nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒07‒17
forty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Time-Varying Parameters in Monetary Policy Rules: A GMM Approach By Christina Anderl; Guglielmo Maria Caporale
  2. The drivers of market-based inflation expectations in the euro area and in the US By Christian Hoynck; Luca Rossi
  3. Consumer Inflation Expectations: Daily Dynamics By Conces Binder, Carola; Campbell, Jeffrey; Ryngaert, Jane
  4. Euro Area Monetary Policy Effects. Does the Shape of the Yield Curve Matter? By Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
  5. Quantitative easing, accounting and prudential frameworks, and bank lending By Andrea Orame; Rodney Ramcharan; Roberto Robatto
  6. Macroprudential Policy and Bank Systemic Risk: Does Inflation Targeting Matter? By Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
  7. A Simple Model of a Central Bank Digital Currency By Mishra, Bineet; Prasad, Eswar
  8. Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention By Alain Naef
  9. Inequality and the Zero Lower Bound By Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño; Omar Rachedi
  10. Recent advances in the literature on capital flow management By Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
  11. Trade Wars, Nominal Rigidities and Monetary Policy By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  12. Getting up from the floor By Claudio Borio
  13. Can Central Bank Credibility Improve Monetary Policy? A Meta-Analysis By Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
  14. Enhancing climate resilience of monetary policy implementation in the euro area By Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
  15. Why Consumers Disagree About Future Inflation By Naveen Rai; Patrick Sabourin
  16. International Spillovers of ECB Interest Rates: Monetary Policy & Information Effects By Santiago Camara
  17. Non-response Bias in Household Inflation Expectations Surveys By Meltem Chadwick; Rennae Cherry; Jaqueson K. Galimberti
  18. Bank profitability and central bank digital currency By Bellia, Mario; Calès, Ludovic
  19. Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model By Mark A. Aguiar; Manuel Amador; Cristina Arellano
  20. The Debt-Inflation Channel of the German Hyperinflation By Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
  21. 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
  22. Monetary Policy and Labor Income Inequality: the Role of Extensive and Intensive Margins By Paul Hubert; Frédérique Savignac
  23. US Monetary Policy Spillovers to Emerging Markets: the Trade Credit Channel By Mélina London; Maéva Silvestrini
  24. Gross bond issuance by Italian banks: key trends in times of crisis and unconventional monetary policy By Donato Ceci; Alessandro Montino; Sara Pinoli; Andrea Silvestrini
  25. Housing Market Connectedness and Transmission of Monetary Policy By Woo Suk Lee; Eunseong Ma
  26. Austria's (Over)Inflation and Its Main Sources By Stefan Schiman-Vukan
  27. Monetary Policy, HTM Securities, and Uninsured Deposit Withdrawals By Özlem Dursun-de Neef; Steven Ongena; Alexander Schandlbauer
  28. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  29. Monetary policy rules and the inequality-augmented Phillips Curve By Lilian Rolim; Laura Carvalho, Dany Lang
  30. Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach By Jessica Reale
  31. Financing imports, the Triffin dilemma and more By Alessandro Saccal
  32. Quasi-Fiscal Implications of Central Bank Crisis Interventions By John Hooley; Mr. Ashraf Khan; Claney Lattie; Istvan Mak; Ms. Natalia Salazar; Amanda Sayegh; Mr. Peter Stella
  33. Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data By Kodjovi M. Eklou
  34. Quasi-Fiscal Implications of Central Bank Crisis Interventions: Case Studies By John Hooley; Claney Lattie; Mr. Peter Stella
  35. The Specification of Lagged Inflation in the Wage Phillips Curve By Campbell, Carl
  36. Exchange Controls As A Fiscal Instrument By Stephanie Schmitt-Grohé; Martín Uribe
  37. Complementary Currencies and Liquidity: The Case of Coca-Base Money By Cristian Frasser; Lucie Lebeau
  38. Firm Inflation Uncertainty By Ivan Yotzov; Lena Anayi; Nicholas Bloom; Philip Bunn; Paul Mizen; Özgen Öztürk; Gregory Thwaites
  39. Original sin and South-South cooperation: Insights for the Mercosur from the experience of the Asian Bond Market Initiative By Fernández Tucci, Candelaria
  40. On the Instability of Fractional Reserve Banking By Heon Lee
  41. Energy, Inflation and Market Power: Excess Pass-Through in France By Axelle Arquié; Malte Thie
  42. Measuring the Natural Rate of Interest after COVID-19 By Kathryn Holston; Thomas Laubach; John C. Williams
  43. Are Cryptos Different? Evidence from Retail Trading By Shimon Kogan; Igor Makarov; Marina Niessner; Antoinette Schoar
  44. On the impact of fiscal policy on inflation: The case of fiscal rules By Jocelyne Zoumenou

  1. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper assesses time variation in monetary policy rules by applying a Time-Varying Parameter Generalised Methods of Moments (TVP-GMM) framework. Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.
    Keywords: Taylor rules, monetary policy rules, Generalised Methods of Moments, Time-varying parameters
    JEL: C14 C52 E52 E58
    Date: 2023
  2. By: Christian Hoynck (Bank of Italy); Luca Rossi (Bank of Italy)
    Abstract: In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.
    Keywords: inflation expectations, international transmission, monetary policy, high-frequency identification.
    JEL: C32 C54 E31 E44 E52
    Date: 2023–06
  3. By: Conces Binder, Carola; Campbell, Jeffrey; Ryngaert, Jane
    Abstract: We use high frequency identification methods to study the response of consumer inflation expectations to many different types of events. We use data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations. We identify the response of expectations to a large set of shocks, including FOMC announcements, macroeconomic data releases, and news related to the Covid-19 pandemic. The majority of FOMC meetings have no detectable effects on consumer inflation expectations, though certain especially salient announcements have short-lived effects. Good news about the pandemic tends to reduce inflation expectations.
    Keywords: inflation expectations, monetary policy, consumer surveys
    JEL: E31
    Date: 2022–12–15
  4. By: Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
    Abstract: This paper investigates the effects of monetary policy in the euro area. We make three main contributions to the literature. First, we use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. Second, we construct a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Third, we show that the way conventional and unconventional monetary policy announcements shape expectations inherent in the term structure influences the response of key macroeconomic variables.
    Keywords: Monetary Policy, Euro Area, Quantitative Easing
    JEL: E50 E20 E37
    Date: 2023
  5. By: Andrea Orame (Bank of Italy); Rodney Ramcharan (University of Southern California); Roberto Robatto (University of Wisconsin-Madison)
    Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks' net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks' balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms' credit constraints through the bank lending channel.
    Keywords: unconventional monetary policy, bank lending channel, sovereign default premia, regulatory capital, historical cost accounting
    JEL: G28 E52 M48
    Date: 2023–06
  6. By: Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Woon Gyu Choi; Farah Mugrabi
    Abstract: This paper investigates macroprudential policy effects on bank systemic risk and the role of inflation targeting in such effects. Using bank-level data for 45 countries comprising various monetary and exchange rate regimes, our regime-dependent dynamic panel regression results point to complementarities between monetary and macroprudential policies. We find that the tightening of most macroprudential tools—including DSTI and LTV limits, and capital requirements—reduces bank systemic risk further under inflation targeting. Our findings lend credence to the view that inflation targeting strengthens macroprudential policy roles in mitigating financial stability risks.
    Keywords: Macroprudential Policies; Banks; Systemic Risk; Monetary Policy; Inflation Targeting
    Date: 2023–06–02
  7. By: Mishra, Bineet (Cornell University); Prasad, Eswar (Cornell University)
    Abstract: We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can in uence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.
    Keywords: central bank digital currency, cash, medium of exchange, store of value, transaction efficiency
    JEL: E4 E5 E61
    Date: 2023–05
  8. By: Alain Naef
    Abstract: Most countries in the world use foreign exchange interventions, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to reverse the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980s and 1990s. Some studies find that interventions work in up to 80% of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8% of cases. I use natural language processing to confirm the validity of the narrative approach. Using Lasso and a VAR analysis, I investigate what makes the Bank of England intervene during that period. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.
    Keywords: Intervention, Foreign Exchange, Natural Language Processing, Central Bank, Bank of England
    JEL: F31 E5 N14 N24
    Date: 2023
  9. By: Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño; Omar Rachedi
    Abstract: This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully nonlinear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’ precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality.
    Keywords: heterogeneous agents, HANK models, neural networks, non-linear dynamics
    JEL: D31 E12 E21 E31 E43 E52 E58
    Date: 2023
  10. By: Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
    Abstract: Large swings in cross-border capital flows can have consequences for domestic stability and open a channel for the transmission of shocks and spillovers across economies, including the euro area. Against this backdrop, the present paper reviews new evidence for the effectiveness of capital flow management policies in achieving macroeconomic and financial stability. Particular attention is paid to literature that has been used by the International Monetary Fund (IMF) to underpin its so-called Integrated Policy Framework, in which the roles of monetary, exchange rate, macroprudential and capital flow management policies are considered jointly. The literature published since the global financial crisis continues to affirm the effectiveness of capital flow management measures (CFMs) in addressing financial stability risks resulting from capital flow reversals; at the same time, however, it also continues to underscore that such policies should not substitute for warranted economic adjustments and structural reforms. Even so, recent literature also provides a case for considering, under certain circumstances, “precautionary” CFMs which could be applied to capital inflows to prevent a boom-and-bust cycle from being set in motion. This paper also highlights the need for further work on the long-term effects of such precautionary instruments, as well as their joint use with monetary policy instruments. Regarding capital flow management policies within the domain of central banks, the literature points to the usefulness of foreign exchange interventions (FXIs) in mitigating financial stability risks in countries with specific characteristics such as currency mismatches, borrowing constraints and shallow foreign exchange markets that are common to emerging market and developing economies alike. However, the literature also warns that such measures may reduce economic agents’ incentives to hedge against currency risks, with the result that unfavourable initial conditions beco JEL Classification: F32, F38
    Keywords: capital controls, short-term capital movements
    Date: 2023–06
  11. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.
    JEL: F30 F40 F41
    Date: 2023–06
  12. By: Claudio Borio
    Abstract: Since the Great Financial Crisis, a growing number of central banks have adopted abundant reserves systems ("floors") to set the interest rate. However, there are good grounds to return to scarce reserve systems ("corridors"). First, the costs of floor systems take considerable time to appear, are likely to grow and tend to be less visible. They can be attributed to independent features of the environment which, in fact, are to a significant extent a consequence of the systems themselves. Second, for much the same reasons, there is a risk of grossly overestimating the implementation difficulties of corridor systems, in particular the instability of the demand for reserves. Third, there is no need to wait for the central bank balance sheet to shrink before moving in that direction: for a given size, the central bank can adjust the composition of its liabilities. Ultimately, the design of the implementation system should follow from a strategic view of the central bank's balance sheet. A useful guiding principle is that its size should be as small as possible, and its composition as riskless as possible, in a way that is compatible with the central bank fulfilling its mandate effectively.
    Keywords: monetary policy operating procedures, central bank balance sheets, abundant vs scarce reserves systems
    JEL: E42 E43 E52 E58
    Date: 2023–05
  13. By: Valentina Cepeda; Bibiana Taboada-Arango; Mauricio Villamizar-Villegas
    Abstract: We bring together the largest meta-analysis ever conducted in the macroeconomic literature to investigate the effects of central bank credibility on monetary policy. With nearly 1, 200 surveyed effects, we first confirm that: (i) conventional policy significantly affects inflation and output, and (ii) unconventional policy significantly affects capital flows and the exchange rate. We next evaluate if different measures of credibility amplify these effects. Our findings indicate that central bank transparency has the largest payoff, as it increases policy effectiveness by 69% when dealing with foreign exchange intervention, by 59% when dealing with capital inflows, and by 14% when dealing with conventional policy. An alternative measure, medium and long-term anchoring in inflation expectations, is the runner up, increasing effectiveness by 31%, 9%, and 10%, respectively. Other measures, such as central bank independence and short-term anchoring in inflation expectations have lower and in some cases null effects. **** RESUMEN: Reunimos el primer meta-análisis sobre el impacto que tiene la credibilidad de los bancos centrales en la política monetaria. Con cerca de 1.200 efectos reportados, primero confirmamos que: (i) la política convencional significativamente afecta la inflación y el crecimiento económico y (ii) la política no convencional afecta significativamente los flujos de capital y tasa de cambio. Segundo, evaluamos si diferentes medidas de credibilidad amplifican estos efectos. Nuestros hallazgos indican que la transparencia del banco central tiene el mayor impacto, ya que aumenta la efectividad en un 69% cuando se trata de intervención cambiaria, en un 59% cuando se trata de flujos de capital, y en un 14% cuando se trata de la política convencional. Otras medidas de credibilidad, como el anclaje de expectativas de inflación y la independencia del banco, también magnifican la política monetaria, pero en menor proporción.
    Keywords: Meta-Analysis, Central bank credibility, Conventional policy, Unconventional policy, Capital Flows, Foreign exchange intervention, Meta-Análisis, Credibilidad Monetaria, Política Convencional, Política No Convencional, Flujos de Capital, Intervención Cambiaria
    JEL: C83 E52 E58
    Date: 2023–06
  14. By: Aubrechtova, Jana; Heinle, Elke; Porcel, Rafel Moyà; Torres, Boris Osorno; Piloiu, Anamaria; Queiroz, Ricardo; Silvonen, Torsti; Cruz, Lia Vaz
    Abstract: Central banks around the world are increasingly monitoring climate change risks and how these affect their balance sheets and their monetary policy transmission. The European Central Bank (ECB) extensively reviewed its monetary policy implementation framework in 2020-21 to better account also for climate change risks. This paper describes these considerations in detail to provide a holistic perspective of one central bank’s climate-related work in relation to its monetary policy implementation framework. The paper starts by characterising the strategic reflections behind the principles of the enhanced framework and their relationship with the ECB monetary policy strategy review. Climate-related disclosures, improvements in risk assessment, a strengthened collateral framework and tilting of corporate bond purchases are the main pillars of the framework enhancements. The paper sheds light on the key motivations behind these enhancements, including the aspects that were reviewed but left unchanged. It also takes stock of the different challenges involved in the identification and estimation of climate change-related risk, how these can be partially overcome, and when they cannot be overcome, how they can constrain the ability of financial institutions, including central banks, to take further action. The integration of climate change considerations into the monetary policy implementation framework is at its inception. As data availability and quality improve, and risk methodologies develop, central banks will be able to deepen their approach. This paper also examines possible future avenues that central banks, including the ECB, might take to further refine their monetary policy implementation using an assessment framework for climate change-related adjustments. JEL Classification: E52, E58, Q54, D53
    Keywords: climate change, monetary policy implementation
    Date: 2023–06
  15. By: Naveen Rai; Patrick Sabourin
    Abstract: Since 2022, consumer inflation expectations have shifted, with a significant increase in those expecting high inflation in the coming year and a surge in those expecting deflation further in the future. Using data from the Canadian Survey of Consumer Expectations, this paper seeks to assess the factors that influence people to expect high inflation, moderate inflation or deflation. While expectations of high inflation are largely based on perceptions about current inflation, most of those anticipating future deflation do not see the Canadian economy as currently deflationary. Rather, their deflationary outlook since 2022 has hinged on the belief that current inflation-inducing supply and demand factors such as supply chain issues are temporary and will reverse, triggering price declines.
    Keywords: Inflation and prices
    JEL: C83 D84 E31
    Date: 2023–06
  16. By: Santiago Camara
    Abstract: This paper shows that disregarding the information effects around the European Central Bank monetary policy decision announcements biases its international spillovers. Using data from 23 economies, both Emerging and Advanced, I show that following an identification strategy that disentangles pure monetary policy shocks from information effects lead to international spillovers on industrial production, exchange rates and equity indexes which are between 2 to 3 times larger in magnitude than those arising from following the standard high frequency identification strategy. This bias is driven by pure monetary policy and information effects having intuitively opposite international spillovers. Results are present for a battery of robustness checks: for a sub-sample of ``close'' and ``further away'' countries, for both Emerging and Advanced economies, using local projection techniques and for alternative methods that control for ``information effects''. I argue that this biases may have led a previous literature to disregard or find little international spillovers of ECB rates.
    Date: 2023–06
  17. By: Meltem Chadwick; Rennae Cherry; Jaqueson K. Galimberti
    Abstract: This paper uses micro-data from the Reserve Bank of New Zealand’s Household Inflation Expectations survey to obtain a more accurate read of households’ true inflation expectations by understanding how different demographic groups respond (or do not respond) to specific questions in the survey. Using a Heckman selection model, we assess whether there is item non-response bias in the survey by comparing the demographic characteristics of responders and non-responders. We quantify and demonstrate how to adjust for bias in aggregate (mean) measures of inflation expectations caused by item non-response. We show that there is a positive bias, and the aggregate inflation expectation series shifts down after the adjustment.
    Keywords: inflation expectations, household surveys, item non-response, demographic heterogeneity
    JEL: C83 D84 E31 E71
    Date: 2023–06
  18. By: Bellia, Mario (European Commission); Calès, Ludovic
    Abstract: This paper analyzes the potential effect of a European Central Bank Digital Currency (CBDC) on banks’ profitability. We use a large sample of EU banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regression, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for small banks, that mostly rely on deposits as a source of funding.
    Keywords: Central Bank Digital Currency, CBDC, ECB, bank deposits
    JEL: G18 G28 G32
    Date: 2023–05
  19. By: Mark A. Aguiar; Manuel Amador; Cristina Arellano
    Abstract: This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation.
    JEL: E4 E60
    Date: 2023–06
  20. By: Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
    Abstract: This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible.
    JEL: E31 G0 G20 G30 N2
    Date: 2023–06
  21. 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.
    Date: 2023–01–05
  22. By: Paul Hubert; Frédérique Savignac
    Abstract: Using French matched administrative-survey data, we quantify the distributional effects of monetary policy on labor income and decompose the extensive and intensive margins of these effects. We find that the effects of ECB monetary policy shocks on labor income are U-shaped along the labor income distribution. These effects are driven by the extensive margin (transitions out or to unemployment) at the bottom of the distribution and by the intensive margin (labor income changes for individuals continuously employed) at the top. We document that sectoral heterogeneity, especially related to the labor force composition, is crucial in explaining these heterogeneous effects.
    Keywords: Distributional Effects, Household Heterogeneity, Labor Market
    JEL: E52 E58
    Date: 2023
  23. By: Mélina London; Maéva Silvestrini
    Abstract: We analyze the effects of exogenous US monetary policy shocks on trade credit towards emerging markets, using a proprietary database on trade credit amounts. We show that a US monetary tightening leads to an increase in foreign-supplied trade credit in Mexico. Thanks to the granularity of our database, we are able to identify a stronger effect for trade credit in USD and trade credit to sectors with low export orientation. This effect is even larger for low-quality buyers, subject to larger financial constraints. In this latter case, distinguishing between the intensive and extensive margins, we show that the use of trade credit as a substitute only holds in a context of pre-existing relationships. This emphasizes the substitution role of trade credit when global financial conditions tighten due to US monetary policy shocks.
    Keywords: US Monetary Policy, Spillovers, Capital Flows, Emerging Market, Trade Credit
    JEL: E52 F14 F40 F44 L14
    Date: 2023
  24. By: Donato Ceci (Bank of Italy); Alessandro Montino (Bank of Italy); Sara Pinoli (Bank of Italy); Andrea Silvestrini (Bank of Italy)
    Abstract: This paper examines the issuance of bonds by Italian banks from the onset of the global financial crisis in 2007-08 to the end of 2022, in light of the macroeconomic environment and the unconventional monetary policy measures adopted in the euro area. The sovereign debt crisis was followed by a progressive reduction in the gross issuance of bank bonds, together with an increase in retail deposits and refinancing operations with the Eurosystem. Disaggregated data show that Italian banks have partially replaced bond issues with alternative sources of funding. This has mitigated the transmission of financial shocks to the cost of funding but, on the other hand, has increased the reliance of the banking system on quantitative measures of monetary policy. In the ongoing phase of monetary policy normalization, banks may once again have to increase bond financing to replace their maturing funds. This could lead to a significant tightening of funding conditions for the private sector in a context of slowing economic activity. The overall cost of bank funding should be constantly monitored in order to prevent unexpected shocks arising within the banking system.
    Keywords: bank bonds, bond issuance, crisis, unconventional monetary policy, cost of funding
    JEL: G12 G21 G32
    Date: 2023–06
  25. By: Woo Suk Lee (Dong-A University); Eunseong Ma (Yonsei University)
    Abstract: This paper examines whether the degree of interconnectivity among local housing markets affects the effectiveness of the monetary transmission mechanism in the U.S. economy. We construct measures of housing market connectedness and use a state-dependent local projection method to estimate nonlinear empirical impulse responses of macroeconomic variables to a monetary policy shock. The primary finding is that monetary policy has a greater impact when regional housing markets are more synchronized. This implies that a spillover effect among local housing markets may magnify the effectiveness of monetary policy. Moreover, analyses reveal two additional findings: monetary policy is more effective i) during high-connectedness periods with expansions, and ii) when house price fluctuations are predominantly driven by a national factor rather than regional factors.
    Keywords: Housing market, connectedness; monetary policy
    JEL: R31 E52 E32
    Date: 2023–05
  26. By: Stefan Schiman-Vukan
    Abstract: Austrian inflation has again been significantly higher than euro area inflation since September 2022. Both domestic and external demand and supply shocks have contributed to this, reflecting the following circumstances: a later implementation of price-dampening measures than in the rest of the euro area, expansive fiscal policies, the resurgence of international tourism, and a delayed pass-through of the decline in wholesale energy prices. By contrast, wage shocks have so far not made a sustained contribution to the inflation (gap), although wage increases have recently been high.
    Date: 2023–06–15
  27. By: Özlem Dursun-de Neef (Goethe University); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR); Alexander Schandlbauer (University of Southern Denmark ; Danish Finance Institute)
    Abstract: This paper shows that an increase in the Fed funds rate is associated with an increase in banks' unrealized losses due to their held-to-maturity (HTM) portfolios. This exposes banks to large uninsured deposit withdrawals as the depositors seek a flight-to-safety and, at the same time, to a reduction in their stock prices as the investors become concerned about possible losses. This relationship is more pronounced for banks with less hedging against the interest rate risk and for banks with lower capital ratios. Our results highlight the importance of banks' HTM securities on how monetary policy affects their uninsured deposits and stock prices.
    Keywords: Interest rate risk; HTM securities; Uninsured deposits; Monetary policy
    JEL: G21 E52 E58
    Date: 2023–04
  28. By: Linda S. Goldberg
    Abstract: Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions.
    Keywords: global liquidity; global dollar cycle; trilemma; exchange market pressure; risk sensitivity; safe haven; capital flows; non-bank financial intermediaries; risk migration
    JEL: E44 F30 G15 G18 G23
    Date: 2023–06–01
  29. By: Lilian Rolim; Laura Carvalho, Dany Lang
    Abstract: We explore the relationship between inequality, unemployment, and inflation by considering the evidence that low-wage workers are more exposed to business cycle fluctuations. The analysis is undertaken in an extended version of the stock-and-flow consistent agent-based model by Rolim et al. (2023), in which inflation and inequality result from the social conflict over income distribution. The inflation-unemployment-inequality nexus leads to the inequality-augmented Phillips curve relating higher levels of unemployment to lower inflation rates and more inequality. We then perform two sets of experiments to investigate the implications of this nexus further. The first experiment shows that the decrease in low-wage workers’ bargaining power could explain the flattening of the Phillips curve and the increase in income and wage inequalities. The second experiment contrasts different monetary policy rules and compares the implications for inequality dynamics. In line with the inequality-augmented Phillips curve, the rules have important implications for wage and income inequalities: a monetary policy rule that prioritizes low inflation rates is associated with higher unemployment and higher inequality levels.
    Keywords: Phillips curve; inflation; unemployment; inequality; monetary policy; bargaining power
    JEL: C63 D3 E2 E3 E4
    Date: 2023–06–27
  30. By: Jessica Reale
    Abstract: This study investigates the functioning of modern payment systems through the lens of banks' maturity mismatch practices, and it examines the effects of banks' refusal to roll over short-term interbank liabilities on financial stability. Within an agent-based stock-flow consistent framework, banks can engage in two segments of the interbank market that differ in maturity, overnight and term. We compare two interbank matching scenarios to assess how bank-specific maturity targets, dependent on the dictates of the Net Stable Funding Ratio, impact the dynamics of the interbank market and the effectiveness of conventional monetary policies. The findings reveal that maturity misalignment between deficit and surplus banks compromises the interbank market's efficiency and increases reliance on the central bank's standing facilities. Monetary policy interest-rate steering practices also become less effective. The study also uncovers a dual stability-based configuration in the banking sector, resembling the segmented European interbank structure. This paper suggests that heterogeneous maturity mismatches between surplus and deficit banks may result in asymmetric funding frictions that might precede credit- and sovereign-risk explanations of interbank tensions. Also, a combined examination of macroprudential tools and rollover-based interbank dynamics can enhance our understanding of how regulatory changes impact the stability of heterogeneous banking sectors.
    Date: 2023–06
  31. By: Alessandro Saccal
    Abstract: This paper presents a formal proof of the notion by which a country devoid of tradable assets and without access to foreign borrowing and lending must systematically pay for its imports in foreign currency through its exports alone, provided a demand for them to begin with. It likewise sets forth a formal proof of the Triffin dilemma, by which a country whose external currency enjoys the status of an international reserve currency is bound to incur a trade deficit and an attendant excess of extant foreign net borrowing in relation to its tradable assets, meanwhile advancing an innovative, orderly model of the balance of payments. Currency regimes, sudden stops in foreign net borrowing, international reserve currencies and changes in private and public consumption are additionally examined. This monograph completes its study of the dynamics pertaining to exports and foreign borrowing by means of a static deterministic partial equilibrium (SDPE) model, via stability analysis.
    Keywords: Balance of payments; exports; imports; international reserve currency; Triffin dilemma; tradable assets.
    JEL: E12 F13 F30 F31 F41 F45 F52 N10
    Date: 2023–06–04
  32. By: John Hooley; Mr. Ashraf Khan; Claney Lattie; Istvan Mak; Ms. Natalia Salazar; Amanda Sayegh; Mr. Peter Stella
    Abstract: We develop a stylized balance sheet framework to help identify ‘quasi-fiscal’ components of central bank crisis interventions and show how sources of fiscal risk are created from both the new claims and how they are funded. Combining central bank balance sheet data with survey evidence from intervention announcements, we document the risks to the public sector balance sheet from central banks’ interventions in response to the Covid-19 crisis, including non-conventional lending to the financial and non-financial sectors and large-scale purchases of government securities. Case study analysis indicates that management of fiscal risks from central bank crisis interventions varies greatly across countries, although several good practices can be identified.
    Keywords: Central bank; quasi-fiscal; fiscal risks; monetary policy; fiscal policy; sovereign debt management; policy coordination
    Date: 2023–06–02
  33. By: Kodjovi M. Eklou
    Abstract: This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.
    Keywords: Dollar exchange rate; volatility; Productivity growth; Investment; Firm heterogeneity and spillovers; dollar exchange rate volatility; exchange rate volatility; firm Level data; dollar invoicing; volatility shock com; Exchange rates; Productivity; Financial sector development; Total factor productivity; Employment protection; Global
    Date: 2023–05–26
  34. By: John Hooley; Claney Lattie; Mr. Peter Stella
    Abstract: This paper presents case studies of central bank crisis interventions during the Covid-19 and the Global Financial Crises in four jurisdictions (Canada, Chile, the United Kingdom, and the United States). The paper serves as an Annex to the main IMF Working Paper WP/23/114 ‘Quasi-Fiscal Implications of Central Bank Crisis Interventions.’
    Keywords: Central bank; quasi-fiscal; fiscal risks; monetary policy; fiscal policy; sovereign debt management; policy coordination
    Date: 2023–06–02
  35. By: Campbell, Carl
    Abstract: In new Keynesian models of wage setting, wage inflation is generally assumed to depend on one lagged value of price inflation. In addition, in purely backward-looking wage Phillips curves, wage inflation is generally assumed to depend on several lagged values of price inflation. This study demonstrates both that current wage inflation is more closely related to lagged wage inflation than to lagged price inflation and that specifications with multiple lags of inflation outperform specifications with only one lag of inflation. Thus, wage inflation can be predicted more accurately by a model that includes multiple lags of wage inflation as independent variables.
    Keywords: Wage Phillips Curve Lag structure
    JEL: J3
    Date: 2023–06–08
  36. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: About 20 percent of countries have in place dual, multiple, or parallel exchange rates. Exchange controls represent a form of distortionary commercial policy. We study an optimal taxation problem of a government with chronic fiscal deficits and two distortionary instruments, money creation and exchange controls. We calibrate the model to Argentina, which over the past decade has experienced significant exchange controls and persistent fiscal deficits. We show that exchange controls can generate sizable fiscal revenue. However, the optimal level of exchange controls is virtually zero. Financing the fiscal deficit with exchange controls is possible, but entails large welfare losses.
    JEL: E5 E63 F41
    Date: 2023–06
  37. By: Cristian Frasser; Lucie Lebeau
    Abstract: In coca-growing villages of Colombia, where pesos are scarce, coca-base is not only used as the main input for cocaine production—it also acts as a complementary currency (CC), circulating locally as a medium of exchange for day-to-day transactions. This paper provides a clear rationale for the economically-motivated adoption of a CC in a small open economy underprovided with official currency. An equilibrium currency shortage arises endogenously in our model, whereby shocks to the local supply of currency have a real impact on local trade and welfare. We show how a CC can mitigate the underprovision of liquidity and derive general insights relating the CC’s characteristics to its ability to supplement the official currency. In an application, we quantify the unintended consequences of various anti-narcotic policies pursued by the Colombian government on liquidity provision in coca-growing villages and identify the least-harmful policy tools given the policy objectives at stake.
    Keywords: complementary currency (CC); Local currency; money supply; commodity money; money shortage; liquidity; anti-narcotic policies
    JEL: E40 E41 E51 O23
    Date: 2023–06–21
  38. By: Ivan Yotzov; Lena Anayi; Nicholas Bloom; Philip Bunn; Paul Mizen; Özgen Öztürk; Gregory Thwaites
    Abstract: We introduce a new measure of own-price inflation uncertainty using firm-level data from a large and representative survey of UK businesses. Inflation uncertainty increased significantly from the start of 2021 and reached a peak in the second half of 2022, even as a similar measure of sales uncertainty declined. We also find large cross-sectional differences in inflation uncertainty, with uncertainty particularly elevated for smaller firms and those in the goods sector. Finally, we show that firms which are more uncertain about their own price expectations experience higher forecast errors 12 months later. These findings suggest that studying inflation uncertainty at the firm level may be an important new dimension to understanding firm performance.
    JEL: E0
    Date: 2023–06
  39. By: Fernández Tucci, Candelaria
    Abstract: The financial crises of the late 1990s in Asian and South American countries have once again highlighted the negative implications of development strategies characterized by high levels of foreign currency external indebtedness. In light of these events, South-South cooperation is conceived as an alternative to unilateral strategies to mitigate the consequences of 'original sin' and reduce macroeconomic vulnerability and financial instability. Following the financial crises of the late 1990s, member states of the Association of Southeast Asian Nations plus China, Japan and the Republic of Korea (ASEAN+3) strengthened monetary cooperation while their South American peers, under Mercosur, maintained unilateral strategies. This paper analyzes the Asian Bond Market Initiative of the ASEAN+3 countries to draw insights for monetary cooperation in the Mercosur. The results suggest that the development of a regional local currency (LCY) bond market has a significant potential to reduce countries' exposure to currency and maturity mismatch. However, the persistence of the original sin phenomenon and the emergence of other sources of instability - such as an increase in the proportion of foreign holdings of LCY bonds - impose significant challenges for policymakers. Consequently, other policy instruments, including capital controls and international reserves accumulation, should complement the development of a regional LCY bond market. Given both the recurrent beggar-thy-neighbor policies and the high levels of intra-regional exchange rate volatility in the Mercosur, this paper argues that there is no alternative to exchange rate coordination in the bloc.
    Keywords: Original sin, financial instability, south-south cooperation, Mercosur, Asian Bond Market Initiative, LCY bond markets
    JEL: G1 G15 F3 F4
    Date: 2023
  40. By: Heon Lee
    Abstract: This paper develops a dynamic monetary model to study the (in)stability of the fractional reserve banking system. The model shows that the fractional reserve banking system can endanger stability in that equilibrium is more prone to exhibit endogenous cyclic, chaotic, and stochastic dynamics under lower reserve requirements, although it can increase consumption in the steady-state. Introducing endogenous unsecured credit to the baseline model does not change the main results. This paper also provides empirical evidence that is consistent with the prediction of the model. The calibrated exercise suggests that this channel could be another source of economic fluctuations.
    Date: 2023–05
  41. By: Axelle Arquié; Malte Thie
    Abstract: We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and February 2023). Our work provides some empirical evidence in favor of a role for firms' market power in explaining inflation, and in favor of the "sellers' inflation" hypothesis (Weber and Wasner 2023): in less competitive sectors, firms could use the energy price hike to increase their prices more than warranted by actual changes in costs. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that, in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through up to 110% of the energy shock, implying an excess pass-through of 10 percentage points. In addition, we find that the association between markup and pass-through is even higher when markup dispersion is low, consistent with the argument that firms engage in price hikes when they expect their competitors to do the same.
    Keywords: Inflation ;Markups
    JEL: E31 F4 L11
    Date: 2023–06
  42. By: Kathryn Holston; Thomas Laubach; John C. Williams
    Abstract: We modify the Laubach-Williams and Holston-Laubach-Williams models of the natural rate of interest to account for time-varying volatility and a persistent COVID supply shock during the pandemic. Resulting estimates of the natural rate of interest in the United States, Canada, and the Euro Area at the end of 2022 are close to their respective levels estimated directly before the pandemic; that is, we do not find evidence that the era of historically low estimated natural rates of interest has ended. In contrast, estimates of the natural rate of output have declined relative to those projected before the pandemic.
    Keywords: Natural rate of output; time-varying volatility; Kalman filter; trend growth; COVID-19 pandemic
    JEL: C32 E43 E52 O40
    Date: 2023–06–01
  43. By: Shimon Kogan; Igor Makarov; Marina Niessner; Antoinette Schoar
    Abstract: Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors. Using a dataset of 200, 000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets. Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. Individual characteristics do not explain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects. Furthermore, our findings are not explained by inattention, differences in fees, or preference for lotterylike stocks. We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction.
    JEL: G12 G14 G41
    Date: 2023–06
  44. By: Jocelyne Zoumenou
    Abstract: This paper examines the impact of fiscal rules on inflation across 79 countries from 1985 to 2021, employing entropy balancing as the methodology. By adopting this approach, the study addresses potential endogeneity concerns and takes into account variations among different country groups, including advanced economies, emerging markets, developing economies, and low-income countries. The primary outcome derived from the analysis indicates a negative relationship between fiscal rules and inflation in emerging and low-income countries. Moreover, this effect is observed for moderate and high inflation rates. These results are robust to different specifications.
    Keywords: Fiscal policy ; Inflation ; Propensity score methodology
    JEL: C31 E31 E61 E62
    Date: 2023

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