nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒04‒24
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The First Practical Guide to Inflation Targeting By Jonung, Lars
  2. Impact of RBI's monetary policy announcements on government bond yields: Evidence from the pandemic By Aeimit Lakdawala; Bhanu Pratap; Rajeswari Sengupta
  3. Do firm expectations respond to monetary policy announcements? By Di Pace, Federico; Mangiante, Giacomo; Masolo, Riccardo
  4. Chorus in the cacophony: Dissent and policy communication of India's Monetary Policy Committee By Rounak Sil; Unninarayanan Kurup; Ashima Goyal; Apoorva Singh and Rajendra Paramanik
  5. Hegemony or Harmony? A Unified Framework for the International Monetary System By Tao Liu; Dong Lu; Liang Wang
  6. Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC By Muñoz, Manuel A.; Soons, Oscar
  7. Welfare Cost of Inflation, when Credit Card Transaction Services Are Included among Monetary Services By William Barnett; Sohee Park
  8. Did monetary policy kill the Phillips Curve? Some simple arithmetics By Drago Bergholt; Francesco Furlanetto; Etienne Vaccaro-Grange
  9. The changing and growing roles of independent central banks now do require a reconsideration of their mandate By Goodhart, Charles; Lastra, Rosa
  10. Big techs and the credit channel of monetary policy By Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
  11. Monetary Policy Shocks and Multi-Scale Positive and Negative Bubbles in an Emerging Country: The Case of India By Oguzhan Cepni; Rangan Gupta; Jacobus Nel; Joshua Nielsen
  12. The Effects of Unconventional Monetary Policy on Stock Markets and Household Incomes in Japan By Karl-Friedrich Israel; Tim Florian Sepp; Nils Sonnenberg
  13. Factor Augmented Vector-Autoregression with narrative identification. An application to monetary policy in the US By Giorgia De Nora
  14. How does the Phillips curve slope vary with repricing rates? By De Veirman, Emmanuel
  15. How Much Does Inflation Vary by Income? Depends on How It’s Measured By Alicia H. Munnell; Diana Horvath
  16. Consolidated Foreign Wealth of Nations: Nationality-based measures of international exposure By Andre Sanchez Pacheco
  17. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  18. Can governments sleep more soundly when holding international reserves? A banking and financial vulnerabilities perspective By Audrey Sallenave; Jean-Pierre Allegret; Tolga Omay
  19. Who Wil Run Their Bank? By Edwin Weinstein; Gulnur Muradoglu
  20. The March 2023 Bank Interventions in Long-Run Context – Silicon Valley Bank and beyond By Andrew Metrick; Paul Schmelzing
  21. A tailored Chain Ladder methodology for inflation analysis in reserving triangles By Sébastien Farkas; Amélie Roux

  1. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: When Sweden left the gold standard on September 27, 1931, the Swedish government declared that the aim of monetary policy should be to stabilize the domestic purchasing power of the Swedish currency, the krona. With this step, price level targeting officially became for the first time the goal for a central bank. Soon after, the Riksbank (Bank of Sweden) sent a questionnaire to three prominent economics professors, Gustav Cassel, David Davidson and Eli Heckscher, asking for advice about the new monetary situation. In a few weeks, the Riksbank received their replies. <p> This paper presents the three reports, for decades kept as classified documents in the archives of the Riksbank. The reports give an excellent view of the monetary thinking in the early 1930s of the first generation of modern Swedish economists, prior to the outbreak of the world depression of the 1930s and the emergence of the Stockholm School in macroeconomics. The reports are strikingly modern. They deal with the central issues in the present discussion on inflation targeting, such as the choice of price index to target, the proper instrument to use, the importance of creating public credibility for the new monetary rule, potential legal changes to anchor the new standard, and the appropriate central bank response to changes in the exchange rate. In short, the three economists prepared the first practical guide to inflation targeting at the zero rate. <p> The paper also considers the impact of the reports on the policy of the Riksbank. Most strikingly, the Riksbank started to construct and collect a weekly consumer price index to use as a guide for implementing the new policy of price stabilization. This task was carried out by Dag Hammarskjöld under the guidance of Erik Lindahl.
    Keywords: Inflation targeting; price level targeting; Gustav Cassel; David Davidson; Eli Heckscher; Knut Wicksell; Dag Hammarskjöld; Erik Lindahl; the Riksbank; the Great Depression; Sweden
    JEL: B22 B25 D83 E31 E32 E50 F33 N14
    Date: 2023–04–03
  2. By: Aeimit Lakdawala (Wake Forest University); Bhanu Pratap (Reserve Bank of India); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: We investigate how the bond market responded to the effects of the Reserve Bank of India's (RBI) monetary policy actions undertaken since the start of the pandemic. Our approach involves combining a narrative analysis of the media coverage together with an event-study framework around RBI's monetary policy announcements. We find that the RBI's actions early in the pandemic were helpful in providing an expansionary impulse to the bond market. Specifically, long-term bond interest rates would have been meaningfully higher in the early months of the pandemic if not for the actions undertaken by the RBI. These actions involved unconventional policies providing liquidity support and asset purchases. We find that some of the unconventional monetary policy actions had a substantial signalling channel component where the market perceived the announcement of an unconventional monetary policy action as representing a lower future path for the short-term policy rate. We also find that the RBI's forward guidance was more effective in the pandemic than it had been in the couple of years preceding the pandemic
    Keywords: Monetary Policy, Reserve Bank of India, Unconventional Monetary Policy, Bond Yields, Forward Guidance, Pandemic
    JEL: E44 E52 E58 G10
    Date: 2023–03
  3. By: Di Pace, Federico (Bank of England); Mangiante, Giacomo (HEC Lausanne); Masolo, Riccardo (Catholic University of the Sacred Heart)
    Abstract: We study whether firms’ expectations react to the Bank of England’s monetary policy announcements by comparing the responses to the Decision Maker Panel survey filed immediately before and after a Monetary Policy Committee meeting. On the one hand, we find that firms’ expectations and uncertainty about their own business for the most part do not respond to high-frequency monetary policy surprises. On the other hand, announced changes in the monetary policy rate induce firms to revise their price expectations, with rate hikes inducing a reduction in price expectations and uncertainty surrounding them.
    Keywords: Central bank communication; firm expectations; high-frequency identification; survey data
    JEL: D84 E52 E58
    Date: 2023–02–10
  4. By: Rounak Sil (KPMG Global Services, India); Unninarayanan Kurup; Ashima Goyal (Indira Gandhi Institute of Development Research); Apoorva Singh and Rajendra Paramanik (Indian Institute of Technology, Patna)
    Abstract: Using minutes of consecutive Monetary Policy Committee (MPC) meetings of the Indian central bank, we have constructed two novel measures of implicit dissent at the individual level as well as across groups. We have used VADER sentiment analysis to arrive at the proposed measures and investigated their influence on anchoring Indian growth and inflation forecasts. Our empirical findings show discordance amongst members increases forecast accuracy. This implies promoting an environment that supports nuanced opinions could improve policy outcomes.
    Keywords: Monetary policy, Dissent, NLP, Supply shock, Linear Regression
    JEL: E52 E58 C22
    Date: 2023–03
  5. By: Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii Manoa)
    Abstract: There have been two competing views on the structure of the international monetary system. One sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that multiple international currencies can coexist. Aiming to provide a unified theoretical framework to reconcile these two views, we develop a micro-founded monetary model to examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles of international currencies reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other. Agents have the incentive to diversify their portfolio and we have a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. We also discuss welfare under different equilibria and the effect of financial sanctions on the dominant currency in a unipolar world.
    Keywords: International, Money, Multipolar, Safe Assets, Unipolar
    JEL: E42 E52 F33 F40
    Date: 2023–03
  6. By: Muñoz, Manuel A.; Soons, Oscar
    Abstract: The bulk of euro-denominated cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty. We develop a Diamond and Dy-bvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Consumers who are sufficiently pessimistic prefer to hold cash. In our model, the introduction of a central bank digital currency (CBDC) as a store of value that is superior to cash leads to bank disintermediation as some depositors opt for switching to CBDC based on their beliefs. While CBDC partially replaces deposits, long-term lending decreases less than proportionally as remaining depositors are, on aver-age, more optimistic about bank stability and banks re-balance their portfolio accordingly. The appropriate calibration of CBDC design features such as remuneration and quantity limits can mitigate these effects. We study the individual and social welfare implications of introducing CBDC as a store of value. JEL Classification: E41, E58, G11, G21
    Keywords: bank disintermediation, bank stability, cash, central bank digital currency, welfare
    Date: 2023–03
  7. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA)
    Abstract: We investigate the welfare cost of anticipated inflation, when the volume of credit card transactions is included in measured monetary service flows. We use the credit-card-augmented Divisia monetary aggregates in a nonlinear dynamic stochastic general equilibrium (DSGE) New Keynesian model and calculate the welfare costs of inflation. The welfare costs of inflation with credit card services included are greater than without them in the New Keynesian DSGE model. Because of the complexity of the model’s dynamical structure, we are not aware of a simple explanation for the increased welfare sensitivity to inflation.
    Keywords: Welfare Cost, Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Money Demand, Inflation, nonlinear dynamics.
    JEL: E31 E41 E51 E52
    Date: 2023–04
  8. By: Drago Bergholt; Francesco Furlanetto; Etienne Vaccaro-Grange
    Abstract: An apparent disconnect has taken place between inflation and economic activity in the US over the last 25 years, with price inflation remaining remarkably stable in spite of large fluctuations in the output gap and other measures of economic slack. This observation has led some to believe that the Phillips curve–a summary measure of aggregate supply–has flattened. We argue that this view may be premature and put forward a few, simple arithmetics which give rise to testable implications for demand and supply curve slopes. Equipped with New Keynesian theory and estimated SVAR models, we decompose the unconditional variation in US macro data into the components driven by demand and supply disturbances, and confront the inflation disconnect with our simple arithmetics. This exercise reveals a relatively stable supply curve slope once shocks to supply have been properly accounted for. The demand curve, instead, has flattened substantially in recent decades. Our results are at odds with a decline in the Phillips curve slope, but fully consistent with a shift towards a more firm monetary policy commitment to inflation stability.
    Keywords: Inflation, The Phillips curve, Monetary policy, Structural VAR models
    JEL: C3 E3 E5
    Date: 2023–02
  9. By: Goodhart, Charles; Lastra, Rosa
    Abstract: In this paper, we analyse why the changing and growing roles of independent Central Banks now do require a reconsideration of their mandate.
    Keywords: accountability; central banking; financial stability; independence; monetary policy
    JEL: M40 J1
    Date: 2023–02–27
  10. By: Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea
    Abstract: We document some stylized facts on big tech credit and rationalize them through the lens of a model where big techs facilitate matching on the e-commerce platform and extend loans. The big tech reinforces credit repayment with the threat of exclusion from the platform, while bank credit is secured against collateral. Our model suggests that: (i) a rise in big techs' matching efficiency increases the value for firms of trading on the platform and the availability of big tech credit; (ii) big tech credit mitigates the initial response of output to a monetary shock, while increasing its persistence; (iii) the efficiency gains generated by big techs are limited by the distortionary fees collected from users.
    Keywords: Big Techs, monetary policy, credit frictions
    JEL: E44 E51 E52 G21 G23
    Date: 2023–04
  11. By: Oguzhan Cepni (Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA)
    Abstract: First, we employ the Multi-Scale Log-Periodic Power Law Singularity Confidence Indicator (MS-LPPLS-CI) approach to identify both positive and negative bubbles in the short-, medium, and long-term for the Indian stock market. We successfully detect major crashes and rallies during the weekly period from November 2003 to December 2020. Second, we utilize a nonparametric causality-in-quantiles approach to analyze the predictive impact of monetary policy shocks on the six bubble indicators. This econometric framework allows us to circumvent potential misspecification due to nonlinearity and instability, rendering the results of no causal influence derived from a linear framework invalid. The two factors of monetary policy shocks namely, the target and path associated with short- and long-term interest rates, reveal strong evidence of predictability for the six bubble indicators across their entire conditional distributions. We observe relatively stronger impacts for the negative bubble indicators due to the target factor rather than the path factor of monetary policy shocks. Our findings have significant implications for the Reserve Bank of India, as well as for academics and investors.
    Keywords: Multi-Scale Positive and Negative Bubbles, Monetary Policy Shocks, Nonparametric Causality-in-Quantiles Test, India
    JEL: C22 E52 G10
    Date: 2023–03
  12. By: Karl-Friedrich Israel (Université Paris 1 Panthéon-Sorbonne - Centre d'Economie de la Sorbonne, Université de la Sarre (Allemagne), Université Catholique de l'Ouest (UCO) Angers); Tim Florian Sepp (Leipzig University); Nils Sonnenberg (Kiel Instute for the World Economy)
    Abstract: In this study, we ingestigate the impact of monetary policy on Japanese household incomes using the Family Income and Expenditure Survey. Our analysis focuses on the savings and income structure of households, and covers the period from Q1 2007 to Q2 2021. We find that households in the highest income brackets have a higher proportion of their savings invested in stocks, while middle and lower income households hold a greater share of their savings in bank deposits. Our hypothesis is that the Bank of Japan's monetary policies have boosted stock markets in particular, leading to disproportionate benefits for high-income households through capital gains and dividends. Using local projections, we first identify a positive, lasting cumulative effect of both conventional and unconventional monetary expansion on Japanese stock markets. We then examine how stock market performance impacts household incomes, and find that the effect is strongest for high-income households, decreases for middle-income households, and disappears for lower-income households. Our results suggest that monetary policy may have contributed to the persistent growth in income inequality in Japan, as measured by metrics such as the Gini coefficient and top-to-bottom income ratios
    Keywords: monetary policy; inequality; Japan; household income
    JEL: D31 D63 E52
    Date: 2023–02
  13. By: Giorgia De Nora (Queen Mary University of London)
    Abstract: I extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an exogenous variable approach. A Gibbs sampling algorithm is provided to estimate the posterior distributions of the models parameters. I estimate the effects of a monetary policy shock in the United States using the proposed algorithm, and find that an increase in the Federal Fund Rate has contractionary effects on both the real and financial sides of the economy. Furthermore, the paper suggests that data-rich models play an important role in mitigating price and real economic puzzles in the estimated impulse responses as well as the discrepancies among the impulse responses obtained with different monetary policy instruments.
    Keywords: information sufficiency, factor-augmented VARs, instrumental variables, monetary policy, structural VARs
    JEL: C32 C38 E52
    Date: 2021–12–15
  14. By: De Veirman, Emmanuel
    Abstract: In sticky price models, the slope of the Phillips curve depends positively on the probability of price adjustment. I use a series for the empirical frequency of price adjustment to test this implication. I find some evidence that the Phillips curve slope depends positively on the repricing rate. My results support the implication from New Keynesian theory with Calvo pricing that the Phillips curve slope is a convex function of the frequency of price adjustment. However, at all observed values of the frequency of price adjustment, the empirical Phillips curve relation is much flatter than the New Keynesian Phillips Curve at standard parameter values would imply. JEL Classification: C22, E31
    Keywords: inflation, Phillips curve, price setting
    Date: 2023–03
  15. By: Alicia H. Munnell; Diana Horvath
    Abstract: In June, the U.S. Bureau of Labor Statistics (BLS) announced the largest 12-month increase in the Consumer Price Index for All Urban Consumers (CPIU) since 1981 – a rate of 9.1 percent. The rise in inflation was driven primarily by higher prices for gasoline, housing, and food. Although inflation has moderated somewhat, it still remains very high. The question is the extent to which the effects of inflation vary for households with different income levels. This brief addresses the distributional question with a straightforward analysis that weights the eight major categories in the CPI-U by expenditure data from BLS’s Consumer Expenditure Survey (CEX) for each income quintile. The confounding issue, however, is that low-income households spend virtually all their after-income-tax money on inflation-affected items, while high-income households spend only 80 percent of their resources on these items. The discussion proceeds as follows. The first section summarizes recent research on inflation by household income. The second section describes the CPI-U and expenditure data from the CEX. The third section discusses the methodology. The fourth section presents the results, which show that inflation rates for the 12-month period ending in June 2022 for items included in the CPI-U are roughly similar across income groups. The final section concludes that, despite facing similar inflation levels, low-income households spend virtually all of their income on affected items, exposing a larger share of their resources to price increases compared to high-income households.
    Date: 2022–09
  16. By: Andre Sanchez Pacheco (Department of Economics, Trinity College Dublin)
    Abstract: This paper presents novel estimates of foreign holdings from a consolidated-by-nationality perspective for a sample of fourteen developed countries over multiple years. It describes the stylized facts that emerge from this new data-set on the international exposure of countries. It shows that aggregate international financial integration is larger from a nationality-based approach relative to the conventional residence-based data. These novel data are used to analyze (1) profit shifting activities and (2) spillovers from U.S. monetary policy shocks. I find evidence suggesting that nationals of relatively high-tax countries may shift assets to low-tax countries in ways not fully captured in residence-based statistics. I also find that a tightening in U.S. monetary policy is associated with a decline in consolidated-by-nationality foreign asset holdings by non-financial multinational enterprises. Such findings highlight the usefulness of this new data-set in international macroeconomics.
    Keywords: Internationalfinancialintegration, financialglobalisation, consolidated-by-nationalitystatistics
    JEL: F36 F21 F23
    Date: 2023–04
  17. By: Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the ultimate underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    Date: 2023–03–25
  18. By: Audrey Sallenave; Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique); Tolga Omay (Atilim Universitesi)
    Abstract: We use a sample of 40 developing and emerging countries over the period 1995- 2015 to assess the effectiveness of international reserve holding as a crisis mitigator. We test the relevance of the reserve accumulation decreasing returns assumption by estimating the most recent version of the PSTR model. We find that increasing stocks of international reserves allows domestic authorities to mitigate the negative impacts of financial and banking vulnerabilities on GDP growth rates leading to reject the decreasing returns assumption. This evidence is robust to sensitivity checks.
    Keywords: Banking vulnerabilities, Financial vulnerabilities, External shocks, Emerging and developing countries, Panel Smooth Transition Regression model, Reserves accumulation
    Date: 2023–02–16
  19. By: Edwin Weinstein (The Brondesbury Group); Gulnur Muradoglu (Queen Mary University of London)
    Abstract: This study aims to identify how trust, awareness, household economics and demographic factors affect the nature and the number of people who will run a bank. The sample is drawn from seven countries. The findings focus on relationships that transcend country boundaries. The study is designed with four scenarios defined by presence/absence of deposit insurance and whether the person has their money in a troubled bank or not. The similarity of response across countries to these two key variables is strong. Across countries, under the least favourable conditions in our study, 56% of respondents said they would run their bank. Under the most favourable conditions, 21% of respondents said they would run. These massive differences have real implications for both policy and public communications.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2023–02
  20. By: Andrew Metrick; Paul Schmelzing
    Abstract: U.S. and European banking institutions were hit by a wave of distress in March 2023. Policymakers on both sides of the Atlantic reacted with an array of interventions, some targeting individual institutions, others designed to shore up the banking sector as a whole. This paper contextualizes events using a new long-run database on banking-sector policy interventions over the last eight centuries. On that basis, recent actions have already been unusual in their policy mix and size – in the database, the vast majority of events with the same pattern of interventions ultimately evolved into “systemic” bank-distress episodes.
    JEL: G01
    Date: 2023–03
  21. By: Sébastien Farkas (Allianz, LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité); Amélie Roux (Allianz, LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité)
    Abstract: This report deals with the estimation of inflation coefficients obtained with the Taylor or Verbeek method. In this report, we will first present the challenge behind the search for an efficient estimate of inflation. Then we will show that to obtain these coefficients it is enough to make a Chain Ladder project in calendar view. Finally, we perform a simulation study.
    Keywords: Actuarial science, Inflation, Chain Ladder, Taylor, Verbeek
    Date: 2023–03–08

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