nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒09‒18
34 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. House Price Expectations and Inflation Expectations: Evidence from Survey Data By Vedanta Dhamija; Ricardo Nunes; Roshni Tara
  2. The origins of monetary policy disagreement: the role of supply and demand shocks By Carlos Madeira; João Madeira; Paulo Santos Monteiro
  3. Exchange rate misalignment and external imbalances: what is the optimal monetary policy response? By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  4. The interplay between monetary and fiscal policy in a small open economy By Øistein Røisland; Tommy Sveen; Ragnar Torvik
  5. Oil Price Shocks and Inflation By Lutz Kilian; Xiaoqing Zhou
  6. Lending by Servicing: Monetary Policy Transmission Through Shadow Banks By Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
  7. A single monetary policy for heterogeneous labour markets: the case of the euro area By Gomes, Sandra; Jacquinot, Pascal; Lozej, Matija
  8. Managing an Energy Shock: Fiscal and Monetary Policy By Adrien Auclert; Hugo Monnery; Matthew Rognlie; Ludwig Straub
  9. Investigating the Effects of Monetary Policy Shocks on Growth and Inflation in Egypt: Asymmetry and the Long-term Impact By Nadeen Omar
  10. Estimating the Causal Relationship between External Debt and Inflation in Jordan: Evidence from an ARDL and Toda-Yamamoto Approaches By Mesbah Fathy Sharaf; Abdelhalem Mahmoud Shahen; Badr Abdulaziz Binzaid
  11. UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts By Chen, Haixia; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  12. Supply or Demand? Policy Makers' Confusion in the Presence of Hysteresis By Antonio Fatás; Sanjay R. Singh
  13. On the unimportance of commitment for monetary policy By Juan Paez-Farrell
  14. A Comment on Monetary Policy and Rational Asset Price Bubbles By Franklin Allen; Gadi Barlevy; Douglas Gale
  15. Can Central Banks Do the Unpleasant Job That Governments Should Do? By Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
  16. The role of mobile money innovations in the effect of inequality on poverty and severity of poverty in Sub-Saharan Africa By Simplice A. Asongu; Sara le Roux
  17. Mobile money innovations, income inequality and gender inclusion in sub-Saharan Africa By Simplice A. Asongu; Peter Agyemang-Mintah; Joseph Nnanna; Yolande E. Ngoungou
  18. The Effects of Exchange Rate Changes on Sudanese Output: An Asymmetric Analysis using the NARDL Model By Mesbah Fathy Sharaf; Abdelhalem Mahmoud Shahen
  19. Interest Rate Surprises: A Tale of Two Shocks By Ricardo Nunes; Ali Ozdagli; Jenny Tang
  20. rationalityandbiasesinsightsfromdisaggregatedfirmlevelinflationexpectationsdata By Monique Reid; Pierre Siklos
  21. Time-varying exchange rate pass-through into terms of trade By Dainauskas, Justas
  22. Behavioral drivers of intentions to use alternatives to cash: An African survey By David Peón
  23. Deposit Dollarization in Turkey: A Rolling Window Analysis By A. Yasemin Yalta; A. Talha Yalta
  24. Currency Areas, Labor Markets, and Regional Cyclical Sensitivity By Katheryn N. Russ; Jay C. Shambaugh; Sanjay R. Singh
  25. A Bayesian approach for the determinants of bitcoin returns By Thanasis Stengos; Theodore Panagiotidis; Georgios Papapanagiotou
  26. A Theory of Capital Flow Retrenchment By J. Scott Davis; Eric Van Wincoop
  27. The FOMC versus the Staff: Do Policymakers Add Value in Their Tales? By Ilias Filippou; James Mitchell; My T. Nguyen
  28. On the Problem of the Purchasing Power of Money by A. A. Konüs and S. S. Byushgens: Translation and Commentary By Valentin Zelenyuk; Erwin Diewert
  29. Currency Areas, Labor Markets, and Regional Cyclical Sensitivity By Katheryn Russ; Jay C. Shambaugh; Sanjay R. Singh
  30. Strategic Money and Credit Ledgers By Markus K. Brunnermeier; Jonathan Payne
  31. The Crypto Cycle and US Monetary Policy By Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
  32. Interest Rate Dynamics and Commodity Prices By Christophe Gouel; Qingyin Ma; John Stachurski
  33. Estimating HANK for Central Banks By Sushant Acharya; William Chen; Marco Del Negro; Keshav Dogra; Aidan Gleich; Shlok Goyal; Donggyu Lee; Ethan Matlin; Reca Sarfati; Sikata Sengupta
  34. The four types of stablecoins: A comparative analysis By Matthias Hafner; Marco Henriques Pereira; Helmut Dietl; Juan Beccuti

  1. By: Vedanta Dhamija (University of Surrey); Ricardo Nunes (University of Surrey); 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.
    JEL: D10 E12 E31 E52 E58
    Date: 2023–07
  2. By: Carlos Madeira; João Madeira; Paulo Santos Monteiro
    Abstract: We investigate how dissent in the FOMC is affected by structural macroeconomic shocks obtained using a medium-scale DSGE model. We find that dissent is less (more) frequent when demand (supply) shocks are the predominant source of inflation fluctuations. In addition, supply shocks are found to raise private sector forecasting uncertainty about the path of interest rates. Since supply shocks impose a trade-off between inflation and output stabilisation while demand shocks do not, our findings are consistent with heterogeneous preferences over the dual mandate among FOMC members as a driver of policy disagreement.
    Keywords: FOMC, committees, monetary policy, structural shocks, dissent
    JEL: E52 E58 D78
    Date: 2023–08
  3. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: How should monetary policy respond to excessive capital in•ows that appreciate the currency and widen the external de•cit? Using the workhorse two-country open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital in•ows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand. JEL Classification: E44, E52, E61, F41, F42
    Keywords: asset markets and risk sharing, currency misalignment, exchange rate pass-through, international policy cooperation, optimal targeting rules, trade imbalances
    Date: 2023–08
  4. By: Øistein Røisland; Tommy Sveen; Ragnar Torvik
    Abstract: We develop a theory for the optimal interaction between monetary and fiscal policy. While one might initially think that monetary and fiscal policy should pull in the same direction, we show within a simple model that this is not always the case. If there are small costs of changing the interest rate, it is optimal that monetary policy and fiscal policy pull in opposite directions when the economy is hit by an inflation or exchange rate shock. The reason is that monetary policy affects inflation through both the demand channel and the exchange rate channel, while fiscal policy only affects inflation through the demand channel. Therefore, monetary policy has a comparative advantage in stabilizing inflation, while fiscal policy has a comparative advantage in stabilizing output. Only when the costs of changing the interest rate are sufficiently high will it be optimal for monetary and fiscal policy to pull in the same direction. We also analyse how tax deduction for interest payments affects the monetary policy transmission. Such an interest subsidy improves goal achievement in response to inflation and exchange rate shocks, but the opposite is true in response to demand shocks.
    Date: 2023–08
  5. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: Despite growing interest in the impact of oil and other energy price shocks on inflation and inflation expectations, until recently this question has not received much attention. This survey not only presents empirical results for the U.S. economy, but expands the analysis to include other major economies. We find that only in the euro area and in the U.K. energy price shocks are associated with a material increase in core consumer prices. This helps explain the somewhat more persistent response of headline inflation in these countries than in the U.S. or Canada. Inflation is even less sensitive to energy price shocks in Japan. We document that energy price shocks played a more important role in explaining headline inflation in the euro area in 2021 and 2022 than in the U.S. This does not mean that energy price shocks have de-anchored inflation expectations, however. While suitable data on long-run inflation expectations are scant, neither for the U.S. nor the U.K. is there evidence that energy price shocks have materially changed long-run inflation expectations.
    Keywords: inflation; oil price; gasoline price; inflation expectation; wage-price spiral
    JEL: E31 Q43
    Date: 2023–08–24
  6. By: Isha Agarwal; Malin Hu; Raluca Roman; Keling Zheng
    Abstract: We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.
    JEL: E52 G21
    Date: 2023–08–02
  7. By: Gomes, Sandra (Bank of Portugal, UECE/REM); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland)
    Abstract: Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment. Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households.
    Keywords: DSGE Modelling, Business cycles, Search and matching, Monetary Union.
    JEL: E24 E32 E43 E52 F45
    Date: 2023–04
  8. By: Adrien Auclert; Hugo Monnery; Matthew Rognlie; Ludwig Straub
    Abstract: This paper studies the macroeconomic effects of energy price shocks in energy-importing economies using a heterogeneous-agent New Keynesian model. When MPCs are realistically large and the elasticity of substitution between energy and domestic goods is realistically low, increases in energy prices depress real incomes and cause a recession, even if the central bank does not tighten monetary policy. Imported energy inflation can spill over to wage inflation through a wage-price spiral, but this does not mitigate the decline in real wages. Monetary tightening has limited effect on imported inflation when done in isolation, but can be powerful when done in coordination with other energy importers by lowering world energy demand. Fiscal policy, especially energy price subsidies, can isolate individual energy importers from the shock, but it has large negative externalities on other economies.
    JEL: E52 F42 Q43
    Date: 2023–08
  9. By: Nadeen Omar (German University in Cairo)
    Abstract: Egypt is an emerging economy that has been going through a series of monetary reforms since the 1990s. Previous studies examined the effects of monetary policy with the assumption of a symmetric impact on the macroeconomic aggregates. We add to this line of literature with a recent investigation of both the symmetric and asymmetric effects of monetary policy on output and inflation in Egypt. This paper utilized the interest rate as the monetary policy instrument and retrieved quarterly data covering the period from 2007Q3 to 2019Q3. We apply both the linear and non-linear Auto-regressive Distributed Lag (ARDL) model. In addition, the paper employs an F-bounds test for cointegration and derives the dynamic multiplier to visualize the asymmetric effects. Despite a significant long-run impact on both macroeconomic variables, there is evidence for asymmetric effects on inflation, but not on output. We conclude with policy implications reflecting on Egypt’s plans of implementing an inflation-targeting (IT) regime.
    Date: 2023–03–20
  10. By: Mesbah Fathy Sharaf (Faculty of Arts, University of Alberta); Abdelhalem Mahmoud Shahen; Badr Abdulaziz Binzaid
    Abstract: This study investigates the causal relationship, if any exists, between external debt and inflation in Jordan over the period 1970 to 2020 within a multivariate framework by including other determinants of inflation. The study uses an ARDL bounds testing approach to cointegration to test the existence of a long-run relationship between the inflation and its drivers. An error correction model is estimated to reveal the short-run dynamics between the series. The direction of causality is examined using Toda-Yamamoto Granger non-causality test. The results suggest a statistically significant long-term relationship between inflation and its drivers. The TodaYamamoto Granger noncausality test reveals a bi-directional causality between inflation and external debt, between the nominal effective exchange rate and inflation, and between money supply and inflation. Proper management of the exchange rate policy, money supply and external debt levels is crucial to control inflation rates in Jordan.
    Date: 2023–07–20
  11. By: Chen, Haixia (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: Considerable micro-level evidence suggests that price/wage contract durations fluctuate with the state of the economy, particularly inflation; nonetheless, macro-level evidence for this is scarce. We incorporate state-dependent price/wage setting into an open economy DSGE model to investigate the evidence of state-dependence in the UK economy’s postwar behaviour. The model is estimated and tested using the Indirect Inference method and is found to fit the dynamic behaviour of key variables very well over a long sample period 1955-2021. In the state-dependent scenario, apart from the direct responses to shocks, monetary policy affects the degree to which the economy is close to the NK world, which in turn indirectly affects the response to these shocks; it also potentially pushes interest rates to the Zero Lower Bound, ZLB. Under the interaction of state-dependence and the ZLB, monetary-fiscal coordination is needed to stabilise the economy, as monetary policy alone cannot achieve economic stability during ZLB scenarios, where it must use bond purchases (Quantitative Easing, QE). Our findings suggest that a coordinated monetary-fiscal policy framework, i.e., an interest rate policy that targets nominal GDP complemented by a ZLB-suppressing fiscal policy, decreases the frequency of economic crises and enhances price/output stability and household welfare compared to the baseline Taylor Rule and QE framework.
    Keywords: State-dependence, DSGE, QE, ZLB, Monetary Policy, Nominal GDP Targeting, Fiscal Policy, Indirect Inference.
    Date: 2023–08
  12. By: Antonio Fatás; Sanjay R. Singh
    Abstract: Policy makers need to separate between temporary demand-driven shocks and permanent shocks in order to design optimal aggregate demand policies. In this paper we study the case of a central bank that ignores the presence of hysteresis when identifying shocks. By assuming that all low frequency output fluctuations are driven by permanent technology shocks, monetary policy is not aggressive enough in response to demand shocks. In addition, we show that errors in assessing the state of the economy can be self-perpetuating if seen through the lens of the mistaken views of the policymaker. We show that a central bank that mistakes a demand shock for a supply shock, will produce permanent effects on output through their suboptimal policies. Ex-post, the central bank will see an economy that resembles what they had forecast when designing their policies. The shock is indeed persistent and this persistence validates their assumption that the shock was a supply-driven one. The interaction between forecasts, policies and hysteresis creates the dynamics of self-perpetuating errors that is the focus of this paper.
    Keywords: supply; demand; hysteresis
    Date: 2023–06–01
  13. By: Juan Paez-Farrell
    Abstract: In a New Keynesian model where the trade-off between stabilising the aggregate inflation rate and the output gap arises from sectoral asymmetries, the gains from commitment are either zero or negligible. Thus, to the extent that economic fluctuations are caused by sectoral shocks, policies designed to overcome the stabilisation bias are aiming to correct an unimportant problem.
    Date: 2023–08
  14. By: Franklin Allen; Gadi Barlevy; Douglas Gale
    Abstract: Galí (2014) showed that a monetary policy rule that raises interest rates in response to bubbles can paradoxically lead to larger bubbles. This comment shows that a central bank that wants to dampen bubbles can always do so by raising interest rates aggressively enough. This result is different from the Miao, Shen and Wang (2019) comment on Galí’s paper. They argue Galí’s model contains additional equilibria in which more aggressive rules dampen bubbles. We show that for these equilibria, more aggressive rules involve threats to raise interest rates more than actual rate increases.
    Date: 2023–07–23
  15. By: Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
    Abstract: We investigate what happens when the fiscal authorities do not react to rising public debt so that the unpleasant task of fiscal sustainability falls upon the Central Bank (CB). In particular, we explore whether the CB’s bond purchases in the secondary market can restore stability and determinacy in an otherwise unstable model. This is investigated in a DSGE model calibrated to the Euro Area (EA) and where monetary policy is conducted subject to the numerical rules of the Eurosystem (ES). We show that given the recent situation in the ES, and to the extent that a relatively big shock hits the economy and fiscal policy remains active, there is no room left for further quasi-fiscal actions by the ECB; there will be room only if the ES’ rules are violated. We then search for policy mixes that can respect the ES’s rules and show that debt-contingent fiscal and quantitative monetary policies can reinforce each other; this confirms the importance of policy complementarities. On the negative side, bond purchases by the CB worsen income inequality and the unavoidable reversal, in the form of QT, will come at a real cost.
    Keywords: central banking, fiscal policy, debt stabilization, Euro Area
    JEL: E50 E60 O50
    Date: 2023
  16. By: Simplice A. Asongu (Oxford, UK); Sara le Roux (Oxford, UK)
    Abstract: This study investigates the role of mobile money innovations in the incidence of income inequality on poverty and severity of poverty in 42 sub-Saharan African countries over the period 1980 to 2019. Mobile money innovations are understood as the mobile used to send money and the mobile used to pay bills online while income inequality is measured with the Gini index. Poverty is measured as the poverty headcount ratio while the severity of poverty is generated as the squared of the poverty gap index. The empirical evidence is based on interactive Quantile regressions. The following main findings are established. (i) Income inequality unconditionally reduces poverty and the severity of poverty though the significance is not throughout the conditional distributions of poverty and the severity of poverty. (ii) Mobile money innovations significantly moderate the positive incidence of income inequality on poverty and the severity of poverty in some quantiles. (iii) Positive net effects are apparent exclusively in the poverty regressions. (iv) Given the negative conditional effects, policy thresholds or minimum mobile money innovation levels needed to completely nullify the positive incidence of income inequality on poverty are provided: 27.666 (% age 15+) and 24.000 (% age 15+) of the mobile used to send money in the 50th and 75th quantiles, respectively and 16.272 (% age 15+) and 13.666 (% age 15+) of the mobile used to pay bills online in the 10th and 50th quantiles, respectively. Policy implications are discussed with respect of SDG1 on poverty reduction and SDG10 on inequality mitigation.
    Keywords: Mobile phones; financial inclusion; poverty; inequality; Africa
    JEL: G20 O40 I10 I20 I32
    Date: 2023–01
  17. By: Simplice A. Asongu (Yaoundé, Cameroon); Peter Agyemang-Mintah (Zayed University, Abu Dhabi, UAE); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria); Yolande E. Ngoungou (Yaoundé, Cameroon)
    Abstract: The study assesses the role of mobile money innovations on income inequality and gender inclusion in 42 Sub-Saharan African countries for the period 1980 to 2019 using interactive quantile regressions. The following findings are established. First, income inequality unconditionally reduces the involvement of women in business and politics. Second, mobile money innovations interact with income inequality to have a positive impact on women in business and politics. Third, net effects from the role of mobile money innovations in income inequality for gender inclusion are consistently negative. Fourth, given that the positive conditional or interactive effects and negative net effects are consistent across the conditional distribution of gender inclusion, thresholds at which mobile money innovations can completely dampen the negative effect of income inequality on gender inclusion are provided. Among others, policy makers should work towards improving conditions for mobile money innovations. They should also be aware that reducing both income inequality and enhancing mobile money innovations simultaneously leads to more inclusive outcomes in terms of gender inclusion.
    Keywords: Financial inclusion; inequality; mobile phones; sub-Saharan Africa; women
    JEL: G20 O40 I10 I20 I32
    Date: 2023–01
  18. By: Mesbah Fathy Sharaf (Faculty of Arts, University of Alberta); Abdelhalem Mahmoud Shahen
    Abstract: This study tests the hypothesis that the real effective exchange rate changes have an asymmetric impact on the domestic output in Sudan from 1960 to 2020. The analysis uses a multivariate framework by controlling for the various channels through which exchange rate changes could affect domestic output. To disentangle the potential asymmetric impact of exchange rate changes on domestic income, we use the nonlinear autoregressive distributed lag (NARDL) framework of Shin et al. (2014) to separate real currency appreciations from depreciation. The results show that fiscal policy has no statistically significant effect on domestic output, while monetary policy has a statistically significant long-run contractionary effect. Results of the NARDL model show long-run asymmetry in the effect of real currency appreciations and depreciations. In particular, real currency appreciations (depreciations) have an expansionary (contractionary) effect on domestic output. There is a considerable difference in the magnitude of the effect of the positive exchange rate shocks compared to the negative shocks, in which the magnitude of the effect of the real currency appreciations on domestic output is almost double that of real currency deprecations. Monetary authorities in Sudan can use the real exchange rate as an effective instrument to affect domestic output in the long run.
    Date: 2023–07–20
  19. By: Ricardo Nunes (University of Surrey); Ali Ozdagli (Federal Reserve Bank of Dallas); Jenny Tang (Federal Reserve Bank of Boston)
    Abstract: Interest rate surprises around FOMC announcements contain both pure policy shocks and interest rate movements driven by central bank information about the economy. By analysing interest rate changes on days of macroeconomic data releases, the impact of the central bank's information shocks can be identified and separated from the pure policy shocks. Results show that there is a significant central bank information component in the widely used policy rate surprise measure. Removing this component reveals that the contractionary effects of a positive pure policy shock are more pronounced relative to those estimated using the entire policy rate surprise. A positive information shock, on the other hand, is expansionary.
    JEL: C36 D83 E52 E58
    Date: 2023–08
  20. By: Monique Reid; Pierre Siklos
    Abstract: In this paper, we reflect on the controversial concept of rational expectations and point out that the meaning of rational has changed over time. After briefly reviewing the literature, we describe the disaggregated firm-level data from the Bureau for Economic Research in South Africa. Our empirical investigation focuses on inflation expectations. The firm-level data are unique in breadth, scope and time span. We focus on these data, which are considered to be more representative of price setters than financial analysts or households. We compare these results with analysis of financial analysts, who have traditionally been the subject of these types of analyses and who tend to be relatively more rational. We find that while neither the inflation expectations of the business sector nor those of the financial analysts are rational in the strict sense of the term, both respond quickly to changes in underlying macroeconomic and financial conditions. There is evidence that inflation forecast errors stem partly from errors made in forecasting variables such as wages, the exchange rate and interest rates. We reach this conclusion because the survey data used also require respondents to forecast related economic variables. In addition, we find that important socio-economic factors such as firm size, the position of the respondent, and the industry a firm belongs to have significant effects on inflation expectations.
    Date: 2023–08–22
  21. By: Dainauskas, Justas
    Abstract: The U.S. invoices nearly all of its imports and exports in U.S. dollars. The U.S. terms of trade should therefore be “neutral” to movements in the U.S. dollar against other currencies. However, I find that the U.S. dollar pass-through into the U.S. terms of trade is: (i) on average positive and significant (31%); and (ii) it exhibits persistent time variation in the range of 10–60% over the period of 1990–2018. I argue that this can be explained by the changing primary commodity share in U.S. imports and the fact that commodity prices are invoiced, but not always “sticky”, in U.S. dollar terms. Without primary commodities, such as petroleum and crude oil, pass-through roughly halves and becomes relatively stable over time. Unlike trade in manufactured goods and services (i.e. non-commodities), trade in commodities thus preserves the conventional link between the exchange rate, terms of trade, and the current account.
    Keywords: commodity prices; current account; dominant currency paradigm; exchange rate pass-through; state-space model; terms of trade
    JEL: J1 F3 G3
    Date: 2023–10–01
  22. By: David Peón (Universidade da Coruna)
    Abstract: Seeking to identify frictions to the possible implementation of CBDCs, I explore potential behavioral drivers for people to use cash or alternative payment methods in retail transactions. I conducted an online survey targeting adults in sub-Saharan Africa, a continent characterized by lower levels of banking penetration, intensive use of cash, and popularity of mobile money accounts to overcome financial exclusion. I obtained robust evidence that the affect heuristic is the only relevant behavioral trait against the use of cash and of credit cards. This adds to criticisms of behavioral finance for frequently neglecting emotional drivers. Cognitive traits, such as mental accounting, fungibility bias, and habit do not mediate in the overall preference but in which contexts people prefer to use one payment method or another. I find no behavioral drivers against the use of electronic payments but robust evidence that higher per capita income reduces their preference. All results are robust to alternative econometric specifications: multinomial logistic, ordered logistic, and logit regressions. My research provides a clear message for policy making: authorities might better favor ensuring that a wide variety of payment alternatives are available for people to use, including cash, and let them choose.
    Date: 2023–08–20
  23. By: A. Yasemin Yalta (Department of Economics, Hacettepe University, Turkey); A. Talha Yalta (Department of Economics, TOBB University of Economics and Technology, Turkey)
    Abstract: In the recent years deposit dollarization in Turkey has been on the rise, reaching record levels in 2021. This was caused by a series of economic as well as political shocks namely the coup attempt in 2016, the switch to the presidential system in 2018, and the Covid-19 pandemic in 2020. This study contributes to the literature by examining the time varying reactions of deposit dollarization to the changing inflation, interest rate volatility, real exchange rate, and the consumer confidence before and after these shocks experienced by the country. The results based on rolling window maximum entropy bootstrap estimates, and monthly data between 2013 and 2021, reveal that all of the model variables had significant and sometimes asymmetric effects on deposit dollarization during different stages of this turbulent period. In particular, we observe a weakening effect of both inflation and the real exchange rate over time, while the impact of interest rate volatility increases after 2017. Therefore, a policy change toward increasing monetary policy credibility is required for achieving de-dollarization in the Turkish economy.
    Date: 2023–03–20
  24. By: Katheryn N. Russ; Jay C. Shambaugh; Sanjay R. Singh
    Abstract: In his papers during the lead up to the birth of the European Monetary Union, Obstfeld considered whether the countries forming the EMU were sufficiently similar to survive a single monetary policy--and more importantly, whether they had the capacity to adjust to asymmetric shocks given a single monetary and exchange rate policy. The convention at the time was to take the United States as the baseline for a smoothly functioning currency union. We document the evolution of the literature on regional labor market adjustment within the United States, expanding on stylized facts illustrating how stratification in local labor market outcomes appears far more persistent today than 30 years ago in the context of what Obstfeld and Peri (1998) call non-adjustment in unemployment rates. We then extend the currency union literature by adding an additional consideration: differences in regional cyclical sensitivity. Using measures of cyclicality and Obstfeld-Peri-type non-adjustment, we explore the characteristics of places that can get left behind when local labor markets respond differently to national shocks and discuss implications for policy.
    Keywords: currencies; unemployment
    JEL: F15 F16 F45 F66
    Date: 2023–06–01
  25. By: Thanasis Stengos (Department of Economics and Finance, University of Guelph, Guelph ON Canada); Theodore Panagiotidis (University of Macedonia); Georgios Papapanagiotou (University of Macedonia)
    Abstract: This paper examines the effect of thirty-one variables on bitcoin returns over the period 2015-2021. We use a Bayesian LASSO model that accounts for stochastic volatility and leverage effect. We examine the impact of economic, financial and technological variables as well as uncertainty and attention indicators on bitcoin returns. Furthermore, we consider two recently proposed indicators (Central Bank Digital Currency (CBDC)) for uncertainty and attention. Our findings suggest that sentiment and technological factors have the most profound effect on bitcoin returns. Regarding economic/financial variables, stock market returns and volatility indices have the greatest impact on bitcoin returns.
    Keywords: Bitcoin, Cryptocurrency, LASSO, Bayesian, CBDC.
    JEL: G12 G15 C11 D80
    Date: 2023
  26. By: J. Scott Davis; Eric Van Wincoop
    Abstract: The empirical literature shows that gross capital inflows and outflows both decline following a negative global shock. However, to generate a positive co-movement between gross inflows and outflows, the theoretical literature relies on asymmetric shocks across countries. We present a model where there is heterogeneity across investors within countries, but there are no asymmetries across countries. We show that a negative global shock (rise in global risk-aversion) generates an identical drop in gross inflows and outflows. The within-country heterogeneity relates to the willingness of investors to hold risky assets and foreign assets.
    Keywords: capital flows; retrenchment; Portfolio Heterogeneity
    JEL: F30 F40
    Date: 2023–08–24
  27. By: Ilias Filippou; James Mitchell; My T. Nguyen
    Abstract: Using close to 40 years of textual data from FOMC transcripts and the Federal Reserve staff's Greenbook/Tealbook, we extend Romer and Romer (2008) to test if the FOMC adds information relative to its staff forecasts not via its own quantitative forecasts but via its words. We use methods from natural language processing to extract from both types of document text-based forecasts that capture attentiveness to and sentiment about the macroeconomy. We test whether these text-based forecasts provide value-added in explaining the distribution of outcomes for GDP growth, the unemployment rate, and inflation. We find that FOMC tales about macroeconomic risks do add value in the tails, especially for GDP growth and the unemployment rate. For inflation, we find value-added in both FOMC point forecasts and narrative, once we extract from the text a broader set of measures of macroeconomic sentiment and risk attentiveness.
    Keywords: monetary policy; sentiment; uncertainty; risk; forecast evaluation; FOMC meetings; textual analysis; machine learning; quantile regression
    JEL: F31 G11 G15
    Date: 2023–08–30
  28. By: Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia); Erwin Diewert (University of British Columbia & University of New South Wales)
    Abstract: In 1939, Econometrica published an English translation of Konüs (1924). Since then, Konüs (1924 [1939]) has become a classic work on the theory of the cost of living index, inspiring many other studies in the field. On the other hand, very few scholars have had the opportunity to read another, equally important, work by Konüs (co-authored with Byushgens) published in 1926 by the same Institute. This other paper of Konüs also pioneered several fundamental concepts and results in economics (including duality theory, the theory of inverse demand functions and the theory of exact index numbers), yet somehow it appears that it has never been translated into English (or any other language). We bridge this gap by offering a translation and a commentary on this important paper.
    Keywords: Price Index, Inflation measurement, Purchasing Power of Money
    JEL: C43 E30
    Date: 2023–01
  29. By: Katheryn Russ; Jay C. Shambaugh; Sanjay R. Singh
    Abstract: In his papers during the lead up to the birth of the European Monetary Union, Obstfeld considered whether the countries forming the EMU were sufficiently similar to survive a single monetary policy—and more importantly, whether they had the capacity to adjust to asymmetric shocks given a single monetary and exchange rate policy. The convention at the time was to take the United States as the baseline for a smoothly functioning currency union. We document the evolution of the literature on regional labor market adjustment within the United States, expanding on stylized facts illustrating how stratification in local labor market outcomes appears far more persistent today than 30 years ago in the context of what Obstfeld and Peri (1998) call non-adjustment in unemployment rates. We then extend the currency union literature by adding an additional consideration: differences in regional cyclical sensitivity. Using measures of cyclicality and Obstfeld-Peri-type non-adjustment, we explore the characteristics of places that can get left behind when local labor markets respond differently to national shocks and discuss implications for policy.
    JEL: F15 F16 F45
    Date: 2023–08
  30. By: Markus K. Brunnermeier; Jonathan Payne
    Abstract: This paper studies strategic decision making by a private currency ledger operator, which faces competition from public money and/or other ledgers. A monopoly ledger operator can incentivize contract enforcement across the financial sector by threatening exclusion, but it can also impose markups through its pricing power. Currency competition limits rent extraction, but also makes coordinated contract enforcement more fragile. The emergent market structure bundles the provision of ledger and platform trading technologies. Regulation to ensure platform cooperation on contract enforcement and competition on markup setting is effective so long as agents can easily switch between platforms.
    JEL: E4 E42 E5 E50 E59 F39 G21 G23 L10 L13
    Date: 2023–08
  31. By: Ms. Natasha X Che; Alexander Copestake; Davide Furceri; Tammaro Terracciano
    Abstract: We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.
    Keywords: US Monetary Policy; Cryptoassets; Stock Markets.
    Date: 2023–08–04
  32. By: Christophe Gouel; Qingyin Ma; John Stachurski
    Abstract: Monetary conditions are frequently cited as a significant factor influencing fluctuations in commodity prices. However, the precise channels of transmission are less well identified. In this paper, we develop a unified theory to study the impact of interest rates on commodity prices and the underlying mechanisms. To that end, we extend the competitive storage model to accommodate stochastically evolving interest rates, and establish general conditions under which (i) a unique rational expectations equilibrium exists and can be efficiently computed, and (ii) interest rates are negatively correlated with commodity prices. As an application, we quantify the impact of interest rates on commodity prices through the speculative channel, namely, the role of speculators in the physical market whose incentive to hold inventories is influenced by interest rate movements. Our findings demonstrate that real interest rates have nontrivial and persistent negative effect on commodity prices, and the magnitude of the impact varies substantially under different market supply and interest rate regimes.
    Date: 2023–08
  33. By: Sushant Acharya; William Chen; Marco Del Negro; Keshav Dogra; Aidan Gleich; Shlok Goyal; Donggyu Lee; Ethan Matlin; Reca Sarfati; Sikata Sengupta
    Abstract: We provide a toolkit for efficient online estimation of heterogeneous agent (HA) New Keynesian (NK) models based on Sequential Monte Carlo methods. We use this toolkit to compare the out-of-sample forecasting accuracy of a prominent HANK model, Bayer et al. (2022), to that of the representative agent (RA) NK model of Smets and Wouters (2007, SW). We find that HANK’s accuracy for real activity variables is notably inferior to that of SW. The results for consumption in particular are disappointing since the main difference between RANK and HANK is the replacement of the RA Euler equation with the aggregation of individual households’ consumption policy functions, which reflects inequality.
    Keywords: HANK model; Heterogeneous-agent New Keynesian (HANK) model; Bayesian inference; sequential Monte Carlo methods
    JEL: C11 C32 D31 E32 E37 E52
    Date: 2023–08–01
  34. By: Matthias Hafner; Marco Henriques Pereira; Helmut Dietl; Juan Beccuti
    Abstract: Stablecoins have gained significant popularity recently, with their market cap rising to over $180 billion. However, recent events have raised concerns about their stability. In this paper, we classify stablecoins into four types based on the source and management of collateral and investigate the stability of each type under different conditions. We highlight each type's potential instabilities and underlying tradeoffs using agent-based simulations. The results emphasize the importance of carefully evaluating the origin of a stablecoin's collateral and its collateral management mechanism to ensure stability and minimize risks. Enhanced understanding of stablecoins should be informative to regulators, policymakers, and investors alike.
    Date: 2023–08

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