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on Monetary Economics |
| By: | Francesco Corsello (Bank of Italy); Matteo Gomellini (Bank of Italy); Dario Pellegrino (Bank of Italy) |
| Abstract: | The Yom Kippur war in 1973 and the Iranian revolution in 1979 triggered large oil-price increases that fuelled high and persistent inflation in advanced countries. There is a broad consensus that a weak monetary policy response, in the form of late tightening or early loosening, was one of the main causes for the failure to keep inflation under control after the 1973 shock. This failure is crucially tied to the end of the Bretton Woods era in 1971, when the fixed exchange rate regime and the currency peg to gold were abandoned, and monetary policy lost a consolidated frame of reference. A new framework – based on the commitment by independent and credible central banks to achieve clear quantitative inflation targets – would only be established in the subsequent two decades. Monetary policy conduct alone, however, does not fully explain the persistence and heterogeneity of inflation across advanced economies. Other institutional factors played a role ‒ most importantly, the lack of central bank independence, the structural features of the labour market, and fiscal policy rules which turned out to be at odds with price stability. A structural VAR-based analysis confirms and quantifies the role these factors played in shaping inflation. Nowadays, the institutional context has evolved considerably, mitigating the risk of inflation staying high for as long as they did in the 1970s. Ensuring that the current institutional context continues to support price stability remains key in limiting inflation persistence. |
| Keywords: | economic history, inflation, oil shocks, monetary policy, central bank independence, wage indexation, fiscal policy. |
| JEL: | N10 E31 E42 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_790_23&r=mon |
| By: | Pompeo Della Posta; Roberto Tamborini |
| Abstract: | In the revised monetary policy strategy of the European Central Bank (ECB), "price stability is best maintained by aiming for two per cent inflation over the medium term", with "symmetric commitment" to this target. "Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable". In this article, we therefore analyse this policy strategy through a model of inflation target zone, with a central value and symmetric upper and lower bounds on inflation, within which the central bank may decide not to intervene, provided inflation is expected to fluctuate around the central value. We show that the policy benefits guaranteed by a target zone can be dissipated if market agents are uncertain about its width. |
| Keywords: | European Central Bank, monetary policy strategy, inflation target zones |
| JEL: | E31 E42 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2022/7&r=mon |
| By: | Yusuke Tanahara; Kento Tango; Yoshiyuki Nakazono |
| Abstract: | This study assesses two central bank announcements about monetary policy and the central bank’s assessment of the economic outlook. We examine whether these two components influence macroeconomic and financial variables under the effective lower bound (ELB) of short-term nominal interest rates in Japan. We identify two shocks: a surprise policy tightening that raises interest rates and reduces stock prices and the complementary positive central bank information shock that raises both. We find that the two shocks have different effects on the Japanese economy. In fact, a contractionary monetary policy shock decreases inflation rates, whereas a positive central bank information shock increases inflation rates. The evidence suggests that announcements conveying the central bank’s assessment of the economic outlook play a certain role in the transmission mechanism of monetary policy under the ELB. However, our study shows that the two series of shocks do not induce changes in output. This suggests that they have a limited impact on the economy. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tupdaa:41&r=mon |
| By: | Anton Grui (National Bank of Ukraine); Nicolas Aragon; Oleksandr Faryna (National Bank of Ukraine; National University of Kyiv-Mohyla Academy); Dmytro Krukovets (National Bank of Ukraine); Kateryna Savolchuk (National Bank of Ukraine); Oleksii Sulimenko; Artem Vdovychenko (National Bank of Ukraine); Oleksandr Zholud (National Bank of Ukraine) |
| Abstract: | This report evaluates the monetary policy transmission mechanism in Ukraine during the early years of inflation targeting. It assesses both the overall strength of the policy interest rate transmission, and its channels. Furthermore, it addresses the stabilizing role of forward guidance, foreign exchange interventions, and monetary policy credibility. The National Bank of Ukraine abandoned its fixed exchange rate regime in 2014 in response to an economic crisis ignited by the initial invasion by russia. Under inflation targeting, the short-term interest rate became the main monetary policy instrument, while the exchange rate remained floating. The full-scale russian invasion in 2022 forced the National Bank of Ukraine to temporarily shelve its policy interest rate, fix the exchange rate and impose administrative restrictions. However, it remains committed to returning to conventional inflation targeting when economic conditions normalize. This report could become a point of reference for future policy decisions by the Ukrainian central bank. |
| Keywords: | monetary policy transmission mechanism, inflation targeting, interest rate channel, exchange rate channel, expectations channel |
| JEL: | E37 E43 E52 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:02/2023&r=mon |
| By: | Cantore, Cristiano (Sapienza University of Rome); Meichtry, Pascal (University of Lausanne) |
| Abstract: | This paper studies the macroeconomic effect of the state dependency of central bank asset market operations and their interactions with household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We quantify the aggregate impact of an occasionally binding zero lower bound in determining an asymmetry between the effects of asset purchases and sales. When close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing minimises the economic costs of monetary policy normalisation. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not amplify the aggregate effects of asset market operations. |
| Keywords: | Unconventional monetary policy; quantitative tightening; quantitative easing; heterogeneous agents; zero lower bound. |
| JEL: | E21 E32 E52 E58 |
| Date: | 2023–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1030&r=mon |
| By: | Schmidt, Torsten; Müller, Henrik; Rieger, Jonas; Schmidt, Tobias; Jentsch, Carsten |
| Abstract: | In this paper, we present a new indicator to measure the media coverage of inflation. Our Inflation Perception Indicator (IPI) for Germany is based on a corpus of three million articles published by broadsheet newspapers between January 2001 and November 2022. It is designed to detect thematic trends, thereby providing new insights into the dynamics of inflation perception over time. Methodically, the IPI makes use of RollingLDA, a dynamic topic modeling approach refining the rather static original LDA to allow for changes in the model's structure over time. We then use time series for the overall inflation perception indicator as well as for specific topics to analyze time-varying correlations with time series for inflation expectations of firms and households. Our results reveal that the link between reporting about inflation and changes in inflation expectations is time-dependent. During periods of intensive newspaper coverage of inflation developments, a correlation with inflation expectations emerges that does not exist at other times. Such correlations are evident after the introduction of the euro, during the financial crisis and during the recent energy price shock. |
| Keywords: | Inflation, perception, expectations, media, attention cycle |
| JEL: | C22 C82 D84 E31 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:1025&r=mon |
| By: | Vedanta Dhamija (University of Surrey); Ricardo Nunes (University of Surrey; Centre for International Macroeconomic Studies (CIMS); Centre for Macroeconomics (CFM)); Roshni Tara (University of Surrey) |
| Abstract: | We find that households tend to overweight house price expectations when forming their inflation expectations. The finding is robust across several specifications and two survey data sets for the United States. We also find that there is a significant effect of the cognitive abilities of households as more sophisticated households don’t overweight house price inflation as much. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and analytically derive a welfare loss function consistent with the micro-foundations of the model. In this setup, we show that to gauge the correct interest rate response, the central bank needs to be aware that some sectors are overweighted and that movements in expected inflation in such sectors are important for monetary policy. |
| Keywords: | Salience, Inflation Expectations, House Price Expectations, Monetary Policy |
| JEL: | D10 E12 E31 E52 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2318&r=mon |
| By: | Dedola, Luca; Gautier, Erwan; Nakov, Anton; Santoro, Sergio; Henkel, Lukas; Fagandini, Bruno; De Veirman, Emanuel |
| Abstract: | This paper analyses the implications of the evidence on micro price setting gathered by Price-setting Microdata Analysis Network (PRISMA) for inflation dynamics and monetary policy, relying on calibrated models and direct empirical evidence. According to models calibrated to the euro area micro evidence in Gautier et al. (2022, 2023), infrequent price changes and moderate state dependence in price setting should result in a meaningful Phillips curve in the euro area. Empirical estimates of the Phillips curve during the low-inflation period confirm previous findings of a relatively flat but stable slope. This estimated flat slope reflects both infrequent and subdued price adjustment in response to aggregate shocks, i.e. the presence of nominal and real rigidities. Model-based simulations show that, due to non-linearities in price setting, changes in trend inflation above 5-6% would have significant effects on the euro area Phillips curve. Similarly, shocks to nominal costs larger than 15% would result in non-linear effects on inflation dynamics in calibrated models. In line with these simulations, recent micro evidence suggests that the return of higher and more volatile inflation seems to be associated with higher frequencies of price changes, mainly because the frequency of price increases rises with the level and volatility of inflation. JEL Classification: E3, E5 |
| Keywords: | heterogeneity, price Phillips curve, real and nominal rigidities, state-dependent price setting and non-linearities |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023321&r=mon |
| By: | Jagjit S. Chadha |
| Abstract: | Major central banks have been caught in a low interest rate trap for over a decade. The temporary response to the financial crisis of 2008-9 has become something of a regime. The Federal Reserve, for example, attempted to ease quantitative easing in 2013 but this stalled following the "taper tantrum" and commenced a normalisation in the Federal Funds rate from 2015 but during Covid major central banks around the world rapidly returned policy rates to around zero. Low policy rates have been the response to tighter credit conditions, excessive global savings, low levels of investment and fiscal consolidation. But they have also played a role in propelling asset price growth and increasing levels of indebtedness. The accommodative stance in monetary policy, as well as the impetus from previous monetary and fiscal interventions seem like to have stoked inflation to a higher level that might otherwise have been the case following the shock of a war on the European continent. But may also have finally secured a normalisation in policy rates. |
| Keywords: | Monetary policy, Ukraine War, Normalisation, Liquidity Trap |
| JEL: | E43 E58 E61 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:551&r=mon |
| By: | Roberto Tamborini |
| Abstract: | The resurgence of inflation since late 2021 is now accompanied by a reversal of prospects of growth, reviving fears of stagflation across the world (IMF 2022, World Bank 2022). In almost all accounts of the mounting stagflation threats, a prominent role is played by the fall of households purchasing power, and hence consumption, due to the inflation shock vis-Ã vis lagging nominal wages. This paper addresses the theoretical puzzle as to why this endogenous real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The paper shows how this channel can be introduced by reformulating the consumption function, with the consequence that it endogenously exerts a stabilisation effect on inflation. By means of simulations the paper discusses the main monetary policy implication: what is the role left to monetary policy intended to curb inflation in the same way? |
| Keywords: | Cost-push inflation, real income effect, stagflation, New Keynesian models for monetary policy |
| JEL: | E17 E3 E5 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2023/1&r=mon |
| By: | Mr. Nicolas E Magud; Samuel Pienknagura |
| Abstract: | We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks. |
| Keywords: | Real exchange rates; external shocks; foreign exchange intervention; capital controls |
| Date: | 2023–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/129&r=mon |
| By: | Haroon Mumtaz (Queen Mary University of London); Jumana Saleheen (Vanguard Asset Management); Roxane Spitznagel |
| Abstract: | This paper studies the impact of different types and styles of Bank of England Monetary Policy Committee (MPC) communication on asset prices (stock prices, gilt yields and interest rate futures) from 1999-2023. We extend MPC communication to include MPC speeches and find MPC speeches to be an important driver of asset prices. We also show that complex and ambiguous communication leads to greater asset price volatility than simple and clear communication. Central banks that want to avoid generating volatility in financial markets should keep it simple. Our results suggest that by ignoring the type and style of monetary policy communication, the previous literature has disregarded an important source of variation in asset prices. |
| Keywords: | Monetary policy, central bank communication, high-frequency data |
| JEL: | E52 E58 G12 |
| Date: | 2023–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:960&r=mon |
| By: | Nizam, Ahmed Mehedi |
| Abstract: | Fiat-backed stablecoins have been around for quite some time and yet not much have been said about its impact on US money supply. Although a few studies have qualitatively discussed that the issuance of fiat-backed dollar-pegged stablecoins might have an impact on US money supply, they are unable to quantify it. Here we have developed a detailed framework to quantify the impact of the issuance of fiat-backed US dollar-pegged stablecoins on US money supply. According to the proposed framework, the issuance of US dollar denominated stablecoins is supposed to have a contractionary effect on US money supply. The said contraction stems from the fact that the issuers of stablecoins tend to invest heavily in US treasury bills and bonds, which takes funds out of the process of fractional reserve banking and thereby stops the money multiplication process. Fitting empirical data into our proposed framework, we have shown that the top 3 issuers of stablecoins together have brought about a monetary contraction in US in the range of 1.1-1.2% of total US money supply during different months of 2022. |
| Keywords: | Cryptocurrencies, stablecoins, money supply |
| JEL: | E44 E51 E52 |
| Date: | 2023–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117948&r=mon |
| By: | Santoro, Sergio; Weber, Henning |
| Abstract: | This paper discusses the normative implications of the micro evidence on heterogeneity in price setting gathered by the Price-setting Microdata Analysis Network (PRISMA) for the level of inflation that central banks should target. The micro price data underlying the consumer price index are used to estimate relative price trends over the product life cycle. Minimising the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate in France, Germany and Italy: the steady-state inflation rate, jointly maximising welfare in all three countries, ranges from 1.1% to 1.7%. Other considerations not taken into account in the present paper may push up optimal inflation targets further. The welfare costs of targeting an inflation rate of zero, as suggested by monetary models ignoring relative price trends, or of targeting 4%, turn out to be substantial. JEL Classification: E31, E52 |
| Keywords: | optimal inflation target, relative price trends, welfare |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023322&r=mon |
| By: | Tao Sun; Ryan Rizaldy |
| Abstract: | This paper synthesizes four lessons from the experiences of six Asian e-money schemes for central banks as they consider adopting central bank digital currency (CBDC): (i) CBDC should embody four attributes: trust, convenience, efficiency, and security; (ii) CBDC service providers can facilitate CBDC adoption through four channels: leveraging digital technology, targeting use cases, developing business models, and complying with legal and regulatory requirements; (iii) central banks could incentivize CBDC service providers to develop these four channels when considering CBDC adoption; and (iv) central banks may be able to establish data-sharing arrangements that preserve privacy while leaving room for CBDC service providers to explore the economic value of data. |
| Keywords: | E-money; central bank digital currency; service providers; e-money adoption; e-money scheme; e-money ecosystem; e-money development; e-money PSP; e-money transaction; Digital currencies; Central Bank digital currencies; Digital financial services; Social networks; Asia and Pacific; Southeast Asia |
| Date: | 2023–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/123&r=mon |
| By: | Stefano Neri (Bank of Italy); Fabio Busetti (Bank of Italy); Cristina Conflitti (Bank of Italy); Francesco Corsello (Bank of Italy); Davide Delle Monache (Bank of Italy); Alex Tagliabracci (Bank of Italy) |
| Abstract: | This paper evaluates the role of supply shocks in driving inflation in the euro area since mid-2021, focusing in particular on shocks to energy prices. The analysis uses different empirical models (including Vector AutoRegressive models, time-varying Phillips curves and dynamic factor models) and shows that shocks to energy prices have had both direct and indirect effects on inflation. The contribution of these shocks to headline inflation is estimated to be around 60 per cent in the fourth quarter of 2022, while that to core inflation to range from 20 to 50 per cent, depending on the model. There is also evidence of an increase in the pass-through of energy prices to core inflation following the outbreak of the pandemic. |
| Keywords: | inflation, energy prices, structural VAR, time-varying Phillips curve, Dynamic Factor model |
| JEL: | C22 C32 C38 E31 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_792_23&r=mon |
| By: | Mr. Luis Brandao Marques; Marco Casiraghi; Mr. R. G Gelos; Olamide Harrison; Gunes Kamber |
| Abstract: | This paper examines whether high government debt levels pose a challenge to containing inflation. It does so by assessing the impact of government debt surprises on inflation expectations in advanced- and emerging market economies. It finds that debt surprises raise long-term inflation expectations in emerging market economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in economies with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in emerging market economies with high and dollarized debt levels, and weaker monetary policy frameworks. |
| Keywords: | Inflation expectations; monetary policy; fiscal dominance; debt |
| Date: | 2023–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/143&r=mon |
| By: | Jannik Hensel; Giacomo Mangiante; Luca Moretti |
| Abstract: | This paper examines the impact of carbon pricing on firms’ inflation expectations and its implications for central banks’ price stability mandate. Carbon policy shocks are identified using high-frequency identification and combined with French firm-level survey data. A change in carbon price increases firms’ inflation expectations as well as their own expected and realized price growth. The effect on price expectations is more persistent than on actual price growth, resulting in negative forecast errors in the medium-/long-run. We show that a significant portion of the increase in inflation expectations is driven by indirect effects. Firms rely on their own business conditions to form expectations about aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. Firms’ responses to the shocks vary based on their energy intensity. Low energy-intensive firms are worse forecasters of the impact that the shocks will have on the evolution of their own prices. |
| Keywords: | climate policies, carbon pricing, inflation expectations, monetary policy, survey data |
| JEL: | E31 E52 E58 Q43 Q54 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10552&r=mon |
| By: | 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) |
| Abstract: | This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed's monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms. |
| Keywords: | monetary policy, unemployment, racial disparities. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04145798&r=mon |
| By: | Michael Kumhof (Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Marco Pinchetti (Centre for Macroeconomics (CFM)); Phurichai Rungcharoenkitkul (Bank of Thailand; Bank for International Settlement); Andrej Sokol (Bloomberg; Centre for Macroeconomics (CFM)) |
| Abstract: | We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. Financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, a cash-like CBDC, and CBDC as generalized access to reserves, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross-border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of over 40% of annual GDP. |
| Keywords: | Central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2309&r=mon |
| By: | Arunima Sinha; Giorgio Topa; Franscisco Torralba |
| Abstract: | While forecasters generally disagree about the expected path of monetary policy, the level of disagreement as measured in the New York Fed’s Survey of Primary Dealers (SPD) has increased substantially since 2022. For instance, the dispersion of expectations about the future path of the target federal funds rate (FFR) has widened significantly. What explains the current elevated disagreement in FFR forecasts? |
| Keywords: | monetary policy; reaction functions; expectations; survey forecasts |
| JEL: | E52 |
| Date: | 2023–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96522&r=mon |
| By: | Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Andrea Papetti (Bank of Italy) |
| Abstract: | Using as a baseline a macroeconomic scenario consistent with the key interest rate path implied by market-based expectations, we evaluate the economic implications and risks of two alternative, illustrative tightening paths for the ECB policy rates that, as in the baseline, bring inflation toward 2 per cent by the end of 2025. We consider a prudent path (labelled 'persistent'), where policy rates are kept at current levels for a prolonged period and subsequently reduced more slowly, and a more pro-active approach ('peak') in which policy rates reach a higher terminal level, but decrease faster. Model-based simulations show that, relative to the baseline scenario, the persistent path would leave inflation and output unchanged in 2023-24, while the peak path would lower inflation at the cost of output losses. The persistent path would be preferable over the period 2023-25 according to a quadratic loss function penalizing inflation and output volatility. The risks of an excessive worsening of financing conditions and the amplification effects attached to the peak scenario are assessed to be greater than those of an upward de-anchoring of inflation expectations and of second-round effects associated with the persistent path. |
| Keywords: | Central banking. monetary policy |
| JEL: | E52 E58 E61 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_791_23&r=mon |
| By: | Mr. Helge Berger; Sune Karlsson; Pär Österholm |
| Abstract: | We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect of money growth on inflation weakened notably after the 1980s before strengthening after 2020. There is evidence that this time variation is related to the pace of price changes, as we find that the maximum impact of money growth on inflation is increasing in the trend level of inflation. These results caution against asserting a simple, time-invariant relationship when modeling the joint dynamics of monetary aggregates and consumer prices. |
| Keywords: | Bayesian VAR; Time-varying parameters; Stochastic volatility |
| Date: | 2023–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/137&r=mon |
| By: | Jappelli, Ruggero; Pelizzon, Loriana; Subrahmanyam, Marti G. |
| Abstract: | We develop a quantity-driven general equilibrium model that integrates the term structure of interest rates with the repurchase agreements (repo) market to shed light on the combined effects of quantitative easing (QE) on the bond and money markets. We characterize in closed form the endogenous dynamic interaction between bond prices and repo rates, and show (i) that repo specialness dampens the impact of any given quantity of asset purchases due to QE on the slope of the term structure and (ii) that bond scarcity resulting from QE increases repo specialness, thus strengthening the local supply channel of QE. |
| Keywords: | Term Structure of Interest Rates, Repo Specialness, Money Market, Quantitative Easing |
| JEL: | E43 E52 G12 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:395&r=mon |
| By: | Escribano, Álvaro; Rodriguez, Juan Andrés |
| Abstract: | Since the influential works of Friedman and Schwartz (1963, 1982) on the monetary history of the United States of America and the United Kingdom from 1876 to 1975, there has been a great concern in the literature about the instability of money demand functions when monetary trends are explored historically. Several authors, at the end of the 1980s and during the 1990s, reconsidered their statistical approach based on the distinction between money demand in the long-run (cointegration) and money demand in the short-run (error-correction models). Recently, using M1 as the measure of money, Benati, Lucas, Nicolini and Weber (2021) have shown, for a shorter and more recent period of time, that there are stable long-run money demands for a long list of countries. However, to date there are no studies on whether a stable long-run and short-run money demand equations exists for the entire monetary history of the US and the UK. By means of a nonlinear cointegration and a nonlinear error-correction approach, this paper goes beyond the work of its predecessors and presents evidence of a well-specified, long-run and short-run money demands of real broad monetary balances in these two countries from 1874 to 2020. The estimated cubic-polynomial cointegrations (US and UK) for the long-run money demand specification, and the linear (US) and cubic equilibrium correction (UK) for the short-run money demands, are shown to be stable based on an appropriate measure of the opportunity cost of holding money. |
| Keywords: | Money Demand; Nonlinear Cointegration; Nonlinear Error Correction Models; Cubic Polynomial Cointegration; Cubic Polynomial Equilibrium Correction; Financial Innovation; Money Demand Stability; Opportunity Cost Of Holding Money |
| JEL: | E41 E43 E47 E51 |
| Date: | 2023–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:37911&r=mon |
| By: | Cristiano Cantore (Sapienza University of Rome); Filippo Ferroni (Chicago Fed); Haroon Mumtaz (Queen Mary University of London); Angeliki Theophilopoulou (Brunel University London) |
| Abstract: | We study the interaction between monetary policy and labor supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong countercyclicality of hours worked in the left tail of the income distribution, following a monetary policy shock in the U.S. and the U.K. That is, while aggregate hours and labor earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with heterogeneity in the marginal utility of consumption and a stronger income effect for the Hand-to-Mouth households. This setup uncovers a novel channel of transmission of monetary policy via inequality generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Using a quantitative model with both intensive and extensive margin of labor supply that replicates our evidence, we show that this new channel reduces the amplification of monetary policy via inequality generated by the heterogenous behavior of unemployment along the income distribution. |
| Keywords: | Monetary policy, Household Survey, FAVARs, TANK, Hand to Mouth |
| JEL: | E52 E32 C10 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2308&r=mon |
| By: | 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); Jan Pablo Burgard (Trier University); Matthias Neuenkirch (Trier University) |
| Abstract: | We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area. |
| Keywords: | Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04145813&r=mon |
| By: | Stefano Grassi (Department of Economics and Finance, University of Rome Tor Vergata, Italy); Francesco Ravazzolo (@ Department of Data Science and Analytics, BI Norwegian Business School, Norway; Faculty of Economics, Free University of Bozen-Bolzano, Italy); Joaquin Vespignani (Tasmanian School of Business and Economics, University of Tasmania, Australia; Centre for Applied Macroeocnomics Analysis, ANU, Australia); Giorgio Vocalelli (Department of Economics, University of Verona, Italy) |
| Abstract: | This paper shows that the impact of the global money supply is disproportionally high for energy than for non-energy commodities prices. An increase in the global money supply for energy commodity prices results mainly in demand-pull inflation. However, for non-energy commodity prices, an increase in global money supply leads to demand-pull and cost-push inflation, as energy is a key input for non-energy commodities. To quantify this effect, we use a Markov switching model with time-varying transition probabilities. This model considers periods of slow, moderate, and fast global money supply growth. We find that the response to global money supply shocks is almost double for energy than for non-energy commodity prices. We also find heterogeneous responses for energy and non-energy commodities under different regimes. |
| Keywords: | Global money supply, Energy and non-energy prices, Markov-Switching VAR. |
| JEL: | C54 E31 F01 Q43 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps100&r=mon |
| By: | António Afonso; José Alves; Serena Ionta |
| Abstract: | We study the effect of monetary surprise shocks on real output and the price level, conditioned on different fiscal sustainability regimes in the period 2001Q4-2021Q4. First, we estimate time-varying fiscal sustainability coefficients based on Bohn’s (1998) approach through Schlicht’s (2003) method. Then, by taking these sustainability coefficients in a nonlinear local projection model for the Euro Area (aggregate data), Germany, Italy, and Portugal, we analyze the interaction between both policies under (un)sustainable fiscal regimes. Our results show that in a Ricardian regime, output and prices respond to monetary tightening by contracting, while in a non-Ricardian regime the effect on output and price levels is negligible (or even positive). The dependence of the effectiveness of monetary policy on fiscal solvency is valid for Euro-Area and all the countries assessed, and does not depend on whether a country is “core” or “periphery”, but on the policy conduct over time. |
| Keywords: | monetary surprises, fiscal sustainability, local-projection models, fiscal-monetary policy mix, Euro area, Germany, Italy, Portugal |
| JEL: | C32 E58 E62 E63 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10558&r=mon |
| By: | Simon P. Lloyd (Bank of England; Centre for Macroeconomics (CFM)); Emile A. Marin (University of California, Davis) |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country-planner acting unilaterally can achieve higher domestic welfare at the expense of the rest of the world by departing from free trade in addition to levying capital controls, absent retaliation from abroad. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter- and intra-temporallyare aligned—e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports—optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic retaliation, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars for both countries. |
| Keywords: | Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2306&r=mon |
| By: | Joshua Bosshardt; Marco Di Maggio; Ali Kakhbod; Amir Kermani |
| Abstract: | This paper studies how tightening monetary policy transmits to the economy through the mortgage market and sheds new light on the distributional consequences at both the individual and regional levels. We find that credit supply factors, specifically restrictions on the debt-to-income (DTI) ratio, account for the majority of the decline in mortgages. These effects are even more pronounced for young and middle-income borrowers who find themselves excluded from the credit market. Also, regions with historically high DTI ratios exhibited greater reductions in mortgage originations, house prices, and consumption. |
| JEL: | E20 E5 E52 G5 G51 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31464&r=mon |
| By: | Bahaj, Saleem (University College London and Bank of England); Czech, Robert (Bank of England); Ding, Sitong (London School of Economics); Reis, Ricardo (London School of Economics) |
| Abstract: | This paper uses transaction-level data on the universe of traded UK inflation swaps to characterise who buys and sells inflation risk, when, and with what price elasticity. This provides measures of expected inflation cleaned from liquidity frictions. We first show that this market is segmented: pension funds trade at long horizons while hedge funds trade at short horizons, with dealer banks as their counterparties in both markets. This segmentation suggests three identification strategies – sign restrictions, granular instrumental variables, and heteroskedasticity – for the demand and supply functions of each investor type. Across the three strategies, we find that (i) prices absorb new information within three days; (ii) the supply of long-horizon inflation protection is very elastic; and (iii) short-horizon price movements are unreliable measures of expected inflation as they primarily reflect liquidity shocks. Our counterfactual measure of long-horizon expected inflation in the absence of these shocks suggests that the risk of a deflation trap during the pandemic and of a persistent rise in inflation following the energy shocks were overstated, while since Autumn of 2022, expected inflation has been lower and falling more rapidly than conventional measures. |
| Keywords: | Asset demand system; monetary policy; anchored expectations; identification of demand and supply shocks. |
| JEL: | C30 E31 E44 G12 |
| Date: | 2023–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1028&r=mon |
| By: | Jagjit S. Chadha (National Institute of Economic and Social Research (NIESR)); Jason Lennard (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Solomos Solomou (University of Cambridge); Ryland Thomas (Bank of England) |
| Abstract: | This paper investigates the degree of pass-through from import prices and tariffs to wholesale prices in interwar Britain using a new high-frequency micro data set. The main results are: (i) Pass-through from import prices and tariffs to wholesale prices was economically and statistically significant. (ii) Despite devaluation, import prices exacerbated deflation in the early 1930s because of the global slump in export prices. (iii) Rising protection, however, was a mild stimulus to prices during the shift to inflation. |
| Keywords: | Exchange rates, interwar, pass-through, prices, tariffs, United Kingdom |
| JEL: | E31 F13 N14 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2303&r=mon |
| By: | Janet Hua Jiang; Peter Norman; Daniela Puzzello; Bruno Sultanum; Randall Wright |
| Abstract: | Monetary exchange is deemed essential when better incentive-compatible outcomes can be achieved with money than without it. We study essentiality both theoretically and experimentally, using finite-horizon monetary models that are naturally suited to the lab. We also follow the mechanism design approach and study the effects of strategy recommendations, both when they are incentive-compatible and when they are not. Results show that output and welfare are significantly enhanced by fiat currency when monetary equilibrium exists. Also, recommendations help if they are incentive-compatible but not much otherwise. Sometimes money is used when it should not be and we investigate why, using surveys and measures of social preferences. |
| Keywords: | Central bank research; Economic models |
| JEL: | E4 E5 C92 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-39&r=mon |
| By: | Weber, Michael (University of Chicago); Candia, Bernardo (University of California, Berkeley); Ropele, Tiziano (Bank of Italy); Lluberas, Rodrigo (Universidad de la República, Uruguay); Frache, Serafin (Universidad de Montevideo); Meyer, Brent (Federal Reserve Bank of Atlanta); Kumar, Saten (Auckland University of Technology); Gorodnichenko, Yuriy (University of California, Berkeley); Georgarakos, Dimitris (European Central Bank); Coibion, Olivier (University of Texas at Austin); Kenny, Geoff (European Central Bank); Ponce, Jorge (Central Bank of Uruguay) |
| Abstract: | Using randomized control trials (RCTs) applied over time in different countries, we study how the economic environment affects how agents learn from new information. We show that as inflation has recently risen in advanced economies, both households and firms have become more attentive and informed about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low- and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment. |
| Keywords: | inattention, RCTs, inflation expectations |
| JEL: | E3 E4 E5 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16305&r=mon |
| By: | Lilit Popoyan; Mauro Napoletano; Andrea Roventini |
| Abstract: | We develop a macroeconomic agent-based model to study the role of systemically important banks (SIBs) in financial stability and the effectiveness of capital surcharges on SIBs as a risk management tool. The model is populated by heterogeneous firms, consumers, and banks interacting locally in different markets. In particular, banks provide credit to firms according to Basel III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to different types of Taylor rules. Our model endogenously generates banks with different balance sheet sizes, making some systemically important. The additional capital surcharges for SIBs prove to have a marginal effect on preventing the crisis since it points mainly to the ''too-big-to-fail'' problem with minimal importance for ''too-interconnected-to-fail'', ''too-many-to-fail'' and other issues. Moreover, we found that additional capital surcharges on SIBs do not account for the type and management strategy of the bank, leading to the ''one-size-fits-all'' problem. Finally, we found that additional loss-absorbing capacity needs to be increased to ensure total coverage of losses for failed SIBs. |
| Keywords: | Financial instability; monetary policy; macro-prudential policy; systemically important banks, additional loss-absorbing capacity, Basel III regulation; agent-based models. |
| Date: | 2023–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2023/30&r=mon |
| By: | Michael Weber; Bernardo Candia; Tiziano Ropele; Rodrigo Lluberas; Serafin Frache; Brent H. Meyer; Saten Kumar; Yuriy Gorodnichenko; Dimitris Georgarakos; Olivier Coibion; Geoff Kenny; Jorge Ponce |
| Abstract: | Using randomized control trials (RCTs) applied over time in different countries, we study how the economic environment affects how agents learn from new information. We show that as inflation has recently risen in advanced economies, both households and firms have become more attentive and informed about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low- and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment. |
| JEL: | E3 E40 E50 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31485&r=mon |
| By: | Strasser, Georg; Wieland, Elisabeth; Macias, Paweł; Błażejowska, Aneta; Szafranek, Karol; Wittekopf, David; Franke, Jörn; Henkel, Lukas; Osbat, Chiara |
| Abstract: | E-commerce has become more prevalent throughout Europe in the last decade. The coronavirus (COVID-19) pandemic accelerated this trend, particularly in the retail sector. This paper focuses on the implications of increasing business-to-consumer e-commerce for prices and inflation in the euro area. It highlights three key results. First, whether online prices and inflation are higher or lower than their offline counterparts depends on the distribution model, the sector and the country. Moreover, properly selected online prices track official inflation indices even in real time. Second, the effect of e-commerce on inflation appears to be transient and differs between countries. However, as the penetration of some markets is still low, these transitory effects will likely persist at the euro area level for several years. Third, online prices change more frequently than offline prices. This might lead to greater price flexibility overall as online trade gains market share in a growing number of sectors. JEL Classification: D4, E31, L11 |
| Keywords: | consumer prices, e-commerce, inflation, microdata, price rigidity |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023320&r=mon |
| By: | Irigoin, Maria Alejandra; Kobayashi, Atsushi; Chilosi, David |
| Abstract: | This paper analyses a new, large dataset of silver prices, as well as silver and merchandise trade flows in and out of China in the crucial decades of the mid-19th century when the Empire was opened to world trade. Silver flows were associated with the interaction between heterogenous monetary preferences and availability of specific coins. Before the 1850s, money markets became increasingly efficient, as reliance on bills of exchange allowed exports to grow in times when sound money was in short supply. When a new standard for silver eventually emerged, there was a new peak in China’s silver imports. |
| Keywords: | China silver flows; triangular trade settlement mechanism; exchange operations; arbitrage; ‘opening of China’ |
| JEL: | E42 F33 N10 |
| Date: | 2023–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:wpaper:119759&r=mon |
| By: | Strasser, Georg; Messner, Teresa; Rumler, Fabio; Ampudia, Miguel |
| Abstract: | Inflation affects the purchasing power of households. This paper documents large, idiosyncratic inflation differences between households in their everyday shopping. Low-income households have experienced higher inflation in the last ten years, but the difference to richer households has been small and time varying. Household-specific behaviour appears to dominate inflation differences within countries. Between countries, multinational retail chains not only differentiate products by branding, but also charge different prices for identical products. Retailers continue to differentiate prices along national borders, even within largely integrated economic regions. Price changes, however, are broadly aligned across borders within the same retailers. JEL Classification: D12, D3, D43, E31, F15, F4 |
| Keywords: | consumer prices, heterogeneous agents, inequality, inflation, substitution |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023325&r=mon |
| By: | Beqiraj, Elton (University of Rome I); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Tarquini, Giulio (University of Rome I) |
| Abstract: | What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis. |
| Keywords: | Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy |
| JEL: | E22 E24 E32 E44 E52 G01 |
| Date: | 2023–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2023_003&r=mon |
| By: | Marco Bellifemine (London School of Economics (LSE)); Adrien Couturier (London School of Economics (LSE)); Rustam Jamilov (University of Oxford) |
| Abstract: | We study the transmission of monetary policy across space in a heterogeneous agents New Keynesian (HANK) model of a monetary union. Using sequence-space methods, we derive the regional Keynesian cross: a characterization of the response of local employment to unexpected changes in interest rates along two dimensions of spatial heterogeneity: (i) openness to national trade and (ii) intertemporal marginal propensities to consume (iMPCs). At the core of our mechanism is an equilibrium complementarity between these two channels, which we validate in the data. We provide an aggregation result and derive the national Keynesian cross that summarizes the role of the joint distribution of regional iMPCs and trade openness across space for the nation-wide response to aggregate shocks. We provide empirical support for our theory using detailed county-level data and identified monetary surprises for the United States. Our main result is that the joint regional distribution of county-level openness to national trade and iMPCs is crucial for the amplification of monetary shocks and the potency of fiscal stabilization policies. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2311&r=mon |
| By: | R. LAFROGNE-JOUSSIER (Insee and CREST-Ecole Polytechnique); J. MARTIN (Université du Quéebec à Montréal and CEPR); I. MEJEAN (Sciences Po and CEPR) |
| Abstract: | We use micro-level price data underlying the French producer price index from January 2018 to July 2022, along with external measures of firms' exposure to imported inputs and energy cost shocks, to study the role of external shocks in the recent inflation surge. Within our sample, firms pass through 30% of changes in the price of imported inputs and 100% of changes in energy costs when resetting their prices, conditional on their exposure to these shocks. For the average firm in our data, this implies that a 10% increase in foreign costs leads to a 0.74% rise in output prices, while a 10% energy cost shock induces prices to increase by 0.73%. We examine how pass-through rates vary across firms within and across industries, depending on their size and exposure to shocks. We find that pass-through rates are asymmetric, with positive cost shocks inducing significantly more pass-through than negative shocks. The heterogeneity in exposure to external shocks across firms and sectors drives important differences in inflation dynamics along firms' distribution. To illustrate this, we predict price changes from cumulative imported inputs and energy price changes between January 2021 and July 2022, and find that between 70% and 75% of the variance in predicted price changes happens within 2-digit industries, across firms. The chemical and metal industries are the most impacted by both imported and energy cost shocks, which contribute to an increase in producer prices in those sectors of at least 9% to 14%. |
| Keywords: | Inflation, Energy prices, Imported Inflation, Cost Pass-Through |
| JEL: | F1 F4 L1 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nse:doctra:2023-13&r=mon |
| By: | Henkel, Lukas; Wieland, Elisabeth; Błażejowska, Aneta; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Jonckheere, Jana; Karadi, Peter; Macias, Paweł; Menz, Jan-Oliver; Seiler, Pascal; Szafranek, Karol |
| Abstract: | The coronavirus (COVID-19) pandemic caused a deep recession globally, as well as in the euro area, accompanied by a steep decline in inflation rates in 2020. This paper reviews some of the main challenges created by the pandemic for inflation measurement and provides micro price data analysis of how price setting has reacted to the strong COVID-19 shock. For this purpose, we use three different, but complementary, microdata sources for specific countries and sectors: micro price data underlying the official consumer price indices in Germany, Italy, Latvia and Slovakia; (scanner) data from German and Italian supermarkets; and online (web-scraped) prices for Poland. A common finding of the micro price studies in this paper is that state dependence significantly contributed to the price-setting response to the COVID-19 shock. Nevertheless, the extent and degree of responses varies widely by sector and even country, also depending on the severity of the pandemic situation. JEL Classification: D4, E31 |
| Keywords: | consumer prices, COVID-19., heterogeneity, inflation, microdata, price rigidity |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023324&r=mon |
| By: | Mr. Niels-Jakob H Hansen; Mr. Frederik G Toscani; Jing Zhou |
| Abstract: | We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24 – slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation. |
| Keywords: | Inflation; Wages; Profits; Terms of Trade |
| Date: | 2023–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/131&r=mon |
| By: | Huw Dixon; Aftab Chowdhury |
| Abstract: | This study finds a downward bias in the official CPI inflation figure from the second quarter to the end of 2022 due to the sudden changes in household energy expenditure. The energy price (specifically, oil price) started increasing from the last quarter of 2021 due to the rebound of economic activity and the supply-side issues after the Covid-19 pandemic, as well as the declining investment in oil and gas production after 2014. However, the sudden increase in the energy price in the second quarter of 2022 is simply derived from the Russia-Ukraine conflict that began on 24 February 2022. The sudden rise in the energy price and its inelastic nature has generated significant changes in household expenditure for energy (specifically in COICOP 04 Housing, water, electricity, gas, and other fuels and the COICOP 07 transport). These produce a significant downward bias in the official CPI inflation rate in COICOP 04 and 07, hence in the official CPI inflation rate for all items. Moreover, the input-output matrix of the national accounts helps us find the intermediate use of energy and its impact in other COICOP divisions which are not directly related to energy, such as COIOP 02 Alcoholic Beverages and Tobacco, COICOP 05 manufacture of Furniture, and COICOP 06 Health. All those together have caused the downward bias in the official CPI inflation rate in 2022. |
| Keywords: | CPI, inflation, energy economics |
| JEL: | C43 C67 D10 E01 E31 Q41 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:550&r=mon |
| By: | Richard Audoly; Martín Almuzara; Davide Melcangi |
| Abstract: | We recover the persistent (“core”) component of nominal wage growth over the past twenty-five years in the United States. Our approach combines worker-level data with time-series smoothing methods and can disentangle the common persistence of wage inflation from the persistence specific to some subgroup of workers, such as workers in a particular industry. We find that most of the business cycle fluctuations in wage inflation are persistent and driven by a common factor. This common persistent factor is particularly important during inflationary periods, and it explains 75 to 90 percent of the post-pandemic surge in wage inflation. |
| Keywords: | wage inflation; persistence; factor models |
| JEL: | C33 E24 |
| Date: | 2023–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:96479&r=mon |
| By: | Brandon Tan |
| Abstract: | For central bank digital currencies (CBDCs) to accomplish their intended objectives, it is necessary for both consumers to use them and for merchants to accept them. This paper develops a dynamic two-sided payments model with both heterogeneous households and merchants/firms to study: (1) The adoption of CBDC by households and firms, and (2) The impact of CBDC issuance on financial inclusion, informality, and disintermediation. Our model shows that there is a feedback loop where more households will adopt CBDC if more firms accept CBDC and vice versa -- incentivizing both households and firms will result in greater levels of take-up. Households are more likely to adopt CBDC if it is low cost, provides an attractive savings vehicle, reduces the cost of remittances, improves the efficiency of government payments, and (if accepted by merchants) offers a valuable means of payment. Firms are more likely to accept CBDC if fees are low, if there are tax exemptions or subsidies for transactions made in CBDC, and if households who prefer to make payments with CBDC make up a large share of revenue. Upon CBDC issuance, an economy can get stuck at a steady state with low CBDC adoption and small welfare gains if the features of CBDC which do not rely on merchant acceptance (remuneration, efficiency of cross border and government payments) are not sufficiently attractive, or if the households benefiting from these features make up a small share of merchant revenue. Temporary subsidies and using CBDC for government payments can spur initial take-up to transition an economy to a welfare improving steady state with high(er) CBDC usage. Greater adoption of CBDC will result in greater financial inclusion and formalization, but potentially the disintermediation of banks and card payments. Thus, there is a trade-off in designing CBDC for greater adoption. However, the gains are more likely to outweigh the risks in lower income economies with larger unbanked populations and informal sectors. |
| Keywords: | Central bank digital currency; financial inclusion; informality; digital money; disintermediation; two-sided market; adoption; payments |
| Date: | 2023–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/127&r=mon |