nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒04‒10
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Dynamics in the Western Balkans By Gohar Minasyan; Magali Pinat; Ezgi O. Ozturk; Mengxue Wang; Zeju Zhu
  2. Climate change, financial intermediation, and monetary policy By Eisei Ohtaki
  3. Monetary Policy and Inequality: A Two-way Relation By Luzie Thiel
  4. The Heterogeneous Effects of U.S. Monetary Policy on Non-Bank Finance By Miss Anke Weber; Andrew Hodge
  5. The Last Mile of Monetary Policy: Inattention, Reminders, and the Refinancing Channel By Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
  6. Inflation and Asset Returns By Anna Cieslak; Carolin Pflueger
  7. Optimal Monetary and Macroprudential Policies under Fire-Sale Externalities By Flora Lutz
  8. Active driver or passive victim: On the role of international monetary policy transmission By Camehl, Annika; von Schweinitz, Gregor
  9. Know your (holding) limits: CBDC, financial stability and central bank reliance By Barbara Meller; Oscar Soons
  10. A Major Shock Makes Prices More Flexible and May Result in a Burst of Inflation or Deflation By Robert E. Hall
  11. Beyond the Headline: How Personal Inflation Exposure Shapes Households’ Financial Choices By Christoph Basten; Merike Kukk; Jan Toczynski
  12. International Sanctions and Dollar Dominance By Javier Bianchi; César Sosa-Padilla
  13. Inflation expectations in the wake of the war in Ukraine By Afunts, Geghetsik; Cato, Misina; Schmidt, Tobias
  14. Euro area consumers' payment behaviour and banking digitalisation By Justus Meyer; Federica Teppa
  15. Households' expectations and regional COVID-19 dynamics By Cato, Misina; Schmidt, Tobias
  16. Derivative margin calls: a new driver of MMF flows By Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
  17. Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy By Miguel Cantillo
  18. Do Capital Controls Limit Inflow Surges? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  19. The 2020-2022 Inflation Surge Across Europe: A Phillips-Curve-Based Dissection By Petia Topalova; Chikako Baba; Mr. Romain A Duval; Ting Lan
  20. Crypto Assets and CBDCs in Latin America and the Caribbean: Opportunities and Risks By Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
  21. The Implementation of Central Bank Policy in China: The Roles of Commercial Bank Ownership and CEO Faction Membership By Michel Antoine Habib; Yushi Peng; Yanjie Wang; Zexi Wang
  22. The Foreign Exchange Policy of China – Is the Country a “Currency Manipulator”? By Zhelev, Paskal
  23. Reduced Impact and Implications of KRW Exchange Rates on Exports By Lee, Sora; Kang, Sungwoo
  24. Unbearable Costs: When Is Inflation Impeding Job Creation? Evidence from Sub-Saharan Africa By Rasmané Ouedraogo; Ibrahima Camara; Mr. Amadou N Sy
  25. Cryptocurrencies Are Becoming Part of the World Global Financial Market By Marcin W\k{a}torek; Jaros{\l}aw Kwapie\'n; Stanis{\l}aw Dro\.zd\.z
  26. Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? By Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru

  1. By: Gohar Minasyan; Magali Pinat; Ezgi O. Ozturk; Mengxue Wang; Zeju Zhu
    Abstract: After trailing Euro Area inflation closely in the recent past, inflation in the Western Balkans has accelerated faster since early 2022 on the back of the shocks to global commodity prices, strong recovery from the pandemic, and lingering supply bottlenecks. This paper employs two complementary empirical approaches of an augmented Phillips curve and structural VAR, adapting them to the data availability and country specificities of the Western Balkans, to analyze the inflation dynamics in the region. It finds that international food prices affect not only headline but also core inflation as well as inflation expectations. Further, inflation in the Western Balkans is not just determined by foreign shocks, and domestic factors, aggregate demand shocks in particular, have a significant impact on inflation. These findings imply a possible role for policies to temporarily limit an immediate and complete pass-through of international to domestic food prices while also stressing the importance of an appropriate domestic macroeconomic policy mix to keep inflation expectations anchored and safeguard credibility in the face of high inflation persistence.
    Keywords: Inflation; Western Balkans; international food price shocks; commodity price shocks; Phillips curve; panel data; structural VAR; inflation expectation; inflation dynamics; inflations determinant; inflation development; inflation in the Western Balkans; Food prices; Energy prices; Nominal effective exchange rate; Global; Europe
    Date: 2023–03–03
  2. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study aims to explore implications of climate change in an economy with financial intermediaries. For this aim, this study develops an overlapping generations model of the environment and financial intermediation. In that model, reactions of financial intermediaries, the monetary steady state, and optimal monetary policy against climate change are studied. Especially, it is demonstrated that the level of the optimal money growth rate depends on how "green" agents are.
    Date: 2023–03
  3. By: Luzie Thiel (University of Kassel)
    Abstract: We study the transmission of monetary policy in the presence of heterogeneous households and examine the implications when the share of constrained households is a function of monetary policy. We build an analytically tractable heterogeneous agent New Keynesian model (THANK) with an endogenous share of hand-to-mouth households. The transmission of monetary policy on aggregate demand is amplified in this setup by inequality between saver and hand-to-mouth households. The amplification effect depends on monopolistic rents (enhancing) and redistribution (mitigating). Unlike most THANK models, we refrain from the assumption of a full insurance steady state.
    Keywords: Monetary Policy, Heterogeneous Households, Inequality, Aggregate Demand, Complementarity, Financial Conditions, Imperfect Insurance
    JEL: E12 E21 E44 E52 E58
    Date: 2023
  4. By: Miss Anke Weber; Andrew Hodge
    Abstract: Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.
    Keywords: Non-bank market-based finance; mutual fund performance and flows; monetary policy shocks
    Date: 2023–03–10
  5. By: Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
    Abstract: Under-refinancing limits the transmission of accommodative monetary policy to the household sector and costs mortgage holders in many countries a significant fraction of income annually. We test whether targeted communication can reduce the attention frictions that inhibit transmission by partnering with a large bank to analyze a field experiment testing messages sent to 12, 000 Irish households. While we find only small effects of disclosure design improvements, a reminder letter increases refinancing by 76%, from 8.9% to 15.7%. To interpret this reminder effect, we extend and estimate a mixture model of inattentive financial decision-making to allow for disclosure treatment effects on attention. We find that reminders increase the likelihood mortgage holders are attentive by over 60%, from 24% to 39%. A conservative back-of-the-envelope cost-effectiveness calculation implies that the average reminder letter generated €42 of mortgagor consumption (€605 per refinancing household). Our results illustrate that targeted central bank communication such as refinancing reminders could have a larger effect on refinancing than a standard policy rate cut. Reminders could further strengthen the refinancing channel and stimulate local consumption even when policy rates are at the zero-lower bound or set in a monetary union.
    JEL: D83 E58 G21 G28 G51
    Date: 2023–03
  6. By: Anna Cieslak; Carolin Pflueger
    Abstract: The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using in a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to supply shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.
    JEL: E0 E31 G1 G12
    Date: 2023–03
  7. By: Flora Lutz
    Abstract: I provide an integrated analysis of monetary and macroprudential policies in a model economy featuring a financial friction and a nominal wage rigidity. In this set-up, the monetary authority faces a trade-off between macroeconomic and financial stability: While expansionary counter-cyclical monetary policy prevents involuntary unemployment, it also amplifies an inefficient reallocation of capital across sectors. The main contribution of the analysis is threefold: First it highlights a novel channel through which monetary policy can impact financial stability. Second, it shows that, by itself, monetary policy can significantly mitigate the wedge between the constrained efficient and the competitive allocation. Third, regardless of the availability of macroprudential tools, stabilizing demand is usually not optimal for monetary policy.
    Keywords: Monetary Policy; Macroprudential Policy; Fire-sales; Pecuniary Externalities; Unemployment
    Date: 2023–03–10
  8. By: Camehl, Annika; von Schweinitz, Gregor
    Abstract: We provide new insights into determinants of international interest rates spillovers across seven advanced economies. To disentangle and quantify their respective importance, we identify country-specific structural monetary policy, demand, and supply equations in a Bayesian structural panel vector autoregressive model. We formulate prior beliefs on magnitudes and signs of contemporaneous structural coefficients (i.e., (semi-)elasticities), based on a standard theoretical multi-country open economy model from the literature. Our findings show that interest rate spillovers occur via an aggregated demand channel. Unexpected monetary tightening causes modest declines in most foreign interest rates, while demand and supply shocks result in increased foreign interest rates. Our results support that central banks respond to changes in the domestic macroeconomic environment induced by domestic or foreign shocks rather than directly reacting to foreign shocks. Spillovers are quantitatively stronger for shocks originating in economically large areas with strong trade linkages.
    Keywords: informative priors, panel vector autoregressions, spillovers, structural vector autoregressions
    JEL: C11 C30 E52 F42
    Date: 2023
  9. By: Barbara Meller; Oscar Soons
    Abstract: How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, minimizing their costs subject to bank-specific and system-wide reserve and collateral availability and different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2, 000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. For the case of the digital euro, Bindseil (2020) and Bindseil and Panetta (2020) have suggested a €3, 000 digital euro holding limit per person. We illustrate that with such a limit, even in extremely pessimistic scenarios, the impact on banks’ liquidity risk and funding structure and on the Eurosystem balance sheet would have been contained.
    Keywords: digital currency; financial intermediation; financial stability; liquidity risk; euro area
    JEL: E52 E58 G21
    Date: 2023–03
  10. By: Robert E. Hall
    Abstract: The US and other advanced countries suffered bursts of severe inflation in 2021 and the first half of 2022, followed by declines of inflation later in 2022, in some countries. In times of high volatility of price determinants—cost and productivity—inflation can jump upward and fall downward at high speed, contrary to the uniformly sticky behavior associated with traditional Phillips curves. This paper establishes that sectors with standard New Keynesian price stickiness are vulnerable to rapid transitions from stickiness to flexibility, as sellers elect to reset their prices and abandon anchoring. The paper shows that the cross-industry volatility of price determinants grew substantially in the inflation episode accompanying the pandemic. Volatility remained elevated even in late 2022. The logic of the New Keynesian model of the Phillips curve links inflation to volatility, because a larger fraction of sellers are pushed out of their regions of inaction when volatility is elevated. The New Keynesian Phillips curve becomes much steeper in volatile times.
    JEL: E31 E42 E44
    Date: 2023–03
  11. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)); Merike Kukk (Tallinn University of Technology (TUT) - Department of Finance and Economics); Jan Toczynski (University of Zurich and Swiss Finance Institute)
    Abstract: Using unique account-level data from a high inflation period in Estonia in 2005-11 and interactive fixed effect estimation, we find individual consumption to depend on personal beyond national headline inflation. Foreign shocks to selected goods’ inflation affect disproportionately households with greater consumption basket weights on these goods and make them increase consumption by an extra 1.3% per percentage point of higher inflation exposure, financed with more net borrowing. Indebted households respond stronger, consistent with a debt depreciation effect. Resulting extra demand for goods with higher inflation can reinforce inflation, letting future inflation depend on its current distribution.
    Keywords: inflation heterogeneity, personal inflation exposure, consumption, borrowing, interactive fixed effects, intertemporal choices.
    JEL: D14 D15 E21 E31
    Date: 2023–02
  12. By: Javier Bianchi; César Sosa-Padilla
    Abstract: This paper investigates the implications of international financial sanctions for the reserve currency status of the US dollar. We propose a simple model of a reserve currency, demonstrate how the anticipation of financial sanctions can weaken the dollar’s status, and evaluate the welfare implications.
    JEL: E42 F31 F32 F34 F41 P48
    Date: 2023–03
  13. By: Afunts, Geghetsik; Cato, Misina; Schmidt, Tobias
    Abstract: Russia's invasion of Ukraine is posing a range of new challenges to the global economy, including affecting the inflation expectations of individuals. In this paper, we aim to quantify the effect of the invasion on short- and long-term inflation expectations of individuals in Germany. We use microdata from the Bundesbank Online Panel - Households (BOP-HH), for the period from February 15th to March 29th, 2022. Treating the unanticipated start of the war in Ukraine on the 24 th of February 2022 as a natural experiment, we find that both short- and long-term inflation expectations increased as an immediate result of the invasion. Long-term inflation expectations increased by around 0.4 percentage points, while the impact on short-term inflation expectations was more than twice as large - around one percentage point. Looking into the possible mechanisms of this increase, we suggest that it can be partially attributed to individuals' fears of soaring energy prices and increasing pessimism about economic trends in general. Our results indicate that large economic shocks can have a substantial impact on both short and long-term inflation expectations.
    Keywords: inflation expectations, Russian invasion of Ukraine, survey, natural experiment
    JEL: D84 D12 E3
    Date: 2023
  14. By: Justus Meyer; Federica Teppa
    Abstract: This paper contributes to understanding consumers' payment behaviour and digitalisation in personal finances. We study individuals' payment choices, the availability of cashless payments in everyday situations and the use of banking apps in the euro area. Using the European Central Bank (ECB) Consumer Expectations Survey (CES), we find that most people prefer to use only one payment instrument, mostly cash, partly due to supply constraints in accepting non-cash payments. We also find substantial cross-country heterogeneity. Our results highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools in managing personal finances. While mobile banking is already popular among euro area consumers, using smart (device) payment methods remains very limited.
    Keywords: Consumer Payment Behaviour; Banking Digitalisation; Consumer Expectations Survey (CES)
    JEL: D12 C13 O33
    Date: 2023–03
  15. By: Cato, Misina; Schmidt, Tobias
    Abstract: In this paper we analyze how consumers in Germany updated expectations about inflation in response to the COVID-19 outbreak. We use a fixed effects model to estimate the effect of regional exposure to COVID-19 cases, the stringency of restriction measures and local unemployment rates on inflation expectations. We find that consumers who were locally more exposed to COVID-19 cases report higher inflation expectations. The relationship between the virus spread and inflation expectations is amplified if respondents live in high unemployment regions. We explain our findings through an information and experience channel. Information about the pandemic and its effects played an important role during the first wave of the pandemic. However, when attention to information diminishes, experience matters most. We document that negative personal (how severely the respondent was affected financially) and local experience (how severely the district was affected by COVID-19) are associated with higher inflation expectations and more pessimistic views with regard to unemployment, interest rates, house prices and the intention to spend. Our findings show that it is important to consider regional disparities when examining individual belief formation.
    Keywords: COVID-19 pandemic, inflationexpectations, inflation disagreement, perceived severity of COVID-19, personal experience
    JEL: E31 D14 D83 D84 G41 G51
    Date: 2023
  16. By: Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
    Abstract: During the March 2020 market turmoil, euro area money-market funds (MMFs) expe-rienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs re-lated to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lip-per data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EUR-denominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an im-portant driver of the flows of EUR-denominated MMFs domiciled in euro area. JEL Classification: G13, G15, G23
    Keywords: big data, interconnectedness, liquidity risk, money market funds, non-bank financial intermediaries
    Date: 2023–03
  17. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.
    Keywords: Bank competition, transmission of monetary policy, Cournot competition, adverse selection in credit markets.
    Date: 2023–03
  18. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: With rising financial integration, the magnitude and swings in capital flows have increased in the past two decades, intensifying the policy debate on how best to deal with these flows. This paper assesses the use and effectiveness of capital controls in limiting inflow surges. Using a novel dataset on capital control changes across 40 advanced and emerging market and developing economies over 1995-2018, we find that the tightening of capital controls reduces the probability of future surges both at the aggregate and the asset flow levels. The results are robust to various definitions of surges and are stronger when controls are matched to the asset class they target. Finally, we also find significant multilateral spillovers from capital control actions, pointing towards the need for international cooperation in the use of these policies.
    Keywords: Capital controls; capital inflows; surges
    Date: 2023–03–10
  19. By: Petia Topalova; Chikako Baba; Mr. Romain A Duval; Ting Lan
    Abstract: In 2021-22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
    Keywords: inflation; Phillips curve; slack; external price; backward-looking; inflation surge; benchmark Phillips Curve estimation; inflation model; inflation dynamics; inflation development; Energy prices; Food prices; Inflation persistence; COVID-19; Europe; Global
    Date: 2023–02–10
  20. By: Ms. Sandra Marcelino; Weicheng Lian; Ms. Nan Geng; Mr. Yorbol Yakhshilikov; Mr. Takuji Komatsuzaki; Maximiliano Appendino; Olga Bespalova; Jean François Clevy; Justin Lesniak; Ms. Rina Bhattacharya; Mr. Mauricio Villafuerte
    Abstract: After providing a general overview of the nature, pros, and cons of crypto assets and CBDCs, this paper focuses on documenting their recent experience in LAC. The region records a high interest in unbacked crypto assets and stablecoins and its authorities’ policy responses have varied substantially, ranging from the introduction of Bitcoin as legal tender in El Salvador to their prohibition in many other countries worried about their impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering. This paper also describes briefly the results of a survey on CBDCs’ introduction plans and crypto assets regulation. Finally, this paper presents some general lessons and policy recommendations for the region on the regulation of cypto assets, digital currencies and cross-border payments, and on the potential introduction of CBDCs.
    Keywords: crypto assets regulation; asset substitution; CBDCs in Latin America and the Caribbean; Policy recommendation; cypto assets; IMF working paper 23/37; Virtual currencies; Central Bank digital currencies; Digital currencies; Payment systems; Currencies; Caribbean; Central America; South America; Global
    Date: 2023–02–17
  21. By: Michel Antoine Habib (University of Zurich; Centre for Economic Policy Research (CEPR)); Yushi Peng (London School of Economics and Political Science); Yanjie Wang (University of Zurich); Zexi Wang (Lancaster University Management School)
    Abstract: We examine the roles of bank ownership and CEO political faction membership in facilitating or hindering the implementation of central bank policy in China. Specifically, we examine the response of China’s commercial banks to People’s Bank of China (PBC) guidelines intended to decrease mortgage lending and to slow down the rise in residential property prices. We find that both bank ownership and faction membership matter. Central government-owned banks whose CEOs are members of the specialist finance faction within the Chinese Communist Party (CCP) respond most strongly to PBC guidance, whereas provincial or city government-owned banks whose CEOs are members of a generalist faction respond least strongly. The implementation of PBC policy has real effects: in those cities where central government-owned banks with specialist CEOs constitute a larger percentage of total bank branches, house prices grew more slowly, as did the number of residential real estate transactions and the number of new listings.Where in contrast provincial and city government-owned banks with generalist CEOs dominate, the number of transactions grew faster; the rate of house price appreciation and the number of listings were however unaffected. We conclude that China’s different levels of government and the CCP’s different factions enjoy some discretion in responding to PBC guidance and that they exploit the discretion they are afforded to vary the strength of their response.
    Keywords: Government bank ownership, CEO political faction membership, Central bank policy, Window guidance, Mortgage lending, Real estate markets
    JEL: E58 G21 R30
    Date: 2023–02
  22. By: Zhelev, Paskal
    Abstract: China’s exchange rate policy has been one of the most contentious economic issues in present times. The large open economy with a state-led development model has been often accused of deliberately keeping its currency undervalued, thereby conferring unfair competitive advantages to its exporters, and fuelling global imbalances. The experts’ opinions on that however are greatly divided. The paper’s main goal is to evaluate whether China has been manipulating the exchange rate of the RMB through its exchange rate policy over the last decade. Based on various indicators, the results show that there is no evidence of China engaging in currency manipulation to the detriment of its trading partners.
    Keywords: Renminbi (RMB), undervalued exchange rate, currency manipulation, foreign exchange reform.
    JEL: F31 F33 F50
    Date: 2022–09–20
  23. By: Lee, Sora (Korea Institute for Industrial Economics and Trade); Kang, Sungwoo (Korea Institute for Industrial Economics and Trade)
    Abstract: The value of the Korean won (KRW) to the US dollar (USD) recently fell to its weakest level since 2009, and its real effective exchange rate (REER) was even lower. The KRW to USD rate exceeded 1, 400 won per dollar due to the tight monetary policy of major economies, the Russian invasion of Ukraine, and fears of a recession. Companies highly vulnerable to FX risks should receive policy support and monitoring to prepare for price fluctuations. Long-term tasks include pursuing differentiation with comparative advantage based on key technologies, securing a leading position in supply chains, and upgrading Korea’s economic structure by increasing the contributions of domestic consumption to economic growth.
    Keywords: monetary policy; money supply; exchange rates; USD-KRW; Korea; tight money; FX; foreign exchange; foreign exchange rates; competitiveness; exports; export competitiveness
    JEL: F18 F21 O24
    Date: 2022–10–19
  24. By: Rasmané Ouedraogo; Ibrahima Camara; Mr. Amadou N Sy
    Abstract: Covid-19 and war-induced commodity price fluctuations, and broadening price pressures have led to a surge in inflation in many sub-Saharan Africa (SSA) countries. To adjust to increasing costs, firms have resorted to several measures including shuttering offices, reducing businesses, laying off, and freezing hiring, thus putting at risk job creation and raising concerns of youth unemployment. This paper explores the effects of inflation on private employment growth in SSA using a large firm -level dataset from the World Bank’s Enterprise Surveys. We find a non-linear relationship between inflation and job creation in SSA, with job creation being negatively correlated with inflation rate when the latter is above 14 percent. This finding holds regardless of the sector of activities of firms and the exchange rate regime. In addition, the paper finds some differential effects based on the type of products. An increase in fuel prices tends to be more detrimental to job creation than food prices. The study also provides evidence that the state of implementation of structural reforms matters. The results show that inflation reduces job opportunities mostly in countries with bad or no structural reforms.
    Keywords: Inflation; Jobs; reforms; sub-Saharan Africa; broadening price pressure; evidence from Sub-Saharan Africa; Survey dataset; firm assessment; rising prices; Job creation; Exchange rate arrangements; Employment
    Date: 2023–03–03
  25. By: Marcin W\k{a}torek; Jaros{\l}aw Kwapie\'n; Stanis{\l}aw Dro\.zd\.z
    Abstract: In this study the cross-correlations between the cryptocurrency market represented by the two most liquid and highest-capitalized cryptocurrencies: bitcoin and ethereum, on the one side, and the instruments representing the traditional financial markets: stock indices, Forex, commodities, on the other side, are measured in the period: January 2020--October 2022. Our purpose is to address the question whether the cryptocurrency market still preserves its autonomy with respect to the traditional financial markets or it has already aligned with them in expense of its independence. We are motivated by the fact that some previous related studies gave mixed results. By calculating the $q$-dependent detrended cross-correlation coefficient based on the high frequency 10 s data in the rolling window, the dependence on various time scales, different fluctuation magnitudes, and different market periods are examined. There is a strong indication that the dynamics of the bitcoin and ethereum price changes since the March 2020 Covid-19 panic is no longer independent. Instead, it is related to the dynamics of the traditional financial markets, which is especially evident now in 2022, when the bitcoin and ethereum coupling to the US tech stocks is observed during the market bear phase. It is also worth emphasizing that the cryptocurrencies have begun to react to the economic data such as the Consumer Price Index readings in a similar way as traditional instruments. Such a spontaneous coupling of the so far independent degrees of freedom can be interpreted as a kind of phase transition that resembles the collective phenomena typical for the complex systems. Our results indicate that the cryptocurrencies cannot be considered as a safe haven for the financial investments.
    Date: 2023–02
  26. By: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
    JEL: G2 L5
    Date: 2023–03

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