nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒07‒24
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Literacy, Inflation Expectations, and Trust in the Central Bank: A Survey Experiment By Dräger, Lena; Nghiem, Giang
  2. How Elastic and Predictable Money Should Be: Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993-2023) By Donato Masciandaro
  3. The Impacts of Global Risk and US Monetary Policy on US Dollar Exchange Rates and Excess Currency Returns By Kerstin Bernoth; Helmut Herwartz; Lasse Trienens
  4. Central Bank Communication and Social Media: From Silence to Twitter By Donato Masciandaro; Oana Peia; Davide Romelli
  5. The monetary and macroprudential policy framework in Colombia in the last 30 years: the lessons learnt and the challenges for the future By Gomez-Pineda, Javier Guillermo; Murcia, Andrés; Cabrera-Rodríguez, Wilmar Alexander; Vargas-Herrera, Hernando; Villar-Gómez, Leonardo
  6. Fifty Shades of QE: Robust Evidence By Brian Fabo; Martina Jancokova; Elisabeth Kempf; Lubos Pastor
  7. Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  8. Where Is Inflation Persistence Coming From? By Babur Kocaoglu; Martín Almuzara; Argia M. Sbordone
  9. Identifying money and inflation expectation shocks on real oil prices By Benk, Szilárd; Gillman, Max
  10. Documentation Paper: Representative Survey on Attitudes and Knowledge About Inflation and Monetary Policy in Germany Conducted in December 2022 By Bernd Hayo
  11. Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Surprises By Spencer D. Krane; Leonardo Melosi; Matthias Rottner
  12. Revisiting the monetary transmission mechanism through an industry‑level differential approach By Choi, Sangyup; Willens, Tim; Yoo, Seung Yong
  13. Janus's Money Demand and Time Inconsistency: A New Impossibility Theorem? By João Ricardo Faria; Peter McAdam
  14. Distressed Firms and the Large Effects of Monetary Policy Tightenings By Ander Pérez-Orive; Yannick Timmer
  15. Monetary Policy Operations: Theory, Evidence, and Tools for Quantitative Analysis By Ricardo Lagos; Gastón Navarro
  16. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  17. On the Nexus of Monetary Policy and Financial Stability: Novel Asset Market Monitoring Tools for Building Economic Resilience and Mitigating Financial Risks By Lauren Spits; Valerie Grossman; Enrique Martinez-Garcia
  18. What is it good for? On the Inflationary Effects of Military Conflicts By Ulrich Eydam; Florian Leupold
  19. Financial de-dollarization in Argentina. When the wind always blows from the East By Eduardo A. Corso; Máximo Sangiácomo
  20. Superior Predictability of American Factors of the Dollar/Won Real Exchange Rate By Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
  21. Monetary and Macroprudential Policy and Welfare in an Estimated Four-Agent New Keynesian Model By George J. Bratsiotis; Kasun D. Pathirage
  22. International Reserve Accumulation: Balancing Private Inflows with Public Outflows By Bada Han; Dongwook Kim; Youngjin Yun
  23. Local Currency Bond Market Development and Currency Stability amid Market Turmoil By Kim, Cheonkoo; Park, Donghyun; Park, Jungsoo; Tian, Shu
  24. What do politicians think of technocratic institutions? Experimental Evidence on the European Central Bank By Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
  25. Quantifying the Germany Shock: Structural Reforms and Spillovers in a Currency Union By Harald Fadinger; Philipp Herkenhoff; Jan Schymik
  26. "The International Role of the U.S. Dollar" Post-COVID Edition By Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
  27. Overborrowing, Underborrowing, and Macroprudential Policy By Fernando Arce; Julien Bengui; Javier Bianchi
  28. The effect of inflation and unemployment on economic growth: evidence on Sierra Leone. By JALLOH, TALATU; BAH, FATMATA BINTA
  29. Price Pass-Through Along the Supply Chain:Evidence from PPI and CPI Microdata By Ahlander, Edvin; Carlsson, Mikael; Klein, Mathias
  30. Revisiting the effects of long-term unemployment on inflation: the role of non-linearities By Esady, Vania; Speigner, Bradley; Wanengkirtyo, Boromeus
  31. Monetary Policy, Distribution and Autonomous Demand in the US By Maria Cristina Barbieri Goes; Joana David Avritzer
  32. Does the recent food price inflation differ by store format? By Çakir, Metin; Cai, Qingyin; Dong, Xiao
  33. A Euro Area Term Structure Model with Time Varying Exposures By Tommaso Tornese
  34. Mobile Money Service, Financial Inclusion, and Ag-Investment in Developing Countries: Evidence from Ghana By Nyanzu, Frederick; Baylis, Kathy
  35. The transmission of macroprudential policy in the tails: evidence from a narrative approach By Fernández-Gallardo, Álvaro; Lloyd, Simon; Manuel, Ed
  36. Brexit and consumer food prices By Bakker, Jan David; Datta, Nikhil; Davies, Richard; De Lyon, Josh

  1. By: Dräger, Lena; Nghiem, Giang
    Abstract: This paper studies the causal effect of inflation literacy on inflation expectations and trust in the central bank using a randomized control trial (RCT) on a representative sample of the German population. In an experiment with two steps, we first test the effect of non-numerical information about inflation and monetary policy, the \textitliteracy treatment. In the second step, we randomly treat respondents with quantitative information and measure whether those who previously received the \textitliteracy treatment, incorporate quantitative information differently into their inflation forecasts. We find that the \textitliteracy treatment improves respondents' knowledge about monetary policy and inflation and raises their trust in the central bank. It also causes a higher likelihood that respondents provide inflation predictions, but does not affect the level of expected inflation. Similarly, those who received the initial \textitliteracy treatment do not react differently to the quantitative information in terms of the level of their inflation forecasts, but they react more strongly to some treatments regarding their reported forecast uncertainty and trust in the central bank.
    Keywords: Inflation literacy; inflation expectations; trust in the central bank; survey experiment; randomized control trial (RCT)
    JEL: E52 E31 D84
    Date: 2023–06
  2. By: Donato Masciandaro
    Abstract: The never ending debate on the optimal money elasticity and predictability, coupled with the recent wishes of the major central banks to normalize monetary policy, as well as to revise their best practices, motivate this paper. Its aim is to offer a review of the evolution of the modern concept of flexible monetary policy rules, from the seminal contribute of Taylor (1993) to nowadays. Four subsequent steps are implemented: after an excursus on the traditional rules versus discretion debate, the origin of the flexible rules is described, and then its evolution; finally, the opportunity to consider as a promising research perspective the role of the central bankers’ heterogeneity – in terms of personal preferences, including the behavioural biases – is highlighted. The more it is likely that psychology matters, the more a new motivation arises for a central bank to adopt a flexible rule.
    Keywords: monetary policy, flexible rules, central bank governance, central banker conservatism, behavioural economics, Sweden, New Zealand
    JEL: E50 E52 E58
    Date: 2023
  3. By: Kerstin Bernoth; Helmut Herwartz; Lasse Trienens
    Abstract: We examine the causal relationship between US monetary policy shocks, exchange rates and currency excess returns for a sample of eight advanced countries over the period 1980M1 to 2022M11. We find that the dynamics of the US dollar exchange rate is the main driver of currency excess returns. The exchange rate is significantly affected by US monetary policy shocks, where the persistence of this shock is important, as well as by an external shock. This external shock is strongly related to global risk aversion and the convenience yield that investors are willing to pay for holding US Dollar assets. A significant part of the response of excess currency returns is also expected, suggesting a violation of the UIP. Focusing only on the post-crisis period, the impact of both the external shock and the inflation targeting shock on exchange rates and currency excess returns disappears in the cross-section.
    Keywords: Exchange rates, excess currency returns, uncovered interest parity, convenience yield, global financial cycle, global risk, monetary policy
    JEL: E52 C32 E43 F31 F41 G15
    Date: 2023
  4. By: Donato Masciandaro; Oana Peia; Davide Romelli
    Abstract: This paper discusses the evolution of central bank communication, focusing on recent efforts by central banks to engage with a wider audience via social media. We document the social media presence of major central banks and discuss how analyzing Twitter content by and about monetary policy makers can inform about the effectiveness of communication in influencing beliefs. We focus on recent techniques employed in analyzing social media content in order to understand how central bank communication affects expectations and, subsequently, behavior in financial markets.
    Keywords: central bank communication, monetary policy, expectations, transparency, text analysis, social media, Twitter.
    JEL: E44 E52 E58 G14 G15 G41
    Date: 2022
  5. By: Gomez-Pineda, Javier Guillermo; Murcia, Andrés; Cabrera-Rodríguez, Wilmar Alexander; Vargas-Herrera, Hernando; Villar-Gómez, Leonardo
    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.
    Keywords: Monetary policy; Macroprudential policy; Inflation targeting; Foreign exchange market intervention; Financial stability
    JEL: E58 E5 E52 E44 E61 G01 G18 G21 G28
    Date: 2023–07
  6. By: Brian Fabo (National Bank of Slovakia); Martina Jancokova (European Central Bank); Elisabeth Kempf (Booth School of Business, University of Chicago); Lubos Pastor
    Abstract: Fabo, Jancokova, Kempf, and Pastor (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).
    JEL: A11 E52 E58 G28
    Date: 2023–06
  7. By: Michael D. Bordo; John V. Duca
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth. Unlike M2 and divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more stable and can be reasonably empirically modeled in both the short run and the long run through the Covid-19 pandemic and to date. In the long run, these velocities depend on regulatory changes and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and an index of the stringency of government pandemic restrictions to control for the unusual effects of the pandemic. The velocity of broad Divisia money temporarily declines during crises like the Great and COVID Recessions, but later rebounds. In each recession monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 Trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting that the banking system was less impaired and could promote rather than hinder multiple deposit creation. Partly as a result, our framework implies that nominal GDP growth and inflationary pressures rebounded much more quickly from the COVID Recession versus the Great Recession. We consider different scenarios for future Divisa money growth and the unwinding of the pandemic that have different implications for medium-term nominal GDP growth and inflationary pressures as monetary policy tightening seeks to restore low inflation.
    JEL: E41 E51 E52 E58
    Date: 2023–06
  8. By: Babur Kocaoglu; Martín Almuzara; Argia M. Sbordone
    Abstract: Elevated inflation continues to be a top-of-mind preoccupation for households, businesses, and policymakers. Why has the post-pandemic inflation proved so persistent? In a Liberty Street Economics post early in 2022, we introduced a measure designed to dissect the buildup of the inflationary pressures that emerged in mid-2021 and to understand where the sources of its persistence are. This measure, that we labeled Multivariate Core Trend (MCT) inflation analyzes whether inflation is short-lived or persistent, and whether it is concentrated in particular economic sectors or broad-based.
    Keywords: inflation; persistence; trend
    JEL: E31 E52
    Date: 2023–07–06
  9. By: Benk, Szilárd; Gillman, Max
    Abstract: The paper adds money supply and inflation expectations shocks to a well-known three-variable structural model that identifies oil price shocks through fundamentals affecting the oil market. Impulse responses show the significance of our two additional monetary shocks in impacting real oil prices. By subtracting from the money supply the temporary Federal Reserve swaps that were used to increase liquidity during the 2008 and 2020 bank crises, shocks upwards in both the adjusted M1 money supply and to inflation expectations significantly increase real oil prices; with the unadjusted M1 aggregate there is no signiÖcant effect of money supply shocks on real oil prices. Decomposition of historical oil price shocks shows a significant role played by inflation expectations and the money supply shocks during major oil shock episodes. These shocks partially replace roles previously attributed to the precautionary oil demand shock and the aggregate demand shock during the three major oil shock periods of the 1970s-1980s, post-2008 and during the 2020-2021 pandemic. The results show that both real oil price shocks and expected inflation shocks cause real GDP to fall.
    Keywords: Real Oil Price Shocks, SVAR, Money Supply, Inflation Expectations
    JEL: Q41 Q43 E31 E52
    Date: 2023
  10. By: Bernd Hayo (University of Marburg)
    Abstract: This paper provides background information on, and basic descriptive statistics for, a representative survey of the German population conducted on my behalf by GfK in December 2022. It replicates a survey done in December 2021. The main difference affecting answers lies in the different time of inflation environment, i.e. low in 2021 and high in 2022. The survey covers various topics having to do with inflation and monetary policy, including: 1) inflation perceptions and expectations, 2) interest in and subjective, as well as objective, knowledge about monetary policy, 3) attitude to and knowledge about the ECB’s monetary policy reform in 2021, 4) trust in the ECB and perception of its independence, 5) importance of climate-change-related measures, and 6) an experiment evaluating whether information about the ECB’s monetary policy reform in 2021 reduces people’s trust in the ECB and their perception of its independence. A broad range of socio-demographic and economic indicators are collected too.
    Keywords: Public opinion survey, Attitudes, Inflation perception, Inflation expectation, Monetary policy, ECB’s monetary policy reform in 2021, Germany
    JEL: D90 E31 E58 E71
    Date: 2023
  11. By: Spencer D. Krane; Leonardo Melosi; Matthias Rottner
    Abstract: Central banks around the world have revised their operating frameworks in an attempt to counter the challenges presented by the effective lower bound (ELB) on policy rates. We examine how private sector agents might learn such a new regime and the effect of future shocks on that process. In our model agents use Bayesian updating to learn the parameters of an asymmetric average inflation targeting rule that is adopted while at the ELB. Little can be discovered until the economy improves enough that rates would be near liftoff under the old policy regime; learning then proceeds until either the new parameters are learned or the average inflation target is reached. Recessionary shocks forcing a return to the ELB would thus delay learning while large inflationary shocks could outright stop it and so inhibit the ability of the new rule to address future ELB episodes. We show the central bank can offset some of the inflation-induced learning loss by deviating from its new rule, but it must weigh the benefits of doing so against the costs of higher near-term inflation and greater uncertainty about the policy function.
    Keywords: new framework; central bank's communications; Deflationary Bias; asymmetric average inflation targeting; imperfect credibility; liftoff; Bayesian Learning
    JEL: E52 C63 E31
    Date: 2023–06–07
  12. By: Choi, Sangyup (Yonsei University); Willens, Tim (Bank of England); Yoo, Seung Yong (Yonsei University)
    Abstract: We combine industry‑level data on output and prices with monetary policy shock estimates for 105 countries to analyse how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our findings are informative on the importance of various transmission mechanisms, as they are thought to vary systematically with the included characteristics. Results suggest that monetary policy has greater output effects in industries featuring assets that are more difficult to collateralise, consistent with the credit channel, followed by industries producing durables, as predicted by the interest rate channel. The credit channel is stronger during bad times as well as in countries with lower levels of financial development, in line with financial accelerator logic. We do not find support for the cost channel of monetary policy, nor for a channel running via exports. Our database (containing estimated monetary policy shocks for 177 countries) may be of independent interest to researchers.
    Keywords: Monetary policy transmission; industry growth; financial frictions; heterogeneity in transmission; monetary policy shocks
    JEL: E32 E52 F43 G20
    Date: 2023–05–26
  13. By: João Ricardo Faria; Peter McAdam
    Abstract: We derive a general “Janus” money demand function that reflects backward- and forward-looking habit formation. The scope of our model allows us to explain the breakdown of money-demand functions and reduced policy relevance of monetary aggregates. Integrating our Janus money demand into a Barro-Gordon framework reveals new insights for time inconsistency in monetary policy and a new impossibility theorem.
    Keywords: money demand; monetary policy; impossibility theorem
    JEL: E41 E5 E61 E71
    Date: 2023–05–11
  14. By: Ander Pérez-Orive; Yannick Timmer
    Abstract: The stance of U.S. monetary policy has tightened significantly starting in March 2022. At the same time, the share of firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s.
    Date: 2023–06–23
  15. By: Ricardo Lagos; Gastón Navarro
    Abstract: We formulate a quantitative dynamic equilibrium theory of trade in the fed funds market, calibrate it to fit a comprehensive set of marketwide and micro-level cross-sectional observations, and use it to make two contributions to the operational side of monetary policy implementation. First, we produce global structural estimates of the aggregate demand for reserves—a crucial decision-making input for modern central banks. Second, we propose diagnostic tools to gauge the central bank's ability to track a given fed funds target, and the heterogeneous incidence of policy actions on the shadow cost of funding across banks.
    JEL: C78 D83 E44 E49 G1 G18 G2 G21 G23 G28
    Date: 2023–06
  16. 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.
    JEL: E44 F30 F36 F38 F40 G15 G18 G23
    Date: 2023–06
  17. By: Lauren Spits; Valerie Grossman; Enrique Martinez-Garcia
    Abstract: In this note we argue that asset pricing bubbles are an important source of financial instabilities. First, the literature has tended to overlook bubbles and their consequences under the premise that they are hard to detect in real time. We suggest that novel statistical techniques allow us to overcome those prejudices as they provide valuable signals of emerging exuberance in real‐time. Second, monetary policy has been slow to recognize that financial instability arising from bubbles can have adverse effects on the transmission mechanism of monetary policy itself and on the types of risks faced by policymakers. We argue that measuring and monitoring episodes of exuberance in housing—but also in other asset classes—can be useful not just for thinking about macroprudential strategies but also to conduct risk analysis for monetary policy.
    Keywords: monetary policy; real estate; banking; finance; COVID-19; financial stability
    JEL: D84 E52 E58 E61 G10 R31 R21
    Date: 2023–06–02
  18. By: Ulrich Eydam (University of Potsdam); Florian Leupold (University of Potsdam)
    Abstract: Military conflicts and wars affect a country’s development in various dimensions. Rising inflation rates are a potentially important economic effect associated with conflict. High inflation can undermine investment, weigh on private consumption, and threaten macroeconomic stability. Furthermore, these effects are not necessarily restricted to the locality of the conflict, but can also spill over to other countries. Therefore, to understand how conflict affects the economy and to make a more comprehensive assessment of the costs of armed conflict, it is important to take inflationary effects into account. To disentangle the conflict-inflation-nexus and to quantify this relationship, we conduct a panel analysis for 175 countries over the period 1950–2019. To capture indirect inflationary effects, we construct a distance based spillover index. In general, the results of our analysis confirm a statistically significant positive direct association between conflicts and inflation rates. This finding is robust across various model specifications. Moreover, our results indicate that conflict induced inflation is not solely driven by increasing money supply. Furthermore, we document a statistically significant positive indirect association between conflicts and inflation rates in uninvolved countries.
    Keywords: inflation, wars, military conflicts, spillover effects, dynamic panel estimation
    JEL: E00 E31 H56 F51
    Date: 2023–07
  19. By: Eduardo A. Corso (Banco Central de la República Argentina); Máximo Sangiácomo (Banco Central de la República Argentina)
    Abstract: Dollarization hinders financial intermediation in domestic currency which is detrimental for economic growth and development. A broad branch of the financial dollarization literature is based on portfolio theory. Dollarization of savings portfolios is the result of optimal mean-variance portfolio selection. In this document, we use an optimal portfolio selection approach to analyse financial dollarization’s hysteresis in Argentina. Based on the historical experience of our country, we model agents’ expectations using second-order probability distributions, that allow us to incorporate positive bias in subjective distribution of dollar returns.This bias arises from the subjective perceptions of unsustainability of the current regime. Under the proposed analytical scheme, in contexts in which households and firms face difficulties in identifying informative signals about the sustainability of the current exchange-rate regime, policy measures aimed at promoting financial de-dollarization may produce unwanted behavior. For example, the usually stated mean-variance approach argument of rising real exchange rate volatility relative to domestic currency volatility (inflation) could be perceived as an increase in the subjective probability of regime change, leading to portfolio rebalancing towards the foreign currency, with opposite results to those expected.
    Keywords: Dollarization; Asset substitution; Financial intermediation
    JEL: E52 F36 F41 G11
    Date: 2023–07
  20. By: Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
    Abstract: This paper examines the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models suggest that the bilateral real exchange rate is driven by the relative economic performance of the two countries, our research demonstrates the superior predictive power of our factor-augmented forecasting models only when factors are obtained from U.S. economic variables, whereas the inclusion of Korean factors fails to enhance predictability and behaves more like noise variables. Our models exhibit particularly strong performance at longer horizons when incorporating American real activity factors, while American nominal/financial market factors contribute to improved short-term prediction accuracy. We attribute the remarkable predictability of American factors to the significant cross-correlations observed among bilateral real exchange rates vis-Ã -vis the U.S. dollar, which suggests a limited influence of idiosyncratic factors specific to small countries. Moreover, we assess our factor-augmented forecasting models by incorporating proposition-based factors instead of macro factors. While macro factors generally exhibit superior performance, it is worth noting that the uncovered interest parity (UIP)-based global factors, with the dollar as the numéraire, consistently demonstrate strong overall performance. On the other hand, the purchasing power parity (PPP) and real uncovered interest parity (RIRP) factors have a limited role in forecasting the dollar/won real exchange rate.
    Keywords: Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast
    JEL: C38 C53 C55 F31 G17
    Date: 2023–06
  21. By: George J. Bratsiotis; Kasun D. Pathirage
    Abstract: We examine the social and agent-specific welfare effects of monetary and macroprudential policy in a four-agent estimated macroeconomic model, consisting of 'banked simple households', 'underbanked simple households', 'firm owners', and 'bank owners'. Optimal capital requirement and loan loss provisions ratios, are shown to improve all agent-specific and social welfare, but imply smaller gains for simple households and firm owners that rely on credit. Countercyclical capital buffers support firm owners and bank owners, with smaller gains for the two simple households. Countercyclical loan loss provisions improve social welfare only for specific shocks and benefit the 'simple underbanked household' and 'firm-owners' at the expense of 'bank-owners' and 'banked simple households'. Coordination between monetary and macroprudential policies yields higher social welfare than no coordination.
    Keywords: monetary policy; macroprudential policy; financial frictions; risk of default; welfare
    JEL: E31 E32 E44 E52 E58 G28
    Date: 2023–06
  22. By: Bada Han (Bank of Korea); Dongwook Kim (Bank of Korea); Youngjin Yun (Inha University)
    Abstract: This paper investigates the reasons behind international reserve accumulation in Emerging Market Economies (EMEs). We rationalize the view held among policymakers in EMEs that reserve accumulation is necessary to counteract the negative effects of unwanted capital inflows. First, we empirically show that EMEs do accumulate reserves in response to global push factor-driven capital inflows, particularly in the form of direct investment. In addition, EMEs with restrictions on residents' investment abroad or with less developed financial institutions accumulate higher levels of reserves. Next, we introduce a theoretical model with direct investment inflows to explain the empirical findings. In the face of a capital flow bonanza, it is optimal for EMEs to invest abroad to smooth consumption. However, various frictions hinder residents' overseas investments or make the investments socially inefficient. In such cases, the public sector accumulates international reserves to supplement the insufficient private outflows or replace the inefficient private outflows. Reserve accumulation becomes an essential tool for managing capital inflows in the presence of restrictions on private outflows.
    Keywords: international reserves, sudden stops, financial openness
    JEL: E60 E61 F30 F38 G01
  23. By: Kim, Cheonkoo (Korea Chamber of Commerce and Industry); Park, Donghyun (Asian Development Bank); Park, Jungsoo (Sogang University); Tian, Shu (Asian Development Bank)
    Abstract: This study investigates how development of the local currency (LCY) bond market brings stability in the financial market. The analysis is based on annual economy panel data set for 1989–2020. The main findings are as follows. First, exchange rate volatility is lower during crisis periods if an economy has a more developed LCY bond market. Second, a greater share of LCY bonds and a greater share of bonds with long-term maturities have a stabilizing effect on exchange rate volatility during normal times. Lastly, a developed LCY bond market can serve as a buffer against monetary policy shocks emanating from the United States. The empirical evidence in this study implies that emerging economies need to consider designing policies to bolster development of LCY bond markets.
    Keywords: local currency bond market; exchange rate volatility; currency mismatch; maturity mismatch; financial crisis
    JEL: E22 G31
    Date: 2023–07–03
  24. By: Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
    Abstract: Technocracy has come to be increasingly regarded as a threat to representative democracy. Significant attention has thus been recently devoted to exploring public preferences towards technocratic institutions. Elected policymakers’ attitudes have instead not been investigated as systematically. This paper fills this gap by examining politicians’ views on central banks. Based on an original elite survey of the Members of the European Parliament, we gauge elected policymakers’ attitudes towards the mandate and policy conduct of the European Central Bank. Our findings show that the political orientation of politicians largely drives attitudes towards the ECB’s institutional mandate. Interestingly, the findings from two experiments embedded in the survey also show that the attitudes of MEPs are not as static as ideological orientations would lead us to expect. The information set to which politicians are exposed significantly shapes their views on both the ECB’s mandate and its policy conduct, but less on ECB independence
    Keywords: accountability, central banks, ECB, independence, political attitudes, technocracy, trust
    Date: 2023
  25. By: Harald Fadinger; Philipp Herkenhoff; Jan Schymik
    Abstract: We examine the effects of unilateral structural reforms within a currency union. Focusing on the surge of German competitiveness following the introduction of the Euro, we first provide reduced-form causal evidence supporting the notion that German structural labor market reforms in the early 2000s led to a crowding-out of manufacturing employment in other Eurozone economies. To assess the impact of this German competitiveness shock, we build a quantitative multi-sector trade model that features downward nominal wage rigidities, endogenous labor supply, unemployment-insurance benefits and international savings. The fixed nominal exchange rate can create binding nominal rigidities in response to a foreign real supply shock – like the one prompted by the German reforms – resulting in significant contraction of manufacturing sectors and increased involuntary unemployment across other Eurozone countries. We consider a number of counterfactual scenarios, such as the impact of German labor-market reforms in the absence of a fixed exchange-rate regime, the role of coordinated reforms within the Eurozone and a higher average inflation rate. of view.
    Keywords: Euro, monetary union, nominal rigidities, labor markets, structural reforms, import competition, spillovers, quantitative trade model
    JEL: F16 F41 F45
    Date: 2023–06
  26. By: Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
    Abstract: For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.
    Date: 2023–06–23
  27. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies.
    Keywords: Macroprudential Policy; Over-borrowing; Under-borrowing
    JEL: E58 F31 F32 F34
    Date: 2023–05
    Abstract: Abstract The main purpose of this study is to investigate the effect of inflation and unemployment on economic growth in Sierra Leone. Using a quarterly time series data, the study adopted the Autoregressive Distributed Lag (ARDL) model for the purpose of estimation and result analysis. Through the ARDL Bounds test for cointegration, the study established the existence of a long-run relationship in the model, and as a result, both a long-run and short-run ARDL models were estimated. From the long-run results, it was revealed that the effect of Inflation (Inf) and unemployment (Unem) on economic growth in Sierra Leone was significantly negative.). For the short-run, an ARDL with lag structure of (2, 2, 0, 1, 2) was used. In this model, the ECT reinforced the existence of a long-run as it was found to be negative and statistically significant. Unlike Unem, the first lag of economic growth (RGDP (-1)), Inf and Inf (-1) were found to have an effect on economic growth in Sierra Leone in the short-run. Based on the findings, it recommended that credible inflation targeting policies must be pursued by monetary authorizes while the government should create opportunities through which the skills and capacity of the population can be fully enhanced.
    Keywords: Economic growth, Inflation, Unemployment, ARDL
    JEL: E01 E31 J64
    Date: 2023–06–14
  29. By: Ahlander, Edvin (Research Department, Central Bank of Sweden); Carlsson, Mikael (Uppsala University, UCLS and Sveriges Riksbank, Research Division); Klein, Mathias (Research Department, Central Bank of Sweden)
    Abstract: We examine the pass-through from producer to consumer prices, using product-group data derived from the microdata underlying the official Swedish PPI and CPI indices. We find a robust pass-through, in line with theoretical models emphasizing production inter-linkages between sectors. The results also display important heterogeneity in pricing behavior both along the supply chain, as well as across product groups. That is, upstream pricing seems much more rigid than downstream pricing in the supply chain and the pass-through across CPI products varies substantially with price-change frequencies. The recent COVID- and high-inflation periods do not change the main results.
    Keywords: Price pass-through; consumer and producer prices; microdata
    JEL: E30 E31 E32
    Date: 2023–06–01
  30. By: Esady, Vania (Bank of England); Speigner, Bradley (Bank of England); Wanengkirtyo, Boromeus (Bank of England)
    Abstract: We demonstrate that it is necessary to control for state dependence in the Phillips curve in order to be able to appropriately identify separate slopes for short and long-term unemployment rates. Whereas several existing studies have typically concluded that long-term unemployment is largely immaterial for price pressures, our evidence suggests that the effect of long-term unemployment on inflation is highly state dependent. In particular, reductions in long-term unemployment are found to be significantly inflationary when aggregate unemployment is low, displaying a larger and more immediate peak effect on inflation than short-term unemployment. The explanation for our finding is a direct consequence of allowing for non-linearity in the Phillips curve together with short and long-term unemployment gaps that enter the specification separately. Variation in long-term unemployment typically arises following large recessionary shocks and the Phillips curve also tends to be flatter in deep recessions. It therefore follows that the comovement between long-term unemployment and inflation will be understated in linear regressions. In order to address this, we adopt a flexible methodology that combines non-linearity and heterogeneity in the unemployment duration distribution, enabling us to control for this confounding effect of state dependence on the identification of separate Phillips-curve slopes for short and long-term unemployment. Our results would caution against underweighting long-term unemployment in the inflation-relevant measure of economic slack, especially when unemployment is low.
    Keywords: Phillips curve; non-linearity; long-term unemployment; cross-sectional identification
    JEL: C22 E24 E32 J60
    Date: 2023–03–31
  31. By: Maria Cristina Barbieri Goes (University of Bari Aldo Moro, Italy); Joana David Avritzer (Economics Department, Connecticut College, USA)
    Abstract: In this paper we explore the empirical implications of considering monetary and distribution shocks on semi-autonomous demand under a supermultiplier framework. In particular, we investigate the effect of changes in financial variables - the federal funds rate - and distributive variables - the wage share of income - on autonomous expenditure (e.g.: private residential investment and consumer credit), as well as economic growth. We use quarterly data for the United States economy from 1968 to 2022 and apply a SVAR model. We find that: (i) the federal funds rate, our financial variable, has a negative and statistically significant effect on autonomous expenditure, whether we define it to be given by residential investment added to consumer credit or to durable goods consumption; (ii) a positive shock in the wage share does seem to have a positive and significant effect on consumption and output, however, this effect is measured to be transitory; (iii) a positive shock in aggregated autonomous demand has a positive, persistent, and statistically significant effect on induced consumption and, output, as well as on the adjusted wage share; (iv) a positive shock in private residential investment has a positive, persistent and statistically significant effect on other autonomous components of demand and output; (v) while residential investment positively influences consumer credit, the inverse does not hold.
    Keywords: Supermultiplier, financial and distributional shocks, SVAR, US, semi-autonomous expenditure
    JEL: C32 D33 E11 E12 E31 E52
    Date: 2023–06
  32. By: Çakir, Metin; Cai, Qingyin; Dong, Xiao
    Keywords: Marketing, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety
    Date: 2023
  33. By: Tommaso Tornese
    Abstract: Using monthly data for Belgium, France, Germany, Italy and Spain for the period 2002-2019, we build a Hierarchical Euro Area Dynamic Nelson-Siegel model that allows for time varying exposures of national factors on the common components, and for stochastic volatility both at the regional and country specific level. Despite the share of national variance explained by the Euro Area factors is generally dominant, our results point out a dramatic decrease of the relative importance of common forces during the 2008 and 2012 crises, which created a neat separation between “core” and “peripheral” countries. This gap is particularly visible in the term premia demanded by investors on long term sovereign bonds. Furthermore, in line with Byrne et al. (2019), we find that both the level of interest rates and the associated term premia are closely related to confidence and uncertainty measures. In the aftermath of the crises these relationships appear weakened, presumably due to unconventional interventions of the ECB.
    Keywords: Term structure, Factor Model, Euro Area, Time-varying loadings, Stochastic volatility.
    JEL: C11 C32 E43 F36 G15
    Date: 2023
  34. By: Nyanzu, Frederick; Baylis, Kathy
    Keywords: International Development, Agricultural and Food Policy, Agricultural Finance
    Date: 2023
  35. By: Fernández-Gallardo, Álvaro (Universidad Alicante); Lloyd, Simon (Bank of England); Manuel, Ed (Bank of England)
    Abstract: We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth by incorporating a narrative-identification strategy within a quantile-regression framework. Exploiting a data set covering a range of macroprudential policy actions across advanced European economies, we identify unanticipated and exogenous macroprudential policy ‘shocks’ and employ them within a quantile-regression setup. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, we find that tighter macroprudential policy brings benefits by reducing the variance of future GDP growth, significantly and robustly boosting the left tail while simultaneously reducing the right. Assessing a range of potential channels through which these effects could materialise, we find that macroprudential policy operates through opposing tails of GDP and credit. Tighter macroprudential policy reduces the right tail of the future credit-growth distribution (both household and corporate) which, in turn, is particularly important for mitigating the left tail of GDP growth (ie, GDP-at-risk).
    Keywords: Growth-at-risk; macroprudential policy; narrative identification; quantile local projections
    JEL: E32 E58 G28
    Date: 2023–06–16
  36. By: Bakker, Jan David (Bocconi University & CEP); Datta, Nikhil (University of Warwick & CEP); Davies, Richard (University of Bristol, Economics Observatory & CEP); De Lyon, Josh (CEP)
    Abstract: Brexit continues to affect the UK economy. The results in this report are updates to the original study of Bakker et al. (2022), showing that higher non-tariff barriers due to Brexit are affecting food price inflation and costing households in the UK. While the original paper used data up to January 2022, this report updates the dataset through to March 2023. The methodology is otherwise identical so for more details please consult the original paper (appended to this paper).
    Date: 2023

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