nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒02‒06
forty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Fiscal Consequences of Missing an Inflation Target By Michele Andreolli; Hélène Rey
  2. Central Bank Communication of Uncertainty By Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
  3. International Spillovers of Tighter Monetary Policy By Dario Caldara; Francesco Ferrante; Albert Queraltó
  4. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  5. The Transmission of International Monetary Policy Shocks on Firms' Expectations By Serafin Frache; Rodrigo Lluberas; Mathieu Pedemonte; Javier Turen
  6. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rate By Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hondula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; Yaz Terajima
  7. Monetary policy and credit card spending By Francesco Grigoli; Damiano Sandri
  8. Shedding lights on Leaning Against the Wind By Federica Vassalli; Massimiliano Tancioni
  9. Monetary-Fiscal Crosswinds in the European Monetary Union By Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
  10. Perceptions about monetary policy By Bauer, Michael D.; Pflueger, Carolin E.; Sunderam, Adi
  11. Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience By Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
  12. The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve By Guido Ascari; Luca Fosso
  13. Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status? By Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
  14. The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs By KAMKOUM, Arnaud Cedric
  15. The impact of high inflation on trust in national politics and central banks By Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
  16. The Bank of Amsterdam and the limits of fiat money By Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
  17. Evolving Reputation for Commitment: The Rise, Fall and Stabilization of US Inflation By Robert G. King; Yang K. Lu
  18. Identifying Monetary Policy Shocks Through External Variable Constraints By Francesco Fusari
  19. Green Transmission: Monetary Policy in the Age of ESG By Patozi, A.
  20. The real effects of financial disruptions in a monetary economy By Miroslav Gabrovski; Athanasios Geromichalos; Lucas Herrenbrueck; Ioannis Kospentaris; Sukjoon Lee
  21. CBDC: Banking and Anonymity By Yuteng Cheng; Ryuichiro Izumi
  22. Inflation and Attention Thresholds By Korenok Oleg; David Munro; Jiayi Chen
  23. Macro Effects of Formal Adoption of Inflation Targeting By Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
  24. Stock Price Wealth Effects and Monetary Policy under Imperfect Knowledge By Ifrim, Adrian
  25. 3 Lessons from Hyperinflationary Periods By Mark Bergen; Thomas Bergen; Daniel Levy; Rose Semenov
  26. Gazing at r-star: A Hysteresis Perspective By Paul Beaudry; Katya Kartashova; Césaire Meh
  27. Controlling Chaotic Fluctuations through Monetary Policy By Takao Asano; Akihisa Shibata; Masanori Yokoo
  28. Switching Monetary-Fiscal Regimes in Egypt: Is the Fiscal Stimulus Necessarily Good in Bad Times? By Dina Kassab
  29. The Regional Keynesian Cross By Marco Bellifemine; Adrien Couturier; Rustam Jamilov
  30. Measuring Inflation Expectations: How the Response Scale Shapes Density Forecasts By Becker, Christoph; Duersch, Peter; Eife, Thomas
  31. The EA-BDF Model and Government Spending Multipliers in a Monetary Union By Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
  32. A Broader Perspective on the Inflationary Effects of Energy Price Shocks By Lutz Kilian; Xiaoqing Zhou
  33. Effects of Rising Base Rates on Major Manufacturing Industries and Policymaking By Kim, Hyun Seok
  34. Financial inclusion, mobile money and regulatory architecture By Metzger, Martina; Were, Maureen; Pédussel Wu, Jennifer
  35. Understanding the Global Drivers of Inflation:How Important are Oil Prices? By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge; Hakan Yilmazkuday
  36. Inflation and Value Creation: An Economic and Philosophic Investigation By Gennady Shkliarevsky
  37. The preferential treatment of green bonds By Giovanardi, Francesco; Kaldorf, Matthias; Radke, Lucas; Wicknig, Florian
  38. The stable in stablecoins By Garth Baughman; Francesca Carapella; Jacob Gerszten; David C. Mills
  39. U.S. Trade Imbalances, East Asian Exchange Rates, and a New Plaza Accord By Willem THORBECKE
  40. The U.K. and the Flow of Funds involving: the Bank of England, U.K. households and the U.K. Government By De Koning, Kees
  41. Equilibrium Yield Curves with Imperfect Information By Hiroatsu Tanaka

  1. By: Michele Andreolli; Hélène Rey
    Abstract: The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary-fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect the reliability of the European Central Bank's monetary policy on public finances. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries. For comparison we also estimate the fiscal consequences of the Federal Reserve and the Bank of England missing their inflation targets. They are also sizeable.
    JEL: E31 E44 E52 E60 F45 H63
    Date: 2023–01
  2. By: Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
    Abstract: In this paper, we examine how the monetary policy setting committees of the Federal Reserve, the Bank of England and the European Central Bank communicate their reaction to incoming data in their policy deliberation process by expressing confidence, surprise or uncertainty with respect to existing narratives. We use text analysis techniques to calculate forward and backward looking measures of relative surprise from the published Minutes of these decision-making bodies. We find many common patterns in this communication. Interestingly, policymakers tend to express more surprise and uncertainty with regard to developments in the real economy, whereas they are more likely to confirm their expectations with regard to inflation and monetary policy. When considering the monetary policy stance, we observe a tendency for policymakers to highlight surprise and uncertainty several meetings in advance of changes, particularly when easing monetary policy. Importantly, we document that a higher proportion of expressions of surprise and uncertainty increases the likelihood of an easier policy stance. By contrast, a higher proportion of expressions of confirmation tends to increase the likelihood of a tighter policy stance.
    Keywords: Central Banks, Monetary Policy, Communication, Minutes, Uncertainty
    JEL: E52 E58 C55
    Date: 2022
  3. By: Dario Caldara; Francesco Ferrante; Albert Queraltó
    Abstract: Central banks around the world are tightening monetary policy in response to a global surge in inflation not seen since the 1970s. This synchronization of global interest rate hikes and further increases expected by markets, illustrated in figure 1, have raised concerns about adverse international spillovers of tighter monetary policy.
    Date: 2022–12–23
  4. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2022–12
  5. By: Serafin Frache; Rodrigo Lluberas; Mathieu Pedemonte; Javier Turen
    Abstract: Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the US can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position and total imports on a monthly basis. We show that a contractionary MP shock in the US reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the inflationary effect of this shock on the Uruguayan economy, suggesting uncertainty about the policy regime. We discuss the issues and challenges of this expectation channel.
    Keywords: Firms' Expectations; Global Financial Cycle; Monetary Policy Spillovers
    JEL: E31 E58 F41 D84 E71
    Date: 2023–01–04
  6. By: Jin Cao; Valeriya Dinger; Tomás Gómez; Zuzana Gric; Martin Hondula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovaná; Yaz Terajima
    Abstract: We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies – Canada, Chile, the Czech Republic and Norway – using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies’ monetary policy when rates shift to and from the very low end of the distribution.
    Keywords: Low and negative interest rate environment (LNIRE), Cross-border monetary policy spillover, International bank lending channel, Portfolio channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2021–11–05
  7. By: Francesco Grigoli; Damiano Sandri
    Abstract: We analyze the impact of monetary policy on consumer spending using confidential credit card data. Being available at daily frequency, these data improve the identification of the monetary transmission and allow for a more precise characterization of the transmission lags. We find that shocks to short-term interest rates affect spending much more rapidly than shocks to medium-term interest rates. We also document significant asymmetries in the effects of monetary policy. While interest rate hikes strongly curb spending-especially if coupled with reductions in stock prices reflecting pure monetary policy shocks-interest rate cuts appear unable to lift spending. Finally, we exploit the disaggregation of credit card data to examine the heterogeneous effects of monetary policy across spending categories and users' characteristics.
    Keywords: credit card spending, heterogeneity, monetary policy, transmission
    JEL: E21 E52
    Date: 2023–01
  8. By: Federica Vassalli; Massimiliano Tancioni
    Abstract: The efficacy of monetary policy intervention against stock market bubbles depends on monetary policy shock identification. We estimate a Bayesian VAR identified with mixed zero-sign restriction, where we distinguish a pure monetary policy shock from a central bank information shock. We show that the two shocks affect the asset price components differently, where the asset price is the sum between the fundamental and the bubbly components. A pure tightening monetary policy shock reduces the S&P500 Index but causes the bubble to increase. In contrast, by disclosing information on the economy's future path, a central bank information shock increases the fundamental component causing a drop in the bubble. Ignoring the distinction between the two types of monetary shock helps to explain the ambiguity surrounding the efficacy of leaning against the wind policy in terms of the ability to deflate a bubble.
    Keywords: Monetary Policy; Bubbles; LAW; BVAR
    JEL: E44 E52 E58 G12
    Date: 2023–01
  9. By: Lucrezia Reichlin; Giovanni Ricco (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Matthieu Tarbé
    Abstract: We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany's fiscal policy during the period in which unconventional monetary policy was adopted.
    Keywords: monetary-fiscal interaction, fiscal policy, monetary policy, intertemporal government budget constraint
    Date: 2021–01–01
  10. By: Bauer, Michael D.; Pflueger, Carolin E.; Sunderam, Adi
    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: Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
    Abstract: We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers’ heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents’ memory, making shocks more persistent. Central banks should be more active to prevent agents from remembering current shocks far into the future.
    Keywords: Expectations; Survey Data; Belief Formation; Heterogeneous Expectations
    JEL: D84 E31 E58 E71
    Date: 2023–01–10
  12. By: Guido Ascari; Luca Fosso
    Abstract: Since 2000 U.S. inflation has remained both below target and silent to domestic slack and monetary interventions. A trend-cycle BVAR decomposition explores the role of imported intermediate goods in explaining the puzzling behaviour of inflation. The trend analysis shows that, starting from the `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 a flattening of the 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
    JEL: C11 C32 E3 E31 E52
    Date: 2021–12–20
  13. By: Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
    Abstract: It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China’s capital account. We argue that the RMB can in fact develop into a consequential reserve currency in the absence of capital account convertibility. Trade and investment links can drive official use and accumulation despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must allow access to RMB through loans and People’s Bank of China (PBoC) currency swaps. It must ensure convertibility of RMB into US dollars on offshore markets. It must provide these RMB services at a stable and predictable price. Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance.
    Keywords: International Monetary System, Renminbi, International Reserve Currencies
    JEL: F31 F38 E58
    Date: 2022
  14. By: KAMKOUM, Arnaud Cedric
    Abstract: The financial crisis that started in the U.S. at the end of 2007 and later spread to other countries was the most severe economic and financial disaster since the Great Depression. The crisis began in the U.S. housing market in August 2007, rapidly extended to other sectors of the U.S. economy, and became global following the collapse of various U.S.-based international financial institutions. To counter the negative effects of the crisis, the Federal Reserve (the central bank of the United States) and other central banks conducted monetary policies that are widely considered unconventional. This master’s thesis examines the monetary policies the Federal Reserve implemented in response to the crisis. More specifically, the thesis analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations implemented from 2007 to 2018. The thesis’ detailed examination of these policies is concluded with an interrupted time-series (ITS) analysis of the causal effects of the QE programs on U.S. inflation and real GDP. The results of this design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the Federal Reserve’s QE programs, real GDP per capita in the U.S. increased by 14% relative to what it would have been during that quarter had there not been the QE programs.
    Date: 2023–01–05
  15. By: Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
    Abstract: Little is known about the impact of high inflation on public trust. Using a survey in the Netherlands, we find that the recent increase in inflation is associated with a decline in trust in the Dutch central bank and Dutch politics. The higher individuals’ perceived inflation is and the harder it is for them to make ends meet, the lower their trust in the European Central Bank, the Dutch central bank, and Dutch politics. We also find that people trust authorities considered responsible for bringing inflation down less. Quite remarkably, most people think government is responsible for maintaining price stability.
    Keywords: inflation; trust; financial stress; central banks; national politics
    JEL: D12 D83 E31 E58
    Date: 2023–01
  16. By: Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.
    Keywords: central banks, negative equity, fiat money, trust
    JEL: E42 E58 N13
    Date: 2023–01
  17. By: Robert G. King; Yang K. Lu
    Abstract: A parsimonious model of shifting policy regimes can simultaneously capture expected and actual US inflation during 1969-2005. Our model features a forward-looking New Keynesian Phillips curve and purposeful policymakers that can or cannot commit. Private sector learning about policymaker type leads to a reputation state variable. We use model inflation forecasting rules to extract state variables from SPF inflation forecasts. US inflation is tracked by optimal policy without commitment before 1981 and by optimal policy with commitment afterward. In theory and quantification, the interaction of private sector learning and optimal policy within regimes is central to expected and actual inflation.
    JEL: D82 E52
    Date: 2022–12
  18. By: Francesco Fusari (University of Surrey)
    Abstract: This paper proposes a new strategy for the identification of monetary policy shocks in structural vector autoregressions (SVARs). It combines traditional sign restrictions with external variable constraints on high-frequency monetary surprises and central bank’s macroeconomic projections. I use it to characterize the transmission of US monetary policy over the period 1965-2007. First, I find that contractionary monetary policy shocks unequivocally decrease output, sharpening the ambiguous implications of standard sign-restricted SVARs. Second, I show that the identified structural models are consistent with narrative sign restrictions and restrictions on the monetary policy equation. On the contrary, the shocks identified through these alternative methodologies turn out to be correlated with the information set of the central bank and to weakly comove with monetary surprises. Finally, I implement an algorithm for robust Bayesian inference in set-identified SVARs, providing further evidence in support of my identification strategy.
    JEL: E52 C51
    Date: 2023–01
  19. By: Patozi, A.
    Abstract: In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming ‘greener’ for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, ‘green’ firms (with high environmental scores) are significantly less impacted than their ‘brown’ counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms’ characteristics. Instead, I show that the heterogeneous response is the result of investors’ preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of ‘green’ asset prices with respect to monetary policy shocks.
    Keywords: Climate Change, ESG, Heterogeneity, Monetary Policy, Sustainable Investing
    JEL: E52 G12 G14 G30
    Date: 2023–01–18
  20. By: Miroslav Gabrovski (Department of Economics, University of Hawaii); Athanasios Geromichalos (Department of Economics, University of California, Davis); Lucas Herrenbrueck (Department of Economics, Simon Fraser University); Ioannis Kospentaris (Department of Economics, VCU School of Business); Sukjoon Lee (Department of Economics, New York University Shanghai)
    Abstract: A large literature in macroeconomics reaches the conclusion that disruptions in financial markets have large negative effects on output and (un)employment. Although seemingly diverse, papers in this literature share a common characteristic: they employ frameworks where money is not explicitly modeled. This paper argues that the omission of money may hinder a model’s ability to evaluate the real effects of financial disruptions, since it deprives agents of a payment instrument that they could have used to cope with the resulting liquidity disruption. In a carefully calibrated New-Monetarist model with frictional labor, product, and financial markets we show that output and unemployment respond very modestly to shocks in the ability of agents to trade in the financial market. Explicitly modeling money enables us to show that the size of the transmission mechanism between the financial market shock and the real economy is disciplined by the inflation level.
    Keywords: search frictions; unemployment; corporate bonds; money; liquidity; inflation
    JEL: E24 E31 E41 E44
    Date: 2023–01
  21. By: Yuteng Cheng (Bank of Canada); Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: What is the optimal design of anonymity in a central bank digital currency (CBDC)? We examine this question in the context of bank lending by building a stylized model of anonymity in payment instruments. We specify the anonymity of payment instruments in two dimensions: The bank has no information about the entrepreneur’s investment, and the bank has less control over the entrepreneur’s profits. An instrument with higher anonymity may discourage the bank from lending, and thus, the entrepreneur strategically chooses payment instruments. Our analysis shows that introducing a CBDC with modest anonymity can improve welfare in one equilibrium, but can also destroy valuable information in bank lending, leading to inefficient lending in another equilibrium. Our results suggest that central banks should either make a CBDC highly anonymous or share CBDC data with banks to eliminate this bad equilibrium.
    Keywords: CBDC, Anonymity, Bank lending
    JEL: E42 E58 G28
    Date: 2023–01
  22. By: Korenok Oleg (Department of Economics, VCU School of Business); David Munro (Department of Economics, Middlebury College); Jiayi Chen (Middlebury College)
    Abstract: One of the dangers of high inflation is that it can cause firms and households to pay close attention to it. This internalization of inflation can lead to an accelerationist regime, making inflation harder to control. We empirically assess the relationship between attention and the level of inflation for 37 countries. Our measures of attention are constructed either from internet search behavior or the popularity of inflation mentions on Twitter. We find evidence that attention thresholds do exist for the majority of countries in our sample. We also find interesting variability across countries.
    Keywords: inflation; attention; threshold
    JEL: E31 E52 E70
    Date: 2022–09
  23. By: Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
    Abstract: We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs). Our paper reports several findings relevant to assessing the success of IT regimes. We find that while the early adopters of IT (pre-2000) all saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Since there is not much difference, on average, between IT and non-IT countries in mean inflation, inflation volatility and the extent of inflation anchoring, it is not easy to sort out what role IT has played in ensuring good outcomes; in particular, we cannot rule out the possibility that the success of IT may be due to ‘regression to the mean’. Our country-level analysis—using the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort—shows that IT adoption delivers significant inflation gains in about a third of the cases. At the same time, we also find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes. At a time when central banks are struggling to keep inflation in check, our results suggest that the belief that IT adoption will be sufficient to achieve this goal cannot be taken for granted.
    Keywords: Inflation targeting; Inflation expectations; Inflation forecasts
    Date: 2023–01–13
  24. By: Ifrim, Adrian
    Abstract: Departures from full-information rational expectation models give rise to stock price wealth effects which introduce inefficient cyclical fluctuations in the economy. Waves of optimism/pessimism affect beliefs and asset prices which influence aggregate demand through expectation-driven wealth effects. Monetary policy can play an important role in eliminating the non-fundamental effects of belief-driven asset price cycle: reacting symmetrically and transparently to stock prices increases welfare significantly compared to flexible inflation targeting strategies. A quantitative model estimated on US data shows that increasing interest rates by 12 basis points for every 100% rise in stock prices accomplish this goal. Moreover, a nonlinear reaction to stock prices only when capital gains exceed 7% delivers similar efficiency gains.
    Keywords: monetary policy, wealth effects, learning, survey expectations, stock prices, animal spirits
    JEL: D84 E32 E44 E52
    Date: 2023
  25. By: Mark Bergen (University of Minnesota); Thomas Bergen (University of Minnesota); Daniel Levy (RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël], ISET - International School of Economics at TSU, ICEA); Rose Semenov (University of Minnesota)
    Abstract: Inflation is painful, for firms, customers, employees, and society. But careful study of periods of hyperinflation point to ways that firms can adapt. In particular, companies need to think about how to change prices regularly and cheaplybecause constant price changes can ultimately be very, very expensive. And they should consider how to communicate those price changes to customers. Providing clarity and predictability can increase consumer trust and help firms in the long run.
    Keywords: Inflation Rate, Hyperinflation, Pricing, Price Setting, Price Adjustment, Menu Cost, Cost of Price Adjustment, Implicit Contract, Long-Term Relationship
    Date: 2022
  26. By: Paul Beaudry; Katya Kartashova; Césaire Meh
    Abstract: Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. We begin by presenting a simple explanation for this pattern that relies on integrating retirement and inter-temporal substitution motives in saving decisions. We then show how the interaction of these two saving motives can have profound implications in terms of the shape of asset demands, the possibility of multiple steady state real interest rates, and a potential role for monetary policy to influence the long-run evolution of real rates. The framework highlights how an inflationary episode followed by a strong monetary response, as we are currently witnessing, can have long-term implications for real interest rates.
    Keywords: Economic models; Fiscal policy; Inflation and prices; Inflation targets; Interest rates; Monetary policy; Monetary policy framework
    JEL: E21 E52 E31 E43 E58 E62 G51 H6
    Date: 2023–01
  27. By: Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University)
    Abstract: This paper applies the chaos control method (the OGY method) proposed by Ott et al. (1990, Physical Review Letters) to policy making in macroeconomics. This paper demonstrates that the monetary equilibrium paths in a discrete-time, two-dimensional overlapping generations model exhibit chaotic fluctuations depending on the money supply rate and the elasticity of substitution between capital and labor under the assumption of the constant elasticity of substitution (CES) production function. We also show that the chaotic fluctuations can be stabilized by controlling the money supply rate by using the OGY method.
    Keywords: Macroeconomy; Chaos Control; OGY method; Monetary Policy; OLG model; Chaos
    Date: 2023–01
  28. By: Dina Kassab (Cairo University)
    Abstract: This paper investigates the monetary-fiscal interaction in Egypt for the period 2001Q1 to 2020Q2, a period that includes several reform programs, the 2011 revolution but also the global financial and the Covid-crises. Markov-switching regression methods are employed to estimate fiscal and monetary policy feedback rules in Egypt and the overlay of the smoothed probabilities is used, in the spirit of Davig and Leeper (2007), to show the estimated timing of the joint monetary-fiscal regime and depict its evolution. A sign restricted vector autoregression (SRVAR) model is then used to analyze the effects of different potential fiscal-monetary policy mixes, similar to those undertaken by different governments the during the coronavirus pandemic, on macro variables in Egypt. Three main findings emerge from the analysis. First, fiscal policy in Egypt always responds to government debt, although the magnitude of this response differs throughout the periods. Second, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization which represents a novel way of tracking the time-series behaviour of government debt and inflation in Egypt. Third, the effect of a fiscal stimulus on real consumption and GDP in Egypt does not outlive the stimulus due to a Ricardian Equivalence effect, where agents expect higher future taxes to finance deficits resulting from the stimulus. This effect can be mitigated with an accommodating monetary policy, at the expense however of inflationary pressures that inflation targeting central bank will have to face.
    Date: 2022–12–20
  29. By: Marco Bellifemine; Adrien Couturier; Rustam Jamilov
    Abstract: We study monetary policy transmission across space. Empirically, we show that two channels explain a sizable portion of the variation in the regional effects of identified U.S. monetary policy shocks: local marginal propensities to consume (MPCs), as captured by household wealth, and industry composition, as measured by the local share of non-tradable employment. Theoretically, we develop a heterogeneous agents New Keynesian (HANK) model of a monetary union with two-layered regional heterogeneity in household and industry composition. We provide a sequence-space characterization of the response of local employment to unexpected changes in interest rates as a function of intertemporal MPCs and industry composition: the regional Keynesian cross. Central to our theory is an equilibrium complementarity between these two sources of regional heterogeneity. We provide direct empirical evidence of this household industry complementarity, thus validating our key model mechanism. Quantitatively, reactions from fiscal authorities and the rest of the nation are key determining factors of the aggregate regional economic response.
    Date: 2022–12–24
  30. By: Becker, Christoph; Duersch, Peter; Eife, Thomas
    Abstract: In density forecasts, respondents are asked to assign probabilities to pre-specified ranges of inflation. We show in two large-scale experiments that responses vary when we modify the response scale. Asking an identical question with modified response scales induces different answers: Shifting, compressing or expanding the scale leads to shifted, compressed and expanded forecasts. Mean forecast, uncertainty, and disagreement can change by several percentage points. We discuss implications for survey design and how central banks can adjust the response scales during times of high inflation.
    Keywords: density forecast; Inflation; Experiment
    Date: 2023–01–13
  31. By: Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
    Abstract: We develop in this paper a new two-country model of the euro area (EA-BDF), based on the large-scale FR-BDF model of France and a new medium-scale block of the rest of the euro area (STREAM). This new block follows an approach close to FR-BDF, being a semi-structural model with the same type of adjustment costs and that we can use with different types of expectations. Both countries of EA-BDF share a common endogenous monetary policy and, thanks to our multi-country setup, we can deal with both symmetric and asymmetric shocks. Our illustrations about the effects of a government spending shock in a monetary union deliver two key results, which are robust whatever the type of expectations. First, by studying symmetric and asymmetric shocks on government spending, kept constant for 2 years, we find that, at this 2-year horizon, trade spillovers would compensate monetary policy spillovers within the euro area. Second, we also find, in the case of a symmetric shock, that the government spending multiplier is smaller under a monetary policy rule based on price-level targeting than on inflation targeting.
    Keywords: Semi-Structural Modeling, Expectations, Monetary and Fiscal Policies
    JEL: C54 E37
    Date: 2022
  32. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: Consumers purchase energy in many forms. Sometimes energy goods are consumed directly, for instance, in the form of gasoline used to operate a vehicle, electricity to light a home or natural gas to heat a home. At other times, the cost of energy is embodied in the prices of goods and services that consumers buy, say when purchasing an airline ticket or when buying online garden furniture made from plastic to be delivered by mail. Previous research has focused on quantifying the pass-through of the price of crude oil or the price of motor gasoline to U.S. inflation. Neither approach accounts for the fact that percent changes in refined product prices need not be proportionate to the percent change in the price of oil, that not all energy is derived from oil and that the correlation of price shocks across energy markets is far from one. This paper develops a vector autoregressive model that quantifies the joint impact of shocks to several energy prices on headline and core CPI inflation. Our analysis confirms that focusing on gasoline price shocks alone will underestimate the inflationary pressures emanating from the energy sector, but not enough to overturn the conclusion that much of the observed increase in headline inflation in 2021 and 2022 reflected non-energy price shocks.
    Keywords: headline inflation; core inflation; goods; services; oil; gasoline; diesel; natural gas; electricity
    JEL: E31 E52 Q43
    Date: 2022–12–21
  33. By: Kim, Hyun Seok (Korea Institute for Industrial Economics and Trade)
    Abstract: Soaring inflationary pressure and the ripple effects of the base rate spikes by the US Federal Reserve are expected to lead the Bank of Korea (BOK) to raise its base rate at least three times during the remainder of 2022. Korean firms rely primarily on indirect financing for their financial needs as the Korean capital market is strongly bank-based. However, small and medium-sized enterprises (SMEs) are far more dependent than large corporations on indirect financing. Monetary policy changes involving interest rates therefore exert a significantly greater impact on SMEs than they do on large corporations, and changes in monetary policy are estimated to transfer greater costs onto SMEs than onto large corporations. Whether in the short term or the long term, the burden of rising interest rates faced by SMEs is greater than that faced by large corporations. Low liquidity, high inflation rates, negative consumer sentiment, and excessive outstanding debt all threaten to increase risks to Korean capital markets today. Industries dominated by SMEs are expected to see their interest coverage ratios drop significantly and the percentage of zombie firms1) grow amid waves of rising interest rates. Proactive policy action is needed to minimize the repercussions of rising base rates on industries where SMEs are concentrated. Textiles, pulp and paper, and metal processing are among the industries with significant proportions of SMEs as well as unhealthy firms. In order to mitigate the impact of high interest rates on these industries and enable them to achieve stable restructuring in both the short and long run, it is critical to provide policy support specifically targeted to unhealthy firms and also to introduce measures for reducing these industries’ dependency on indirect financing and supporting measures to encourage greater use of direct financing, such as support for the bonds market, for example.
    Keywords: Korean Capital Market; Interest Rates; Monetary Policy
    JEL: E43 E44 E52
    Date: 2022–04–04
  34. By: Metzger, Martina; Were, Maureen; Pédussel Wu, Jennifer
    Abstract: This paper discusses first the role of mobile money accounts to enhance financial inclusion towards vulnerable groups in developing countries in the light of recent empirical evidence. Second, we explore the role of regulation to address risks to consumers and the financial system arising from the use of mobile money accounts, a question which has not been thoroughly addressed in the literature. Although financial inclusion via mobile money accounts is increasing, the outreach to particular disadvantaged and poor groups is still limited. However, remittances and G2P payments might develop into game changers for financial inclusion of poor and vulnerable households. Many countries from Sub-Saharan Africa are outperformers in terms of use of mobile money accounts in comparison to developing countries in other regions. Strikingly, the empirical evidence suggests that the regulatory landscape was of strategic importance to unleash the developmental potential of mobile money networks and the crowding-in of formerly unbanked households. Regulation on consumer protection particularly is of strategic relevance for the lasting acceptance and smooth operation of mobile money services and sharing the benefits with disadvantaged and poor households. A lack of effective and convincing consumer safeguards in place could diminish the trust in mobile money services and subsequently their acceptance and use. As mobile money services involve similar risks as traditional banking services, similar rules should apply. In addition, there are risks arising from the particular technology for mobile money account holders and institutions of the financial sector, including DFS providers. To these risks belong hysteresis effects to the disadvantage of poor households due to the use of alternative data and biased algorithms as well as displacement effects in local traditional and digital financial services due to BigTech.
    Keywords: Mobile money, financial inclusion, regulation, consumer protection, digital financial services, Big Data, Sub-Saharan Africa
    JEL: D18 G18 G23 G51 G59
    Date: 2022
  35. By: Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge; Hakan Yilmazkuday
    Abstract: This paper examines the global drivers of inflation in 55 countries over the 1970–2022 period. We estimate a Factor-Augmented Vector Autoregression model for each country and assess the importance of several global (demand, supply, and oil price) and domestic shocks. We report three main results. First, global shocks have explained about 26 percent of inflation variation in a typical economy. Oil price shocks accounted for only about 4 percent of inflation variation, but they had a statistically significant impact on inflation in three quarters of countries. Second, global shocks have become more important in driving inflation variation over time. The share of inflation variance caused by oil price shocks increased from 4 percent prior to 2000 to roughly 9 percent over the 2001–2022 period. They also accounted for some of the steep runup in inflation between mid-2021 and mid-2022. Finally, oil price shocks tended to contribute significantly more to inflation variation in advanced economies; countries with stronger global trade and financial linkages; commodity importers; net energy importers; countries without inflation-targeting regimes; and countries with pegged exchange rate regimes. Our headline results are robust to a wide range of exercises—including alternative measures of global factors and oil prices—and aggregation of countries.
    Keywords: Inflation, oil prices, global shock, domestic shock, FAVAR, exchange rates
    JEL: E31 E32 Q43
    Date: 2023–01
  36. By: Gennady Shkliarevsky
    Abstract: The subject of this study is inflation, a problem that has plagued America and the world over the last several decades. Despite a rich trove of scholarly studies and a wide range of tools developed to deal with inflation, we are nowhere near a solution of this problem. We are now in the middle of the inflation that threatens to become a stagflation or even a full recession; and we have no idea what to prevent this outcome. This investigation explores the real source of inflation. Tracing the problem of inflation to production, it finds that inflation is not a phenomenon intrinsic to economy; rather, it is a result of inefficiencies and waste in our economy. The investigation leads to a conclusion that the solution of the problem of inflation is in achieving full efficiency in production. Our economic production is a result of the evolution that is propelled by the process of creation. In order to end economic inefficiencies, we should model our economic practice on the process that preceded production and has led to its emergence. In addition, the study will outline ways in which our economic theory and practice must be changed to achieve full efficiency of our production. Finally, the study provides a critical overview of the current theories of inflation and remedies that are proposed to deal with it.
    Date: 2023–01
  37. By: Giovanardi, Francesco; Kaldorf, Matthias; Radke, Lucas; Wicknig, Florian
    Abstract: We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral. The collateral premium associated to a relaxation in collateral policy induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by modest preferential treatment, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal emission taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.
    Keywords: Green Investment, Collateral Framework, Environmental Policy
    JEL: E44 E58 E63 Q58
    Date: 2022
  38. By: Garth Baughman; Francesca Carapella; Jacob Gerszten; David C. Mills
    Abstract: Stablecoins have garnered much attention as a key part of the emerging decentralized finance (or "DeFi") ecosystem, and as a potential way to pay for goods and services. Stablecoins facilitate trades on crypto exchanges, serve as the underlying asset for many crypto loans, and allow market participants to avoid inefficiencies stemming from converting back to fiat currency for crypto trades.
    Date: 2022–12–17
  39. By: Willem THORBECKE
    Abstract: The U.S. real effective exchange rate is at its highest level since 1985. In that year, the U.S. and its trading partners coordinated a depreciation of the dollar and the U.S. agreed to reduce its budget deficit. This paper reports that a dollar depreciation today would still improve U.S. trade imbalances with East Asia and the world. East Asian countries would also benefit from a dollar depreciation because it would lower the local currency costs of imported oil, commodities, and food and reduce imported inflation. The U.S. and East Asia should consider engineering a coordinated dollar depreciation and the U.S. should again reduce its budget deficit.
    Date: 2022–12
  40. By: De Koning, Kees
    Abstract: In the U.K., like in other countries, households have usually two main savings objectives: Buying a home and saving for a pension. Both are long term commitments. When the Bank of England increases its base rates, households are often forced to limit ordinary expenses in order to give priority to serving the two savings objectives. Their is another solution: using existing savings levels in home equity. The Bank of England could create a funding scheme "QE Home Equity" which could help households to overcome the cost of living crisis and thereby maintain economic growth.
    Keywords: Fund flows from households into savings for pensions and home equity. Bank of England support.
    JEL: E2 E21 E24 E3 E31 E4 E42 E44 E5
    Date: 2023–01–03
  41. By: Hiroatsu Tanaka
    Abstract: I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. The model generates term premia that are on average positive with sizable countercyclical variation that arises endogenously. Importantly, demand shocks, in addition to supply shocks, play a key role in the dynamics of term premia. This is in sharp contrast to existing DSGE term structure models with perfect information, which tend to rely on large supply shocks to generate timevariation in yields and term premia. With imperfect information, a shock to productivity is a supply shock, while a shock to signals about productivity that do not lead to actual changes in productivity acts as a demand shock. Nevertheless, an increase in economic activity generates more information about productivity, regardless of which type of shock it arises from. Moreover, a decrease in economic uncertainty leads to a decline in term premia as longer-term bonds are risky on average. This feature helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as being an important driver of business cycles over the last few decades.
    Keywords: Term Premium; Term Structure of Interest Rates; Yield Curve; DSGE Model; Imperfect Information; Learning
    JEL: D83 E12 E32 E43 E44 E52 G12
    Date: 2022–12

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