nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒02‒27
39 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. Central Bank Digital Currencies and Banking: Literature Review and New Questions By James Chapman; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Francisco Rivadeneyra; Yu Zhu
  3. Price and Prejudice: A Note on the Return of Inflation and Ideology By MatÍas Vernengo; Esteban Ramon Perez Caldentey
  4. Measuring the effects of bank remuneration rules: evidence from the UK By Sakalauskaite, Ieva; Harris, Qun
  5. On (Current) Monetary Tightening and Inflation By Stefan Schiman-Vukan
  6. Lumpy Investment, Fluctuations in Volatility and Monetary Policy By Min Fang
  7. Leverage and Time-Varying Effects of Monetary Policy on the Stock Market By Severin Bernhard; Philip Vermeulen
  8. Estimating the impact of quality adjustment on consumer price inflation By Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
  9. Assessing the pass-through of energy prices to inflation in the euro area By Francesco Corsello; Alex Tagliabracci
  10. Real and nominal effects of monetary shocks under time-varying disagreement By Esady, Vania
  11. Introducing the Bank of Canada’s Market Participants Survey By Annick Demers; Tamara Gomes; Stephane Gignac
  12. Inflation targeting strategy and its credibility By Carlos Esteban Posada
  13. Central Bank Independence and Inflation in Latin America—Through the Lens of History By Mr. Luis Ignacio Jácome; Samuel Pienknagura
  14. Determinants of Inflation in Iran and Policies to Curb It By H. Elif Ture; Ali Reza Khazaei
  16. The real effects of financial disruptions in a monetary economy By Miroslav Gabrovski; Athanasios Geromichalos; Lucas Herrenbrueck; Ioannis Kospentaris; Sukjoon Lee
  17. Analysing the rising oil price shock driven by Russia-Ukrainian tensions - effect on inflationary pressure in South Africa By Dr Jan Roan Neethling
  18. On the marginal utility of fiat money: insurmountable circularity or not? By Reiss, Michael
  19. Elastic Cash By Anup Rao
  20. The shine beneath: foreign exchange intervention in resource-rich economies By Ortiz, Marco; Herrera, Gerardo; Perez, Fernando
  21. The Fear Economy: A Theory of Output, Interest, and Safe Assets By Ruchir Agarwal
  22. Four mistakes in the use of measures of expected inflation By Ricardo Reis
  23. Digital Divide: Empirical Study of CIUS 2020 By Joann Jasiak; Peter MacKenzie; Purevdorj Tuvaandorj
  24. Exchange Rate Uncertainty and Connectedness of Inflation By Sadettin Haluk Citci; Hüseyin Kaya
  25. Connected Lending of Last Resort By Mitchener, Kris James; Monnet, Eric
  26. U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data By Davide Furceri; Ms. Elif C Arbatli Saxegaard; Jeanne Verrier; Melih Firat
  27. Understanding the Global Drivers of Inflation: How Important are Oil Prices? By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge; Hakan Yilmazkuday
  28. From the 1931 sterling devaluation to the breakdown of Bretton Woods: Robert Triffin’s analysis of international monetary crises By Ivo Maes; Ilaria Pasotti
  29. Understanding Monetary Policy:The Real Sector and Welfare By Marcella Lucchetta
  30. Optimal monetary policy with the risk-taking channel By Abbate, Angela; Thaler, Dominik
  31. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  32. From Bazooka to Backstop: The Political Economy of Standing Swap Facilities By Lea Steininger; Mathis L. Richtmann
  33. Information acquisition ahead of monetary policy announcements By Ehrmann, Michael; Hubert, Paul
  34. Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19 By Juan Yepez; Weijia Yao; Anamika Sen
  35. Monetary Policy and Home Buying Inequality By Daniel R. Ringo
  36. Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring By Yoosoon Chang; Ana Maria Herrera; Elena Pesavento
  37. The highs and the lows: Bank failures in Sweden through inflation and deflation, 1914-1926 By Kenny, Sean; Ögren, Anders; Zhao, Liang
  38. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  39. Soft or strong: the art of monetary tightening By Christophe Blot; Jérôme Creel

  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: James Chapman; Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Francisco Rivadeneyra; Yu Zhu
    Abstract: We review the nascent but fast-growing literature on central bank digital currencies (CBDCs), focusing on their potential impacts on private banks. We evaluate these impacts in three areas of traditional banking: payments, lending and liquidity and maturity transformation. For each area, we discuss the lessons learned and identify gaps in the research yet to be fully explored. We also take a broader look at CBDCs and highlight two promising directions for future research. One is to study CBDCs through the lens of industrial organization, exploring issues such as platform competition and business models. The second is the crypto space and its new developments such as stablecoins and decentralized finance.
    Keywords: Central bank research; Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E50 E58 G00 L00
    Date: 2023–02
  3. By: MatÍas Vernengo; Esteban Ramon Perez Caldentey
    Abstract: The current debate on the causes of inflation is dominated by a particular view of what caused the inflationary acceleration in the 1970s, the so-called Great Inflation. In this view inflation is always and everywhere a demand phenomenon and requires contractionary monetary policy to be kept under control. The alternative view put forward by many heterodox authors emphasize what might be termed the oligopolistic view of inflation. In this paper we trace the limitations of both views for the center and the periphery.
    Keywords: Center-periphery, conflict inflation, corporate power, excess demand, supply-side shocks
    JEL: E12 E31 E52 O11
    Date: 2023–02
  4. By: Sakalauskaite, Ieva (Bank of England); Harris, Qun (Bank of England)
    Abstract: In this paper, we study whether and how some of the remuneration rules introduced after the Global Financial Crisis affected bankers’ compensation using a unique regulatory dataset on remuneration in six major UK banks during 2014–19. We find that for bankers most affected by limits on their bonus to fixed pay ratios (the bonus cap), total pay growth did not decrease, but compensation shifted from bonuses to fixed remuneration. We also find some evidence which could indicate that requiring bankers’ bonuses to be deferred for longer periods was correlated with increases in total compensation and a lower proportion of bonuses being deferred.
    Keywords: Remuneration regulation; bonus cap; deferral; bank regulation
    JEL: G21 G28 G38 J33 L51
    Date: 2022–12–19
  5. By: Stefan Schiman-Vukan
    Abstract: In response to rising inflation, monetary policy in many countries around the world has recently been tightened, often sharply. This Research Brief shows that central banks have reacted with remarkable similarity, and that, contrary to what current policy rates might suggest, tightening in the USA and the euro area has so far been of roughly the same magnitude. It is also shown that the disinflationary effects of monetary tightening are not yet clearly evident. This is true both for the world's major currencies as well as for European currencies. The report then draws on new empirical evidence which shows that the ECB's interest rate policy from 1999 to 2019 had the desired effect on inflation, but that this effect unfolded only gradually. Thus, the price-dampening effects of the current tightening cycle have yet to materialise. The more monetary policy is tightened now, the more disinflation will be amplified as non-monetary price shocks unwind. It therefore seems appropriate to wait for the effects of the monetary policy measures taken so far before tightening further.
    Date: 2023–02–07
  6. By: Min Fang (Department of Economics, University of Florida)
    Abstract: I argue that monetary policy is less effective at stimulating investment during periods of elevated volatility in firm-level productivity. Empirically, I document that high volatility weakens investment responses to monetary stimulus. I then develop a heterogeneous firm New Keynesian model with lumpy investment to interpret these findings. In the model, non-convex capital adjustment costs create a sizable extensive margin of investment which is more sensitive to changes in both the interest rate and volatility than the intensive margin. When volatility is high, firms tend to stay inactive at the extensive margin, so monetary stimulus motivates less investment at the extensive margin. I find that the quantitative implications of the model are primarily shaped by the specifications of the capital adjustment costs. Unlike much of the prior literature, I use the dynamic moments of investment to identify this key model element. Based on this parameterization, high volatility reduces the effectiveness of monetary stimulus for investment by 30%. This reduction is about half of what I find in the data. Therefore, the effect of monetary policy depends on both the lumpy nature of firm-level investment and fluctuations in volatility.
    JEL: E52 E32 E22
    Date: 2021–06
  7. By: Severin Bernhard; Philip Vermeulen
    Abstract: Using high-frequency identification, we investigate leverage of the firm and economy-wide leverage as determinants of the sensitivity of a firm's stock price to monetary policy announcements. We show that the effect of economy-wide leverage is substantially larger than the effect of the firm's own leverage. It is sufficient for the response of a firm's stock price to strengthen that other firms in the economy become more leveraged. We further show that economy-wide leverage fluctuations explain the time-varying effects of monetary policy on stock prices. Our results are robust controlling for a variety of common business cycle variables and household leverage.
    Keywords: Monetary policy, stock returns, leverage
    JEL: E44 E52 G14
    Date: 2023–01
  8. By: Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
    Abstract: How much does quality adjustment matter in measuring consumer price inflation? To address this question, we use different sources of micro and macro price data for Germany and the euro area. For Germany, we find that quality adjustment applies to a large range of goods and services but, on average, price adjustments due to quality changes reduce headline inflation only by 0.06 percentage points, which is balanced out by an increase due to quantity adjustment (e.g. a smaller package size) of the same amount. For the euro area, we assess the impact of heterogeneous quality adjustment methods by deriving the distribution of member states’ cumulative inflation rates for typical quality-adjusted products. Our macro-based estimate makes up to ± 0.2 percentage points for headline HICP inflation and ranges between± 0.1 and 0.3 percentage points for core inflation, when controlling for income differentials between member states. [...] JEL Classification: E31, C43
    Keywords: inflation differentials, inflation measurement, micro price data, quality adjustment
    Date: 2023–02
  9. By: Francesco Corsello (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper focuses on the developments of energy prices since mid-2021 and assesses their impact on euro-area headline inflation, also considering the indirect transmission through the core and food components. We find that, while the contribution of energy inflation to core and food inflation is generally low in normal times, it has been significant in the recent period, as a consequence of the exceptional increase in energy prices. In the first nine months of 2022, energy inflation accounted for more than 60 per cent, on average, of headline inflation in the euro area, either directly or indirectly. The same result holds qualitatively true for the four largest countries in the euro area, although with some quantitative differences. These findings provide relevant indications for setting the normalization path of monetary policy in the euro area. Given the prevailing role of energy prices – an exogenous supply factor that can hardly be affected directly by policy rate increases – in driving inflation, the appropriate speed of adjustment largely depends on the assessment of the risks of second-round effects and of a de-anchoring of long-term inflation expectations.
    Keywords: energy price shocks, inflation dynamics, pass-through
    JEL: C11 E31 E32 E52
    Date: 2023–02
  10. By: Esady, Vania (Bank of England)
    Abstract: How do varying degrees of information frictions affect the transmission mechanism of monetary policy? Using non‑linear methods, I empirically find that during heightened disagreement, monetary policy has a smaller effect on inflation, yet more influence over output. As a proxy for information frictions, I use real GDP nowcast disagreement across professional forecasters. Significant nowcast disagreement indicates when it is difficult to observe the current economic state, or a period of high information rigidities. I develop a tractable theoretical model that shows rationally inattentive price‑setters produce this result. Improved central bank communication that reduces disagreement among economic agents can mitigate output losses when implementing disinflationary monetary policies.
    Keywords: Time-varying disagreement; monetary policy; state-dependent local projections; rational inattention
    JEL: D83 E32 E52 E58
    Date: 2022–12–16
  11. By: Annick Demers; Tamara Gomes; Stephane Gignac
    Abstract: The Market Participants Survey (MPS) gathers financial market participants’ expectations for key macroeconomic and financial variables and for monetary policy. This staff analytical note describes the MPS’s objectives and main features, its process and design, and how Bank of Canada staff use the results.
    Keywords: Financial markets; Monetary policy and uncertainty; Recent economic and financial developments
    JEL: C8 C83 E4 E44 E5 E52 E58 G1 G12 G14
    Date: 2023–01
  12. By: Carlos Esteban Posada
    Abstract: The money supply is endogenous if the monetary policy strategy is the so called Inflation and Interest Rate Targeting, IRT. With that and perfect credibility, the theory of the price level and inflation only needs the Fisher equation, but it interprets causality in a new sense: if the monetary authority raises the policy rate, it will raise the inflation target, and vice versa, given the natural interest rate. If credibility is not perfect or if expectations are not completely rational, the theory needs something more. Here I present a model corresponding to this theory that includes both the steady state case and the recovery dynamics after a supply shock, with and without policy reactions to such a shock. But, under the finite horizon assumption for IRT, at some future point in time the money supply must become exogenous. This creates the incentive for agents to examine, as of today, statistics on monetary aggregates and form their forecasts of money supply growth and inflation rates. Additionally, inflation models of the small open economy allow us to deduce that the IRT in this case is much more powerful than otherwise, and for the same degree of credibility. But things are not necessarily easier for the monetary authority: it must monitor not only internal indicators, but also external inflation and its determinants, and it must, in certain circumstances, make more intense adjustments to the interest rate.
    Date: 2023–01
  13. By: Mr. Luis Ignacio Jácome; Samuel Pienknagura
    Abstract: We study the link between central bank independence and inflation by providing narrative and empiricial evidence based on Latin America’s experience over the past 100 years. We present a novel historical dataset of central bank independence for 17 Latin American countries and recount the rocky journey traveled by Latin America to achieve central bank independence and price stability. After their creation as independent institutions, central bank independence was eroded in the 1930s at the time of the Great Depression and following the abandonement of the gold exchange standard. Then, by the 1940s, central banks turned into de facto development banks under the aegis of governments, sawing the seeds for high inflation. It took the high inflation episodes of the 1970s and 1980s and the associated major decline in real income, and growing social discontent, to grant central banks political and operational independence to focus on fighting inflation starting in the 1990s. The empirical evidence confirms the strong negative association between central bank independence and inflation and finds that improvements in independence result in a steady decline in inflation. It also shows that high levels of central bank independence are associated with reductions in the likelihood of high inflation episodes, especially when accompanied by reductions in central bank financing to the central government.
    Keywords: Central Bank Independence; Inflation; Latin America; inflation episode; independence result; CBI index; gold exchange; finance government expenditure; inflation distribution; executive branch; fiscal dominance; country level; inflation expectation; term of office; credit to the government; inflation inertia; Latin American country; Central bank autonomy; Central bank legislation; Bank credit; Central bank organization; Central America; South America
    Date: 2022–09–16
  14. By: H. Elif Ture; Ali Reza Khazaei
    Abstract: High and volatile inflation has been an endemic economic and social issue in Iran that has contributed to rising poverty and social tensions. For policymakers to effectively address the inflation problem, it is critical to understand its causes. This paper seeks to contribute to this endeavor by applying a vector error-correction model to study the short- and long-term determinants of inflation in Iran over the past two decades and identify policy options to curb it. Using quarterly data spanning 2004-2021, it finds that money growth drives inflation only in the long term, while currency depreciation, fiscal deficits, and sanctions (proxied by oil exports) drive inflation both in the short- and the long term. In the absence of a removal of US trade and financial sanctions that could significantly boost the rial, budget deficits will have to be adjusted to contain inflation, albeit gradually to avoid hindering the recovery. Over the medium term, strengthening the inflation targeting framework could help improve monetary transmission and contain inflation durably.
    Keywords: Inflation; Iran; sanctions; inflation problem; growth drives inflation; inflation in Iran; predicted inflation; determinants of inflation; Oil exports; Nominal effective exchange rate; Oil prices; Government debt management; Global
    Date: 2022–09–09
  15. By: Skufi, Lorena; Papavangjeli, Meri
    Abstract: Inflation in Albania dropped below the central bank’s target of 3% in 2012 and has fluctuated below target until end-2021. In this article we investigate the evolution of inflation risks in Albania and its main drivers. We use quantile regressions to estimate the three-month-ahead density forecast of inflation, derived from a Phillips curve for a small open economy. This methodology provides a measure to quantify the uncertainty surrounding the main estimation. The in-sample results reveal significant time variation in the shape of the distribution of inflation and considerable nonlinearities in the effects of the explanatory variables, beyond the volatility. On average the inflation distribution results skewed on the positive side. We find that inflation react more to cyclical conditions and exchange rate movements in the right tail of the distribution.
    Keywords: inflation, quantile regression, changing dynamics
    JEL: E31 E37 E52 E58
    Date: 2022
  16. By: Miroslav Gabrovski (University of Hawaii); Athanasios Geromichalos (University of California, Davis); Lucas Herrenbrueck (Simon Fraser University); Ioannis Kospentaris (Virginia Commonwealth University); Sukjoon Lee (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 modelÕs ability to evaluate the real effects of financial shocks, 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
  17. By: Dr Jan Roan Neethling (Faculty of Economic and Management Sciences, Northwest University, South Africa Author-2-Name: Abigail Stiglingh-Van Wyk Author-2-Workplace-Name: Faculty of Economic and Management Sciences, Northwest University, South Africa Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: " Objective - The aim of this paper is to examine the relationship between the CPI, the brent crude oil price, and the PPI for final manufactured goods as well as the Rand/Dollar exchange rate during the past year. The study used South Africa as a proxy for developed countries. The objective is, therefore, to evaluate the effects of the increase in commodity prices on inflation and other macroeconomic variables. Methodology - The study utilised a quantitative methodological approach through the assessment of an econometric model that employed monthly data from January 2017 to May 2022. The paper utilized variables such as CPI, brent crude oil prices, PPI for final manufactured goods as well as the Rand/Dollar exchange rate. Findings - Short- and long-run relationships were established between the variables using the vector error correction model (VECM) and the Johansen co-integration equation methods. The long-run conclusions showed that high brent crude oil prices, high sunflower oil, a depreciating exchange rate and increasingly high PPI levels will lead to an increase in the CPI (Inflation). The results also indicated that oil prices still influence the basic prices of goods and services since all things need to be transported. Novelty - The results of the study showed that a perpetual international and national macro-economic environment is crucial to prevent inflationary pressures and price shocks, while volatile exchange rates unsteady PPI's and significantly high oil and commodity prices causes cost-push inflation. Policy certainty and political stability is important to keep inflation stable and economic growth positive, which could lead to a more self-sufficient economy which are is reliant on political instability as an obstacle for positive future economic growth. Type of Paper - Empirical"
    Keywords: Russian-Ukrainian conflict, economic growth, Brent crude oil prices, PPI, CPI, exchange rates, sunflower oil.
    JEL: E31 E37 E60 E63
    Date: 2022–12–31
  18. By: Reiss, Michael
    Abstract: The question of how a pure fiat currency is enforced and comes to have a non-zero value has been much debated (Selgin, 1994). What is less often addressed is, in the case where the enforcement is taken for granted and we ask what value (in terms of goods and services) the currency will end up taking. Establishing a decentralised mechanism for price formation has proven a challenge for economists: "Since no decentralized out-of-equilibrium adjustment mechanism has been discovered, we currently have no acceptable dynamical model of the Walrasian system." (Gintis, 2006) In his paper, Gintis put forward a model for price discovery based on the evolution of the model's agents, i.e. \poorly performing agents dying and being replaced by copies of the well performing agents." It seems improbable that this mechanism is the driving force behind price discovery in the real world. This paper proposes a more realistic mechanism and presents results from a corresponding agent based model.
    Keywords: Price discovery, Walrasian system, Agent based model
    JEL: E37 E47
    Date: 2023
  19. By: Anup Rao
    Abstract: Elastic Cash is a new decentralized mechanism for regulating the money supply. The mechanism operates by modifying the supply so that an interest rate determined by a public market is kept approximately fixed. It can be incorporated into the conventional monetary system to improve the elasticity of the US Dollar, and it can be used to design new elastic cryptocurrencies that remain decentralized.
    Date: 2023–01
  20. By: Ortiz, Marco; Herrera, Gerardo; Perez, Fernando
    Abstract: We propose a dynamic general equilibrium model to study the optimal reaction to terms of trade shocks when international financial markets are imperfect and the composition of capital flows affects the exchange rate determination. These elements allow us to showcase the interactions between commodity prices and international financial market inefficiencies. Positive commodity price shocks will generate a real over-appreciation of the currency and an inefficiently large shift of factors between the tradable and non-tradable sectors. We study the welfare implications of foreign exchange intervention through optimal simple rules and find support for leaning-against-the-wind foreign exchange intervention. Our setup, allows us to rationalize the reserve accumulation episodes commonly observed during periods of high commodity prices in resource-rich economies.
    Keywords: Open economy macroeconomics; Foreign exchange intervention; Terms of trade
    JEL: D58 E32 F31 F41 G15 O24
    Date: 2022–10–28
  21. By: Ruchir Agarwal
    Abstract: This paper presents a fear theory of the economy, based on the interplay between fear of rare disasters and the interest rate on safe assets. To do this, I study the macroeconomic consequences of government-administered interest rates in the neoclassical real business cycle model. When the government has the power to fix the safe real interest rate, the gap between the `sticky real safe rate' and the `neutral rate' can generate far-reaching aggregate distortions. When fear exogenously rises, the demand for safe assets rise and the neutral rate falls. If the central bank does not lower the safe rate by the same amount, savings rise leading to a decline in consumption and aggregate demand. The same mechanism works in reverse, when fear falls. Quantitatively, I show that a single fear factor can simultaneously (i) generate cross-correlations in output, labor, consumption, and investment consistent with the postwar US economy; and (ii) generates variation in equity prices, bond prices, and a large risk premium in line with the asset pricing data. Six novel insights emerge from the model: (1) actively regulating the safe interest rate (in both directions) can mitigate the fluctuations generated by fear cycles; (2) recessions will be deeper and longer when central banks accept the zero lower bound and are unwilling to use negative rates; (3) a commitment to use negative rates in recessions—even if never implemented—raises both the short- and long-run real neutral rates, and moderates the business cycle; (4) counter-cyclical fiscal policy can act as disaster insurance and be expansionary by reducing fear; (5) quantitative easing can be narrowly effective only when fear is high at the lower bound; and (6) when fear is high, especially at the lower bound, policies that boost productivity also help fight recessions.
    Keywords: fear; business cycles; interest; safe assets; fear economy; government-administered interest rates; fear theory; business cycle model; fear factor; Output gap; Consumption; Zero lower bound; Interest rate floor; Yield curve; Global
    Date: 2022–09–09
  22. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: With the profusion of measures of expected inflation (from market prices and from surveys of households, firms, and professionals) it is a mistake to focus on a single one while ignoring the others. This paper discusses four common arguments for a single focus, and finds each of them to be lacking. In the process, it isolates characteristics of different measures that models that combine them should take into account.
    Keywords: Phillips curve, anchoring, monetary policy, central banking
    JEL: E31 E52
    Date: 2023–01
  23. By: Joann Jasiak; Peter MacKenzie; Purevdorj Tuvaandorj
    Abstract: As Canada and other major countries investigate implementing ``digital money'' or Central Bank Digital Currencies (CBDC), important questions need to be answered relating to the effect of demographic and geographic factors on the population's digital literacy. This paper uses the Canadian Internet Use Survey (CIUS) 2020 and survey versions of Lasso inference methods to assess the digital divide in Canada and determine the relevant factors that influence it. We find that a significant divide in the use of digital technologies, e.g., online banking and virtual wallet, continues to exist across different demographic and geographic categories. We also create a digital divide score that measures the survey respondents' digital literacy and provide multiple correspondence analyses that further corroborate these findings.
    Date: 2023–01
  24. By: Sadettin Haluk Citci (Department of Economics, Gebze Technical University); Hüseyin Kaya (Department of Economics, Istanbul Medeniyet University)
    Abstract: In this study, we theoretically and empirically examine the connectedness of exchange rate uncertainty and inflation. In a small open economy setting with a flexible exchange rate and monopolistically competitive imported final goods sector, we show that price rigidities cause importers to carry exchange rate risk and they impose a premium for the risk they face by increasing consumer prices. This pricing behavior provides a channel between exchange rate uncertainty and overall price level. Then, we empirically analyze the impact of exchange rate uncertainty on inflation by using panel data from 149 countries over the period 19802017. The estimation results point that the uncertainty of the exchange rate has a significant and positive effect on inflation. Moreover, the degree of exchange rate pass-through and the effect of exchange rate uncertainty on inflation differ among country groups and their effects on inflation have decreased through time. We also show that the effect of exchange rate uncertainty on inflation is non-monotonic.
    Keywords: exchange rate uncertainty, inflation, pricing power, exchange rate passthrough
    JEL: E31 E52 F41
    Date: 2023–01–24
  25. By: Mitchener, Kris James (Santa Clara University CASBS, CAGE, CEPR, CESifo and NBER); Monnet, Eric (Paris School of Economics EHESS and CEPR)
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    Keywords: Lender of last resort, fiscal backing, central-bank solvency, central-bank design, banking crises, central bank independence, Banque de France, Great Depression JEL Classification: E44, E58, G01, G32, G33, G38, N14, N24
    Date: 2023
  26. By: Davide Furceri; Ms. Elif C Arbatli Saxegaard; Jeanne Verrier; Melih Firat
    Abstract: We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment.
    Keywords: U.S. monetary policy shocks; international spillovers; investment; firm heterogeneity.; shock spillover; balance sheet channel; spillover channel; trade channel; level data; Financial statements; Exchange rates; Spillovers; Exports; Exchange rate arrangements; Global
    Date: 2022–09–16
  27. By: Jongrim Ha (World Bank, Prospects Group); M. Ayhan Kose (World Bank, Prospects Group; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank, Prospects Group; CEPR; CAMA); Hakan Yilmazkuday (Department of Economics, Florida International University)
    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: 2023–02
  28. By: Ivo Maes (Chaire Robert Triffin, Université catholique de Louvain & ICHEC Brussels Management School); Ilaria Pasotti (Consultant at Archivio Storico Intesa Sanpaolo)
    Abstract: Robert Triffin (1911-1993) was one of the main protagonists in the international monetary debates in the postwar period. He became famous with his book Gold and the Dollar Crisis, published in 1960, in which he predicted the end of the Bretton Woods system. In his analysis there, Triffin was very much marked by the breakdown of the gold exchange standard in the early 1930s. In his view, the growth of foreign exchange reserves after World War Two repeated, but on a much larger scale, their similar expansion after the First World War. Triffin argued that the gold exchange standard had been a highly fragile construction as funds could move in and out due to changes in relative interest rates and/or changes in exchange rate expectations. The focus of this paper is on Triffin’s analysis of the sterling devaluation of 1931 throughout his writings, from his early articles on the 1935 devaluation of the Belgian franc to his writings after the breakdown of the Bretton Woods system. The aim is twofold: to provide an assessment of Triffin’s view of the interwar period and assess the significance of his analysis of the interwar period for his view on the Bretton Woods system.
    Keywords: : Robert Triffin, Bretton Woods system, gold exchange standard, pound sterling, Triffin dilemma
    JEL: A11 B22 B31 E30 E50 F02 F32
    Date: 2023–01
  29. By: Marcella Lucchetta (Department of Economics, University Of Venice CÃ Foscari)
    Abstract: This paper shows theoretically the linkages among monetary policy rate, the real sector demand for loans with supply shocks, aggregate risks, and social welfare. We prove that a) when the loans’ demand is elastic bank competition and the policy rate decrease risks and increase the amount of lending to firms b) these effects are reinforced as the number of banks in the banking market raises. We provide theoretical support to the empirical findings that a competitive environment, or an elastic demand for investments, renders the monetary policy more effective and increases welfare (Aghion et al 2019), on the contrary, uncompetitive structures obtain opposite effects (Wang et all 2022). The policy implications are that the welfare maximizing policy rate can be lower it could be lower than set by the Central Bank when there is high inflation (Rogoff, 2017). c) As in this economic phase of perfect diversification difficulties because of aggregate risks, the policy rate is more effective in welfare increasing if the banking sector is competitive.
    Keywords: Monetary policy, bank competition, risk-taking and banking market structure, investment demand elasticity, aggregate risk and social welfare.
    JEL: G2 D4 D61
    Date: 2023
  30. By: Abbate, Angela; Thaler, Dominik
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7%lifetime consumption equivalent). JEL Classification: E44, E52
    Keywords: inertial policy rate, optimal monetary policy, risk-taking channel
    Date: 2023–02
  31. By: Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
    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
  32. By: Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Mathis L. Richtmann (Reuters & LSE)
    Abstract: The permanent international lender of last resort consists of a swap line network between six major central banks, centering around the US Federal Reserve. Arguably, this network is a solution to a long debated problem as it provides public emergency liquidity provision to the world's largest financial market, the Eurodollar market. Drawing on exclusive interviews with monetary technocrats as well as a textual analysis of Federal Open Market Committee meeting transcripts over the course of 14 years, we reconstruct how this facility came into being. Building on Kalyanpur (2017) and Braun (2015), we develop an interpretative framework of bricolage to set the formation into context: In times of crises, central bankers rely on retrospection, experimentation, and creative re-deployment to develop their tools. However, in non-crises times, those tools prevail which offer what we coin 'bureaucratic familiarity'.
    Keywords: Standing Swap Facilities, lender of last resort, International Monetary Policy, Central Bank Cooperation, Monetary Technocrats
    JEL: E52 E58 F5
    Date: 2023–02
  33. By: Ehrmann, Michael; Hubert, Paul
    Abstract: How do financial markets acquire information about upcoming monetary policy decisions, beyond their reaction to central bank signals? This paper hypothesises that sharing information among investors can improve expectations, especially in the presence of disagreement or uncertainty about the economy. To test this hypothesis, the paper studies monetary policy-related content on Twitter during the “quiet period” before European Central Bank announcements, when policymakers refrain from public statements related to monetary policy. Conditional on large disagreement about the economic outlook, higher Twitter traffic is associated with smaller monetary policy surprises, suggesting that exchanging private signals among investors can help improve expectations. JEL Classification: D83, E52, E58, G14
    Keywords: Central bank communication, information processing, market expectations, quiet period, Twitter
    Date: 2023–02
  34. By: Juan Yepez; Weijia Yao; Anamika Sen
    Abstract: This paper studies whether bank ownership influenced lending behavior during the COVID-19 shock. It finds that, similar to previous episodes of financial distress, foreign banks appear to have played a shock-transmitting role, as there was a sharp slowdown in lending by foreign banks’ affiliates relative to domestic banks. However, given the uniqueness of the COVID-19 shock and the impact of lockdowns on economic activity, foreign banks were found to lend at a higher rate than domestic banks once the stringency of mobility restrictions is accounted for, with their lending portfolio concentrated more in the corporate sector. Results also suggest that the difference in lending rates between foreign and domestic banks could be explained by the heterogeneous effects of policy measures in response to the pandemic. In jurisdictions with more stringent mobility restrictions, policy interventions actually encouraged higher lending by foreign banks. These findings suggest that foreign bank presence may have acted as a shock absorber in jurisdictions where economic activity was most affected by the pandemic.
    Keywords: Policy announcements; financial conditions; credit; ownership; capital; liquidity; COVID-19.; bank ownership; ownership data; bank behavior; bank characteristic; domestic bank; bank size; Foreign banks; COVID-19; Bank credit; Credit ratings; Global; Central America; Central and Eastern Europe
    Date: 2022–09–16
  35. By: Daniel R. Ringo
    Abstract: Does monetary policy influence who becomes a home owner? Home purchases by low- and moderate-income households may be particularly sensitive to mortgage interest rates, as these households’ budgets are tighter and they more frequently come up against binding payment-to-income ratio constraints in credit decisions. Exploiting the timing of high-frequency observations of mortgage applicants locking in their interest rates around monetary policy shocks, I find that a 1 percentage point policy-induced increase in mortgage rates lowers the presence of low-income households in the population of home buyers by 1 percentage point, and of low- and moderate-income households by 2 percentage points, immediately following the shock. Effects are substantially stronger among first-time home buyers, and persist for approximately one year.
    Keywords: Home ownership; Inequality; Monetary policy; Interest rates; Credit constraints
    JEL: G21 E43 E44 R21
    Date: 2023–01–20
  36. By: Yoosoon Chang (Indiana University); Ana Maria Herrera (University of Kentucky); Elena Pesavento (Emory University)
    Abstract: Using a novel approach to model regime switching with dynamic feedback and interactions, we extract latent mean and volatility factors in oil price changes. We illustrate how the volatility factor constitutes a useful measure of oil market risk (or oil price uncertainty) for policy makers and analysts as it captures uncertainty not reflected in other economic/financial uncertainty measures. Then, in the context of a VAR, we investigate the role of oil price uncertainty in driving inflation expectations and inflation anchoring. We show that shocks to the mean factor lead to higher expected inflation and inflation disagreement among professional forecasters and households. In contrast, shocks to the volatility factor act as aggregate demand shocks in that they result in lower expected inflation, yet they do increase disagreement about future inflation among professional forecasters and, especially, among households. We also provide econometric evidence suggesting the proposed endogenous volatility switching model can outperform other regime switching models.
    Keywords: oil price volatility, endogenous regime switching, expected inflation, inflation anchoring
    Date: 2023–02
  37. By: Kenny, Sean; Ögren, Anders; Zhao, Liang
    Abstract: This paper revisits the Swedish banking crisis (1919-26) that materialized as post war deflation replaced wartime inflation (1914-18). Inspired by Fisher's 'debt deflation theory', we employ survival analysis to 'predict' which banks would fail, given certain ex-ante bank characteristics. Our tests support the theory; maturity structures mattered most in a regime of falling prices, with vulnerable shorter-term customer loans and bank liabilities representing the most consistent cause of bank distress in the crisis. Similarly, stronger growth in i) leverage, ii) weaker collateral loans and iii) foreign borrowing during the boom were all associated with bank failure in post-war Sweden (1919-26).
    Keywords: banking crisis, survival analysis, early warning indicators, debt deflation, maturity mismatch, Sweden
    JEL: E58 G01 G21 G28 N24
    Date: 2023
  38. 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: 2023–02
  39. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: The rise of inflation has sparked tightening measures by the ECB. The paper discusses the causes of this rise and the factors that impinge on the effectiveness of ECB policy at curbing inflation. Drawing on own assessment of the respective trends in these factors, we recommend a careful approach to monetary policy. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 26 September 2022.
    Date: 2023–09

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