nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒04‒03
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation: Thruway of ECB's monetary policy By Seidl, Christian
  2. The macroeconomic effects of different CBDC regimes in an economy with a heterogeneous household sector By Magin, Jana Anjali; Neyer, Ulrike; Stempel, Daniel
  3. Understanding post-Covid inflation dynamics By Martín Harding; Jesper Lindé; Mathias Trabandt
  4. Did interest rate guidance in emerging markets work? By Julián Caballero; Blaise Gadanecz
  5. A Theory of Intrinsic Inflation Persistence By Takushi Kurozumi; Willem Van Zandweghe
  6. Disclosing Dissent in Monetary Policy Committees By Jan Filacek; Lucie Kokesova Matejkova
  7. Public debt and household inflation expectations By Francesco Grigoli; Damiano Sandri
  8. Global Supply Chain Disruptions: Challenges for Inflation and Monetary Policy in Sub-Saharan Africa By Marijn A. Bolhuis; Shushanik Hakobyan; Zo Andriantomanga
  9. Monetary Policy and Economic Growth in Developing Countries: A Literature Review By Marouane Daoui
  10. Inflation Targets and Policy Horizons By Graham Voss
  11. Wilhelm Lautenbach’s credit mechanics – a precursor to the current money supply debate By Decker, Frank; Goodhart, Charles A. E.
  12. Interest Rates and Inflation: Knives Out By Fix, Blair
  13. Geopolitical Risk and Inflation Spillovers across European and North American Economies By Elie Bouri; David Gabauer; Rangan Gupta; Harald Kinateder
  14. Drivers and spillover effects of inflation: the United States, the euro area, and the United Kingdom By Stephen G. Hall; George S. Tavlas; Yongli Wang
  15. Weighted Median Inflation Around the World: A Measure of Core Inflation By Laurence M. Ball; Carlos Carvalho; Christopher Evans; Mr. Luca A Ricci
  16. The origination and distribution of money market instruments: sterling bills of exchange during the first globalization By Accominotti, Olivier; Lucena-Piquero, Delio; Ugolini, Stefano
  17. Stock Market Responses to Monetary Policy Shocks: Universal Firm-Level Evidence By Samuel Federico Kaplan; Arin Kerim Peren Kaplan; Polyzos Efstathios Kaplan; Spagnolo Nicola Kaplan
  18. A broader perspective on the inflationary effects of energy price shocks By Kilian, Lutz; Zhou, Xiaoqing
  19. Oil Prices Uncertainty, Endogenous Regime Switching, and Inflation Anchoring By Yoosoon Chang; Ana María Herrera; Elena Pesavento
  20. Quantitative Tightening and Capital Flows to Emerging Markets By Otaviano Canuto
  21. Short and Variable Lags By Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Ortiz, A.; Ortiz, A.
  22. The Highs and the Lows: Bank failures in Sweden through inflation and deflation, 1914-1926 By Kenny, Seán; Ögren, Anders; Zhao, Liang
  23. The Global Financial Cycle and the Effects of Fed Unconventional Monetary Policies on Foreign Portfolio Flows in Colombia By Nathali Cardozo-Alvarado; David Castañeda-Arévalo; Fredy Gamboa-Estrada; Javier Miguelez-Márquez
  24. The Heterogeneous Impact of Inflation on Households' Balance Sheets By Mayorga Clodomiro Ferreira; Miguel Cardoso; José Miguel Leiva; Alvaro Ortiz
  25. Milton Friedman and the road to monetarism: a review essay By George S. Tavlas
  26. The more the merrier? Macroprudential instrument interactions and effective policy implementation By Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
  27. Financial fragilities and risk-taking of corporate bond funds in the aftermath of central bank policy interventions By Nicola Branzoli; Raffaele Gallo; Antonio Ilari; Dario Portioli
  28. The Key to Managing Inflation: Higher Wages By Fix, Blair
  29. Finding the Optimal Currency Composition of Foreign Exchange Reserves with a Quantum Computer By Martin Vesely
  30. Capital Controls and Free-Trade Agreements By Lloyd, S. P.; Marin, E. A.
  31. External debt, domestic debt and inflation in Nigeria: A multivariate granger-causality test By Aimola, Akingbade U; Odhiambo, Nicholas M
  32. Exchange Rate Pass-Through and Data Frequency: Firm-Level Evidence from Bangladesh By Md Deluair Hossen
  33. Macroprudential policy tightening, loan loss provisioning and income smoothing: Empirical evidence from European Economic Area banks By Malgorzata OLSZAK; Christophe J. GODLEWSKI; Sylwia ROSZKOWSKA; Dorota SKALA
  34. Smooth versus Harsh Regulatory Interventions and Policy Equivalence By Schilling, Linda
  35. Have inflation and monetary tightening changed the game? Long-run perspectives on the interest – growth difference on public debt By Freddy Heylen; Marthe Mareels; Christophe Van Langenhove
  36. Commodity prices and the US Dollar By Daniel Rees
  37. The impact of bank regulation on bank lending: A review of international literature By Thamae, Retselisitsoe I; Odhiambo, Nicholas M
  38. Is the effect of public debt on inflation symmetric or asymmetric? Evidence from the Gambia By Aimola, Akingbade U; Odhiambo, Nicholas M
  39. Non-bank Financial Intermediation and Capital Flows: Evidence from Emerging Market Economies By Horacio Aguirre; Rodrigo Pérez Ártica

  1. By: Seidl, Christian
    Abstract: Part of the present inflation is caused by the breakdown of globalization, in particular supply chains, part is caused by the Corona Pandemic, in particular lockdowns, part is caused by the Ukrainian War, part is caused by European sanctions, and part - and not the smallest one - is caused by the European Central Bank's printing money by hook or by crook in the past and in the presence. This paper attributes inflation decisively to the overwhelming money creation by the European Central Bank.
    Keywords: Inflation, Monetary Unions, Central Bank Policy, Money Supply, InterestRates, Financial Markets
    JEL: E31 E42 E43 E44 E51 E52 E58 E63 F34 F36 F38 F45
    Date: 2023
  2. By: Magin, Jana Anjali; Neyer, Ulrike; Stempel, Daniel
    Abstract: Many central banks discuss the introduction of a Central Bank Digital Currency (CBDC). Empirical evidence suggests that households may differ in their willingness to hold CBDC. Against this background, this paper investigates the macroeconomic effects of different CBDC regimes in a New Keynesian model with a heterogeneous household sector. We consider that a CBDC may facilitate transactions. In particular, households will face additional transaction costs if they do not hold their optimal mix of conventional forms of money and CBDC. We analyze the impact of four different CBDC regimes: (i) no CBDC, (ii) each household may hold an unlimited amount of CBDC, (iii) the central bank sets a maximum amount of CBDC each household is allowed to hold, (iv) the central bank uses the CBDC as a monetary policy instrument by adjusting the maximum amount of CBDC each household is allowed to hold. Generally, we find that the introduction of a CBDC increases economy-wide utility as it allows higher consumption. Moreover, the shock absorption capability increases in an economy with CBDC. This particularly applies to the case when the central bank uses the CBDC as a monetary policy instrument. By adjusting the maximum amount of CBDC, the central bank can stabilize prices more effectively after adverse shocks. However, this stabilization implies distributional effects between households.
    Keywords: Central bank digital currency, monetary policy, household heterogeneity, central banks, New Keynesian model
    JEL: E52 E42 E58 E41 E51
    Date: 2023
  3. By: Martín Harding; Jesper Lindé; Mathias Trabandt
    Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-COVID period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.
    Keywords: inflation dynamics, inflation risk, monetary policy, linearized model, nonlinear model, real rigidities.
    JEL: E30 E31 E32 E37 E44 E52
    Date: 2023–02
  4. By: Julián Caballero; Blaise Gadanecz
    Abstract: This paper studies the experience of emerging markets with explicit interest rate guidance during 2020-2021. Despite some heterogeneity, interest rate guidance generally provided additional monetary stimulus, as reflected in lower medium-termyields and lower termspreads. The magnitude of the reduction in 10-year yields ranged between five and twenty basis points, and these effects are found when the policy rate was at its historical minima. Outcome-based guidance appears to have had the largest effects. In the immediate aftermath of the guidance, we do not observe a systematic negative market reaction of the kind that would be associated with a loss of central bank credibility or with concerns about fiscal dominance, such as a de-anchoring of inflation expectations, currency depreciation pressures, or increased sovereign credit risk.
    Keywords: monetary policy; forward guidance; central bank communication; emerging markets
    JEL: E52 E58
    Date: 2023–03
  5. By: Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and Kimball (1995)-type aggregators of individual differentiated goods and labor in a model with staggered price- and wage-setting. Under nonzero trend inflation, the non-CES aggregator of goods and staggered price-setting give rise to a variable real marginal cost of goods aggregation, which becomes a driver of inflation. This marginal cost consists of an aggregate of the goods' relative prices, which depends on past inflation, thereby generating intrinsic inertia in inflation. Likewise, the non-CES aggregator of labor and staggered wage-setting lead to intrinsic inertia in wage inflation, which enhances the persistence of price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to monetary policy shocks. We also demonstrate that lower trend inflation reduces inflation persistence and that a credible disinflation leads to a gradual decline in inflation and a fall in output.
    Keywords: Trend inflation; Non-CES aggregator; Credible disinflation
    JEL: E31 E52
    Date: 2023–03–13
  6. By: Jan Filacek; Lucie Kokesova Matejkova
    Abstract: Dissenting opinions in monetary policy meetings are a common phenomenon and an integral part of committee decisions, but not every central bank discloses them to the same degree. This paper discusses the pros and cons of the various degrees of transparency of 14 central banks in disclosing differences of opinion among committee members. It focuses on the experience of the Swedish Riksbank and the Czech National Bank, both of which publish attributed minutes of their boards' monetary policy meetings. We argue that attributed minutes, which the Czech National Bank started to publish in February 2020, have provided market participants and the public with an opportunity to better understand the board members' individual opinions and behaviour. It can also be argued that attributed minutes have benefited the board members themselves, as they give them more room to present and explain their arguments.
    Keywords: Central bank communication, dissent, minutes, monetary policy committees, transparency
    JEL: D71 D83 E52 E58
    Date: 2022–12
  7. By: Francesco Grigoli; Damiano Sandri
    Abstract: We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.
    Keywords: public debt, inflation expectations, monetary finance, fiscal dominance
    JEL: E31 E52 E58
    Date: 2023–03
  8. By: Marijn A. Bolhuis; Shushanik Hakobyan; Zo Andriantomanga
    Abstract: The Covid-19 pandemic has led to a large disruption of global supply chains. This paper studies the implications of supply chain disruptions for inflation and monetary policy in sub-Saharan Africa. Increases in supply chain pressures have had a sizeable impact on headline, food, and tradable inflation for a panel of 29 sub-Saharan African countries from 2000 to 2022. Our findings suggest that central banks can stabilize inflation and output more efficiently by monitoring global supply chains and adjusting the monetary policy stance before the disruptions have fully passed through into all inflation components. The gains from monitoring supply chain disruptions are particularly large for open economies which tend to experience outsized second-round effects on the prices of non-tradable goods and services.
    Keywords: Inflation; global supply chains; sub-Saharan Africa; shipping costs; monetary policy; core inflation; food prices; oil price
    Date: 2023–02–24
  9. By: Marouane Daoui
    Abstract: This article conducts a literature review on the topic of monetary policy in developing countries and focuses on the effectiveness of monetary policy in promoting economic growth and the relationship between monetary policy and economic growth. The literature review finds that the activities of central banks in developing countries are often overlooked by economic models, but recent studies have shown that there are many factors that can affect the effectiveness of monetary policy in these countries. These factors include the profitability of central banks and monetary unions, the independence of central banks in their operations, and lags, rigidities, and disequilibrium analysis. The literature review also finds that studies on the topic have produced mixed results, with some studies finding that monetary policy has a limited or non-existent impact on economic growth and others finding that it plays a crucial role. The article aims to provide a comprehensive understanding of the current state of research in this field and to identify areas for future study.
    Date: 2023–03
  10. By: Graham Voss (Department of Economics, University of Victoria)
    Abstract: We use conditional forecasts from Canadian inflation over the inflation targeting period to estimate monetary policy horizons, defined as the period required for conditional forecasts of inflation to return to target. The conditional forecasts generate a set of policy horizons that tend to have median lengths longer than the typical two-year horizon identified by central banks. Further, the distribution of these forecasts is not unimodal, with policy horizons massed on shorter lengths of about one year and longer lengths of three or more years. The variation in the policy horizons, which are conditional on current economic conditions, is evidence of a form of flexibility in monetary policy. We also provide evidence of some instability in the underlying inflation models and associated policy horizons.
    Date: 2022–12–20
  11. By: Decker, Frank; Goodhart, Charles A. E.
    Abstract: This article assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behaviour of non-banks and non-borrowing bank creditors. With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be re-established.
    Keywords: bank credit creation; money supply theory; credit and balances mechanics; borrowers' collateral
    JEL: E40 E41 E50 E51
    Date: 2022–03–04
  12. By: Fix, Blair
    Abstract: If you’re just tuning in, I’ve spent the last few months debunking some common misconceptions about inflation: Is inflation a uniform increase in prices? No. Inflation is wildly differential. Is inflation driven by an ‘over-heated’ economy? No. Inflation tends to come with economic stagnation. Do higher interest rates reduce inflation? No. Higher interest rates are associated with higher inflation. As expected, the last claim put mainstream economists into war mode. You see, the belief that interest rates down-regulate inflation has come to be sacred. So by scrutinizing this idea with evidence, I was effectively torching an effigy of the pope. (Novelist Cory Doctorow helped fan the flames by writing an incendiary essay about my research.) And so I spent a ‘fun’ week on Twitter being bombarded by econo-scorn. Now back to science. When I published ‘A Test of Monetary Faith’, I had more evidence in the pipelines — evidence that debunks the idea that interest rates down-regulate inflation. In this post, I’ll wade through the data. The take-home message is clear: when we look at the World Bank database, there is no evidence that higher interest rates down-regulate inflation. If anything, the evidence suggests that rate hikes make inflation worse. But before we get to the data, I’ll respond to some of the more cogent criticisms that economist hurled my way.
    Keywords: interest rates, inflation, monetarism, monetary policy
    JEL: E31 E43 F4 E52
    Date: 2023
  13. By: Elie Bouri (School of Business, Lebanese American University, Beirut, Lebanon); David Gabauer (Software Competence Center Hagenberg, Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Harald Kinateder (School of Business, Economics and Information Systems, University of Passau, Germany)
    Abstract: In this paper, we examine the spillover across the monthly inflation rates (measured by the CPI) covering the USA, Canada, UK, Germany, France, Netherlands, Belgium, Italy, Spain, Portugal, and Greece. Using data covering the period from May 1963 to November 2022 within a time-varying spillover approach, we show that the total spillover index across the inflation rates spiked during the war in Ukraine period, exceeding its previous peak shown during the 1970s energy crisis. Notably, we apply a quantile-on-quantile regression and reveal that the total spillover index is positively associated with the level of global geopolitical risk (GPR) index. Levels of GPR are positively influencing high levels of the inflation spillover index, whereas the GPR Acts index is positively associated with all levels of inflation spillover index. Given that rising levels of inflation are posing risks to the financial system and economic growth, these findings should matter to the central banks and policymakers in advanced economies. They suggest that the policy response should go beyond conventional monetary tools by considering the political actions necessary to solve the Russia-Ukraine war and ease the global geopolitical tensions.
    Keywords: Inflation spillovers; geopolitical risk; TVP-VAR; dynamic connectedness
    JEL: C32 C5 G15
    Date: 2023–03
  14. By: Stephen G. Hall (Leicester University, Bank of Greece, and Pretoria University); George S. Tavlas (Bank of Greece and the Hoover Institution, Stanford University); Yongli Wang (Birmingham University)
    Abstract: We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply two methods to calculate shocks -- the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions
    Keywords: Inflation; VAR analysis; impulse responses; spatial spillovers
    JEL: C52 C53
    Date: 2022–12
  15. By: Laurence M. Ball; Carlos Carvalho; Christopher Evans; Mr. Luca A Ricci
    Abstract: The standard measure of core or underlying inflation is the inflation rate excluding food and energy prices. This paper constructs an alternative measure, the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggretion of the CPI over 1990-2021, and compares the properties of this measure to those of standard core. For quarterly data, we find that the weighted median is less volatile than standard core, more closely related to economic slack, and more closely related to headline inflation over the next year. The weighted median also has a drawback: in most countries, it has a lower average level than headline inflation. We therefore also consider a measure of core inflation that eliminates this bias, which is based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.
    Keywords: core inflation; median inflation; Phillips curve
    Date: 2023–02–24
  16. By: Accominotti, Olivier; Lucena-Piquero, Delio; Ugolini, Stefano
    Abstract: This article presents a detailed analysis of how liquid money market instruments—sterling bills of exchange—were produced during the first globalization. We rely on a unique dataset that reports systematic information on all 23, 493 bills re‐discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of these bills. Our analysis reveals the truly global nature of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organization of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.
    Keywords: money market; industrial organisation; information asymmetry; bill of exchange
    JEL: E42 G23 L14 N20
    Date: 2021–11–01
  17. By: Samuel Federico Kaplan; Arin Kerim Peren Kaplan; Polyzos Efstathios Kaplan; Spagnolo Nicola Kaplan
    Abstract: Using a universal firm-level data set for the U.S., we investigate the stock price responses to unanticipated and unconventional monetary policy shocks. Our results show that indebtedness/ leverage is more important than size or age in explaining the cross-firm variation in responses to monetary policy. We also show that the magnitude of the indebtedness is important while the debt structure is not, and our results are driven by the third quartile of firms in terms of their leverage. Finally, our results are robust to the use of different measures of monetary policy shocks.
    JEL: E5 G1 C4
    Date: 2022–11
  18. By: Kilian, Lutz; Zhou, Xiaoqing
    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, core, oil, gasoline, diesel, jet fuel, natural gas, coal, electricity
    JEL: E31 E52 Q43
    Date: 2023
  19. By: Yoosoon Chang; Ana María Herrera; Elena Pesavento
    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.
    Date: 2023–02
  20. By: Otaviano Canuto
    Abstract: In its May 15th meeting, the Federal Open Market Committee of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the biggest increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year. In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening". How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?
    Date: 2022–06
  21. By: Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Ortiz, A.; Ortiz, A.
    Abstract: We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies.
    Keywords: Economic Activity, Event-study, High-frequency data, Local projections, Monetary Policy
    JEL: E31 E43 E44 E52 E58
    Date: 2023–03–02
  22. By: Kenny, Seán (Department of Economic History, Lund University); Ögren, Anders (Department of Economic History, Uppsala University); Zhao, Liang (Department of Economic History, Lund University)
    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: 2023–01–17
  23. By: Nathali Cardozo-Alvarado; David Castañeda-Arévalo; Fredy Gamboa-Estrada; Javier Miguelez-Márquez
    Abstract: Assessing the effects of U.S. monetary policies on portfolio flows is important for policymakers as they could pose risks to the effectiveness of domestic monetary policy. This paper analyzes the effects of the Global Financial Cycle (GFC) and Federal Reserve (Fed) unconventional monetary policy announcements on foreign portfolio investment flows in Colombia between 2010 and 2018. Using an ordinary least squares model with corrected serial correlation, we find that Fed unconventional monetary policy announcements affected portfolio flows in Colombia, especially those related to Tapering, Operation Twist and Forward Guidance. These announcements reinforced the effects of the GFC during the period analyzed. The results by type of flow indicate that public bonds flows are more sensitive to Fed announcements than private bond and equity flows. **** RESUMEN: Evaluar los efectos de la política monetaria de EE. UU. en los flujos de portafolio es importante para los hacedores de política, ya que podría afectar la eficacia de la política monetaria local. Este artículo analiza los efectos del Ciclo Financiero Global (CFG) y los anuncios de política monetaria no convencional de la Reserva Federal (Fed) sobre los flujos de inversión extranjera de portafolio en Colombia entre 2010 y 2018. Usando un modelo de mínimos cuadrados ordinarios con correlación serial corregida, encontramos que los anuncios de política monetaria no convencional de la Fed afectaron los flujos de portafolio en Colombia, especialmente los relacionados con Tapering, Operación Twist y Forward Guidance. Estos anuncios reforzaron los efectos del CFG durante el período analizado. Los resultados por tipo de flujo indican que los flujos de deuda soberana son más sensibles a los anuncios de la Fed que los flujos de bonos y acciones privados.
    Keywords: Foreign investors, Federal Reserve, global financial cycle, unconventional monetary policies, Colombian portfolio flows, Inversionistas extranjeros, Reserva Federal, ciclo financiero global, política monetaria no convencional, flujos de portafolio en Colombia
    JEL: C22 E52 F3
    Date: 2023–03
  24. By: Mayorga Clodomiro Ferreira; Miguel Cardoso; José Miguel Leiva; Alvaro Ortiz
    Abstract: We identify and study three key channels that shape how inflation affects wealth inequality: (i) the traditional Fisher channel through which inflation redistributes from lenders to borrowers; (ii) a nominal labour income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels for Spain in 2021 using both public surveys and a novel proprietary bank dataset that includes detailed information on clients’ assets and liabilities, credit and debit card payments, bills and labour related income. Results show that the Fisher and labour income channels are one order of magnitude larger than relative consumption. Middle-aged individuals were roughly unaffected by inflation while older ones suffered the most its consequences.
    JEL: E31 E21 D31
    Date: 2022–11
  25. By: George S. Tavlas (Bank of Greece)
    Abstract: The objective of Ed Nelson’s two-volume book, Milton Friedman and Economic Debate in the United States, 1932-1972, is to provide an account of Friedman’s views in major monetary-policy debates during the period identified in the book’s title. Nelson tells the story of the development of Friedman’s monetary framework, from its Keynesian origins in the early-1940s, to its gradual absorption of monetary factors in the late-1940s, and, finally, to its monetarist character of the 1950s and after, through the windows of a selection debates that engaged Friedman. At the same time, Nelson places Friedman’s monetary contributions within the context of the modern macroeconomics literature. In this essay, I consider doctrinal issues related to Nelson’s account of the development of Friedman’s monetarist framework.
    Keywords: Milton Friedman; monetarism; Keynesian economics; New Keynesian model
    JEL: B31 E51 E52
    Date: 2022–11
  26. By: Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
    Abstract: Macroprudential policies since the global financial crisis have been central to safeguarding financial stability. Despite the increasing use of multiple policy instruments, a detailed understanding of interactions among them is still needed to assess how instrument combinations can enhance the effectiveness of macroprudential action. This paper proposes a conceptual framework for informing the choice of combinations of macroprudential instruments, looking at the role of micro and macroeconomic transmission channels, interactions across policy objectives, the importance of country specificities and linkages with other macroeconomic or supervisory policies. It also reviews considerations related to circumvention, leakages, time of activation and communication of policies, all of which may affect the desirability of different combinations of macroprudential instruments. The paper also discusses a possible operational use of combinations of macroprudential instruments to address selected risks and provides a rich analysis of instrument interactions within the categories of borrower-based and, respectively, capital-based measures. The paper concludes that the combinations of capital and borrower-based instruments ensures a comprehensive coverage of different systemic risks and entail important synergies. JEL Classification: G21, G28
    Keywords: banks, financial stability, macroprudential policy
    Date: 2023–03
  27. By: Nicola Branzoli (Bank of Italy); Raffaele Gallo (Bank of Italy); Antonio Ilari (Bank of Italy); Dario Portioli (Bank of Italy)
    Abstract: This paper provides evidence that, by restoring market functioning, central banks' pandemic-related asset purchase programmes lowered payoff complementarities among investors in corporate bond funds, reinforcing asset managers' willingness to hold riskier assets to increase funds' returns. Controlling for potentially confounding factors, we show that funds more exposed to these interventions – i.e. those which immediately prior to the pandemic crisis held a high share of securities eligible for inclusion in purchase programmes – took on more credit and liquidity risks than less exposed ones. Risk-taking was stronger when more exposed funds under-performed their peers or held less liquid assets. We discuss the implications for the design of policy interventions in the aftermath of market stress and the regulation of the investment fund sector.
    Keywords: corporate bond funds, market stress, asset purchase programmes, risk-taking
    JEL: E50 G01 G11 G23
    Date: 2023–03
  28. By: Fix, Blair
    Abstract: For the last few months, I’ve been diving into the economics of inflation. In this post, I’m excited to review some forgotten history. Our journey starts with a basic question: what is the key policy tool for managing the rate of inflation? According to mainstream economics, the key tool is the rate of interest. Hike this rate, economists argue, and you will cool an overheated economy, solving the problem of inflation. As you probably know, I don’t think much of this idea. (Criticism here and here.) And so I’ve been looking for alternative theories of inflation management. After months spent in the library stacks, I’m happy to report that I’ve discovered some lost theory. During the mid-20th century, it seems that while most economists were jumping on the interest-rate bandwagon, a few researchers went in the opposite direction. They proposed that inflation could be treated with a dose of wage hikes. Needless to say, this alternative theory remains virtually unknown. And on its face, it seems absurd. But as I’ll show, the wage-hike approach is strongly supported by evidence. Using standard economic tools, I find that rapid wage growth tends to be followed by a drop in inflation. The message? Policy makers should reverse course. Instead of greeting inflation with a dose of interest-rate hikes, governments should reach for the wage-rate lever. Hike wages as fast as possible, and you will surely reduce inflation.
    Keywords: inflation, wages
    JEL: E31 J3
    Date: 2023
  29. By: Martin Vesely
    Abstract: Portfolio optimization is an inseparable part of strategic asset allocation at the Czech National Bank. Quantum computing is a new technology offering algorithms for that problem. The capabilities and limitations of quantum computers with regard to portfolio optimization should therefore be investigated. In this paper, we focus on applications of quantum algorithms to dynamic portfolio optimization based on the Markowitz model. In particular, we compare algorithms for universal gate-based quantum computers (the QAOA, the VQE and Grover adaptive search), single-purpose quantum annealers, the classical exact branch and bound solver and classical heuristic algorithms (simulated annealing and genetic optimization). To run the quantum algorithms we use the IBM Quantum\textsuperscript{TM} gate-based quantum computer. We also employ the quantum annealer offered by D-Wave. We demonstrate portfolio optimization on finding the optimal currency composition of the CNB's FX reserves. A secondary goal of the paper is to provide staff of central banks and other financial market regulators with literature on quantum optimization algorithms, because financial firms are active in finding possible applications of quantum computing.
    Date: 2023–03
  30. By: Lloyd, S. P.; Marin, E. A.
    Abstract: How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country planner acting unilaterally can achieve higher domestic welfare by departing from free trade in addition to levying capital controls. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter-and intra-temporally are aligned-e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports-optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic interactions, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars.
    Keywords: Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy
    JEL: F13 F32 F33 F38
    Date: 2023–02–14
  31. By: Aimola, Akingbade U; Odhiambo, Nicholas M
    Abstract: Most recent studies have established a significant link between public debt and inflation in developed and developing countries. However, limited studies dealt with the direction of causality between these variables. Since external public debt relief in 2005, the Nigerian government has pursued public debt management strategy aimed at restoring macroeconomic stability. Yet, inflation rates remain high compared to the Central Bank's single-digit policy target range of 6% to 9%. It is unclear whether the high inflation rate in the economy is related to the renewed contributions of external and domestic public debt in the funding of the budget deficit, and if it is, what could be the direction of the causality? Therefore, this study examines the dynamic Granger-causality between public external debt and inflation and public domestic debt and inflation in Nigeria using annual data for the period between 1986 and 2019. The study introduces interest rate and economic growth as intermittent variables alongside key variables to create a multivariate Granger-causality model to account for omission-of-variable bias. Using the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration and the error correction model (ECM)-based Granger-causality test, the results show a distinct unidirectional causal flow from inflation to external debt. The findings further show a feedback relationship between domestic debt and inflation in the short run, but causality runs from domestic debt to inflation in the long run. The findings of this study have important policy implications.
    Keywords: domestic debt; external debt; inflation; Nigeria; Granger-causality
    Date: 2022–12
  32. By: Md Deluair Hossen
    Abstract: The vast literature on exchange rate fluctuations estimates the exchange rate pass-through (ERPT). Most ERPT studies consider annually aggregated data for developed or large developing countries for estimating ERPT. These estimates vary widely depending on the type of country, data coverage, and frequency. However, the ERPT estimation using firm-level high-frequency export data of a small developing country is rare. In this paper, I estimate the pricing to market and the exchange rate pass-through at a monthly, quarterly, and annual level of data frequency to deal with aggregation bias. Furthermore, I investigate how delivery time-based factors such as frequent shipments and faster transport affect a firm`s pricing-to-market behavior. Using transaction-level export data of Bangladesh from 2005 to 2013 and the Poisson Pseudo Maximum Likelihood (PPML) estimation method, I find very small pricing to the markets to the exchange rates in the exporter's price. As pass-through shows how the exporters respond to macro shocks, for Bangladesh, this low export price response to the exchange rate changes indicates that currency devaluation might not have a significant effect on the exporter. The minimal price response and high pass-through contrast with the literature on incomplete pass-through at the annual level. By considering the characteristics of the firms, products, and destinations, I investigate the heterogeneity of the pass-through. The findings remain consistent with several robustness checks.
    Date: 2023–03
  33. By: Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Sylwia ROSZKOWSKA (Uniwersytet Warszawski); Dorota SKALA (WNEiZ, University of Szczecin)
    Abstract: In this study, we provide evidence of the effects of macroprudential policy tightening on loan loss provisions (LLP) and income smoothing of European Economic Area (EEA) banks. Overall, we find that tightening actions of macroprudential policy reduce LLP, but the results depend on the period of analysis: the effect is positive in the pre-Basel III period (1996-2010), and it turns negative after 2010. Policy tightening increases (respectively decreases) income smoothing in the pre-Basel period (respectively Basel III period). We also find that our results depend on the category of macroprudential instruments. In particular, tools relating to LLP policy and taxes are associated with increased LLP and income smoothing in the pre-Basel III period. This outcome changes direction under the Basel III regulatory regime. We also show that the heterogeneity of the effects of the policy on LLP and income smoothing depends on the tool, on the type of the policy change (an activation of a new tool versus a recalibration of existing tools) and on market significance of a bank.
    Keywords: Loan loss provisions, macroprudential policy actions, income smoothing, policy tightening, EEA
    JEL: E44 E58 G21 G28
    Date: 2023
  34. By: Schilling, Linda
    Abstract: Policy makers have developed different forms of policy intervention for stopping, or preventing runs on financial firms. This paper provides a general framework to characterize the types of policy intervention that indeed lower the run-propensity of investors versus those that cause adverse investor behavior, which increases the run-propensity. I employ a general global game to analyze and compare a large set of regulatory policies. I show that common policies such as bailouts, Emergency Liquidity Assistance, and withdrawal fees either exhibit features that lower firm stability ex ante, or have offsetting features rendering the policy ineffective.
    Keywords: financial regulation, bank runs, global games, policy effectiveness, bank resolution, withdrawal fees, emergency liquidity assistance, lender of last resort policies, money market mutual fund gates, suspension of convertibility
    JEL: D81 D82 E61 G21 G28 G33 G38
    Date: 2023–03–08
  35. By: Freddy Heylen; Marthe Mareels; Christophe Van Langenhove (-)
    Abstract: The difference between the implicit nominal interest rate and the growth rate of nominal GDP is a key determinant of the dynamics and the sustainability of public debt. This paper studies the determinants of r - g in a panel of 17 OECD countries since the early 1980s. Whereas the focus of existing empirical studies is mainly on fiscal, monetary and financial drivers of the interest–growth difference, our approach and contribution are to highlight in particular the impact of real long-run drivers, such as technical progress, employment growth, demographic change, and income inequality. This allows us to derive empirically based projections for r - g beyond the next five or ten years. Our projections suggest that the major shocks that hit many economies in 2022-2023 have not fundamentally changed the game. Our baseline expectation is that the structural drivers of the interest rate and growth will keep r - g below zero for the next two decades in most European countries that we study. For the US, however, our baseline projection of r - g is positive.
    Keywords: public debt, r - g, fiscal sustainability, demographic change, inequality
    JEL: E43 E62 H63 H68 J11
    Date: 2023–02
  36. By: Daniel Rees
    Abstract: In the aftermath of the Covid pandemic rising commodity prices went hand-in-hand with a strengthening US dollar. This was a sharp contrast to the usual relationship between commodity prices and the dollar. This paper presents evidence that post-Covid correlation patterns could become more common in the future. This conclusion rests on two observations. First, the US dollar exhibits a close and stable relationship with the US terms of trade. Second, the United States' shift from being a net oil importer to a net oil exporter means that higher commodity prices now tend to raise the US terms of trade, rather than lowering them. Changes in the relationship between commodity prices and the US dollar will have implications for commodity exporters and importers alike.
    Keywords: time series models, foreign exchange, open economy macroeconomics
    JEL: C22 F31 F41
    Date: 2023–03
  37. By: Thamae, Retselisitsoe I; Odhiambo, Nicholas M
    Abstract: This paper reviews the theoretical and empirical literature on the impact of bank regulation on bank lending. It also structures the empirical evidence according to the impact of various bank regulatory measures on bank lending. The surveyed theoretical literature generally indicates that the impact of bank regulation on lending could be asymmetric, depending on the trade-off between the costs and benefits of bank regulation. The evidence from the empirical studies also shows that the impact of bank regulatory measures on lending is ambiguous. Although many studies found the impact to be negative, some established that it was positive while others found it to be insignificant or inconclusive. However, most empirical studies only assumed first-round effects using static and/or dynamic models, whereas the ones incorporating second-round effects using general equilibrium models were limited. Therefore, this systematic review of the literature indicates that policy recommendations regarding the appropriateness and efficacy of bank regulatory measures in influencing bank lending cannot be implemented uniformly across different regions or countries.
    Keywords: Bank regulation, bank lending, bank regulatory measures, bank credit
    Date: 2022–12
  38. By: Aimola, Akingbade U; Odhiambo, Nicholas M
    Abstract: Several studies have identified the impact of total public debt on inflation. These studies are based on the assumption of a symmetric relationship between these variables. However, because different governments react to changes in total public debt (positive or negative) differently, this study employed the nonlinear autoregressive distributed lag (NARDL) technique to investigate the nature of the link between total public debt and inflation in the Gambia for the period from 1978 to 2019. The results indicate an asymmetric relationship between total public debt and inflation, irrespective of whether the analysis was conducted in the short run or long run. The coefficient of a positive shock in total public debt is statistically significant in the short run and in the long run, suggesting the inflationary effect of positive variation in total public debt in the Gambia. On the other hand, the effect of a negative shock is not statistically significant in the short run or in the long run. These findings reinforce the need for government to approach increase in public debt with caution to minimise volatility in inflation. Overall, this study provides a fresh insight into the optimal estimation technique for testing the public debt?inflation nexus through a nonlinear approach.
    Keywords: nonlinear autoregressive distributed lag (NARDL); public debt; inflation; the Gambia
    Date: 2022–12
  39. By: Horacio Aguirre; Rodrigo Pérez Ártica
    Abstract: We look at the interplay of non-bank financial intermediation (NBFI) and capital flows in emerging market economies (EMEs). We examine whether gross capital flows to twenty-four EMEs, including seven Latin American economies, are related to foreign bond holdings of non-bank financial intermediaries, over and above local and global factors. We estimate panel data models that account for cross-country correlation, using quarterly data from the dataset by Arslanalp and Tsuda (2014) in the 2004-2021 period. We discriminate flows by sectors (total, government, corporate and banking), include time and country fixed effects, and employ several definitions of our variable of interest: as a categorical variable, capturing countries with the largest share of foreign nonbank investors, or as a direct measure of their participation. We also carry out event studies around the occurrence of the global financial crisis and the covid-19 crisis. Preliminary results suggest that: NBFI are “pipe” factors driving flows (in addition to “push” and “pull” ones), whose impact changes over time and depending on the type of flow; in some cases, foreign NBFI magnifies the impact of global factors on capital inflows, while they weaken the pull of local factors; and NBFI amplified outflows in the market turmoil of 2020.
    JEL: C23 E44 F32 G23
    Date: 2022–11

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