nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒05‒29
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A Simple Model of a Central Bank Digital Currency By Bineet Mishra; Eswar S. Prasad
  2. The Energy-Price Channel of (European) Monetary Policy By Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
  3. Bank capitalization heterogeneity and monetary policy By Peter Paz
  4. Money market funds and the pricing of near-money assets By Sebastian Doerr; Sebastian Egemen Eren; Semyon Malamud
  5. Trend Inflation and Exchange Rate Dynamics : A New Keynesian Approach By KANO, Takashi
  6. Dampening global financial shocks: can macroprudential regulation help (more than capital controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob Hansen; Katharina Damiano Sandri
  7. Can We Use High-frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No! By Jonathan Hambur; Qazi Haque
  8. Loose Monetary Policy and Financial Instability By Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
  9. Inflation as Redistribution. Creditors, Workers, Policymakers By Bichler, Shimshon; Nitzan, Jonathan
  10. Carbon pricing and inflation volatility By Daniel Santabárbara; Marta Suárez-Varela
  11. Modeling the impact of sanctions on inflation expectations By Matevosova Anastasia
  12. The Global Pandemic, Laboratory of the Cashless Economy? By Jeremy Srouji; Dominique Torre
  13. How Deposit Insurers Account for Inflation: Practices and Existing Guidance By Van Roosebeke, Bert; Defina, Ryan
  14. Inflation Expectations and Misallocation of Resources: Evidence from Italy By Tiziano Ropele; Yuriy Gorodnichenko; Olivier Coibion
  15. “Making Text Talk”: The Minutes of the Central Bank of Brazil and the Real Economy By Carlos Moreno Pérez; Marco Minozzo
  16. The Slope of the Phillips Curve for Service Prices in Japan: Regional Panel Data Approach By Yui Kishaba; Tatsushi Okuda
  17. Money Aggregates, Debt, Pent-Up Demand, and Inflation: Evidence from WWII By Federico S. Mandelman
  18. Telecommunications regulation, mobile money innovations and financial inclusion By Simplice A. Asongu
  19. Inflation Surge and Sovereign Borrowing: The Role of Policy Practices in Strengthening Sovereign Resilience By Joshua Aizenman; Huanhuan Zheng
  20. Market-Function Asset Purchases By Darrell Duffie; Frank M. Keane
  21. Effectiveness of Foreign Exchange Interventions Evidence and Lessons from Chile By Jorge Arenas; Stephany Griffith-Jones
  22. Monetary policy and the joint distribution of income and wealth: The heterogeneous case of the euro area By Anna Stelzer
  23. Supply Chain Constraints and Inflation By Diego A. Comin; Robert C. Johnson; Callum J. Jones
  24. The Transmission of Negative Nominal Interest Rates in Finland By Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
  25. It’s Baaack: The Surge in Inflation in the 2020s and the Return of the Non-Linear Phillips Curve By Pierpaolo Benigno; Gauti B. Eggertsson
  26. Drivers of Post-pandemic Inflation in Selected Advanced Economies and Implications for the Outlook By Danilo Cascaldi-Garcia; Musa Orak; Zina Saijid
  27. On the pass-through of large devaluations By Carlos Casacuberta; Omar Licandro
  28. Real Effects of Supplying Safe Private Money By Xu, Chenzi; Yang, He
  29. A Theory of Net Capital Flows over the Global Financial Cycle By J. Scott Davis; Eric Van Wincoop
  30. Macroprudential FX Regulations: Sacrificing Small Firms for Stability? By María Alejandra Amado
  31. The Bitcoin–Macro Disconnect By Gianluca Benigno; Carlo Rosa
  32. Forecasting CPI Shelter under Falling Market-Rent Growth By Christopher D. Cotton; John O'Shea
  33. The Inflationary Effects of Sectoral Reallocation By Francesco Ferrante; Sebastian Graves; Matteo Iacoviello
  34. Re-evaluating whether absolute or relative purchasing power parity is being tested when using price indices By Stewart, Chris
  35. Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations By Hess T. Chung; Etienne Gagnon; James Hebden; Kyungmin Kim; Bernd Schlusche; Eric Till; James Trevino; Diego Vilán
  36. The US, Economic News, and the Global Financial Cycle By Christoph E. Boehm; Niklas Kroner
  37. The foreign exchange market By Alain Chaboud; Dagfinn Rime; Vladyslav Sushko
  38. Trade Credit and Exchange Rate Risk Pass Through By Bryan Hardy; Felipe E. Saffie; Ina Simonovska
  39. Identifying Financial Crises Using Machine Learning on Textual Data By Mary Chen; Matthew DeHaven; Isabel Kitschelt; Seung Jung Lee; Martin Sicilian
  40. Occasional paper on Stablecoins By Banco de Portugal working group on crypto-assets

  1. By: Bineet Mishra; Eswar S. Prasad
    Abstract: We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can influence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.
    JEL: E4 E5 E61
    Date: 2023–04
  2. By: Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
    Abstract: This study examines whether central banks can combat inflation that is caused by rising energy prices. By using a high-frequency event study and a Structural Vector Autoregression, we find evidence that the European Central Bank (ECB) and the Federal Reserve (Fed) are capable of doing so by affecting domestic and global energy prices. This “energy-price channel” of monetary policy plays an important role in the transmission mechanism of monetary policy. As many major sources of energy, such as oil, are priced in dollars, fluctuations in the domestic exchange rate vis-a-vis the dollar crucially shapes the transmission of monetary policy to energy prices. On the one hand an appreciation of the euro against the dollar lowers local energy prices (in euro) through cheaper imports. On the other hand lower import prices raise energy demand and thereby increase global energy prices (in dollars). Our counterfactual analysis demonstrates that both effects are present, but the latter effect is stronger than the former.
    Keywords: Inflation, energy prices, monetary policy transmission mechanism
    JEL: C22 E31 E52 Q43
    Date: 2023
  3. By: Peter Paz (Banco de España)
    Abstract: This paper shows that heterogeneity in bank capitalization ratios plays a crucial role in the transmission of monetary policy to bank lending. First, I offer new empirical evidence on how banks’ lending responses to monetary policy shocks depend on their capitalization ratios. Highly capitalized banks reduce their lending more after a monetary tightening, even after controlling for bank liquidity, size and market power in the deposit market. I also document how highly capitalized banks have a riskier portfolio, as measured by loan charge-off rates, and default rates on their loans increase relatively more after a tightening in monetary policy. I then construct a dynamic macroeconomic model that rationalizes the empirical evidence through the interaction of the heterogeneous recovery technologies of banks facing a risk-weighted capital constraint. In particular, after an increase in the policy rate, the model predicts that loan rates and default probabilities increase in both sectors. Highly capitalized banks with a riskier portfolio are more sensitive because the risk-weighted capital constraint affects them more, so they contract lending more. In a counterfactual analysis, I find higher capital requirements amplify the effects of monetary policy.
    Keywords: monetary policy, banks, heterogeneity
    JEL: E43 E52 E58 E60 G21
    Date: 2022–10
  4. By: Sebastian Doerr; Sebastian Egemen Eren; Semyon Malamud
    Abstract: US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos). We build a theoretical model in which MMFs strategically interact with banks and each other. These interactions generate interdependencies between repo and T-bill markets, affecting the pricing of these near-money assets. Consistent with the model's predictions, we empirically show that when MMFs allocate more cash to the T-bill market, T-bill rates fall, and the liquidity premium on T-bills rises. To establish causality, we devise instrumental variables guided by our theory. Using a granular holding-level dataset to examine the channels, we show that MMFs internalize their price impact in the T-bill market when they set repo rates and tilt their portfolios towards repos with the Federal Reserve when Treasury market liquidity is low. Our results have implications for the transmission of monetary policy, benchmark rates, and government debt issuance.
    Keywords: T-bills, repo, money market funds, near-money assets, liquidity
    JEL: E44 G11 G12 G23
    Date: 2023–05
  5. By: KANO, Takashi
    Abstract: This study examines the exchange rate implications of trend inflation within a two-country New Keynesian (NK) model. An NK Phillips curve generalized by trend inflation makes the inflation differential smoother, more persistent, and less sensitive to the real exchange rate. A Bayesian analysis with post-Bretton Woods data for Canada and the U.S. shows that the model’s equilibrium, which relies on Taylor rules with a persistent trend inflation shock and strong policy inertia, mimics empirical regularities in exchange rates that are difficult to reconcile within a standard NK model. Trend inflation helps explain the empirical puzzles of the exchange rate dynamics.
    Keywords: Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Model, Bayesian analysis
    JEL: E31 E52 F31 F41
    Date: 2023–04
  6. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob Hansen; Katharina Damiano Sandri
    Abstract: We show that macroprudential regulation significantly dampens the impact of global financial shocks on emerging markets. Specifically, a tighter level of regulation reduces the sensitivity of GDP growth to capital flow shocks and movements in the VIX. A broad set of macroprudential tools contributes to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. We do not find evidence that capital controls provide similar benefits.
    Keywords: macroprudential regulation, monetary policy, capital controls
    JEL: F3 F4 E5
    Date: 2023–05
  7. By: Jonathan Hambur (Reserve Bank of Australia); Qazi Haque (University of Adelaide)
    Abstract: Understanding the effects of monetary policy and its communication is crucial for a central bank. This paper explores a new approach to identifying the effects of monetary policy using high-frequency data around monetary policy decisions and other announcements that allows us to explore different facets of monetary policy, specifically: current policy action; signalling or forward guidance about future rates; and the effect on uncertainty and term premia. The approach provides an intuitive lens through which to understand how policy and its communication affected expectations for rates and risks during certain historical periods, and more generally. For example, it suggests that: (i) signalling/forward guidance shocks tended to raise expected future policy rates in the mid-2010s as the RBA highlighted rising risks in housing markets; (ii) COVID-19-era monetary policy worked mainly through affecting term premia rather than expectations for future policy rates, unlike pre-COVID-19 policy; and (iii) shocks to the expected path of rates are predictable based on data available at the time, which suggests that markets systematically misunderstand how the RBA reacts to data, highlighting the importance of clear communication. We also explore the macroeconomic effects of these different shocks. The effects of shocks to current policy are similar to those estimated in previous papers, and existing issues such as the 'price puzzle' remain, while the effects of other shocks are imprecisely estimated. Although the approach provides little new information on the macroeconomic effects of monetary policy, it does highlight the importance of these other facets of policy in moving interest rates and suggests additional work in this space could be valuable.
    Keywords: high-frequency data; affine term structure model; multidimensional policy shocks; monetary policy transmission
    JEL: C58 E43 E52 E58
    Date: 2023–05
  8. By: Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
    Keywords: financial crises; crisis prediction; monetary policy; natural rate
    JEL: E43 E44 E52 E58 G01 G21 N10
    Date: 2023–02–06
  9. By: Bichler, Shimshon; Nitzan, Jonathan
    Abstract: This paper is part of a dialogue with Blair Fix on how inflation redistributes income between creditors and workers and the way in which monetary policy affects this process. In his 2023 paper, ‘Inflation! The Battle Between Creditors and Workers’, Fix shows, first, that the impact of U.S. inflation on creditor-worker distribution has been historically contingent (favouring workers during some periods and creditors in others); and second, that since the 1970s, Fed policy to combat inflation with higher interest rates boosted the yield of creditors relative to the wage rate of workers. Our own research suggests that these conclusions might be too general. We point out that creditors are not a monolithic class and that different types of creditors are affected differently, and often inversely, by the rate of interest. We illustrate that, contrary to bank depositors, bondholders tend to lose from inflation. And we show that monetary policy, at least in the United States, appears to follow rather than determine market yields. More generally, since most capitalists nowadays are lenders as well as borrowers, and given that ‘dominant capital’ profits from the full spectrum of investment instruments, we wonder if ‘creditors’ is still a useful category for analysing redistribution in general and inflationary redistribution in particular.
    Keywords: Blair Fix, bond yields, creditors, income distribution, inflation, interest rate, monetary policy, total returns, wages
    JEL: G12 E5 J3 D3 E5
    Date: 2023
  10. By: Daniel Santabárbara (Banco de España); Marta Suárez-Varela (Banco de España)
    Abstract: Carbon pricing initiatives, designed to increase the relative prices of greenhouse gas-intensive goods and services, could not only push up CPI inflation but also affect its volatility. Existing empirical literature has only found that carbon pricing schemes are generally associated to a transitory effect on the level of inflation. This paper assesses empirically the effects of carbon pricing on inflation volatility for both carbon tax and cap-and-trade schemes (also known as emission trading systems). Our work finds strong evidence that cap-and-trade schemes are associated with larger volatility in CPI headline inflation, while no significant effect is found in the case of carbon taxes. This effect seems to feed only through the energy component, and does not seem to affect the volatility of core inflation. In addition, we find that under cap-and-trade schemes, both the increase in the underlying price of emissions and the expansion in the activities covered by these initiatives are associated with greater inflation volatility. These findings have important policy implications, given that inflation volatility could complicate the conduct of monetary policy. Since the ambition to mitigate climate change in the years to come is expected to be implemented through broader coverage of carbon pricing, central banks should monitor those developments closely.
    Keywords: carbon pricing, emission trading systems, carbon tax, inflation, inflation volatility
    JEL: E31 E32 E52 E58 Q48 Q58
    Date: 2022–09
  11. By: Matevosova Anastasia (Department of Economics, Lomonosov Moscow State University)
    Abstract: In 2022, Russian economy faced unprecedented sanctions pressure from the collective West. Against this background, the government and the Central Bank need to constantly monitor the economic situation in the Russian Federation in order to take timely and effective measures. A high-frequency indicator of inflation expectations based on big data can help in the solution of this problem. In the article the author presents significant shortcomings leading to the inapplicability of existing common approaches to assessing inflation expectations under sanctions. Based on the constructed high-frequency indicators of inflation expectations, contribution of sanctions to the formation of inflation expectations and sanctions concerns, the impact of sanctions on the inflation expectations of Russian population is analyzed.
    Keywords: sanctions, inflation expectations, high-frequency indicator, inflation
    JEL: F51 E31 D84 C55 C82
    Date: 2023–05
  12. By: Jeremy Srouji (Université Côte d'Azur, France; GREDEG CNRS); Dominique Torre (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: The COVID-19 pandemic has had a profound impact on payment systems and preferences around the world, reducing the use of cash in favor of digital payment instruments and accelerating the discussion around the need for a central bank digital currency. This article presents the digital payments and cashless agenda both before and after the pandemic, focusing on how the changing payments landscape has influenced the priorities and decisions of regulators, banks and other financial intermediaries with regards to the future shape of payment systems. It finds that while the pandemic has demonstrated the benefits associated with building an advanced, competitive and integrated digital payments eco-system, it has also brought to the forefront more disparities and fragmentation than convergence between payment systems in different regions of the world.
    Keywords: Central bank digital currencies, CBDC, digital payments, mobile money, cashless, payment systems, e-wallets
    Date: 2022–05
  13. By: Van Roosebeke, Bert; Defina, Ryan
    Abstract: IADI Guidance in place recommends a review of deposit insurance coverage levels more frequently than every five years if consumer price inflation is high. This review may not necessarily lead to a change of coverage levels. Although data availability on this topic is very limited, we find: • On a self-reported basis and irrespective of inflation, only half of deposit insurers “periodically” review the coverage level. Although this share has been growing over the past decade, evidence from a sub-sample suggests that irrespective of inflation, periodic review of coverage levels by deposit insurers may regularly take place at intervals exceeding five years. • Linking data on coverage review to historical inflation figures on an individual jurisdictional level, we found no substantial evidence that high inflation correlates with more regular periodic review of coverage levels. • As to changes of coverage levels – which are observable, in contrast to reviews – we find some early evidence to suggest that coverage levels are adjusted more frequently in jurisdictions with higher levels of inflation.
    Keywords: deposit insurance; bank resolution; inflation
    JEL: E31 G21 G33
    Date: 2022–11
  14. By: Tiziano Ropele; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using Italian data that includes both inflation forecasts of firms and external information on their balance sheets, we study the causal effect of changes in the dispersion of beliefs about future inflation on the misallocation of resources. We find that as disagreement increases, so does misallocation. In times of low inflation, the aggregate TFP loss of the dispersed expectations-induced misallocation is low, but we argue that it likely becomes quite significant in times of high inflation.
    JEL: E3 E5 E7
    Date: 2023–04
  15. By: Carlos Moreno Pérez (Banco de España); Marco Minozzo (University of Verona)
    Abstract: This paper investigates the relationship between the views expressed in the minutes of the meetings of the Central Bank of Brazil’s Monetary Policy Committee (COPOM) and the real economy. It applies various computational linguistic machine learning algorithms to construct measures of the minutes of the COPOM. First, we create measures of the content of the paragraphs of the minutes using Latent Dirichlet Allocation (LDA). Second, we build an uncertainty index for the minutes using Word Embedding and K-Means. Then, we combine these indices to create two topic-uncertainty indices. The first one is constructed from paragraphs with a higher probability of topics related to “general economic conditions”. The second topic-uncertainty index is constructed from paragraphs that have a higher probability of topics related to “inflation” and the “monetary policy discussion”. Finally, we employ a structural VAR model to explore the lasting effects of these uncertainty indices on certain Brazilian macroeconomic variables. Our results show that greater uncertainty leads to a decline in inflation, the exchange rate, industrial production and retail trade in the period from January 2000 to July 2019.
    Keywords: Central Bank of Brazil, monetary policy communication, Latent Dirichlet Allocation, monetary policy uncertainty, Structural Vector Autoregressive model, Word Embedding
    JEL: C32 C45 D83 E52
    Date: 2022–11
  16. By: Yui Kishaba (Bank of Japan); Tatsushi Okuda (Bank of Japan)
    Abstract: We estimate the slope of the Phillips curve for service prices in Japan using prefecture-level panel data, where we control the impact of inflation expectations on inflation by including time-fixed effects instead of proxies for inflation expectations. Our estimates indicate the flattening of the slope of the Phillips curve for the majority of seven subgroups in services since the 2000s. We also examine for any changes in the slope of the Phillips curve in the 2010s and during the Covid-19 pandemic, but observe no clear evidence of such changes.
    Keywords: Phillips curve; Service prices; Inflation expectations; Inflation dynamics
    JEL: C32 C33 E31 E52
    Date: 2023–05–01
  17. By: Federico S. Mandelman
    Abstract: The COVID-19 pandemic produced a massive decline in U.S. consumption in 2020 and swift fiscal and monetary responses. After growing at a rather steady 5 percent rate for decades, the money supply (M2) increased 25 percent over the past year alongside unprecedented fiscal support, raising some inflationary concerns. Concurrent with the reopening of the economy as vaccines roll out, this article derives some lessons from the U.S. experience during and after WWII. The debt-to-GDP ratio increased from 40 percent to 110 percent because of the war effort. Most of it was financed by Fed debt purchases, through a de facto yield curve control that held down short- and long-term interest rates. The money supply doubled in size, but inflation was muted during the conflict as private consumption demand was severely restrained. Private consumption was suppressed, as factories were fully devoted to the rearmament effort, food was rationed, and construction was practically prohibited. Households’ saving boomed as a result. After the war, swift pent-up consumption demand culminated in a short-lived spike in inflation from 2 percent to 20 percent in 1946–47, which quickly returned to 2 percent in 1949. Contractionary monetary and fiscal policies, along well-anchored low inflation expectations inherited from the Great Depression, appeared to have contributed to rapid disinflation. I also discuss the experiences of Japan and Europe in recent decades.
    Keywords: Money aggregates; inflation; World War II; pent-up demand; COVID-19
    JEL: E19 I19
    Date: 2021–05–17
  18. By: Simplice A. Asongu (Yaounde, Cameroon)
    Abstract: This study assesses how corporate telecommunication (telecom) policies follow telecom sector regulation in mobile money innovation for financial inclusion in developing countries. Telecom policies are understood in terms of mobile subscriptions, mobile connectivity coverage and mobile connectivity performance while mobile money innovations represent mobile money accounts, the mobile used to send money and the mobile used to receive money. The empirical evidence is based on Tobit regressions. Telecom sector regulation positively influences mobile money innovations. From net influences, mobile subscriptions and connectivity policies moderate telecom sector regulation to positively influence mobile money innovations; exclusively within the remit of mobile money accounts because the corresponding net influences on the mobile used to send money and the mobile used to receive money are negative. The interactive influences are consistently negative and hence, thresholds for complementary policies are provided in order to maintain the positive influence of telecom sector regulation on mobile money innovations. This study has complemented the extant literature by assessing how corporate telecommunication policies follow telecommunication sector regulation in mobile money innovations for financial inclusion.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2023–01
  19. By: Joshua Aizenman; Huanhuan Zheng
    Abstract: Sovereign borrowing during inflation surges is a litmus test of a government’s ability to withstand and navigate macroeconomic shocks. Based on transaction-level bond issuance data, we explore how sovereign financing strategies respond to inflation surges and how policy practices affect their ability to weather inflation shocks. We find that governments rely more on foreign-currency debt from foreign investors during periods of high inflation. This pattern is particularly prevalent in emerging markets (EMs), especially when the inflation surge is prolonged and severe. We further show that good practices of fiscal discipline, credibly pegged exchange regime, open capital account, and monetary dependence alleviate the need to borrow foreign capital in foreign currency during periods of inflation surges.
    JEL: F21 F31
    Date: 2023–04
  20. By: Darrell Duffie; Frank M. Keane
    Abstract: This paper investigates the goals, costs, and benefits of official-sector purchases of government securities for the purpose of restoring market functionality. We explore the design of market-function purchase programs, including their communication, triggers, operational protocols, exit, and wind-down strategies. We further discuss whether, under some circumstances, fiscal buybacks might be a useful alternative or complement to central-bank market-function purchase programs, and how these buybacks could be funded. The use of fiscal buybacks to support market functionality can be aligned with the fiscal authority’s goal of minimizing the government’s interest expense and can reduce challenges that can be faced by a central bank when asset purchases are not naturally congruent with monetary policy. Depending on the setting and circumstances, fiscal buybacks can also mitigate perceptions of risks to the central bank’s independence.
    Keywords: government securities; financial stability; bond markets; central banking; debt management
    JEL: D53 E52 E58 E44 E61
    Date: 2023–02–01
  21. By: Jorge Arenas; Stephany Griffith-Jones
    Abstract: In this article we evaluate the effectiveness of the last two foreign exchange interventions (FXI) of the Central Bank of Chile (BCCh), dated 2019 and 2022. Using data with daily and intra-daily frequency for the nominal exchange rate, results show through different empirical methods that both intervention episodes have significant effects in the expected direction on the level and volatility of the exchange rate. The effects associated with the 2019 and 2022 interventions are appreciations of an average of 2% and 6%, respectively. The estimated decrease in volatility is also greater in the 2022 intervention. The results support the implications of the different mechanisms that have been proposed in the literature to understand the effectiveness of FXI. Simultaneously, these results suggest that intervening the forward market seems just as effective as intervening into the spot market.
    Date: 2023–04
  22. By: Anna Stelzer
    Abstract: This papers aims to establish the empirical relationship between income, net wealth and their joint distribution in a selected group of euro area countries. I estimate measures of dependence between income and net wealth using a semiparametric copula approach and calculate a bivariate Gini coefficient. By combining structural inference from vector autoregressions on the macroeconomic level with a simulation using microeconomic data, I investigate how conventional and unconventional monetary policy measures affect the joint distribution. Results indicate that effects of monetary policy are highly heterogeneous across different countries, both in terms of the dependence of income and net wealth on each other, and in terms of inequality in both income and net wealth.
    Date: 2023–04
  23. By: Diego A. Comin; Robert C. Johnson; Callum J. Jones
    Abstract: We develop a multisector, open economy, New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up, similar to reduced-form markup shocks. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff.
    JEL: E12 E3 E5 F40
    Date: 2023–04
  24. By: Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
    Abstract: Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.
    Keywords: negative nominal interest rates; Finland; European Central Bank (ECB); negative rates; mortgage rates
    Date: 2023–04–20
  25. By: Pierpaolo Benigno; Gauti B. Eggertsson
    Abstract: This paper proposes a non-linear New Keynesian Phillips curve (Inv-L NK Phillips Curve) to explain the surge of inflation in the 2020s. Economic slack is measured as firms' job vacancies over the number of unemployed workers. After showing empirical evidence of statistically significant nonlinearities, we propose a New Keynesian model with search and matching frictions, complemented by a form of wage rigidity, in the spirit of Phillips (1958), that generates strong nonlinearities. Policy implications include the thesis that appropriate monetary policy can bring inflation down without a significant recession and that the recent inflationary surge was mostly generated by a labor shortage -- i.e. an exceptionally tight labor market.
    JEL: E12 E3 E30 E40 E50 E60
    Date: 2023–04
  26. By: Danilo Cascaldi-Garcia; Musa Orak; Zina Saijid
    Abstract: With the reopening of economies from strict COVID-19 lockdowns and the war-induced sharp increases in food, energy, and other commodity prices, headline inflation has surged globally, as shown for a few selected advanced economies by the black line in the left panel of figure 1. Core inflation (the dashed red line) has also risen sharply and has become increasingly persistent across these economies.
    Date: 2023–01–13
  27. 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.
    Keywords: Uruguay; export shares; exchange rates
    Date: 2023
  28. By: Xu, Chenzi (Stanford U); Yang, He (Harvard U)
    Abstract: Privately issued money often bears devaluation risk that create monetary transaction frictions. We evaluate the real effects of supplying a new type of safe money in the historical context of the US in 1863. We instrument for the change in monetary frictions locally using regulatory capital requirements and measure the degree safe money access with a market access approach derived from general equilibrium trade theory. Lowering monetary transaction costs increased traded goods production and spurred structural transformation with more manufacturing output, employment, and urban population. The growth in manufacturing was driven by employment and inputs rather than capital investment.
    JEL: E42 E44 E51 F14 G21 N11 N21
    Date: 2022–09
  29. By: J. Scott Davis; Eric Van Wincoop
    Abstract: We develop a theory to account for changes in net capital flows of safe and risky assets over the global financial cycle. We show empirically that countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt) during a downturn in the global financial cycle. This is accomplished through a rise in total net outflows and a drop in net outflows of risky assets. We develop a multi-country portfolio choice model that can account for these facts. The theory relies on cross-country heterogeneity in the share of an investor's portfolio invested in risky assets. A global drop in risky asset prices changes relative wealth across countries due to this heterogeneity, which leads to changes in net flows of safe and risky assets. The model is applied to 20 advanced countries and calibrated to reflect observed cross-country heterogeneity of net foreign asset positions of safe and risky assets. The implications of the calibrated model for net capital flows are quantitatively consistent with the data.
    Keywords: global financial cycle; capital flows; current account; Portfolio Heterogeneity
    JEL: F30 F40
    Date: 2023–05–06
  30. By: María Alejandra Amado (Banco de España)
    Abstract: Macroprudential FX regulation may reduce systemic risk; however, little is known about its unintended consequences. I propose a theoretical mechanism in which currency mismatch acts as a means for relaxing small firms’ borrowing constraints, and show that policies taxing dollar lending may increase financing disparities between small and large firms. To verify this empirically, I study the implementation of a macroprudential FX tax by the Central Bank of Peru. I construct a novel dataset that combines confidential credit register data with firm-level data on employment, sales, industry and geographic location for the universe of formally registered firms. I show that a 10% increase in bank exposure to the tax significantly increases disparities in the growth of total loans between small and large firms by 1.6 percentage points. When accounting for firms switching to soles financing from different banks, the effect on large firms’ debt is only compositional. Using a confidential dataset on the universe of FX derivative contracts, I show that firms that are mostly affected by the policy are not hedged through FX derivatives. Additional findings using survey data suggest that this policy has potential heterogeneous implications for firms’ real outcomes.
    Keywords: macroprudential FX regulations, currency mismatch, small firms, FX derivatives, emerging markets, borrowing constraints, bank lending channel
    JEL: E43 E58 F31 F38 F41
    Date: 2022–10
  31. By: Gianluca Benigno; Carlo Rosa
    Abstract: This paper investigates the link between Bitcoin and macroeconomic fundamentals by estimating the impact of macroeconomic news on Bitcoin using an event study with intraday data. The key result is that, unlike other U.S. asset classes, Bitcoin is orthogonal to monetary and macroeconomic news. This disconnect is puzzling as unexpected changes in discount rates should, in principle, affect the price of Bitcoin even when interpreting Bitcoin as a purely speculative asset.
    Keywords: Bitcoin; asset prices; United States; high-frequency data; monetary surprises; macroeconomic announcements
    JEL: F3 F4 G1
    Date: 2023–02–01
  32. By: Christopher D. Cotton; John O'Shea
    Abstract: Shelter (housing) costs constitute a large component of price indexes, including 42 percent of the widely followed core Consumer Price Index (CPI). The shelter prices measured in the CPI capture new and existing renters and tend to lag market rents. This lag explains how in recent months the shelter-price index (CPI shelter) has accelerated while market rents have pulled back. We construct an error correction model using data at the metropolitan statistical area level to forecast how CPI shelter will evolve. We forecast that CPI shelter will grow 5.88 percent from September 2022 to September 2023 and 3.91 percent over the subsequent 12 months. We demonstrate that the most important factor supporting high future CPI-shelter growth is that a large part of past growth in market rents had not been captured in CPI shelter as of September 2022. We estimate that the headline CPI and core CPI will be 1.05 and 1.34 percentage points higher, respectively, from September 2022 to September 2023 as a result of above-average shelter inflation.
    Keywords: rent; housing; CPI; PCE
    JEL: E37 E31 E17
    Date: 2023–02–16
  33. By: Francesco Ferrante; Sebastian Graves; Matteo Iacoviello
    Abstract: The COVID-19 pandemic has led to an unprecedented shift of consumption from services to goods. We study this demand reallocation in a multi-sector model featuring sticky prices, input-output linkages, and labor reallocation costs. Reallocation costs hamper the increase in the supply of goods, causing inflationary pressures. These pressures are amplified by the fact that goods prices are more flexible than services prices. We estimate the model allowing for demand reallocation, sectoral productivity, and aggregate labor supply shocks. The demand reallocation shock explains a large portion of the rise in U.S. inflation in the aftermath of the pandemic.
    Keywords: Sectoral Reallocation; Inflation; Input-Output Models; Moment-matching exercise
    JEL: E10 E17 E31 E32 E37
    Date: 2023–02–14
  34. By: Stewart, Chris (Kingston University London)
    Abstract: A growing body of research suggests that the literature applying unit root, stationarity and cointegration tests of long run purchasing power parity (PPP) and the law of one price (LOP) with price index data test relative PPP/LOP and not absolute PPP/LOP. We argue that such tests cannot determine when long run relative PPP/LOP is rejected and therefore are not tests of relative PPP/LOP. These are not tests of strong absolute PPP/LOP either. We contend that they are tests of weaker forms of absolute PPP/LOP and that determining which form of absolute PPP/LOP is useful in terms of, for example, establishing the form of long run flexible-price monetary exchange rate model that it implies.
    Keywords: absolute purchasing power parity; relative purchasing power parity; the law of one price; price indices; unit root tests; cointegration tests; flexible-price monetary exchange rate models.
    JEL: C32 C43 F31
    Date: 2023–04–28
  35. By: Hess T. Chung; Etienne Gagnon; James Hebden; Kyungmin Kim; Bernd Schlusche; Eric Till; James Trevino; Diego Vilán
    Abstract: Once considered "unconventional, " balance sheet policies have become an integral part of the toolkit of many central banks. Increased reliance on balance sheet policies reflects in part a decline in the neutral level of interest rates, which limits central banks' ability to cut their policy rates to support the economy during downturns, and many observers expect that neutral level to remain low relative to its historical average in the coming decades.
    Date: 2023–02–03
  36. By: Christoph E. Boehm; Niklas Kroner
    Abstract: We provide evidence for a causal link between the US economy and the global financial cycle. Using intraday data, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large - often comparable in size to the response of the S&P 500. Further, US macroeconomic news explains on average 23 percent of the quarterly variation in foreign stock markets. The joint behavior of stock prices, bond yields, and risk premia suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence points to a direct effect on investor’ risk-taking capacity. Our findings show that a byproduct of the United States' central position in the global financial system is that news about its business cycle has large effects on global financial conditions.
    Keywords: Global Financial Cycle; Macroeconomic announcements; International spillovers; Stock returns; VIX; Monetary Policy; High-frequency event study
    JEL: E44 E52 F40 G12 G14 G15
    Date: 2023–02–25
  37. By: Alain Chaboud; Dagfinn Rime; Vladyslav Sushko
    Abstract: This chapter discusses the structure and functioning of the spot foreign exchange (FX) market. The market structure, which has become far more complex over the past three decades, has mostly evolved endogenously as the global FX market is subject to notably less regulatory oversight than equity and bond markets in most countries. Major banks used to dominate liquidity provision, but they have found their role challenged by high frequency trading firms in an increasingly fragmented electronic market. The information structure of the market has also changed. As such, high-frequency cross-asset correlations, especially with the futures market, have become more important. The chapter also discusses the important role of the official sector in the FX market, and it highlights a few special topics such as flash events and the FX fixing scandal. We conclude with some suggestions for future research.
    Keywords: financial markets, foreign exchange, market microstructure, dealer intermediation, electronic trading, algorithmic trading
    JEL: F31 G15
    Date: 2023–04
  38. By: Bryan Hardy; Felipe E. Saffie; Ina Simonovska
    Abstract: We show that trade credit mitigates exchange rate risk pass through along supply chains. We develop a theory of trade credit provision along supply chains that involve large intermediate-good suppliers and small final-good producers, both of which face bank borrowing constraints. Motivated by empirical findings, we assume that large suppliers borrow in foreign currency, while small final-good producers borrow in domestic currency at higher rates. Trade credit loosens borrowing constraints and allows for higher production scale. Additionally, the model predicts that unconstrained suppliers fully absorb increasing costs of borrowing in foreign currency when domestic currency depreciates: specifically, suppliers settle for lower profits but maintain unchanged trade credit lines with their trade partners. We verify the model's predictions using firm-level data for over 11, 000 large firms in 19 emerging markets over the 2004-2020 period.
    JEL: E30 F2 F3 F4 G15 G3
    Date: 2023–03
  39. By: Mary Chen; Matthew DeHaven; Isabel Kitschelt; Seung Jung Lee; Martin Sicilian
    Abstract: We use machine learning techniques on textual data to identify financial crises. The onset of a crisis and its duration have implications for real economic activity, and as such can be valuable inputs into macroprudential, monetary, and fiscal policy. The academic literature and the policy realm rely mostly on expert judgment to determine crises, often with a lag. Consequently, crisis durations and the buildup phases of vulnerabilities are usually determined only with the benefit of hindsight. Although we can identify and forecast a portion of crises worldwide to various degrees with traditional econometric techniques and using readily available market data, we find that textual data helps in reducing false positives and false negatives in out-of-sample testing of such models, especially when the crises are considered more severe. Building a framework that is consistent across countries and in real time can benefit policymakers around the world, especially when international coordination is required across different government policies.
    Keywords: Financial crises; Machine learning; Natural language processing
    JEL: C53 C55 G01
    Date: 2023–03–31
  40. By: Banco de Portugal working group on crypto-assets
    Abstract: Although the terminology used to define stablecoins is currently ambiguous, they can be broadly defined as a specific type of crypto-asset that aims to maintain a stable value relative to a specified currency, asset, or pool of currencies/assets. This paper characterises different types of stablecoins according to the stabilisation mechanism used and analyses the current stablecoins’ market. It also describes the regulatory framework applicable to stablecoins in a few selected jurisdictions. The main focus of the paper is the identification of the main risks associated with stablecoins, particularly the so-called global stablecoins, i.e., those stablecoins with a potential to be adopted across different jurisdictions and achieve a substantial volume. Finally, the paper concludes that continuous monitoring of the stablecoins’ market should be pursued, given their increasing relevance and potential impact on the financial sector.
    JEL: E42 E51 E58 F31 G21 G23 G28 L50 O32 O33
    Date: 2023

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