov (University of Minnesota)
    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.
    Date: 2022–12
  39. By: Eric Schaling; Kgotso Morema
    Abstract: Optimal interest rate gaps for flexible inflation targeting
    Date: 2022–12–13
  40. By: Casoli, Chiara; Manera, Matteo; Valenti, Daniele
    Abstract: We develop a Bayesian Structural VAR (SVAR) model to study the relationship between different kinds of energy shocks and inflation dynamics in Europe. Specifically, we include in our specification two separate energy markets (oil and natural gas) and two target macroeconomic variables, measuring inflation expectations and the realized headline inflation. Our results demonstrate that, during the last year, inflation in the Euro area is more affected from energy price shocks, particularly those coming from the natural gas sector. The high peaks of the Eurozone inflation are mainly associated with gas consumption demand shocks and, to a lesser extent, to oil and gas supply shocks.
    Keywords: Public Economics, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy
    Date: 2022–12–19
  41. By: Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
    Abstract: We develop a two-sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD per tonne of carbon is 4 times more effective.
    Keywords: Climate Change, Integrated Assessment Model, 2-Sector Model, Green Quantitative Easing, Carbon Taxation
    JEL: E51 E62 Q54
    Date: 2022
  42. By: Orsetta Causa; Emilia Soldani; Nhung Luu; Chiara Soriolo
    Abstract: Inflation has quickly and significantly increased in most OECD countries since the end of 2021 and further accelerated after Russia’s war of aggression against Ukraine, mostly driven by surging energy and food prices. Certain categories of households are particularly vulnerable, as large parts of their consumption expenditures are devoted to energy and food. Drawing on national micro-based household budget surveys and on CPI data, this paper provides a quantification of the impact of rising prices on households’ welfare. Declines in household purchasing power between August 2021 and August 2022 are estimated to range from 3% in Japan to 18% in the Czech Republic. This decline is driven by energy prices in most countries, especially Denmark, Italy, and the United Kingdom, while energy prices play a lesser role in countries where inflation is more broad-based like the Czech Republic and the United States. In all considered countries, inflation weighs relatively more on low than high-income households. Rural households are hit particularly hard, most often more than low-incomes ones, and this is driven by energy price inflation. To cushion vulnerable households from rising inflation, especially from energy prices, these findings call for a careful targeting of income and price support measures, notwithstanding their administrative and logistical complexity, taking into account their effects on economic activity, inflation, and, last but not least, environmental goals.
    Keywords: distribution, energy, inequality, inflation, policy analysis, purchasing power
    JEL: H12 H23 I3 Q41 Q48
    Date: 2022–12–22
  43. By: Mykola Pinchuk
    Abstract: This paper examines the effect of macroeconomic news announcements (MNA) on the stock market. Stocks exhibit a strong positive response to major MNA: 1 standard deviation of MNA surprise causes 11-25 bps higher returns. This response is highly time-varying and is weaker during periods of high monetary uncertainty. I decompose this response into cash flow and risk-free rate channels. 1 standard deviation of good MNA surprise leads to plus 30 bps returns from the cash flow channel and minus 23 bps per 1\% of monetary uncertainty from the risk-free rate channel. Risk-free rate channel is time-varying and is stronger when monetary uncertainty is high. High levels of monetary uncertainty mask the strong positive response of stocks to MNA, which explains why past research failed to detect this relation.
    Date: 2022–12
  44. By: Pachankis, Yang
    Abstract: The article analyzes the realpolitik strategic offensive behavior of PRC’s centralized banking after joining the GATT and WTO. With the Bretton Woods and issuance of USD anchored to gold, the PRC State-owned Assets Supervision and Administration (SASAC) of the import-export control regime enabled the “double-circulation” operations of the RMB and offshore RMB, with quantitative restriction distributed to the commercial banking in private dealership in currency exchanges and banning on bona fide private dealership. The gold and oil hedging on the free market further enabled the Chinese central bank’s “monetary conduction mechanism” in issuing money according to USD for strategic offense with the currency price market. With Brexit and Trade War, PRC currently has blocked almost all international settlement channels in the controlled market in maintaining offshore RMB value evaluations. With the background of cryptocurrency and PRC’s approach in digitization of economic control, the article analyzes possible resolutions for economic justice.
    Keywords: digitization, cryptocurrency, price market, security risks, offshore RMB, compartmentalization, IMF, trade deficit
    JEL: C72 C73 C92 E31 E32 E51 E58 O31 O33 P51
    Date: 2022–10–20
  45. By: Dimitrios Kanelis; Pierre L. Siklos
    Abstract: We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to analyze how the vocal emotions and language of ECB President Mario Draghi affect the yield curve of major euro area economies. Vocal emotions significantly impact the yield curve. However, their impact varies in size and sign: positive signals raise German and French yields, while Italian yields react negatively, which is reflected in an increase in yield spreads. A by-product of our study is the construction and provision of a synchronized data set for voice and language.
    Keywords: Communication, ECB, Neural Networks, High-Frequency Data, Speech Emotion Recognition, Asset Prices
    JEL: E50 E58 G12 G14
    Date: 2022–12
  46. By: Santoro, Sergio; Viviano, Eliana
    Abstract: We show that a sticky price model featuring firms' heterogeneity in terms of productivity and strategic complementarities in price setting delivers a strictly positive optimal inflation in steady state, differently from standard New Keynesian models. Due to strategic complementarities, more productive firms have higher markups in steady state. This leads to a misallocation distortion, as more productive firms produce too little compared to the social optimum. An increase of steady state inflation curbs the markups, especially those of the more productive firms, hence attenuating the inefficient dispersion of markups. At low levels of inflation, the gains from the reduction in misallocation outweigh the cost of inflation. Heterogeneity in productivity and strategic complementarities in price setting, the key ingredients of our model, imply that also firms' response to shocks is heterogenous: less productive firms transmit cost shocks to prices much more than more productive ones. To provide empirical support to our key mechanism we resort to a quasi-natural experiment occurred in Italy in late 2014, when a cut to social security contributions for all new open-ended contracts was announced. Consistently with our theory, we show that the pass-through of this shock to labour costs was much stronger for less productive firms. JEL Classification: D00, D22, E31
    Keywords: firm heterogeneity, labour costs, optimal inflation rate, price pass-through
    Date: 2022–12
  47. By: Jiri Gregor; Jan Janku; Martin Melecky
    Abstract: This paper studies the pass-through from the market benchmark rate (proxied by the 5-year swap rate) to interest rates on all newly issued residential mortgage loans in the Czech Republic-an EU country. It tests for and explains the potential spatial heterogeneity in the pass-through to local mortgage rates highlighted by the literature for the US (Scharfstein & Sunderam, 2016). This spatial pass-through has not been studied in the context of the EU with its specific mortgage loan market structure. Using unique data on residential mortgages in the Czech Republic over 2016-2021, we show that the pass-through varies notably across districts and is significantly driven by local mortgage market concentration (bank market power) and the unemployment rate. We find a lower aggregate pass-through than previous studies (about 0.5). The most important pricing factors for residential mortgage loans appear to be the loan-to-value ratio, the net income of the borrower, the loan maturity, and the length of the fixed-rate period.
    Keywords: Banking market concentration, districts and regions, heterogeneity, interest rate pass-through, mortgage lending rates
    JEL: E43 G21 G51 R32
    Date: 2022–11
  48. By: Emilian Libman; Leonardo Stanley
    Abstract: Abstract: This article describes the Argentinean experience during the first two decades of the 21st century. After a successful recovery phase from the 2001 debt crisis, during 2011 Argentina adopted incorrect macroeconomic policies to avoid the contractionary and inflationary effects from a large depreciation of the currency, by implementing a strict system of restrictions on foreign exchange purchase and sale. The restrictions were lifted 4 years after their implementation, and during 2016-2017 Argentina drew heavily from international capital markets until the country suffered a sudden stop of capital flows. Resumen: Este artículo describe la experiencia argentina durante las dos primeras décadas del siglo XXI. Luego de una recuperación exitosa de la crisis de 2001, a partir del ano 2011 Argentina adoptó una política macroeconómica incorrecta, implementando un esquema de restricciones a la compra - venta de divisas. Cuatro anos luego de introducidas, las restricciones fueron levantadas, y durante 2016-2017 Argentina retornó a los mercados financieros internacionales, hasta que el país sufrió de un freno a los ingresos de capitales.
    Keywords: Capital Controls, Inflation Targeting, Foreign Exchange Restrictions, Currency Crises, IMF programs, capital flow bonanzasontroles de capitales, metas de inflación, restricciones en el mercado de cambios, crisis cambiarias, programas del FMI, auge de flujo de capitales
    JEL: F21 F32 F53
    Date: 2022–01–22
  49. By: Hugh Ding; Natasha Khan; Bena Lands; Cameron MacDonald; Laura Zhao
    Abstract: Cryptoassets that reference a national currency (commonly known as stablecoins) aim to peg their value to the reference currency and typically use a reserve of traditional financial assets to maintain the peg. The market value of these fiat-referenced cryptoassets has grown more than thirtyfold between early 2020 and mid-2022. We explore some of their potential benefits and key risks.
    Keywords: Digital currencies and fintech; Financial institutions; Financial markets; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: E4 G2 G28 O3
    Date: 2022–12
  50. By: Franz Seitz; Lucas Devigne; Raymond de Pastor
    Abstract: The present paper analyzes the net cash issues of the Banque de France. It is divided in two parts. The first estimates cash demand functions for different denominational groups (small, medium, large). We find that many of the different motives for holding cash are present in the French case. In a second step we try to estimate the amounts used for transaction and store of wealth purposes, internal hoardings and foreign demand with indirect methods with a special focus on different variants of the so-called seasonal method. Our results reveal that in 2019 only around 15 % of the cumulated net issues are used for domestic transactions. Around 60 % are held outside France, either in other euro area countries or outside the euro area.
    Keywords: Cash, Banknotes, Net Issues, Seasonal Method.
    JEL: C22 E41 E58
    Date: 2022
  51. By: Jan Ditzen (Free University of Bozen-Bolzano, Italy); Francesco Ravazzolo (Free University of Bozen-Bolzano, Italy)
    Abstract: For western economies a long-forgotten phenomenon is on the horizon: rising inflation rates. We propose a novel approach christened D^{2}ML to identify drivers of national inflation. D^{2}ML combines machine learning for model selection with time dependent data and graphical models to estimate the inverse of the covariance matrix, which is then used to identify dominant drivers. Using a dataset of 33 countries, we find that the US inflation rate and oil prices are dominant drivers of national in ation rates. For a more general framework, we carry out Monte Carlo simulations to show that our estimator correctly identifies dominant drivers.
    Keywords: Time Series, Machine Learning, LASSO, High dimensional data, Dominant Units, Inflation.
    JEL: C22 C23 C55
    Date: 2022–12
  52. By: Alberto Di Iorio (Bank of Italy); Giorgia Rocco (Bank of Italy)
    Abstract: In this study we use data from the 2019 Study on the Payment Attitudes of Consumers in the Euro area (SPACE) to analyse the main drivers of payment choices at the point of sale (POS) in Italy. We find that transaction-related features are the most important drivers of payment choice at the POS, while individual consumer preferences play a minor role. We also document that consumers often pay in cash, even though they would prefer to use a different payment instrument, due to a lack of acceptance of alternative instruments by merchants, especially for low-value transactions. Finally, consumers’ digital skills are found to be a relevant factor in payment habits since they affect preferences and reduce the likelihood of cash usage, especially for those groups that tend to use it more, such as women and residents in the South.
    Keywords: payment habits, consumer choice, payment preferences, cash, payment cards, survey data, diary data
    JEL: D12 E58 G02
    Date: 2022–11
  53. By: J. Scott Davis; Eric van Wincoop
    Abstract: We develop a theory to account for changes in gross and net capital flows over the global financial cycle (GFC). The theory relies critically on portfolio heterogeneity among investors within and across countries, related to risky portfolio shares and portfolio shares allocated to foreign assets. A global drop in risky asset prices during a downturn of the GFC changes relative wealth within and across countries due to portfolio heterogeneity. This leads to changes in gross and net capital flows that are consistent with the stylized facts: all countries experience a decline in gross capital flows (retrenchment), while countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt). This is accomplished through a rise in total net outflows and a drop in net outflows of risky assets. The model is applied to 20 advanced countries and calibrated to micro data related to within country portfolio heterogeneity, as well as cross country heterogeneity of net foreign asset positions of safe and risky assets. The implications of the calibrated model for gross and net capital flows are quantitatively consistent with the data.
    JEL: F30 F40
    Date: 2022–12
  54. By: Massimo Casa (Bank of Italy); Marco Carnevali (Iccrea Banca); Silvia Giacinti (Bank of Italy); Roberto Sabatini (Bank of Italy)
    Abstract: The Bank of Italy collects a large amount of data — statistical, supervisory and resolution — from banks and other financial intermediaries in order to fulfil its institutional functions and meet the needs of other national and international authorities, in particular the ECB, the EBA and the SRB. Since the late 1980s, the Bank of Italy has been promoting intensive cooperation with the banking system through the PUMA procedure (Procedura Unificata Matrici Aziendali, Integrated Corporate Matrix Procedure), with the main objective of providing support to intermediaries in their reporting activities. The importance of this approach has been fully confirmed also in the context of the changes to the reporting framework that have been introduced over time at the European level. This paper aims to describe the characteristics of PUMA, discuss the main results achieved over the years, explain its role in inspiring similar initiatives undertaken at the European level, and investigate how this cooperation between the Bank of Italy and the financial system will remain central in the coming years. In an increasingly complex reporting system, PUMA has been instrumental in achieving an efficient balance between the need to support reporting agents, while pursuing objectives of data quality and cost containment, and maintaining the responsibilities for the production of the reporting flows with the reporting entities.
    Keywords: regulatory reporting, banking reporting, data model, data quality, information management, statistical production, information system, data dictionary, statistical integration
    JEL: C81 G21 M15
    Date: 2022–11
  55. By: Lorenzo Gobbi (Banca d'Italia)
    Abstract: The surge of digitization in the financial industry and in e-commerce has favoured the strong growth of Buy Now Pay Later (BNPL) operators, which traditionally grant short-term loans of a limited amount, allowing consumers to split the payment of a purchase into a variable number of interest-free instalments. After providing a general overview of the BNPL model and some statistics on market penetration, this paper describes the existing regulatory framework, in terms of both contracts and licences. It then considers the potential implications of rising inflation, and of the resulting increases in interest rates by various Central Banks, for the business models of BNPL operators, whose valuations have already decreased. Lastly, it discusses the need to protect consumers from inadvertently piling up excessive debt.
    Keywords: Buy Now Pay Later (BNPL), Fintech, Digital credit
    JEL: G23 G51
    Date: 2022–11
  56. By: Sangjae Lee (Korea Deposit Insurance Corporation); Jeongeun Park (Korea Deposit Insurance Corporation)
    Abstract: Korea's fintech market is expanding with the rise in non-face-to-face financial transactions triggered by the development of mobile banking along with the COVID-19 pandemic. This Brief discusses the risk of misdirected money transfers and recent legislative changes in Korea mandating the Korea Deposit Insurance Corporation (KDIC) to assist in recovering such misdirected payments. Within the new scheme for supporting the recovery of misdirected payments, KDIC will have the powers to upon request by the payment sender, subrogate into its claim and in lieu of the latter attempt to collect the money through a payment order issued by the court. Upon recovery of the misdirected payment, the KDIC will pay out the amount to the sender after deducting relevant expenses incurred in making notifications and managing the Scheme.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–11
  57. By: Goldbach, Stefan; Nitsch, Volker
    Abstract: This paper examines the effect of administrative restrictions on cross-border capital transactions. Using highly disaggregated data from the German balance of payments statistics for the period from 1999 through 2017, we document several stylized facts about the effectiveness of such capital control policies introduced by other countries. Capital controls are associated with economically and statistically significant declines in capital flows; they affect bilateral financial relationships along both the extensive and the intensive margin.
    Date: 2022
  58. By: Masanori Orihara (University of Tsukuba); Yoshiaki Ogura (Waseda University); Yue Cai (Gakushuin University)
    Abstract: We find firms which successfully obtained a bank loan in a crisis reduced their cash holdings post-crisis, using Japanese data from the 2008 financial crisis. Firms received loans primarily from non-main banks. This substitution between borrowing and cash holdings applies to firms with an executive who had served as a CEO or financial officer in the crisis. This resulted in a substantial reduction in borrowing costs after the crisis. These findings are consistent with theories of relationship banking that managerial confidence in the availability of non-main bank loans reduces their precautionary cash holdings both to address a liquidity shortage and to mitigate a hold-up by their main bank. We also find that, in the post-crisis period, firms that obtained bank loans during the crisis spent more (over time and in comparison to other firms) on equity investments in their affiliates as well as on R&D among firms with pre-crisis R&D expenses.
    Keywords: Financial Crisis; Cash Holdings; Relationship Banking; Hold-up Problem; Bank Consolidation
    JEL: G21 G31 G32
    Date: 2022–11
  59. By: Massimo Ferrari Minesso; Maria Sole Pagliari
    Abstract: This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in general equilibrium macroeconomic models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-defined objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with barriers to entry. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the first best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter.
    Keywords: DSGE Model, Optimal Policies, Computational Economics
    JEL: C63 E32 E61
    Date: 2022
  60. By: Massimiliano Marcellino; Dalibor Stevanovic
    Abstract: In this article we study how the demand and supply of information about inflation affect inflation developments. As a proxy for the demand of information, we extract Google Trends (GT) for keywords such as "inflation", "inflation rate", or "price increase". The rationale is that when agents are more interested about inflation, they should search for information about it, and Google is by now a natural source. As a proxy for the supply of information about inflation, we instead use an indicator based on a (standardized) count of the Wall Street Journal (WSJ) articles containing the word "inflat" in their title. We find that measures of demand (GT) and supply (WSJ) of inflation information have a relevant role to understand and predict actual inflation developments, with the more granular information improving expectation formation, especially so during periods when inflation is very high or low. In particular, the full information rational expectation hypothesis is rejected, suggesting that some informational rigidities exist and are waiting to be exploited. Contrary to the existing evidence, we conclude that the media communication and agents attention do play an important role for aggregate inflation expectations, and this remains valid also when controlling for FED communications. Dans cet article, nous étudions comment la demande et l'offre d'informations sur l'inflation affectent l'évolution de l'inflation. Comme indicateur de la demande d'informations, nous extrayons les tendances de Google (GT) pour des mots clés tels que "inflation", "taux d'inflation" ou "augmentation des prix". Le raisonnement est le suivant : lorsque les agents sont plus intéressés par l'inflation, ils doivent rechercher des informations à ce sujet, et Google est désormais une source naturelle. Comme indicateur de l'offre d'informations sur l'inflation, nous utilisons un indicateur basé sur un comptage (standardisé) des articles du Wall Street Journal (WSJ) contenant le mot "inflat" dans leur titre. Nous constatons que les mesures de la demande (GT) et de l'offre (WSJ) d'informations sur l'inflation jouent un rôle important dans la compréhension et la prévision de l'évolution réelle de l'inflation, les informations les plus granulaires améliorant la formation des attentes, en particulier pendant les périodes où l'inflation est très élevée ou très faible. En particulier, l'hypothèse de l'espérance rationnelle à information complète est rejetée, ce qui suggère que certaines rigidités informationnelles existent et attendent d'être exploitées. Contrairement à l'évidence établie, nous concluons que la communication des médias et l'attention des agents jouent un rôle important dans les attentes d'inflation agrégées, et ceci reste valable même en contrôlant les communications de la FED.
    Keywords: Inflation,Expectations,Google trends,Text analysis, Inflation,Attentes,Google trends,Analyse de texte
    JEL: C53 C83 D83 D84 E31 E37
    Date: 2022–12–01

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