nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒10‒02
38 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. An Unconventional FX Tail Risk Story By Carlos Cañon; Eddie Gerba; Alberto Pambira; Evarist Stoja
  2. The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates Since 1950 By Michael D. Bordo; Pierre Siklos
  3. Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies By Philippe Bacchetta; Kenza Benhima; Brendan Berthold
  4. Monetary Policy Surprises on the Banking Sector: the Role of the Information and Pure Monetary Shocks By Felipe Beltrán; David Coble
  5. Monetary policy surprises shocks under different fiscal regimes: a panel analysis of the Euro Area By António Afonso; José Alves; Serena Ionta
  7. The Profitability Channel of Monetary Policy Transmission By Alex Hsu; Indrajit Mitra; Linghang Zeng
  8. Optimal Monetary Policy and Rational Asset Bubbles By Jacopo Bonchi; Salvatore Nisticò
  9. Perceived Inflation in Germany in 2022 By Treu, Johannes; Hartwig, Johannes
  10. Monetary Policy in Small Open Economies and the International Zero Lower Bound By Marco Rojas
  11. Global monetary policy surprises and their transmission to emerging market economies: an external VAR analysis By Felipe Beltrán
  12. Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing By Ding Ding; Yannick Timmer
  13. From Dominant to Producer Currency Pricing: Dynamics of Chilean Exports By José De Gregorio; Pablo García; Emiliano Luttini; Marco Rojas
  14. Monetary Approach to Balance of Payments: Empirical Evidence from ECOWAS Countries By Cham, Yaya
  15. The Impact of Monetary Policy on a Labor Market with Heterogeneous Workers: The Case of Chile By Carlos Madeira; Leonardo Salazar
  16. Effectiveness of Foreign Exchange Interventions: Evidence and Lessons from Chile By Jorge Arenas; Stephany Griffith-Jones
  17. Households' Response to the Wealth Effects of Inflation By Philip Schnorpfeil; Michael Weber; Andreas Hackethal
  18. Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment By Alberto Botta; Eugenio Caverzasi; Alberto Russo
  19. Supply, or Demand, that is the Question: Decomposing Euro Area Inflation By Pasimeni, Paolo
  20. Where is the Inflation? The Diverging Patterns of Prices of Goods and Services By Gent Bajraj; Guillermo Carlomagno; Juan M. Wlasiuk
  21. A HANK2 Model of Monetary Unions By Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
  22. What determines passthrough of policy rates to deposit rates in the euro area? By Todd Messer; Friederike Niepmann
  23. Rudimentary Inflation Conflict Models: A Note By Bill Martin
  24. Overborrowing, Underborrowing, and Macroprudential Policy By Fernando Arce; Julien Bengui; Javier Bianchi
  25. Forecasting inflation and inflation expectations in small open economies: A comparison of market and survey based approaches for Jamaica By Uluc Aysun; Cardel Wright
  26. Liquidity and Exchange Rates: An Empirical Investigation By Engel, Charles; Wu, Steve Pak Yeung
  27. Greed? Profits, Inflation, and Aggregate Demand By Florin O. Bilbiie; Diego R. Känzig
  28. Between money and speculative asset: the role of financial literacy on the perception towards Bitcoin in Italy By Cascavilla, Alessandro
  29. Deficits, Crowding Out and Inflation in Monetarily Sovereign Nations By Dubey, Rohan Ajay
  30. Agent-based Modeling and the Sociology of Money: a Framework for the Study of Coordination and Plurality By Eduardo Ferraciolli; Tanya Araújo
  31. Exchange rate volatility and the effectiveness of FX interventions: the case of Chile By Alejandro Jara; Marco Piña
  32. Imported Fossil Fuel Dependent Energy Market of Bangladesh: How Global Energy Crisis Triggered Domestic Inflation? By Khondaker Golam Moazzem; Abeer Khandker
  33. The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis By Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L.J. Wright
  34. Keep calm and bank on: panic-driven bank runs and the role of public communication By Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
  35. Freight costs and domestic prices during the COVID-19 pandemic By Gustavo González; Emiliano Luttini; Marco Rojas
  36. Disentangling Demand and Supply Inflation Shocks from Chilean Electronic Payment Data By Guillermo Carlomagno; Nicolas Eterovic; L. G. Hernández-Román
  37. Agree to Disagree: Measuring Hidden Dissents in FOMC Meetings By Kwok Ping Tsang; Zichao Yang
  38. Price Formation in the Foreign Exchange Market By Florent Gallien; Sergei Glebkin; Serge Kassibrakis; Semyon Malamud; Alberto Teguia

  1. By: Carlos Cañon; Eddie Gerba; Alberto Pambira; Evarist Stoja
    Abstract: We examine how the tail risk of currency returns over the past 20 years were impacted by central bank (monetary and liquidity) measures across the globe with an original and unique dataset that we make publicly available. Using a standard factor model, we derive theoretical measures of tail risks of currency returns which we then relate to the various policy instruments employed by central banks. We find empirical evidence for the existence of a cross-border transmission channel of central bank policy through the FX market. The tail impact is particularly sizeable for asset purchases and swap lines. The effects last for up to 1 month, and are proportionally higher for joint QE actions. This cross-border source of tail risk is largely undiversifiable, even after controlling for the U.S. dollar dominance and the effects of its own monetary policy stance.
    Keywords: unconventional and conventional monetary policy, liquidity measures, currency tail risk, systematic and idiosyncratic components of tail risk
    JEL: E44 G12 G15 E52
    Date: 2023
  2. By: Michael D. Bordo; Pierre Siklos
    Abstract: In this paper we revisit the Canadian experience with floating exchange rates since 1950. Canada was a pioneer in successfully adopting a floating exchange rate during the Bretton Woods pegged exchange rate regime. Since then, most advanced countries have followed the Canadian example. A key finding of our paper based on historical narrative and econometric analysis is that economic performance under floating depended on its monetary policy performance as Milton Friedman originally argued in his seminal 1953 article. Canadian monetary policy achieved low and stable inflation once it adopted inflation targeting as a nominal anchor. Also, as Friedman argued, Canada’s floating exchange rate provided it with a modicum of insulation from external shocks, especially commodity price shocks that influenced both the level and volatility of the real exchange rate over the past three decades. The Canadian experience with floating (along with that of other small open economies such as Australia, New Zealand and Sweden) and inflation targeting became a model for the conduct of monetary policy in emerging countries.
    JEL: E32 E52 F31 F32 N1
    Date: 2023–09
  3. By: Philippe Bacchetta (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)); Kenza Benhima (University of Lausanne; Centre for Economic Policy Research (CEPR)); Brendan Berthold (University of Lausanne)
    Abstract: We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.
    Date: 2023–08
  4. By: Felipe Beltrán; David Coble
    Abstract: This paper analyzes how monetary policy surprises in Chile affects the real and financial sector separating between a pure monetary policy shock and an information shock. Using inter-day movements of futures of interest rate in the banking system, we identify an information shock when labor data is released and a pure monetary policy shock when the central bank reveals their interest rate decision, and their effects are quantified through an external vector autoregression model. Our results suggest that a pure monetary policy shock produce an appreciation of nominal exchange rate, and contractionary effects on the economy. However, an information shock does not necessarily produce adverse effects. This paper contribute to the literature in two dimensions: studying the effect of the main driver behind the central bank announcements, and their transmission to the banking sector and consequently to the real and monetary sector.
    Date: 2023–04
  5. By: António Afonso; José Alves; Serena Ionta
    Abstract: We study the effect of monetary policy surprise shocks on real output and the price level, conditioned on different fiscal stances in the period 2001Q4-2021Q4 for a panel of the 19 countries of the Euro Area. Applying local projection methodology, we find that the effect of monetary shocks depends on each country's fiscal stance, specifically, if for output response the debt is more important in the effect of monetary policy, for prices, the "Ricardian" nature of fiscal policy appears to be far more crucial. However, regarding inflation targeting, monetary policy is most effective in the low debt regime and in the high fiscal sustainability one. Our results are robust to different specifications and models and have important policy implications notably for monetary policy, which should consider different fiscal stances when pursuing specific monetary policy objectives.
    Keywords: monetary policy surprises, public debt, fiscal sustainability, localprojection models, fiscal-monetary policy mix, Euro area.
    JEL: C32 E58 E62 E63
    Date: 2023–08
  6. By: T. Saungweme (University of South Africa); N.M. Odhiambo (University of South Africa)
    Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contested in literature. In the main, however, it is widely recognised that whether public debts are financed in a monetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy in ensuring price stability. This study contributes to the debate by testing the dynamic causal relationship between public debt and inflation in Tanzania covering the period 1970-2020. The study applies the autoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-based Granger-causality test to explore this relationship. In order to address the omission-of-variable bias, which has been the major methodological deficiency detected in some previous studies, two monetary variables, namely money supply and interest rate, were added as intermittent variables alongside public debt and inflation. The findings from this study show that there is a consistent long-run cointegrating relationship between public debt, inflation, money supply and interest rate in Tanzania. However, the results fail to find evidence of causality between public debt and inflation in Tanzania, irrespective of whether the causality is estimated in the short run or in the long run. The findings of this study, therefore, show that Tanzania’s current debt is not inflationary; hence, policymakers may continue to pursue the desirable fiscal policies necessary for the country’s long-term optimal growth path.
    Date: 2021–11
  7. By: Alex Hsu; Indrajit Mitra; Linghang Zeng
    Abstract: We provide firm-level evidence that Federal Open Market Committee announcements have real effects by changing expectations of firm profitability. We use an existing decomposition of a monetary policy shock into a central bank information component (CBI) and a conventional monetary component (MP). We find (1) firms with a higher value of capital asset pricing model (CAPM) beta have a higher investment rate sensitivity to the CBI component; no similar heterogeneity in investment response is observed for the MP component. We also find (2) the heterogeneity in investment sensitivity is due to innovations to firm profitability.
    Keywords: monetary policy; Fed information shocks; investments; CAPM beta
    JEL: E22 E52 G31
    Date: 2023–06–20
  8. By: Jacopo Bonchi; Salvatore Nisticò
    Abstract: Using a New Keynesian model with stochastic asset market participation, we analyze the normative implications of bubbly fluctuations for monetary policy. We show that stochastic asset-market participation allows rational bubbles to emerge in equilibrium despite the fact that households are infinitely lived. A central bank concerned with social welfare faces an additional tradeoff implied by the effect of bubbly fluctuations on consumption dispersion across market participants, which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. Deviations from inflation targeting are welfare improving in particular when the economy fluctuates around a balanced-growth path where equilibrium bubbles are small or absent, and the endogenous tradeoff is more stringent, requiring larger deviations of inflation/output gap to mitigate bubbly fluctuations in wealth and thus consumption inequality. The specific optimal monetary-policy response to bubbly fluctuations depends however on the intrinsic features of latter, and the associated effects on wealth inequality.
    Keywords: Rational bubbles, Optimal monetary policy, Stochastic Asset Market Participation, Consumption dispersion
    JEL: E21 E32 E44 E58
    Date: 2023–08
  9. By: Treu, Johannes; Hartwig, Johannes
    Abstract: The starting point of the paper is the question of the current level of perceived inflation (by consumers) in Germany and the (quantitative) difference between perceived inflation and officially measured inflation This paper shows that there is a very large difference between the official measured inflation rate and perceived inflation in Germany. While the inflation rate in Germany was 10.0% in September 2022 and 10.4% in October, a nationwide ad-hoc consumer survey revealed that respondents perceived inflation to be 34.15%. At the same time, the paper provides an explanatory approach to explain the perceived inflation using regression models. It becomes clear that all independent variables are highly significant and provide an explanatory contribution. It also shows that higher inflation concerns lead to a higher estimate of perceived inflation.
    Keywords: inflation, perceived inflation, inflation expectations, inflation measurement
    JEL: E3 E31
    Date: 2023–08–28
  10. By: Marco Rojas
    Abstract: How does the zero lower bound (ZLB) on the international interest rate affect monetary policy in small open economies (SOE)? When the Fed’s rate was at the ZLB (2008-2015), data for several SOE show a significantly lower correlation between interest rates and inflation, which is at odds with the empirical regularity. This is explained in a model where the distribution of shocks that affect SOE changes when the international interest rate hits the ZLB. Two opposing channels affect the exchange rate. At the ZLB, the depreciating channel is amplified, while the appreciating channel is attenuated. Then, the SOE currency depreciates more than in a scenario without ZLB. This passes through to inflation, which affects SOE’s ability to stabilize the economy as it cannot lower its interest rate as much. In an estimated model, this mechanism by itself can explain 26 percent of the lower correlation observed in the data.
    Date: 2022–12
  11. By: Felipe Beltrán
    Abstract: This paper analyzes how monetary policy surprises in the U.S. affects emerging market economies (EMs) focusing on the transmission through the real exchange rate (RER) and country spreads (EMBI). To do so, we disentangle U.S. interest rate movements between both a pure monetary policy shock and an information shock: while the former is constructed based on high-frequency movements of the interest rate around FOMC announcements, the latter builds from major macroeconomic releases. We quantify their relative impacts through an SVAR model with external instruments. The results suggest that a pure monetary policy shock produces a persistent appreciation of the RER in the U.S. coupled with an increase of the EMBI that induces contractionary effects in the real sector of EMs. In contrast, an information shock does not necessarily produce such contractionary effects in EMs. These results contribute to the literature in identifying the specific drivers behind each movement in Fed announcements and its transmission to EMs.
    Date: 2023–04
  12. By: Ding Ding; Yannick Timmer
    Abstract: In this paper, we estimate exchange rate elasticities of international tourism. Both the bilateral exchange rate and the U.S. dollar exchange rate relative to tourism origin countries are important drivers of tourism flows. The U.S. dollar exchange rate is more important for tourism destination countries with higher U.S. dollar borrowing, pointing toward a complementarity between U.S. dollar pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role on average but are important for tourism-dependent countries and those with a high concentration of foreign tourists. Consistent with dominant currency pricing, we also find that local hotel prices do increase strongly when the domestic currency depreciates against the U.S. dollar. The importance of the U.S. dollar exchange rate represents a strong piece of evidence of dominant currency pricing (DCP) in the international trade of services. The results suggest that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought and that a broad appreciation of the U.S. dollar is associated with a significant decline in tourism flows globally.
    Keywords: Exchange rates; Trade flows; Tourism; Dominant currency pricing
    JEL: F31 F14 F41
    Date: 2023–08–15
  13. By: José De Gregorio; Pablo García; Emiliano Luttini; Marco Rojas
    Abstract: We revisit a central question for international macroeconomics: The response of export prices and quantities to movements in the exchange rate (ER). We use a comprehensive dataset for Chile and study how the effects vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when we control for U.S. dollar ER, which supports the dominant currency paradigm. The longer the horizon, the larger the role is played by bilateral ER movements, which lends support to producer currency pricing. The dynamics do not depend on the invoicing currency. We find consistent results for quantities, supporting the view that bilateral exchange rate movements contribute to macroeconomic adjustment through exports. We also find that U.S. dollar fluctuations, holding bilateral exchange rates constant, show results suggestive of relevant supply and demand effects.
    Date: 2023–01
  14. By: Cham, Yaya
    Abstract: The study primarily presents a critical and imperative analytical framework, accentuating the intricate interplay between the demand for money and the supply of money in shaping the economic equilibrium of the balance of payments (BOP). The focal point of this paper involves a meticulous examination of the monetary perspective regarding the BOP within the ECOWAS countries spanning the temporal domain from 2005 to 2019. This investigation is accomplished through the adept utilization of the second-generation unit root tests, namely the Common Augmented Dickey-Fuller (CADF) test and the Cross-sectional Augmented IPS (CIPS) test, alongside the comprehensive Westerlund cointegration test to ascertain the enduring nexus existing within the examined series. By adopting the dynamic homogeneous panel estimator, this study conducts an exhaustive scrutiny of both the short-term and long-term dynamics. The empirical findings, gleaned from the Pooled Mean Group analysis, unveil the pivotal role of monetary variables in determining BOP. In the medium and extended temporal spectra, ameliorations in domestic credit within the ECOWAS region are juxtaposed with a concomitant decline in net foreign assets, thus manifestly contributing to the deterioration of the BOP milieu in the aforementioned zones. Furthermore, a parallel analysis divulges a counteractive relationship between economic growth and inflation with net foreign assets in the short run, while this association transforms a synergistic correlation over the long haul. Conversely, the money supply engenders a positive and consequential influence on net foreign assets, evinced across both the transient and enduring periods. Essentially, the research findings substantiate the veracity of the monetary approach within the purview of the zones under contemplation. Consequently, monetary variables wield substantial and pronounced impacts on the BOP, with an escalating BOP, forth as a harbinger of enhanced equilibrium within the zones' balance of payments framework. Concerning policy implications, the underlying study underscores the monetary approach as an adept and fitting strategy, elucidating the notion that an outsized BOP deficit could potentially foster an environment conducive to the propagation of excessive domestic credit. Knowledge obtained from this research will go a long way in helping policy formulation and will also help the region in ensuring smooth developments in the external sector especially during the implementation of monetary policy.
    Keywords: Yaya Cham Monetary Approach Balance of Payments West African Monetary Institute Central Bank of The Gambia ARDL ECOWAS Crossectional
    JEL: E5 E51 E52 E58 O55 O57 Y40 Y50
    Date: 2023–08
  15. By: Carlos Madeira; Leonardo Salazar
    Abstract: We use a factor-augmented vector autoregressive (FAVAR) model to analyze the effect of a contractionary monetary policy shock on macroeconomic aggregates and labor market indicators for different demographic groups in Chile classified by industry, age, and income quintile. Inflation is negatively correlated with unemployment across groups. The model shows that most groups’ job-separation rate and wage volatility increase after an interest rate rise. The response of the job-finding rate is mixed, decreasing in some groups and rising in others after an interest rate shock. The labor market in the primary sector is the least sensitive to monetary shocks.
    Date: 2023–06
  16. By: Jorge Arenas; Stephany Griffith-Jones
    Abstract: In this article we evaluate the effectiveness of the last two foreign exchange interventions (FXI) of the Central Bank of Chile (BCCh), dated 2019 and 2022. Using data with daily and intra-daily frequency for the nominal exchange rate, results show through different empirical methods that both intervention episodes have significant effects in the expected direction on the level and volatility of the exchange rate. The effects associated with the 2019 and 2022 interventions are appreciations of an average of 2% and 6%, respectively. The estimated decrease in volatility is also greater in the 2022 intervention. The results support the implications of the different mechanisms that have been proposed in the literature to understand the effectiveness of FXI. Simultaneously, these results suggest that intervening the forward market seems just as effective as intervening into the spot market.
    Date: 2023–06
  17. By: Philip Schnorpfeil; Michael Weber; Andreas Hackethal
    Abstract: We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023–09
  18. By: Alberto Botta; Eugenio Caverzasi; Alberto Russo
    Abstract: This paper analyzes the macroeconomic and distributional implications of central banks’ decisions to raise interest rates after a prolonged period at near the Zero Lower Bound (ZLB). The main goal of our study is to assess the interaction between monetary policy, inequality, and financial fragility, in a financialized economic system. Financialization is here portrayed as the presence in the economy of complex financial products, i.e., asset-backed securities, produced via the securitization of banks’ loans. We do so in the context of a hybrid Agent-Based Model (ABM). We first compare the prevailing macroeconomic and financial features of a low interest rate environment (LIRE) with respect to a “Great Moderation”(GM)-like setting. As expected, we show that LIRE tends to stimulate faster growth and higher employment, and to reduce income and wealth inequality, as well as (poor) households’ indebtedness. Consistent with existing empirical literature, this comes at the cost of higher inflation and some signs of financial system’s fragility, i.e., lower banks’ profitability and Capital Adequacy Ratio (CAR), and higher “search for risk” given by credit extension to poorer households. We then show that increases in the central bank’s policy rate, as motivated by the central bank’s willingness to reduce inflation, effectively curb price dynamics and accomplish with central bank’s inflation targeting mandate. Higher interest rates also improve commercial banks’ CAR and profitability. However, they also cause a pronounced increase in non-performing loans (stronger than what possibly observed in a GM scenario) and some worrisome macro-financial dynamics. In fact, higher interest rates give rise to higher households’ and overall economy indebtedness as allowed by wealthier households’ demand for high-yield complex financial products and mounting securitization. We finally show how financialization structurally changes the functioning of the economy and the behavior of central banks. Financialization actually contributes to create a (private sector) debt-led economy, which becomes structurally more resistant to central bank’s attempts to control inflation. Central bank’s reaction in terms of higher interest rates could likely come with perverse distributional consequences.
    Keywords: Low interest rate environment, Contractionary monetary policy, Securitization
    JEL: E24 E44 E52
    Date: 2023–09
  19. By: Pasimeni, Paolo (European Commission – DG GROW, and Brussels School of Governance (BSoG) at the Vrije Universiteit Brussel (VUB))
    Abstract: This paper studies the recent trends in inflation in the euro area and estimates to what extent the current inflationary pressures are driven by demand expansion and by supply side disruptions. First of all, consumer price inflation is particularly pronounced in goods and less so in the case of services. Energy and food are the most relevant components of rising consumer prices, accounting for almost three-quarters of total headline inflation. The fact that price pressure comes mainly from sectors with a high import content, then, suggests that disruptions along international supply chains may play a key role. The paper then focuses on producer prices at sectoral level and presents a methodology to decompose the rise in inflation between supply and demand impulses. It finds that, in the present context, supply factors are the main driver of inflation and account for about 80% of the current increase in producer prices. This is particularly evident in industry and in each one of the manufacturing sectors with the highest price pressures. These findings imply that, if repairing supply-side problems and disruptions along supply chains is the priority, then promoting the right investment may be more urgent than cooling demand down.
    JEL: C83 E31 E37 L6
    Date: 2022–09
  20. By: Gent Bajraj; Guillermo Carlomagno; Juan M. Wlasiuk
    Abstract: We construct a novel monthly dataset of disaggregated CPI data for 44 countries. CPIs are broken down into 93 components with a common methodology and precise definition of each component. This dataset allows international comparisons of inflation dynamics free of methodological and aggregation weights differences. We document stylized facts on relative prices across countries and sectors, and assess the importance of local, global and sectoral factors for headline inflation and its main categories. We find strong international co-movement of inflation components across countries, but also significant and persistent differences in the level, volatility, and cyclical dynamics between those components. We also find international factors to be important drivers of the main broad categories of inflation, especially for energy and headline inflation. Interestingly, local factors tend to be more relevant for the inflation of non-energy industrial goods, while the influence of the global factor is stronger on services inflation
    Date: 2023–01
  21. By: Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
    Abstract: How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK2) and show in closed form that a monetary union shifts the adjustment to a shock horizontally—across countries—within the brackets of the union-wide wealth distribution rather than vertically—that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.
    Keywords: HANK2, OCA theory, Two-country model, monetary union, spillovers, monetary policy, heterogeneity, inequality, households
    JEL: F45 E52 D31
    Date: 2023
  22. By: Todd Messer; Friederike Niepmann
    Abstract: Interest rates on bank deposits are sticky and move only sluggishly following changes in central bank policy rates. As deposits are typically the largest share of bank liabilities, deposit rate stickiness plays a key role for bank funding costs and profitability.
    Date: 2023–07–28
  23. By: Bill Martin
    Abstract: Using the most rudimentary models, this note explains how the pursuit by workers and firms of collectively unobtainable goals for real wages and real profits can lead not simply to a higher rate of inflation but to an explosive inflation. The rudimentary nature of the models allows a clear link to be forged between these conflicting aspirations and the distribution of national income. The models exclude any notion that workers or firms form, or act upon, expectations about future inflation but can generate the equivalent of a non-accelerating inflation rate of unemployment, a concept absent from many complex conflict models. Out of academic fashion since the ‘defeat of inflation’, conflict models may now enjoy a revival of interest from policy makers should the British economy suffer a period of ‘stagflation’. If so, solutions proposed by British academics who developed the inflation conflict approach in the 1970s and 1980s would warrant their own revival.
    Keywords: inflation, conflict, stock-flow consistency, British economy
    JEL: E25 E31
    Date: 2022–09
  24. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies.
    Keywords: Macroprudential policy; Under-borrowing; Over-borrowing
    JEL: E58 F32 F34 F31
    Date: 2023–05–31
  25. By: Uluc Aysun (University of Central Florida, Orlando, FL); Cardel Wright (Bank of Jamaica, Kingston, Jamaica)
    Abstract: This paper builds a dynamic factor model to obtain both in-sample and out-of-sample forecasts of inflation in Jamaica. The model is estimated with both survey and market data. For the latter, a global latent factor is first extracted from international financial data and then included as an exogenous variable in the estimations with Jamaican data. The results indicate that the estimations with market data provide a much better fit for in-sample and out-of-sample values of inflation and inflation expectations. The dynamic factor, under a parsimonious representation, also outperforms univariate models, Bank of Jamaica's in-house forecasts of inflation and those obtained from an estimated DSGE model.
    Keywords: Jamaica, inflation expectations, forecasting, dynamic factor model, survey data.
    JEL: E32 E44 F33 F44
    Date: 2023–09
  26. By: Engel, Charles; Wu, Steve Pak Yeung
    Abstract: Abstract: We find strong empirical evidence that the liquidity yield on government bonds in combination with standard economic fundamentals can well account for nominal exchange rate movements. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all the G10 countries, and we stress that the US dollar is not special in this relationship. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.
    Keywords: Economics, Applied Economics, Econometrics, Applied economics, Economic theory
    Date: 2023–09–05
  27. By: Florin O. Bilbiie; Diego R. Känzig
    Abstract: Amidst the recent resurgence of inflation, this paper investigates the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive a novel analytical condition for profits to be procyclical and inflationary. Furthermore, we show that the cyclicality of profits is a key determinant of the propagation properties of these models under household heterogeneity, but there is a catch: for aggregate-demand fluctuations and inflation to be amplified by heterogeneity, profits have to be countercyclical—an implication that is at odds with the data. Adding physical capital investment to the model can resolve this conundrum, generating aggregate-demand amplification even under procyclical profits. However, the amplification works through an investment channel and not through profits, inconsistent with the narrative attributing elevated inflation to corporate greed.
    JEL: D11 E32 E52 E62
    Date: 2023–08
  28. By: Cascavilla, Alessandro
    Abstract: With Bitcoin at the forefront, cryptocurrencies are gaining traction as an alternative asset investment, particularly among young investors. Although most of the empirical evidence has shown that it could not be defined as a currency, some Bitcoin users argue the opposite. This paper analyzes the factors influencing the perception of Bitcoin, i.e., whether it is a currency or an asset, with a focus on financial literacy among a subject pool of university students in Italy. The results show that, after controlling for several individual characteristics such as behavioral biases, personal attitudes, psychological traits, and socio-demographic information, this cryptocurrency is considered more than just an asset, and thus it could replace currency, among subjects with lower financial literacy, higher knowledge of Bitcoin, and those who do not trust the banking system. In contrast, Bitcoin is considered a speculative asset among those individuals with higher financial literacy. In line with the recent evidence that cryptocurrencies are mostly owned by young investors, results indicate the importance of increasing the level of financial education among them.
    Keywords: Bitcoin, Financial education, Financial literacy, Behavioral bias
    JEL: D14 D91 E41 O33
    Date: 2023
  29. By: Dubey, Rohan Ajay
    Abstract: Government deficits are often viewed negatively by mainstream economic theory. They are believed to lead to higher interest rates, inflation, and crowding out of private investment. This paper aims to evaluate the validity of these conventional beliefs about deficits. To do so, a Modern Monetary Theory and Keynesian theoretical framework have been used. These theories have then been analysed in the context of empirical data from the United States and Japan over the last three decades. I find that deficits have not directly led to higher interest rates, crowding out or inflation in these two nations. The findings emphasise the importance for monetarily sovereign governments to prioritise addressing socio-economic issues faced by citizens rather than being overly concerned about deficits on their own. The findings also indicate the need for a more pluralistic approach to macroeconomic policy that involves considering various schools of thought - such as Modern Monetary Theory - apart from mainstream economics, that may offer a more suitable framework for understanding fiscal policy choices and their respective outcomes.
    Date: 2023–09–08
  30. By: Eduardo Ferraciolli; Tanya Araújo
    Abstract: The institution of money can be seen as a foundational social mechanism providing communities with the ability to quantify the results of economic processes and collectively regulate independent activities of production and trade – money can be said, indeed, to constitute the micro-macro link in economics. As such, investigations of money’s role in the economy can be fruitfully combined with the tools of social simulation. This paper revisits some of the main positions taken in the contested landscape of monetary theory, evaluating how they might serve as a foundation for the development of a new generation of conceptual and empirical agent-based models.We start out by presenting a comparative review of the way different intellectual traditions in mainstream economics, heterodox economics, and economic sociology attempt to specify the nature of money as an institution and clarify its role in the economy. We extract the key "concepts of money" that each approach emphasizes, paying especially close attention to the contrast between the sociology of money and the microfoundations-related traditions in economics (focusing on "money is memory" models, search-theory and mechanism design). We then review the current literature applying agent-based modeling to questions surrounding the nature of money, assessing some of the main contributions from the perspectives of generative epistemology and of the key concepts identified above. We conclude by indicating different research directions in which we believe agent-based models, in combination with the sociology of money, still have the potential to provide new answers to old questions in monetary theory: by clarifying convergence processes related to money of account, by illustrating the formation of economic structure through symbolic mediation, by constructing tools for analyses of intersubjectivity and coordination, or by providing formal generalization to the social-monetary patterns that are currently being revealed in the wealth of empirical data originating from digital complementary currencies and new histories of money.
    Keywords: monetary theory, agent-based modeling, economic sociology
    Date: 2023–08
  31. By: Alejandro Jara; Marco Piña
    Abstract: In this paper, we study the effectiveness of FX interventions in Chile since adopting a fully flexible exchange rate regime in the late 1990s. In particular, we ask whether these interventions have dumped excess exchange rate volatility and reduced its probability of being in a high volatility state. To do so, we rely on a high-frequency GARCH(1, 1) volatility model with Markov-Switching regimes (Haas et al., 2004) and evaluate the effectiveness of FX interventions within a Local Projection setting (Jordà, 2005). We show that FX interventions in Chile tend to occur during high exchange rate volatility periods, which correlate with domestic and foreign financial factors. Moreover, we show that the FX intervention that started by the end of 2019–the latest intervention included in our study–effectively reduced the exchange rate volatility and the probability of being at a high volatility state.
    Date: 2022–09
  32. By: Khondaker Golam Moazzem; Abeer Khandker
    Abstract: With the depletion of domestic natural gas reserves, Bangladesh’s energy market has become increasingly dependent on imported energy – mainly petroleum, LNG and coal. Hence, the volatility in the global energy market is gradually impacting the energy sector as well as the economy as a whole. The Ukraine war has further accentuated the global energy market crisis both in terms of energy supply and energy prices which have multi-dimensional adverse impacts on developing countries. There is no comprehensive study found on the war-led global energy crisis and its impact on inflation where the level of adversity has been measured. Most of the studies are indicative in terms of causal relationships between energy crisis and its impact on macroeconomic aggregates including inflation. Hence a quantitative analysis is required to show how the global energy market crisis led to domestic inflation, particularly in developing countries. In this backdrop, this study will seek to estimate the level of inflationary impact on Bangladesh economy due to global energy price volatility.
    Keywords: Fossil Fuel, Global Energy Crisis, Domestic Inflation, Energy sector, Bangladesh economy
    Date: 2022–11
  33. By: Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L.J. Wright
    Abstract: This paper quantifies the positive and normative impact of Bretton Woods capital controls on global and regional economic activity. A three-region DSGE capital flows accounting framework consisting of the U.S., Western Europe, and the Rest of the World (ROW) is developed to quantify capital controls and evaluate their impact on the world economy. We find these controls had large effects. Counterfactual analysis show world output would have been 0:5 percent higher had there been perfect capital mobility, with substantial capital flowing from the ROW to the U.S. Bretton Woods capital controls raised welfare substantially in the ROW, but at the expense of much lower U.S. welfare. Given the U.S.’s goal of keeping capital within these countries to preserve their stability during this period, we interpret lower U.S. welfare due to Bretton Woods as the implicit value the U.S. placed on preserving geopolitical stability in ally countries during the Cold War.
    JEL: E0 F30 P0
    Date: 2023–08
  34. By: Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using a survey with information treatments conducted in the aftermath of SVB's collapse, we study households' perspectives on bank stability, the potential for panic-driven bank runs, and the role of public communication. When informed about SVB's collapse, households become more likely to withdraw deposits, due to both a higher perceived risk of bank failure and higher expected losses on deposits in case of bank failure. Leveraging hypothetical questions and the exogenous variation in beliefs generated by the information treatments, we show that households reallocate deposit withdrawals primarily into other banks and cash, with little passthrough into spending. Information about FDIC insurance and communication about bank stability by the Federal Reserve can reassure depositors, while communication from political leaders only influences their electoral base.
    Keywords: bank runs, public communication, information treatments
    JEL: E21 E58 G21
    Date: 2023–08
  35. By: Gustavo González; Emiliano Luttini; Marco Rojas
    Abstract: How much do changes in the cost of international freight spill over into domestic inflation? Using Chilean customs data, we document that imports from Asia primarily explain the sharp increase in average freight costs observed during 2019-2021. We exploit the heterogeneous exposure of importing firms to this region to implement a shiftshare instrument for import prices to estimate the elasticity of substitution between intermediate inputs from Asia and the Rest of the world. Using this estimate in a general equilibrium model with nominal rigidities, we calculate that the observed increase in freight costs accounts for 14% of the inflation for the 2019Q4-2021Q4 period.
    Date: 2023–06
  36. By: Guillermo Carlomagno; Nicolas Eterovic; L. G. Hernández-Román
    Abstract: We propose a novel methodology to track inflation dynamics in Chile by identifying supply and demand shocks at a highly disaggregated level using prices and quantities information from elec-tronic payments data. We estimate SVAR models where supply and demand shocks are identified with sign restrictions. These estimates are then used to group products into categories of CPI inflation. As opposed to similar studies using categorical-level regressions (e.g., Shapiro, 2022), supply and demand shocks may coexist at a given point in time for a particular category, providing a much richer environment for the policymaker. For the Chilean case, our decomposition provides a reasonable narrative to explain the dynamics of inflation since the start of the COVID-19 pandemic and thereafter. The decomposition of headline inflation obtained by adding up the disaggregates is consistent with that coming from a large DSGE model of the Chilean economy. Keywords: Emerging Economy, Electronic Payment Data, COVID-19, inflation, supply and demand shocks, SVAR.
    Date: 2023–07
  37. By: Kwok Ping Tsang; Zichao Yang
    Abstract: Based on a record of dissents on FOMC votes and transcripts of the meetings from 1976 to 2017, we develop a deep learning model based on self-attention modules to create a measure of the level of disagreement for each member in each meeting. While dissents are rare, we find that members often have reservations with the policy decision. The level of disagreement is mostly driven by current or predicted macroeconomic data, and personal characteristics of the members play almost no role. We also use our model to evaluate speeches made by members between meetings, and we find a weak correlation between the level of disagreement revealed in them and that of the following meeting. Finally, we find that the level of disagreement increases whenever monetary policy action is more aggressive.
    Date: 2023–08
  38. By: Florent Gallien (Swissquote); Sergei Glebkin (INSEAD); Serge Kassibrakis (Swissquote); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Alberto Teguia (UBC Sauder)
    Abstract: We study joint price formation in the dealer-to-dealer (D2D) and dealer-to-customer (D2C) segments of the foreign exchange (FX) market, both theoretically and empirically. Our theory accounts for dealer heterogeneity, market power, and non-exclusive customer-dealer relationship and shows that several statistics of the cross-section of D2C quotes help predict D2D prices and liquidity. In particular, D2D prices are negatively related to cross-sectional covariance between D2C mid-quotes and spreads, contrary to predictions of other theories of two-tiered markets. Our predictions are confirmed empirically using unique proprietary D2C data. Model calibration reveals and quantifies the FX market’s inelasticity and non-competitiveness.
    Keywords: Liquidity, Foreign Exchange, OTC markets, Price Impact, Market Power
    JEL: F31 G12 G14 G21
    Date: 2023–08

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