nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒05‒22
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Does Monetary Policy in India Anchor Inflation Expectation? By Bhattacharya, Rudrani
  2. Relative Price Shocks and Inflation By Francisco J. Ruge-Murcia; Alexander L. Wolman
  3. A snapshot of Central Bank (two year) forecasting: a mixed picture By Goodhart, C. A. E.; Pradhan, Manoj
  4. How Abundant Are Reserves? Evidence from the Wholesale Payment System By Afonso, Gara; Duffie, Darrell; Rigon, Lorenzo; Shin, Hyun Song
  5. Does Monetary Policy Matter? The Narrative Approach after 35 Years By Christina D. Romer; David H. Romer
  6. Inflation persistence, noisy information and the Phillips curve By José-Elías Gallegos
  7. UK monetary and fiscal policy since the Great Recession- an evaluation By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wang, Ziqing
  8. A Model of the Gold Standard By Jesús Fernández-Villaverde; Daniel R. Sanches
  9. Helicopter Drops and Liquidity Traps By Manuel Amador; Javier Bianchi
  10. Bank accounts, bank concentration and mobile money innovations By Asongu, Simplice A; Odhiambo, Nicholas M
  11. Measurement and Use of Cash by Half the World’s Population By Mr. Tanai Khiaonarong; David Humphrey
  12. Bank accounts, bank concentration and mobile money innovations By Simplice A. Asongu; Nicholas M. Odhiambo
  13. The Reversal Interest Rate By Joseph Abadi; Markus K. Brunnermeier; Yann Koby
  14. Multilateral Comovement in a New Keynesian World: A Little Trade Goes a Long Way By Paul Ho; Pierre-Daniel G. Sarte; Felipe Schwartzman
  15. A Note of Caution on the Relation between Money Growth and Inflation By Berger, Helge; Karlsson, Sune; Österholm, Pär
  16. Public Debt and Household Inflation Expectations By Mr. Damiano Sandri; Mr. Francesco Grigoli
  17. Money Market Fund Reform: Dealing with the Fundamental Problem By Huberto M. Ennis; Jeffrey M. Lacker; John A. Weinberg
  18. A tale of two margins: monetary policy and capital misallocation By Silvia Albrizio; Beatriz González; Dmitry Khametshin
  19. The inflation attention cycle: Updating the Inflation Perception Indicator (IPI) up to February 2023. A research note By Müller, Henrik; Schmidt, Tobias; Rieger, Jonas; Hornig, Nico; Hufnagel, Lena Marie
  20. A Review of the Bank of Canada’s Support of Key Financial Markets During the COVID-19 Crisis By Joshua Fernandes; Michael Mueller
  21. Distributional Effects of Exchange Rate Depreciations: Beggar-Thy-Neighbour or Beggar-Thyself? By Boris Fisera
  22. Flip the coin: Heads, tails or cryptocurrencies? By António Manuel Portugal Duarte; Fátima Teresa Castelo Assunção Sol Murta; Nuno José Henriques Baetas da Silva; Beatriz Rodrigues Vieira
  23. Collateral Advantage: Exchange Rates, Capital Flows and Global Cycles By Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
  24. Lender of Last Resort and moral hazard By Goodhart, C. A. E.; Lastra, Rosa
  25. Corporate financing in fixed-income markets: the contribution of monetary policy to lowering the size barrier By Pana Alves; Sergio Mayordomo; Manuel Ruiz-García
  26. On the pass-through of large devaluations By Carlos Casacuberta; Omar Licandro
  27. The role of mobile money innovations in transforming unemployed women to self-employed women in sub-Saharan Africa By Simplice A. Asongu; Sara le Roux
  28. Entrepreneurship in developing countries: can mobile money play a role? By Ablam Estel Apeti; Jean-Louis Combes; Eyah Denise Edoh
  29. Dollar Dominance in Cross-border Bank Loans and Its Response to Uncertainties By ITO Hiroyuki; XU Ying
  30. The Art and Science of Monetary and Fiscal Policies in Chile By Medina, Juan Pablo; Toni, Emiliano; Valdes, Rodrigo
  31. How Banks Create Gridlock to Save Liquidity in Canada's Large Value Payment System By Rodney J. Garratt; Zhentong Lu; Phoebe Tian
  32. Are Inflationary Shocks Regressive? A Feasible Set Approach By Felipe N. Del Canto; John R. Grigsby; Eric Qian; Conor Walsh
  33. Early Warning System for Currency Crises using Long Short-Term Memory and Gated Recurrent Unit Neural Networks By Sylvain Barthélémy; Fabien Rondeau; Virginie Gautier
  34. IMF precautionary facilities and their use in Latin America By Sonsoles Gallego; Isabel Garrido; Ignacio Hernando
  35. Error Spotting with Gradient Boosting: A Machine Learning-Based Application for Central Bank Data Quality By Csaba Burger; Mihály Berndt
  36. Fund raising in the international capital markets in 2021 By Laura Álvarez; Alberto Fuertes; Luis Molina; Emilio Muñoz de la Peña
  37. Price Markups and Wage Setting Behavior of Japanese Firms By Kosuke Aoki; Yoshihiko Hogen; Kosuke Takatomi
  38. Effects of Fiscal Policy on Inflation: Implications of Supply Disruptions and Economic Slack: Working Paper 2023-05 By U. Devrim Demirel; Matthew Wilson

  1. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy)
    Abstract: India has entered into the Inflation Targeting (IT) monetary policy regime in 2015. Under this rule-based monetary policy regime, changes in the policy rate transmits to the economic activities and current inflation rate by altering the inflation expectation of the rational economic agents. This study empirically investigates whether monetary policy can anchor ination expectation of economic agents in India. In our analysis, the survey based measure of households' inflation expectation published by the Reserve Bank of India (RBI) captures inflation expectation of private agents. Using a co-integrated Vector Auto Regression (VAR) model, we find moderate but significant monetary policy transmission in India via interest rate channel. However, inflation expectation seems to be unanchored by monetary policy conduct in the country. Our finding is found to be robust under alternative modeling frameworks.
    Keywords: Inflation expectation ; Monetary policy ; Co-integrated VAR ; India
    JEL: C32 C5 E31 E52 E58
    Date: 2023–04
  2. By: Francisco J. Ruge-Murcia; Alexander L. Wolman
    Abstract: Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S. inflation into contributions from sectoral (or "relative price") shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood with U.S. data for the post-1994 period in which inflation and the monetary policy regime appeared to be stable. In addition to providing a broad decomposition of inflation behavior, we enlist the model to help us understand the inflation shortfall from 2012 to 2019, and the dramatic inflation movements during the COVID pandemic.
    Keywords: Monetary Policy; sectoral shocks; inflation shortfall; COVID-19
    JEL: E31 E52 E58
    Date: 2022–05
  3. By: Goodhart, C. A. E.; Pradhan, Manoj
    Abstract: Central Banks normally adjust monetary policy so that inflation hits the Inflation Target (IT) within two years. Since a central bank must believe its policy stance is appropriate to achieve this goal, its inflation forecast at the two-year horizon should generally be close to target. We examine whether this has held for three main Central Banks, Bank of England, ECB and Fed. During the IT period, there have been two crisis periods, The Great Financial Crisis (GFC), and then Covid/Ukraine. We examine how the two-year forecasts differed depending on whether we were in a crisis, or more normal, period. Although over the whole IT period, up until 2022, both forecasts and outcomes were commendably close to target, we found that this was due to a sizeable forecast underestimate of the effects of policy and inherent resilience to revive inflation after each crisis hit, largely offset by an overestimate of the effect of monetary policy to restore inflation to target during more normal times. We attribute such latter overestimation to an unwarranted belief in forward looking, ‘well anchored’, expectations amongst households and firms, and to a failure to recognise the underlying disinflationary trends, especially in 2010-2019. We outline a novel means for assessing whether these latter trends were primarily demand driven, e.g. secular stagnation, or supply shocks, a labour supply surge. Finally, we examine how forecasts for the uncertainty of outcomes and relative risk (skew) to the central forecast have developed by examining the Bank of England’s fan chart, again at the two-year horizon.
    Keywords: forecasting; expectations
    JEL: D10 D21 D80 D89 E17 E31 E37 E47 E59
    Date: 2023–03–29
  4. By: Afonso, Gara (Federal Reserve Bank of New York); Duffie, Darrell (Stanford U); Rigon, Lorenzo (Stanford U); Shin, Hyun Song (BIS)
    Abstract: Before the era of large central bank balance sheets, banks relied on incoming payments to fund outgoing payments in order to conserve scarce liquidity. Even in the era of large central bank balance sheets, rather than funding payments with abundant reserve balances, we show that outgoing payments remain highly sensitive to incoming payments. By providing a window on liquidity constraints revealed by payment behavior, our results shed light on thresholds for the adequacy of reserve balances. Our findings are timely, given the ongoing shrinking of central bank balance sheets around the world in response to inflation.
    JEL: E42 E44 E52 E58 G21
    Date: 2022–11
  5. By: Christina D. Romer; David H. Romer
    Abstract: The narrative approach to macroeconomic identification uses qualitative sources, such as newspapers or government records, to provide information that can help establish causal relationships. This paper discusses the requirements for rigorous narrative analysis using fresh research on the impact of monetary policy as the focal application. We read the historical minutes and transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.
    JEL: E31 E52 E58 E65 N12
    Date: 2023–04
  6. By: José-Elías Gallegos (Banco de España)
    Abstract: A vast literature has documented how US inflation persistence has fallen in recent decades, but this finding is difficult to explain in monetary models. Using survey data on inflation expectations, I document a positive co-movement between ex-ante average forecast errors and forecast revisions (suggesting forecast sluggishness) from 1968 to 1984, but no co-movement thereafter. I extend the New Keynesian setting to include noisy and dispersed information about the aggregate state, and show that inflation is more persistent in periods of greater forecast sluggishness. My results suggest that changes in firm forecasting behavior explain around 90% of the fall in inflation persistence since the mid-1980s. I also find that the changes in the dynamics of the Phillips curve can be explained by the change in information frictions. After controlling for changes in information frictions, I estimate only a modest decline in the slope. I find that a more significant factor in the dynamics of the Phillips curve is the shift towards greater forward-lookingness and less backward-lookingness. Finally, I find evidence of forecast underrevision in the post-COVID period, which explains the increase in the persistence of current inflation.
    Keywords: inflation persistence, Phillips curve, noisy information
    JEL: E31 E32 E52 E70
    Date: 2023–02
  7. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wang, Ziqing (Sheffield Hallam University, Sheffield, United Kingdom)
    Abstract: This paper explores the economic impacts of the Bank of England’s quantitative easing policy, implemented as a response to the global financial crisis. Using an open economy Dynamic Stochastic General Equilibrium (DSGE) model, we demonstrate that monetary policy can remain effective even when nominal interest rates have reached the zero lower bound. We estimate and test the model using the indirect inference method, and our simulations indicate that a nominal GDP targeting rule implemented through money supply could be the most effective monetary policy regime. Additionally, our analysis suggests that a robust, active fiscal policy regime with nominal GDP targeting could significantly enhance economic stabilization efforts.
    Keywords: Quantitative easing, Financial friction, SOE-DSGE, Indirect inference, Zero bound
    JEL: E44 E52 E58 C51
    Date: 2023–04
  8. By: Jesús Fernández-Villaverde; Daniel R. Sanches
    Abstract: The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery.
    Keywords: gold standard; specie flows; non-neutrality of money; inside money
    JEL: E42 E58 G21
    Date: 2022–09–21
  9. By: Manuel Amador; Javier Bianchi
    Abstract: We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are, at best, irrelevant.
    Keywords: Helicopter drops; Central bank independence; Liquidity traps; Zero lower bound
    JEL: E58 E31 E61 E52 E63
    Date: 2023–04–06
  10. By: Asongu, Simplice A; Odhiambo, Nicholas M
    Abstract: The present study investigates how increasing bank accounts and bank concentration affect mobile money innovations in 148 countries. It builds on scholarly and policy concerns in the literature that increasing bank accounts may not be having the desired effects on financial inclusion on the one hand and on the other, that bank concentration which is a proxy for market power is a relevant mobile money innovation demand factor. The empirical evidence is based on Tobit regressions. From the findings, it is apparent that boosting bank accounts is positively related to the three mobile money innovations (i.e. mobile bank accounts and the mobile phone used to send money). Moreover, some critical levels of bank account penetration require complementary policies in order to maintain the positive relationship between boosting bank accounts and positive outcomes in terms of money mobile innovations. Conversely, financial inclusion in terms of the three mobile money innovations is not significantly apparent upon enhancing bank concentration. Policy implications are discussed in the light of the provided thresholds for complementary policies.
    Keywords: Mobile money; technology; diffusion; financial inclusion; inclusive innovation, information asymmetry
    Date: 2023–04
  11. By: Mr. Tanai Khiaonarong; David Humphrey
    Abstract: The use of cash for payments is not well measured. We view the value of cash withdrawn from ATMs, or as a share of all payments, as a more accurate and timely measure of cash use compared to the standard measure of currency in circulation, or as a ratio to GDP. These two measures are compared for 14 advanced and emerging market economies. When aggregated, the trend in cash use for payments is currently falling for half the world’s population. Such a measure can help inform policy decisions regarding CBDC and regulatory decisions concerning access to and use of cash.
    Keywords: Cash; payments; access to cash; central bank digital currency; cash use; ATM cash; aggregate Currency value; value of cash; use of cash; Currencies; Monetary base; Purchasing power parity; Stocks; Payment systems
    Date: 2023–03–17
  12. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: The present study investigates how increasing bank accounts and bank concentration affect mobile money innovations in 148 countries. It builds on scholarly and policy concerns in the literature that increasing bank accounts may not be having the desired effects on financial inclusion on the one hand and on the other, that bank concentration which is a proxy for market power is a relevant mobile money innovation demand factor. The empirical evidence is based on Tobit regressions. From the findings, it is apparent that boosting bank accounts is positively related to the three mobile money innovations (i.e. mobile bank accounts and the mobile phone used to send money). Moreover, some critical levels of bank account penetration require complementary policies in order to maintain the positive relationship between boosting bank accountsand positive outcomes in terms of money mobile innovations.Conversely, financial inclusion in terms of the three mobile money innovations is not significantly apparent upon enhancing bank concentration. Policy implications are discussed in the light of the provided thresholds for complementary policies.
    Keywords: Mobile money; technology; diffusion; financial inclusion; inclusive innovation, information asymmetry
    JEL: D10 D14 D31 D60 O30
    Date: 2023–01
  13. By: Joseph Abadi; Markus K. Brunnermeier; Yann Koby
    Abstract: The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model.
    Keywords: Monetary Policy; Lower Bound; Negative Rates; Banking
    JEL: E43 E44 E52 G21
    Date: 2022–09–01
  14. By: Paul Ho; Pierre-Daniel G. Sarte; Felipe Schwartzman
    Abstract: We study how international linkages and nominal price rigidities jointly shape the dynamics of inflation and output across multiple large economies. We describe how these features produce a global system of Phillips curves explicitly connected by multilateral trade relationships. In equilibrium, disturbances abroad propagate to domestic variables not only directly, through pairwise trade between countries, but also indirectly through third-country effects arising from the network structure of trade. The combined propagation mechanisms imply that country-specific shocks alone explain almost 90 percent of the observed average pairwise comovement in output growth between countries. These idiosyncratic shocks also explain more than 1/2 the cross-country comovement in inflation, and between output and inflation. We estimate that a European inflationary shock results in significant U.S. inflation accompanied by lower output, and that these responses transpire almost entirely from the network effects of trade. In addition, a tightening of U.S. monetary policy generates a percentage decline in output globally that is comparable to 1/2 the domestic response.
    Keywords: international comovement; multilateral trade; New Keynesian Phillips Curve
    JEL: E31 E32 F41 F44
    Date: 2022–11–16
  15. By: Berger, Helge (International Monetary Fund); Karlsson, Sune (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect that shocks to money growth has on inflation weakened notably after the 1980s before making a comeback after 2020. This instability implies that caution should be exercised when relating monetary aggregates to inflation.
    Keywords: Bayesian VAR; Time-varying parameters; Stochastic volatility; Model selection
    JEL: E31 E37 E47 E51
    Date: 2023–04–28
  16. By: Mr. Damiano Sandri; Mr. Francesco Grigoli
    Abstract: We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.
    Keywords: Capital controls; capital outflows; financial crises; inflation expectation; household inflation expectation; increase inflation expectation; sensitivity of inflation expectation; public debt level; Inflation; Inflation targeting; Quasi-fiscal operations; Global
    Date: 2023–03–17
  17. By: Huberto M. Ennis; Jeffrey M. Lacker; John A. Weinberg
    Abstract: After the events in March 2020, it became clear to policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed all associated stability concerns related to surges in withdrawals. In December 2021, the SEC proposed a new set of rules governing how money market funds can operate. A fundamental problem behind the instability of (some) money market funds is the expectation that backstop liquidity support will be provided by the government in the event of financial distress, along with the government's inability to credibly commit to not provide such support. This expectation dampens funds' incentives to take steps ahead of time to mitigate the risk of sudden withdrawals. The newly proposed reforms aim to address this problem by constraining withdrawals or penalizing them with "swing pricing." We argue that if the commitment problem is the fundamental issue, it would be more useful to reduce expectations of ex post support by requiring MMFs to have contractual commitments in place, ex ante, for liquidity support from private parties.
    Keywords: Money market funds; prime money market; Securities and Exchange Commission; regulation
    Date: 2022–06–23
  18. By: Silvia Albrizio (International Monetary Fund); Beatriz González (Banco de España); Dmitry Khametshin (Banco de España)
    Abstract: This paper explores the impact of monetary policy on capital misallocation through its heterogeneous effects on firms. Using Spanish firm-level data covering the period 1999-2019, we show that an expansionary monetary policy shock leads to a decrease in capital misallocation, as measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyse the mechanism behind this finding, we first explore the intensive margin and show that high-MRPK firms increase their investment and their debt financing relatively more than low-MRPK firms after monetary policy easing. We also document that a firm’s MRPK is a much stronger driver of its investment sensitivity to monetary policy than its age, leverage or cash. These findings suggest that MRPK is a good proxy for financial frictions. Second, we explore the extensive margin and show that monetary policy easing increases entry and decreases exit, although the effect is quantitatively small, and it does not lead to significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, the evidence points to expansionary monetary policy decreasing capital misallocation mainly through the relaxation of financial frictions of incumbent, productive, constrained firms.
    Keywords: monetary policy, financial frictions, investment, misallocation, productivity
    JEL: D22 D24 E22 E32 E52 O11 O4
    Date: 2023–01
  19. By: Müller, Henrik; Schmidt, Tobias; Rieger, Jonas; Hornig, Nico; Hufnagel, Lena Marie
    Keywords: Inflation, expectations, narratives, latent Dirichlet allocation, text mining, computational methods
    Date: 2023
  20. By: Joshua Fernandes; Michael Mueller
    Abstract: The COVID-19 pandemic placed unprecedented strain on the global financial system. We describe how the Bank of Canada responded to the rapidly deteriorating liquidity in core Canadian fixed-income markets. We also describe how market functioning improved after the Bank intervened. The Bank implemented several emergency facilities to ease market-wide liquidity strains, restore market functioning and support the stabilization and recovery of the Canadian economy. Over time, market functioning improved, and liquidity returned to pre-pandemic levels. The Bank’s facilities helped resolve market dysfunction and ensured that credit continued to be extended to households and businesses.
    Keywords: Coronavirus disease (COVID-19); Financial markets; Market structure and pricing; Monetary policy and uncertainty
    JEL: E44 E58 G01
    Date: 2023–04
  21. By: Boris Fisera (Faculty of Social Sciences, Charles University, Prague & Institute of Economic Research, Slovak Academy of Sciences, Bratislava)
    Abstract: While it is often argued that exchange rate depreciation has a beggar-thy-neighbour effect, in this paper, we investigate, whether exchange rate depreciation has a beggarthyself effect. Specifically, we explore the distributional consequences of Exchange rate movements. Using a heterogeneous panel cointegration approach, we find that, on average, small depreciations of the domestic currency decrease income inequality over the long-term. However, large depreciations in excess of 25%, increase income inequality over the long term. Large appreciations of the domestic currency also increase income inequality. Next, we identify 119 episodes of managed depreciations to better capture the distributional consequences of exchange rate movements. Managed depreciations are defined as situations in which the central bank intervenes to depreciate its domestic currency. Using the local projections (LP) approach, we find that managed depreciation shocks decrease income inequality. We find no evidence supporting the idea that exchange rate depreciation has a "beggar-thyself" effect with respect to income inequality, as it does not seem to increase inequality.
    Keywords: exchange rate depreciation, income inequality, competitive devaluation, managed depreciation, distributional effects
    JEL: F10 F30 F31 F43
    Date: 2023–04
  22. By: António Manuel Portugal Duarte (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Fátima Teresa Castelo Assunção Sol Murta (Univ of Coimbra, CeBER, Faculty of Economics); Nuno José Henriques Baetas da Silva (Ph.D. Student at Faculty of Economics, University of Coimbra); Beatriz Rodrigues Vieira (Univ Coimbra, Faculty of Economics)
    Abstract: This paper analysis and compares the volatility of seven cryptocurrencies – Bitcoin, Dogecoin, Ethereum, BitcoinCash, Ripple, Stellar and Litecoin – to the volatility of seven centralized currencies – Yuan, Yen, Canadian Dollar, Brazilian Real, Swiss Franc, Euro and British Pound. We estimate GARCH models to analyze their volatility. The results point to a considerably high volatility of cryptocurrencies when compared to that of centralized currencies. Therefore, we conclude that cryptocurrencies still fall far short of fulfilling all the requirements to be considered as a currency, specifically regarding the functions of store of value and unit of account.
    Keywords: Centralized currencies, cryptocurrencies; GARCH models; volatility.
    Date: 2023–03
  23. By: Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu
    Abstract: We construct a two-country New Keynesian model in which US government debt has an advantage as a superior collateral asset in the balance sheets of banks. The model can account for the observed response of the US dollar and US bond returns to a global downturn, in particular when the downturn is associated with a global financial crisis. In our model, the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates and the “convenience yield” earned by U.S. government bonds increases. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. In addition, the model displays a U.S. real exchange rate appreciation despite that domestic absorption in the US falls relative to the rest of the world during a global downturn, thus addressing the “reserve currency paradox” highlighted by Maggiori (2017).
    JEL: F30 F40 G15
    Date: 2023–04
  24. By: Goodhart, C. A. E.; Lastra, Rosa
    Abstract: In this paper we revisit the Lender of Last Resort (LOLR) function of the central bank and the associated moral hazard incentives. We argue that, from an economic perspective, the strict application of penalties to the operation of LOLR actions can make that instrument unworkable. Instead, we suggest that both penalties and publication should only be applied after such LOLR had been in place for a time. Normative frameworks ought to be adjusted in this regard.
    Keywords: lender-of-last-resort; illiquidity; insolvency; stigma
    JEL: E50 E58 E59 G18
    Date: 2023–03–29
  25. By: Pana Alves (Banco de España); Sergio Mayordomo; Manuel Ruiz-García (Banco de España)
    Abstract: Access to financing in fixed-income markets enables firms to diversify their sources of financing and reduces their vulnerability, particularly in periods when access to bank credit is restricted. This paper analyses the factors explaining firms’ recourse to capital market financing using the ERICA database, which contains detailed information on the balance sheets of the main non-financial groups listed in euro area countries. The results show that size is the most important determinant of recourse to this source of financing. According to the results of this paper, the introduction of the corporate sector purchase programme by the European Central Bank in 2016 appears to have contributed to improving capital market access for smaller listed firms. Nonetheless, size continues to be a key barrier to capital market access. Implementation of other more structural initiatives, such as the capital markets union, could help to further reduce these barriers to access to external financing.
    Keywords: corporate financing, fixed-income securities, CSPP, small listed firms, bank financing
    JEL: E51 E52 E58 G2 G12 G15 G23
    Date: 2022–05
  26. By: Carlos Casacuberta; Omar Licandro
    Abstract: In 2002 Uruguay faced a sudden stop of international capital flows, inducing a deep financial crisis and a large devaluation of the peso. The real exchange rate depreciated and exports expanded. Paradoxically, export shares and real exchange rates negatively correlate among Uruguayan exporters around 2002. To unravel this paradox, we develop a small open economy model of heterogeneous firms. Domestic firms are price takers in the international market, operate under monopolistic competition in the domestic market, and face financial constraints when exporting. Confronted to a large nominal devaluation, financial constraints deepen. Financially constrained exporters cannot optimally expand in the export market and react by passing-through the devaluation to the domestic price only partially, expanding domestic sales. As a consequence, the more financially constrained exporters are, the less their export shares expand and the more their firm specific real exchange rates depreciate. As a result, export shares and real exchange rates of exporters are negatively correlated as in the data.
    Date: 2023
  27. By: Simplice A. Asongu (Yaounde, Cameroon); Sara le Roux (Oxford Brookes University, Oxford, UK)
    Abstract: The study examines how mobile money innovations transform unemployed women to self-employed women. The empirical evidence is based on interactive quantile regressions focusing on data in 44 countries from sub-Saharan Africa for the period 2004 to 2018. The hypothesis that mobile money innovations transform female unemployment to female self-employment is tested. Eight mobile money innovation dynamics presented in four categories are employed. Three main common findings are apparent from interactions between female unemployment, eight mobile money innovation dynamics and female self-employment: (i) the investigated hypothesis is valid exclusively at the top quantiles of female self-employment; (ii) the net effects are consistently negative and (iii) the corresponding conditional or interactive effects upon which the net effects are based are consistently positive. This is an indication that critical masses at which money innovation innovations have an overall positive net effect on female self-employment are apparent. The corresponding mobile money innovation policy thresholds at which the net effects on female self-employment change from negative to positive are provided. Policy implications are discussed.
    Keywords: Mobile phones; financial inclusion; women; inequality; sub-Saharan Africa
    JEL: G20 O40 I10 I20 I32
    Date: 2023–01
  28. By: Ablam Estel Apeti (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne); Jean-Louis Combes (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne); Eyah Denise Edoh (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne)
    Abstract: This paper examines the impact of mobile money adoption on entrepreneurship in a large panel of 105 developing countries over the period 2006-2020 using entropy balancing method. Results indicate that countries with mobile money have higher entrepreneurial activities. Specifically, countries with mobile money experienced an increase of 0.35 percentage points in their entrepreneurial activity compared to nonmobile money countries. This result is robust to several robustness tests, including altering the definition of mobile money, the definition of entrepreneurship, placebo tests, adding additional control variables, changing the sample design, and alternative estimation methods such as panel fixed effects, and the GMM system. Furthermore, the heterogeneity tests performed indicate the sensitivity of our results to the intensity of mobile money use, some structural factors such as democracy, conflict, regulatory quality, corruption, financial development, internet, and education.
    Keywords: Mobile money, entrepreneurship, entropy balancing, developing countries
    Date: 2023–04–25
  29. By: ITO Hiroyuki; XU Ying
    Abstract: This paper examines whether, and if so, to what extent uncertainty increases the degree of the use of U.S. dollars in cross-country loans. To this end, we investigate what factors affect the choice of currency for denomination of cross-border syndicated loans. Among them, we focus on whether external shocks and global uncertainties, such as uncertainty stemming from U.S. monetary, fiscal, and trade policies, financial instability (measured by VIX), and infectious disease risk affect the choice of international loans. The analysis uses micro firm-level data on syndicated loans agreed between borrowers located in 25 emerging market economies (EMEs) and lenders from 59, from the 1995 to 2019 period. We find that uncertainties driven by U.S. trade policy led to a higher USD share in total international loans from the borrowers’ perspective, indicating the borrowers’ inclination to avert the exchange rate risk or volatility that may arise due to the uncertainty of U.S. trade policy. A rise in the general level of U.S. economic policy and the intensity of financial instability both have a negative impact on the USD share, likely reflecting dollar shortages at the time of increasing economic policy uncertainty and financial instability. The estimation on the currency shares from the lenders’ perspective also confirms these impacts on U.S. economic uncertainties and financial instability. We also test the correlation between currency choice for international loans and the borrowers’ revenue volatility, and find that syndicated loans in the local currency are associated with less revenue volatility compared to USD-denominated loans.
    Date: 2023–04
  30. By: Medina, Juan Pablo; Toni, Emiliano; Valdes, Rodrigo
    Abstract: There is consensus that Chile has made substantial progress in its macroeconomic policies during the last 30 years. However, there is no comprehensive and formal quantification of the macroeconomic stabilization gains in terms of the critical dimensions in the conduct of monetary and fiscal policies. In this work, we make an effort to quantify these gains using a structural model that incorporates essential features of the Chilean economy, disentangling the role of changes in policies and shocks in shaping the business cycles. We pay particular attention to two simultaneous and significant policy regime changes. In 2000, Chile moved from a managed exchange rate regime to a floating one coupled with flexible inflation targeting. On fiscal, policy shifted to a more countercyclical budget, changing a the-facto nominal target for a structural one. Policies also deviated from their implicit rules in the old and the new regimes—the ``art" policy component. Fitting the model to the Chilean data through Bayesian techniques in the period 1990-2015, we find that a flexible exchange rate regime and a countercyclical fiscal rule enhance each other in terms of lowering macroeconomic volatility, especially those arising from commodity prices and other critical economic shocks. Together, the monetary and budgetary reforms attenuated both GDP and inflation's volatility considerably in 2000-2015 (compared to the counterfactual based on the 90's policies). The art part also contributed substantially to lowering macro volatility, especially fiscal policy deviations on GDP volatility. For the 90s, the counterfactuals using the new policy framework also show lower volatility and an even more relevant role for policy deviations.
    Keywords: DSGE Model, Fiscal and Monetary Policies, Macroeconomic stabilization, Chile.
    JEL: C54 E32 E37 E52 E62 F41
    Date: 2023–04–28
  31. By: Rodney J. Garratt; Zhentong Lu; Phoebe Tian
    Abstract: Using detailed data from Canada’s new high-value payment system (HVPS), we show how participants of the system save liquidity by exploiting the new gridlock resolution arrangement. These observed behaviors are consistent with the equilibrium of a “gridlock game” that captures the key incentives that participants face in the system. The findings have important implications for the design of HVPSs and shed light on financial institutions’ liquidity preference.
    Keywords: Financial institutions; Payment clearing and settlement systems
    JEL: E42 E58 G21
    Date: 2023–05
  32. By: Felipe N. Del Canto; John R. Grigsby; Eric Qian; Conor Walsh
    Abstract: We develop a framework to measure the welfare impact of inflationary shocks throughout the distribution. The first-order impact of a shock is summarized by the induced movements in agents' feasible sets: their budget constraint and borrowing constraints. To measure this impact, we combine estimated impulse response functions with micro-data on household consumption bundles, asset holdings and labor income for different US households. We find that inflationary oil shocks are regressive, but monetary expansions are progressive, and there is substantial heterogeneity throughout the life cycle. In both cases, the dominant channel is the effect of the shock on asset prices, not movements in goods prices or labor income.
    JEL: E2 E30 E50
    Date: 2023–04
  33. By: Sylvain Barthélémy (TAC Economics, Saint-Hilaire-des-Landes, France); Fabien Rondeau (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France); Virginie Gautier (TAC Economics and University of Rennes, France.)
    Abstract: Currency crises, recurrent events in economic history for developing, emerging and developed countries, generate disastrous economic consequences. This paper proposes an early warning system for currency crises using sophisticated recurrent neural networks like Long Short-Term Memory (LSTM) and Gated Recurrent Unit (GRU). These models were initially used in language processing where they performed well. Such models are increasingly used in forecasting nancial asset prices, including exchange rates, but they have not yet been applied to the prediction of currency crises. As for all recurrent neural networks, they allow to take into account non-linear interactions between variables and the inuence of past data in a dynamic form. For a set of 68 countries including developed, emerging and developing economies over the period 1995-2020, LSTM and GRU outperformed our benchmark models. LSTM and GRU correctly sent continous signals within a two-year warning window to alert 91% of the crises. For LSTM, false signals represent only 14% of the emitted signals compared to 23% for the logistic regression, making them ecient early warning systems for policymakers.
    Keywords: currency crises, early warning system, neural network, long short-term memory, gated recurrent unit
    JEL: F14 F31 F47
    Date: 2023–04
  34. By: Sonsoles Gallego (Banco de España); Isabel Garrido (Banco de España); Ignacio Hernando (Banco de España)
    Abstract: Between 2009 and 2010, in response to the global financial crisis, the International Monetary Fund created a number of lending tools to pre-empt and insure against crises. These pre-emptive facilities were intended for countries with sound economic fundamentals and policies, but with exposure to financial contagion risks. The use of these instruments (in terms of number of countries) was limited during the first ten years of their existence, but with the outbreak of the pandemic three Latin American countries applied to use them. An assessment of these lines suggests they have performed the insurance function for which they were conceived. In anticipation of the forthcoming review of these credit lines, and in the light of recent experience, possible reasons for the limited demand are analysed and relevant factors are suggested for the design of “exit strategies”, the aspect of their use that has attracted most attention.
    Keywords: IMF, insurance facilities, Flexible Credit Line, Short-term Liquidity Line, Latin America
    JEL: F30 F33
    Date: 2023–02
  35. By: Csaba Burger (Magyar Nemzeti Bank (the Central Bank of Hungary)); Mihály Berndt (Clarity Consulting Kft)
    Abstract: Supervised machine learning methods, in which no error labels are present, are increasingly popular methods for identifying potential data errors. Such algorithms rely on the tenet of a ‘ground truth’ in the data, which in other words assumes correctness in the majority of the cases. Points deviating from such relationships, outliers, are flagged as potential data errors. This paper implements an outlier-based error-spotting algorithm using gradient boosting, and presents a blueprint for the modelling pipeline. More specifically, it underpins three main modelling hypotheses with empirical evidence, which are related to (1) missing value imputation, (2) the loss-function choice and (3) the location of the error. By doing so, it uses a cross sectional view on the loan-to-value and its related columns of the Credit Registry (Hitelregiszter) of the Central Bank of Hungary (MNB), and introduces a set of synthetic error types to test its hypotheses. The paper shows that gradient boosting is not materially impacted by the choice of the imputation method, hence, replacement with a constant, the computationally most efficient, is recommended. Second, the Huber-loss function, which is piecewise quadratic up until the Huber-slope parameter and linear above it, is better suited to cope with outlier values; it is therefore better in capturing data errors. Finally, errors in the target variable are captured best, while errors in the predictors are hardly found at all. These empirical results may generalize to other cases, depending on data specificities, and the modelling pipeline described underscores significant modelling decisions.
    Keywords: data quality, machine learning, gradient boosting, central banking, loss functions, missing values
    JEL: C5 C81 E58
    Date: 2023
  36. By: Laura Álvarez (Banco de España); Alberto Fuertes (Banco de España); Luis Molina (Banco de España); Emilio Muñoz de la Peña (Banco de España)
    Abstract: This paper analyses the main trends in the private sector’s issuance activity in international capital markets during 2021, a year in which, despite positive developments that resulted in volumes above pre-2020 levels, the record 2020 figures were not achieved. Thus, the total issuance volume of debt securities declined due to lower issuance in the non-financial corporate sector, which may have been driven by the large amount of funds raised during 2020, lower funding needs for precautionary reasons in view of the improved health situation and higher funding costs. However, bond issuance by the banking sector and other financial institutions increased; this growth was concentrated in the United States, on expectations of monetary policy tightening in that area and regulatory factors. High-yield bond issuance also increased, benefiting from lower risk aversion. By region, the sharpest declines were in the United States, followed by the United Kingdom and the euro area. Conversely, issuance in the equity markets was strong and surpassed the 2020 figures.
    Keywords: bond issuance, international capital markets, corporate finance, debt securities, equities
    JEL: G15 G20 G32
    Date: 2022–11
  37. By: Kosuke Aoki (University of Tokyo); Yoshihiko Hogen (Bank of Japan); Kosuke Takatomi (Bank of Japan)
    Abstract: We estimate price markups and wage markdowns of Japanese firms using a newly constructed dataset of individual firms' financial statements -- which covers about 80 percent of the Economic Census in terms of sales size. We find that Japanese firms have secured profits by increasing markdowns amid a declining trend in markups, which has ultimately led to the stabilization of the labor share in the long run. We also find that this trend has been more pronounced among small firms in the non-manufacturing sector. Comparing our results with the U.S., (1) markdowns have increased in both Japan and the U.S., however, (2) the decline in markups in Japan is in stark contrast to the U.S., where the rise of the so-called superstar firms with strong market power has led to expansions of markups for the whole corporate sector.
    Keywords: Price markup; Wage markdown; Monopsony; Labor share
    JEL: E24 E31 J30 J42 L12
    Date: 2023–04–21
  38. By: U. Devrim Demirel; Matthew Wilson
    Abstract: Fiscal policy provided substantial support to economic growth in 2020 and 2021 amid disruptions to supply in product and labor markets, adding to the inflationary pressures that emerged during the strong rebound from the pandemic-induced recession. In this paper, we investigate the implications of supply disruptions and economic slack for the inflationary effects of fiscal policy. We propose and estimate a nonlinear Phillips curve, whereby the sensitivity of inflation to changes in demand varies with supply conditions and the amount of slack in the economy. Our results
    JEL: E37 E62 E31
    Date: 2023–04–25

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