nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒06‒19
68 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Bank Deposit Flows to Money Market Funds and ON RRP Usage during Monetary Policy Tightening By Manjola Tase; Andrei Zlate
  2. Inflation and Monetary Policy in a Low-Income and Fragile State: The Case of Guinea By Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
  3. Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg By Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
  4. Effects of Monetary Policy on Household Expectations: The Role of Homeownership By Hie Joo Ahn; Choongryul Yang
  5. The ECB’s new inflation target from a short- and long-term perspective By BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
  6. The Macroeconomic Implications of CBDC: A Review of the Literature By Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
  7. Optimal monetary policy and the vintage-dependent price and wage Phillips curves: An international comparison By DI BARTOLOMEO, Giovanni; SERPIERI, Carolina
  8. State-Dependent Exchange Rate Pass-Through By Carrière-Swallow, Yan; Firat, Melih; Furceri, Davide; Jiménez, Daniel
  9. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  10. Monetary Inflation Relationship in Madagscar: a DSGE Model Analysis By Andrianady, Josué R.; Rajaonarison, Njakanasandratra R.
  11. BigTech credit and monetary policy transmission: Micro-level evidence from China By Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
  12. The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area By Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
  13. Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature By Petrevski, Goran
  14. The impact of monetary policy on functional income distribution: a panel SVAR analysis (1970-2019) By Stefano Di Bucchianico; Antonino Lofaro
  15. Central Bank Credibility and Fiscal Responsibility By Jesse Schreger; Pierre Yared; Emilio Zaratiegui
  16. Inflation Expectations and Misallocation of Resources: Evidence from Italy By Ropele, Tiziano; Gorodnichenko, Yuriy; Coibion, Olivier
  17. Will Central Bank Digital Currency Disintermediate Banks? By Whited, Toni M.; Wu, Yufeng; Xiao, Kairong
  18. The Federal Reserve’s Response to the Global Financial Crisis and Its Long-Term Impact: An Interrupted Time-Series Natural Experimental Analysis By KAMKOUM, Arnaud Cedric
  19. Developments in and Characteristics of Japan's FX Market: An Analysis Based on the 2022 BIS Triennial Central Bank Survey By Kota Watanabe; Kyosuke Hari; Natsu Sawada; Hidemi Bessho
  20. Dampening the financial accelerator? direct lenders and monetary policy By Ryan Banerjee; José-María Serena
  21. Racial unemployment gaps and the disparate impact of the inflation tax By Mohammed Ait Lahcen; Garth Baughman; Hugo van Buggenum
  22. Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects? By Mr. Etibar Jafarov; Enrico Minnella
  23. To What Degree and through Which Channel Do Central Banks Other Than the Federal Reserve Cause Spillovers? By Christopher D. Cotton
  24. 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
  25. Information Shocks in the U.S. and Asset Mispricing in Emerging Economies By Antonia Lopez Villavicencio; Marc Pourroy
  26. History-Dependent Monetary Regimes: A Lab Experiment and a Henk Model By Jasmina Arifovic; Isabelle Salle; Hung Truong
  27. Carbon pricing and inflation expectations: evidence from France By Jannik Hensel; Giacomo Mangiante; Luca Moretti
  28. Monetary stability and regional currency board: towards a two-tier system to accelerate regional integration in the Horn of Africa: a policy proposal By Moustapha Aman; Nikolay Nenovsky
  29. The German inflation trauma: Weimar's policy lessons between persistence and reconstruction By Barkhausen, David; Teupe, Sebastian
  30. State-Dependent Exchange Rate Pass-Through By Mr. Yan Carriere-Swallow; Melih Firat; Davide Furceri; Daniel Jimenez
  31. Oil Prices, Monetary Policy and Inflation Surges By Luca Gagliardone; Mark Gertler
  32. Nonlinear Input Cost Pass-through to Consumer Prices: A Threshold Approach By Takatoshi Sasaki; Hiroki Yamamoto; Jouchi Nakajima
  33. On the Essentiality of Credit and Banking at Zero Interest Rates By Paola Boel; Christopher J. Waller
  34. Does U.S. Monetary Policy Respond to Macroeconomic Uncertainty? By Thomas Gomez; Giulia Piccillo
  35. Volatility jumps and the classification of monetary policy announcements By G.M. Gallo; D. Lacava; E. Otranto
  36. Trillion Dollar Words: A New Financial Dataset, Task & Market Analysis By Agam Shah; Suvan Paturi; Sudheer Chava
  37. Identifying financial fragmentation: do sovereign spreads in the EMU reflect differences in fundamentals? By Jan Kakes; Jan Willem van den End
  38. ECB Euro Liquidity Lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
  39. Comecon Monetary Mechanisms. A history of socialist monetary integration (1949 -1991) By Adrien Faudot; Tsvetelina Marinova; Nikolay Nenovsky
  40. On the Pass-Through of Large Devaluations By Carlos Casacuberta; Omar Licandro
  41. Kites and Quails: Monetary Policy and Communication with Strategic Financial Markets By Giampaolo Bonomi; Ali Uppal
  42. Household debt, liquidity constraints and the interest rate elasticity of private consumption By Kärkkäinen, Samu; Silvo, Aino
  43. Helicopter money: what is it and what does it do? By Reis, Ricardo; Tenreyro, Silvana
  44. How inflation varies across Spanish households By Irene Monasterolo
  45. Quantitative Easing, Households' Savings and Growth: A Luxembourgish Case Study By Sarah Goldman; Shouyi Zhang
  46. Female unemployment, mobile money innovations and doing business by females By Simplice A. Asongu; Nicholas M. Odhiambo
  47. Unconventional green By Zaghini, Andrea
  48. Inflation: Everywhere and Always Differential By Fix, Blair
  49. Nigeria’s eNaira, One Year After By Jookyung Ree
  50. Spillovers to Emerging Markets from US Economic News and Monetary Policy By Philipp Engler; Mr. Roberto Piazza; Galen Sher
  51. How Do Firms Adjust Prices in a High Inflation Environment? By Wändi Bruine de Bruin; Keshav Dogra; Sebastian Heise; Edward S. Knotek; Brent Meyer; Robert W. Rich; Raphael Schoenle; Giorgio Topa; Wilbert Van der Klaauw
  52. Pushing Bonds Over the Edge: Monetary Policy and Municipal Bond Liquidity By John Bagley; Stefan Gissler; Ivan T. Ivanov
  53. World Economy in Spring 2023: Stubborn inflation, moderate growth By Gern, Klaus-Jürgen; Kooths, Stefan; Reents, Jan; Sonnenberg, Nils; Stolzenburg, Ulrich
  54. The spectre of financial dominance in the eurozone By BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
  55. Measuring inflation during the Pandemic with the benefit of hindsight By Chowdhury, Aftab; Dixon, Huw David
  56. How We Missed the Inflation Surge: An Anatomy of Post-2020 Inflation Forecast Errors By Mr. Christoffer Koch; Diaa Noureldin
  57. Towards a Single Currency in Natural Syria Region - A Conceptual Monetary Innovation: A Reflection By Wissam Samia; Nada Mallah Boustani
  58. Financial Stability and Interest Rates By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
  59. Whatever it Takes? The Impact of Conditional Policy Promises By Valentin Haddad; Alan Moreira; Tyler Muir
  60. Central Bank Communication and House Price Expectations By Carola Binder; Pei Kuang; Li Tang
  61. Measuring the Stances of Monetary and Fiscal Policy By Mr. Francis Vitek
  62. Forecasting banknote circulation during the COVID-19 pandemic using structural time series models By Nikolaus Bartzsch; Marco Brandi; Lucas Devigne; Raymond de Pastor; Gianluca Maddaloni; Diana Posada Restrepo; Gabriele Sene
  63. Inflation targeting and the composition of public expenditure: Evidence from developing countries By Ablam Estel Apeti; Jean-Louis Combes; Alexandru Minea
  64. The impact of global warming on inflation: averages, seasonality and extremes By Kotz, Maximilian; Kuik, Friderike; Lis, Eliza; Nickel, Christiane
  65. Network risk and key players: a structural analysis of interbank liquidity By Denbee, Edward; Julliard, Christian; Li, Ye; Yuan, Kathy
  66. Has the Phillips Curve Become Steeper? By Mr. Anil Ari; Mr. Daniel Garcia-Macia; Shruti Mishra
  67. The Effects of Inflation on Public Finances By Mr. Daniel Garcia-Macia
  68. Dollarization Dynamics By Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning

  1. By: Manjola Tase; Andrei Zlate
    Abstract: Using the historical experience from past monetary tightening cycles and the market-expected path of the federal funds rate for the current tightening cycle, we project that the flows from bank deposits to money market funds (MMFs) would be relatively small, at about $600 billion through the end of 2024, or about 3 percent of current bank deposits. Of these potential inflows to MMFs, about $100 billion are projected to flow into the overnight reverse repo (ON RRP) facility, or about 7 percent of MMFs’ recent take-up. Other factors such as the private demand for repo funding and the net supply of Treasury bills are expected to have more substantial effects on MMFs’ take-up at the ON RRP facility than the inflows from bank deposits.
    Keywords: Monetary policy tightening; Bank deposits; Money market funds; Overnight reverse repo facility; Private repo funding; Treasury bills
    JEL: E43 E52 E58
    Date: 2022–09–02
  2. By: Mr. Yan Carriere-Swallow; Nelnan Fidèle Koumtingué; Mr. Sebastian Weber
    Abstract: Inflation in low-income countries is often high and volatile, driven by external shocks. In addition, inflation in fragile states is affected by highly volatile domestic factors that complicate monetary policy’s ability to deliver price stability. We estimate the drivers of inflation in Guinea since the early 2000s, a period in which the country suffered major shocks from pandemics, commodity price movements, and multiple military coups, and during which inflation averaged 12 percent. Results confirm that global commodity and transport prices account for a large share of the variation in inflation. The contribution of monetary policy shocks to inflation is moderate, reflecting its broadly neutral stance throughout most of the last two decades. However, monetary policy has occasionally made larger contributions to inflation, and recently helped contain price pressures from high commodity prices. The effectiveness of monetary policy reflects a strong relationship between monetary aggregates and the exchange rate.
    Keywords: Monetary Policy; Inflation; Low-income Countries; Fragile States; inflation dynamics; shocks to inflation; monetary policy shock; commodity price movement; inflation development; Monetary base; Exchange rates; Exchange rate arrangements; Nominal effective exchange rate; Global; Sub-Saharan Africa
    Date: 2023–04–21
  3. By: Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls
    Abstract: We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.
    Keywords: unconventional monetary policy, optimal monetary policy, New Keynesian model, policy rate lower bound, interest rate peg
    JEL: E43 E52 E58
    Date: 2023
  4. By: Hie Joo Ahn; Choongryul Yang
    Abstract: We study the role of homeownership in the effectiveness of monetary policy on households' expectations. Empirically, we find that homeowners revise down their near-term inflation expectations and their optimism about future labor market conditions in response to a rise in mortgage rates, while renters are less likely to do so. We further show that the monetary-policy component of mortgage-rate changes creates the difference in expectation revisions between homeowners and renters. This result suggests that homeowners are attentive to news on interest rates and adjust their expectations accordingly in a manner consistent with the intended effect of monetary policy. We characterize these findings using a rational inattention model with two types of households---homeowners and renters.
    Keywords: Inflation expectations; Homeownership; Rational inattention
    JEL: D83 D84 E31 E52
    Date: 2022–10–03
  5. By: BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
    Abstract: The ECB’s target was recently revised, specifying that the 2%-inflation-rate threshold must be applied symmetrically and with a medium-term orientation. In the current phase, characterized by high inflation rates and a growing risk of stagnation in the euro area, this revision of the monetary policy strategy is crucial for explaining the recent decisions of the ECB and forecasting their possible evolution. However, monetary policy can only become one of many policy tools in the euro area. Therefore, there is room for a compelling policy mix necessary to control excessive inflation and support the European economy’s medium-term sustainable growth.
    Keywords: European Central Bank, Inflation expectations, Stagflation, Policy mix
    Date: 2023–03
  6. By: Sebastian Infante; Kyungmin Kim; André F. Silva; Robert J. Tetlow
    Abstract: This paper provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. A CBDC also raise important questions regarding monetary policy implementation and the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.
    Keywords: Financial stability; Monetary policy; Banking; Central bank digital currency; Central banking
    JEL: G20 E40 E50
    Date: 2022–11–17
  7. By: DI BARTOLOMEO, Giovanni; SERPIERI, Carolina
    Abstract: In this study, we compare the conduct of central banks across seven advanced economies by analyzing the relationship between observed and optimal monetary policies. We estimate the New Keynesian Phillips curves for prices and wages and use model-consistent welfare measures to conduct counterfactual analysis. What sets our approach apart is the focus on the impact of inertia on output gaps and price/wage dynamics, which we model using duration-dependent adjustments. Ignoring the effects of inertia on welfare and policies could result in a misleading and incomplete understanding of inflation dynamics. By incorporating this element into our analysis, we aim to identify common trends and specificities in central banks’ monetary policy conduct across different countries.
    Keywords: Duration-dependent adjustments, Intrinsic inflation persistence, DSGE models, Hybrid Phillips curves, Optimal policy
    JEL: E31 E32 C11
    Date: 2023–03
  8. By: Carrière-Swallow, Yan; Firat, Melih; Furceri, Davide; Jiménez, Daniel
    Abstract: We estimate how the rate of pass-through from the exchange rate to domestic prices varies across states of the economy and depends on the shocks that drive fluctuations in the exchange rate. We confirm several results from the literature and uncover new facts. Drawing on the experience of a large sample of advanced and emerging market economies over the past 30 years, we document that exchange rate pass-through is significantly larger during periods of high inflation and elevated uncertainty. Using a novel identification strategy, we also show that pass-through is higher when exchange rate fluctuations are driven by U.S. monetary policy.
    Keywords: Exchange rate; Pass Through; Inflation
    JEL: E31 E52 F31 F44
    Date: 2023–05
  9. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the COVID-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisia money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    Keywords: Velocity; monetary services index; Divisia; liquidity; money; shadow banks; mutual funds
    JEL: E51 E41 E52 E58
    Date: 2023–05–25
  10. By: Andrianady, Josué R.; Rajaonarison, Njakanasandratra R.
    Abstract: This work investigates the impact of an increase in the money supply on inflation using DSGE model in Madagascar. The results showed a strong positive correlation between these two variables, confirming the economic theory that an increase in the money supply leads to a proportional increase in inflation. The study also revealed that the increase in the money supply has a significant effect on inflation in the short term, but this effect quickly diminishes and disappears after about twelve quarters.Targeted monetary policies may limit short-term effects on inflation, but strcutural and busgetary policies in the long term are needed to sustainably reduce inflation and promote sustained economic growth.
    Keywords: Madagascar, DSGE, Inflation, money, PCA
    JEL: E0 E3 E4 E41 E43 E51 E58
    Date: 2023
  11. By: Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech credit amplifies monetary policy transmission mainly through the extensive margin. Specifically, the BigTech bank is more likely to grant credit to new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. In addition, monetary policy has a stronger impact on the real economy through BigTech lending.
    Keywords: Financial Technology, Bank Lending, Monetary Policy Transmission
    JEL: E52 G21 G23
    Date: 2023
  12. By: Policy, Monetary; Stability, Financial; Albertazzi, Ugo; Martin, Alberto; Assouan, Emmanuelle; Tristani, Oreste; Galati, Gabriele; Vlassopoulos, Thomas; Adolf, Petra; Kok, Christoffer; Altavilla, Carlo; Lewis, Vivien; Andreeva, Desislava; Lima, Diana; Brand, Claus; Musso, Alberto; Bussière, Matthieu; Nikolov, Kalin; Fahr, Stephan; Patriček, Matic; Fourel, Valère; Prieto, Esteban; Heider, Florian; Rodriguez-Moreno, Maria; Idier, Julien; Signoretti, Federico; Aban, Jorge; Busch, Ulrike; Ambrocio, Gene; Cassar, Alan; Balfoussia, Hiona; Chalamandaris, Dimitrios; Bonatti, Guido; Cuciniello, Vincenzo; Bonfim, Diana; Eller, Markus; Bouchinha, Miguel; Falagiarda, Matteo; Fernandez, Luis; Maddaloni, Angela; Garabedian, Garo; Mazelis, Falk; Geiger, Felix; Miettinen, Pavo; Grassi, Alberto; Nakov, Anton; Hristov, Nikolay; Obradovic, Goran; Ibas, Pelin; Papageorghiou, Maria; Ioannidis, Michael; Pogulis, Armands; Jan, Jansen David; Redak, Vanessa; Jovanovic, Mario; Velez, Anatoli Segura; Kakes, Jan; Tapking, Jens; Kempf, Alina; Valderrama, Maria; Klein, Melanie; Weigert, Benjamin; Licak, Marek; policy, Work stream on macroprudential
    Abstract: Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. However, model-based quantitative analysis suggests that this approach may require impractically drawn-out periods of deviation from price stability and potentially result in a de-anchoring of inflation expectations. ... JEL Classification: E3, E44, G01, G21
    Keywords: financial frictions, Monetary policy, systemic risk
    Date: 2023–05
  13. By: Petrevski, Goran
    Abstract: This paper surveys the voluminous empirical literature of inflation targeting (IT). Specifically, the paper focuses on three main issues: the main institutional, macroeconomic, and technical determinants that affect the adoption of IT; the effects of IT on macroeconomic performance (inflation expectations, inflation persistence, average inflation rate, inflation variability, output growth, output volatility, interest rates, exchange rates, and fiscal outcomes); and disinflation costs of IT (the so-called sacrifice ratios). The main findings from our review are the following: concerning the determinants behind the adoption of IT, there is robust empirical evidence that larger and more developed countries are more likely to adopt the IT regime; similarly, the introduction of this regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; however, the literature suggests that the link between various macroeconomic and institutional determinants and the likelihood of adopting IT may be rather weak, i.e., they are not to be viewed either as strict necessary or sufficient conditions; the empirical evidence has failed to provide convincing evidence that IT itself may serve as an effective tool for stabilizing inflation expectations and for reducing inflation persistence; the empirical research focused on advanced economies has failed to provide convincing evidence on the beneficial effects of IT on inflation performance, concluding that inflation targeters only converged towards the monetary policy of non-targeters, while there is some evidence that the gains from the IT regime may have been more prevalent in the emerging market economies (EMEs); there is not convincing evidence that IT is associated with either higher output growth or lower output variability; the empirical research suggests that IT may have differential effects on exchange-rate volatility in advanced economies versus EMEs; although the empirical evidence on the impact of IT on fiscal policy is quite limited, it supports the idea that IT indeed improves fiscal discipline; the empirical support to the proposition that IT is associated with lower disinflation costs seems to be rather weak. Therefore, the accumulated empirical literature implies that IT does not produce superior macroeconomic benefits in comparison with the alternative monetary strategies or, at most, they are quite modest.
    Keywords: monetary policy, inflation targeting
    JEL: E52 E58
    Date: 2023
  14. By: Stefano Di Bucchianico; Antonino Lofaro
    Abstract: In most countries, recurrent crises episodes due to financial disorder, the pandemic, and the recent war have increased income and wealth inequality. Moreover, since the 2008 crisis, major central banks have adopted highly expansionary conventional and unconventional monetary policies. Thus, attention towards the connection between monetary policy and inequality is surging. However, first, there is no consensus in the empirical literature on what the impact of monetary policy shocks on inequality is. Second, the literature is mainly focused on the effects of monetary policy on personal rather than functional income distribution. Third, the conventional hypothesis is for monetary policy to have at most an impact over the cycle but not in the long-run. Therefore, our work grounds on three objectives. First, we tackle the role of monetary policy in shaping functional income distribution by looking at the long-run behavior of real wages and the labor share of income. Second, we employ for the first time a panel SVAR methodology to a new panel dataset of 15 advanced economies during the 1970-2019 period. Third, differently from extant literature, we pose special attention to the so called ‘cost’ and ‘labor market’ channels of monetary policy. According to our results, a contractionary monetary policy shocks generates long-run adverse effects on the level of real wages. While the labor share initially rises because of the fall in GDP, the subsequent pronounced fall in real wages lets the labor share fall back to the pre-shock level.
    Keywords: Monetary policy; functional income distribution; Panel SVAR; labor share; income inequality
    JEL: E24 E52 E58
    Date: 2023–05
  15. By: Jesse Schreger; Pierre Yared; Emilio Zaratiegui
    Abstract: We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is non-monotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.
    JEL: E40 E44 E49 E50 E52
    Date: 2023–05
  16. By: Ropele, Tiziano (Bank of Italy); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin)
    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 moderate, but we argue that it likely becomes quite significant in times of high inflation.
    Keywords: misallocation, inflation expectations
    JEL: E31 C83 D84 O47
    Date: 2023–05
  17. By: Whited, Toni M. (University of Michigan and the NBER); Wu, Yufeng (University of Illinois); Xiao, Kairong (Columbia University)
    Abstract: We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.
    Keywords: central bank digital currency, banking competition, maturity mismatch, ï¬ nancial stability
    JEL: E51 E52 G21 G28
    Date: 2023–05
  18. By: KAMKOUM, Arnaud Cedric
    Abstract: This paper examines the monetary policies the Federal Reserve implemented in response to the Global Financial Crisis. More specifically, it analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations conducted from 2007 to 2018. The essay’s detailed examination of these policies culminates in an interrupted time-series (ITS) analysis of the long-term causal effects of the QE programs on U.S. inflation and real GDP. The results of this formal design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the QE programs, real GDP per capita in the U.S. was 14% higher relative to what it would have been during that quarter had there not been the QE programs. These findings contradict Williamson’s (2017) informal natural experimental evidence and confirm the conclusions of VARs and new Keynesian DSGE models that the Federal Reserve’s QE policies positively affected U.S. real GDP. The results suggest that the current U.S. and worldwide high inflation rates are likely not because of the QE programs implemented in response to the financial crisis that accompanied the COVID-19 pandemic. They are likely due to the unprecedentedly large fiscal stimulus packages used, the peculiar nature of the financial downturn itself, the negative supply shocks from the war in Ukraine, or a combination of these factors. To the best of my knowledge, this paper is the first study to measure the macroeconomic effects of QE using a design-based natural experimental approach.
    Keywords: Federal Reserve System; monetary policy; quantitative easing (QE); Global Financial Crisis; interrupted time-series (ITS) analysis; natural experiment; Great Recession; unconventional monetary policies; quasi-quantitative easing (qQE); quantitative tightening (QT); quasi-quantitative tightening (qQT); CPI inflation; Williamson (2017)
    JEL: C10 C22 E52 E58 G01
    Date: 2023–05–20
  19. By: Kota Watanabe (Bank of Japan); Kyosuke Hari (Bank of Japan); Natsu Sawada (Bank of Japan); Hidemi Bessho (Bank of Japan)
    Abstract: In 2022, foreign exchange (FX) markets saw a rapid and significant depreciation of the Japanese yen (JPY) against the U.S. dollar (USD). Based on the results of the Triennial Central Bank Survey conducted by the Bank for International Settlements (BIS) in April 2022, this paper explores FX turnover in Japan -- which reached a historical high since the start of the survey -- by currency, type of instrument, and counterparty. It then examines the impact of the increase in FX turnover on the USD/JPY exchange rate. In addition, it explains the background of the long-term downtrend in the share of Japan in the global FX market through a comparison with global survey results, mainly by analyzing turnover by currency.
    Keywords: Foreign exchange; Turnover; Market structure
    JEL: F31 G12 G15
    Date: 2023–05–30
  20. By: Ryan Banerjee (Bank for International Settlement); José-María Serena (Banco de España)
    Abstract: Direct lenders, non-bank credit intermediaries with low leverage, have become increas-ingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers’ net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy.
    Keywords: direct lending, monetary policy, financial accelerator, credit channel
    JEL: G21 G32 F32 F34
    Date: 2021–12
  21. 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 US. 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 is counter-cyclical 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 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
  22. By: Mr. Etibar Jafarov; Enrico Minnella
    Abstract: Extended periods of ultra-easy monetary policy in advanced economies have rekindled debates about the zombification of weak companies and its impact on resource allocation, economic growth, inflation, and financial stability. Using both firm-level and macroeconomic data, we find that recessions are a critical factor in the rapid increase in the number of zombie firms. Expansionary monetary policy can help reduce zombification when interest rates are at the zero lower bound (ZBL), but a too-accommodative monetary policy for extended periods is associated with a higher probability of zombification. Small and medium enterprises are more likely to become zombie firms. This raises concerns about the sustainability of too-easy monetary policy implementation, especially in countries where growth is lackluster. Our findings imply a tradeoff between conducting a countercyclical monetary policy, which also helps contain the increase in the number of zombie firms in cyclical downturns, and using an expansionary monetary policy for long periods, which may lead to a combination of low interest rates, low growth, and high financial vulnerability. Such a tradeoff is not a concern currently when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions.
    Keywords: Too Low for Too Long; Zombie Firms; Financial Stability
    Date: 2023–05–19
  23. By: Christopher D. Cotton
    Abstract: Spillovers play a crucial role in driving monetary policy around the world. The literature focuses predominantly on spillovers from the Federal Reserve. Less attention has been paid to spillovers from other central banks. I measure the degree to which 20 central banks cause spillovers. I show that central banks in medium- to high-income countries cause spillovers to medium- to long-term interest rates in similar countries through a bond-pricing channel. These effects are narrower than spillovers from the Federal Reserve, which also affect emerging markets, short-term interest rates, and other assets. However, they are still pronounced. Fourteen central banks other than the Federal Reserve cause significant spillovers: the central banks of Australia, Canada, Czechia, the eurozone, Japan, Mexico, Norway, New Zealand, Poland, Romania, South Korea, Sweden, Switzerland, and the United Kingdom. Consequently, the Federal Reserve causes only one-fifth of the spillovers to 10-year interest rates, and the United States is the recipient of large spillovers. My results imply that central banks, especially the Federal Reserve, are affected by greater spillovers than is commonly believed, and that non-Fed central banks cause spillovers through a bond-pricing channel.
    Keywords: monetary policy spillovers; central bank; global financial cycle
    JEL: F42 E43 E52
    Date: 2022–09–01
  24. By: Jonathan Hambur; Qazi Haque
    Abstract: We examine the effects of three facets of monetary policy in Australia using high-frequency yield changes around RBA announcements: current policy; signalling/forward guidance; and changes in premia. Shocks to current policy have similar effects to those identified using conventional approaches, but the effects of signalling and premia shocks are imprecisely estimated. Still, the approach provides evidence that: forward guidance shocks raised future rate expectations in the mid-2010s as the RBA highlighted housing risks; Covid-era policy mainly affected term premia, unlike pre-COVID policy; shocks to the expected path of rates are predictable, suggesting markets misunderstand the RBA’s reaction to data.
    Keywords: high-frequency data, affine term structure model, multidimensional policy shocks, monetary policy transmission
    JEL: E43 E52 E58 C58
    Date: 2023–06
  25. By: Antonia Lopez Villavicencio; Marc Pourroy
    Abstract: We explore whether U.S. monetary policy shocks can lead to create booms and busts of asset prices in emerging economies. Using impulse response function obtained from local projections, we show that the Fed's announcements of a tighter monetary policy lead to strong under-valuations of equity markets in EMEs. However, the information content in a tightening announcement lead to over-valuation in EME's asset prices. We attribute these differences to perceptions of signalling a better-than-expected economic outlook. Finally, we show that real integration influences more than financial integration the propagation of communication shocks.
    Keywords: emerging markets, asset mispricing, monetary policy, information channel, local projections
    JEL: E52 E58 F41
    Date: 2023
  26. By: Jasmina Arifovic (Simon Fraser University); Isabelle Salle (University of Ottawa); Hung Truong (Simon Fraser University)
    Abstract: Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a laboratory group experiment – where expectations are elicited from human subjects – to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with both deflationary and cost-push shocks. We then emulate the subjects’ expectations with a micro-founded heterogeneous-expectation New Keynesian (HENK) model and reproduce the macroeconomic dynamics observed in the lab. Both in the lab and in the HENK model, the benefits of PLT over an IT regime obtained under the FIRE assumption are not observed: both human subjects and HENK agents are unable to learn the underlying implications of PLT, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance from the CB consistent with closing the price gap, the stabilizing benefits of PLT materialize both in the lab and in the model.
    Keywords: heterogeneous expectations, learning, central bank communication, lab experiments
    JEL: E7 E52 E42 C92
    Date: 2023–05–12
  27. By: Jannik Hensel; Giacomo Mangiante; Luca Moretti
    Abstract: This paper studies the impact of carbon pricing on firms’ inflation expectations and discusses the potential implications for what constitutes the core of most central banks’ mandate: price stability. Carbon policy shocks are identified from high-frequency changes in carbon futures price around regulatory events. The shock series is combined with French firm-level survey data. We document that a change in the price of carbon increases firms’ inflation expectations. We then investigate how firms’ business conditions are affected by carbon policy shocks and we find that firms’ own expected and realized price growth respond similarly to inflation expectations. The effect on price expectations is more persistent than on actual price growth leading to positive forecast errors in the medium- /long-run. We also show that a sizable share of the increase in inflation expectations is due to indirect effects. Firms rely on their own business conditions to form expectations about the aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. Finally, we study how firms’ responses are heterogeneously influenced by the shocks based on the share of input costs devoted to energy expenditures. We find that high energy-intensive firms tend to overreact relatively more in terms of their own price expectations compared to the actual price change the shocks induce.
    Keywords: Climate policies, carbon pricing, inflation expectations, monetary policy, survey data
    JEL: E31 E52 E58 Q43 Q54
    Date: 2023–04
  28. By: Moustapha Aman (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne); Nikolay Nenovsky (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel, LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: The last few decades have been marked by a proliferation of currency union projects in Africa. In a context of exchange rate instability and poorly convertible currencies, the authorities in most of the countries of the Horn of Africa are looking for an exchange rate regime that can stabilise and develop their economies. To achieve monetary stability in this sub-region, which is at the crossroads of some of the busiest sea and land routes, this paper reflects on the potential benefits of a monetary system that is characterised by a two-tiered architecture: national currencies and a common currency governed by a regional Currency Board.
    Keywords: monetary regime, Currency board, Central Bank, Horn of Africa JEL Classification: C01
    Date: 2022
  29. By: Barkhausen, David; Teupe, Sebastian
    Abstract: The notion of a nation-specific inflation trauma among the German population is ubiquitous in the public debate in Germany and beyond. Because of its experience with hyperinflation in 1923, the German population fears rising prices and favors stability-oriented monetary as well as fiscal policy. It is less clear, however, whether this contemporary understanding of the German inflation trauma is as old as its historical point of reference. The majority of the literature presumes that such a traumatic disposition has persisted since 1923 and has been transposed intergenerationally (persistence thesis). Others, however, point to an ex-ante reconstruction of past experiences (reconstruction thesis). By employing an interdisciplinary approach of methodological triangulation drawing on both methods of history and political sciences, we provide new insights on the question of origin. Specifically, we examine the remembrance of hyperinflation in personal memoirs and the German Bundestag in regard to the monetary and fiscal policy lessons connected to memories of 1923. Doing so, we find support for the logic of reconstruction. We show that the hyperinflation was not remembered unambiguously, and that memories were not immediately linked to specific policy lessons. Only from the 1980s onwards, a process of discursive alignment occurred that mirrors the contemporary understanding of the inflation trauma. By providing this insight, our paper allows to better understand the historical origins of today's popular memory and its political uses.
    Keywords: Inflation Trauma, Hyperinflation, Stability Culture, Monetary History, Collective memory
    JEL: N0 Z1
    Date: 2023
  30. By: Mr. Yan Carriere-Swallow; Melih Firat; Davide Furceri; Daniel Jimenez
    Abstract: We estimate how the rate of pass-through from the exchange rate to domestic prices varies across states of the economy and depending on the shocks that drive fluctuations in the exchange rate. We confirm several results from the literature and uncover new facts. Drawing on the experience of a large sample of advanced and emerging market economies over the past 30 years, we document that exchange rate pass-through significantly larger during periods of high inflation and elevated uncertainty. Using a novel identification strategy, we also show that pass-through is higher when exchange rate fluctuations are driven by U.S. monetary policy.
    Keywords: Exchange rate; pass-through; inflation; state-dependence
    Date: 2023–04–28
  31. By: Luca Gagliardone; Mark Gertler
    Abstract: We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation, with emphasis on the role of oil shocks and accommodative monetary policy. The model features oil as a complementary good for households and as a complementary input for firms. It also allows for unemployment and real wage rigidity. We estimate the key parameters by matching model impulse responses to those from identified money and oil shocks in a structural VAR. We then show that our model does a good job of explaining unemployment and inflation since 2010, including the recent inflation surge that began in mid 2021. We show that mainly accounting for this surge was a combination oil price shocks and “easy” monetary policy, even after allowing for demand shocks and shocks to labor market tightness. Important for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case.
    JEL: E0
    Date: 2023–05
  32. By: Takatoshi Sasaki (Bank of Japan); Hiroki Yamamoto (Bank of Japan); Jouchi Nakajima (Hitotsubashi University; Bank of Japan)
    Abstract: This paper examines a possible nonlinearity in the pass-through to CPI inflation of increases in firms' input costs. Using Japanese data, the paper empirically investigates whether the degree of the pass-through rises when increases in costs exceed a certain threshold. Three main empirical results are obtained. First, there is a statistically significant nonlinearity in that the pass-through to CPI inflation of increases in producer prices, exchange rates, and wages rises once the increase in each of these variables exceeds a certain threshold. Second, our nonlinear model is superior to the linear model used in previous studies in terms of in-sample model fit and out-of-sample forecasting performance, suggesting that the linear model underestimates the degree of the pass-through of an input-cost increase that exceeds the threshold while overestimating that of a smaller input-cost increase. Third, the estimated impact of the nonlinear pass-through of increases in producer prices and exchange rates on CPI inflation is often transitory, whereas that of wage growth tends to be persistent due to the observed higher inertia in wage growth. These results suggest that whether a nonlinearity will arise in the pass-through of wage growth is one of the most important issues for future developments in CPI inflation.
    Keywords: Inflation; Pass-through; Nonlinearity; Threshold model
    JEL: C24 E31 E58
    Date: 2023–05–22
  33. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the welfare-increasing role of credit and banking at zero interest rates in a microfounded general equilibrium monetary model. Agents differ in their opportunity costs of holding money due to heterogeneous idiosyncratic time-preference shocks. Without banks, the constrained-efficient allocation is never attainable, since impatient agents always face a positive implicit rate in equilibrium. With banks, patient agents pin down the borrowing rate and in turn enable impatient agents to borrow at no cost when the inflation rate approaches the highest discount factor. Banks can therefore improve welfare at zero rates, provided that both types of agents are included in the financial system and that the borrowing limit is sufficiently lax. The result is robust to several extensions.
    Keywords: Banking; Money; Zero Interest Rates
    JEL: E40 E50
    Date: 2023–05–23
  34. By: Thomas Gomez; Giulia Piccillo
    Abstract: We find that macroeconomic uncertainty plays a significant role in U.S. monetary policy. First, we construct a measure of uncertainty as felt by policymakers at the time of making their rate-setting decisions. This measure is derived from a real-time, Bayesian estimation of a small monetary VAR with time-varying parameters. We use it to calculate the probability of being in a high-uncertainty regime. Second, we estimate a monetary policy reaction function that, apart from macroeconomic uncertainty, includes Greenbook forecasts, revisions of those forecasts, and a measure of stock market volatility. Using data for the period 1969 - 2008, we find that policymakers set an interest rate that is significantly lower in a high-uncertainty regime, compared to a low-uncertainty regime.
    Keywords: monetary policy, uncertainty, real-time data, Bayesian VAR, time-varying coefficients
    JEL: E52 E58 E01 D81
    Date: 2023
  35. By: G.M. Gallo; D. Lacava; E. Otranto
    Abstract: Central Banks interventions are frequent in response to any endogenous and/or exogenous exceptional events (in the last two decades, subprime mortgage crisis, the Covid-19 pandemic, and the recent high inflation), with direct implications on financial market volatility. In this paper, we propose a new model in the class of Multiplicative Error Models (MEM), the Asymmetric Jump MEM (AJM), which accounts for a specific jump component of volatility within an intradaily framework (thirty minute intervals), while preserving the flexibility and the ability of the MEM to reproduce the empirical regularities characterizing volatility. Taking the actions of the US Federal Reserve (Fed) as a reference, we introduce a new model–based classification of monetary policy announcements according to their impact on the jump component of realized volatility. Focusing on a short window following each Fed's communication, we isolate the impact of monetary announcements by excluding any contamination carried by relevant events that may occur within the same announcement day. By considering specific tickers, our classification method provides useful information for both policy makers and investors about the impact of monetary announcements on specific sectors of the market.
    Keywords: Financial markets;realized volatility;Significant jumps;Monetary policy an- nouncements;Multiplicative Error Model
    Date: 2023
  36. By: Agam Shah; Suvan Paturi; Sudheer Chava
    Abstract: Monetary policy pronouncements by Federal Open Market Committee (FOMC) are a major driver of financial market returns. We construct the largest tokenized and annotated dataset of FOMC speeches, meeting minutes, and press conference transcripts in order to understand how monetary policy influences financial markets. In this study, we develop a novel task of hawkish-dovish classification and benchmark various pre-trained language models on the proposed dataset. Using the best-performing model (RoBERTa-large), we construct a measure of monetary policy stance for the FOMC document release days. To evaluate the constructed measure, we study its impact on the treasury market, stock market, and macroeconomic indicators. Our dataset, models, and code are publicly available on Huggingface and GitHub under CC BY-NC 4.0 license.
    Date: 2023–05
  37. By: Jan Kakes; Jan Willem van den End
    Abstract: We present a metric for financial fragmentation in the Economic and Monetary Union (EMU), based on the higher moments of the distribution of sovereign spreads relative to macro-financial fundamentals. We apply fixed parameter and rolling regressions to allow for time variation in this relationship, while controlling for market sentiment. The metric shows that the observed moments of the spread distribution occasionally overshot the fundamentals-based benchmark until 2018. Since then, the moments of observed spreads have generally not exceeded the fundamentals-based moments, also not in the most recent period, despite the increase in interest rates. The latter may be attributed to backstop facilities of the European Central Bank (ECB), such as the Transmission Protection Instrument (TPI).
    Keywords: Monetary policy; Quantitative Easing; Sovereign risk; Sovereign spreads
    JEL: E52 E58 G12
    Date: 2023–05
  38. By: Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
    Abstract: Central bank liquidity lines have gained momentum since the global financial crisis as a crosscurrency liquidity management tool. We provide a complete timeline of the ECB liquidity line announcements and study their signalling and spillback effects. The announcement of an ECB euro liquidity line decreases the premium paid by foreign agents to borrow euros in FX markets relative to currencies not covered by these facilities by 51 basis points. Consistent with a stylized model, bank equity prices increase by around 1.75% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
    Keywords: liquidity facilities; central bank swap and repo lines; spillbacks.
    Date: 2023–05–05
  39. By: Adrien Faudot (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes, CREG - Centre de recherche en économie de Grenoble - UGA - Université Grenoble Alpes); Tsvetelina Marinova (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne); Nikolay Nenovsky (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: Today's fragmentation of the world economy, the emergence in the near future of large economic blocs operating in different ideological and conceptual models of economy and society, and the fierce struggle for resources and influence, logically lead us turn to history, including the recent one. The issue of the functioning and collapse of the socialist monetary community has another, more specific but also topical meaning. It has to do with understanding the mechanisms of disintegration of the European Union and the euro area, its management and eventual overcoming. In this paper, we focus on the study of monetary mechanisms within the socialist system, and more specifically on its model of integration, the Comecon, which lasted from 1949 to 1991. In the first part we present the basic principles of socialist integration and the role of international socialist money. In the second part we present the main stages in the evolution of the monetary mechanisms of Comecon. The third part is devoted to some technical problems of multilateral payments and the peculiarities of the transfer ruble. Finally, we try to compare with European Payment Union. We present some competing hypotheses, answering the question why the monetary system of Comecon failed.
    Keywords: socialist integration, Comecon, transferable ruble, European Payment Union, Soviet Union, commodity-money relations
    Date: 2022
  40. By: Carlos Casacuberta; Omar Licandro
    Abstract: In 2002 Uruguay faced a sudden stop of international capital flows, inducing a deep financial crisis and a large devaluation of the peso. The real exchange rate depreciated and exports expanded. Paradoxically, export shares and real exchange rates negatively correlate among Uruguayan exporters around 2002. To unravel this paradox, we develop a small open economy model of heterogeneous firms. Domestic firms are price takers in the international market, operate under monopolistic competition in the domestic market, and face financial constraints when exporting. Confronted to a large nominal devaluation, financial constraints deepen. Financially constrained exporters cannot optimally expand in the export market and react by passing-through the devaluation to the domestic price only partially, expanding domestic sales. As a consequence, the more financially constrained exporters are, the less their export shares expand and the more their firm specific real exchange rates depreciate. As a result, export shares and real exchange rates of exporters are negatively correlated as in the data.
    Date: 2023–05
  41. By: Giampaolo Bonomi; Ali Uppal
    Abstract: We develop a simple game-theoretic model to determine the consequences of explicitly including financial market stability in the central bank objective function, when policymakers and the financial market are strategic players, and market stability is negatively affected by policy surprises. We find that the inclusion of financial sector stability among the policy objectives can induce an inefficiency, whereby market anticipation of policymakers' goals biases investment choices. When the central bank has private information about its policy intentions, the equilibrium communication is vague, because fully informative communication is not credible. The appointment of a ``kitish'' central banker, who puts little weight on market stability, reduces these inefficiencies. If interactions are repeated, communication transparency and overall efficiency can be improved if the central bank punishes any abuse of market power by withholding forward guidance. At the same time, repeated interaction also opens the doors to collusion between large investors, with uncertain welfare consequences.
    Date: 2023–05
  42. By: Kärkkäinen, Samu; Silvo, Aino
    Abstract: We study whether the level of household indebtedness is related to the interest rate elasticity of private consumption. Looking at Finnish aggregate data, we find no robust evidence of increased interest rate elasticity of private consumption even as the household sector's debt-to-income ratio has almost doubled in the past 20 years. Estimates based on the household-level Finnish Wealth Survey suggest that the share of liquidity-constrained households has declined over the same time period, which may have contributed towards muting the sensitivity of private consumption to interest rates even as aggregate debt of the household sector has grown significantly. Our results are consistent with the key role played by heterogeneity in credit and liquidity constraints in driving aggregate consumption and debt dynamics. Other factors behind muted responses of consumption to interest rates may include the recent low interest rate period, which has muted the cash-flow channel of monetary policy, and possible asymmetric effects of monetary policy.
    Keywords: consumption, interest rates, household debt, liquidity constraints
    JEL: E21 E52 G51
    Date: 2023
  43. By: Reis, Ricardo; Tenreyro, Silvana
    Abstract: We review the different meanings of helicopter money, both in the literature and in the public debate around it, and we clarify the conditions under which helicopter money can have an impact on real activity. To do so, we set out a simple model that encapsulates a number of potential channels of policy transmission. The model provides a taxonomy of possibilities for helicopter money to affect the economy, as well as a benchmark set of conditions under which helicopter money is neutral. We use the model to analyze and discuss the impact that helicopter drops might have in response to a number of economic shocks, including a financial crisis, a fiscal crisis, and a pandemic.
    Keywords: central bank balance sheet; fiscal monetary interactions; helicopter money; European Union's Horizon 2020 research and innovation programme; MACROTRADE; under grant number No. GA: 681664.
    JEL: E52 E63 E32
    Date: 2022–08–12
  44. By: Irene Monasterolo (BANCO DE ESPAÑA; URJC; BANCO DE ESPAÑA)
    Abstract: Inflation has distributional effects. Leveraging the data on consumption expenditure on goods across households provided in the Spanish Household Budget Survey we estimate household-specific inflation from 2006 to 2021 in Spain and analyse how it varies according to households’ known characteristics. We show that households with lower income and more members and whose head is less educated, older and male experience higher inflation. Lastly, we also depict the effects of the most recent price increases across households. The differences are substantial: in 2021, inflation for lower-income households (bottom quartile) was 2 percentage points higher than for higher-income households (top quartile), while for households whose head is over the age of 60 it was 1.5 percentage points higher than for younger households.
    Keywords: inflation inequality, household expenditure, household-level inflation
    JEL: E21 E31 D12
    Date: 2023–03
  45. By: Sarah Goldman (Lux-SIR); Shouyi Zhang (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: The aim of the paper is to evaluate the impact of Quantitative Easing (QE) on economic growth through households' saving, in particular currency, deposits, and mutual funds. We focus on currency, deposits, and mutual funds since they represent more than 75% of the total assets of Luxembourgish households (on average more than 50% for the currency and deposits and about 25% for the mutual funds for the period 2002Q1 to 2016Q2). We try to under-line how savings' decisions are affected by unconventional monetary policies during crisis periods, economic instability and low-interest rate environment. Different scenarios are taken into account. Three trials, with one being the base-line model, are performed. The baseline is run with the pre-crisis values for all model parameters. The first scenar-io presents a crisis environment without quantitative easing policy whereas the second Scenario introduces the QE policy in a crisis environment. According to our simple theoretical model, the saving rate decreases during an eco-nomic crisis without QE framework. This result may be interpreted as a "ratchet effect", and increase globally when the QE program is applied. For the wealthier the precautionary saving rises (despite its weak yield) due to economic uncertainty whereas the poorest population dissave.
    Keywords: Quantitative Easing Policy, Mutual Funds, Currency
    Date: 2022
  46. 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
  47. By: Zaghini, Andrea
    Abstract: We analyze the effects of the PEPP (Pandemic Emergency Purchase Programme), the temporary quantitative easing implemented by the ECB immediately after the burst of the Covid-19 pandemic. We show that the differences in aim, size and flexibility with respect to the traditional Corporate Sector Purchase Programme (CSPP) were able to significantly involve, in addition to the directly targeted bonds, also the green bond segment. Via a standard difference-in-differences model we estimate that the yield on green bonds declined by more than 20 basis points after the PEPP. In order to take into account also the differences attributable to the eligibility to the programme, we employ a triple difference estimator. Bonds that at the same time were green and eligible benefitted of an additional premium of 39 basis points.
    Keywords: Green bonds, ECB, Corporate quantitative easing, triple difference estimator
    JEL: G15 G32 E52 C21
    Date: 2023
  48. By: Fix, Blair
    Abstract: In November 2021, I wrote a post called ‘The Truth About Inflation’. At the time, inflation fears were heating up. And as usual, mainstream economists were missing the bus. Sure, economists pointed to the consumer price index and said, “Look, it’s going up!” But they didn’t look under the hood of this index to see the big picture. Despite what economists proclaim, inflation is not a uniform increase in prices. It is an instability in the whole price system. It’s now been a year since that post was published, so I thought I’d update the analysis. While much has changed in the global political landscape, the underlying picture of inflation remains the same: it is everywhere and always differential.
    Keywords: capital as power, income distribution, inflation
    JEL: P1 D3 E31
    Date: 2022
  49. By: Jookyung Ree
    Abstract: This paper reflects on the first year of the eNaira—the first CBDC in Africa. Despite the laudable undisrupted operation for the first full year, the CBDC project has not yet moved beyond the initial wave of limited adoption. Network effects suggest the initial low adoption spell will require a coordinated policy drive to break it. The eNaira’s potential in financial inclusion requires a strategy to set the right relationship with mobile money, given the former’s potential to either complement or substitute the latter. Cost savings from integrating CBDC—as a bridge vehicle—in the remittance process may also be substantial.
    Keywords: Central Bank Digital Currency; financial inclusion; remittance; blockchain; mobile money
    Date: 2023–05–16
  50. By: Philipp Engler; Mr. Roberto Piazza; Galen Sher
    Abstract: When the U.S. economy sneezes, do emerging markets catch a cold? We show that economic news, and not just monetary policy, in the United States affects financial conditions in emerging markets. News about U.S. employment has the strongest effects, followed by news about economic activity and about vaccines during the COVID-19 pandemic. News about inflation has instead limited effects on average. A key channel of international transmission of U.S. economic news appears to be the risk perceptions or risk aversion of international investors. We also show that some of the transmission of U.S. economic news occurs independently of the U.S. monetary policy reaction. Finally, we expand on evidence that financial conditions in the U.S. and emerging markets respond differently to U.S. monetary policy surprises, depending on the reaction of US stock prices.
    Keywords: Spillovers; economic news; emerging markets; financial conditions
    Date: 2023–05–19
  51. By: Wändi Bruine de Bruin; Keshav Dogra; Sebastian Heise; Edward S. Knotek; Brent Meyer; Robert W. Rich; Raphael Schoenle; Giorgio Topa; Wilbert Van der Klaauw
    Abstract: How do firms set prices? What factors do they consider, and to what extent are cost increases passed through to prices? While these are important questions in general, they become even more salient during periods of high inflation. In this blog post, we highlight preliminary results from ongoing research on firms’ price-setting behavior, a joint project between researchers at the Federal Reserve Banks of Atlanta, Cleveland, and New York. We use a combination of open-ended interviews and a quantitative survey in our analysis. Firms reported that the strength of demand was the most important factor affecting pricing decisions in recent years, while labor costs and maintaining steady profit margins were also highly important. Using three methodological approaches, we consistently estimate a rate of cost-price passthrough in the range of 60 percent for the representative firm over 2022-23—with considerable heterogeneity in this number across firms.
    Keywords: inflation; Price level; Price-setting; decision making; microeconomics
    JEL: E31
    Date: 2023–06–02
  52. By: John Bagley; Stefan Gissler; Ivan T. Ivanov
    Abstract: We examine the role of institutional investors in monetary policy transmission to asset markets by exploiting a discontinuous threshold in the tax treatment of municipal bonds. As bonds approach the threshold, mutual funds, the primary institutional traders in the market, dispose of the bonds at significant risk of falling below the threshold. This is driven by mutual funds anticipating future illiquidity. Once bonds cross the threshold, their liquidity declines and illiquidity-induced yield spreads increase substantially as retail investors become more important in price formation. Unexpected monetary policy tightening sharply reduces trading activity, amplifying the path to illiquidity in the market.
    Keywords: monetary policy; municipal bonds; institutional investors; asset liquidity
    Date: 2023–01–19
  53. By: Gern, Klaus-Jürgen; Kooths, Stefan; Reents, Jan; Sonnenberg, Nils; Stolzenburg, Ulrich
    Abstract: The recovery of the global economy from the Covid crisis came to an end in 2022 amid high energy prices and great uncertainty. While the energy crisis is easing, the effects of monetary policy, which was tightened rather late but then very quickly, are now increasingly weighing on growth. World output slowed to a crawl toward the end of the year and is expected to expand only moderately in the current year despite a post-Covid revival in China. Measured on a purchasing power parity basis, we anticipate global growth of 2.5 percent in 2023, following 3.2 percent last year. We have raised our forecast for 2023 by 0.4 percentage points from December, partly because of the improved situation on energy markets and partly because the economy in the United States has proved more robust than expected. Our forecast for 2024 remains unchanged at 3.2 percent. Although inflation is likely to fall significantly in the coming months thanks to lower commodity prices, underlying inflation is likely to remain high for the time being and will not return to near the target levels before the end of the forecast horizon.
    Keywords: advanced economies, emerging economies, monetary policy
    Date: 2023
  54. By: BENIGNO, Pierpaolo; CANOFARI, Paola; DI BARTOLOMEO, Giovanni; MESSORI, Marcello
    Abstract: Differently from previous crises, the European institutions responded promptly to the Covid-19 pandemic by implementing an appropriate policy mix. However, this policy mix has proven to be insufficient for reducing the risks of financial instability in the European Union due to the temporary horizon of the centralised fiscal policy and the persistence of adverse shocks. In fact, the impact of the pandemic was exacerbated by the dramatic consequences of the war in Ukraine. The possible inefficiencies in implementing the Next Generation-EU (NG-EU) and an inadequate response to the war’s shock could trigger, at best, the revival of financial and fiscal dominance in the euro-area economies. However, by using a simple model referred to the post-pandemic and war period, we show that the overburdening of the European Central Bank’s role would come with high costs. Hence, we argue that it is necessary to pursue sustainable development based on the successful implementation of the NG-EU and the related transformation of the one-shot centralised fiscal policy into a recurrent policy tool.
    Keywords: Fiscal dominance, Financial dominance, ECB, Monetary policy
    JEL: E31 E51 E58
    Date: 2023–03
  55. By: Chowdhury, Aftab (Cardiff Business School); Dixon, Huw David (Cardiff Business School)
    Abstract: This study has adopted the actual household expenditure data from the national accounts to construct a true inflation rate (using the Fisher index) and found that the official inflation rate in the 33 OECD countries was an overestimate of true inflation for 22 and underestimate in 11 countries in the first wave of the COVID-19 pandemic. The result obtained for the countries where true inflation was higher than the official rate in this study matches the results obtained by Cavallo (2020) and Reinsdorf (2020). However, a significant difference has been detected for the countries where the official inflation exceeds the true measure in this study. The core reason behind the discrepancies is in the use of appropriate expenditure weights. This suggests caution in using credit-card based expenditure data when spending behaviour has changed dramatically.
    Keywords: FCoronavirus (COVID-19), Pandemic, Inflation measurement, Household Final Consumption Expenditure (HHFCE), Consumer Price Index (CPI)
    JEL: C43 E01 E31 I10
    Date: 2023–05
  56. By: Mr. Christoffer Koch; Diaa Noureldin
    Abstract: This paper analyzes the inflation forecast errors over the period 2021Q1-2022Q3 using forecasts of core and headline inflation from the International Monetary Fund World Economic Outlook for a large group of advanced and emerging market economies. The findings reveal evidence of forecast bias that worsened initially then subsided towards the end of the sample. There is also evidence of forecast oversmoothing indicating rigidity in forecast revision in the face of incoming information. Focusing on core inflation forecast errors in 2021, four factors provide a potential ex post explanation: a stronger-than-anticipated demand recovery; demand-induced pressures on supply chains; the demand shift from services to goods at the onset of the pandemic; and labor market tightness. Ex ante, we find that the size of the COVID-19 fiscal stimulus packages announced by different governments in 2020 correlates positively with core inflation forecast errors in advanced economies. This result hints at potential forecast inefficiency, but we caution that it hinges on the outcomes of a few, albeit large, economies.
    Keywords: Inflation; Inflation surge; Forecast error; COVID-19; Fiscal policy
    Date: 2023–05–12
  57. By: Wissam Samia (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne); Nada Mallah Boustani (USJ - Université Saint-Joseph de Beyrouth, LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: This research paper studies the benefits and the feasibility of a Single Currency in the Natural Syria region. The economic crisis that heavily weighs on the countries of this region makes it primordial to join forces and converge resources, potentials, and opportunities to raise the standard of living. A monetary union with its single currency may hold structural remedies to the woes of this region whose ability to face its economic, political, and internal difficulties depends mainly on the logic of support and cooperation. Based on a conceptual model of a currency basket, taking into consideration specific economic and monetary criteria, this potential union is enhanced by a single currency establishment that must be a feature of economic and political relations between the countries of the region which achieve the supreme interest represented in eliminating cases of fragmentation and disintegration and ensuring a comfortable life for the citizen. Hereby, the implementation of a Single Currency in Natural Syria seems to be a real turning point.
    Keywords: Single currency, Monetary Union, Production, Innovation
    Date: 2022
  58. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
    Abstract: In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
    Keywords: financial stability; monetary policy; Dynamic Stochastic General Equilibrium (DSGE) models; rates; nonlinear responses; shocks; fire sale
    JEL: E2 E5 E4 G2
    Date: 2023–05–23
  59. By: Valentin Haddad; Alan Moreira; Tyler Muir
    Abstract: At the announcement of a new policy, agents form a view of state-contingent policy actions and impact. We develop a method to estimate this state-contingent perception and implement it for many asset-purchase interventions worldwide. Expectations of larger support in bad states—“policy puts”—explain a large fraction of the announcements’ impact. For example, when the Fed introduced purchases of corporate bonds in March 2020, markets expected five times more price support had conditions worsened relative to the median scenario. Perceived promises of additional support in bad states persistently distort asset prices, risk, and the response to future announcements.
    JEL: E50 G0
    Date: 2023–05
  60. By: Carola Binder; Pei Kuang; Li Tang
    Abstract: We study how US consumers’ house price expectations respond to verbal and non-verbal communication about interest rate changes using several large online surveys. Verbal communication about interest rate hikes leads to little response of average house price expectations but large heterogeneity among household groups. Communication about rate hikes combined with a simple explanation of the mortgage rate channel causes large downward revisions to house price expectations. Consumers interpret heterogeneously Chair Powell’s voice tone and body language at the press conference which significantly influence their house price expectations. More negative evaluations are associated with larger upward revisions to house price expectations.
    JEL: E30 E31 E52 E7
    Date: 2023–05
  61. By: Mr. Francis Vitek
    Abstract: We derive measures of the stances of monetary and fiscal policy within the framework of an empirically plausible extension of the basic New Keynesian model, and jointly estimate them for the United States using a closed form multivariate linear filter. Our theoretical analysis reveals that the neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy, which in turn depends on the composition and expected timing of structural changes in the fiscal instruments. Our empirical application finds that accounting for fiscal policy significantly alters the estimated stance of monetary policy, and that the so-called fiscal impulse is a poor proxy for the stance of fiscal policy.
    Keywords: stance of monetary policy; stance of fiscal policy; new keynesian model; multivariate linear filter
    Date: 2023–05–12
  62. By: Nikolaus Bartzsch (Deutsche Bundesbank); Marco Brandi (Banca d'Italia); Lucas Devigne (Banque de France); Raymond de Pastor (Banque de France); Gianluca Maddaloni (Banca d'Italia); Diana Posada Restrepo (Banco de España); Gabriele Sene (Banca d'Italia)
    Abstract: As part of the Eurosystem’s annual banknote production planning, the national central banks draw up forecasts estimating the volumes of national-issued banknotes in circulation for the three years ahead. As at the end of 2021, more than 80 per cent of euro banknotes in circulation (cumulated net issuance) had been issued by the national central banks of France, Germany, Italy and Spain (‘4 NCBs’). To date, the 4 NCBs have been using ARIMAX models to forecast the banknotes issued nationally in circulation by denomination (‘benchmark models’). This paper presents the structural time series models developed by the 4 NCBs as an additional forecasting tool. The forecast accuracy measures used in this study show that the structural time series models outperform the benchmark models currently in use at each of the 4 NCBs for most of the denominations. However, it should be borne in mind that the statistical informative value of this comparison is limited by the fact the projection period is only twelve months.
    Keywords: euro, demand for banknotes, forecast of banknotes in circulation, structural time series models, ARIMA models, intervention variables
    JEL: C22 E41 E47 E51
    Date: 2023–05
  63. By: Ablam Estel Apeti (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, UCA - Université Clermont Auvergne); Jean-Louis Combes (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, UCA - Université Clermont Auvergne); Alexandru Minea (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne, ICUB - Research Institute of the University of Bucharest - UniBuc - University of Bucharest, Carleton University)
    Abstract: An important literature shows that inflation targeting (IT) adoption improves fiscal discipline. Our impact assessment analysis performed in a large sample of 89 developing countries over three decades shows that this favorable impact covers a composition effect: IT adoption is found to reduce more current expenditure compared with public investment in IT countries relative to non-IT countries. This finding is robust to various alternative specification, related to the structure of the sample, the measurement of the IT regime, or the estimation method. Consequently, aside from its acknowledged benefits for monetary policy goals, IT appears as an efficient tool to strengthen fiscal policy in developing countries towards lower and more productive public expenditure.
    Keywords: Inflation targeting, Composition effect of public expenditure, Impact analysis, Current expenditure, Public investment
    Date: 2023–06
  64. By: Kotz, Maximilian; Kuik, Friderike; Lis, Eliza; Nickel, Christiane
    Abstract: Understanding of the macroeconomic effects of climate change is developing rapidly, but the implications for past and future inflation remain less well understood. Here we exploit a global dataset of monthly consumer price indices to identify the causal impacts of changes in climate on inflation, and to assess their implications under future warming. Flexibly accounting for heterogenous impacts across seasons and baseline climatic and socio-economic conditions, we find that increased average temperatures cause non-linear upwards inflationary pressures which persist over 12 months in both higher- and lower-income countries. Projections from state-of-the-art climate models show that in the absence of historically un-precedented adaptation, future warming will cause global increases in annual food and headline inflation of 0.92-3.23 and 0.32-1.18 percentage-points per year respectively, under 2035 projected climate (uncertainty range across emission scenarios, climate models and empirical specifications), as well as altering the seasonal dynamics of inflation. Moreover, we estimate that the 2022 summer heat extreme increased food inflation in Europe by 0.67 (0.43-0.93) percentage-points and that future warming projected for 2035 would amplify the impacts of such extremes by 50%. These results suggest that climate change poses risks to price stability by having an upward impact on inflation, altering its seasonality and amplifying the impacts caused by extremes. JEL Classification: Q54, E31, C33
    Keywords: climate change, climate physical risk, inflation dynamics
    Date: 2023–05
  65. By: Denbee, Edward; Julliard, Christian; Li, Ye; Yuan, Kathy
    Abstract: Using a structural model, we estimate the liquidity multiplier of an interbank network and banks’ contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity and multiplier are high. The latter prevails when the opportunity cost of liquidity is large, incentivising banks to borrow neighbors’ reserves instead of holding their own. Consequently, the network can amplify or dampen shocks to individual banks. Empirically, network topology explains cross-sectional heterogeneity in banks’ systemic-risk contributions while changes in the equilibrium type drive time-series variation.
    Keywords: financial networks; liquidity; interbank market; payment systems; payment velocity; payment multiplier; key players; systemic risk
    JEL: F3 G3 J1
    Date: 2021–09
  66. By: Mr. Anil Ari; Mr. Daniel Garcia-Macia; Shruti Mishra
    Abstract: This paper analyzes whether structural changes in the aftermath of the pandemic have steepened the Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation. Particularly, analysis of granular price quote data from the UK indicates that increased digitalization may have raised price flexibility, while de-globalization may have made inflation more responsive to domestic economic conditions again. Using sectoral data from 24 advanced economies in Europe, higher digitalization and lower trade intensity are shown to be associated with steeper Phillips curves. Post-pandemic Phillips curve estimates indicate some steepening in the UK, Spain, Italy and the euro area as a whole, but at magnitudes that are too small to explain the entire surge in inflation in 2021–22, suggesting an important role for outward shifts in the Phillips curve.
    Keywords: Phillips Curve; Inflation; De-globalization; Digitalization; Structural change
    Date: 2023–05–12
  67. By: Mr. Daniel Garcia-Macia
    Abstract: Does inflation help improve public finances? This paper documents the dynamic responses of fiscal variables to an inflation shock, using both quarterly and annual panel data for a broad set of economies. Inflation shocks are estimated to improve fiscal balances temporarily, as nominal revenues track inflation closely, while nominal primary expenditures take longer to catch up. Inflation spikes also lead to a persistent reduction in debt to GDP ratios, both due to the primary balance improvement and the nominal GDP denominator channel. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. The results are robust to using various inflation measures and instrumental variables.
    Keywords: Inflation; fiscal balance; public debt
    Date: 2023–05–05
  68. By: Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
    Abstract: This study explores the consequences of dollarizing an economy with an initial dollar shortage. We show that the resulting transitional dynamics are tantamount to that of a “sudden stop”: consumption of tradable goods fall, the real exchange rate depreciates abruptly by a discrete drop in domestic prices and wages followed by a gradual appreciation from positive inflation. With nominal rigidities the economy first falls into a recession. This is true even if all prices and wages are allowed to adjust flexibly on impact. The subsequent recovery in activity always “overshoots” the steady state: the non-tradable sector transitions from the initial recession to a boom, then asymptotes to its steady state.
    JEL: E10 F30
    Date: 2023–06

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