nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒08‒28
thirty-six papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Intervening against the Fed By Alexander Rodnyansky; Yannick Timmer; Naoki Yago
  2. Monetary policy shocks and firms’ bank loan expectations By Ferrando, Annalisa; Grazzini, Caterina Forti
  3. Bank credit, inflation, and default risks over an infinite horizon By Goodhart, Charles A.E.; Tsomocos, Dimitrios P.; Wang, Xuan
  4. The ECB Strategy Review - Implications for the Space of Monetary Policy By Lucian Briciu; Stefan Hohberger; Luca Onorante; Beatrice Pataracchia; Marco Ratto; Lukas Vogel
  5. The Impact of Monetary Policy on the U.S. Stock Market since the Pandemic By Willem THORBECKE
  6. Quantitative easing, accounting and prudential frameworks, and bank lending By Orame, Andrea; Ramcharan, Rodney; Robatto, Roberto
  7. Interest Rate Pass-Through in Nigeria By Oyadeyi, Olajide
  8. Optimal Monetary Policy with r* By Roberto M. Billi; Jordi Galí; Anton Nakov
  9. Unmet Payment Needs and a Central Bank Digital Currency By Christopher Henry; Walter Engert; Alexandra Sutton-Lalani; Sebastian Hernandez; Darcey McVanel; Kim Huynh
  10. Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach By Chavleishvili, Sulkhan; Kremer, Manfred; Lund-Thomsen, Frederik
  11. Unraveling the Impact of Higher Uncertainty on Profits and Inflation By Engin Kara; Ahmed Pirzada
  12. What People Believe about Monetary Finance and What We Can(‘t) Do about It: Evidence from a Large-Scale, Multi-Country Survey Experiment By Cars Hommes; Julien Pinter; Isabelle Salle
  13. Shared Problem, Shared Solution: Benefits from Fiscal-Monetary Interactions in the Euro Area By Robert C. M. Beyer; Rupa Duttagupta; Alexandra Fotiou; Ms. Keiko Honjo; Mr. Mark A Horton; Zoltan Jakab; Vina Nguyen; Mr. Rafael A Portillo; Jesper Lindé; Mrs. Nujin Suphaphiphat; Mr. Li Zeng
  14. What inflation disrupts? A comment on “Inflation – Pragmatics of money and inflationary sensoria” by Federico Neiburg By Jeanne Lazarus
  15. Dollar Rivals By Jeffrey A. Frankel
  16. Monetary Transmission through Bank Securities Portfolios By John Krainer; Pascal Paul
  17. Propagation of Price Shocks to CPI Inflation: The Role of Cross-demand Dependencies By Christian Glocker; Philipp Piribauer
  18. The Fiscal Effects of Terms-of-Trade-Driven Inflation By Gergö Motyovszki
  19. Energy Price Shocks, Conflict Inflation, and Income Distribution in a Three-sector Model By Rafael Wildauer; Karsten Kohler; Adam Aboobaker; Alexander Guschanski
  20. The Evolution of Short-Run r* after the Pandemic By Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu
  21. Tokenization: A Potential Pathway for Bitcoin’s Future By Georgii Zvonka
  22. The contribution of firm profits to the recent rise in inflation By Panagiotis Bouras; Christian Bustamante; Xing Guo; Jacob Short
  23. Fiscal Dominance, Monetary Policy and Exchange Rates: Lessons from Early-Modern Venice By Donato Masciandaro; Davide Romelli; Stefano Ugolini
  24. The Long-Run Phillips Curve is ... a Curve By Guido Ascari; Paolo Bonomolo; Qazi Haque
  25. Return and Volatility Connectedness in Foreign Exchange Markets of Sierra Leone By Johnson, Leroy; Osabuohien, Evans
  26. Application of the Deffuant model in money exchange By Hsin-Lun Li
  27. Behavioral drivers of cashless payments in Africa By Batiz-Lazo, Bernardo; Maixe-Altes, J Carles; Peon, David
  28. On the Origins of the Federal Reserve System and Its Structure By Owen F. Humpage
  29. Good vs. Bad Volatility: The Dichotomy and Drivers of Connectedness in Major Cryptocurrencies By Jan Sila; Evzen Kocenda; Ladislav Kristoufek; Jiri Kukacka
  30. Pandemic, War, Inflation: Oil Markets at a Crossroads? By Christiane Baumeister
  31. The Post-Pandemic r* By Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu
  32. Credit cycles revisited By Urban, Jörg
  33. The Begining of the Trend: Interest Rates, Markups, and Inflation By Anton Bobrov; James Traina
  34. Do You Even Crypto, Bro? Cryptocurrencies in Household Finance By Weber, Michael; Candia, Bernardo; Coibion, Olivier; Gorodnichenko, Yuriy
  35. The Impact of Money in Politics on Labor and Capital: Evidence from Citizens United v. FEC By Pat Akey; Tania Babina; Greg Buchak; Ana-Maria Tenekedjieva
  36. Kicking the Can Down the Road: Government Interventions in the European Banking Sector By Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen

  1. By: Alexander Rodnyansky; Yannick Timmer; Naoki Yago
    Abstract: This paper studies the spillovers of US monetary policy and the mitigating role of foreign exchange interventions (FXI) by combining deviations from a daily FXI policy rule with high-frequency US monetary policy shocks, daily exchange rates, and firm-level stock prices, as well as firm-level balance sheet variables across several countries. We first present evidence that–without interventions– contractionary US monetary policy shocks spill over through a balance sheet channel: foreign exchange rates depreciate and stock prices fall, driven by those firms with US dollar debt. However, when countries counter-intervene, the spillover of US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock price for firms with US dollar debt, suggesting that “intervening against the Fed" protects economies from the adverse spillover of US monetary policy tightening through the balance sheet channel of exchange rates.
    Keywords: foreign exchange intervention, monetary policy spillovers, balance sheet channel, exchange rates, dollar debt
    JEL: E44 E52 F31 F32 F41
    Date: 2023
  2. By: Ferrando, Annalisa; Grazzini, Caterina Forti
    Abstract: We provide new evidence on how ECB’s monetary policy decisions affect firms’ bank loan expectations in the euro area. We use firm-level data derived from the ECB Survey on the Access to Finance of Enterprises for the period 2009 to 2022 and identify the impact of monetary policy by comparing the responses of firms interviewed shortly before and after monetary policy shocks. Our results are as follows. First, we find that firms’ bank loan expectations react to monetary policy, with a contractionary shock leading to a downward revision of expectations. Second, we show that firms’ response depends on the size and the sign of the shock, with only large and contractionary shocks having a significant negative effect on expectations. Third, we observe that the different components of central bank communication (i.e. the pure monetary policy shock and the central bank information shock) have different impacts on firms’ beliefs. Fourth, we find that conventional and unconventional QE shocks have opposite effects on expectations, with the impact of QE policies mainly being driven by the central bank information component of the related announcements. Finally, we document that the response to monetary policy differs along firms’ structural characteristics. JEL Classification: C83, D22, D84, E58
    Keywords: firms’ expectations, monetary policy, survey data
    Date: 2023–08
  3. By: Goodhart, Charles A.E.; Tsomocos, Dimitrios P.; Wang, Xuan
    Abstract: The financial intermediation wedge of the banking sector used to co-move positively with the federal funds rate, but the post-GFC era saw a disconnect between them. We develop a flexible price dynamic general equilibrium with banks’ liquidity creation to offer an explanation. In a corridor system, the financial wedge and policy rate are shown to co-move, and the pass-through of monetary policy onto both inflation and output obtains. However, the post-GFC floor system obviates the need for the financial wedge to cover the cost of obtaining reserves, so the wedge and the policy rate indeed disconnect in equilibrium; furthermore, we show that the disconnect obstructs monetary expansions from generating inflation. In this environment, tightening bank capital requirement leads to disinflationary pressure. Money-financed fiscal expansions that subsidise non-bank sectors’ borrowing costs improve output and reduce default risks but increase inflation. The model uses banks’ liquidity creation via credit extension to provide a rationale for both the pre-pandemic disinflation and the post-pandemic inflation. The results hold both on the dynamic paths and in the steady state, and the role of money enlarges the Taylor rule determinacy region.
    Keywords: corporate default; financial intermediation wedge; inside money deposits; liquidity creation; long-run non-neutrality; money-financing; reserve management
    JEL: F3 G3 J1
    Date: 2023–08–01
  4. By: Lucian Briciu; Stefan Hohberger; Luca Onorante; Beatrice Pataracchia; Marco Ratto; Lukas Vogel
    Abstract: This paper investigates two important elements of the ECB’s 2021 monetary policy strategy review in an estimated structural open-economy macro model of the euro area: (a) explicit symmetry of the 2% inflation target, which can be expected to lower the risk of hitting the effective lower bound (ELB) on short-term interest rates by raising average inflation towards the target, and (b) commitment to forceful or persistent monetary accommodation in a low interest rate environment, here interpreted as low-for-longer response in the recovery from the ELB. We simulate the model with draws from the estimated distribution of shocks. Both elements increase average inflation and reduce the average output gap. Stabilisation gains are modest in quantitative terms, however, for the given illustrative policy rules, and they are more pronounced when the economy operates at the ELB. Important in the current context, the low-for-longer policy in the model does not jeopardise inflation stabilisation in the event of (inflationary) negative supply shocks at the exit from the ELB. With private sector ‘myopia’ instead of fully rational expectations, the low-for-longer rule still yields stabilisation gains at the ELB, but they shrink in quantitative terms.
    JEL: E30 E52 E58
    Date: 2023–07
  5. By: Willem THORBECKE
    Abstract: Inflation in 2021 and 2022 grew much faster than the Federal Reserve expected. The Fed downplayed inflation in 2021 and then increased the federal funds rate by 500 basis points between March 2022 and May 2023. This paper investigates how this unprecedented tightening impacted the stock market. To do so it estimates a fully specified multi-factor model that measures the exposure of 53 assets to Bauer and Swanson (2022) monetary policy surprises over the 1988 to 2019 period. It then uses the monetary policy betas to gauge investors’ beliefs about monetary policy between 2020 and 2023. The results indicate that changing perceptions about monetary policy multiplied uncertainty and stock market volatility.
    Date: 2023–07
  6. By: Orame, Andrea; Ramcharan, Rodney; Robatto, Roberto
    Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks’ net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks’ balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms’ credit constraints through the bank lending channel. JEL Classification: G28, E52, M48
    Keywords: bank lending channel, historical cost accounting, regulatory capital, sovereign default premia, unconventional monetary policy
    Date: 2023–08
  7. By: Oyadeyi, Olajide
    Abstract: This paper examined interest rate pass-through in Nigeria using monthly data from 2006 to 2020. It focused on the pass-through process from the policy rate to the money market and retail rates and from the pass-through of the money market rates to the retail rates. The results showed that there was an incomplete short-run pass-through with a higher degree from the policy rate to the money market rate, while the pass-through process over-shoot in the long run. However, this pass-through was found to be very weak and incomplete from the policy rate to the retail rates and from the money market rates to the retail rates. The mean adjustment lags suggested that it takes a quicker period for policy rate changes to fully reflect on the money market and retail segment of the market. Finally, the deposit rates were found to respond more significantly, albeit slowly, to changes in the policy and interbank rates compared to the lending rates. In essence, we recommend that the monetary authorities critically appraise the size of interest rate pass-through to the retail and money market rates in light of the heterogeneous response from the policy rate to the retail and money market rates.
    Keywords: Interest Rate Pass-Through; Monetary Policy Rate; Lending Rates, Deposit Rates and; Interbank Rates
    JEL: E4 E42 E43 E51 E52 E58
    Date: 2022–04–18
  8. By: Roberto M. Billi; Jordi Galí; Anton Nakov
    Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches.
    JEL: E32 E5
    Date: 2023–07
  9. By: Christopher Henry; Walter Engert; Alexandra Sutton-Lalani; Sebastian Hernandez; Darcey McVanel; Kim Huynh
    Abstract: We discuss the payment habits of Canadians both in the current payment environment and in a hypothetical cashless environment. We also consider whether a central bank digital currency (CBDC) would address unmet payment needs in a cashless society. Most adult Canadians do not experience gaps in their access to a range of payment methods, and this would probably continue to be the case in a cashless environment. Some people could, however, face difficulties making payments if merchants no longer generally accepted cash as a method of payment. For a payment-oriented CBDC to successfully address unmet payment needs, the main consumer groups—who already have access to a range of payment options—would have to widely adopt the CBDC and use it at scale. This is necessary to encourage widespread merchant acceptance of CBDC, which would, in turn, encourage further consumer adoption and use. However, most consumers face few payment gaps or frictions and therefore might have relatively weak incentives to adopt and—especially—to use CBDC at scale. If that were the case, widespread merchant acceptance also would be unlikely. This suggests that addressing unmet payment needs for a minority of consumers by issuing a CBDC could be challenging under the conditions explored in this paper. The minority of consumers with unmet payment needs will only be able to benefit from a CBDC if the majority of consumers experience material benefits and therefore drive its use.
    Keywords: Bank notes; Central bank research; Digital currencies and fintech; Financial services
    JEL: C C9 E E4 O O54
    Date: 2023–08
  10. By: Chavleishvili, Sulkhan; Kremer, Manfred; Lund-Thomsen, Frederik
    Abstract: We propose a novel empirical approach to inform monetary policymakers about the potential effects of policy action when facing trade-offs between financial and macroeconomic stability. We estimate a quantile vector autoregression (QVAR) for the euro area covering the real economy, monetary policy and measures of ex ante and ex post systemic risk representing financial stability. Policy implications are derived from scenario analyses where the associated costs and benefits are functions of the projected paths of the potentially asymmetric distributions of inflation and economic growth, allowing us to take a risk management perspective. One exercise considers the intertemporal financial stability trade-off in the context of the global financial crisis, where we find ex post evidence in favour of monetary policy leaning against the financial cycle. Another exercise considers the short-term financial stability trade-off when deciding the appropriate speed of monetary policy tightening to combat inflationary pressures in a fragile financial environment. JEL Classification: C32, E37, E44, E52, G01
    Keywords: growth-at-risk, Policy trade-offs, quantile regression, systemic risk
    Date: 2023–07
  11. By: Engin Kara; Ahmed Pirzada
    Abstract: This paper aims to explore the impact of rising uncertainty on prices using micro-data on prices and multi-sector new Keynesian models. We identify diverse price responses to increasing macroeconomic uncertainty: goods with relatively flexible prices experience a decline due to lower demand caused by the rising uncertainty, while those with sticky prices experience an increase. The model suggests that economic uncertainty creates strategic complementarity for firms with sticky prices, prompting them to raise markups and prices in anticipation of potentially higher future inflation. These findings establish a connection between heightened uncertainty, higher core inflation, and increased profits.
    Keywords: uncertainty, inflation, heterogeneity in price stickiness, micro-data on prices, New Keynesian
    JEL: E52 E58
    Date: 2023
  12. By: Cars Hommes; Julien Pinter; Isabelle Salle
    Abstract: We conduct an information-provision experiment within a large-scale household survey on public finance in France, The Netherlands and Italy. We elicit prior opinions via open-ended questions and introduce a measure of macroeconomic policy literacy. A central bank (CB) educational blogpost explaining the mechanics of CB money preceded by a short video clip on public finance can persistently induce less support for monetary-financed proposals and more for fiscal discipline and CB independence, no matter the respondents’ level of policy literacy. However, prior beliefs matter and contradictory information may be polarizing. Additional analysis of our data shows that information affects the respondents’ views by shifting their inflation and tax expectations associated to these policies.
    Keywords: large-scale household survey, information-provision experiment, RCT, central bank communication, expectations
    JEL: E70 E60 E62 E58 G53 H31 C83
    Date: 2023
  13. By: Robert C. M. Beyer; Rupa Duttagupta; Alexandra Fotiou; Ms. Keiko Honjo; Mr. Mark A Horton; Zoltan Jakab; Vina Nguyen; Mr. Rafael A Portillo; Jesper Lindé; Mrs. Nujin Suphaphiphat; Mr. Li Zeng
    Abstract: This paper employs two established macroeconomic models to show that fiscal policy in the euro area can help monetary policy in reducing inflation. Specifically, a fiscal consolidation of 1 percent of GDP for two years and 0.5 percent in the third year across the euro area would ease the policy interest rate by 30-50 basis points relative to the baseline scenario, while lowering inflation. It would also put the public debt-to-GDP ratio on a downward path, with the output costs reversing after the second year. Additionally, a stronger fiscal contribution to the policy mix could mitigate financial fragmentation risks. In the current context of elevated inflation in all euro area economies, the findings suggest two key takeaways: first, synchronized fiscal and monetary policies offer gains even when monetary policy is unconstrained and, second, sharing the burden of lowering inflation through fiscal consolidation among euro area members is beneficial for union-wide inflation reduction, improving debt sustainability and inducing a lower policy rate path.
    Keywords: Policy mix; monetary policy; fiscal policy; policy coordination
    Date: 2023–07–21
  14. By: Jeanne Lazarus (CSO - Centre de sociologie des organisations (Sciences Po, CNRS) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Keywords: Inflation, poverty
    Date: 2023
  15. By: Jeffrey A. Frankel
    Abstract: Written on the 50th anniversary of floating exchange rates, this paper deals with possible alternatives to a unipolar dollar-based system. It considers (1) measures of international currency use; (2) potential challengers to the dollar; (3) network externalities; and (4) the plausibility of gold and digital currencies, as alternatives to regular currencies. On the one hand, network externalities operate in favor of the status quo: the dollar as the single leading international currency. On the other hand, the danger of abuse of exorbitant privilege – for example, by debasing the currency or repeated use of sanctions – operates in favor of challengers. A good guess is that the dollar will continue to lose market share slowly to others, but will remain in the lead.
    JEL: F33
    Date: 2023–07
  16. By: John Krainer; Pascal Paul
    Abstract: We study the transmission of monetary policy through bank securities portfolios for the United States using granular supervisory data on bank securities, hedging positions, and corporate credit. We find that banks that experienced larger market value losses on their securities during the monetary tightening cycle in 2022 extended relatively less credit to firms. Such a spillover effect was stronger for (i) available-for sale securities, (ii) unhedged securities, (iii) low-capitalized banks, and (iv) banks that have to include unrealized gains and losses on their available-for-sale securities in their regulatory capital. Our findings provide evidence for a forceful transmission channel of monetary policy that is shaped by the regulatory framework of the banking system.
    Keywords: banks; firms; securities; monetary policy
    JEL: E32 E43 E44 E51 E52 E60 G21 G32
    Date: 2023–07–26
  17. By: Christian Glocker (WIFO); Philipp Piribauer (WIFO)
    Abstract: Cross-demand creates links between goods which cause demand-driven cross-price dependencies. We construct a theoretical model to analyze their role in propagating microeconomic price shocks to the CPI inflation rate and examine their empirical relevance using spatial econometric techniques. The results highlight the importance of complementarity and substitution properties between goods in exacerbating or mitigating price shocks. This contrasts with the propagation through the production network. Most importantly, demand-driven cross-price dependencies determine the impact of producer prices on the CPI inflation rate.
    Keywords: Inflation, Consumer behaviour, Cross price dependencies, Network analysis
    Date: 2023–08–02
  18. By: Gergö Motyovszki
    Abstract: This paper looks at whether the recent sharp spike in inflation can be beneficial for public debt sustainability by eroding the real value of nominal debt. Simulations with the European Commission’s QUEST model suggest that if the source of inflation is an adverse terms-of-trade shock, then it leads to a rising public debt-to-GDP ratio. In this case, the debt-reducing effect of higher inflation is outweighed by the adverse effects of slower real growth, a declining primary budget balance, and higher interest rates as an active monetary policy tightens to fight inflationary pressures. The results are highly policy-dependent: shorter consolidated debt maturity (brought about by past QE programs) would speed up the rise in interest expenditures, while a more accommodative monetary policy would delay them, also supporting nominal growth. The reaction of the primary fiscal balance (via automatic stabilisers, inflation indexation and debt-stabilisation rules) also matters. However, the baseline result that the debt-to-GDP ratio rises in response to an adverse terms-oftrade shock is fairly robust across all but the most extreme alternative policy scenarios
    JEL: E52 E62 E63 F41 F44 H62 H63
    Date: 2023–07
  19. By: Rafael Wildauer; Karsten Kohler; Adam Aboobaker; Alexander Guschanski
    Abstract: The paper presents a model of conflict inflation to investigate the distributional effects of energy price shocks. We argue that periods of high inflation are always periods of significant redistribution of income. We analyse how such redistribution occurs along two dimensions: between workers and firms and between sectors of the economy. To study the distributional outcomes of the recent inflationary episode, we build a three-sector model comprising a domestic energy sector which provides inputs for a goods and a services sector. The model is calibrated to US sectoral data with the Method of Simulated Moments. While energy prices are set internationally, non-energy prices and nominal wages are set by firms and workers, giving rise to conflicting claims over the distribution of income. We consider three shocks that trigger inflationary distributional conflict: an energy price shock combined with demand and supply shocks to the goods sector. We find that the recent inflationary episode constitutes a price-wage rather than a wage-price spiral. The combined shocks induce non-energy firms to raise prices, which undermines real wages, and redistributes income towards firms. The sectoral demand shift towards goods in combination with pandemic-related supply bottlenecks further raises mark-ups, accelerating inflation and leading to divergence in sectoral profit margins. We compare three anti-inflationary policies: redistributing windfall profits to workers, nominal wage restraint, and aggregate demand contraction through monetary or fiscal policy. The redistribution of profits via a windfall tax is most effective in reducing inflation without reinforcing reductions in employment and labour shares.
    Keywords: energy price shocks, inflation, income distribution, multi-sector model, wageprice spiral, price-wage spiral
    JEL: E24 E31 J30
    Date: 2023–08
  20. By: Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu
    Abstract: This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates.
    Keywords: r*; r-star; post-pandemic; Dynamic Stochastic General Equilibrium (DSGE) models
    JEL: E4 E5
    Date: 2023–08–10
  21. By: Georgii Zvonka (University of Lausanne; Swiss Finance Institute)
    Abstract: Tokenization is a process that may cause a transition to new monetary standards in a world of decentralized money. The possibility of tokenization explains why Bitcoin may have a high value today under expectations that the gradual decline in the mining reward will reduce security, as explained by Auer (2019). The paper introduces tokenization as a way to upgrade Bitcoin and discusses how the possibility of tokenization can affect the value of the first cryptocurrency. Tokenization may be deferred because of the balance between the network effect and congestion in the usage of Bitcoin’s blockchain against those for the new monetary standard. As security of Bitcoin declines, this balance shifts in favour of the new monetary standard. The new monetarist model predicts zero price of Bitcoin in the view of declining security and absence of the option for tokenization. Enabling agents to use tokenized version of Bitcoin instead of Bitcoin itself allows for an equilibrium in which the price of Bitcoin increases with time as the new monetary standard is adopted more widely.
    Keywords: Bitcoin, tokenization, monetary standards, monetary economics, diffusion processes
    JEL: E42 O33
    Date: 2023–06
  22. By: Panagiotis Bouras; Christian Bustamante; Xing Guo; Jacob Short
    Abstract: We measure the contribution to inflation from the growth in markups of Canadian firms. The dynamics of inflation and markups suggest that changes in markups could account for less than one-tenth of inflation in 2021. Further, they suggest that peak inflation was driven primarily by changes in the costs of firms.
    Keywords: Firm dynamics; Inflation and prices; Market structure and pricing
    JEL: D22 D4 E31 L11
    Date: 2023–08
  23. By: Donato Masciandaro; Davide Romelli; Stefano Ugolini
    Abstract: The impact of fiscal dominance on exchange rates has been relatively overlooked by the literature. We focus on an early unique experiment of freely floating State-issued money, implemented in Venice from 1619 to 1666. Building on a new hand-collected database from a previously unused archival source, we show that despite the Venetian government’s reputation for fiscal prudence, the external value of the ducat was highly sensitive, and increasingly so, to episodes of automatic government deficit monetization through the Banco del Giro during the shocks of 1630 (outbreak of the bubonic plague) and 1648-50 (escalation of the Cretan War).
    JEL: F31 E63 N33 N43
    Date: 2023
  24. By: Guido Ascari; Paolo Bonomolo; Qazi Haque
    Abstract: In U.S. data, inflation and output are negatively related in the long run. A Bayesian VAR with stochastic trends generalized to be piecewise linear provides robust reduced-form evidence in favor of a threshold level of trend inflation of around 4%, below which potential output is independent of trend inflation, and above which, instead, potential output is negatively affected by trend inflation. Moreover, this negative relationship is quite substantial: above the threshold every percentage point increase in trend inflation is related to about 1% decrease in potential output per year. A New Keynesian model generalized to admittime-varying trend inflation and estimated via particle filtering provides theoretical foundations to this reduced-form evidence. The structural long-run Phillips Curve implied by the estimated New Keynesian model is not statistically different from the one implied by the reduced-form piecewise linear BVAR model.
    Keywords: Long-Run Phillips Curve, Inflation, Bayesian VAR, DSGE, Particle Filter
    JEL: C32 C51 E30 E31 E52
    Date: 2023–08
  25. By: Johnson, Leroy; Osabuohien, Evans
    Abstract: The study explores the return and volatility nexus in Sierra Leone Foreign Exchange (Forex) Markets. The exchange rate excessive volatilities have been a serious concern as it translates to propel inflationary pressures and erodes the strength of the currency. The methodology of Diebold and Yilmaz (2012, 2014) indicator of connectedness was employed to unravel the intensity of connectedness among the selected forex markets in Sierra Leone (January 2011- December 2021). The study then uses, Leone/USD, Le/ Euro and Le/Pound sterling official exchange rate from the central bank to measure exchange rate dynamics in the market. The study finds connectedness among the forex markets in Sierra Leone to be highly time-varying and appear to be higher during the period of high depreciation of the Leone which coincides with the period of falling iron-ore and oil prices and domestic economic meltdown of 2014 and 2016, respectively. This shows that, relative to external shocks, connectedness among financial markets is likely to get amplified during the time of domestic turbulence. The paper, therefore portends the build-up of reserves by the Central Bank of Sierra Leone which serves as buffers to contain and assuage internal and external shocks in a timely and efficient manner.
    Keywords: Connectedness, Foreign Exchange, Return Spillover, Volatility
    JEL: G10
    Date: 2023–07–29
  26. By: Hsin-Lun Li
    Abstract: A money transfer involves a buyer and a seller. A buyer buys goods or services from a seller. The money the buyer decreases is the same as that the seller increases. At each time step, a pair of socially connected agents are selected and transact in agreed money. We evolve the Deffuant model to a money exchange system and study circumstances under which asymptotic stability holds, or equal wealth can be achieved.
    Date: 2023–07
  27. By: Batiz-Lazo, Bernardo; Maixe-Altes, J Carles; Peon, David
    Abstract: We explore the potential of different behavioral drivers for people to use cash when presented with digital payment alternatives in retail transactions. Behavioral finance traits in our study include the otherwise neglected emotional drivers. We conducted an online survey targeting university educated adults in sub-Saharan African countries, a continent characterized by lower levels of banking penetration, intensive use of cash, and increased popularity of mobile money accounts to reduce financial exclusion. We obtain robust evidence that the affect heuristic is the only relevant behavioral trait determining the use of cash and of payments with credit cards, while there is no evidence of behavioral drivers influencing the overall decision to use of electronic payments. However, in specific payment contexts cognitive traits, such as mental accounting, fungibility bias, and habit, do mediate in determining the choice of payment method. We found robust evidence that a higher value of our personal income proxy is associated with a reduction in the intention to use electronic payments. All results are robust to alternative econometric specifications: multinomial logistic, ordered logistic, and logit regressions. Our research provides a clear policy message, namely for authorities to promote a variety of payment alternatives, including cash, and ensure they are available in retail transactions.
    Keywords: FinTech, Cash, Digital Payments, Behavioral Finance (Affect Heuristic), Africa (Ghana, Kenya, Nigeria, South Africa).
    JEL: E4 E5 G1 G2 L8 O3
    Date: 2023–07
  28. By: Owen F. Humpage
    Abstract: The creation of the Federal Reserve System ultimately stemmed from fundamental changes in the banking industry that heightened the risks associated with shifts in the public’s liquidity preferences and that created an atmosphere of distrust between the small, traditional, country banks and the large, transforming, Wall Street banks. The severity of the Panic of 1907 became the proximate factor in the Federal Reserve’s formation. The panic, which the New York Clearing House’s slow, discriminative, and insufficient response characterized, gave credence to concerns of growing financial risks and invigorated calls for reform. The Federal Reserve’s unique structure reflects compromises reached in attempts to dampen the risks in the banking industry while easing the distrust and fears of dominance among its various stakeholders.
    Keywords: Inelastic/Elastic Currency; New York Clearing House; Reserve pyramiding; Panic of 1907; Aldrich Plan; Federal Reserve Act; Reserve Bank Organization Committee
    JEL: E58 N20
    Date: 2023–08–02
  29. By: Jan Sila (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Evzen Kocenda (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Ladislav Kristoufek (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia); Jiri Kukacka (Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia & Czech Academy of Sciences, Institute of Information Theory and Automation, Prague, Czechia)
    Abstract: Cryptocurrencies exhibit unique statistical and dynamic properties compared to those of traditional financial assets, making the study of their volatility crucial for portfolio managers and traders. We investigate the volatility connectedness dynamics of a representative set of eight major crypto assets. Methodologically, we decompose the measured volatility into positive and negative components and employ the time-varying parameters vector autoregression (TVP-VAR) framework to show distinct dynamics associated with market booms and downturns. The results suggest that crypto connectedness reflects important events and exhibits more variable and cyclical dynamics than those of traditional financial markets. Periods of extremely high or low connectedness are clearly linked to specific events in the crypto market and macroeconomic or monetary history. Furthermore, existing asymmetry from good and bad volatility indicates that information about market downturns spills over substantially faster than news about comparable market surges. Overall, the connectedness dynamics are predominantly driven by fundamental crypto factors, while the asymmetry measure also depends on macro factors such as the VIX index and the expected inflation.
    Keywords: Volatility, Dynamic connectedness, Asymmetric effects, Cryptocurrency
    JEL: C58 G10 C36
    Date: 2023–07
  30. By: Christiane Baumeister
    Abstract: The COVID-19 pandemic as well as the Russian invasion of Ukraine have had profound effects on the global energy landscape, with some of the longer-lasting effects still unfolding. This paper discusses how these events have reshaped the supply side of the global oil market by focusing on structural changes in each of the three main oil-producing countries. The demand side has responded to geopolitical developments by devising a set of policy tools to stabilize oil markets and counter inflationary pressures. In particular, the price cap policy was introduced to supplement the EU embargo on seaborne Russian oil exports, and record volumes of oil were released from government-controlled emergency stockpiles. The sources of oil price fluctuations associated with these events are also discussed, as is their role in the recent surge of inflation, with a particular focus on the heterogeneity in the pass-through of oil supply shocks within the Euro area.
    JEL: E31 E58 Q41 Q43
    Date: 2023–07
  31. By: Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu
    Abstract: The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially on long-run measures and tomorrow’s post on short-run r*.
    Keywords: r*; r-star; post-pandemic; Dynamic Stochastic General Equilibrium (DSGE) models
    JEL: E4 E5
    Date: 2023–08–09
  32. By: Urban, Jörg
    Abstract: Credit and business cycles play an important role in economic research, especially for central banks and supervisors. We reexamine a dynamic model proposed by Kiyotaki and Moore (1997) of an economy with an endogenous credit limit. They claim that a small temporary shock generates large and persistent deviations from the steady state due to a positive feedback loop and the endogenous credit constraint. We mathematically show that contrary to common belief the model does not show amplification and persistence is visible only for a few parameter settings. Kiyotaki and Moore have linearized the model in deviations of landholdings and found that these deviations from the equilibrium are large. This is mathematically inconsistent, because any higher order term would then be more important, rendering any finite-order Taylor expansion invalid. Further, we show that spillover effects in an economy with two distinct sectors are small. The strong amplification present in the original results, which supposedly is due to the large inter-temporal or dynamic multiplier effect, is spurious. The dynamic multiplier effect is of similar size than the static effect and in all cases numerically small.
    Keywords: Amplification, credit constraints, credit cycles, dynamic economies, Taylor expansion
    JEL: E32 E37 E51 E52
    Date: 2023
  33. By: Anton Bobrov; James Traina
    Abstract: Recent literature argues the decline in real interest rates led to significant increases in economic profits and markups. Consequently, some have linked rising market power to inflation. We scrutinize the effect of time series sensitivity on estimating secular trends through two relevant examples: increasing market power perceived as rising markups and the influence of corporate profits on inflation. Our analysis reveals that a four-year shift in sample start dates significantly affects economic profit growth trends, accounting for 19% of the trend, or $3, 000 per worker in 2014. Likewise, our qualitative evidence suggests that increased corporate profits are unlikely to drive inflation.
    Date: 2023–07
  34. By: Weber, Michael (University of Chicago); Candia, Bernardo (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley)
    Abstract: Using repeated large-scale surveys of U.S. households, we study the cryptocurrency investment decisions and motives of households relative to other financial assets. Cryptocurrency holders tend to be young, white, male and more libertarian relative to non-crypto holders. They expect much higher rates of returns for crypto and perceive it as relatively safer than do other households. They also view it as a better hedge against inflation. For those holding cryptocurrencies, changes in Bitcoin prices translate into their purchases of durable goods. Finally, exogenously-provided information about historical returns of cryptocurrencies leads individuals to increase their desired crypto holdings and makes them more likely to actually purchase cryptocurrency subsequently. We compare these views and behaviors to those of households toward other financial assets and argue that cryptocurrency is unique in many of these respects.
    Keywords: cryptocurrency, household finance, surveys
    JEL: E4 G5 D8
    Date: 2023–07
  35. By: Pat Akey; Tania Babina; Greg Buchak; Ana-Maria Tenekedjieva
    Abstract: We examine whether corporate money in politics benefits or hurts labor using the 2010 Supreme Court ruling Citizens United, which rendered bans on political election spending unconstitutional. In difference-in-difference analyses, affected states experience increases in both capital and labor income relative to unaffected states. We find evidence consistent with increased political spending spurring political competition and the adoption of pro-growth policies. These policies benefit a broader set of constituents as we find a broad-based increase in labor income. Affected states see increased political turnover and reduced regulatory burdens. The economic effects are stronger among ex-ante politically inactive and younger firms.
    JEL: D72 E25 G38 J30 P16
    Date: 2023–07
  36. By: Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
    Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.
    Keywords: forbearance; evergreening; zombie lending; sovereign debt crisis; bank recapitalization; fiscal constraints; political economy
    JEL: E44 G21 G28 G32 G34
    Date: 2023–08

This nep-mon issue is ©2023 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.