nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒06‒26
forty-five papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Consumption categories, household attention, and inflation expectations: Implications for optimal monetary policy By Dietrich, Alexander M.
  2. Has the reaction function of the European Central Bank changed over time? By Tatar, Balint
  3. Effectiveness of the Interest Rate Channel of Monetary Policy Transmission Mechanism in Sierra Leone By Jackson, Emerson Abraham; Barrie, Mohamed Samba; Tamuke, Edmund
  4. MONEY VELOCITY, DIGITAL CURRENCY, AND INFLATION DYNAMICS By Danny Hermawan Adiwibowo; Aryo Sasongko; Denny Lie
  5. Media Treatment of Monetary Policy Surprises and Their Impact on Firms’ and Consumers’ Expectations By Julien Pinter; Evžen Kocenda
  6. Money and output asymmetry: The Unintended consequences of central banks' obsession with inflation By Taniya Ghosh; Abhishek Gorsi
  7. The Global Financial Cycle and Us Monetary Policy in An Interconnected World By Stéphane Dées; Alessandro Galesi
  8. EOn the Effectiveness of Foreign Exchange Reserves during the 2021-22 U.S. Monetary Tightening Cycle. By Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
  9. Mind Your Language: Market Responses to Central Bank Speeches By Maximilian Ahrens; Deniz Erdemlioglu; Michael McMahon; Christopher J. Neely; Xiye Yang
  10. Fifty shades of QE: Robust evidence By Fabo, Brian; Jancoková, Martina; Kempf, Elisabeth; Pástor, éLuboés
  11. From Policy to Regime: the changing posture of the ECB between liquidity and collateral through the lens of Monetary Regime By Giordano, Matteo; Goghie, Alexandru-Stefan
  12. CBDC: Lesson from a Historical Experience By Grodecka-Messi, Anna; Zhang, Xin
  13. A Monetary Equilibrium with the Lender of Last Resort By Tarishi Matsuoka; Makoto Watanabe
  14. Decomposing the Monetary Policy Multiplier By Pietro Alessandrini; Òscar Jordà; Fabrizio Venditti
  15. The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? By Giancarlo Corsetti; Paul Bergin
  16. Determinants of Inflation Targeting: A Survey of Empirical Literature By Petrevski, Goran
  18. Central bank communication and trust: an experimental study on the European Central Bank and the general public By Mochhoury, Sarah
  19. Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response? By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  20. Fed Communication, News, Twitter, and Echo Chambers By Bennett Schmanski; Chiara Scotti; Clara Vega
  21. Swiss National Bank: Is the recent loss a threat to monetary policy? A research note By Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli
  22. Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis By Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
  23. Should inequality factor into central banks’ decisions? By Niels-Jakob H. Hansen; Alessandro Lin; Rui C. Mano
  24. More than Words: Twitter Chatter and Financial Market Sentiment By Andrea Ajello; Diego Silva; Travis Adams; Francisco Vazquez-Grande
  25. On the Pass-Through of Large Devaluations By Carlos Casacuberta; Omar Licandro
  26. Female unemployment, mobile money innovations and doing business by females By Simplice A. Asongu; Nicholas M. Odhiambo
  27. The digital euro: A precautionary device, not a deus ex machina By Angeloni, Ignazio
  28. The transmission of negative nominal interest rates in Finland By Kwan, Simon H.; Ulate, Mauricio; Voutilainen, Ville
  29. “Density forecasts of inflation using Gaussian process regression models” By Petar Soric; Enric Monte; Salvador Torra; Oscar Claveria
  30. The Federal Reserve's Response to the Global Financial Crisis and Its Long-Term Impact: An Interrupted Time-Series Natural Experimental Analysis By Arnaud Cedric Kamkoum
  31. Banks’ Balance-Sheet Costs and ON RRP Investment By Gara Afonso; Catherine Huang; Marco Cipriani; Gabriele La Spada
  32. The monetary and macroprudential policy framework in Colombia in the last 30 years: the lessons learnt and the challenges for the future By Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
  33. Dollarization dynamics: A comment By Emilio Ocampo; Nicolás Cachanosky
  35. Short and Variable Lags By Giancarlo Corsetti; Gergely Buda; Vasco M. Carvalho
  36. China as an international lender of last resort By Horn, Sebastian; Parks, Bradley; Reinhart, Carmen M.; Trebesch, Christoph
  37. Is Mobile Money Changing Rural Africa? Evidence from a Field Experiment By Batista, Catia; Vicente, Pedro C.
  38. Unconventional-Policy Spillovers of U.S. Interest on Reserves within Global Dollar-Denominated Retail Loan and Deposit Markets By Enzo Dia; David VanHoose
  39. Targeted Reserve Requirements for Macroeconomic Stabilization By Zheng Liu; Mark M. Spiegel; Jingyi Zhang
  40. What determines demand for digital community currencies? OurVillage in Cameroon By Pédussel Wu, Jennifer; Metzger, Martina; Neira, Ignacio Silva; Farroukh, Arafet
  41. Original sin and the CFA Franc: A case study of the West African Economic and Monetary Union By Peist, Moritz Manuel
  42. Financial Vulnerability and Macroeconomic Fragility By Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
  43. Asset prices, collateral and bank lending: the case of Covid-19 and real estate By Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
  44. Exchange rate pass-around By Crozet, Matthieu; Hinz, Julian; Trionfetti, Federico
  45. Stablecoins: Adoption and Fragility By Bertsch, Christoph

  1. By: Dietrich, Alexander M.
    Abstract: What inflation measure should central banks target? This paper shows optimal monetary policy targets headline inflation if households pay limited attention to different consumption categories when forming inflation expectations. This result stands in contrast to standard rational expectations models, where optimal policy targets core inflation. The core inflation rate excludes volatile energy and food prices (non-core) from headline inflation. Using novel survey data on inflation expectations for disaggregated consumption categories, I find household expectations are disproportionately driven by beliefs about future non-core prices. I develop a sparsity-based rational inattention model to account for the empirical evidence. While forming inflation expectations, households pay attention to the volatile non-core components; the stable core inflation component receives little attention. Finally, I embed this framework into a multi-sector New Keynesian model to derive the optimal inflation target. In the model, targeting headline inflation is optimal, whereas a core inflation target would fail to stabilize the economy sufficiently.
    Keywords: Households expectations, Survey, Monetary policy, Behavioral macroeconomics
    JEL: C83 E31 E52 E70
    Date: 2023
  2. By: Tatar, Balint
    Abstract: I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
    Keywords: Monetary policy rules, Bayesian time-varying parameter estimation, unconventional monetary policy, Hamiltonian Monte Carlo
    JEL: E52 C11 C22 C51
    Date: 2023
  3. By: Jackson, Emerson Abraham; Barrie, Mohamed Samba; Tamuke, Edmund
    Abstract: The study investigated the effectiveness of the interest rate channel of monetary policy transmission to domestic price level in Sierra Leone using data from February 2011 to June 2022. Two VAR models are employed to analyze the relationship between the lending rate and credit to the private sector, exchange rate, money supply, and consumer price index. The results indicate that a one standard deviation shock to lending rates does not significantly affect credit to the private sector, suggesting that the lending rate channel has minimal impact. The impact of the lending rate on the exchange rate is also insignificant. However, the impact of the monetary policy rate on the lending rate is significant. Thus, while monetary policy rate is effectively transmitted to the lending rate, the lending rate does not effectively transmit to other monetary variables of interest, including credit to the private sector and the price level, implying that the role of the monetary policy rate in Sierra Leone is quite limited. Thus, there is a need for structural changes, including building financial inclusion to reduce the role of cash transactions.
    Keywords: Monetary Policy Transmission, Interest Rate Channel, Exchange Rate, Sierra Leone
    JEL: C32 E43 E52 O5
    Date: 2023–05–02
  4. By: Danny Hermawan Adiwibowo (Bank Indonesia); Aryo Sasongko (Bank Indonesia); Denny Lie (University of Sydney)
    Abstract: This paper empirically investigates the impact of transaction cost-induced varia- tions in the velocity of money on infation dynamics in Indonesia, based on a struc- tural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. This money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction cost and facilitating purchases of goods and services. We fnd a signifcant aggregate impact: our preferred estimates suggest that a 10% reduction in money velocity, which may be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the infation rate by 1%, all else equal. Using the estimates and within a small-scale, structural New Keynesian model, we investigate the likely implications of a CBDC issuance on aggregate nominal and real fuctua- tions. A CBDC issuance that (conservatively) lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0.8% and lower the infation rate by 0.8%. Both nominal and real interest rates are also permanently lower. Shocks to the velocity of money are an important driver of aggregate fuctuations.
    Keywords: inflation dynamics, transaction cost, velocity of money, digital money, digital currency, digital payments, central bank digital currency (CBDC).
    JEL: E31 E32 E42 E52 E58
    Date: 2022
  5. By: Julien Pinter; Evžen Kocenda
    Abstract: Do firms’ and consumers’ expectations react to central bank announcements? Past literature has come to divergent conclusions, but it has systematically ignored how media treat the announcements. This paper investigates the link between monetary policy announcements and expectations by taking into account their media treatment. We initially rely on the standard monetary policy surprise measures in the euro area to identify exogenous changes in monetary policy stances. We then analyze how the main general newspapers in France report on announcements. 85 % of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign that is inconsistent with the media report. Only when we consider media-consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. We then build our own measure of media monetary policy surprises and confirm that these matter. Further analysis reveals that the tonality of the media reports on the economy drives the sign of consumers’ response.
    Keywords: firm expectations, consumer expectations, monetary policy surprises, European Central Bank, information effect
    JEL: D84 E02 E52 E31
    Date: 2023
  6. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Abhishek Gorsi (Indira Gandhi Institute of Development Research)
    Abstract: The study reexamines the relationship between money and output for the US, UK, and the Euro Area using quarterly data up to 2022. Modern central banks are focused on controlling inflation, and adjust their monetary policy and liquidity accordingly. However, it is common practise to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as been done currently by some major economies, may have long-term effects on those economies' output.
    Keywords: Monetarism, Monetary Aggregates, Monetary Policy, Money, Money-Income-Output, NARDL, Non-Linear Granger Causality
    JEL: E42 E52 E58 E64
    Date: 2023–05
  7. By: Stéphane Dées (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux); Alessandro Galesi
    Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macro-financial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.
    Keywords: Trilemma, Global financial cycle, Monetary policy spillovers, Network effects
    Date: 2021–07
  8. By: Rashad Ahmed; Joshua Aizenman; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: This paper examines whether levels of foreign exchange (FX) reserves and other fundamental factors explain cross-country differences in foreign currency depreciation observed over the 2021- 22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Considering a broad cross-section of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation and this buffer effect was larger among less financially developed economies. Higher ex-ante policy rates were also associated with less depreciation, especially among financially open economies. Taken together, these results support the buffering role of FX reserves and their potential to promote monetary policy independence in the presence of international spillovers.
    Keywords: International Reserves, Trilemma, Global Financial Cycle, Currency Risk, Spillovers
    JEL: F3 F31 F32 F36
    Date: 2023
  9. By: Maximilian Ahrens; Deniz Erdemlioglu; Michael McMahon; Christopher J. Neely; Xiye Yang
    Abstract: Researchers have carefully studied post-meeting central bank communication and have found that it often moves markets, but they have paid less attention to the more frequent central bankers’ speeches. We create a novel dataset of US Federal Reserve speeches and use supervised multimodal natural language processing methods to identify how monetary policy news affect financial volatility and tail risk through implied changes in forecasts of GDP, inflation, and unemployment. We find that news in central bankers’ speeches can help explain volatility and tail risk in both equity and bond markets. We also find that markets attend to these signals more closely during abnormal GDP and inflation regimes. Our results challenge the conventional view that central bank communication primarily resolves uncertainty.
    Keywords: central bank communication; multimodal machine learning; natural language processing; speech analysis; high-frequency data; volatility; tail risk
    JEL: E50 E52 C45 C53 G10 G12 G14
    Date: 2023–05–31
  10. By: Fabo, Brian; Jancoková, Martina; Kempf, Elisabeth; Pástor, éLuboés
    Abstract: Fabo, Jancoková, Kempf, and Pástor (2021) show that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek (2022) show that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. We examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals (Journal of Monetary Economics, Journal of Money, Credit and Banking, and Applied Economics Letters), and their average number of citations is well over 200. Moreover, we show that these papers have supported policy communication by the world's leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in Fabo et al. (2021).
    Keywords: Economic research, quantitative easing, QE, central bank, career concerns
    JEL: A11 E52 E58 G28
    Date: 2023
  11. By: Giordano, Matteo; Goghie, Alexandru-Stefan
    Abstract: The evolution of the European Central Bank (ECB) and of the forms of monetary policy implemented in the Eurozone since its inception outline a more radical shift in the posture of the ECB rather than the simple recourse to new instruments of monetary policy. This paper explores the concept of monetary regime to understand under a systemic lens the changes occurred in the conventional and unconventional monetary policy operations, and how they have shaped the position of the ECB within the increasingly market-based financial system. We argue that the features of a monetary regime affect the processes of de- and re-politicization of the ECB. To do so, we explore three key but under-studied changes in the operations of the ECB: the shift from a corridor to a floor system with the fixed-rate full allotment (FRFA) procedure for its refinancing operations in 2008, the implementation of Securities Lending in the second half of the 2010s, and the introduction of the Transmission Protection Mechanism in 2022. These events, in turn, hinge on the evolving dynamics between liquidity and collateral, which not only define the frame of the monetary regime, but also allow for the central bank’s operations to have significant, though involuntary and indirect, fiscal consequences. Ultimately, this paper highlights the shift from monetary and fiscal concerns to financial ones, thus arguing that macroeconomic policies have become subordinated to financial logics that imply an increasing blurring of the separations between monetary and fiscal spheres.
    Date: 2023–05–26
  12. By: Grodecka-Messi, Anna (Monetary Policy Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: Central banks have been considering the introduction of central bank digital currencies (CBDCs). The theoretical literature indicates that this may influence private banks’ lending activity and their profitability with implications for financial stability. To provide empirical evi dence on this debate, we study the effects of the arrival of a new central-bank issued currency on commercial banks in a historical setup. We use the opening of the Bank of Canada in 1935 as a natural experiment to provide evidence that banks mostly affected by the currency competition experienced lower profitability but did not decrease their lending compared to unaffected peers.
    Keywords: Money and Banking; Central Bank Digital Currencies; Central Banks; Bank Profitability; Bank Lending; Bank of Canada; Banknote Monopoly
    JEL: E42 E50 G21 G28 N22
    Date: 2023–06–01
  13. By: Tarishi Matsuoka; Makoto Watanabe
    Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a bank’s monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare-improving but reduces banks’ ex-ante incentive to hold monetary reserves, which increases the probability of a liquidity crisis, and can cause moral hazard in capital investment. We also analyze the combined effects of monetary and extensive LLR policies, such as a nominal interest rate, a lending rate, and a haircut.
    Keywords: monetary equilibrium, liquidity crisis, lender of last resort, moral hazard
    JEL: E40
    Date: 2023
  14. By: Pietro Alessandrini; Òscar Jordà; Fabrizio Venditti
    Abstract: Financial markets play an important role in generating monetary policy transmission asymmetries in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary tightening than to an expansion. At a one year horizon, the ‘financial multiplier’ of monetary policy—defined as the ratio between the cumulative responses of employment and credit spreads—is zero for a monetary expansion, -2 for a monetary tightening, and -4 for a monetary tightening that takes place under strained credit market conditions. These results have important policy implications: the central bank may inadvertently over-tighten in times of financial uncertainty.
    Keywords: monetary policy; credit spreads; local projections; Kitagawa decomposition
    JEL: C13 C32 E32 E52
    Date: 2023–05–24
  15. By: Giancarlo Corsetti; Paul Bergin
    Abstract: In the wake of Brexit and Trump trade war, central banks face the need to reconsider the role ofmonetary policy in managing the inflationary-recessionary effects of hikes in tariffs. Using a NewKeynesian model enriched with global value chains and firm dynamics, we show that the optimalmonetary response is expansionary. It supports activity and producer prices at the expense ofaggravating short-run headline inflation---contrary to the prescription of the standard Taylor rule. Thisholds all the more when the home currency is dominant in pricing of international trade.
    Keywords: Tariff shock, tariff war, optimal monetary policy, production chains
    Date: 2023–03
  16. By: Petrevski, Goran
    Abstract: This paper surveys the empirical literature of dealing with the choice of inflation targeting (IT). Specifically, the paper focuses on the main institutional, macroeconomic, and technical determinants affecting the adoption of IT. The main findings from our review are the following: there is strong empirical evidence that larger and more developed countries are more likely to adopt the IT regime; similarly, the introduction of IT 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.
    Keywords: inflation targeting, monetary policy, emerging markets economies
    JEL: E52 E58
    Date: 2023
  17. By: Solikin M. Juhro (Bank Indonesia); Denny Lie (University of Sydney); Atet Rizki Wijoseno (University of North Carolina); Mohammad Aly Fikry (Bank Indonesia)
    Abstract: This paper seeks to answer the following policy-relevant questions: (i) does the complementarity between monetary and macroprudential policies depend on the monetary and fiscal policy stances, and (ii) what is the likely aggregate effect of a central bank digital currency (CBDC) issuance on the existing central bank policy mix (CBPM) framework. We analyze these questions within a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model for Indonesia with a non-trivial fiscal policy and a parsimonious CBDC effect. On the first question, we find that monetaryfiscal policy stances do matter for whether a macroprudential policy rule stabilizes business cycle fluctuations and is welfare-improving. It is still the case, however, a passive monetary, active fiscal regime (PMAF) is sub-optimal compared to the active monetary, passive fiscal (AMPF) regime counterpart. On the second question, we find that a CBDC issuance lowers the transaction costs and its effects on aggregate economic variables are similar to the effects of a permanent technological progress.
    Keywords: integrated policy framework, central bank policy mix, DSGE model for Indonesia, monetary-fiscal policy coordination, macroprudential-fiscal policy coordination, central bank digital currency (CBDC)
    JEL: E12 E32 E58 E61 E63 F41
    Date: 2022
  18. By: Mochhoury, Sarah
    Abstract: While it has become clear that communication is a monetary policy tool for central banks, and extensive research has been conducted on central bank communication with financial markets, little is known so far on central bank communication with the general public. My research provides new insights into this field, confirming that the efforts of central banks to connect with a wider public are not in vain. In a randomised controlled trial, I focus on the determinants of trust in the European Central Bank (ECB) and on understanding of its communication about the Pandemic Emergency Purchase Programme, which was set up as part of the ECB’s response to the COVID-19 crisis. I find that the ECB’s simplified and relatable communication leads to greater trust in the central bank among the general public, as it has a positive impact on perceptions of the ECB among laypeople. The simplified content also proves to contribute to increased understanding of the central bank’s messages among the wider public. JEL Classification: C83, C93, D83, E52, E58
    Keywords: Behavioural economics, Central bank communication, European Central Bank, Experimental economics, Trust
    Date: 2023–06
  19. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: How should monetary policy respond to excessive capital inflows that appreciate the currency, widen the external deficit and cause overheating? Using the workhorse open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities reduce the ERPT. Excessive capital inflows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand.
    Keywords: Currency misalignments, trade imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through
    Date: 2022–11
  20. By: Bennett Schmanski; Chiara Scotti; Clara Vega
    Abstract: We estimate monetary policy surprises (sentiment) from the perspective of three different textual sources: direct central bank communication (FOMC statements and press conferences), news articles, and Twitter posts during FOMC announcement days. Textual sentiment across sources is highly correlated, but there are times when news and Twitter sentiment substantially disagree with the sentiment conveyed by the central bank. We find that sentiment estimated using news articles correlates better with daily U.S. Treasury yield changes than the sentiment extracted directly from Fed communication, and better predicts revisions in economic forecasts and FOMC decisions. Twitter sentiment is also useful, but slightly less so than news sentiment. These results suggest that news coverage and Tweets are not a simple echo chamber but they provide additional useful information. We use Sastry (2022)'s theoretical model to guide our empirical analysis and test three mechanisms that can explain what drives monetary policy surprises extracted from different sources: asymmetric information (central bank has better information than journalists and Tweeters), journalists (and Tweeters) have erroneous beliefs about the monetary policy rule, and the central bank and journalists (Tweeters) have different confidence in public information. Our empirical results suggest that the latter mechanism is the most likely mechanism.
    Keywords: Monetary policy; Public information; Price discovery
    JEL: C53 D83 E27 E37 E44 E47 E50 G10
    Date: 2023–05–26
  21. By: Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli
    Abstract: The Swiss National Bank (SNB) announced to refrain from profit distribution in 2022 owing to the accumulation of a huge financial loss. In this note we examine the key determinants of the SNB's loss and shed light on its implications to conduct monetary policy. In particular, we show that different accounting principles yield different results concerning the equity position of a central bank's balance sheet, yet not affecting the ability to run monetary policy.
    Keywords: Swiss National Bank, central bank, monetary policy
    JEL: E5 G15
    Date: 2023
  22. By: Max Sina Knicker; Karl Naumann-Woleske; Jean-Philippe Bouchaud; Francesco Zamponi
    Abstract: The economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020-2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include in particular a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply-chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the United States, including demand-pull, cost-push, and profit-driven factors. Our main results are four-fold: (i)~without appropriate policy, the shocked economy can take years to recover, or even tip over into a deep recession; (ii)~the response to policy is non-monotonic, leading to a narrow window of ``optimal'' policy responses due to the trade-off between inflation and unemployment; (iii)~the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to direct impact of interest rate hikes; (iv)~the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offers an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.
    Date: 2023–06
  23. By: Niels-Jakob H. Hansen (International Monetary Fund); Alessandro Lin (Bank of Italy); Rui C. Mano (International Monetary Fund)
    Abstract: Inequality is increasingly a policy concern. It is well known that fiscal and structural policies can mitigate inequality. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for the conduct of monetary policy within a tractable Two-Agent New Keynesian model. We find some support for making consumption inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules. Given the importance of labor income at the lower end of the income distribution, we also consider augmented Taylor rules targeting the labor share. We find that such a rule is preferable to targeting consumption inequality directly. However, under optimal monetary policy the gains from targeting inequality are smaller.
    Keywords: inequality, optimal monetary policy, Taylor rules
    JEL: E21 E32 E52
    Date: 2023–04
  24. By: Andrea Ajello; Diego Silva; Travis Adams; Francisco Vazquez-Grande
    Abstract: We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.
    Keywords: Financial Market Sentiment; Monetary policy; Natural Language Processing; Stock Returns; Twitter
    JEL: D53 C58 C55 E52
    Date: 2023–05–23
  25. 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
  26. 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
  27. By: Angeloni, Ignazio
    Abstract: There is much discussion today about a possible digital euro (PDE). Is this attention exaggerated? Are "central bank digital currencies" (CBDCs) "a solution in search of a problem", as some have argued? This article summarizes the main facts about the PDE and concludes that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. However, there may be future circumstances in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.
    Keywords: Digital, Euro, Financial Stability, Monetary Policy, Central Bank, CBDC, Banks
    Date: 2023
  28. By: Kwan, Simon H.; Ulate, Mauricio; Voutilainen, Ville
    Abstract: Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB's changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.
    Keywords: nominal interest rate, monetary policy transmission, Finland
    Date: 2023
  29. By: Petar Soric (University of Zagreb); Enric Monte (Polytechnic University of Catalunya); Salvador Torra (Riskcenter-IREA, University of Barcelona); Oscar Claveria (AQR-IREA, University of Barcelona)
    Abstract: The present study uses Gaussian Process regression models for generating density forecasts of inflation within the New Keynesian Phillips curve (NKPC) framework. The NKPC is a structural model of inflation dynamics in which we include the output gap, inflation expectations, fuel world prices and money market interest rates as predictors. We estimate country-specific time series models for the 19 Euro Area (EA) countries. As opposed to other machine learning models, Gaussian Process regression allows estimating confidence intervals for the predictions. The performance of the proposed model is assessed in a one-step-ahead forecasting exercise. The results obtained point out the recent inflationary pressures and show the potential of Gaussian Process regression for forecasting purposes.
    Keywords: Machine learning, Gaussian process regression, Time-series analysis, Economic forecasting, Inflation, New Keynesian Phillips curve JEL classification: C45, C51, C53, E31
    Date: 2022–07
  30. By: Arnaud Cedric Kamkoum
    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. This paper is the first study to measure the macroeconomic effects of QE using a design-based natural experimental approach.
    Date: 2023–05
  31. By: Gara Afonso; Catherine Huang; Marco Cipriani; Gabriele La Spada
    Abstract: Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
    Keywords: overnight reverse repo (ON RRP); balance sheet constraints; money market funds (MMFs)
    JEL: G2 G1
    Date: 2023–05–18
  32. By: Javier G. Gómez-Pineda; Andrés Murcia; Wilmar Alexander Cabrera-Rodríguez; Hernando Vargas-Herrera; Leonardo Villar-Gómez
    Abstract: Over the past 30 years, monetary and macroprudential policy in Colombia evolved towards the pursuit of a low and credible inflation target and a stable financial system. The protracted inflation that began in the early seventies was defeated at the turn of the century with the help of the new framework for monetary policy formulation, inflation targeting. In the field of macroprudential policy, the financial crisis of the late nineties led to important institutional developments in the formulation and coordination of macroprudential policy, as well as in the assessment of systemic risk. Along with these developments, important lessons have been learnt. One is that, to preserve macroeconomic stability, the price stability objective must be complemented with the financial stability objective, as well as with macroprudential policy. Another lesson is that the new institutional framework for monetary policy formulation helped Banco de la República overcome 25 years of inflation, then called moderate inflation. The challenges for the future include to continue preserving price and financial stability, strengthening the role of the Banco de la República in macroprudential policy, and to continue strengthening the channels of international coordination and cooperation in macroprudential policy. **** RESUMEN: En los últimos 30 años la política monetaria y macroprudencial de Colombia transitó hacia la búsqueda de un objetivo de inflación bajo y creíble, así como de un sistema financiero estable. La prolongada inflación que comenzó a comienzo de los años setenta fue superada a comienzo del nuevo siglo con la ayuda del nuevo régimen para la formulación de la política monetaria, de meta de inflación. En el ámbito de la política macroprudencial, la crisis financiera de finales de los años noventa llevó a importantes avances institucionales para la coordinación de la política macroprudencial y para la evaluación del riesgo sistémico. A lo largo de estos desarrollos importantes lecciones han sido aprendidas. Una de ellas es que, para preservar la estabilidad macroeconómica, el objetivo de estabilidad de precios debe ser complementado con el de estabilidad financiera, así como con la política macroprudencial. Otra lección es que el nuevo marco institucional para la formulación de la política monetaria ayudó al Banco de la República a superar 25 años de inflación, entonces llamada inflación moderada. Entre los retos están continuar preservando la estabilidad de precios y la estabilidad financiera, reforzar el papel del Banco de la República en la política macroprudencial y continuar fortaleciendo los canales de coordinación y cooperación internacional en la política macroprudencial.
    Keywords: Macroprudential policy, Monetary policy, Inflation targeting, Foreign exchange market intervention, Financial stability, Política macroprudencial, Política monetaria, Régimen de meta de inflación, Intervención en el mercado cambiario, Estabilidad financiera
    JEL: E5 E52 E44 E58 E61 G01 G18 G21 G28
    Date: 2023–06
  33. By: Emilio Ocampo; Nicolás Cachanosky
    Abstract: We analyze a recent paper that claims that dollarizing an economy in the presence of a “dollar shortage” will provoke an immediate sharp reduction in real output and welfare. We find many problems with the model that supports this conclusion: confusion about the nature of a dollar shortage and its practical implications, invalid assumptions, invariant calibration in the presence of a regime change and lack of empirical testing. In our opinion, the paper does not make a valuable contribution to the dollarization debate nor provide useful guidance to policymakers. The proposed model is based on unrealistic assumptions and its predictions are contradicted by the available evidence. A more promising and useful line of research would have been to investigate what happens to a dollarized economy in a scenario of exchange rate overshooting and how it compares in relation to other stabilization plans.
    Keywords: Dollarization, Dynamics, Dollar shortage
    JEL: E10 E42 E50 F30 F33
    Date: 2023–06
  34. By: Wahyoe Soedarmono (Sampoerna University); Iman Gunadi (Bank Indonesia); Fiskara Indawan (Bank Indonesia); Carla Sheila Wulandari (Bank Indonesia)
    Abstract: This paper investigates the determinants of foreign capital inflows and analyzes whether such inflows affect bond market and banking in the Indonesian context. We document that exchange rate depreciation and domestic interest rate benchmark tend to boost foreign capital inflows. Likewise, higher fiscal deficit reduces foreign capital inflows regardless capital inflows measurement. Moreover, higher foreign ownership in government bond is also driven by foreign capital inflows directly or through an increase in the current account. Regarding implications for banking, higher foreign capital inflows mitigate bank credit risk. Global factors such as the US interest rate benchmark and the volatility index indeed affect foreign capital inflows, although their impacts differ according to the measures of capital inflows. Eventually, in order to mitigate foreign capital reversals, this paper advocates the importance of policy mix such as fiscal deficit management, prudent monetary policy to maintain the interest rate differential between the US and domestic interest rate benchmark, as well as flexible exchange rate or inflation management. Nevertheless, identifying types of foreign capital outflows is also essential to understand what policy mix is necessary to deal with certain challenges.
    Keywords: capital flows, current account balance, financial stability, macroeconomies policies, bond market, banking
    JEL: F32 G0 F4 G1
    Date: 2022
  35. By: Giancarlo Corsetti; Gergely Buda; Vasco M. Carvalho
    Abstract: We study the transmission of monetary policy shocks using daily consumption, corporate sales andemployment series. We find that the economy responds at both short and long lags that are variablein economically significant ways. Consumption reacts in one week, reaches a local trough in onequarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but theinitial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for fivequarters albeit with a smaller impact reaction. We show that these short lags are masked by timeaggregation at lower —quarterly— frequencies.
    Keywords: Event-study, Monetary Policy, Economic Activity, High-Frequency Data, Local Projections
    Date: 2023–03
  36. By: Horn, Sebastian; Parks, Bradley; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China's overseas bailouts between 2000 and 2021 and provide new insights into China's growing role in the global financial system. A key finding is that the global swap line network put in place by the People's Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China's overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China's rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    Keywords: China, financial crises, sovereign debt crises, bailouts, rescue loans, external debt, official lending, hidden debts, sovereign risk, Belt and Road initiative
    JEL: F21 F33 F42 F65 G15 H63 N25
    Date: 2023
  37. By: Batista, Catia (Nova School of Business and Economics); Vicente, Pedro C. (Nova School of Business and Economics)
    Abstract: Rural areas in Sub-Saharan Africa are typically underserved by financial services. Mobile money brings a substantial reduction in the transaction costs of remittances. We follow the introduction of mobile money for the first time in rural villages of Mozambique using a randomized field experiment. We find that mobile money increased migration out of these villages, where we observe lower agricultural activity and investment. At the same time, remittances received and welfare of rural households increased, particularly when facing geo-referenced village-level floods and household-level idiosyncratic shocks. Our work suggests that mobile money can accelerate urbanization and structural change in Sub-Saharan Africa.
    Keywords: mobile money, migration, remittances, investment, agriculture, structural change, technology adoption, insurance, Mozambique, Africa
    JEL: O12 O15 O16 O33 G20 R23
    Date: 2023–04
  38. By: Enzo Dia; David VanHoose
    Abstract: A linchpin of the Federal Reserve’s unconventional policies has been payment of interest on reserves, of which 16 to 44 percent have been held by foreign banks with U.S. subsidiaries, at a rate typically several basis points higher than other funds rates. This paper constructs a model with competition among domestic banks, foreign banks with domestic subsidiaries, and other foreign banks in dollar-denominated common and local retail markets for loans and deposits. The paper shows that the interest rate that the interest rate on reserves influences not only loan and deposit rates domestically but also in Eurodollar-denominated foreign retail markets. The paper also explores implications for steady-state adjustments and dynamic responses of balance sheets and retail rates to parameter changes and exogenous shocks.
    Keywords: Interest on reserves, Eurodollar, Loan markets, Spillovers
    JEL: G21 G28 E43
    Date: 2022
  39. By: Zheng Liu; Mark M. Spiegel; Jingyi Zhang
    Abstract: We study the effectiveness of targeted reserve requirements (RR) as a policy tool for macroeconomic stabilization. Targeted RR adjustments were implemented in China during both the 2008-09 global financial crisis and the recent COVID-19 pandemic. We develop a model in which firms with idiosyncratic productivity can borrow from two types of banks---local or national---to finance working capital. National banks provide liquidity services, while local banks have superior monitoring technologies, such that both types coexist. Relationship banking is modeled in terms of a fixed cost of switching lenders, and banks choose to switch only under sufficiently large shocks. Reducing RR on local banks boosts leverage and aggregate output, whereas reducing RR on national banks has an ambiguous output effect. Following a large recessionary shock, a targeted RR policy that reduces RR for local banks relative to national banks can lower costs of switching lenders, stabilizing macroeconomic fluctuations. However, targeting RR in that manner also boosts local bank leverage, increasing risks of default and related liquidation losses. Our model's mechanism is supported by bank-level empirical evidence.
    Keywords: reserve requirements; macroeconomic stabilization; bank sizes
    JEL: E32 E52 E21
    Date: 2023–05–08
  40. By: Pédussel Wu, Jennifer; Metzger, Martina; Neira, Ignacio Silva; Farroukh, Arafet
    Abstract: Community currency systems are now turning to digital methods to increase the social outreach of member households in remote areas, mitigate detrimental effects in times of crises, and promote community social cohesion. The resilience of digital community currency systems depends on a set of decisive factors including stability, sustainability, and technical functionality. OurVillage in Cameroon is a socio-economic project that aims to increase and promote economic activity through the introduction of a blockchain-based local community currency system. This paper explores the potential of electronic complimentary payment systems by examining the underlying motivations for consumer use based on their socio-economics characteristics. We develop a demand estimate for the community currency, concentrating on the underlying environmental conditions of the target population. A demand study is helpful in order to observe the optimal conditions for goods' consumption, in this case the community currency system. The resulting estimation provides fundamental insights into the quality of the project and the determinants for successful implementation. Our findings have important policy implications, particularly for communities intending to introduce their own digital community currency systems.
    Keywords: demand estimates, community currency, socio-economic development projects
    JEL: B4 C10 D02 E42 O12
    Date: 2023
  41. By: Peist, Moritz Manuel
    Abstract: This paper investigates Original Sin in the West African Economic and Monetary Union in the framework of regional integration and cooperation initiatives. The phenomenon describes the inability of countries to borrow in their currency. The central hypothesis is that smaller South-South Coordination schemes do not possess the necessary magnitude to overcome Original Sin. The paper first substantiates the existence of Original Sin in West Africa. It then examines the influence of economic, fiscal, and monetary factors on the time variance of Original Sin in the region using a Tobit model. The results delivered mixed outcomes but confirm Original Sin's negative correlation with country size. The results uphold the hypothesis that financial and monetary integration and cooperation alone are not a panacea for Original Sin.
    Keywords: Original Sin, WAEMU, CFA Franc, Tobit
    JEL: C33 C34 F3 F4 F6
    Date: 2023
  42. By: Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó
    Abstract: What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
    Keywords: financial crises; nonlinear dynamics; shocks; financial stability
    JEL: G21 E52 G2 E51
    Date: 2023–05–22
  43. By: Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
    Abstract: Our paper uses credit registry data for the euro area to examine how the banking system transmits asset price shocks to credit via revaluation of collateral and subsequent lending decisions. Specifically we examine banks’ treatment of real estate collateral during the Covid-19 crisis. First we find evidence of significant frictions in the trans-mission of asset price dynamics to collateral values. Despite this we find that lending relationships reliant on real estate collateral received one third less credit following the outbreak of the pandemic and that firms experiencing downward revaluations of their collateral were significantly less likely to be given new loans. Our findings confirm that the collateral channel does create an economically significant link between real estate values and credit but suggest that the banking system’s role in transmission may be more complex than traditional economic theory would imply. JEL Classification: G21, R3, C55
    Keywords: banking, collateral channel, financial accelerator, microdata, real estate
    Date: 2023–06
  44. By: Crozet, Matthieu; Hinz, Julian; Trionfetti, Federico
    Abstract: In January 2015, The Swiss Franc (CHF) appreciated unexpectedly against the Euro by approximately 15%. We document a new fact: French firms that exported to both the Swiss market and the Eurozone also exhibited a sudden change in their export prices to the Eurozone. We coin this the 'exchange rate pass-around' effect. We rationalise this fact with a simple model based on the endogenous decision of some firms to give up pricing-to-market and opt for single-pricing to all markets. An important implication of this finding is that single-pricing may be one of the causes of the incomplete pass-through. This mechanism has so far remained unexplored in the literature, which may have led to overestimating the importance of other factors. Based on monthly French export data, our empirical analysis confirms the existence of the pass-around. Firms directly affected by the CHF exchange rate shock increased their prices in neighboring markets by 0.8% compared to other exporters. The effect was stronger for firms with lower ex-ante price heterogeneity across markets and for firms with smaller trade costs to Switzerland. However, the effect was short-lived. As time passed, exporters tended to decouple the prices they set on the Swiss market from those for the Eurozone, and the pass-around effect faded.
    Keywords: Exchange rate pass-through, International trade, Pricing-to-market
    JEL: F14 F31 D61 D62
    Date: 2023
  45. By: Bertsch, Christoph (Research Department, Central Bank of Sweden)
    Abstract: Stablecoins promise a stable and secure way to park funds in the crypto universe. However, stablecoin issuers are vulnerable to runs triggered by negative information about the quality and liquidity of their reserves, as well as custodial, operational, and technological risks. I propose a framework for analyzing the factors influencing stablecoin adoption and fragility, which offers insights for risk assessment and appropriate regulation, as well as new testable implications. Under the premise that payment preferences are heterogeneous across potential stablecoin holders, a wider adoption of stablecoins is associated with a destabilizing composition effect. Positive network effects mitigate the destabilizing composition effect, but they may also undermine the role of bank deposits as a means of payment. The marginal stablecoin adopter does not internalize these effects. Consequently, adoption is likely to be excessive. Factors that increase the issuer’s income from fees and seigniorage promote stability, as do congestion effects. A stablecoin lending market promotes both stability and adoption, if it is not undermined by speculation. The introduction of a moral hazard problem provides additional insights into reserve management and disclosure.
    Keywords: Stablecoins; money; payment preferences; financial stability; global games
    JEL: D83 E40 G01 G28
    Date: 2023–05–01

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