nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒10‒23
27 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Preaching to the Agnostic: Inflation Reporting Can Increase Trust in the Central Bank but Only among People with Weak Priors By Bernd Hayo; Pierre-Guillaume Méon
  2. CBDC and the operational framework of monetary policy By Jorge Abad; Galo Nuño Barrau; Carlos Thomas
  3. Simple Macroeconomics of Crypto Currency and the Political Economy of Monetary Policy in a Democracy By Sugata Marjit; Kausik Gupta
  4. Monetary Policy Effectiveness in the Face of Uncertainty: The Real Macroeconomic Impact of a Monetary Policy Shock in South Africa during High and Low Uncertainty States By Chevaughn van der Westhuizen; Renee van Eyden; Goodness C. Aye
  5. ANALYSIS OF ALTERNATIVE APPROACHES TO DETERMINING THE TARGET LEVEL OF INFLATION IN RUSSIA By Perevyshin, Yury (Перевышин, Юрий); Drobyshevsky, Sergey (Дробышевский, Сергей); Trunin, Pavel (Трунин, Павел)
  6. Examining CBDC and Wholesale Payments By Jon Durfee; Jesse Leigh Maniff; Priyanka Slattery
  7. The role of central bank forecasts in uncertain times By Jacek Kotłowski
  8. Functional Shocks to Inflation Expectations and Real Interest Rates and Their Macroeconomic Effects By Christina Anderl; Guglielmo Maria Caporale
  9. Unconventional Fiscal Policy in Times of High Inflation By Mai Dao; Allan Dizioli; Chris Jackson; Pierre-Olivier Gourinchas; Mr. Daniel Leigh
  10. In search of accounting principles for the central bank By Krzysztof Kruszewski; Mikołaj Szadkowski
  11. The Contribution of Food Subsidy Policy to Monetary Policy in India By William Ginn; Marc Pourroy
  12. The Swaps Strike Back: Evaluating Expectations of One-Year Inflation By Colin Campbell; Anthony M. Diercks; Steven A. Sharpe; Daniel Soques
  13. Energy prices and household heterogeneity: monetary policy in a Gas-TANK By Chan, Jenny; Diz, Sebastian; Kanngiesser, Derrick
  14. One Hundred Inflation Shocks: Seven Stylized Facts By Mr. Anil Ari; Mr. Carlos Mulas-Granados; Mr. Victor Mylonas; Mr. Lev Ratnovski; Wei Zhao
  15. Estimation and Determinants of Cost Efficiency: Evidence from Central Bank Operational Expenses By Mr. Romain M Veyrune; Solo Zerbo
  16. Overconfidence of the chair of the Federal Reserve and market expectations: Evidence based on media coverage By Hamza Bennani
  17. The Zombie Lending Channel of Monetary Policy By Bruno Albuquerque; Chenyu Mao
  18. The research of Russian’s inflation expectations under sanctions based on big data By Matevosova Anastasia
  19. Modeling the Reserve Demand to Facilitate Central Bank Operations By Zhuohui Chen; Nikolaos Kourentzes; Mr. Romain M Veyrune
  20. Mobile Money, Interoperability, and Financial Inclusion By Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
  21. The effect of quantitative easing and quantitative tightening on the U.S. equity REIT returns By Axelsson, Birger; Song, Han-Suck
  22. An Extended Quarterly Projection Model for the Central Bank of Jordan By Adel Al-Sharkas; Nedal Al-Azzam; Sarah AlTalafha; Rasha Abu Shawish; Ahmad Shalein; Auday Rawwaqah; Amany Al-Rawashdeh; Daniel Baksa; Mr. Philippe D Karam; Mr. Jan Vlcek
  23. CPD’s Reaction to the MPS FY2021-22: To What Extent Does Monetary Policy Meet the Needs of the Economy? By Fahmida Khatun; Syed Yusuf Saadat
  24. Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel By Livia Chiţu; Magdalena Grothe; Tatjana Schulze; Ine Van Robays
  25. Foreign exchange hedging using regime-switching models: the case of pound sterling By Lee, Taehyun; Moutzouris, Ioannis C; Papapostolou, Nikos C; Fatouh, Mahmoud
  26. Monetary Policy and Innovation By Yueran Ma; Kaspar Zimmermann
  27. The CO2 content of the TLTRO III scheme and its greening By Chiara Colesanti Senni; Maria Sole Pagliari; Jens van ‘t Klooster

  1. By: Bernd Hayo; Pierre-Guillaume Méon
    Abstract: Using a randomized controlled trial, we study whether showing German respondents a graph plotting the European Central Bank’s inflation target alongside inflation in the euro area from 1999 to 2017 affects respondents’ trust in the ECB. The treatment has, on average, no significant effect on the level of trust in the ECB respondents report, but trust increases among respondents who report no preference for any political party. Within this group, the information about the actual development of the inflation rate, and not information about the inflation target itself, appears to be the main driving force.
    Keywords: central bank trust, European Central Bank, central bank communication, monetary policy, Germany, household survey, RCT
    JEL: E52 E58 Z10
    Date: 2023
  2. By: Jorge Abad; Galo Nuño Barrau; Carlos Thomas
    Abstract: We analyze the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facillities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks' deposit funding. However, this 'deposit crunch' has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of CBDC on the central bank's operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a 'floor' system –with ample reserves– to a 'corridor' one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a 'ceiling' one with scarce reserves.
    Keywords: central bank digital currency, interbank market, search and matching frictions, reserves
    JEL: E42 E44 E52 G21
    Date: 2023–09
  3. By: Sugata Marjit; Kausik Gupta
    Abstract: The paper attempts to examine the macroeconomic implications of the coexistence of crypto currency with legal tender money in the context of a democratic country such as India. The paper shows that macroeconomic implications of crypto currency can be captured by a simple extension of the IS-LM model. The main potential political consequence emerges due to difficulty in implementation of monetary policy, especially prior to elections. The paper shows that if the share of crypto currency out of total money supply is high it is bound to impact on the efficacy of monetary policy. .The paper also examines the practical difficulties of legalizing crypto currency.
    Keywords: block chain, crypto currency, legal tender money, monetary policy
    JEL: E52 E58 E61 E63
    Date: 2023
  4. By: Chevaughn van der Westhuizen (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Renee van Eyden (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Goodness C. Aye (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: Economies all over the world operate monetary policy with the main objective to create stable macroeconomic environment for economic prosperity, with monetary policy typically the first line of defence against a number of internal and external shocks. This study addresses whether the effectiveness of monetary policy in South Africa is influenced by the prevailing degree of uncertainty in the domestic goods, stock and currency market as well as the degree of uncertainty in global markets. This is investigated through a Self-Exciting Interacted VAR (SEIVAR) methodology augmented with GARCH and EGARCH volatilities on monthly South African data, over the period 2000:02-2022:05 during which South Africa operated under an inflation targeting regime. Results point to the asymmetric effects of a monetary policy shock dependent on the uncertainty state and that monetary policy was less effective in the high uncertainty states. The results hold important policy implications for the policy makers, as it is imperative to understand how uncertainty alters the transmission of monetary policy through the economy.
    Keywords: Financial Markets, Generalized Impulse Response Function, Inflation, Monetary policy shocks, Non-Linear Self-Exciting Interacted Vector Auto-Regressions, Uncertainty
    JEL: C32 E32 E52
    Date: 2023–10
  5. By: Perevyshin, Yury (Перевышин, Юрий) (The Russian Presidential Academy of National Economy and Public Administration); Drobyshevsky, Sergey (Дробышевский, Сергей) (The Russian Presidential Academy of National Economy and Public Administration); Trunin, Pavel (Трунин, Павел) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper examines the property of the core inflation indicator to predict future values of headline inflation, which is a critical task in preparing a medium-term inflation forecast to support decision-making on monetary policy. To test this property (on the example of the core inflation by Rosstat and inflation excluding fruits and vegetables, gasoline and housing and communal services), two approaches were applied. The first approach projected headline inflation based on actual core inflation and the historical relationship between these indicators, and then projected headline inflation based on actual headline inflation. The accuracy of the two headline inflation forecasts was then compared. As a result, it turned out that core inflation indicators, starting from 2011, better predict headline inflation than current headline inflation values over a horizon of up to a year. The second approach answer the question of whether the accuracy of the headline inflation forecast is improved if the core inflation forecast is used instead. To do this, within a certain class of models, a core inflation forecast was built, which was used as a headline inflation forecast, then its accuracy was compared with a forecast based on the same class of models estimated for headline inflation. As a result, it turned out that in the framework of VAR, MA(1) and ARIMA models, the use of a core inflation forecast instead of a headline inflation forecast increases the accuracy. We estimate VAR model and decompose core inflation by factors (output gap, ruble exchange rate, and monetary policy rate). It helps us to estimate the magnitude of the price shock in the 1st quarter of 2022 in Russian economy, which amounted to 6.2 p.p. Our inflation forecast based on the VAR model assumes its acceleration from 1.6% q/q SAAR in the 4th quarter of 2022 to 4.1% in the 1st quarter and 6.0% in the 2nd quarter of 2023, then it followed by stabilization at 7% QoQ SAAR by the end of 2023.
    Keywords: inflation forecasting, inflation, monetary policy, short-term forecasting, core inflation, vector autoregression model, inflation decomposition, price shock
    JEL: E31 E37 C53
    Date: 2022–11–10
  6. By: Jon Durfee; Jesse Leigh Maniff; Priyanka Slattery
    Abstract: This paper explores whether a new settlement asset in the form of central bank money is essential for a new platform that processes wholesale payment transactions. Central bank money currently exists for wholesale transactions in the form of depository institution balances at the Federal Reserve (Reserve Banks) used for Fedwire® Funds Service (Fedwire).
    Date: 2023–09–08
  7. By: Jacek Kotłowski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: The macroeconomic projection is one of the key communication tools of the central bank. We examine how the projection published by Narodowy Bank Polski affects the expectations of the professional forecasters. We focus on the role of uncertainty in explaining the impact of inflation and GDP forecasts released by the central bank on the forecasters’ expectations. We find that by disclosing its projection the central bank affects the inflation and GDP forecasts formulated by professional forecasters for all the examined horizons: the current year, the next year and two years ahead. Importantly, our results show that the impact of the NBP projection on the expectations of the professional forecasters is stronger when uncertainty is high, which remains in line with the Woodford (2001) model, in which public information helps private agents to separate signal from noise contained in the data. We also evidence that the coordinating role of the projection for the private sector inflation forecasts is larger in high inflation environment.
    Keywords: Monetary policy, central bank communication, forecasting, inflation expectations, uncertainty.
    JEL: C24 E37 E52 E58
    Date: 2023
  8. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper applies a recently developed method (Inoue and Rossi, 2021) to estimate functional inflation expectations and ex-ante real interest rate shocks, and then examines their macroeconomic effects in the context of a Functional Vector Autoregressive model with exogenous variables (Functional VARX). Monthly data from January 1998 to May 2023 for the US, the UK and the euro area are used for the analysis. The estimated impulse responses show significant effects of the functional shocks on both inflation and output. In addition, threshold functional local projections indicate that the effects are nonlinear and depend on central bank credibility. Further, inflation expectations shocks have similar effects to supply (demand) ones when they are driven by long-term (short-term) changes. In the presence of an inverted (steepening) real interest rate term structure, the effects are inflationary (deflationary) and expansionary (recessionary). Finally, the responses of inflation, output and the policy rate are driven primarily by the slope and curvature factors of the term structure shocks, which contain important information not captured by traditional scalar shocks.
    Keywords: inflation expectations, term structure, real interest rates, functional shocks
    JEL: E31 E43 C32
    Date: 2023
  9. By: Mai Dao; Allan Dizioli; Chris Jackson; Pierre-Olivier Gourinchas; Mr. Daniel Leigh
    Abstract: The surge in energy prices in 2022 has been a defining factor behind the increase in euro area inflation. We assess the impact of “unconventional fiscal policy, ” defined as the set of fiscal measures, possibly expansionary, motivated by a desire to mute the effects of the increase in energy prices and to lower inflation. Overall, we find that these unconventional measures reduced euro area inflation by 1 to 2 percentage points in 2022 and may avoid an undershoot later on. When nonlinearities in the Phillips curve are taken into account, the net effect is to reduce inflation by about 0.5 percentage points in 2021-24, and keep it nearer to its target. About one-third to one-half of the reduction in 2022 reflects the direct effects of the measures on headline inflation, with much of the remainder reflecting the lower pass-through to core inflation. The fiscal measures were deficit-financed but had limited effects on raising inflation by stimulating demand and instead modestly helped to stabilize longer-term inflation expectations. Looking ahead, the prospective decline in inflation in the euro area is partly due to fortunate circumstances, with energy prices falling from their 2022 peaks and their pass-through effects fading, and with less economic overheating than in economies such as the United States. Implementing similar measures in the face of a more persistent increase in energy prices, or in a more overheated economy, would have caused a more persistent rise in core inflation.
    Keywords: Inflation; fiscal policy; monetary policy.
    Date: 2023–09–01
  10. By: Krzysztof Kruszewski (Narodowy Bank Polski); Mikołaj Szadkowski (Narodowy Bank Polski)
    Abstract: The paper presents the selected accounting principles applied by central banks. It has been emphasised that since 2004 the NBP accounting principles are in line with the Eurosystem accounting principles. The paper shows that the possible change of these principles depends on the perspective of adopting the euro by Poland. If the adoption of the euro takes place in the near future, NBP will have to continue applying the current accounting rules. In this context the paper presents how the NBP balance sheet would change on the date of the hypothetical adoption of the euro by Poland. On the other hand, if the adoption of the single currency becomes a distant prospect, NBP could consider changing the applied accounting principles. Due to the growing risks faced by central banks in the first two decades of the 21st century, this choice should be correlated with the need to build a bank's strong equity position and to reduce the volatility of its financial result. Hence, the paper proposes directions for modification of the existing NBP accounting principles, which would ensure the implementation of the adopted assumptions. The authors indicate that in the case of NBP the application of IFRS would be unjustified.
    Keywords: central bank, central bank accounting, accounting principles of central banks.
    JEL: E58 G21
    Date: 2023
  11. By: William Ginn (LabCorp); Marc Pourroy (CRIEF - Centre de recherche sur l'intégration économique et financière - Université de Poitiers, Université de Poitiers)
    Abstract: Food price volatility is a major threat for welfare, economic prosperity and political stability. The monetary authority is generally viewed in the literature as the only institution responsible for price stability, however this approach overlooks the importance of food price stabilization policies using fiscal instruments. We develop and estimate a Bayesian DSGE model that incorporates monetary and fiscal policy tailored to India, replicating food demand and food supply subsidies. We find that following a world food price shock, CPI and therefore interest rate volatility would be 21% higher in the absence of food subsidies. Putting this effect aside would lead to overestimating the effectiveness of inflation targeting by the central bank. Accordingly, we find that the subsidy policy has large heterogeneous distributional welfare effects: while farmers benefit from all subsidies, the inclusion of urban households into the demand subsidy program is required to offset supply subsidy welfare cost.
    Keywords: DSGE Model, Price stabilisation, Food prices, Commodities, Monetary Policy, India
    Date: 2022–08
  12. By: Colin Campbell; Anthony M. Diercks; Steven A. Sharpe; Daniel Soques
    Abstract: This study examines the forecasting performance of inflation swaps and survey-based expectations for one-year inflation. Conducting this exercise helps determine if one set of expectations can provide a cleaner signal about future inflation. The study finds that, overall, inflation swaps more frequently provide better forecasts of future inflation. Previous studies that found poor performance of swaps were strongly influenced by liquidity issues during the financial crisis and the pandemic. When these periods are excluded, swaps have superior predictive ability. Our analysis suggests that combining the two expectations can lead to even better forecasts. The optimal static combination is roughly an equal weighting of swaps and surveys. Alternatively, a dynamic smooth-transition regime switching model can also lead to superior performance and provide a clearer signal on expectations of future inflation. Recently, this measure has implied the Federal Reserve is expected to be closer to its inflation target over the next year than the surveys would suggest.
    Keywords: Inflation expectations; Inflation swaps; Surveys; Forecasting
    JEL: E31 E37
    Date: 2023–09–22
  13. By: Chan, Jenny (Bank of England); Diz, Sebastian (Central Bank of Paraguay); Kanngiesser, Derrick (Bank of England)
    Abstract: How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small, open-economy TANK model that features labour and an energy import good as complementary production inputs (Gas-TANK). Given such complementarities, higher energy prices reduce the labour share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from adverse energy price shocks, further depressing labour income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labour in production and the degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalised to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy.
    Keywords: Energy prices; inflation; household heterogeneity; monetary policy
    JEL: E21 E23 E31 E52 F41
    Date: 2023–09–22
  14. By: Mr. Anil Ari; Mr. Carlos Mulas-Granados; Mr. Victor Mylonas; Mr. Lev Ratnovski; Wei Zhao
    Abstract: This paper identifies over 100 inflation shock episodes in 56 countries since the 1970s, including over 60 episodes linked to the 1973–79 oil crises. We document that only in 60 percent of the episodes was inflation brought back down (or “resolved”) within 5 years, and that even in these “successful” cases resolving inflation took, on average, over 3 years. Success rates were lower and resolution times longer for episodes induced by terms-of-trade shocks during the 1973–79 oil crises. Most unresolved episodes involved “premature celebrations”, where inflation declined initially, only to plateau at an elevated level or re-accelerate. Сountries that resolved inflation had tighter monetary policy that was maintained more consistently over time, lower nominal wage growth, and less currency depreciation, compared to unresolved cases. Successful disinflations were associated with short-term output losses, but not with larger output, employment, or real wage losses over a 5-year horizon, potentially indicating the value of policy credibility and macroeconomic stability.
    Keywords: Inflation Shocks; Disinflation; Monetary Policy; 1973–79 Oil Crises; Termsof- Trade Shocks
    Date: 2023–09–15
  15. By: Mr. Romain M Veyrune; Solo Zerbo
    Abstract: The finances of central banks is a topic of renewed interest: many central banks are posting significant losses due to the cost of monetary policy, over which central banks have no control. Conversely, operational expenses, over which the central banks have more control, is a subject of less attention. We use public income statement data from central banks to calculate a score for operational expense efficiency based on a stochastic frontier analysis. In addition, we offer potential explanations for the observed variations in efficiency levels across central banks. Our analysis reveals significant heterogeneity across countries and income groups. Central banks with a single objective demonstrate higher efficiency compared with those with multiple objectives. Regarding the output of price stability, central banks in low-income developing countries exhibit lower efficiency compared with central banks in emerging markets and advanced economies. Factors such as central bank independence, the depth of the financial system, and the degree of openness play a role in influencing efficiency levels. Our findings underscore the significance of well-defined objectives, the operating environment, and concentration on core activities in reducing inefficiency.
    Keywords: operational efficiency; stochastic frontier analysis; operating independence; trade; financial depth
    Date: 2023–09–15
  16. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université)
    Abstract: This paper examines the relationship between the overconfidence expressed by the chair of the US Federal Reserve and financial market expectations. I first use a media‐based proxy to compute a measure of Fed chair's overconfidence for the period 1999M01–2017M07, the overconfidence indicator. The overconfidence indicator provides a quantitative measure of the overconfidence expressed by the Fed chair, which is covered by the media, and thus, perceived by financial market participants. I relate this variable to inflation and unemployment expectations of market participants. Our results show that an overconfident Fed chair is significantly associated with higher inflation expectations and lower unemployment expectations. These findings are robust to (i) the macroeconomic forecasts used to extract the exogenous component of the media‐based proxy reflecting Fed chair's overconfidence (the Survey of Professional Forecasters and the Greenbook forecasts) and (iii) an alternative proxy of inflation expectations. These findings shed some new light on the impact of central bankers' communication on financial market expectations, and thus, on the effectiveness of their monetary policy decisions.
    Date: 2023–07
  17. By: Bruno Albuquerque; Chenyu Mao
    Abstract: We uncover a new channel—the zombie lending channel—in the transmission of monetary policy to nonfinancial corporates. This channel originates from the presence of unviable and unproductive (zombie) firms. We identify exogenous variation in monetary conditions around the world by exploiting the international transmission of US monetary policy shocks. We find that tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms. Zombies are then able to cut investment and employment by relatively less. This is indicative of evergreening motives by lenders when interest rates rise: lenders face incentives to restructure existing loans of zombie firms to avoid the realization of losses on their balance sheets. Policies that strengthen banks’ balance sheets, that limit banks’ incentives to engage in risky behavior, and laws that allow an efficient resolution of weak firms, may help mitigate zombie lending practices when financial conditions tighten.
    Keywords: Monetary policy; Corporate investment; Zombie firms; Zombie lending
    Date: 2023–09–15
  18. By: Matevosova Anastasia (Department of Economics, Lomonosov Moscow State University)
    Abstract: In 2022, Russian economy faced unprecedented sanctions pressure from the collective West. Against this background, the government and the Central Bank need to constantly monitor the economic situation in the Russian Federation in order to take timely and effective measures. A high-frequency indicator of inflation expectations based on big data can help in the solution of this problem. The article presents significant shortcomings leading to the inapplicability of existing common approaches to the assessment of inflation expectations under sanctions. Based on the constructed high-frequency indicators of inflation expectations, contribution of sanctions to the formation of inflation expectations and sanctions concerns, the impact of sanctions on the inflation expectations of Russian population is analyzed. The method of the assessment inflation expectations based on big data has confirmed its effectiveness in the conditions of sanctions. This method proved the impact of sanctions on the formation of inflation expectations of the Russian population.
    Keywords: sanctions, inflation expectations, high-frequency indicator, inflation
    JEL: F51 E31 D84 C55 C82
    Date: 2023–05
  19. By: Zhuohui Chen; Nikolaos Kourentzes; Mr. Romain M Veyrune
    Abstract: Implementing monetary policy largely consists in controlling short-term interest rates which supposes having a good understanding of banks’ demand for liquidity also called “reserves” at the central bank. This work aims to offer a modeling methodology for estimating the demand for reserves that itself is influenced by various macro and market structure variables. The model can help central banks to identify ”stable points” on the demand for reserves, which correspond to the levels of reserves for which the short-term interest rate volatility is minimal. Both parametric and non-parametric approaches are provided, with a particular focus on capturing the modeling uncertainty and, therefore, facilitating scenario analysis. A method is proposed to test the forecasting performances of different approaches and exogenous regressors combination, finding that simpler parametric expressions provide on balance better performances. Adding variables to both parametric and non-parametric provides better explanations and predictions. The proposed methodology is evaluated using data from the Euro system and the US Federal Reserve System.
    Keywords: Reserve demand; scenario analysis; short-term interest rate; sigmoid
    Date: 2023–09–01
  20. By: Markus K. Brunnermeier; Nicola Limodio; Lorenzo Spadavecchia
    Abstract: This paper investigates the tradeoff between competition and financial inclusion resulting from the vertical integration between mobile network and money operators. Joining newly assembled data on mobile money fees through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our results show that interoperability benefits users by lowering mobile money fees and their dispersion across operators. However, these positive effects are offset by a decrease in mobile towers and network coverage, especially in rural and poor districts, which, in turn, leads to a lower financial inclusion. We note that combining interoperability with subsidies for rural telecommunications delivers lower fees without hurting coverage.
    JEL: E4 O16 O30
    Date: 2023–09
  21. By: Axelsson, Birger (Department of Real Estate and Construction Management, Royal Institute of Technology); Song, Han-Suck (Department of Real Estate and Construction Management, Royal Institute of Technology)
    Abstract: The Federal Reserve (the Fed) has implemented several quantitative easing (QE) programmes to stimulate the U.S. economy and increase the inflation rate after the great financial crisis (GFC) and the COVID-19 crisis. However, when the inflation rate started to increase steeply in 2021, the Fed instead begun to implement quantitative tapering (QT) to cool down the U.S. economy and bring back inflation to it target rate. This study seeks to estimate the effect of the QE and QT programmes on the U.S. equity Real Estate Investment Trusts (REITs) index returns, while controlling for several other important macro-financial factors. The estimations show that the QE programmes significantly contributed to a long period of positive REIT returns, while the recent 2022 QT efforts has contributed significantly to the recent period of negative REIT returns. We also find that the increases in the key macro-financial factors Baa Corporate Bond Yield ad the CBOE volatility index of the U.S. stock market (VIX) result in lower REIT returns, while increases in total bank equity capital of FDIC-Insured Commercial Banks and Savings Institutions contribute to positive REIT returns. We also find that the negative initial REIT return reaction to the COVID-19 outbreak was likely outperformed by the positive impacts of the large combined monetary (QE) and fiscal stimulus packages implemented after the outbreak of the COVID-19 crisis. The findings of this study show that REIT returns are highly sensitive to profound QE and QT programmes through important monetary transmission mechanisms channels such as the interest rate, asset price and risk-taking channels. This research supports REIT investors to understand how the Fed's monetary policy actions, particularly QE and QT programmes, impact the returns of the REIT index, and to adjust their investment strategies accordingly based on their expectations of future monetary policy actions and macro-financial conditions.
    Keywords: REITs; Quantitative Easing; Quantitative Tightening; Real Estate; Inflation
    JEL: E31 E41 E44 G19
    Date: 2023–09–28
  22. By: Adel Al-Sharkas; Nedal Al-Azzam; Sarah AlTalafha; Rasha Abu Shawish; Ahmad Shalein; Auday Rawwaqah; Amany Al-Rawashdeh; Daniel Baksa; Mr. Philippe D Karam; Mr. Jan Vlcek
    Abstract: The Central Bank of Jordan (CBJ) has developed a Forecasting and Policy Analysis System (FPAS) to serve as a reliable analytical framework for macroeconomic analysis, forecasting and decision-making under a pegged exchange rate regime. At the heart of the FPAS is the CBJ’s extended Jordan Analysis Model (JAM2.0). The model captures the monetary transmission mechanism and provides a consistent monetary policy framework that uses the exchange rate as an effective nominal anchor. This paper outlines the structure and properties of JAM2.0 and emphasizes the enhanced interplay and tradeoffs among monetary, fiscal, and foreign exchange management policies. Simulation and forecasting exercises demonstrate JAM2.0’s ability to match key stylized facts of the Jordanian economy, produce accurate forecasts of important macroeconomic variables, and explain the critical relationships among policies.
    Date: 2023–08–25
  23. By: Fahmida Khatun; Syed Yusuf Saadat
    Abstract: The monetary policy of FY2021–22 appears to be a cautious policy during the chaotic times of the pandemic. The central bank has refrained from taking any active steps in reducing the prevailing excess liquidity in the banking system, but has assured that it will not hesitate to take action if the need arises. The overall stance of the policy is expansionary, and in the words of the central bank, "accommodative". It appears that the targets set for private sector credit growth and economic growth may not be met, considering the rapid worsening of the COVID-19 situation. Finally, governance of the banking sector will be an important determinant for better recovery of the economy. Unfortunately, reforms in the banking sector remain outside the radar of the central bank.
    Keywords: Monetary Policy, FY2021–22, Economic Growth, COVID-19, Bangladesh
    Date: 2021–12
  24. By: Livia Chiţu; Magdalena Grothe; Tatjana Schulze; Ine Van Robays
    Abstract: We study the heterogeneous impact of jointly identified monetary policy and global risk shocks on corporate funding costs. We disentangle these two shocks in a structural Bayesian Vector Autoregression framework and investigate their respective effects on funding costs of heterogeneous firms using micro-data for the US. We tease out mechanisms underlying the effects by contrasting traditional financial frictions arising from asset-based collateral constraints with the recent earnings-based borrowing constraint hypothesis, differentiating firms across leverage and earnings. Our empirical evidence strongly supports the earnings-based borrowing constraint hypothesis. We find that global risk shocks have stronger and more heterogeneous effects on corporate funding costs which depend on firms' position within the earnings distribution.
    Keywords: Corporate spreads; earnings-based borrowing constraint; heterogeneous firms; monetary policy shocks; global risk shocks
    Date: 2023–09–15
  25. By: Lee, Taehyun (Bayes Business School, Faculty of Finance); Moutzouris, Ioannis C (Bayes Business School, Faculty of Finance); Papapostolou, Nikos C (Bayes Business School, Faculty of Finance); Fatouh, Mahmoud (Bank of England)
    Abstract: We develop a four-state regime-switching model for optimal foreign exchange (FX) hedging using forward contracts. The states reflect four possible market conditions, defined by the direction and magnitude of deviation of the prevailing FX spot rate from its long-term trends. The model’s performance is tested for five currencies against pound sterling for various horizons. Our analysis compares the hedging outcomes of the proposed model to those of other frequently used hedging approaches. The empirical results suggest that our model demonstrates the highest level of risk reduction for the US dollar, euro, Japanese yen and Turkish lira and the second-best performance for the Indian rupee. The risk reduction is significantly higher for lira, which suggests that the proposed model might be able to provide much more effective hedging for highly volatile currencies. The improved performance of the model can be attributed to the adjustability of the estimation horizon for the optimal hedge ratio based on the prevailing market conditions. This, in turn, allows it to better capture fat‑tail properties frequently observed in FX returns. Our findings suggest that FX investors tend to use short-term memory (focus more on recent price movements) during low market conditions (relative to trend) and long-term memory in high ones. It would be also useful to build a better understanding of how investor behaviour depends on market conditions and mitigate the adverse behavioural implications of short-term memory, such as panic.
    Keywords: Regime switching; foreign exchange hedging; hedging effectiveness; high‑volatility currencies; forward hedging
    JEL: G13 G15
    Date: 2023–09–22
  26. By: Yueran Ma; Kaspar Zimmermann
    Abstract: We document that monetary policy has a substantial impact on innovation activities. After a tightening shock of 100 basis points, research and development (R&D) spending declines by about 1 to 3 percent and venture capital (VC) investment declines by about 25 percent in the following 1 to 3 years. Patenting in important technologies, as well as a patent-based aggregate innovation index, declines by up to 9 percent in the following 2 to 4 years. Based on previous estimates of the sensitivity of output to innovation activities, these magnitudes imply that output could be 1 percent lower after another 5 years. Monetary policy can influence innovation activities by changing aggregate demand and correspondingly the profitability of innovation, and by changing financial market conditions. Both channels appear relevant in the data. Our findings suggest that monetary policy may affect the productive capacity of the economy in the longer term, in addition to the well-recognized near-term effects on economic outcomes.
    JEL: E2 E5 G31 O3
    Date: 2023–09
  27. By: Chiara Colesanti Senni; Maria Sole Pagliari; Jens van ‘t Klooster
    Abstract: This paper investigates the climate impact of central bank refinancing operations, with a focus the ECB’s TLTRO III program. Notably, we construct a novel database that combines i) confidential data on loans granted by EU banks to non-financial corporations; ii) confidential data on TLTRO III participation and iii) data on sectoral emissions. We find that the emissions content of bank loans granted over the TLTRO III reference period amount to 8% of overall Euro Area 2019 emissions and that more than 80% of total cumulated loans issued in the reference period was directed towards polluting companies. We then investigate the effectiveness of a green credit easing scheme via a general equilibrium model. Our findings are twofold: first, the central bank policy can increase the costs for lending to polluting companies, thus re-directing loans to less-polluting firms; second, the financial stability implications of such a policy should be carefully considered. Finally, we address legal and operational challenges to such a policy by outlining three alternative ways of implementing a “green†TLTRO programme.
    Keywords: TLTRO, CO2 emissions; transition risk; monetary policy; financial stability
    JEL: E40 E50 Q50 Q54
    Date: 2023–10

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