nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒05‒15
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems By Ms. Inutu Lukonga
  2. Using Functional Shocks to Assess Conventional and Unconventional Monetary Policy in Canada By Thorsten V. Koeppl; Jeremy M Kronick; James McNeil
  3. Inflation is Conflict By Guido Lorenzoni; Iván Werning
  4. Currency Usage for Cross Border Payments By Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
  5. Open Mouth Operations. Monetary Policy by Threats and Arguments. The Monthly Meetings Between the Riksbank and the Commercial Banks, 1956-73 By Jonung, Lars
  6. Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege By Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
  7. Bank Concentration and Monetary Policy Pass-Through By Isabel Gödl-Hanisch
  8. The effect of wage rigidity on the transmission of monetary policy to inequality By Momo Komatsu
  9. The Central Bank Crystal Ball: Temporal information in monetary policy communication By Byrne, David; Goodhead, Robert; McMahon, Michael; Parle, Conor
  10. Unconventional Monetary Policy and Local Fiscal Policy By Huixin Bi; Nora Traum
  11. Central Bank Digital Currency and Financial Inclusion By Brandon Tan
  12. Drivers of Sovereign Bond Demand – The Case of Japans By Carlos Alberto Piscarreta Pinto Ferreira
  13. Liquidity, Debt Denomination, and Currency Dominance By Coppola, Antonio; Krishnamurthy, Arvind; Xu, Chenzi
  14. The Currency Crisis in Turkey and its Implications By Oyadeyi, Olajide
  15. Derivative Margin Calls: A New Driver of MMF Flows By Mr. German Villegas Bauer; Maddalena Ghio; Linda Rousova; Dilyara Salakhova
  16. The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  17. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  18. Capital Controls in Times of Crisis – Do They Work? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  19. The rise of crypto-assets: cool breeze or tsunami in balance of payments statistics? By Andrea Carboni; Giuseppe Carone; Giuseppina Marocchi
  20. Mobile Money, Interoperability and Financial Inclusion By Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
  21. Leaning Against the Data: Policymaker Communications under State-Based Forward Guidance By Taeyoung Doh; Joseph W. Gruber; Dongho Song
  22. China as an International Lender of Last Resort By Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
  23. Export Experience and the Choice of Invoice Currency: Evidence from a questionnaire survey of Japanese SMEs By GOTO Mizuki; HAYAKAWA Kazunobu; KOIBUCHI Satoshi; YOSHIMI Taiyo
  24. Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? By Jiang, Erica Xuewei; Matvos, Gregor; Piskorski, Tomasz; Seru, Amit
  25. Individual Credit Market Experience and Beliefs about Bank Lending Policy: Evidence from a Firm Survey By Jarko Fidrmuc; Christa Hainz; Werner Hölzl
  26. Risks and opportunities in arbitrage and market-making in blockchain-based currency markets. Part 1 : Risks By Vittorio Astarita
  27. Measuring the Temporal Dimension of Text: An Application to Policymaker Speeches By Byrne, David; Goodhead, Robert; McMahon, Michael; Parle, Conor

  1. By: Ms. Inutu Lukonga
    Abstract: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
    Keywords: Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance; impact monetary policy implementation; design option; unremunerated CBDC; monetary policy implication; deposit disintermediation; Commercial banks; Velocity of money; Islamic banking; Monetary base; Global
    Date: 2023–03–17
  2. By: Thorsten V. Koeppl; Jeremy M Kronick (C.D. Howe Insitute); James McNeil (Dalhousie University)
    Abstract: We develop a new series of Canadian monetary policy shocks and analyze their impact on inflation and real GDP from 1996–2020. Our shocks are constructed as the daily change in the Nelson-Siegel yield curve factors after a monetary policy announcement. Because these shocks include information along the entire yield curve, they provide a more comprehensive view of Canadian monetary policy relative to the existing literature, which focuses on shocks to the short-run interest rate. We document that monetary policy shocks often twist the yield curve, which tends to make monetary policy less effective. Furthermore, we find that lower real interest rates have muted the overall impact of monetary policy over time. Looking at particular episodes, there is little evidence that forward guidance or quantitative easing had a significant impact on inflation or real GDP.
    Keywords: Monetary Policy Shocks, Canada, Yield Curve, Local Projections, Unconventional Monetary Policy
    JEL: E52 E65 C58 G12
    Date: 2023–04
  3. By: Guido Lorenzoni; Iván Werning
    Abstract: This paper isolates the role of conflict or disagreement on inflation in two ways. In the first part of the paper, we present a stylized model, kept purposefully away from traditional macro models. Inflation arises despite the complete absence of money, credit, interest rates, production, and employment. Inflation is due to conflict; it cannot be explained by monetary policy or departures from a natural rate of output or employment. In contrast, the second part of the paper develops a flexible framework that nests many traditional macroeconomic models. We include both goods and labor to study the interaction of price and wage inflation. Our main results provide a decomposition of inflation into “adjustment” and “conflict” inflation, highlighting the essential nature of the latter. Conflict should be viewed as the proximate cause of inflation, fed by other root causes. Our framework sits on top of a wide set of particular models that can endogenize conflict.
    JEL: E0 E12 E31
    Date: 2023–04
  4. By: Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
    Abstract: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.
    Keywords: Cross border payments; Swift; currency dominance; legal tender; international monetary system (IMS)
    Date: 2023–03–24
  5. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: After World War II and prior to the financial deregulation of the 1980s, monetary policy in Sweden as well as in other western European countries rested chiefly on a system of far- reaching non-market-oriented controls of credit flows and interest rates. How was monetary policy conducted in such an environment of financial repression, where the central bank was unable to rely on traditional monetary policy instruments working on "free" and "unregulated" money and capital markets?<p> This study provides an answer from the Swedish experience. It is based on a unique set of confidential minutes from about 160 monthly meetings between the Riksbank and the commercial banks during the years 1956-73. These minutes, written during or directly after the meetings, have not been available to scholars before. Most likely, a similar archive material does not exist for any other country.<p> The examination of the minutes demonstrates that monetary policy was framed in a process involving threats and arguments in a small and closed club involving the central bank and the chief executives of the commercial banks. According to a joke assigned to Erik Lundberg “open market operations were replaced by open mouth operations” - albeit the dialogue was kept within the club.<p> When Swedish financial markets were deregulated in the 1980s, the standard tools of monetary policy rapidly replaced the meetings between the central bank and the commercial banks. Today, the Riksbank communicates in an open way to all financial market participants, instead of turning to a small set of commercial bankers in meetings closed to outsiders.
    Keywords: Credit controls; interes rate controls; exchange controls; financial repression; liquidity ratios; the Riksbank; Sweden
    JEL: B22 E42 E50 E58 E65 G21 N14
    Date: 2023–04–24
  6. By: Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
    Abstract: We show theoretically and empirically that the dollar’s status as the global reserve currency can lead to economically significant changes in U.S. money market liquidity. We develop a model in which U.S. money market spreads respond to foreign central banks’ exchange-rate management decisions. Foreign central banks remove liquidity from U.S. money markets and cause spreads to widen by selling Treasuries to supply liquidity to their financial systems. Our analysis focuses on the major oil exporting countries with fixed exchange rates because their foreign-exchange market interventions are straightforward to characterize. Our regression analysis shows that shifts in the central banks’ demand for dollar liquidity related to oil price volatility are associated with significantly higher overnight spreads in domestic money markets. A one-standard deviation increase in the demand for dollar liquidity by a central bank in an oil-exporting country leads, on average, to three billion dollars of Treasury sales and a two to six basis point increase in U.S. money market spreads. At the same time, deposits held with the Federal Reserve increase in response to this higher oil-price volatility, which is consistent with the model’s predictions. This evidence indicates that the widespread use of the U.S. dollar as a reserve currency acts as a channel that can propagate funding shocks from the rest of the world to the United States.
    Keywords: central banking; markets
    JEL: E43 G12 G13 G23
    Date: 2022–09–02
  7. By: Isabel Gödl-Hanisch
    Abstract: This paper analyzes the implications of the gradual rise in bank concentration since the 1990s for the transmission of monetary policy. I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more. I then build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets, along with bank capital requirements, lead to frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration alters monetary policy pass-through by two channels: the market power and capital allocation channels. Both channels further strengthen monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve.
    Keywords: monetary transmission, bank heterogeneity, monopolistic competition, bank regulation
    JEL: E44 E51 E52 G21
    Date: 2023
  8. By: Momo Komatsu
    Abstract: What is the effect of wage rigidities on the transmission of monetary policy to inequality? This paper investigates this question with a Two-Agent New Keynesian model with financially constrained and unconstrained households, and with search-and-matching frictions. I study the relative effects of the wage channel and the labour market channel in the transmission of conventional and unconventional monetary policy, and how these change with degrees of wage rigidity. My main result is that the stickier the wage, the more a contractionary monetary policy shock reduces consumption inequality, whether that is conventional monetary policy or quantitative tightening, driven by the wage channel.
    Date: 2023–03–31
  9. By: Byrne, David (Central Bank of Ireland); Goodhead, Robert (Central Bank of Ireland); McMahon, Michael (University of Oxford); Parle, Conor (European Central Bank and Trinity College Dublin)
    Abstract: Effective central bank communication provides information that the public wants but does not have. Using a new textual methodology to quantify the temporal information in central bank communication, we argue that central bank assessments of the (latent) state of the economy can be the source of the public’s information deficit, rather than superior information necessarily. The implication of this is that communication of a single, fixed, reaction function, even if desirable, is likely impossible even if preferences remain fixed over time. Communication of how the central bank is assessing the economy should be emphasised in addition to any forward guidance.
    Keywords: Monetary Policy, Communication, Natural Language Processing.
    JEL: E52 E58 C55
    Date: 2023–02
  10. By: Huixin Bi; Nora Traum
    Abstract: Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: 1) by alleviating cash flow problems of the regional governments and 2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.
    Keywords: monetary policy; quantitative easing; municipal debt; Municipal Liquidity Facility (MLF)
    JEL: E52 E58 E62
    Date: 2022–11–07
  11. By: Brandon Tan
    Abstract: In this paper, we develop a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC). CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion which can increase overall lending and reduce bank disintermediation risks. Our model captures two key channels. First, CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. We find that CBDC can increase overall lending if (1) bank deposit liquidity risk is low, (2) the size and relative wealth of the previously unbanked population is large, and (3) CBDC is valuable to households as a means of payment or for credit-building. CBDC can still be optimal for household welfare even when overall lending decreases as households benefit from the value of using CBDC for payments, CBDC provides an alternative "safe" savings vehicle, and CBDC generates greater surplus in lending by reducing credit-risk information asymmetry. Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers. If non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC. If CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.
    Keywords: CBDC; Financial Inclusion; Digital currency; CBDC issuance; credit-risk information asymmetry; CBDC data; CBDC model; CBDC wallet; Central Bank digital currencies; Commercial banks; Deposit rates; Loans; Global
    Date: 2023–03–17
  12. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: The aim of this empirical paper is to understand the portfolio decisions of banks regarding their asset allocation to sovereign bonds applied to the case of Japan, over the period 2002-21. The issue is relevant because globally central banks are moving to a passive holder or even net seller stance, raising the question of whether banks can be counted among the investors which will replace them. Japan makes an interesting case since Japanese banks are among the banks in advanced economies with a larger share of non-official holdings of domestic sovereign debt, their mean ratio of gross claims on the central government to total assets is about three times above average values in the United States or in the Euro Area, and government portfolios are relatively more homogeneous. We contribute to the existing literature by exploring the impact of unconventional monetary policy on sovereign bond bank demand and putting to test the significance of risk on banks´ asset portfolio decisions using a dynamic rather than a static setting. Our results show that banks struggling to grow, more diversified, better capitalized, or larger banks during expansion periods tend to hold relatively fewer sovereign bonds. On the contrary, past higher profitability, higher economic volatility and funding risk encourage relatively greater holdings. Though less clearly, data also suggests that banks facing weaker loan performance and regional banks with more significant need of collateral hold a higher proportion of sovereign bonds. Quantitative and Qualitative Monetary Easing had a major disruptive effect over banks’ government bond demand. Excess reserves at the Bank of Japan became a low risk/low return alternative to government bonds, as banks with relatively higher excess reserves have relatively less government bond holdings in their assets. Going forward, only a reversion of the monetary base expansion may help government bonds regain their role of the single riskless asset for Japanese banks.
    Keywords: Sovereign Debt, Portfolio Choice, Banks, Monetary Policy, Panel Data
    JEL: C23 E58 G11 G21 H63
    Date: 2023–03
  13. By: Coppola, Antonio (Stanford U); Krishnamurthy, Arvind (Stanford U); Xu, Chenzi (Stanford U)
    Abstract: We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi.
    Date: 2023–02
  14. By: Oyadeyi, Olajide
    Abstract: The Turkish Lira is in the midst of a currency crisis, there's no other way to phrase it. USD/TRY rates have surged almost 42 percent and EUR/TRY rates have risen over 37 percent since the Central Bank of the Republic of Turkey (CBRT) made a surprise 100-bps rate decrease at the end of September. Under Governor Sahap Kavcioglu's tenure, the CBRT has lost all appearance of independence, owing to heavy-handed pressure from Turkish President Recep Tayyip Erdogan. The currency crisis that has bedeviled the Turkish Lira in recent months has already taken a negative turn, and another negative shift could be on the way, with the CBRT expected to maintain its rate cuts in the near future. Turkey's short-term external debt stock has risen to $124.4 billion, a growth of +8.8% since the end of 2020, according to news released today. The rise in the USD/TRY and EUR/TRY exchange rates will only exacerbate Turkey's financial woes in the coming months. According to CBRT data, approximately 43 percent of the country's debt is denominated in US dollars, with just over 25 percent pegged in Euros. This article explains the implications of such a move by the Turkish authorities on a developing economy like Nigeria.
    Keywords: Turkish Lira, Currency Crisis, Turkey
    JEL: E31 E52 E58 F41 F45
    Date: 2021–12–22
  15. By: Mr. German Villegas Bauer; Maddalena Ghio; Linda Rousova; Dilyara Salakhova
    Abstract: During the March 2020 market turmoil, euro area money-market funds (MMFs) experienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs related 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 Lipper 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 EURdenominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an important driver of the flows of EUR-denominated MMFs domiciled in euro area.
    Keywords: liquidity risk; money market funds; big data; interconnectedness; non-bank financial intermediaries.; EUR-denominated MMFs; derivative margin calls; MMF flow; variation margin payment; VM flow; Stocks; Liquidity; Mutual funds; Nonbank financial institutions; Pension spending; Global
    Date: 2023–03–17
  16. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.
    Keywords: remittances;monetary policy;monetary transmission mechanism
    JEL: E5 E52 F24
    Date: 2023–04–20
  17. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  18. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
    Keywords: Capital controls; capital outflows; financial crises; inflow control; outflow controls Introduced; outflow control; controls on outflow; tightening control; Capital account; Capital flows; Caribbean; Global
    Date: 2023–03–17
  19. By: Andrea Carboni (Bank of Italy); Giuseppe Carone (Bank of Italy); Giuseppina Marocchi (Bank of Italy)
    Abstract: Recent years have shown a significant acceleration in the adoption and development of blockchains or Distributed Ledger Technologies, particularly in the financial sector. Alongside the well-known and widely used Bitcoin, other cryptocurrencies have been developed and have become popular (Ethereum, XRP...). As a result, digital wallets and exchange platforms are becoming commonly used technologies. Meanwhile, different instruments are being developed rapidly, which could be launched and reach scale in the near future; this is the case of stablecoins, Central Bank Digital Currencies (CBDCs) and Non-Fungible Tokens (NFTs). Besides technical details and contingent regulatory requirements, the purpose of this paper is to evaluate and highlight the impacts of such instruments on the compilation of external statistics. After a brief digression on the features and classification of digital assets, the potential effects on some BoP items are discussed (the current and financial account).
    Keywords: crypto-assets, crypto-currencies, stablecoins, balance of payments, remittances, payment services
    JEL: E4 F02 F24 F3
    Date: 2023–04
  20. By: Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
    Abstract: This paper explores the tradeoff between competition and financial inclusion given by the vertical integration between mobile network and money operators. Joining novel data on mobile money fees built through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our findings show that interoperability lowers mobile money fees and reduces network coverage and mobile towers, especially in rural and poor districts. Interoperability also results in a decline in various survey metrics of financial inclusion. Keywords: Mobile Money, Interoperability, Financial inclusion JEL Codes: E42, L14, O10
    Date: 2023
  21. By: Taeyoung Doh; Joseph W. Gruber; Dongho Song
    Abstract: A purported benefit of state-based forward guidance is that the private sector adjusts the expected stance of policy without further policymaker communications. This assumes a shared understanding of how policymakers are interpreting the data and that policymakers are consistent in their assessment of the data. Using text analysis, we test whether the FOMC’s introduction of state-based forward guidance in December 2012 changed the tone of policymaker communications. We find that policymakers tended to downplay positive data following the introduction of the guidance, in effect leaning against the data and reinforcing the dependence of policy expectations on policymaker communications.
    Keywords: Monetary policy; Forward guidance; Financial markets
    JEL: E30 E40 E50 G12
    Date: 2022–09–08
  22. By: Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    JEL: F2 F33 F42 F65 G15 H63 N25
    Date: 2023–04
  23. By: GOTO Mizuki; HAYAKAWA Kazunobu; KOIBUCHI Satoshi; YOSHIMI Taiyo
    Abstract: This study examines the determinants of invoice currency with a focus on the effect of export experience, based on a questionnaire survey of Japanese small and medium enterprises (SMEs) in the manufacturing industry. We find that exporters with extensive export experience tend to switch the invoice currency from the Japanese yen to foreign currencies. The interpretation is that export experience mitigates the exchange rate uncertainty faced by firms and enables them to use foreign currency in their exports. This effect persists even if firms intermittently export from their first exports. We also find that the yen is more likely to be chosen as the first export when the age of the exporter is higher, the sales value of the exporter is smaller, the exporter has an initiative to determine the invoice currency, and the exporter started exporting before the global financial crisis in 2007.
    Date: 2023–04
  24. By: Jiang, Erica Xuewei (U of Southern California); Matvos, Gregor (Northwestern U); Piskorski, Tomasz (Columbia U); Seru, Amit (Stanford U)
    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.
    Date: 2023–03
  25. By: Jarko Fidrmuc; Christa Hainz; Werner Hölzl
    Abstract: We study how firms’ individual credit market experience influences their beliefs about the bank lending policy, using the Austrian Business Survey between 2011 and 2016. Firms which have recently experienced a loan rejection are more likely to believe that the lending policy is restrictive. We see similar effects for firms who were granted loans, but with conditions worse than anticipated. Exploiting the panel structure shows that firms without recent credit market experience are less likely to change their beliefs, which converge towards the middle category. Our findings are in line with theories of rational inattention and with asymmetric experience effects.
    Keywords: Formation of beliefs, rational inattention, pessimism, persistence, behavioral macroeconomics
    JEL: G21 E51 D22
    Date: 2023
  26. By: Vittorio Astarita
    Abstract: This study provides a practical introduction to high-frequency trading in blockchain-based currency markets. These types of markets have some specific characteristics that differentiate them from the stock markets, such as a large number of trading exchanges (centralized and decentralized), relative simplicity in moving funds from one exchange to another, and the large number of new currencies that have very little liquidity. This study analyzes the possible risks that specifically characterize this type of trading operation, the potential opportunities, and the algorithms that are mostly used, providing information that can be useful for practitioners who intend to operate in these markets by providing (and risking) liquidity.
    Date: 2023–04
  27. By: Byrne, David (Central Bank of Ireland); Goodhead, Robert (Central Bank of Ireland); McMahon, Michael (University of Oxford); Parle, Conor (European Central Bank and Trinity College Dublin)
    Abstract: Discussions of time are central to many questions in the social sciences and to official announcements of policy. Despite the growing popularity of applying Natural Language Processing (NLP) techniques to social science research questions, before now there have been few attempts to measure expressions of time. This paper provides a methodology to measure the “third T of Text”: the Time dimension. We also survey the techniques used to measure the other Ts, namely Topic and Tone. We document key stylised facts relating to temporal information in a corpus of policymaker speeches.
    Keywords: Textual analysis, Machine Learning, Communication.
    JEL: C55 C80 E58
    Date: 2023–02

This nep-mon issue is ©2023 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.