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on Monetary Economics |
| By: | Francisco Serranito; Philipp RODERWEIS; Jamel Saadaoui |
| Abstract: | The European Central Bank’s (ECB) quantitative easing (QE) program was supposed to stimulate the real economy and be able to control inflation rates. Nevertheless, primarily the financial sector has benefited from the asset purchase program. Transmission was not taking place as desired, with commercial banks as money creators and thus liquidity distributors at the center of its inefficiency. Accordingly, this article aims to examine the transmission of central bank money to the euro area economy via the banking system and the corresponding bank lending channel (BLC). To bring clarity to the economic debate about the effectiveness of the BLC, bank lending and additional macroeconomic variables are divided into productive and unproductive. We analyze how these data react to an exogenous monetary policy shock in excess reserves, which is identified using different identification schemes before deploying least-square and penalized local projection (LP) methods. Following the estimation results, it can be concluded that a liquidity increase via quantitative easing cannot stimulate economic activity-enhancing lending in the euro area but, on the contrary, tends to disincentivize it. On the other hand, it drives lending to an unproductive sector. Additionally, this is confirmed by the fact that prices, especially in the housing sector, react significantly positively to a QE shock, whereas, on the contrary, producer prices in the industrial sector and inflation are not affected by unconventional monetary policy. |
| Keywords: | unconventional monetary policy, bank lending, local projection, identification, zero- and sign restrictions |
| JEL: | C32 E44 E51 E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2023-17&r=mon |
| By: | Gara Afonso; Catherine Huang; Marco Cipriani; Abduelwahab Hussein; Gabriele La Spada |
| Abstract: | The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve. |
| Keywords: | bank deposits; Beta; Effective Federal Funds Rate (EFFR); money market funds; monetary policy |
| JEL: | E52 G1 G2 |
| Date: | 2023–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95914&r=mon |
| By: | Christophe Blot; Paul Hubert; Jérôme Creel; Caroline Bozou |
| Abstract: | We investigate the financial market effects of central bank asset purchases by exploiting the unique setting provided by ECB’s PSPP and PEPP policies. While the PSPP aimed to counter deflationary risks, the PEPP was announced to alleviate sovereign risks, these programs consist in purchases of identical assets. We assess their impacts on various asset prices. We find that they have different effects on two variables: PSPP positively affects inflation swaps whereas PEPP negatively impacts sovereign spreads, but not the opposite. We document the channels for these differentiated effects and highlight the role of clarifying the rationale of a policy. |
| Keywords: | monetary policy, asset prices, central bank communication, central bank reaction function, intermediate objectives |
| JEL: | G12 E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2023-15&r=mon |
| By: | Hassan Afrouzi; Marina Halac; Kenneth S. Rogoff; Pierre Yared |
| Abstract: | This paper studies the implications of central bank credibility for long-run inflation and inflation dynamics. We introduce central bank lack of commitment into a standard non-linear New Keynesian economy with sticky-price monopolistically competitive firms. Inflation is driven by the interaction of lack of commitment and the economic environment. We show that long-run inflation increases following an unanticipated permanent increase in the labor wedge or decrease in the elasticity of substitution across varieties. In the transition, inflation overshoots and then gradually declines. Quantitatively, the inflation response is large, as is the welfare loss from lack of commitment relative to inflation targeting. |
| JEL: | D02 E02 E52 E58 E61 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31207&r=mon |
| By: | Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka |
| Abstract: | To study implications of an interest-bearing CBDC on the economy, we integrate a New Monetarist-type decentralised market that explicitly accounts for the means-of-exchange function of bank deposits and CBDC into a New Keynesian model with financial frictions. The central bank influences the store-of-value function of money through a conventional Taylor rule while it affects the means-of-exchange function of money through CBDC operations. Peak responses to monetary policy shocks remain similar in the presence of an interest-bearing CBDC, implying that monetary transmission is not impaired. At the same time however, the provision of CBDC helps smooth responses to macroeconomic shocks. By supplying CBDC, the central bank contributes to stabilising the liquidity premium, thereby affecting bank funding conditions and the opportunity costs of money, which dampens and smoothes the reaction of investment and consumption to macroeconomic shocks. JEL Classification: E58, E41, E42, E51, E52 |
| Keywords: | Central bank digital currency, DSGE, monetary policy, search and matching |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232811&r=mon |
| By: | Jeremy Srouji (Université Côte d'Azur, France; GREDEG CNRS) |
| Abstract: | It is often difficult to make sense of the range of optimistic, cautious, and pessimistic views about the sustainability of the US dollar's role as the top international currency. This paper reframes the US dollar debate by demonstrating that economists generally draw on two distinct theories of currency internationalization, with very different assumptions about how currencies achieve and maintain an international role. These assumptions often remain implicit, but are essential to make sense of the debate, as well as the question of international money more generally. The paper then considers whether crypto currencies and central bank digital currencies could play the international currency role, as understood by these theories. It concludes by reflecting on whether in an increasingly multipolar world the question of the sustainability of the US dollar's international role is misplaced, particularly given the growing support for the establishment of a true global international reserve currency. |
| Keywords: | US dollar, international money, international monetary system reform, US debt, Bretton Woods II, global macroeconomic imbalances |
| JEL: | F01 F33 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2022-06&r=mon |
| By: | Toni Gravelle; Ron Morrow; Jonathan Witmer |
| Abstract: | At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. This decision was informed by the analysis and assessment of the two frameworks in this paper. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework. Our evaluation includes a discussion of how these relative merits have changed since the pandemic began. Specifically, we examine the evolving regulatory landscape, changes in payment systems, and the Bank's quantitative easing program to understand their implications for the relative strengths of the two frameworks for monetary policy implementation. |
| Keywords: | Market structure and pricing; Monetary policy implementation; Payment clearing and settlement systems |
| JEL: | D4 D47 E42 E5 E58 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-10&r=mon |
| By: | Sinem Kandemir (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen) |
| Abstract: | Most meetings of the Governing Council of the ECB take place intra muros at the ECB’s premises in Frankfurt. Some meetings, however, are held extra muros, i.e. outside Frankfurt, hosted by one of the national central banks. This paper uses high-frequency surprises from meeting days to show that the standard deviation of surprises is higher when the ECB meets intra muros. This difference is mostly due to larger timing, forward guidance and QE surprises when meeting in Frankfurt. We show that the transmission of policy surprises to longer-term interest rates is significantly weaker when meeting extra muros. In addition, when the meeting takes place extra muros, the wording of the ECB communication during the press conference is significantly more similar to the preceding meeting. The results suggest that the important decisions are taken in Frankfurt and that the ECB avoids large changes to the policy path when meeting extra muros. The difference across meeting types has consequences for the macroeconomic impact of monetary policy. |
| Keywords: | monetary policy, expectations, central bank communication, monetary policy committee, text analysis |
| JEL: | E58 E43 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202312&r=mon |
| By: | Carlos Moreno Pérez (Banco de España); Marco Minozzo (University of Verona) |
| Abstract: | We study and measure uncertainty in the minutes of the meetings of the board of governors of the Central Bank of Mexico and relate it to monetary policy variables. In particular, we construct two uncertainty indices for the Spanish version of the minutes using unsupervised machine learning techniques. The first uncertainty index is constructed exploiting Latent Dirichlet Allocation (LDA), whereas the second uses the Skip-Gram model and K-Means. We also create uncertainty indices for the three main sections of the minutes. We find that higher uncertainty in the minutes is related to an increase in inflation and money supply. Our results also show that a unit shock in uncertainty leads to changes of the same sign but different magnitude in the inter-bank interest rate and the target interest rate. We also find that a unit shock in uncertainty leads to a depreciation of the Mexican peso with respect to the US dollar in the same period of the shock, which is followed by appreciation in the subsequent period. |
| Keywords: | Central Bank of Mexico, central bank communication, Latent Dirichlet Allocation, monetary policy uncertainty, Structural Vector Autoregressive model, Word Embedding |
| JEL: | C32 C45 D83 E52 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2229&r=mon |
| By: | Carolyn Davin; Thiago Revil T. Ferreira |
| Abstract: | With major central banks in the process of tightening monetary policy aggressively, an important question is how far policy rates will rise and where they will settle in the longer run. One reference point often used to evaluate this question is the longer-run neutral policy rate—the policy rate consistent with economic activity at its longer-run potential and inflation at its target. |
| Date: | 2022–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2022-12-01&r=mon |
| By: | Stephan Luck; Matthew Plosser; Josh Younger |
| Abstract: | Recent events have highlighted the importance of understanding the distribution and composition of funding across banks. Market participants have been paying particular attention to the overall decline of deposit funding in the U.S. banking system as well as the reallocation of deposits within the banking sector. In this post, we describe changes in bank funding structure since the onset of monetary policy tightening, with a particular focus on developments through March 2023. |
| Keywords: | deposits; monetary policy; Fed Funds |
| JEL: | E52 G01 G21 |
| Date: | 2023–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96141&r=mon |
| By: | Nikolay Nenovsky (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne) |
| Abstract: | The purpose of the present article is to present a comprehensive framework to analyse main characteristics and institutional forms of the dependent monetary regimes. A country's monetary regime is an extension of its geopolitical and geo-economic place in the international system. The dynamic monetary dependence/independence of a particular country is a direct continuation of, as well as ‘serving', the (geo)political and economic dependence/independence of that country. That dependence does not mean that small countries do not benefit from this type of monetary and political regimes; on the contrary – in most cases it is the most appropriate, so to speak, "optimal" form which, if skilfullymanaged, minimises losses under a given external structural constraint. As a rule, in dependent countries, external sources of money supply dominate domestic sources. Peripheral and dependent countries cannot borrow on international markets in their own national currencies. They borrow in major world currencies and become vulnerable to currency (exchange rate) risk. The inflow of external capital, in turn, requires a corresponding stable institutional and political environment. Therefore, the external equilibrium (external stability), i.e., the state of the balance of payments and especially its financial (capital) account, as well as the dynamics of the exchange rate, become central parameters for the development of the peripheral countries. It is interesting to add that the imposition of a dependent regime in small and peripheral countries is accompanied by the imposition and dissemination of economic views, theories and ideas ("economic narrative"), which legitimise this new monetary regime and prepare the imposition of a certain economic development model. |
| Keywords: | monetary system, monetary regime, dependent monetary regimes, monetary history |
| Date: | 2022–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04081154&r=mon |
| By: | Mohammed Ait Lahcen; Garth Baughman; Hugo van Buggenum |
| Abstract: | We study the nonlinearities present in a standard monetary labor search model modified to have two groups of workers facing exogenous differences in the job finding and separation rates. We use our setting to study the racial unemployment gap between Black and white workers in the United States. A calibrated version of the model is able to replicate the difference between the two groups both in the level and volatility of unemployment. We show that the racial unemployment gap rises during downturns, and that its reaction to shocks is state-dependent. In particular, following a negative productivity shock, when aggregate unemployment is above average the gap increases by 0.6pp more than when aggregate unemployment is below average. In terms of policy, we study the implications of different inflation regimes on the racial unemployment gap. Higher trend inflation increases both the level of the racial unemployment gap and the magnitude of its response to shocks. |
| Keywords: | Unemployment; Discrimination; Racial inequality; Monetary policy; Inflation |
| JEL: | E31 E32 E52 J64 |
| Date: | 2023–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-17&r=mon |
| By: | Erwan Gautier (Banque de France); Cristina Conflitti (Banca d’Italia); Riemer P. Faber (National Bank of Belgium); Brian Fabo (National Bank of Slovakia); Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Jan-Oliver Menz (Deutsche Bundesbank); Teresa Messner (Oesterreichische Nationalbank); Pavlos Petroulas (Bank of Greece); Pau Roldan-Blanco (Banco de España); Fabio Rumler (Oesterreichische Nationalbank); Sergio Santoro (European Central Bank); Elisabeth Wieland (Deutsche Bundesbank); Hélène Zimmer (National Bank of Belgium) |
| Abstract: | Using CPI micro data for 11 euro area countries, covering 60% of the European consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) on average 12.3% of prices change each month, compared with 19.3% in the United States; however, when price changes due to sales are excluded, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) the differences in price rigidity are rather limited across euro area countries and are larger across sectors; (iii) the median price increase (decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size of the price change than for the frequency; (iv) the distribution of price changes is highly dispersed: 14% of price changes are below 2% in absolute values, whereas 10% are above 20%; (v) the frequency of price changes barely changes with inflation and it responds very little to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size of the price change; when this effect is broken down, variations in the share of price increases have a greater weight than changes in the size of the price increase or in the size of the price decrease. These findings are consistent with the predictions of a menu cost model in a low-inflation environment in which idiosyncratic shocks are a more relevant driver of price adjustments than aggregate shocks. |
| Keywords: | price rigidity, inflation, consumer prices, micro data |
| JEL: | D40 E31 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2225&r=mon |
| By: | Ken Isaacson; Jesse Leigh Maniff; Paul Wong |
| Abstract: | This paper explores whether there could be a first-mover advantage for a jurisdiction issuing a central bank digital currency (CBDC) compared to other jurisdictions that subsequently issue their own CBDC. Conventional academic literature provides a framework by which one can assess a CBDC in the domestic payments market, the international payments market, and the technology markets that support payments. However, a CBDC may be more than just a means of payment and thus first-mover advantage is examined for both the asset component of reserve currency and a future financial system built on CBDCs. Overall, the first mover literature does not suggest that there is a compelling first-mover advantage for issuing a CBDC. |
| Date: | 2022–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2022-11-25&r=mon |
| By: | Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University); Barbara Livorova (Institute of Economic Studies, Faculty of Social Sciences, Charles University & Czech National Bank) |
| Abstract: | This paper contributes to studying the interaction between monetary and macroprudential policies by examining whether the impact of macroprudential policy on credit and house price growth differs between the two key phases of monetary policy cycle, i.e. monetary policy tightening and loosening. The dataset covers 33 advanced and 33 emerging market countries in the period 1990 - 2019 in quarterly frequency. Using the GMM estimation method, the results show that tightening of monetary policy does on average reinforce the effects of macroprudential policy on credit and house prices. Furthermore, we show that this reinforcing effect works for some but not all types of macroprudential policy measures, and that the results differ between advanced countries and emerging markets. |
| Keywords: | Macroprudential Policy, Monetary Policy Cycle, Credit Growth, House Price Growth, Interaction of Policies |
| JEL: | E52 E58 G21 G28 E32 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2023_15&r=mon |
| By: | Juan Equiza (University of Navarra); Ricardo Gimeno (Banco de España); Antonio Moreno (University of Navarra); Carlos Thomas (Banco de España) |
| Abstract: | The theoretical literature on term structure models emphasises the importance of the expected absorption of duration risk during the residual life of term bonds in order to understand the yield curve effect of central banks’ government bond purchases. Motivated by this, we develop a forward-looking, long-horizon measure of euro area government bond supply net of Eurosystem holdings, and use it to estimate the impact of the ECB’s asset purchase programmes in the context of a no-arbitrage affine term structure model. We find that an asset purchase shock equivalent to 10% of euro area GDP lowers the 10-year average yield of the euro area big four by 59 basis points (bp) and the associated term premium by 50 bp. Applying the model to the risk-free (OIS) yield curve, the same shock lowers the 10-year rate and term premium by 35 and 26 bp, respectively. |
| Keywords: | monetary policy, ECB, asset purchase programme, yield curve, term premium, risk-neutral rate |
| JEL: | E43 E44 E47 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2303&r=mon |
| By: | Lukas Hack; Klodiana Istrefi; Matthias Meier |
| Abstract: | We propose a novel identification design to estimate the causal effects of systematic monetary policy on the propagation of macroeconomic shocks. The design combines (i) a time-varying measure of systematic monetary policy based on the historical composition of hawks and doves in the Federal Open Market Committee (FOMC) with (ii) an instrument that leverages the mechanical FOMC rotation of voting rights. We apply our design to study the effects of government spending shocks. We find fiscal multipliers between two and three when the FOMC is dovish and below zero when it is hawkish. Narrative evidence from historical FOMC records corroborates our finndings. |
| Keywords: | Systematic monetary policy, FOMC, rotation, government spending |
| JEL: | E32 E52 E62 E63 H56 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_408v2&r=mon |
| By: | Becker, Christoph; Duersch, Peter; Eife, Thomas |
| Abstract: | In density forecasts, respondents are asked to assign probabilities to pre-specified ranges of inflation. We show in two large-scale experiments that responses vary when we modify the response scale. Asking an identical question with modified response scales induces different answers: Shifting, compressing or expanding the scale leads to shifted, compressed and expanded forecasts. Mean forecast, uncertainty, and disagreement can change by several percentage points. We discuss implications for survey design and how central banks can adjust the response scales during times of high inflation. |
| Keywords: | density forecast; survey; Inflation; Experiment |
| Date: | 2023–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0727&r=mon |
| By: | Ozge Akinci; Gianluca Benigno; Hunter L. Clark; William Cross-Bermingham; Ethan Nourbash |
| Abstract: | Inflationary pressures—their determinants and evolution—continue to dominate policy discussions. In this post, we provide a simple framework to analyze the determinants of different measures of inflation and use it to lay out a risk-scenario analysis. We find that global supply factors captured by the New York Fed’s Global Supply Chain Pressure Index (GSCPI) are strongly associated with inflationary developments measured by the producer price index (PPI) and by the c0nsumer price index (CPI). Under the assumption that the GSCPI falls back to its historical average over twelve months, our model would project a substantial easing of consumer price inflation over 2023 to below 4.0 percent. The normalization of the GSCPI would then be consistent with a return of inflation to levels consistent with a soft-landing scenario. |
| Keywords: | inflation; Global Supply Chain Pressure Index (GSCPI); oil price |
| JEL: | E31 E52 F0 |
| Date: | 2023–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95692&r=mon |
| By: | Hassan Afrouzi; Saroj Bhattarai |
| Abstract: | We derive closed-form solutions and sufficient statistics for inflation and GDP dynamics in multi-sector New Keynesian economies with arbitrary input-output linkages. Analytically, we decompose how production linkages (1) amplify the persistence of inflation and GDP responses to monetary and sectoral shocks and (2) increase the pass-through of sectoral shocks to aggregate inflation. Quantitatively, we confirm the significant role of production networks in shock propagation, emphasizing the disproportionate effects of sectors with large input-output adjusted price stickiness: The three sectors with the highest contribution to the persistence of aggregate inflation have consumption shares of around zero but explain 16% of monetary non-neutrality. |
| JEL: | C67 E32 E52 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31218&r=mon |
| By: | Nina Boyarchenko; Or Shachar |
| Abstract: | The Federal Open Market Committee (FOMC) started increasing rates on March 16, 2022, and after the January 31–February 1, 2023, FOMC meeting, the lower bound of the target range of the federal funds rate had reached 4.50 percent, a level last registered in November 2007. Such a rapid rates increase could pass through to higher funding costs for U.S. corporations. In this post, we examine how corporate leverage and bond market debt have evolved over the course of the current tightening cycle and compare the current experience to that during the previous three tightening cycles. |
| Keywords: | corporate bond oustading; Nonfinancial leverage; monetary policy tightening |
| JEL: | E5 |
| Date: | 2023–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95944&r=mon |
| By: | Jose De Gregorio; Pablo Garcia; Emiliano Luttini; Marco Rojas |
| Abstract: | We revisit a central question for international macroeconomics: The response of export prices and quantities to movements in the exchange rate (ER). We use a comprehensive dataset for Chile and study how the effects vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when we control for U.S. dollar ER, which supports the dominant currency paradigm. The longer the horizon, the larger the role is played by bilateral ER movements, which lends support to producer currency pricing. The dynamics do not depend on the invoicing currency. We find consistent results for quantities, supporting the view that bilateral exchange rate movements contribute to macroeconomic adjustment through exports. We also find that U.S. dollar fluctuations, holding bilateral exchange rates constant, show results suggestive of relevant supply and demand effects. |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp543&r=mon |
| By: | Nina Boyarchenko; Richard K. Crump; Leonardo Elias; Ignacio Lopez Gaffney |
| Abstract: | The Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 4.50 percentage points since March 16, 2022. In tightening the stance of monetary policy, the FOMC balances the risk of inflation remaining persistently high if the economy continues to run “hot” against the risk of unemployment rising as the economy cools. In this post, we review a quantitative approach to measuring the evolution of risks to real GDP growth, the unemployment rate, and inflation that is inspired by our previous work on “Vulnerable Growth.” We find that, in February, downside risks to real GDP growth and upside risks to unemployment moderated slightly, and upside risks to inflation continued to decline. |
| Keywords: | risks to the economic outlook |
| JEL: | E2 G1 |
| Date: | 2023–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95660&r=mon |
| By: | Mary Amiti; Sebastian Heise; Fatih Karahan; Ayşegül Şahin |
| Abstract: | U.S. inflation has recently surged, with inflation reaching its highest readings since the early 1980s. We examine the drivers of this rise in inflation, focusing on supply chain disruptions, labor supply constraints, and their interaction. Using a calibrated two-sector New Keynesian DSGE model with multiple factors of production, foreign competition, and endogenous markups, we find that supply chain disruptions combined with a rise in the disutility of work raised inflation by about 2 percentage points in the 2021-22 period. We show that the combined shock increased price inflation in the model by 0.6 percentage point more than it would have risen if the shocks had hit separately. This amplification arises because the joint shock to labor and imported input prices makes substituting between labor and intermediates less effective for domestic firms. Moreover, the simultaneous foreign competition shock allows domestic producers to increase their pass-through into prices without losing market share. We then show that the benefit of aggressive monetary policy in the model depends on the source of the rise in inflation. If the rise in inflation is demand-driven, then aggressive monetary tightening can contain inflation without a recession later. In contrast, aggressive policy can have a large negative effect on the labor market when inflation is driven by supply chain and labor market disruptions. We use aggregate and industry-level data on producer prices, wages, and input prices to provide corroborating evidence for the key amplification channels in the model. |
| JEL: | E24 E31 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31211&r=mon |
| By: | Stein Berre; Asani Sarkar |
| Abstract: | Proponents of narrow banking have argued that lender of last resort policies by central banks, along with deposit insurance and other government interventions in the money markets, are the primary causes of financial instability. However, as we show in this post, non-bank financial institutions (NBFIs) triggered a financial crisis in 1772 even though the financial system at that time had few banks and deposits were not insured. NBFIs profited from funding risky, longer-dated assets using cheap short-term wholesale funding and, when they eventually failed, authorities felt compelled to rescue the financial system. |
| Keywords: | nonbank financial institutions; nonbank financial institutions (NBFIs); crisis of 1772; financial intermediation; economic history |
| JEL: | G01 G2 N00 |
| Date: | 2023–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95976&r=mon |
| By: | Martín Almuzara; Argia M. Sbordone |
| Abstract: | This post presents updated estimates of inflation persistence, following the release of personal consumption expenditure (PCE) price data for January 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently here and here. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares. |
| Keywords: | inflation persistence; data revisions; personal consumption expenditures (PCE) |
| JEL: | E31 E2 |
| Date: | 2023–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95841&r=mon |
| By: | Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek |
| Abstract: | The importance of the U.S. dollar in the context of the international monetary system has been examined and studied extensively. In this post, we argue that the dollar is not only the dominant global currency but also a key variable affecting global economic conditions. We describe the mechanism through which the dollar acts as a procyclical force, generating what we dub the “Dollar’s Imperial Circle, ” where swings in the dollar govern global macro developments. |
| Keywords: | Global spillovers; spillovers and spillbacks; manufacturing; global trade; global supply chain |
| JEL: | F00 |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95729&r=mon |
| By: | Michael T. Kiley |
| Abstract: | This paper examines whether the measurement of trend inflation can be improved by using wage data in a dynamic factor model of disaggregated prices and wages for the United States. The model features time-varying coefficients and stochastic volatility. An estimate of trend inflation is a time-varying distributed lag of prices and wages, where the weight on a series depends on its time-varying volatility, persistence, and comovement with other series. The results show that wages inform estimates of trend inflation. The weight on wages was highest around 1980, drifted down through the 2000s, and returned to its 1980s value by 2022. In addition, inflation in the 2020s appears to have unmoored moderately from the 2 percent range that prevailed for decades, as the role of the persistent component of inflation increased in recent year. However, accounting for wages lowers the model's view of the increase in the volatility of trend inflation. |
| Keywords: | Price Inflation; Wage Inflation; Unobserved Components Model; Factor Model |
| JEL: | E37 E31 C32 |
| Date: | 2023–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-22&r=mon |
| By: | Jackson, Emerson Abraham; Kamara, Purity; Kamara, Abdulsalam |
| Abstract: | This paper examines the determinants of inflation in Sierra Leone using monthly time series data from 2010M1 to 2021M12, with the application of the ARDL model. The emphasis of the empirical study as outlined in the objectives is to examine both supply-side and demand-side pressure as observed in the outcome of the short and long-run relationships. Taking into account the characteristics of the Sierra Leonean economy, which is also backed by recent studies on inflation dynamics, the constructed ARDL model emphasizes the effects of the exchange rate, RGDP, Fiscal Balance (FBAL), Currency in Circulation, and Lending Rate (LR) factors on inflation dynamics in the economy. The empirical results show that in the long-run, the main determinants of inflation in Sierra Leone are the exchange rate, Real Gross Domestic Product (RGDP), Fiscal Balance, Currency in Circulation, and Lending Rate. In the short run, all the variables except RGDP and Exchange Rate manifested significant effects on inflation dynamics. Finally, the error correction term (-0.063) was proven to be negative and statistically significant, thereby suggesting the rapid rate of adjustment to its long-run state |
| Keywords: | Inflation Targeting, Supply-Side, Demand-Side, Shocks, Sierra Leone |
| JEL: | C22 E20 E3 E31 |
| Date: | 2022–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117278&r=mon |
| By: | Fix, Blair |
| Abstract: | I’ve been writing about inflation for the better part of three months. It’s been exhausting. Most of my time has been spent debunking misconceptions promoted by mainstream economists. Fortunately, I’m ready to move on. What’s interesting about inflation is not the fact that prices rise. What matters is that prices rise at different rates. In other words, inflation creates winners and losers — it redistributes income. In this post, I’ll dive into the redistribution dynamics between wage workers and creditors. When inflation rears its head, both groups try to bolster their income. But they rarely have equal success. Looking at over two centuries of US price history, I find (perhaps surprisingly) that inflation tended to benefit workers at the expense of creditors. Since the 1970s, however, the reverse has been true; inflation has systematically benefited creditors at the expense of workers. So what changed? Two things. First, the US labor movement was crushed. Second (and far less discussed), US policy makers adopted a new way to ‘fight’ rising prices. When inflation reared its head, central banks attempted to quell it by aggressively hiking interest rates. Today, it’s received wisdom that this policy ‘works’. Of course, the policy does work — but not for its stated goal. Never mind ‘fighting inflation’. When you raise interest rates, you give creditors a raise. Framed in this light, it’s unsurprising that inflation has recently become a boon for US creditors. Backed by monetarist ideology, the government is now dedicated to preserving the return on credit. When it comes to class struggle, there’s nothing like having the sledgehammer of the state to back you up. With credit returns in mind, here’s the road ahead. Before diving into the dynamics of class struggle, I’ll take a quick look at the language used to describe rising prices. Next, I’ll quantify the price struggle between creditors and workers. Finally, I’ll measure how this struggle has changed over time, and how it relates to the ideological currents of the period. |
| Keywords: | creditors, inflation, interest rates, inflation, wages |
| JEL: | P00 P1 E3 E31 D3 J3 D74 E5 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:270852&r=mon |
| By: | Matthew Jaremski; David C. Wheelock |
| Abstract: | This paper examines how the election of 1912 changed the makeup of Congress and led to the Federal Reserve Act. The decision of Theodore Roosevelt and other Progressives to run as third-party candidates split the Republican Party and enabled Democrats to capture the White House and Congress. We show that the election produced a less polarized Congress and that new members were more likely to support the Act. Absent the Republican split, Republicans would likely have held the White House and Congress, and enactment of legislation to establish a central bank would have been unlikely or certainly quite different. |
| Keywords: | Federal Reserve Act; Progressive Party; central bank; Aldrich plan |
| JEL: | N42 G28 P43 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:96067&r=mon |
| By: | Makoto Nakajima |
| Abstract: | I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more from an accommodative monetary policy in the absence of income-dependent fiscal transfers. |
| Keywords: | Business cycle; Marginal Propensity to Consume; Monetary policy; Labor market; Heterogeneous agents; Hand-to-mouth; Unemployment; Wealth distribution; Racial inequality |
| JEL: | J64 J15 E52 E21 |
| Date: | 2023–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:96021&r=mon |
| By: | Stefania D'Amico; Thomas B. King |
| Abstract: | We examine the inflation-hedging properties of various financial assets and portfolios by estimating simple time-series models of the joint dynamics of each asset-inflation pair, for multiple inflation indices and at horizons from one month to 30 years. There is no one-size-fits-all approach to inflation hedging: the optimal hedge depends on the particular types of prices that an investor is exposed to and at which horizons. For example, food and energy prices are easy to hedge with commodities and certain stock portfolios, while non-housing service prices and wages are not highly correlated with any financial asset. Inflation-protected bonds are good hedges for headline consumer inflation at horizons matching their maturities but can perform quite poorly at shorter horizons and for other price indices. During the inflationary period of 2020-2022, many historical hedging relationships failed, as monetary policy tightening lagged inflation. |
| Keywords: | Inflation; real assets; Treasury Inflation-Protected Securities (TIPS); Hedging |
| Date: | 2023–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:96038&r=mon |
| By: | Tersoo David Iorngurum (Faculty of Social Sciences, Charles University, Prague) |
| Abstract: | Estimates of the exchange rate pass-through vary significantly across studies, making it difficult for policymakers and researchers to ascertain the true impact of exchange rate fluctuations on domestic prices. I conduct a meta-analysis to understand why estimates differ and provide consensus for the conflicting results. My dataset includes 32 primary studies containing 684 estimates for 108 countries. Because there are many potential causes of heterogeneity, I use Bayesian model averaging to identify the most important ones. I find that estimates vary due to differences in country-specific and methodological characteristics. The country-specific characteristics include central bank independence, inflationary environment, and economic development, while the methodological variables include data frequency, data dimension, and data time span. When I control for differences in methodology and assign greater weight to those that reflect the best practices in the literature, I find that the implied pass-through estimates remain substantial, albeit smaller than suggested in the literature. The pass-through is 6% for developed countries and 9% for developing countries. |
| Keywords: | exchange rate pass-through, prices, heterogeneity, meta-analysis |
| JEL: | F31 F41 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2023_16&r=mon |
| By: | S. Boragan Aruoba; Eugene Oue; Felipe Saffie; Jonathan L. Willis |
| Abstract: | We propose a parsimonious framework for real rigidities, in the form of strategic complementarities, that can generate real and nominal dynamics and match key features of the data across several literatures. Existing menu-cost models featuring strategic complementarities require unrealistically volatile shocks to idiosyncratic productivity to be consistent with pricing moments. We develop a simple menu-cost model with strategic complementarities along with idiosyncratic productivity and demand shocks that are disciplined by the data. This approach allows us to overcome previous criticism from analysis of models that employ only an idiosyncratic productivity shock and calibrate solely using data from the price-adjustment literature. Despite its simplicity, the model can generate sizable monetary nonneutrality along with the magnitude of cost pass-through documented in previous studies, while also remaining consistent with micro pricing and markup evidence. |
| Keywords: | menu costs; strategic complementarities; demand shocks; sticky prices; monetary nonneutrality |
| JEL: | D02 E02 E44 G21 |
| Date: | 2023–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:96138&r=mon |
| By: | Fix, Blair |
| Abstract: | When I read about monetary policy, I have a rule of thumb. Every time I see the phrase interest rate, I replace it with the term wage rate. Then I ask myself whether the discussion still makes sense. Often, it does not. The reason I make this substitution is that in conceptual terms, the interest rate and the wage rate are similar: they are both rates of return. Wages are the return on employment. Interest rates are the return on credit. Now, the important thing about rates of return is that when we change them, we are toying with the distribution of income. Hike wages and we send more income to workers. Hike the rate of interest and we send more income to creditors. Sure, the specifics of this redistribution are open for inquiry. But by definition, rates of return are ‘distributional variables’ — they determine how the income pie gets divvied up. Back to my word substitution. When it comes to wages, the issue of distribution is typically front and center. That’s why talk of a minimum-wage hike prompts businesses (and many economists) to complain about reduced profits. But when creditors hike the rate of interest, talk of income distribution is curiously absent. Instead, we get a barrage of macroeconomic jargon — terms like the ‘natural rate of interest’ and the ‘non-accelerating inflation rate of unemployment’. Why the discrepancy? One possibility is that economists know something that we don’t. Perhaps they’ve looked at the evidence and concluded that interest rates have a ‘neutral’ effect on the distribution of income. Another possibility is that the macroeconomic jargon is mostly a distraction. In other words, like wages, the rate of interest is a ‘distributional variable’. But it’s one that mainstream economists prefer to ignore. So which option is true? In this post, I let the evidence speak for itself. Looking at cross-country evidence, I find that interest rates are decidedly non-neutral. As interest rates rise, three things happen: (1) the interest share of income increases; (2) the labor share of income decreases; (3) income inequality increases. In short, the evidence suggests that interest rates play a key role in the game of class warfare. And that makes sense. Interest, after all, is a rate of return. And when it comes to divvying up the income pie, rates of return are always zero sum. |
| Keywords: | credistors, distribution, interest rates, labour, wages |
| JEL: | E5 J3 E4 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:270866&r=mon |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa) |
| Abstract: | The purpose of this study is to complement extant literature by examining how mobile money innovations can moderate the unfavorable incidence of female unemployment on female doing of business in 44 countries from sub-Saharan Africa for the period 2004 to 2018. The empirical evidence is based on interactive quantile regressions. The employed doing business constraints are the procedures a woman has to go through to start a business and the time for women to set up a business, while the engaged mobile money innovations are: (i) registered mobile money agents (registered mobile money agents per 1000 km2 and registered mobile money agents per 100 000 adults) and (ii) active mobile money agents (active mobile money agents per 1000 km2 and active mobile money agents per 100 000 adults). The hypothesis that mobile money innovation moderates the unfavorable incidence of female unemployment on business constraints is overwhelmingly invalid. The invalidity of the tested hypothesis is clarified, and the policy implications are discussed. |
| Keywords: | Mobile phones; financial inclusion; women; doing business; sub-Saharan Africa |
| JEL: | G20 O40 I10 I20 I32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:aak:wpaper:23/009&r=mon |
| By: | C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky |
| Abstract: | During his state visit to China in April 2023, Brazilian President Lula proposed the creation of a trade currency supported by the BRICS countries. Using the United Nations Comtrade database, providing the frame of the world trade network associated to 194 UN countries during the decade 2010 - 2020, we study a mathematical model of influence battle of three currencies, namely, the US dollar, the euro, and such a hypothetical BRICS currency. In this model, a country trade preference for one of the three currencies is determined by a multiplicative factor based on trade flows between countries and their relative weights in the global international trade. The three currency seed groups are formed by 9 eurozone countries for the euro, 5 Anglo-Saxon countries for the US dollar and the 5 BRICS countries for the new proposed currency. The countries belonging to these 3 currency seed groups trade only with their own associated currency whereas the other countries choose their preferred trade currency as a function of the trade relations with their commercial partners. The trade currency preferences of countries are determined on the basis of a Monte Carlo modeling of Ising type interactions in magnetic spin systems commonly used to model opinion formation in social networks. We adapt here these models to the world trade network analysis. The results obtained from our mathematical modeling of the structure of the global trade network show that as early as 2012 about 58 percent of countries would have preferred to trade with the BRICS currency, 23 percent with the euro and 19 percent with the US dollar. Our results announce favorable prospects for a dominance of the BRICS currency in international trade, if only trade relations are taken into account, whereas political and other aspects are neglected. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2305.00585&r=mon |
| By: | Cuzzola, Angelo; Barbieri, Claudio; Bindseil, Ulrich |
| Abstract: | The paper studies the central bank collateral framework and its impact on banks’ liquidity under an adverse stress test scenario. We construct a stress test model that accounts for a granular and multi-faceted representation of the liquidity of marketable and non-marketable assets. In particular, the model analyses banks’ strategic decisions to mobilise assets through four funding channels: unsecured loans, asset sales, private repurchase agreements, or Central Bank lending. We test three scenarios: the EBA regulatory stress test exercise, a shock to Russia and the Eastern European countries, and a shock to the Southern European countries. Results show that illiquidity can trigger insolvency and that liquidity adjustment can last significantly after the initial shock. We find evidence of a threshold in the benefits of expanding the collateral framework and highlight the heterogeneous effects across different jurisdictions and financial institutions. We find that bank equity losses are reduced in aggregate up to 17% at the tail of the loss distribution and on average by around 5% when financial institutions can rely on the collateral framework channel. JEL Classification: C63, E52, G01, G28 |
| Keywords: | Asset liquidity, Central Bank Collateral Framework, Collateral, Lender-Of-Last Resort, Stress test |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232814&r=mon |
| By: | Haelim Anderson; Adam Copeland |
| Abstract: | The collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has raised questions about the fragility of the banking system. One striking aspect of these bank failures is how the runs that preceded them reflect risks and trade-offs that bankers and regulators have grappled with for many years. In this post, we highlight how these banks, with their concentrated and uninsured deposit bases, look quite similar to the small rural banks of the 1930s, before the creation of deposit insurance. We argue that, as with those small banks in the early 1930s, managing the information around SVB and SB’s balance sheets is of first-order importance. |
| Keywords: | bank runs; information management; bank crises; banking crisis |
| JEL: | G21 G01 |
| Date: | 2023–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96142&r=mon |
| By: | Richard Berner; Marco Cipriani; Michael Holscher; Antoine Martin; Patrick E. McCabe |
| Abstract: | The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run. |
| Keywords: | bank run; Minimum Balance at Risk; money market funds (MMFs); uninsured deposits |
| JEL: | F0 G2 G01 |
| Date: | 2023–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95972&r=mon |
| By: | Kellard, Neil; Madsen, Jakob B; Snaith, Stuart |
| Abstract: | The real exchange rate is an important measure of the relative strength of an economy. Given long-term productivity differentials between countries, Harrod-Balassa-Samuelson effects suggest that stronger economies will experience real exchange rate appreciations and vice versa. How long can these effects last? Using a novel dataset and trend tests robust to pre-testing for the order of integration, we examine the path of ten ultra-long real exchange rates relative to Sterling with data commencing in the 13th century.Whilst we show Sterling commonly presents a trend appreciation from the 16th century to the 19th century, a striking trend depreciation occurred throughout 20th century with some evidence of prior decline. Further analysis reveals that real exchange rates are cointegrated with productivity differential proxies over much of the last millennia, suggesting the UK’s current productivity decline is more entrenched and persistent than previously thought. |
| Keywords: | Real exchange rate; Sterling; Harrod-Balassa-Samuelson effects; Robust trends; Cointegration |
| Date: | 2023–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:35634&r=mon |
| By: | Sri Rajitha Tattikota (Madras School of Economics, Chennai, India); Naveen Srinivasan ((Corresponding author) Professor, Madras School of Economics, Chennai, India) |
| Abstract: | In this study we compare the in-sample-accuracy to evaluate the performance of Econometric models and Machine Learning models on the Time Series data. Enclosed to explore techniques which perform better for Time Series Classification to predict the state (High, Medium, or Low) of each quarter by studying macroeconomic variables in the United States: Inflation and Unemployment. In the direction of improving the models using machine learning techniques and investigating how they are incorporated in time series data to improve the efficiency of the predictions. We perform a comparative analysis of various models for this classification problem. In ML, Logistic regression, K-Nearest neighbors, Support vector machines, Gradient boosting and Random forest models were explored. In Econometrics, Autoregressive Moving Average and Autoregressive Conditional Heteroskedasticity models were explored. The results showed that Machine learning models are superior compared to the traditional Econometric models for time series data. The best model for Unemployment data was EGARCH in Econometrics and K- Nearest Neighbors to predict both 2 states and 3 states in ML. The best model for Inflation data was EGARCH in Econometrics and Linear SVM, Random forest to predict 2 states and 3 states respectively in ML. Even though the ML models lack the interpretability and clarity in the exact internal process, these models have resulted exceptional in terms of accuracy in predictions. Econometric modelling would be more suitable, if we focus to only understand the effect and interpret the casual effect of the data. |
| Keywords: | Inflation, Unemployment, Econometric models, Machine Learning |
| JEL: | C5 E24 E27 E31 E37 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2021-207&r=mon |