nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒08‒14
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Stock price reaction to ECB communication: Introductory Statements vs. Questions & Answers By Pawel Baranowski; Hamza Bennani; Wirginia Doryń
  2. The Anatomy of Monetary Policy Transmission in an Emerging Market By Kodjovi M. Eklou
  3. Green monetary and fiscal policies: The role of consumer preferences By Mohamed Tahar Benkhodja; Xiaofei Ma; Tovonony Razafindrabe
  4. Central bank digital currency and European banks’ balance sheets By Marco Petracco Giudici; Francesca Di Girolamo
  5. Measuring inflation with heterogeneous preferences, taste shifts and product innovation: methodological challenges and evidence from microdata By Osbat, Chiara; Conflitti, Cristina; Eiglsperger, Martin; Goldhammer, Bernhard; Kuik, Friderike; Menz, Jan-Oliver; Rumler, Fabio; Moreno, Marta Saez; Segers, Lina; Wieland, Elisabeth; Bellocca, Gian-Pietro; Siliverstovs, Boriss; Touré, Anaëlle
  6. Exchange Rate Pass-Around By Matthieu Crozet; Julian Hinz; Federico Trionfetti
  7. Optimal Disinflation with Delegation and Limited Credibility By Mridula Duggal; Luis Rojas
  8. Payments and prices By Dirk Niepelt
  9. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou
  10. Would Friedman Burn your Tokens? By Aggelos Kiayias; Philip Lazos; Jan Christoph Schlegel
  11. Analysis of cashless economy, demand for money and price determination : A possibility for implementation in Nigeria By EKPEYONG, PAUL
  12. Price adjustment in the euro area in the low-inflation period: evidence from consumer and producer micro price data By Gautier, Erwan; Karadi, Peter; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Fuss, Catherine; Kosma, Theodora; Jouvanceau, Valentin; Martins, Fernando; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Seward, Domingos; De Veirman, Emmanuel; Wieland, Elisabeth; Wintr, Ladislav; Wursten, Jesse; Zimmer, Hélène; Amann, Juergen; Faber, Riemer; Bachiller, Javier Sánchez; Stanga, Irina
  13. Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications By Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
  14. Monetary Policy across the Wealth Distribution By Franconi, Alessandro; Rella, Giacomo
  15. Density forecasts of inflation: a quantile regression forest approach By Lenza, Michele; Moutachaker, Inès; Paredes, Joan
  16. Oligopolistic Competition, Price Rigidity, and Monetary Policy By Kozo Ueda; Kota Watanabe
  17. Price Level and Inflation Dynamics in Heterogeneous Agent Economies By Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
  18. Uncertainty, politics, and crises: The case for cash By Rösl, Gerhard; Seitz, Franz
  19. Is the Bank of Canada concerned about inflation or the state of the economy? By Ke Pang, Christos Shiamptanis
  20. Towards acceptance criteria for a digital euro By Krüger, Nicolai; Busche, Jan
  21. Runs on Stablecoins By Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
  22. A (Bayesian) Update on Inflation and Inflation Persistence By Michael T. Kiley
  23. The Dollar in an Era of International Retrenchment By Ryan Chahrour; Rosen Valchev
  24. Investigating Excess Reserve Accumulation and Credit Crunch in U.S. Commercial Banks Focusing on the Financial Crisis By Priyo, Asad Karim Khan
  25. Analysis of Indian foreign exchange markets: A Multifractal Detrended Fluctuation Analysis (MFDFA) approach By R. P. Datta
  26. Pass-Through of Cost-Push Shocks By Isabel Gödl-Hanisch; Manuel Menkhoff
  27. Artificial Intelligence and Inflation Forecasts By Miguel Faria-e-Castro; Fernando Leibovici
  28. Inflating Away the Debt: The Debt-Inflation Channel of German Hyperinflation By Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
  29. What Caused the US Pandemic-Era Inflation? By Olivier J. Blanchard; Ben S. Bernanke
  30. Gibson’s Paradox and the Natural Rate of Interest By Luca Benati; Pierpaolo Benigno
  31. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou

  1. By: Pawel Baranowski; Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université); Wirginia Doryń
    Abstract: Using textual analysis and high-frequency financial data, this letter emphasizes the informativeness of the different communication phases of the ECB press conference, the Introductory Statement and the Questions & Answers, for market participants. Our results show that, while the tone of the Introductory Statement brings valuable information to stock market participants, the Questions & Answers were mostly informative after the Global Financial Crisis. Moreover, the announcement of unconventional measures triggers stronger reaction from market participants, particularly during the Questions & Answers.
    Keywords: central bank communication, financial markets, textual analysis
    Date: 2023–03
  2. By: Kodjovi M. Eklou
    Abstract: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.
    Keywords: Monetary Policy; Emerging markets; Exchange rate; Credit; Inflation; Economic activity; Global monetary policy
    Date: 2023–07–07
  3. By: Mohamed Tahar Benkhodja (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Xiaofei Ma (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Tovonony Razafindrabe (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers' awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.
    Keywords: Consumers’ preferences, E-DSGE, Economic recovery, Elasticity of substitution, Environmental policies, Stimulus policy
    Date: 2023
  4. By: Marco Petracco Giudici (European Commission - JRC); Francesca Di Girolamo (European Commission - JRC)
    Abstract: The aim of this paper is to look at possible scenarios of demand for a retail-only euro central bank digital currency and assess their impact on bank’s balance sheets, to explore potential effects on bank’s intermediation capacity and financial stability. The European Central Bank, in the context of the Eurosystem investigative exercise, has tackled this issue by proposing a set of illustrative scenarios for the adoption of a Euro CBDC (see Adalid et al., 2022 and discussion therein). We expand their analysis to include more detailed results at country level by making use of individual banks data. For each demand scenario, we estimate the potential shock on deposits making use of MS-level data. We then apply these shocks at individual bank level and compare them to a set of alternative adjustment channels, including free reserves, wholesale funding and assets (deleveraging) to obtain a distribution of the ratio of shocks to different channels. Results show that per capita demand scenarios around 3 thousand euro do not seem to present risks for financial stability in the aggregate, though they present asymmetric impacts and could give raise to shifts in the structure of balance sheets and interbank markets.
    Keywords: finance, financial stability, central bank digital currency, digital euro, banks, banking, deposits
    Date: 2023–06
  5. By: Osbat, Chiara; Conflitti, Cristina; Eiglsperger, Martin; Goldhammer, Bernhard; Kuik, Friderike; Menz, Jan-Oliver; Rumler, Fabio; Moreno, Marta Saez; Segers, Lina; Wieland, Elisabeth; Bellocca, Gian-Pietro; Siliverstovs, Boriss; Touré, Anaëlle
    Abstract: This paper provides an extensive literature review and analyses some open issues in the measurement of inflation that can only be explored in depth using micro price data. It builds on the analysis done in the context of the ECB’s strategy review, which pointed at directions for improvement of the Harmonised Index of Consumer Prices (HICP), including better quantification of potential biases. Two such biases are the substitution bias and the quality adjustment bias. Most analyses of substitution bias rest on the concept of the cost of living, positing that preferences are stable, homogeneous and homothetic. Consumer behaviour is characterised by preference shifts and heterogeneity, which influence the measurement of the cost of living and substitution bias. Climate change may make the impact of preference shifts particularly relevant as it causes the introduction of new varieties of “green” goods and services (zero-kilometre food, sustainable tourism) and a shift from “brown” to “green” products. Furthermore, PRISMA data show that consumption baskets and thus inflation vary across income classes (e.g. higher-income households tend to buy more expensive goods), pointing to non-homotheticity of preferences. When preferences are heterogeneous and/or non-homothetic, it is important to monitor different experiences of inflation across classes of consumers/citizens. This is particularly important when very large relative price changes affect items that enter the consumption baskets of the rich and the poor, the young and the old, in very different proportions. Another open area of analysis concerns the impact of quality adjustment on measured inflation. Evidence based on web-scraped prices shows that the various implicit quality adjustment methods can produce widely varying inflation trends when product churn is fast. In the euro area specifically, using different quality adjustment methods can be an overlooked source of divergent inflation trends in sub-categories, and, if pervasive, shows up in overall measured inflation divergence across countries. JEL Classification: E31
    Keywords: consumer prices, heterogeneity, inflation, micro data
    Date: 2023–07
  6. By: Matthieu Crozet (RITM - Réseaux Innovation Territoires et Mondialisation - Université Paris-Saclay); Julian Hinz; Federico Trionfetti
    Abstract: In January 2015, The Swiss Franc (CHF) appreciated unexpectedly against the Euro by approximately 15%. We document a new fact: French firms that exported to both the Swiss market and the Eurozone also exhibited a sudden change in their export prices to the Eurozone. We coin this the "exchange rate pass-around" effect. We rationalise this fact with a simple model based on the endogenous decision of some firms to give up pricing-to-market and opt for single-pricing to all markets. An important implication of this finding is that single-pricing may be one of the causes of the incomplete pass-through. This mechanism has so far remained unexplored in the literature, which may have led to overestimating the importance of other factors. Based on monthly French export data, our empirical analysis confirms the existence of the pass-around. Firms directly affected by the CHF exchange rate shock increased their prices in neighboring markets by 0.8% compared to other exporters. The effect was stronger for firms with lower ex-ante price heterogeneity across markets and for firms with smaller trade costs to Switzerland. However, the effect was short-lived. As time passed, exporters tended to decouple the prices they set on the Swiss market from those for the Eurozone, and the pass-around effect faded.
    Keywords: Exchange rate pass-through, International trade, Pricing-to-market
    Date: 2023–04
  7. By: Mridula Duggal; Luis Rojas
    Abstract: We examine the challenge faced by a government aiming to implement a gradual reduction in inflation by entrusting monetary policy to an independent central bank with limited credibility. Expanding upon the framework established by Barro and Gordon (1983b) , we demonstrate that an optimal policy for minimizing the sacrifice ratio of disinflation involves a gradual disinflationary process coupled with the announcement of intermediate targets. The speed at which disinflation occurs strikes a balance between the objective of enhancing credibility and the associated costs of unexpected inflation. Our theoretical framework provides an explanation for the disinflationary experiences observed in Chile and Colombia during the 1990s, wherein these countries established new monetary institutions and steadily achieved single-digit inflation levels through the annual announcement of decreasing inflation targets. We argue that the use of intermediate targets played a pivotal role in their design, facilitating the establishment of credibility with lower output costs.
    Keywords: disinflation, credibility, inflation, inflation expectations
    JEL: D83 E17 E31 E52 E58
    Date: 2023–07
  8. By: Dirk Niepelt
    Abstract: We analyze the effect of structural change in the payment sector and of monetary policy on prices. Means of payment are obtained through portfolio choices and commodity sales and "liquified" through velocity choices. Interest rates, intermediation margins, and costs of payment instrument use affect portfolios, velocities, liquidity, relative prices, and the aggregate price level. Money is neutral, interest rate policy is not. Scarcer liquidity need not drive up velocity. Payment instruments and velocities generate positive externalities. Commodity price aggregates mis-measure consumer price inflation, distinctly so over the business cycle.
    Keywords: Payments, velocity, prices, intermediation, inflation
    JEL: E31 E41 E44 E52 G11 G23
    Date: 2023
  9. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023
  10. By: Aggelos Kiayias; Philip Lazos; Jan Christoph Schlegel
    Abstract: Cryptocurrencies come with a variety of tokenomic policies as well as aspirations of desirable monetary characteristics that have been described by proponents as 'sound money' or even 'ultra sound money.' These propositions are typically devoid of economic analysis so it is a pertinent question how such aspirations fit in the wider context of monetary economic theory. In this work, we develop a framework that determines the optimal token supply policy of a cryptocurrency, as well as investigate how such policy may be algorithmically implemented. Our findings suggest that the optimal policy complies with the Friedman rule and it is dependent on the risk free rate, as well as the growth of the cryptocurrency platform. Furthermore, we demonstrate a wide set of conditions under which such policy can be implemented via contractions and expansions of token supply that can be realized algorithmically with block rewards, taxation of consumption and burning the proceeds, and blockchain oracles.
    Date: 2023–06
    Abstract: This study explores the feasibility of implementing a cashless policy in Nigeria and its impact on money demand and price determination. Drawing from renowned scholars such as Keynes, Friedman, and Woodford, the analysis delves into the dynamics of monetary policy, the role of money in trade and financial markets, and factors influencing price levels. The study investigates the relationship between money demand and the implementation of a cashless policy. It emphasizes the behavior of real balances, transaction velocity, and the effects of monetary policy on trading activity and asset prices. The findings indicate that as an economy moves towards a cashless system, various factors come into play. Transaction velocity, a measure of cash efficiency, becomes critical, increasing as cash usage diminishes and the economy becomes more cashless. Additionally, the study reveals that implementing a cashless policy affects price determination. Contrary to conventional belief, even as real balances approach zero in a cashless economy, asset prices remain responsive to monetary policy. This implies that monetary equilibrium prices do not necessarily converge to their nonmonetary equilibrium counterparts when real balances vanish. Based on these findings, a viable policy recommendation emerges: the monetary authority should carefully manage the money supply per investor to control and stabilize the price level in a cashless economy. Adjusting the money supply allows the authority to achieve and maintain a desired price level, even in a cashless environment. However, the study acknowledges limitations and calls for further research. Specifically, exploring the implications and challenges of implementing a cashless policy in Nigeria is necessary. Factors such as financial inclusion, technological infrastructure, and public acceptance should be examined to assess the feasibility and potential impacts of a cashless economy on different segments of society. Overall, this study contributes valuable insights into the possibility of implementing a cashless policy, its effects on money demand and price determination, and its implications for economic stability and efficiency in Nigeria.
    Keywords: price, cashless policy, monetary policy, price determination, efficiency
    JEL: E4 E41 E42 E44
    Date: 2023–07–13
  12. By: Gautier, Erwan; Karadi, Peter; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Fuss, Catherine; Kosma, Theodora; Jouvanceau, Valentin; Martins, Fernando; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Seward, Domingos; De Veirman, Emmanuel; Wieland, Elisabeth; Wintr, Ladislav; Wursten, Jesse; Zimmer, Hélène; Amann, Juergen; Faber, Riemer; Bachiller, Javier Sánchez; Stanga, Irina
    Abstract: This paper documents five stylised facts relating to price adjustment in the euro area, using various micro price datasets collected in a period with relatively low and stable inflation. First, price changes are infrequent in the core sectors. On average, 12% of consumer prices change each month, falling to 8.5% when sales prices are excluded. The frequency of producer price adjustment is greater (25%), reflecting that the prices of intermediate goods and energy are more flexible. For both consumer and producer prices, cross-sectoral heterogeneity is more pronounced than cross-country heterogeneity. Second, price changes tend to be large and heterogeneous. For consumer prices, the typical absolute price change is about 10%, and the distribution of price changes shows a broad dispersion. For producer prices, the typical absolute price change is smaller, but nevertheless larger than inflation. Third, price setting is mildly state-dependent: the probability of price adjustment rises with the size of price misalignment, mainly reflecting idiosyncratic shocks, but it does not increase very sharply. Fourth, for both consumer and producer prices, the repricing rate showed no trend in the period 2005-19 but was more volatile in the short run. Fifth, small cyclical variations in frequency did not contribute much to fluctuations in aggregate inflation, which instead mainly reflected shifts in the average size of price changes. Consistent with idiosyncratic shocks as the main driver of price changes, aggregate disturbances affected inflation by shifting the relative number of firms increasing or decreasing their prices, rather than the size of price increases and decreases. JEL Classification: E3, E5
    Keywords: consumer prices, price stickiness, producer prices, scanner data.
    Date: 2023–07
  13. By: Nazim Belhocine; Mr. Ashok Vir Bhatia; Jan Frie
    Abstract: The Eurosystem, having purposefully expanded its footprint in recent years, confronts a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly. This paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable. The policy conclusions are fourfold. First, the temporary and recoupable nature of the loss-making obviates any need for capital contributions or indemnities from the state, instead allowing losses to be offset against future net income. Second, it must nonetheless be communicated that fiscal impacts will be material, with annual taxes and transfers of 0.1−0.2 percent of GDP giving way to potentially long interruptions in some cases. Third, more-conservative profit distribution policies in the future steady state could help mitigate the on-off pattern of dividends. Finally and most vitally, loss-making must remain orthogonal to monetary policy decision-making, as indeed it is at the ECB. Ultimately, credibility will rest on performance in delivering on the price stability mandate.
    Keywords: Eurosystem; balance sheet; monetary policy; profit distribution; seigniorage; central bank independence
    Date: 2023–07–07
  14. By: Franconi, Alessandro; Rella, Giacomo
    Abstract: Using vector autoregression and the Distributional Financial Accounts of the United States, we show that monetary policy has unequal effects across the wealth distribution. The direction and persistence of these effects depend on the policy instrument and the wealth group. Interest rate cuts initially reduce wealth inequality but increase it in the medium run. Asset purchases, instead, increase wealth inequality but only temporarily. Housing is the main channel through which monetary policy affects wealth at the bottom. The effects of monetary policy on capital gains are larger at the top due to heterogeneous portfolios. (Stone Center on Socio-Economic Inequality Working Paper)
    Date: 2023–07–06
  15. By: Lenza, Michele; Moutachaker, Inès; Paredes, Joan
    Abstract: Density forecasts of euro area inflation are a fundamental input for a medium-term oriented central bank, such as the European Central Bank (ECB). We show that a quantile regression forest, capturing a general non-linear relationship between euro area (headline and core) inflation and a large set of determinants, is competitive with state-of-the-art linear benchmarks and judgemental survey forecasts. The median forecasts of the quantile regression forest are very collinear with the ECB point inflation forecasts, displaying similar deviations from “linearity”. Given that the ECB modelling toolbox is overwhelmingly linear, this finding suggests that the expert judgement embedded in the ECB forecast may be characterized by some mild non-linearity. JEL Classification: C52, C53, E31, E37
    Keywords: Inflation, Non-linearity, Quantile Regression Forest
    Date: 2023–07
  16. By: Kozo Ueda (Waseda University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo)
    Abstract: This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling's model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
    Date: 2023–07
  17. By: Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
    Abstract: We study equilibria in a heterogeneous-agent incomplete-market economy with nominal government debt and flexible prices. Unlike in representative agent economies, steady-state equilibria exist when the government runs persistent deficits, provided that the level of deficits is not too large. In these equilibria, the real interest rate is below the growth rate of the economy. We quantify the maximum sustainable deficit for the US and show that it is lower under more redistributive tax and transfer systems. With constant primary deficits, there exist two steady-states, and the price level and inflation are not uniquely determined. We describe alternative policy settings that deliver uniqueness. We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.
    JEL: E3 E4 E5 E6 H2 H3
    Date: 2023–07
  18. By: Rösl, Gerhard; Seitz, Franz
    Abstract: We analyze the repercussions of different kinds of uncertainty on cash demand, including uncertainty of the digital infrastructures, confidence crises of the financial system, natural disasters, political uncertainties, and inflationary crises. Based on a comprehensive literature survey, theoretical considerations and complemented by case studies, we derive a classification scheme how cash holdings typically evolve in each of these types of uncertainty by separating between demand for domestic and international cash as well as between transaction and store of value balances. Hereby, we focus on the stabilizing macroeconomic properties of cash and recommend guidelines for cash supply by central banks and the banking system. Finally, we exemplify our analysis with five case studies from the developing world, namely Venezuela, Zimbabwe, Afghanistan, Iraq, and Libya.
    Keywords: Cash, banknotes, money, crises, stabilization, uncertainty
    JEL: E41 E51 E58 O57
    Date: 2023
  19. By: Ke Pang, Christos Shiamptanis (Wilfrid Laurier University)
    Abstract: This paper examines the behaviour of the Bank of Canada (BoC) since the adoption of the inflation-targeting framework. We use a newly released dataset that contains quarterly vintages of real-time historical data and BoC staff forecasts, and we present the following novel empirical findings. First, the BoC appears to have increased its focus towards the state of the economy. Over the sample period, we find that the response to inflation weakens and the response to the real economy rises substantially. Second, the BoC appears to be responding to an alternative inflation measure: persistent expected future inflation deviations. We fi nd that transitory or past inflation deviations do not elicit a response. Third, the BoC appears to respond asymmetrically to positive and negative persistent expected future inflation deviations. We fi nd an aggressive response to positive inflation deviations that declines over time in favour of a modest response to negative inflation deviations, suggesting that persistent expected future inflation overshoots and undershoots elicit different responses and these responses are time-varying.
    Keywords: asymmetric monetary policy, expected inflation deviations, real-time data and forecasts, forward looking Taylor rule
    JEL: E42 E43 E52 E58
    Date: 2022–05
  20. By: Krüger, Nicolai; Busche, Jan
    Abstract: Alongside other central banks, the European Central Bank (ECB) is currently exploring the potential of a Central Bank Digital Currency (CBDC). Such a significant payment innovation requires compliance with the ECB's mandate based on the Treaties of the European Union, in addition to socio-technical and socioeconomic considerations. Thus, Information Systems (IS) researchers might witness and actively participate in one of the most important changes associated to currency-related fundamental rights in our time in the euro area. IS research can provide useful insights into technology acceptance criteria of a CBDC, which is a novel and unfamiliar technology for most people, and help identify requirements. Our paper provides an overview of the current state of development. Furthermore, we present a Technology Acceptance Model - based vignette study (N = 207) and derive design principles for a prospective digital euro (PDE). The results of the study show that acceptance by the German population can be assumed. However, there are significant differences depending on the final design choices.
    Keywords: Central Bank Digital Currency, European Central Bank, Digital Euro, Technology Acceptance Model, Intention to use, Cryptocurrencies
    Date: 2023
  21. By: Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
    Abstract: Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the different types of stablecoins and how they keep their peg, compare them with money market funds—a similar but much older and more regulated financial product, and discuss the stablecoin run of May 2022.
    Keywords: cryptocurrency; stablecoins; money market mutual funds (MMF); fire sale; currency
    JEL: E42
    Date: 2023–07–12
  22. By: Michael T. Kiley
    Abstract: Inflation in 2021 reached the highest level seen since the early 1980s. High inflation has raised questions regarding the speed with which inflation may return to the 2-percent range consistent with the Federal Reserve's inflation objective.
    Date: 2023–07–07
  23. By: Ryan Chahrour; Rosen Valchev
    Abstract: Recent trends suggest the world economy may be tending towards an equilibrium with two distinct trading blocs, each internally integrated, but with significant isolation between the blocs. This paper uses a quantitative theory to explore how far this bifurcation would need to go to pose a threat to the special role of the dollar in international exchange. The theory emphasizes the joint determination of countries' portfolio choices and trading currency. We find that unilateral protectionism on the part of the US could modestly reinforce the dollar's dominant role, but that policies directly supporting the Chinese yuan's use in trade could end the dollar's continued dominance if implemented over a long-enough period. Tit-for-tat responses between just the US and China would likely leave the dollar's role essentially unchanged. If both countries coordinate protectionist policies within their trading blocs, however, a transition away from global dollar dominance becomes far more likely.
    JEL: E44 F02 F33 F41 G15
    Date: 2023–06
  24. By: Priyo, Asad Karim Khan
    Abstract: This paper using bank-specific data for the period 1999-2009 investigates the excess reserve accumulation and credit crunch in the US commercial banking industry during the financial crisis of 2007-2008. During the sample period, the lending and reserve behaviors of large banks significantly differ from those of small banks. A large amount of excess reserve builds up in the large banks during the crisis whereas excess reserve of small banks remains stable at low levels. Large banks experience severe credit crunch during the crisis which the small banks are able to avert. Employing a two-stage model of the banking industry that treats large and small banks separately, I demonstrate that among other factors, differences in idiosyncratic uncertainties in the form of volatility of deposits and short-term funding and disparities in investments in risky trading securities can generate similar patterns observed in data. I also address the ongoing debate between two schools of thought, one of which attributes the buildup of excess reserves and reduction in interbank lending to liquidity hoarding due to precautionary motive, while the other ascribes these to an increase in counterparty risk. I demonstrate that counterparty risk plays a greater role over the short run whereas the impact of liquidity hoarding is more prominent over the long run.
    Keywords: excess reserves; bank loans; deposit volatility; trading securities; liquidity hoarding; counterparty risk
    JEL: G01 G21 G29
    Date: 2023–07–07
  25. By: R. P. Datta
    Abstract: The multifractal spectra of daily foreign exchange rates for US dollar (USD), the British Pound (GBP), the Euro (Euro) and the Japanese Yen (Yen) with respect to the Indian Rupee are analysed for the period 6th January 1999 to 24th July 2018. We observe that the time series of logarithmic returns of all the four exchange rates exhibit features of multifractality. Next, we research the source of the observed multifractality. For this, we transform the return series in two ways: a) We randomly shuffle the original time series of logarithmic returns and b) We apply the process of phase randomisation on the unchanged series. Our results indicate in the case of the US dollar the source of multifractality is mainly the fat tail. For the British Pound and the Euro, we see the long-range correlations between the observations and the thick tails of the probability distribution give rise to the observed multifractal features, while in the case of the Japanese Yen, the origin of the multifractal nature of the return series is mostly due to the broad tail.
    Date: 2023–06
  26. By: Isabel Gödl-Hanisch; Manuel Menkhoff
    Abstract: This paper examines the pass-through of cost-push shocks to customers at a granular level. Using unique firm-level survey data, we document five facts about pass-through across firms, sectors, and over time. We highlight a new channel relevant for pass-through: beliefs about the expected duration of the shock and its interaction with price rigidities. We then employ a hypothetical vignette to study the causal effect of nominal and real rigidities as well as the nature of the shock - size, duration, and economic environment - on pass-through. We observe gradual pass-through stretching over 24 months, especially for idiosyncratic shocks, undershooting the pass-through of aggregate shocks by 40%, in line with the presence of real rigidities. The survey design further allows us to infer the implied slope of the Phillips curve, which flattens after accounting for strategic complementarities.
    Keywords: pass-through, cost shocks, firms, heterogeneous expectations, uncertainty, nominal rigidities, real rigidities
    JEL: E24 E31 E50 E60
    Date: 2023
  27. By: Miguel Faria-e-Castro; Fernando Leibovici
    Abstract: We explore the ability of Large Language Models (LLMs) to produce conditional inflation forecasts during the 2019-2023 period. We use a leading LLM (Google AI's PaLM) to produce distributions of conditional forecasts at different horizons and compare these forecasts to those of a leading source, the Survey of Professional Forecasters (SPF). We find that LLM forecasts generate lower mean-squared errors overall in most years, and at almost all horizons. LLM forecasts exhibit slower reversion to the 2% inflation anchor. We argue that this method of generating forecasts is inexpensive and can be applied to other time series.
    Keywords: inflation forecasts; large language models; artificial intelligence
    JEL: E31 E37 C45 C53
    Date: 2023–07–14
  28. By: Markus K. Brunnermeier; Sergio A. Correia; Stephan Luck; Emil Verner; Tom Zimmermann
    Abstract: The recent rise in price pressures around the world has reignited interest in understanding how inflation transmits to the real economy. Economists have long recognized that unexpected surges of inflation can redistribute wealth from creditors to debtors when debt contracts are written in nominal terms (see, for example, Fisher 1933). If debtors are financially constrained, this redistribution can affect real economic activity by relaxing financing constraints. This mechanism, which we call the debt-inflation channel, is well understood theoretically (for example, Gomes, Jermann, and Schmid 2016), but there is limited empirical evidence to substantiate it. In this post, we discuss new insights from one of the key events in monetary history: the Great German Inflation of 1919-23. Because this case of inflation was both surprising and extremely high, Germany’s experience helps shed light on how high inflation impacts firms’ economic activity through the erosion of their nominal debt burdens. These insights are based on a recently released research paper.
    Keywords: Hyperinflation; debt-inflation; macro-finance
    JEL: E31 E52
    Date: 2023–07–13
  29. By: Olivier J. Blanchard; Ben S. Bernanke
    Abstract: We answer the question posed by the title by specifying and estimating a simple dynamic model of prices, wages, and short-run and long-run inflation expectations. The estimated model allows us to analyze the direct and indirect effects of product-market and labor-market shocks on prices and nominal wages and to quantify the sources of U.S. pandemic-era inflation and wage growth. We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices given wages. These shocks included sharp increases in commodity prices, reflecting strong aggregate demand, and sectoral price spikes, resulting from changes in the level and sectoral composition of demand together with constraints on sectoral supply. However, although tight labor markets have thus far not been the primary driver of inflation, we find that the effects of overheated labor markets on nominal wage growth and inflation are more persistent than the effects of product-market shocks. Controlling inflation will thus ultimately require achieving a better balance between labor demand and labor supply.
    JEL: E31
    Date: 2023–06
  30. By: Luca Benati; Pierpaolo Benigno
    Abstract: We argue that Gibson’s paradox has nothing to do with the Gold Standard per se, and it rather originates from low-frequency variation in the natural rate of interest under certain types of monetary regimes that make inflation I(0) and (approximately) zero-mean. Although the Gold Standard is the only historical example of such a regime, Gibson’s paradox is a feature of a potentially wide array of monetary arrangements. In fact, once removing the deterministic component of the drift in the price level, the paradox can be recovered from the data generated under inflation-targeting regimes. By the same token, the paradox could arise under a regime targeting the level of the money stock, whereas it would not appear under arrangements targeting the levels of either prices or nominal GDP. We show that the mechanism underlying Gibson’s paradox hinges on the interaction between the Fisher equation and an asset pricing condition determining the current value of money. Our interpretation points towards inefficiencies in the actual implementation of monetary policies.
    Keywords: Gibson’s Paradox; monetary regimes; natural rate of interest; Fisher equation; Gold Standard; inflation targeting; optimal monetary policy
    JEL: E2 E3
    Date: 2023–03
  31. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30

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