nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒01‒16
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Robust real rate rules By Holden, Tom D.
  2. The burst of high inflation in 2021–22: how and why did we get here? By Ricardo Reis
  3. On the macroeconomic effects of reinvestments in asset purchase programmes By Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
  4. Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP By Gara Afonso; Marco Cipriani; Gabriele La Spada
  5. Lost in Negative Territory? Search for Yield! By Girotti Mattia; Horny Guillaume; Sahuc Jean-Guillaume
  7. Unemployment in the Euro Area and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  8. Macro-financial stability frameworks: experience and challenges By Claudio Borio; Ilhyock Shim; Hyun Song Shin
  9. The Consequences of Low Interest Rates for the Australian Banking Sector By Anthony Brassil
  10. Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries By Ahmed H. Elsayed; Nader Naifar; Ahmed H. Elsayed
  11. Measuring Global Interest Rate Comovements with Implications for Monetary Policy Interdependence By Renée Fry-McKibbin; Kate McKinnon; Vance L Martin
  12. Interest Rate Uncertainty and Macroeconomics in Turkey By Pelin Öge Güney
  13. FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability By Damiano Sandri
  14. Understanding the Food Component of Inflation By Emanuel Kohlscheen
  15. Inequality-Constrained Monetary Policy in a Financialized Economy By Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
  16. What drives inflation? Disentangling demand and supply factors By Eickmeier, Sandra; Hofmann, Boris
  17. Estimating the impact of quality adjustment on consumer price inflation By Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
  18. Fiscal, Monetary and Macroprudential Regimes: Incentives-Values Compatibility in Constitutional Democracies By Paul Tucker
  19. Importer Dispersion and Exchange Rate Pass-Through By Qingyuan Du; Yalin Liu; Jianwei Xu
  20. Macroeconomic uncertainty and bank lending By Vegard H. Larsen; Ragnar E. Juelsrud
  21. The global financial cycle and macroeconomic tail risks By Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
  22. How Economic, Political, and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region By Najia Maraoui; Thouraya Hadj Amor; Islem Khefacha; Christophe Rault
  23. Gazing at r*: A Hysteresis Perspective By Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh
  24. A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies By Alex Ilek; Guy Segal
  25. The IMF should enhance the role of SDRs to strengthen the international monetary system By Edwin M. Truman
  26. 환율과 기초여건 간 괴리에 대한 연구: 시장심리를 중심으로(Exchange Rate Predictability Based on Market Sentiments) By Kim, Hyosang; Kang, Eunjung; Kim, Yuri; Moon, Seongman; Jang, Huisu
  27. The Relative Benefits and Risks of Stablecoins as a Means of Payment: A Case Study Perspective By Annetta Ho; Sriram Darbha; Yuliya Gorelkina; Alejandro García
  28. Developing Countries’ Policy Responses to Large Private Capital Inflows: Control or Liberalize? By Shereen Attia; Ahmed Ragab
  29. The exchange rate elasticity of the Swiss current account By Johannes Eugster; Giovanni Donato
  30. How the Phillips Curve Shaped Full Employment Policy in the 1970s: The Debates on the Humphrey-Hawkins Act By Aurélien Goutsmedt
  31. International Liquidity Shock and Bank Resilience: Evidence from Matched Bank-Firm Data By Youngju Kim; Hyunjoon Lim; Youngjin Yun
  32. Monetary-Fiscal Policy Interactions During Uncertainty Shocks: Evidence from Egypt By Sarah El-Khishin; Dina Kassab
  33. Whether Low-Income Households and Retirees Face Higher Inflation? Evidence from Latvia By Olegs Krasnopjorovs
  34. Comments on “Capital Flow Deflection under the Magnifying Glass” By Juhro, Solikin M.
  35. 2021 Methods-of-Payment Survey Report By Christopher Henry; Matthew Shimoda; Julia Zhu
  36. The Threshold Impact of Remittances on Financial Development: New Evidence from Egypt By Mesbah Fathy Sharaf; Abdelhalem Mahmoud Shahen
  37. Monetary and Fiscal Institutional Arrangements: Have We Got Them Backwards? By Eric M Leeper
  38. The redistributive effects of inflation: a microsimulation analysis for Italy By Nicola Curci; Marco Savegnago; Giordano Zevi; Roberta Zizza
  39. Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods By Sámano Daniel
  40. Bank credit risk and macro-prudential policies: role of counter-cyclical capital buffer By Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
  41. Welfare Effects of Capital Controls By Andreasen, Eugenia; Bauducco, Sofía; Dardati, Evangelina
  42. Cryptocurrencies and Decentralised Finance By Igor Makarov; Antoinette Schoar
  43. Survival of The Fittest: A Natural Experiment from Crypto Exchanges By Ahmet Faruk Aysan; Asad Ul Islam Khan; Humeyra Topuz; Ahmet Semih Tunali

  1. By: Holden, Tom D.
    Abstract: Central banks wish to avoid self-fulfilling fluctuations. Monetary rules with a unit response to real rates achieve this under the weakest possible assumptions about the behaviour of households and firms. They are robust to household heterogeneity, hand-to-mouth consumers, non-rational household/firm expectations, active fiscal policy, missing transversality conditions and to any form of intertemporal or nominal-real links. They are easy to employ in practice, using inflation protected bonds to infer real rates. With a time-varying inflation target, they can implement arbitrary inflation dynamics, including optimal policy. They work thanks to the key role played by the Fisher equation in monetary transmission.
    Keywords: robust monetary rules,determinacy,Taylor principle,inflation dynamics,monetary transmission mechanism
    JEL: E52 E43 E31
    Date: 2022
  2. By: Ricardo Reis
    Abstract: The current institutional arrangements for monetary policy delivered more than two decades of low and stable inflation. Yet, central banks failed to prevent a burst of high inflation in 2021-22. This paper inspects four tentative hypotheses for why this happened. The first is a misdiagnosis of the nature of shocks during a time of great uncertainty leading to an overly long period of expansionary policy. The second is a neglect of expectations data driven by a strong belief that inflation expectations were firmly anchored and so inflation increases would be temporary. The third is an over-reliance on the credibility earned in the past, creating an illusion of too much room to focus on the recovery of real activity and underpredicting the resulting inflation. The fourth is a revision of strategy that made central banks tolerant of higher inflation because of the trend fall in the return on government bonds, even though the return on private capital stayed high.
    Keywords: Price level, central bank independence, r-star, dove, hawk
    JEL: E58 E50 E31
    Date: 2022–12
  3. By: Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
    Abstract: A feature of recent monetary policy asset purchase programmes is the reinvestment policy: the central bank announces to keep the overall volume of assets on its balance sheet constant for some time. In this paper, we systematically assess the macroeconomic effects of such reinvestment policies. Conceptually, monetary policy can achieve a given macroeconomic stimulus by substituting higher overall volumes (more net purchases) with longer reinvestments. Quantitatively, we find that omitting reinvestments in a programme that embeds key features of the Eurosystem's pandemic emergency purchase programme reduces the effect on inflation by roughly one third. Stochastic simulations reveal that reinvestment policies can be applied to mitigate the constraints of upper purchase limits. Introducing bounded rationality attenuates the effects of reinvestment policies.
    Keywords: Reinvestment,Stock effect,State-dependent asset purchases,Cognitive discounting,Bayesian estimation
    JEL: D78 E31 E44 E52 E58
    Date: 2022
  4. By: Gara Afonso; Marco Cipriani; Gabriele La Spada
    Abstract: In June 2022, the Federal Reserve started reducing the size of its balance sheet, which had expanded to just under $9 trillion in response to the COVID-19 pandemic. However, whereas banks’ reserves at the Federal Reserve have decreased, the investment of money market funds (MMFs) at the Federal Reserve’s overnight reverse repo (ON RRP) facility has continued to increase, reaching $2.4 trillion in September 2022. In this paper, we causally identify the drivers of ON RRP take-up through a diff-in-diff approach. By exploiting a temporary change in the computation of banks’ Supplementary Leverage Ratio (SLR) implemented in 2020-21, we show that banks’ balance sheet costs incentivize them to push deposits toward MMFs and to reduce their overnight borrowing from MMFs, leading to an increase in MMF investment at the ON RRP. Furthermore, we show that monetary policy tightening, and Treasury bill scarcity are two additional factors contributing to the recent increase in ON RRP usage.
    Keywords: balance sheet constraints; banks; leverage ratio; monetary policy; money market funds; overnight reverse repo (ON RRP)
    JEL: G10 G21 E41 E51 E58
    Date: 2022–12–01
  5. By: Girotti Mattia; Horny Guillaume; Sahuc Jean-Guillaume
    Abstract: We study how negative interest rate policy (NIRP) affects banks’ loan pricing. Using contract-level data from France, we show that NIRP affects bank lending rates to firms through a portfolio rebalancing channel: banks holding a one standard deviation more of cash and central bank reserves offer a 8.6 basis points lower loan rate after NIRP is introduced. The impact concentrates on medium-term loans (with maturity comprised between three and six years) but not on loans to risky firms, indicating that banks conduct a search for yield focused on term spreads. These findings suggest that NIRP complements quantitative easing policies.
    Keywords: Negative Interest Rates, Portfolio Rebalancing, Search for Yield, term spreads, Banks
    JEL: E43 E58 G21
    Date: 2022
    Abstract: ABSTRACT This paper is an effort to investigate the economic implications and justification for the adoption of the policy of currency redesign by the monetary authority in Nigeria. In order to fulfil this objective, this paper reviewed the impacts of similar policy on the Nigerian economy over years by employing a descriptive approach of analysis using percentages, graphs and tables. The results from this study show that such policy is inflationary induced and it causes deviation of actual inflation and money supply from target level as well as results to excessive supply of money, the study also examine the influence of monetary policy on the new currency redesigned with the key objectivity of its effect on small and medium scale enterprises (SMEs) and the proposed benefits it might forged, it effects on the generality of the Nigeria economy in terms of capital accumulation, wealth creation, it has been well observed that government in most developing countries of the world have redesigned their currencies to suit their prevailing economies situations, The findings of the study shows that currency redesigning by the CBN is another means to reduce excess of money supply in circulation and reinforced more monetary policy effectiveness in curbing inflationary pressure and enhanced the exchange rate policy of the CBN and more liquidity. The study recommends more stabilization focus on pegging the exchange rate of dollar to naira, Harmonization of both monetary and fiscal policies effectiveness of government, it will go a long way in ensuring that a lot of naira notes circulating outside the banks are crowded in, by increasing the deposits in the commercial banks, it means the banks will have more money to lend which may reduce interest rates, capital flight and crowd in more investments prospects
    Keywords: Keywords: Macroeconomics, Currency refurbishment, Interest Rates, Inflation Rate,
    JEL: E50
    Date: 2022–12–12
  7. By: Oliver Hülsewig; Horst Rottmann
    Abstract: We examine the impact of the European Central Bank’s monetary policy on the euro area labor markets over the period 2010-2018. Using Jordà’s (2005) local projection method, we find that unemployment rates decline in response to expansionary monetary policy surprises that can be related to unconventional policy measures. At the same time, hours worked rise. In the periphery countries, the reduction in unemployment rates is relatively pronounced, while in the core countries it is only minor. Thus, labor markets in the euro area were impacted differently by unconventional monetary policy measures.
    Keywords: Euro area, unconventional monetary policy, labor markets, local projections
    JEL: E24 E52 E58 C23
    Date: 2022
  8. By: Claudio Borio; Ilhyock Shim; Hyun Song Shin
    Abstract: Since the 2008–9 Great Financial Crisis, major advanced economies (AEs) have used monetary and macroprudential policies to achieve macroeconomic and financial stability. Emerging market economies (EMEs) have, in addition, combined interest rate tools with FX intervention, macroprudential policy and, sometimes, capital flow management measures (CFMs) to address the challenges from capital flow and exchange rate volatility. This paper provides an overview of the use of monetary, macroprudential and exchange rate policies, sometimes alongside CFMs, both in AEs and EMEs. It also assesses the extent to which the use of these policies constitutes a holistic macro-financial stability framework (MFSF). We reach three conclusions. First, combining tools has succeeded in improving policy trade-offs, notably by mitigating the risks to domestic stability arising from external influences. Second, a holistic MFSF is still a work in progress. Finally, more efforts need to be made to better understand the channels of international spillovers and spillbacks.
    Keywords: capital flow, exchange rate policy, macro-financial stability framework, macroprudential measure, monetary policy
    JEL: E44 E52 F38 G28
    Date: 2022–12
  9. By: Anthony Brassil (Reserve Bank of Australia)
    Abstract: There is a vast international literature exploring the consequences of low interest rates for various banking sectors. In this paper, I explore how this international literature relates to the Australian banking sector, which operates differently to other jurisdictions. In the face of low rates, the profitability of Australian banks has likely been less adversely affected than what the international literature would predict, but the flip side to this is that the pass-through of monetary policy to lending rates may have been more muted. I then use a recent advance in macrofinancial modelling to explore whether pass-through in Australia could turn negative – the so called 'reversal rate' – and find that the features of the Australian banking system mean a reversal rate is highly unlikely to exist in Australia.
    Keywords: banking; interest rates; monetary policy
    JEL: E43 E52 G21
    Date: 2022–12
  10. By: Ahmed H. Elsayed (Durham University); Nader Naifar (University of Sfax); Ahmed H. Elsayed (University Lahore)
    Abstract: This paper investigates the interaction between monetary policy and financial stability in the Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite financial stability index to monitor the financial vulnerabilities and crisis periods. To this end, the study estimated monetary policy reaction functions for each of the GCC countries (namely, Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates) using the Nonlinear Autoregressive Distributed Lag Model (NARDL) over the period from 2006-Q4 to 2020-Q2. Empirical findings indicate that monetary authorities' response to the deviation of inflation from their target level, output gap, or exchange rate movement differ in terms of magnitude, sign, and significance across the GCC countries. The results further explain that monetary authorities react significantly to negative or positive shocks in financial stability, but their reaction is different in the short-run or long run. Overall, an augmented Taylor rule including financial stability as an additional monetary policy objective is more appropriate for the GCC countries.
    Date: 2021–08–20
  11. By: Renée Fry-McKibbin; Kate McKinnon; Vance L Martin
    Abstract: A general measure of the strength of U.S. and local interest rate comovement is developed to identify changes in monetary policy interdependence between January 1999 and May 2020. Entropy theory captures comovements through second-order comoments and higher-order comoments of coskewness, cokurtosis and covolatility. The sample contains monthly short-term shadow rates, with local rates for Australia, Canada, Europe, Japan, New Zealand, Switzerland, and the U.K. Monetary policy overall became more interdependent during the Global Financial Crisis but progressively more independent after adopting unconventional monetary policy by central banks. Measures using second-order comoments do not entirely capture changes in interest rate interdependence.
    Keywords: entropy; generalised exponential family; higher-order comoment; decomposition; independence testing; zero-lower bound
    Date: 2022–06
  12. By: Pelin Öge Güney (Hacettepe University)
    Abstract: Monetary policy plays a central role in stabilizing macroeconomic fluctuations. In addition to monetary policy, uncertainty in monetary policy associated with uncertainty in interest rates is an important determinant of economic decisions. In this paper, we analyze the effect of interest rate uncertainties for different maturities on industrial production, inflation, unemployment, and exchange rate for Turkey using the VAR model. Since the dominant position of the US economy in global financial markets implies uncertainty about how the monetary policy of the US (MPU) may impact foreign economies, we also discuss the impact of MPU uncertainty on the variables of interest. Although the effect varies across the different maturities of the yield, our findings suggest that interest rate uncertainty reduces the growth of industrial production, increases unemployment, and depreciates the exchange rate. Additionally, inflation increases in response to interest rate uncertainty shocks. Finally, while a shock in MPU uncertainty tends to significantly increase unemployment, it decreases the growth of production.
    Date: 2022–08–20
  13. By: Damiano Sandri
    Abstract: We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable from an ex-ante perspective, suggesting that FX intervention is used to stabilize the exchange rate against temporary excessive fluctuations relative to UIP conditions. Consistent with this interpretation, we document that the direction and size of FX intervention respond to UIP deviations. We also find that FX intervention respond more aggressively to UIP deviations when there is less uncertainty about the future level of the exchange rate and when the exchange rate is overvalued.
    Keywords: FX intervention, profitability, exchange rate
    JEL: E58 F31
    Date: 2022–12
  14. By: Emanuel Kohlscheen
    Abstract: This article presents evidence based on a panel of 35 countries over the past 30 years that the Phillips curve relation holds for food inflation. That is, broader economic overheating does push up the food component of the CPI in a systematic way. Further, general inflation expectations from professional forecasters clearly impact food price inflation. The analysis also quantifies the extent to which higher food production and imports, or lower food exports, reduce food inflation. Importantly, the link between domestic and global food prices is typically weak, with pass throughs within a year ranging from 0.07 to 0.16, after exchange rate variations are taken into account.
    Keywords: crop, expectations, energy, food export, food prices, food import, food production, forecast, inflation, output gap, Phillips curve
    JEL: E30 E31 E32 E50 F14 Q00
    Date: 2022–12
  15. By: Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
    Abstract: We study how income inequality affects monetary policy through the inequality-household debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.
    Keywords: Inequality; Financial Fragility; Monetary Policy; Agent-Based Model
    JEL: E21 E25 E31 E52 G01
    Date: 2022–12–01
  16. By: Eickmeier, Sandra; Hofmann, Boris
    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
  17. By: Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
    Abstract: How much does quality adjustment matter in measuring consumer price inflation? To address this question, we use different sources of micro and macro price data for Germany and the euro area. For Germany, we find that quality adjustment applies to a large range of goods and services but, on average, price adjustments due to quality changes reduce headline inflation only by 0.06 percentage points, which is balanced out by an increase due to quantity adjustment (e.g. a smaller package size) of the same amount. For the euro area, we assess the impact of heterogeneous quality adjustment methods by deriving the distribution of member states' cumulative inflation rates for typical quality-adjusted products. Our macro-based estimate makes up to ± 0.2 percentage points for headline HICP inflation and ranges between ± 0.1 and 0.3 percentage points for core inflation, when controlling for income differentials between member states. Finally, we illustrate the role of heterogeneous quality adjustment methods in the euro area based on micro price data for washing machines. We show that the price development of this product would have been lower by about 3.5 percentage points during the first years of the euro area and by about half a percentage point during recent years, if prices in the member states had been quality-adjusted in exactly the same way.
    Keywords: inflation measurement,quality adjustment,inflation differentials,micro price data
    JEL: E31 C43
    Date: 2022
  18. By: Paul Tucker
    Keywords: monetary policy; macroprudential policy; fiscal policy; central banking; central bank independence; unelected power; financial stability
    Date: 2022–07
  19. By: Qingyuan Du (Department of Economics, Monash University); Yalin Liu (Central University of Finance and Economics); Jianwei Xu (Beijing Normal University)
    Abstract: This paper investigates the effect of importer dispersion on exchange rate pass-through. We show theoretically that greater importer dispersion leads to lower exporter markup, thereby causing a higher exchange rate pass-through. Empirically, we use Colombia’s transaction-level customs data to provide strong evidence supporting the theoretical prediction. The quantitative effect of importer dispersion on exchange rate pass-through is significant: the importer dispersion channel is at least as important as the traditional exporter heterogeneity channel. Our results are robust to various empirical specifications and become even stronger in the context of the dominant currency paradigm.
    Keywords: importer heterogeneity, exchange rate pass-through
    JEL: F1
    Date: 2022–12
  20. By: Vegard H. Larsen; Ragnar E. Juelsrud
    Abstract: We investigate the impact of macro-related uncertainty on bank lending in Norway. We show that an increase in general macroeconomic uncertainty reduces bank lending. Importantly, however, we show that this effect is largely driven by monetary policy uncertainty, suggesting that uncertainty about the monetary policy stance is key for understanding why macro-related uncertainty impacts bank lending.
    Keywords: Macroeconomic uncertainty, Textual analysis, Bank lending
    Date: 2022–11
  21. By: Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
    Abstract: We study the link between the global financial cycle and macroeconomic tail risks using quantile vector autoregressions. Contractionary shocks to financial conditions and monetary policy in the United States cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution more strongly than the center of the distribution. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage, suggesting that exchange rate policies and macroprudential policies can mitigate downside risks to growth.
    Keywords: Financial shocks,Monetary policy,Global financial cycle,Growth-at-Risk,International spillovers,Quantile VAR
    JEL: C32 E23 E32 E44 F44
    Date: 2022
  22. By: Najia Maraoui (University of Monastir); Thouraya Hadj Amor (University of Monastir); Islem Khefacha (University of Monastir); Christophe Rault (University of Orléans)
    Abstract: In this paper, we investigate how economic, political, and institutional factors affect the choice of exchange rate regimes using data on eight Middle East and North Africa (MENA) countries over the 1984-2016 period. Specifically, we run random-effects ordered probit regressions of the likelihood of exchange rate regimes on the potential determinants of exchange rate regimes. Three important findings emerge from the analysis. The first finding is that political and institutional factors play an important role in determining the exchange rate regime in MENA countries, where a democratic political regime and a low level of corruption increase the probability of opting for a fixed regime, while strong governments, political stability (such as less internal conflicts and more government stability), more law and order enforcement, and a left-wing government decrease the probability of opting for a fixed regime. The second finding is that bureaucracy, independent central banks, elections, terms of trade, and monetary independence have no effect on the choice of exchange rate regimes. The third finding is that financial development is not a robust determinant of the choice of exchange rate regimes. Our results still hold when considering alternative specifications, and they have important implications for policymakers in MENA countries
    Date: 2021–10–20
  23. By: Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh
    Abstract: Despite current high inflation and a monetary tightening cycle, the market's evaluation of long-term real interest rates remains very low in most advanced countries. This is consistent with the view that neither monetary policy nor inflation shocks — which are both nominal phenomena — are likely to effect long-run real interest rates. This paper presents both theory and evidence that put into question this simple dichotomy between real and nominal phenomena due to asset accumulation behavior that favours the emergence of more than one steady state value of real interest rates (r*) and thereby creates hysteresis. Our main building block is household saving decisions that incorporate both inter-temporal substitution and retirement forces. When households trade off these two saving motives, we show how this can give rise to C-shaped asset demands and the possibility of more than one steady state equilibrium real interest rate. Since many macroeconomic models predict that long-run asset demands are increasing in interest rates, as opposed to C-shaped, we provide evidence from household balance sheets that runs counter to the former and favours the latter. A central contribution of the paper is to show that when r* is not unique due to C-shaped asset demands, monetary policy can greatly influence long-run real interest rate outcomes. In particular, we show that an aggressive inflation targeting regime can make a high-real-rate outcome fragile to small negative inflation shocks and favour the convergence to a low (possibly negative) real-rate environment. However, we also show that either a large positive inflation shock or a large increase in public debt can bring back an equilibrium with high real rates, which could surprise the market in the current environment.
    Keywords: real interest rates; wealth-to-income ratio; saving rates; inter-temporal substitution; retirement motives; C-shaped long-run asset demand; inflation; general equilibrium
    Date: 2022–06
  24. By: Alex Ilek (Bank of Israel); Guy Segal (Bank of Israel)
    Abstract: We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within an estimated central bank's policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: they fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.
    Date: 2022–01
  25. By: Edwin M. Truman (Harvard Kennedy School)
    Abstract: The special drawing right (SDR), issued by the International Monetary Fund (IMF), has the potential to strengthen dramatically the international monetary system. Established in 1969 and allocated twice during its first decade, the SDR was in the institutional closet from 1980 until 2009, when $250 billion in SDRs was allocated to members of the IMF to help address the global financial crisis. In 2021 another $650 billion in SDRs was allocated to help address the coronavirus pandemic. The SDR has proved itself as a crisis instrument. This paper addresses critically the arguments against SDR allocations. It proposes regular annual SDR allocations, along with measures to make the SDR more attractive to critics and measures to build out the SDR system in support of the international monetary system. The paper includes an appendix on the history of the SDR. A second appendix analyzes SDR use following the 2009 and 2021 allocations and finds that contrary to the popular myth, many countries other than low-income members of the IMF benefited directly in multiple ways from those allocations.
    Keywords: International Monetary Fund, Special Drawing Right, International Monetary Arrangements and Institutions
    JEL: F32 F33
    Date: 2022–12
    Abstract: 본 연구는 기존 정형화된 환율 예측모형과 더불어 외환시장의 시장심리지수가 환율예측에 도움이 되는지 점검해 보고자 한다. 그리고 시장심리지수를 사용하여 외환시장 딜러들이 사용하는 반대의견(contrarion opinion) 투자전략에 기반하여 환율을 예측해 보았다. 또한 경제여건변수 및 시장심리지수를 종합적으로 활용한 기계학습 모형이 환율 예측력을 높일 수 있는지도 살펴보았다. Central bankers, policymakers, and market participants need topredict the future exchange rate movement. However, awell-known puzzle is that exchange rates are difficult to forecastusing observable macro fundamental variables. Meese and Rogoff(1983) report that the random walk model is better at predictingexchange rates in out-of-sample forecasts than models reflectingchanges in economic fundamentals. A large body of literature hasfound that, in attempting to solve the Meese‐Rogoff puzzle, therandom walk beats fundamentals-based models for periods up to aone‐year forecasting horizon. This study intends to examine whether the market sentiment index of the foreign exchange market, along with the standardizedfundamental-based models, helps predict the exchange rate. Basedon the market sentiment index data, we try to predict the exchangerate based on the contrary opinion investment strategy used byforeign exchange market dealers. We also examine whether machine learning models incorporating a wide range of economic data and market sentiment indices can improve exchange rateforecasting. This study mainly consists of four parts. Chapter 2 re-examines whether fundamental-based models can have prediction power onexchange rates. We examine developing market currencies, including the Korean won, in addition to major currencies. TheTaylor-rule model has short-term predictability on the Canadiandollar, Swiss franc, and British pound among major currencies. Formost models we analyze, emerging market currencies tend to showhigher long-term and short-term predictability than majorcurrencies. However, there is a significant variation in the predictive power of fundamental models over currency and period. In Chapter 3, the market sentiment index and Bloomberg’s exchange rate forecast are tested in terms of their ability to predictexchange rates. To compare the exchange rate predictability fundamental-based models in Chapter 2, we make them in identicalconditions: the data is transformed to monthly, and a single linearequation model is used. Both the market sentiment index and theBloomberg exchange rate forecast demonstrate high short-termexchange rate predicting power against the Euro. However, theyhave lower exchange rate forecasting power to other major currencies than the random walk model. (the rest omitted)
    Keywords: 환율; 금융정책; Exchange rate; monetary policy
    Date: 2021–12–30
  27. By: Annetta Ho; Sriram Darbha; Yuliya Gorelkina; Alejandro García
    Abstract: Our paper contributes to the discussion about the utility of stablecoins for retail payments through an objective, evidence-based approach that compares stablecoins with traditional retail payment methods. The paper also provides insights that could be useful in the design of central bank digital currencies. We identify the potential benefits, risks and costs of stablecoin arrangements used for retail payments relative to traditional retail payment methods. We select three real-world examples for comparison: (i) a Mastercard credit card payment through a traditional bank; (ii) a Unified Payments Interface fast payment through Paytm (a technology-enabled payments company regulated as a limited-purpose bank); and (iii) a stablecoin retail transaction using USD Coin and a BitPay wallet. We find that certain stablecoin arrangements offer end users greater control of their privacy, facilitate more rapid innovation and have the potential to increase transaction speeds, particularly for cross-border payments. At the same time, stablecoins may provide less consumer protection for fraud, present higher risks to the payment system and to efforts to combat financial crime (partly because of the more nascent regulatory framework), and be costlier relative to traditional payment arrangements. Our findings suggest that stablecoin arrangements do not currently serve as substitutes for the suite of traditional payment arrangements but instead address niche use cases or user segments that value their benefits and can accept their risks or costs.
    Keywords: Digital currencies and fintech; Payment clearing and settlement systems
    JEL: D78 O38
    Date: 2022–12
  28. By: Shereen Attia (Senior Researcher and Consultant); Ahmed Ragab (Cairo University)
    Abstract: Although the influx of large private capital inflows provides developing countries with substantial macroeconomic benefits, the integration process carries some difficult macroeconomic challenges. This paper examines the implications of large private capital inflows episodes on the macroeconomic fundamentals of highly integrated developing countries under the two policy regimes. We begin by classifying developing countries according to their degree of capital account openness. Then, we exploit large capital inflow episodes to measure their short-run effects on key domestic macroeconomic fundamentals for a sub-sample of highly integrated countries that adopted the two policy regimes using a VAR framework. The results indicate that countries experiencing more volatile macroeconomic fluctuations, including a sharp reversal of inflows, tend to have higher current account deficits and experience stronger increases in both aggregate demand and the real value of the currency during the period of large capital inflows. In this respect, countries with a liberalized capital account usually witness an expansion of economic activity. However, such an effect is not likely to last indefinitely, and the boom phase may tend to reverse itself as the economy reaches its potential. Meanwhile, countries that adopt tightening capital controls on capital inflows experience more moderate GDP growth following the surge in inflows. Nonetheless, capital controls don’t completely insulate countries against external disturbances, as the real exchange rate is more vulnerable to shocks.
    Date: 2022–09–20
  29. By: Johannes Eugster; Giovanni Donato
    Abstract: This paper investigates the effects of Switzerland's real effective exchange rate (REER) on its current account. Using dynamic empirical methods, we focus on exchange rate movements that are unrelated to real and monetary developments, i.e., those more likely to be driven by the Swiss franc's safe-haven proprieties or unexpected exchange rate policy decisions. The paper's key result is that the Swiss headline current account has been largely inelastic to the exchange rate at the business cycle frequency. Three factors explain this somewhat counterintuitive result. A) A negative but short-lived effect on the trade balance is partly offset by a positive effect on net investment income. B) Large and often volatile net exports of nonmonetary gold blur the aggregate reaction. C) Improved terms-of-trade largely offset the negative effect on the (real) goods trade balance, as import prices tend to fall by more than export prices. The limited sensitivity of the current account, however, does not mean that the Swiss economy is insensitive to the exchange rate. Our results confirm that consumer prices, as well as corporate profits in particularly exposed sectors, decline significantly following an appreciation. These results suggest that an appreciation of the Swiss franc likely doesn't reduce Switzerland's current account quickly but rather tightens monetary conditions, reduces GDP, and hampers prospects in the longer term.
    Keywords: Exchange rate, current account, pass-through
    JEL: E31 F31 F32 F41
    Date: 2022
  30. By: Aurélien Goutsmedt (ISPOLE - Institut de Sciences Politiques Louvain Europe - Institut de Sciences Politiques Louvain Europe)
    Abstract: Abstract This article relates the history of economists' influence in shaping the content of the Humphrey-Hawkins Act (1978) and its immediate consequences. The act committed the federal government to reducing unemployment to 4 percent and inflation to 3 percent as soon as 1983. Initially, the Humphrey-Hawkins bill was conceived as a project to favor the economic integration of African Americans and economic planning and targeted only the unemployment rate. Republican senators successfully pushed for adding a numerical inflation target during the debates in Congress. The act eventually put on equal footing inflation and unemployment. This article argues that the economists in the Carter administration, and notably the Council of Economic Advisers, were instrumental, even if unintentionally, in favoring the integration of an inflation target and such an interpretation of the bill. In the negotiations that opposed them to the supporters of the bill, as well as in the analysis of the bill they produced, they insisted on the existence of a trade-off between inflation and unemployment and referred frequently to the famous Phillips curve. They endeavored to anchor their expertise on academic publications, which strengthened the role of the Phillips curve in shaping the debates. Business organizations and senators used references to the trade-off to undermine the bill and favor the integration of an inflation target.
    Date: 2022–08–01
  31. By: Youngju Kim (Bank of Korea); Hyunjoon Lim (Bank of Korea); Youngjin Yun (Inha University)
    Abstract: Banks are the first line of defense against the propagation of adverse external shocks. This study examines the role of banks in the transmission of international liquidity shock using matched bank-firm data for Korea over the 2006-2015 period. We measure individual banks’ sensitivity to international shocks by analyzing their foreign exchange (FX) borrowing rates. The bank from which a firm borrows matters in times of FX liquidity shocks. We find that sensitive banks reduce FX credit supply to firms and that FX loan-reliant, highly productive firms subsequently reduce their investment. Foreign banks are affected less by the shocks, but they reduce credit supply more than domestic banks. Our findings emphasize the importance of bank resilience vis-Ã -vis external and domestic stability.
    Keywords: international liquidity shock, FX loan, credit register, real effect
    JEL: E22 F34 G15
    Date: 2022–12
  32. By: Sarah El-Khishin (British University in Egypt); Dina Kassab (Faculty of Economics and Political Science)
    Abstract: This paper empirically examines monetary-fiscal interactions during uncertainty shocks. Applying on the Egyptian economy, we examine the extent to which fiscal dominance and discretionary interventions resulted in undesired outcomes, particularly during uncertainty shocks. We construct a Structural VAR model to model monetary-fiscal interactions in Egypt during uncertainty. Alternative outcomes under counterfactual scenarios of monetary autonomy, as opposed to fiscal dominance, are examined under the New-Keynesian system of assumptions. Results show that poor monetary autonomy and sustained fiscal dominance contributed to establishing long-run procylical fiscal behavior in Egypt and significantly impeded the effectiveness of monetary policy in stabilizing the economy during uncertainty shocks. We recommend establishing a strong, commitment-based monetary policy framework to lessen the undesired outcomes resulting from the persistent fiscal dominance. Recent IMF-supported reform measures show a stronger role of monetary policy in stabilizing the economy within a coordinated framework. Nevertheless, proper institutional measures need to be established to sustain such outcomes after the materialization of the reform program.
    Date: 2021–10–20
  33. By: Olegs Krasnopjorovs (LU - University of Latvia)
    Abstract: Economy-wide inflation rate does not necessarily correspond to the inflation rate actually faced by any given household. This paper is the first one to assess different inflation experiences of various household types in Latvia. It finds that low-income households and retirees have faced consistently higher inflation rate by about 0.5 percentage points per annum over the last 20 years. This result is consistent with higher inflation perceptions among these population groups as recorded in consumer surveys. Higher inflation for low-income households and retirees reflects the lion's share of food, utility bills and healthcare services in their consumption basket, which are among those goods and services with the fastest increase in consumer prices. Inflation inequality was particularly large before the Global Financial Crisis (GFC) of 2008 and grew again at the beginning of the Covid-19 pandemics. It is expected that inflation inequality in Latvia might increase further in 2022. The results of this study could be used in welfare policy debates, particularly regarding the use of retiree-specific (rather than economy-wide) inflation rate for indexation of old-age pensions, as well as analysing unequal economic costs of the Covid-19 pandemics on different population groups.
    Keywords: inflation inequality, inflation by population groups, inflation perceptions by population groups
    Date: 2022–05–13
  34. By: Juhro, Solikin M.
    Abstract: This paper explores my comments on "Capital Flow Deflection under the Magnifying Glass", a paper by Fillipo Gori et al. (2020), which is a coherent and timely overview of the major policy concerns on capital flow behavior, especially capital flow deflection. The paper explores quite extensive identification strategies, including robustness checks which are convincing in revealing spillovers. It also elaborates relevant assessment and leaves grounds for renewing a call for deeper international coordination of capital account policies, as collective policy coordination can mitigate negative externalities arising from unilateral actions. Unfortunately, it poses a relatively limited number of literatures, particularly empirical studies and policy perspectives on whether or not they support the findings. My discussion on this paper will explore more upon the bigger-picture of central bank policy issues, rather than the technical aspects. To conclude the discussion, we need to seek a state of urgency in how to bring together AEs and EMEs common mutual beneficial interests amidst increasing financial liberalization.
    Keywords: Capital flow, capital flow management, central bank policy mix
    JEL: E52
    Date: 2021–04–22
  35. By: Christopher Henry; Matthew Shimoda; Julia Zhu
    Abstract: We present results from the 2021 Methods-of-Payment (MOP) Survey, including updated payment shares based on a three-day shopping diary. We highlight long-term trends observed across previous MOP surveys from 2009, 2013 and 2017. We also review patterns of the management and use of cash, the adoption and use of payment cards, and the use of alternative payment methods across different demographic groups. Using other survey and data sources, we provide additional context for these results with respect to the COVID-19 pandemic.
    Keywords: Bank notes; Digital currencies and fintech; Financial services; Coronavirus disease (COVID-19)
    JEL: D83 E41
    Date: 2022–12
  36. By: Mesbah Fathy Sharaf (Department of Economics, Faculty of Arts, University of Alberta, Canada); Abdelhalem Mahmoud Shahen
    Abstract: This study examines the nonlinear impact of remittances on financial development (FD) in Egypt over the period 1980-2019 while controlling for other key determinants of FD. The paper utilizes a recently developed comprehensive index of FD and uses an Autoregressive Distributed lag (ARDL) bounds testing approach to cointegration and a vector error-correction model to estimate the short- and long-run parameters of equilibrium dynamics. We find support for the complementarity hypothesis in the short run in which remittances have a statistically significant positive impact on FD. However, the results show that remittances have an inverted U-shaped impact on FD in the long run. In particular, remittances complement (substitute) FD below (above) a remittance-toGDP ratio of 7.28 percent. This implies that in the long run remittances to Egypt hinder FD when received in large quantities. We also found that financial openness has a statistically significant positive impact on FD in the long run, while inflation impedes FD. Policies aimed at increasing the flows of remittances to Egypt should mitigate its potential adverse impact on financial development
    Date: 2022–04–20
  37. By: Eric M Leeper
    Keywords: monetary policy; fiscal policy; allocation; wealth; monetary contraction; fiscal backing; fiscal financing; monetary-fiscal policy authority
    Date: 2022–06
  38. By: Nicola Curci (Bank of Italy); Marco Savegnago (Bank of Italy); Giordano Zevi (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: We analyse the impact of the marked and unexpected increase in inflation recorded since the second half of 2021 on Italian households’ purchasing power. Exploiting microsimulation tools, we are able to quantify the extent to which government measures supporting households’ incomes and lessening energy price hikes, mitigated the distributional impact of the inflationary shock. According to our estimates, in 2022 the measures attenuated inflation on average by slightly less than 2 percentage points and reduced the impact of the shock on households’ purchasing power by almost €32 billion (from more than €80 billion to less than €50 billion). This implies that in 2022 government intervention reduced the expected drop in purchasing power from an average €3, 200 per household to about €2, 000, with a relatively more marked effect for low-income households. Evaluated on the basis of both their cost for the public finances and their impact on inequality, the strengthening of the electricity and gas social bonuses, targeted at less well-off households, was the most effective intervention while untargeted price reductions (such as the decrease in VAT rates on gas tariffs or lower excise duties on fuel) were the least effective. The one-off allowances (€200 and €150 bonuses) and the other measures affecting take-home pay (reduction of social security contributions paid by employees and the advance partial payment of pension revaluations) were only moderately effective since these measures, being conditional on individual income, also benefit wealthy households.
    Keywords: inflation, energy, redistribution, inequality, microsimulation
    JEL: E31 E21 D31 H23
    Date: 2022–12
  39. By: Sámano Daniel
    Abstract: I develop an asymmetric two-country incomplete markets model in which economies trade final consumption goods and inputs. The purchases of imported inputs from the firms of one of the economies (the emerging) to the firms of the other economy (the advanced) are subject to a foreign currency working capital constraint. Domestic firms are assumed to finance their working capital by borrowing from the domestic household in local currency. Through numerical simulations, I show that in this environment domestic productivity shocks have compositional effects through the cost of the working capital. In particular, after a domestic positive productivity shock terms of trade rise and the working capital cost exhibits a sudden increase followed by a prolonged temporary decrease. This leads to inputs recomposition in the domestic economy in response to working capital cost adjustments.
    Keywords: Working capital;Foreign currency;Imported inputs
    JEL: C68 F15 F41
    Date: 2022–12
  40. By: Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
    Abstract: This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.
    Keywords: Bank CDS; Macro-prudential policy; Bank-level characteristics; Macroeconomic environment; Uncertainty
    JEL: G15
    Date: 2022–12–01
  41. By: Andreasen, Eugenia; Bauducco, Sofía; Dardati, Evangelina
    Abstract: This paper studies the effect of capital controls on misallocation and welfare in an economy with financial constraints. We build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. Since high-productivity and exporting firms need to borrow more to reach their optimal scale, capital controls that tax international borrowing hit them harder. As a result, misallocation increases relatively more for this group of firms, and for young firms that are still trying to reach their optimal scale. In terms of welfare, the model predicts a sizable aggregate loss of 2.39 percent when capital controls are introduced, with welfare decreasing twice as much for high-productivity firms. We empirically corroborate the main insights in terms of misallocation obtained from the model using Chilean manufacturing firm data from 1990 to 2007.
    Keywords: International trade;Financial Frictions;welfare;Capital controls;Misallocation
    JEL: F41 O47 F12
    Date: 2021–06
  42. By: Igor Makarov; Antoinette Schoar
    Abstract: The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.
    Keywords: Decentralized finance, blockchain technology, financial intermediation, system risk
    JEL: G12 G15 F38
    Date: 2022–12
  43. By: Ahmet Faruk Aysan (Hamad Bin Khalifa University); Asad Ul Islam Khan (Ibn Haldun University); Humeyra Topuz (Istanbul Sehir University); Ahmet Semih Tunali (Middle East Technical University)
    Abstract: This paper explores the applicability of universal cryptocurrency exchange by analyzing crypto exchanges of Binance, Latoken, Kucoin, and Qash, which also have their own cryptocurrencies in the crypto market. Results of the recursive Johansen cointegration test proved that even though all of the cryptocurrencies have cointegration among each other, Binance positively disassociated itself from others after it moved to Malta on 23 March 2018. Based on the daily prices of cryptocurrencies over the period from November 6, 2017, to November 10, 2019, taken from coinmarketcap, we conclude that Binance can be considered as a survival of the fittest among all of the crypto exchanges in this natural experiment.
    Date: 2022–02–20

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