nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒01‒30
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. (Almost) Recursive Identification of Monetary Policy Shocks with Economic Parameter Restrictions By Jan Pablo Burgard; Matthias Neuenkirch; Dennis Umlandt
  2. Optimal Long-run Money Growth Rate in a Cash-in-Advance Economy with Labor-Market Frictions By Been-Lon Chen; Shian-Yu Liao; Dongpeng Liu; Xiangbo Liu
  3. Inequality-Constrained Monetary Policy in a Financialized Economy By Luca Eduardo Fierro; Federico Giri; Alberto Russo
  4. Agent-Based Modeling for Studying the Spontaneous Emergence of Money By Mattia Di Russo; Zakaria Babutsidze; Célia da Costa Pereira; Maurizio Iacopetta; Andrea G. B. Tettamanzi
  5. Monetary policy when export revenues drop By Drago Bergholt; Øistein Røisland; Tommy Sveen; Ragnar Torvik
  6. Optimal monetary and transfer policy in a liquidity trap By Stefano Maria Corbellini
  7. Exchange Rate Pass-Through to Food and Energy Consumer Price Inflation By Richhild Moessner
  8. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  9. Leaning-against-the-wind Intervention and the “carry-trade” View of the Cost of Reserves By Eduardo Levy Yeyati; Juan Francisco Gómez
  10. Perceptions about Monetary Policy By Michael D. Bauer; Carolin E. Pflueger; Adi Sunderam
  11. Summaries of Central Bank Policy Deliberations: A Canadian Context By Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
  12. Intergenerational Sharing ofUnhedgeable Inflation Risk By Damiaan H.J. Chen; Roel M.W.J. Beetsma; Sweder J.G. van Wijnbergen
  13. Post-COVID Inflation Dynamics: Higher for Longer By Randal Verbrugge; Saeed Zaman
  14. Uncertain Policy Regimes and Government Spending Effects By Ruoyun Mao; Wenyi Shen; Shu-Chun S. Yang
  15. The 2021–22 Merchant Acceptance Survey Pilot Study By Angelika Welte; Joy Wu
  16. Heterogeneous labor market response to monetary policy: small versus large firms By Aarti Singh; Jacek Suda; Anastasia Zervou
  17. Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis By Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
  18. Central Bank Digital Currencies: A Review of Operating Models and Design Issues By Bert Van Roosebeke; Ryan Defina
  19. The Layers of Inflation Persistence By Marek Jarocinski; Martín Almuzara; Argia M. Sbordone
  20. The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve By Guido Ascari; Luca Fosso
  21. Resurgence of inflation: Assessing the role of Macroeconomic Policies By Hamid Raza; Thibault Laurentjoye; Mikael Randrup Byrialsen; Sebastian Valdecantos
  22. The Dollar’s Imperial Circle By Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
  23. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  24. Central bank asset purchases: Insights from quantitative easing auctions of government bonds By Laséen, Stefan
  25. Monetary Policy When the Central Bank Shapes Financial-Market Sentiment By Anil K Kashyap; Jeremy C. Stein
  26. Global value chains and the transmission of exchange rate shocks to consumer prices By Hadrien Camatte; Guillaume Daudin; Violaine Faubert; Antoine Lalliard; Christine Rifflart

  1. By: Jan Pablo Burgard; Matthias Neuenkirch; Dennis Umlandt
    Abstract: Recursively identified vector autoregressive (VAR) models often lead to a counterintuitive response of prices (and output) shortly after a monetary policy shock. To overcome this problem, we propose to estimate the VAR parameters under the restriction that economic theory is not violated, while the shocks are still recursively identified. We solve this optimization problem under non-linear constraints using an augmented Lagrange solution approach, which adjusts the VAR coefficients to meet the theoretical requirements. In a generalization, we allow for a (minimal) rotation of the Cholesky matrix in addition to the parameter restrictions. Based on a Monte Carlo study and an empirical application, we show that particularly the "almost recursively identified approach with parameter restrictions" leads to a solution that avoids an estimation bias, generates theory-consistent impulse responses, and is as close as possible to the recursive scheme.
    Keywords: Monetary Policy Transmission, Non-Linear Optimization, Price Puzzle, Recursive Identification, Rotation, Sign Restrictions
    JEL: C32 E52 E58
    Date: 2023
  2. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shian-Yu Liao (Fu Jen Catholic University); Dongpeng Liu (Nanjing University); Xiangbo Liu (Renmin University of China)
    Abstract: We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms’wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimallong-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Fi-nally, wefind that our model with sustainable growthfits the data better than that withoutsustainable growth.
    Keywords: Endogenous Growth, Money Supply, Labor Search, Unemployment, Welfare
    JEL: E41 J64 O42
    Date: 2022–08
  3. By: Luca Eduardo Fierro (Institute of Economics, Scuola Superiore Sant’Anna Pisa, Italy); Federico Giri (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy); Alberto Russo (Department of Economics and Social Sciences, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: We study how income inequality affects monetary policy through the inequalityhousehold 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 G51
    Date: 2023
  4. By: Mattia Di Russo (Laboratoire I3S - SPARKS - Scalable and Pervasive softwARe and Knowledge Systems - I3S - Laboratoire d'Informatique, Signaux, et Systèmes de Sophia Antipolis - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Zakaria Babutsidze (SKEMA Business School); Célia da Costa Pereira (Laboratoire I3S - SPARKS - Scalable and Pervasive softwARe and Knowledge Systems - I3S - Laboratoire d'Informatique, Signaux, et Systèmes de Sophia Antipolis - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Maurizio Iacopetta (SKEMA Business School); Andrea G. B. Tettamanzi (WIMMICS - Web-Instrumented Man-Machine Interactions, Communities and Semantics - CRISAM - Inria Sophia Antipolis - Méditerranée - Inria - Institut National de Recherche en Informatique et en Automatique - Laboratoire I3S - SPARKS - Scalable and Pervasive softwARe and Knowledge Systems - I3S - Laboratoire d'Informatique, Signaux, et Systèmes de Sophia Antipolis - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: A central question in economics is how a society accepts money, defined as a commodity used as a medium of exchange, as an unplanned outcome of the individual interactions. This question has been approached theoretically in the literature and investigated by means of agent-based modeling. While an important aspect of the theory is the individual's speculative behavior, that is, the acceptance of money despite a potential short-term loss, previous work has been unable to reproduce it with boundedly rational agents. We investigate the reasons for the failure of previous work to have boundedly rational agents learn speculative strategies. Starting with an agent-based model proposed in the literature, where the intelligence of the agents is guided by a learning classifier system that is shown to be capable of learning trade strategies (core strategies) that involve short sequences of trades, we test several modifications of the original model and we come up with a set of assumptions that enable the spontaneous emergence of speculative strategies, which explain the emergence of money even when the agents have bounded rationality.
    Keywords: Search and Money Reinforcement Learning Social Simulation, Search and Money, Reinforcement Learning, Social Simulation
    Date: 2022–11–17
  5. By: Drago Bergholt; Øistein Røisland; Tommy Sveen; Ragnar Torvik
    Abstract: We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the welfare-optimal monetary policy.
    Keywords: Structural Change, Dutch Disease, Monetary Policy
    JEL: E52 F41 O14
    Date: 2022–11
  6. By: Stefano Maria Corbellini
    Abstract: Optimal monetary and fiscal policy are jointly analyzed in a heterogeneous two-agents New Keynesian environment, where fiscal policy is modeled in the form of lump-sum transfers set by the government. The main result is that transfer policy does not serve as a substitute for forward guidance - as it entails consumption dispersion costs - and does not affect its optimal duration. Transfers indeed influence the length of stay at the zero lower bound through two offsetting channels: a shortening channel works through an initial increase in transfers that mitigates the recession (reducing the need for forward guidance), and a lengthening channel works through a later transfer cut that curbs the undesired expansion (making forward guidance desirable for a longer horizon). Imposing a homogeneous transfer policy across agents does not change the stabilization outcome or the effect on the duration of forward guidance, nor does so allowing for cyclical income differences.
    Keywords: heterogeneity, inequality, liquidity trap, optimal monetary policy, optimal fiscal policy, forward guidance
    JEL: E52 E62 E63
    Date: 2022–12
  7. By: Richhild Moessner
    Abstract: This paper studies exchange rate pass-through to food and energy consumer price inflation and its dependence on the inflation environment using cross-country panel estimation of Phillips curves. It considers a large panel of OECD member and candidate economies with quarterly data from 1994 to 2021. We find that exchange rate pass-through is largest for energy CPI inflation and also significant for food CPI inflation. A 10% depreciation in the exchange rate leads to an increase in energy CPI inflation of around 2 percentage points (pp) at the quarterly horizon and of 4pp at the yearly horizon; it leads to an increase in food CPI inflation of around 0.3pp and 2pp at the quarterly and yearly horizon, respectively. We also find some evidence that exchange rate pass-through to food and energy CPI inflation depends on the inflation environment, with higher inflation leading to larger pass-through.
    Keywords: inflation, food prices, energy prices, exchange rates
    JEL: E31 E52 E58 F31
    Date: 2022
  8. By: Christopher Roth (University of Cologne, ECONtribute); Mirko Wiederholt (LMU Munich and Sciences Po, CESifo, CEPR); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute)
    Abstract: We study the effects of monetary policy on aggregate consumption combining a heterogeneous agent model with measured expectations under different policy counterfactuals. We express the consumption of non-hand-to-mouth households as a function of expectations only and elicit all expectations appearing in the consumption functions for alternative policy scenarios with tailored surveys. Feeding these individual-level expectations into the model illustrates that a modest forward guidance statement in March 2021 would have reduced aggregate consumption by 0.14 percent on impact and an interest rate hike of 40 basis points in March 2022 would have reduced aggregate consumption by 0.30 percent on impact.
    Keywords: Monetary Policy, Expectation Formation, Aggregate Consumption
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2023–01
  9. By: Eduardo Levy Yeyati; Juan Francisco Gómez
    Abstract: For a sample of emerging economies, we estimate the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor) but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).
    Keywords: Exchange rates, foreign exchange intervention, international reserves, self-insurance
    Date: 2022–10
  10. By: Michael D. Bauer; Carolin E. Pflueger; Adi Sunderam
    Abstract: We estimate perceptions about the Fed’s monetary policy rule from panel data on professional forecasts of interest rates and macroeconomic conditions. The perceived dependence of the federal funds rate on economic conditions is time-varying and cyclical: high during tightening episodes but low during easings. Forecasters update their perceptions about the policy rule in response to monetary policy actions, measured by high-frequency interest rate surprises, suggesting that forecasters have imperfect information about the rule. The perceived rule impacts asset prices crucial for monetary policy transmission, driving how interest rates respond to macroeconomic news and explaining term premia in long-term interest rates.
    Keywords: FOMC, monetary policy rule, survey forecasts, beliefs
    JEL: E43 E52 E58
    Date: 2022
  11. By: Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
    Abstract: This paper provides the context, rationale and key considerations that informed the Bank of Canada’s decision to publish a summary of monetary policy deliberations. It includes an analysis of how other central banks disclose minutes and summaries of their monetary policy deliberations. Most other central banks surveyed publish some sort of summary of deliberations. The Bank of Canada’s existing communications already include aspects of these summaries. However, the Bank does not normally provide some information that they contain, such as: a review of the policy choices that were discussed, a diversity of viewpoints on the economic outlook and policy choices, the perspectives of individual members, Publishing a summary of deliberations could enhance transparency, accountability and credibility and also reinforce the Bank’s independence. However, these benefits must be balanced against the potential for constraints on internal debate or the sending of mixed messages about the Bank’s outlook and decisions. The Bank of Canada Act empowers the Governor to make decisions, but in practice, decisions are made by consensus among members of the Bank’s Governing Council. This decision-making by consensus could have implications for what could or should be included in a summary. In the Canadian context, assuming the Bank will provide additional information, we also discuss some advantages and disadvantages of providing a summary of deliberations as a separate communication product or as an enhancement to current communications products. The material in the paper originally served as background information for internal discussions at the Bank of Canada around publishing a summary of policy deliberations. Following those discussions, the International Monetary Fund (IMF) published a review of the Bank of Canada’s transparency, concluding that the Bank “… sets a high benchmark for transparency” (IMF 2022). In that review, the IMF provided a recommendation on how the Bank could further improve its transparency by providing more information on its monetary policy deliberations. In response to the IMF review and internal discussions at the Bank, the Bank has publicly committed to providing a summary of its policy deliberations beginning in February 2023.
    Keywords: Monetary policy communications
    JEL: D83 E58
    Date: 2023–01
  12. By: Damiaan H.J. Chen (University of Amsterdam); Roel M.W.J. Beetsma (University of Amsterdam); Sweder J.G. van Wijnbergen (University of Amsterdam)
    Abstract: We explore how members of a collective pension scheme can share inflation risks in the absence of suitable financial market instruments. Using intergenerational risk sharing arrangements, risks can be allocated better across the various participants of a collective pension scheme than would be the case in a strictly individual- or cohort-based pension scheme, as these can only lay off risks via existing financial market instruments. Hence, intergenerational sharing of these risks enhances welfare. In view of the sizes of their funded pension sectors, this would be particularly beneficial for the Netherlands and the U.K
    Keywords: pension funds, intergenerational risk sharing, unhedgeable inflation risk, incomplete markets, welfare loss
    JEL: C61 E21 G11 G23
    Date: 2022–12–15
  13. By: Randal Verbrugge; Saeed Zaman
    Abstract: In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method. We model core PCE inflation using three components that align with those noted by Chair Powell in his December 14, 2022, press conference: housing, core goods, and core-services-less-housing. Our model projects that conditional on the SEP unemployment rate path and a rapid deceleration of core goods prices, core PCE inflation moderates to only 2.75 percent by the end of 2025: inflation will be higher for longer. A deep recession would be necessary to achieve the SEP’s projected inflation path. A simple reduced-form welfare analysis, which abstracts from any danger of inflation expectations becoming unanchored, suggests that such a recession would not be optimal.
    Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis
    JEL: E31 E32 E52 C32
    Date: 2023–01–13
  14. By: Ruoyun Mao (Grinnell College); Wenyi Shen (Oklahoma State University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show thata moderate inflation- driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers.
    Keywords: government spending effects, fiscal multipliers, regime-switching policy, monetary and fiscal policy interaction, nonlinear New Keynesian models
    JEL: E32 E52 E62 E63 H30
    Date: 2022–09
  15. By: Angelika Welte; Joy Wu
    Abstract: In recent years, the rise in digital payment innovations such as contactless cards and Interac eTransfer has spurred a discussion about the future of cash at the point of sale. The COVID-19 pandemic has also contributed to this discussion: While consumers reported that some merchants started to refuse cash early on in the pandemic, such reported refusals dropped as the pandemic progressed. The Bank of Canada’s most recent Merchant Acceptance Survey (MAS) took place in 2018, prompting a need for updated data to study merchant cash acceptance, payment trends and conditions for the potential issuance of a central bank digital currency (Lane 2020, 2021a). Against this background, the Bank conducted the 2021–22 MAS Pilot Study to monitor payment methods accepted by small and medium-sized businesses (SMBs). Survey data was collected from merchants in two batches, in late 2021 and early 2022. Our results show that 97% of SMBs in Canada accepted cash in 2021–22 and only 3% have plans to stop accepting cash. For cards and digital payments, merchant acceptance has increased since 2018. Additionally, the acceptance of different payment methods varies by the size of the merchant, industry and region.
    Keywords: Payment clearing and settlement systems
    JEL: C8 D22 E4 L2
    Date: 2023–01
  16. By: Aarti Singh (School of Economics, University of Sydney); Jacek Suda (Narodowy Bank Polski); Anastasia Zervou (Department of Economics, the University of Texas at Austin)
    Abstract: We study the heterogeneous effects of monetary policy on the labor market of large and small firms in the United States. We uncover the following facts: (i) Expansionary monetary policy boosts employment and hiring growth in small firms more than in large firms; however, a monetary contraction shrinks small firms’ employment and hiring growth less than in large firms. As a result, monetary policy has a countervailing effect on the employment concentration in large firms. (ii) There is an asymmetry in the effects of monetary contractions versus expansions with respect to firms’ employment and hiring growth. Not accounting for such asymmetry leads to the fallacious conclusion that small firms respond more than large firms to monetary policy shocks. This asymmetry also reveals that contractionary monetary policy shocks have immediate effects on the labor market while the effects of expansionary shocks are slower to manifest.(iii) The response of employment is weaker than that of hiring, highlighting the importance of using labor market flows. (iv) The growth of earnings of new hires decreases similarly across large and small firms in contractions but reacts more for small firms in expansions. We use a heterogeneous firms model with a working capital constraint, an upward-sloping marginal cost curve, and a financial accelerator effect. We augment this model with the wage effect summarized in fact (iv) and demonstrate how the additional wage effect can explain the differential response of the hiring and employment growth of small and large firms of fact (i).
    Keywords: Heterogeneous firms, financing constraints, labor market, monetary policy
    JEL: D22 E24 E52 J23 L25
    Date: 2023
  17. By: Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
    Abstract: We revisit an old question but with a new identification strategy, namely the difference in exchange rate effects between announced (“vocal”) and secret (“dirty”) foreign exchange intervention. Using a Regression Discontinuity Design, we exploit a rule-based intervention mechanism enacted by the Central Bank of Colombia that, under observable and deterministic conditions, triggered either the issuance of FX options or the ability to exercise them. We take the former (issuance) as central bank announcements under a sharp setting, since the rule and information that triggered the issuance of options was public, and we take the latter (exercise) as secret trades under a fuzzy setting, since traders could have chosen (but were not required) to exercise their options in the following days after issuance. Our results indicate that, unconditionally, both announcements and secret trades carry similar effects. However, the effects of announcements are considerably amplified conditional on: (i) higher central bank credibility, (ii) less frequent announcements, and (iii) episodes of higher FX volatility. **** RESUMEN: Revisitamos una antigua pregunta, pero con una nueva estrategia de identificación, concretamente, la diferencia entre los efectos de las intervenciones cambiarias anunciadas (“vocales”) y secretas (“sucias”). Para esto estudiamos un mecanismo de intervención basado en reglas del Banco de la República que, bajo condiciones observables y deterministas, activó la emisión de opciones (call y put) o la capacidad de ejercerlas. Interpretamos la primera (emisión) como anuncios del Banco bajo un diseño de regresión discontinua sharp, ya que la regla y la información cambiaria que la activó eran públicas, e interpretamos los ejercicios de las opciones como operaciones secretas bajo un diseño de regresión discontinua fuzzy, ya que los agentes del mercado podían haber elegido (pero no estaban obligados) a ejercerlas en los días siguientes a su emisión. Nuestros resultados indican que, de forma no condicional, tanto los anuncios como la intervención secreta tienen efectos similares. Sin embargo, el impacto de los anuncios se amplifica cuando se condicionan a: (i) una alta credibilidad del banco central, (ii) anuncios menos frecuentes y (iii) episodios de mayor volatilidad cambiaria.
    Keywords: Foreign Exchange Intervention effectiveness, Regression Discontinuity Design, Announced Intervention, Secret Intervention, Intervención cambiaria, Regresión discontinua, Intervención con anuncios, Intervención secreta
    JEL: E58 F31 C22
    Date: 2023–01
  18. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: The topic of Central Bank Digital Currencies (CBDC) is highly relevant to deposit insurers. As an increasing number of central banks further their research and planning efforts in CBDC, IADI members are encouraged to intensify their understanding of the potential impact of the introduction of a CBDC in their own as well as in other jurisdictions. To assess the potential impact of a CBDC, sound understanding of operating models and design features is crucial. These will affect factors of key interest to deposit insurers. This extends to the division of labour between central and commercial banks and the degree of privacy attached to CBDC usage. The paper offers a review of key issues relevant to deposit insurers regarding operating models and design features for CBDC, and links these to early global policy standards. Whilst not recommending a particular CBDC design, deposit insurers are encouraged to make their own determination based on developing a deeper understanding of the principles presented. This paper acts as a follow up to a previous IADI Fintech Brief which highlighted some key motivations for CBDCs by central banks.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–12
  19. By: Marek Jarocinski; Martín Almuzara; Argia M. Sbordone
    Abstract: In a recent post, we introduced the Multivariate Core Trend (MTC), a measure of inflation persistence in the core sectors of the personal consumption expenditure (PCE) price index. With data up to February 2022, we used the MCT to interpret the nature of post-pandemic price spikes, arguing that inflation dynamics were dominated by a persistent component largely common across sectors, which we estimated at around 5 percent. Indeed, over the year, inflation proved to be persistent and broad based, and core PCE inflation is likely to end 2022 near 5 percent. So, what is the MCT telling us today? In this post, we extend our analysis to data through November 2022 and detect signs of a decline in the persistent component of inflation in recent data. We then dissect the layers of inflation persistence to fully understand that decline.
    Keywords: inflation persistence; housing; supply chain
    JEL: E2 E31
    Date: 2023–01–05
  20. By: Guido Ascari (University of Oxford; University of Pavia; RCEA); Luca Fosso (University of Pavia; Norges Bank)
    Abstract: Since 2000 U.S. inflation has remained both below target and silent to domestic slack and monetary interventions. A trend-cycle VAR decomposition explores the role of globalisation in explaining the puzzling behaviour of inflation. The trend analysis shows that, starting from 90s, despite very well-anchored expectations, slow-moving imported ”cost-push” factors induced deflationary pressure keeping trend inflation below target. The cycle block provides evidence in favour of the flattening of Phillips curve, mainly attributable to a weaker wage pass-through. The business cycle behaviour of inflation is determined by a shock originating abroad, which indeed generates the main bulk of volatility in the international prices of intermediate goods and is poorly connected to the domestic slack.
    Keywords: Trend-Cycle Decomposition, Trend Inflation, Global Inflation, Phillips Curve, Spectral Analysis
    JEL: C11 C32 E3 E31 E52
    Date: 2021–04
  21. By: Hamid Raza; Thibault Laurentjoye; Mikael Randrup Byrialsen; Sebastian Valdecantos
    Abstract: After decades of relative consumer price stability, inflation is now making a come-back as a central topic in economic and political discussions, against a backdrop of various policy challenges. The aim of this paper is to provide a nuanced assessment of the different channels through which monetary, fiscal and income policies can affect prices and output in a small open economy, as well as discuss which policy measures are desirable and practically feasible when such an economy experiences inflationary shocks. To do so, we adopt a comprehensive modelling approach and build an empirical stock-flow-consistent model using sectoral national account data for Denmark over the period 2005Q1-2020Q1. We then replicate the inflationary environment in which Denmark and several other countries are currently operating and introduce a monetary policy reaction which leads to a modest reduction in inflation at the cost of further contracting the economy. Taking monetary tightening as a forced policy response in the case of a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the adverse effects of inflation. Specifically, we introduce fiscal interventions - in the form of tax cuts on income and production - along with wage- and price-based income policies. Our main conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Finally, we address a question of political relevance by exploring the effects of different policies on public budget and debt. Overall, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.
    Keywords: Inflation, Fiscal policy, Monetary policy, Income policy, Stock-flow consistent model
    JEL: E12 E52 E61 E64
    Date: 2023–01
  22. By: Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
    Abstract: In this paper we highlight a new channel through which dollar fluctuations can become a self-fulfilling pro-cyclical force. We call this mechanism “Imperial Circle” as it makes the dollar the dominant macroeconomic variable in the context of the current international monetary system. At the core of it, there is a fundamental asymmetry between the shrinking exposure of the “real” U.S. economy to global developments versus the growing global role of the U.S. dollar. Dollar appreciation leads to a decline in global economic activity, which in turn benefits, in relative terms, the dollar itself, reinforcing the initial appreciation and its effects.
    Keywords: Dynamic Stochastic General Equilibrium (DSGE) models; global supply chains; dollar currency pricing; trade; spillover
    JEL: E32 E44 F41
    Date: 2022–12–01
  23. By: Sangyup Choi (Yonsei University); Kimoon Jeong (Yonsei University); Jiseob Kim (Yonsei University)
    Abstract: What accounts for contrasting economic paths between core and periphery countries in the euro area? Unlike many studies focusing on fiscal problems, we highlight the interplay of bank mortgage lending standards and imbalances created by the common monetary policy framework. To illustrate the mechanism, we derive a country-specific monetary policy stance gap and estimate the panel VAR model of core and periphery countries, respectively. While the widening monetary policy stance gap—the accommodative stance of the ECB given individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by sharply different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different paths in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, where macroprudential policies on mortgage credit are tightened and bank lending margin decreases, increase their cross-border lending to periphery countries, which could fuel excessive risk-taking in periphery countries.
    Keywords: Euro area; Mortgage credit; Monetary policy stance gap; Bank lending survey; Macroprudential policy; Cross-border banking flows; Panel VARs.
    JEL: E21 E32 E44 F52 G21
    Date: 2023–01
  24. By: Laséen, Stefan (Research Department, Central Bank of Sweden)
    Abstract: How willing are individual primary dealers to alter their offered yields in central bank quantitative easing auctions of government bonds in order to sell an additional share of the outstanding amount of a bond to the central bank? This question is of great importance for a central bank’s potential to affect yields during quantitative easing purchase operations and the one I address in this paper. In order to do so I study a unique, and confidential, dataset consisting of all pairs of offered yields and quantities from individual dealers participating in the Riksbank’s (central bank of Sweden) quantitative easing auctions from 2015 to 2021. I find, on average, that an offer by individual dealers to sell an additional one percent of the outstanding amount of a bond is associated with between 0.6 to 7.5 basis points lower yields. However, offers depend in a non-linear way on offered amounts. Offers are less elastic (steeper) for offered quantities below 10 per cent and above 20 per cent of outstanding amounts of bonds. The finding of a non-linear slope is new in the literature and is only possible to uncover with access to the whole distribution and significant size of the offered amounts at each auction. Moreover, I find that marginal yields (yields where supply equals demand) at the auctions are highly, and persistently, correlated with changes in market yields for an extended period after the auction suggesting that purchase operations have a more persistent impact on market yields than what has previously been found.
    Keywords: Monetary Policy; Asset Purchases; Quantitative Easing; Sovereign Yields; Asset Purchase Auctions.
    JEL: D44 E52 E58 E63
    Date: 2023–01–01
  25. By: Anil K Kashyap; Jeremy C. Stein
    Abstract: Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.
    JEL: E44 E52 E58
    Date: 2022–12
  26. By: Hadrien Camatte; Guillaume Daudin (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Violaine Faubert; Antoine Lalliard; Christine Rifflart (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: Following the 2008 financial crisis, inflation rates in advanced economies have been at odds with the prediction of a standard Phillips curve. This puzzle has triggered a debate on the global determinants of domestic prices. We contribute to this debate by investigating the impact of exchange rate shocks on consumer prices from 1995 to 2018. We focus on cost-push inflation through global value chains. We build on three sectoral world input-output datasets (WIOD and two versions of TiVA). We assume a Cobb-Douglas production framework and work in a partial equilibrium setting. The construction of World Input-Output tables is data-demanding and WIOTs are typically released with a lag of several years. To address this gap, we use more up-to-date GDP and trade data, thus providing a tool for approximating the partial equilibrium impact of an exchange rate shock on consumer prices from 2015 onwards. Depending on countries, the absolute value of the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate ranges from 0.05 to 0.35, confirming the importance of global value chains in channelling external shocks to domestic inflation. Using data from WIOD on a sample of 43 countries, we find that the mean output-weighted elasticity of the HCE deflator to the exchange rate increased in absolute value from 0.075 in 2000 to 0.094 in 2008. After peaking in 2008, it declined to 0.088 in 2014. Extrapolations based on more up-to-date GDP and trade data suggest that the decline continued until 2016, before reversing in 2017 and 2018. Our findings are robust to using three different datasets.
    Keywords: input-output linkages, spillovers, global value chains, cost-push inflation
    Date: 2021–01–01

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