nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒10‒09
thirty-one papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The effect of monetary policy on inflation heterogeneity along the income distribution By Miguel Ampudia; Michael Ehrmann; Georg Strasser
  2. The Macroeconomic Effects of the Federal Reserve's Conventional and Unconventional Monetary Policies By Eric T. Swanson
  3. Banking Crises under a Central Bank Digital Currency (CBDC) By Lea Bitter
  4. Firm Financial Conditions and the Transmission of Monetary Policy By Thiago Revil T. Ferreira; Daniel Ostry; John Rogers
  5. Central Bank Digital Currencies in the Post-pandemic Era By Dominique Torre; Qing Xu
  6. Determinants of monetary policy frameworks in emerging and developing countries By Sullivan, Megan
  7. Where next for monetary policy? lessons from the financial crisis and the pandemic By Minford, Patrick
  8. Sticky information and the Taylor rule By Meyer-Gohde, Alexander; Tzaawa-Krenzler, Mary
  9. Households' response to the wealth effects of inflation By Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
  10. The Recent Rise in US Inflation: Policy Lessons from the Quantity Theory By Han Gao; Juan Pablo Nicolini
  11. Are Real Assets Owners Less Averse to Inflation? Evidence from Consumer Sentiments and Inflation Expectations By Geng Li; Nitish R. Sinha
  12. Runs and Flights to Safety: Are Stablecoins the New Money Market Funds? By Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
  13. Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe By T. Saungweme; N.M. Odhiambo
  14. Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model By Mark Aguiar; Manuel Amador; Cristina Arellano
  15. Review essay: Central banking in Italy By Ivo Maes
  16. Recent Characteristics of Long-Term Interest Rates and Stock Prices in the United States and Europe: with a Focus on the Effects of Increased Attention to Inflation Indicators By Akitaka Tsuchiya; Kenichi Sakura
  17. Inflation and Economic Growth in Kenya: An Empirical Examination By T. Saungweme; N.M. Odhiambo
  19. R-star: A new approach to estimate the polar star of monetary policy By Bofinger, Peter; Haas, Thomas
  20. Corporate Quantitative Easing in Europe during the COVID-19 Crisis and Debt Overhang By Asli Demirgüç-Kunt; Bálint L. Horváth; Harry Huizinga
  21. Keep Calm and Bank On: Panic-Driven Bank Runs and the Role of Public Communication By Damiano Sandri; Francesco Grigoli; Yuriy Gorodnichenko; Olivier Coibion
  22. Large Shocks Travel Fast By Alberto Cavallo; Francesco Lippi; Ken Miyahara
  23. A Measure of our Uncertainty: Households’ Inflation Expectation and Information Shocks By Ignacio Galará
  24. Funding Liquidity Creation by Banks By Anjan V. Thakor; Edison Yu
  25. Did the policy response to the energy crisis cause crime? Evidence from England By Bakker, Jan David; Datta, Nikhil; Davies, Richard; De Lyon, Josh
  26. Managed decline? Muddling through with the sterling (dis)agreements, 1968-74 By De Bromhead, Alan; Jordan, David P.; Kennedy, Francis; Seddon, Jack
  27. Funding Stability and the Pricing of Retail Rates: Evidence from Turkish Banking Sector By Koray Alper; Tanju Capacioglu
  28. European Consumer Price Indices since 1870 By Ljungberg, Jonas
  29. The New York Fed DSGE Model Forecast— September 2023 By Marco Del Negro; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula
  30. Retail Foreign Exchange Margin Trading in Japan: An Analysis from the Developments in 2022 By Naoki Matsuda; Juri Oyama; Rie Yamaoka; Hidemi Bessho
  31. Household Finance and Consumption Survey in Malta: Results from the Fourth Wave By Valentina Antonaroli; Warren Deguara; Aleandra Muscat

  1. By: Miguel Ampudia; Michael Ehrmann; Georg Strasser
    Abstract: This paper studies the effect of monetary policy on inflation along the income distribution in several euro area countries. It shows that monetary policy has differential effects and identifies two channels which point in opposite directions. On the one hand, different consumption shares imply that inflation by high-income households responds less to monetary policy. On the other hand, the paper provides novel evidence that there are substantial differences in shopping behaviour and its reaction to monetary policy, which imply that inflation by high-income households responds more to monetary policy.
    Keywords: inflation, distributional effects, monetary policy, shopping behaviour, substitution
    JEL: E31 E52 D30
    Date: 2023–09
  2. By: Eric T. Swanson
    Abstract: I separately identify and estimate the effects of the Federal Reserve’s federal funds rate, forward guidance, and large-scale asset purchase (LSAP) policies on the U.S. economy. I extend the high-frequency identification strategy of Bauer and Swanson (2023b) for monetary policy VARs by allowing each of the above policies to have possibly different economic effects. I follow Swanson (2021) and Swanson and Jayawickrema (2023) to separately identify federal funds rate, forward guidance, and LSAP components of monetary policy announcements using high-frequency interest rate changes around FOMC announcements, post- FOMC press conferences, FOMC meeting minutes releases, and speeches and testimony by the Fed Chair and Vice Chair. I find that changes in the federal funds rate have had the most powerful effects on the U.S. economy, followed by forward guidance and, lastly, LSAPs.
    JEL: E52 E58
    Date: 2023–08
  3. By: Lea Bitter (TU Berlin)
    Abstract: One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is offset by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is offset by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.
    Keywords: central bank digital currency; financial intermediation; financial stability; bank runs;
    JEL: E42 E58 G01 G21
    Date: 2023–09–12
  4. By: Thiago Revil T. Ferreira; Daniel Ostry; John Rogers
    Abstract: We study how the transmission of monetary policy to firms' investment and credit spreads depends on their financial conditions, finding a major role for their excess bond premia (EBPs), the component of credit spreads in excess of default risk. While monetary policy easing shocks compress credit spreads more for firms with higher ex-ante EBPs, it is lower-EBP firms that invest more. We rationalize these findings using a model with financial frictions in which lower-EBP firms have flatter marginal product of capital curves. We also show empirically that the cross-sectional distribution of firm EBPs determines the aggregate effectiveness of monetary policy.
    Keywords: monetary policy; investment; credit spreads; excess bond premium; firm heterogeneity
    JEL: E22 E44 E50
    Date: 2023–05–31
  5. By: Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Qing Xu (UCL - Université catholique de Lille, GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: With fast development of Fintech in financial industry and increasing popularity of cryptocurrencies and stablecoins, more and more central banks conducted extensive research on Central Bank Digital Currencies (CBDCs), the new form of digital fiat currency. Some of them are engaging in CBDCs pilots, with cross border payment tests. Important currency areas as China, EU or UK are interested in the subject but less significative ones as Bahamas, Nigeria, or Venezuela seem also interested in. This chapter aims to analyze this new phase in the development of the forms of money/means of payment. Different forms of CBDCs are imagined: are they different expressions of the same objective or not? Will hey substitute the official currency or other means of payments? Which technology will be activated to make the operational? Which will be the role of banks on this context? How to explain that some big central banks (the Federal Reserve) are not interested in them? Will they generalize?
    Keywords: CBDC, People's Bank of China, blockchains, disintermediation, Stable coins, means of payment, currencies, digitalization
    Date: 2023–07–20
  6. By: Sullivan, Megan
    Abstract: This paper investigates the determinants of countries’ choice of monetary policy frameworks for emerging and developing countries. It draws on the literature concerning how exchange rate regimes are determined, and the much smaller body of literature on determination of monetary policy frameworks (for advanced and emerging countries), to identify 3 approaches that account for countries’ choice of monetary policy framework. We empirically test the joint relevance of the variables within each theory and find them to be jointly statistically significant. A key highlight of this paper is that it uses an (emerging and developing) country tailored variable that measures trade networks of potential currency blocs. The model correctly predicts 79% of countries’ choice of framework, when aggregated by target variable, and 84% of countries’ choices, when aggregated by degree of monetary control.
    Keywords: monetary policy frameworks; trade networks; inflation targets; exchange rate targets; discretion; central bank independence
    JEL: E42 E52 E58 F40
    Date: 2023–07
  7. By: Minford, Patrick (Cardiff Business School)
    Abstract: Monetary developments of recent decades began with much promise with inflation targeting by independent central banks; the financial crisis of 2007 ushered in a period of great monetary instability. There are lessons for a return to more stability. Central banks need to stabilize money supply growth. Fiscal policy should be coopted to a stabilization role to reduce interest rate instability, and particularly future risks of hitting the zero-interest rate bound. Budget discipline should be enforced by long run solvency rules, not by short run fiscal rules that in practice prevent the use of fiscal policy. Nor should the budget be burdened by monetary policy methods that transfer seigniorage to commercial banks.
    Date: 2023–09
  8. By: Meyer-Gohde, Alexander; Tzaawa-Krenzler, Mary
    Abstract: We present determinacy bounds on monetary policy in the sticky information model. We find that these bounds are more conservative here when the long run Phillips curve is vertical than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority's concern for inflation. These determinacy bounds are obtained by appealing to frequency domain techniques that themselves provide novel interpretations of the Phillips curve.
    Keywords: Determinacy, Taylor Rule, Sticky Information, Frequency Domain, z-Transform
    JEL: C62 E31 E43 E52
    Date: 2023
  9. By: Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas
    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.
    Keywords: Inflation Beliefs, Information Treatment, Consumption, Monetary Policy
    JEL: D12 D14 D83 D84 E21 E31 E52
    Date: 2023
  10. By: Han Gao; Juan Pablo Nicolini
    Abstract: We build a scenario for inflation in the United States in the years to come. Following Gao, Kulish, and Nicolini (2021), we use the quantity theory of money as a conceptual framework and confront the theory with evidence from both the United States and other OECD countries. We argue that a) the quantity theory of money works very well in the medium term, which we define to be close to four years; b) deviations from the inflation rate predicted by the quantity theory tend to disappear in the medium term; c) the burst in inflation that started in 2012 in the United States is a deviation from the inflation rate predicted by the quantity theory; and d) if the policy framework does not change, we expect inflation to be back close to its 2% target no later than 2025.
    Keywords: Quantity theory of money; Inflation; Monetary policy
    JEL: E51 E41 E52
    Date: 2023–08–31
  11. By: Geng Li; Nitish R. Sinha
    Abstract: Using data from the University of Michigan Surveys of Consumers, we document a significant negative association between consumer sentiment and inflation expectations, controlling for prevailing inflation in the economy. We further show that consumer sentiments of homeowners and stockowners are more sensitive to expected inflation than those of other consumers, a disparity at odds with the notion that owning such assets provides hedges against inflation. Leveraging data from the Survey of Consumer Expectations, we find three factors that help account for this difference. First, assets owners' outlook for the broad economy seems to be more sensitive to their inflation expectations than other consumers' outlook. Second, assets owners appear to expect income growth to lag spending growth by a wider margin than other consumers and that margin widens with inflation expectations. Third, homeowners' inflation expectations tend to be less variable and less volatile than those of renters, which may allow the former to have a greater bearing on consumer sentiments.
    Keywords: Inflation expectations; Consumer sentiments; Homeownership; Stockownership; Rational inattention; Inflation targeting
    JEL: D84 E31 E52 E58 G11 G41 R21
    Date: 2023–08–31
  12. By: Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang
    Abstract: Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similarly to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate.
    Keywords: stablecoins; money market mutual funds; financial stability; Crypto Assets; runs; liquidity transformation
    JEL: G10 G20 G23
    Date: 2023–09–01
  13. By: T. Saungweme (University of South Africa); N.M. Odhiambo (University of South Africa)
    Abstract: The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.
    Date: 2021–10
  14. By: Mark Aguiar; Manuel Amador; Cristina Arellano
    Abstract: This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation.
    Keywords: Inflation; Ricardian Equivalence; Heterogeneous agents; Government debt
    JEL: E60 E40 E30
    Date: 2023–06–16
  15. By: Ivo Maes (Robert Triffin Chair, University of Louvain and Visiting Fellow, Bruegel)
    Abstract: Gianni Toniolo was one of Italy’s, and Europe’s, foremost economic historians. Unfortunately, he suddenly passed away in November 2022, a few weeks after he had presented in Rome his newest book, the first volume of his history of the Bank of Italy, Storia della Banca d’Italia. Tomo I. Formazione ed evoluzione di una banca centrale, 1893-1943 (History of the Bank of Italy. Part I. Formation and evolution of a central bank, 1893-1943). Toniolo’s history of the Bank of Italy illustrates very well many issues which are at the heart of the literature on central banking. What emerges very well is the gradual transformation of the Bank of Italy, from an emission bank to a central bank, with a growing public character of the Bank. The early relationship between the Bank of Italy and the commercial banks was often one of business rivalry and competition. Through time, the Bank of Italy gained the monopoly of the emission of banknotes but had to stop its commercial activities, while being entrusted with responsibilities in the supervision of the commercial banks. Toniolo’s book covers a turbulent period in Italian monetary history, with several banking crises. Monetary policy was dominated by the issue of the reconciliation of two contrasting objectives: the exchange rate of the lira and the stability of the banking system. A distinguishing feature of the Italian experience of central banking is how the development of the Bank of Italy was embedded in the process of nation-building. In other countries, where the nation-state was established before the central bank, this was very much a process of extending the network of branches. In Italy, where the process of unification was later, it implied the merger of emission banks, a much more delicate political issue.
    Keywords: central banking, Bank of Italy, banking crises, financial stability, Italian lira
    JEL: E42 E58 G28 N10
    Date: 2023–09
  16. By: Akitaka Tsuchiya (Bank of Japan); Kenichi Sakura (Bank of Japan)
    Abstract: Since last year, U.S. and European financial markets have experienced significant volatility in long-term interest rates and stock prices as market participants have been paying more attention to developments in inflation and monetary policy. In this paper, we use a simple sign-restricted VAR to analyze how changes in market participants' views on the economic outlook and monetary policy have affected long-term interest rates and stock prices, particularly in the United States. First, while an improvement in the economic outlook in the United States, due to an easing of the impact of COVID-19 and other factors, has pushed up U.S. stock prices, a tightening of monetary policy since the beginning of last year has pushed down U.S. stock prices. In addition, as inflation has become a market theme since last year, we found that fluctuations in interest rates and stock prices have widened at times when economic and price indicators, especially the CPI, were released. Moreover, the recent release of the U.S. CPI has affected the European markets in some cases, suggesting that changes in market participants' views have easily propagated between the United States and Europe.
    Keywords: Identification of shocks; Sign restrictions; VAR; Inflation indicators
    JEL: C32 E44 G12 G15
    Date: 2023–09–12
  17. By: T. Saungweme (University of South Africa); N.M. Odhiambo (University of South Africa)
    Abstract: This paper examines the relationship between inflation and economic growth in Kenya from an analytical and empirical standpoint. The paper applies the autoregressive distributed lag (ARDL) bounds testing approach and the multivariate Granger-causality test using time series data covering 1970-2019. Structural breaks in the time series were also conducted using the Perron (1997) (PPURoot) and Zivot-Andrews (1992) (ZAU Root) techniques. Incorporating structural breaks into time series increases statistical inference's overall validity. Inflation and economic growth in Kenya were found to have structural breaks in 1995 and 1991. These years are marked by Kenya's economic, financial, public sector and institutional reforms. The other findings of the study revealed that inflation has a statistically significant negative influence on long-term economic growth. The multivariate Granger-causality results showed a distinct short-run unidirectional causality from economic growth to inflation in Kenya. In order to mitigate the negative consequences of inflation and the coronavirus on the economy and welfare, the study recommends that Kenya's government should pursue prudent monetary, financial, and fiscal policies.
    Date: 2021–10
  18. By: Alberto Botta; Eugenio Caverzasi (Universita' degli Studi dell'Insubria); Alberto Russo (Department of Economics and Social Sciences, Universita' Politecnica delle Marche)
    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 nancial 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 highyield 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: Bofinger, Peter; Haas, Thomas
    Abstract: The necessary adjustments to prominent measures of the neutral rate of interest following the COVID pandemic sparked a wide-ranging debate on the measurement and usefulness of r-star. Due to high uncertainty about relevant determinants, trend patterns and the correct estimation method, we propose in this paper a simple alternative approach derived from a standard macro model. Starting from a loss function, neutral periods can be determined in which a neutral real interest rate is observable. Using these values, a medium-term trend for a neutral interest rate can be determined. An application to the USA shows that our simple calculation of a neutral interest rate delivers comparable results to existing studies. A Taylor rule based on our neutral interest rate also does a fairly good job of explaining US monetary policy over the past 60 years.
    Keywords: Neutral rate of interest, equilibrium real interest rate, monetary policy rul
    JEL: E3 E4 E5
    Date: 2023
  20. By: Asli Demirgüç-Kunt (Center for Global Development); Bálint L. Horváth (University of Arizona); Harry Huizinga (Tilburg University and CEPR)
    Abstract: This paper finds that shareholders of highly leveraged firms benefit relatively less compared to bondholders from the corporate quantitative easing (QE) announcements by the European Central Bank and the Bank of England in March 2020, as evidence of debt overhang. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang. The monetary and fiscal responses to the pandemic are complements in the sense that a stronger pandemic-related fiscal response and higher pre-announcement sovereign credit default swap (CDS) spreads enhance the positive effects of corporate QE on equity and debt valuations.
    Keywords: Quantitative easing, debt overhang, pandemic
    JEL: E52 G14
    Date: 2023–04–26
  21. 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.
    JEL: E21 E58
    Date: 2023–08
  22. By: Alberto Cavallo; Francesco Lippi; Ken Miyahara
    Abstract: We leverage the inflation upswing of 2022 and various granular datasets to identify robust price-setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We set up a parsimonious New Keynesian model and calibrate it to fit the steady-state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass-through to prices -- large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics.
    Date: 2023–09
  23. By: Ignacio Galará (Banco de España)
    Abstract: This work focus on understanding deeper how the general public form their inflation expectations, addressing the importance of having well (micro)founded models to forecast consumer’s inflation expectations, not only for inflationary countries (like some developing ones) or inflationary contexts (like the one that begins after COVID-19 pandemic), but also when there exist some information breaks driven by specific global or national events. By a proposed VAR structural model based on behavioral mechanisms, and a state-space model based on Bayesian’s principles, I use data from Argentina and the US to retrieve a latent variable of attention to own beliefs and to outside information, which proves to be related to information outbreaks, and that correlates with different uncertainty measures, specially during those breaks.
    JEL: E31 D84 C11 C32
    Date: 2023–09
  24. By: Anjan V. Thakor; Edison Yu
    Abstract: Relying on theories in which bank loans create deposits—a process we call “funding liquidity creation”—we measure how much funding liquidity the U.S. banking system creates. Private money creation by banks enables lending to not be constrained by the supply of cash deposits. During the 2001–2020 period, 92 percent of bank deposits were due to funding liquidity creation, and during 2011–2020 funding liquidity creation averaged $10.7 trillion per year, or 57 percent of GDP. Using natural disasters data, we provide causal evidence that better-capitalized banks create more funding liquidity and lend more even during times when cash deposit balances are falling.
    Date: 2023–01–30
  25. By: Bakker, Jan David (Bocconi University & CEP); Datta, Nikhil (University of Warwick & CEP); Davies, Richard (University of Bristol, Economics Observatory & CEP); De Lyon, Josh (CEP)
    Abstract: Brexit continues to affect the UK economy. The results in this report are updates to the original study of Bakker et al. (2022), showing that higher non-tariff barriers due to Brexit are affecting food price inflation and costing households in the UK. While the original paper used data up to January 2022, this report updates the dataset through to March 2023. The methodology is otherwise identical so for more details please consult the original paper (appended to this paper). JEL Classification:
    Date: 2023
  26. By: De Bromhead, Alan; Jordan, David P.; Kennedy, Francis; Seddon, Jack
    Abstract: How do policy makers manage the decline of an international currency? This paper examines British policy towards the pound sterling's international role in the years 1968-74. Using previously uncited government archival sources, we revisit the view that the 'sterling agreements' of 1968-74, bilateral contracts made between the UK and governments holding sterling, formed a successful paradigm shift in British policy, towards deliberately managing sterling's international 'retirement'. Our research indicates that there was no settled consensus or strategic direction to British policy in this period, a case of 'muddling through'. Indeed, when feasible options presented themselves, British officials sought to maximise, not reduce, international sterling holdings.
    Keywords: Sterling Area Agreements, international currency, sterling policy, disintegration
    JEL: N10 F02 F22 F33
    Date: 2023
  27. By: Koray Alper (European Investment Bank); Tanju Capacioglu (Central Bank of the Republic of Turkey)
    Abstract: This paper documents how a system wide deterioration in funding quality, which we argue to be underpinned by macroeconomic conditions, can have a substantial effect in the pricing of deposit and loan rates. The study is motivated by a puzzling observation from Turkish banking system. During 2015-2016, retail rates of Turkish banks displayed a persistent upward trend when the policy and money market rates remained unchanged. We conjecture that the underlying reason was the continued deterioration in the structural liquidity positions of Turkish banks, reflected as rising loan-to-deposit ratios (LDR). Our results show that in the presence of increasing pressures from worsening funding quality, banks with high LDRs tried to attract more deposits while trying to slow down loan growth rates. To this end, these banks offered higher rates to deposits, particularly, to more stable deposit types. Similarly, evidence suggest that, on the loans side, banks with worse funding quality raised the rates more. As expected, banks increased the rates for the clients/segments where they have more market power. On the other side, despite the increasing pressures on interest rate margins, high LDR banks don’t seem to have opted for risky loans.
    Keywords: Retail rates, banks, financial stability, macro-financial linkages.
    JEL: D22 E43 G21
    Date: 2023–09
  28. By: Ljungberg, Jonas (Department of Economic History, Lund University)
    Abstract: This paper presents a database with the probably most up-to date and reliable consumer price indices for a large sample of European countries since 1870. The database is a compilation but a contribution by going back to original or ignored works. For some Eastern European countries, where CPIs have been missing, new provisional indices are constructed. It critically examines historical CPIs in oft-used online databases and uncover some alarming inaccuracies and even fallacies. Despite the importance of accurate CPIs in long-term analyses, previously little effort has been put in assessing the quality and comparability of data between countries. Realism of the CPIs is examined within a framework of economic integration, that qualifies received views. Lack of integration of Mediterranean countries before mid-twentieth century is validated, and contradictory patterns of integration in interwar and post-war Europe uncovered.
    Keywords: consumer price indices; cost of living; source criticism; economic integration
    JEL: E31 N13 N14
    Date: 2023–09–14
  29. By: Marco Del Negro; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula
    Abstract: This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2023. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.
    Keywords: Dynamic Stochastic General Equilibrium (DSGE) models; forecasting
    JEL: E5
    Date: 2023–09–22
  30. By: Naoki Matsuda (Bank of Japan); Juri Oyama (Bank of Japan); Rie Yamaoka (Bank of Japan); Hidemi Bessho (Bank of Japan)
    Abstract: Foreign exchange (FX) margin trading by Japanese retail investors hit a record high in 2022, unprecedentedly exceeding 10 quadrillion yen. While outlining the mechanism of retail FX margin trading, this paper summarizes factors behind the recent surge in retail FX margin trading and changes in investment patterns of Japanese retail investors. In addition, an analysis is conducted on how retail FX margin trading impacts the global and Japan's FX markets. Continued monitoring of investment patterns of retail FX margin traders is integral to better understanding the developments in FX markets.
    Keywords: Foreign Exchange Margin Trading
    JEL: F31 G12 G15
    Date: 2023–09–13
  31. By: Valentina Antonaroli; Warren Deguara; Aleandra Muscat (Central Bank of Malta)
    Abstract: This article summarizes the main findings from the fourth wave of the Household Finance and Consumption Survey (HFCS) for Malta. The HFCS is part of a co-ordinated research project led by the European Central Bank and involves national central banks of all euro area countries and selected non-euro area EU member states. The results presented are obtained from micro-data collected for reference year 2020 from households residing in Malta and compared with the previous three waves. The HFCS provides household-level data on assets, liabilities, wealth and income. As such, it plays an important role in analysing the economic behaviour of Maltese households and contributes to a better understanding of the developments underlying macro statistics. The results also provide a glimpse of the impact of the COVID-19 pandemic on household balance sheets and finances.
    JEL: D14 D31 E21 G51
    Date: 2023

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