nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒11‒06
thirty-six papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Artificial Intelligence and Central Bank Communication: The Case of the ECB By Nicolas Fanta; Roman Horvath
  2. The Reserve Supply Channel of Unconventional Monetary Policy By William F. Diamond; Zhengyang Jiang; Yiming Ma
  3. Is There a Portfolio Rebalancing Channel of QE in Latvia? By Andrejs Zlobins
  4. Liquidity premia: the PPP puzzle's missing piece? By Olk, Christopher
  5. Living Up to Expectations: Central Bank Credibility, the Effectiveness of Forward Guidance, and Inflation Dynamics Post-Global Financial Crisis By Stephen Cole; Enrique Martinez-Garcia; Eric R. Sims
  6. Deposit Convexity, Monetary Policy and Financial Stability By Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
  7. Inflation Targeting and Private Domestic Investment in Developing Countries By Bao-We-Wal Bambe
  8. Replication Report: Market-Based Monetary Policy Uncertainty By Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
  9. A comment on Bauer, Lakdawala, Mueller: Market-Based Monetary Policy Uncertainty (2022) By Baxa, Jaromir; Buliskeria, Nino; Elminejad, Ali; Havranek, Tomas; Havrankova, Zuzana; Kundu, Suranjana
  10. Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics By Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
  11. Monetary policy spillovers and the role of prudential policies in the European Union By Coman, Andra
  12. Can Central Banks Be Heard Over the Sound of Gunfire? By Ge Gao; Alex Nikolsko-Rzhevskyy; Oleksandr Talavera
  13. Labor Market Shocks and Monetary Policy By Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
  14. Is There Really an Inflation Tax? Not For the Middle Class and the Ultra-Wealthy By Edward N. Wolff
  15. 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
  16. The Labor Demand and Labor Supply Channels of Monetary Policy By Sebastian Graves; Christopher K. Huckfeldt; Eric T. Swanson
  17. Monetary policy shocks and exchange rate dynamics in small open economies By Madison Terrell; Qazi Haque; Jamie L. Cross; Firmin Doko Tchatoka
  18. Identification of systematic monetary policy By Hack, Lukas; Istrefi, Klodiana; Meier, Matthias
  19. Firms’ Cash Holdings and Monetary Policy Transmission By Falk Bräuning; José Fillat; Gustavo Joaquim
  20. Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework By Junko Koeda; Bin Wei
  21. One question at a time! A text mining analysis of the ECB Q&A session By Angino, Siria; Robitu, Robert
  22. Price setting on the two sides of the Atlantic: evidence from supermarket-scanner data By Karadi, Peter; Amann, Juergen; Bachiller, Javier Sánchez; Seiler, Pascal; Wursten, Jesse
  23. Macroepidemics and unconventional monetary policy By Verónica Acurio Vásconez; Olivier Damette; David W Shanafelt
  24. Negative Externalities of Financial Dollarization By Valida Pantsulaia; Ana Jangveladze; Shalva Mkhatrishvili
  25. Uncertainty and the Term Structure of Interest Rates By Jamie L. Cross; Aubrey Poon; Dan Zhu
  26. Long-Term Nexus of Macroeconomic and Financial Fundamentals with Cryptocurrencies By Pourpourides, Panayiotis
  27. Tackling Food Inflation: Is restricting exports and imposing stocking limits the optimal policy? By Ashok Gulati; Raya Das; Sanchit Gupta; Manish Kumar Prasad
  28. Inflation measurement with high frequency data By Kevin J. Fox; Peter Levell; Martin O'Connell
  29. Who gets jobs matters: monetary policy and the labour market in HANK and SAM By Herman, Uroš; Lozej, Matija
  30. Forecasting Credit Dynamics : VAR, VECM or modern Factor-Augmented VAR approach? By Szydlo, Jan
  31. BEAST: A model for the assessment of system-wide risks and macroprudential policies By Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
  32. Inflation, fiscal policy and inequality By Basso, Henrique S.; Flevotomou, Maria; Freier, Maximilian; Pidkuyko, Myroslav; Amores, Antonio F.; Bischl, Simeon; De Agostini, Paola; De Poli, Silvia; Dicarlo, Emanuele; Maier, Sofia; García-Miralles, Esteban; Ricci, Mattia; Riscado, Sara
  33. High-Frequency Groceries Prices: Evidence from Czechia By Anna Pavlovova
  34. How the IBOR reform affects interest rate swaps By Goebel, Josua; Heidorn, Thomas; Huang, Zizhen
  35. Invoice Currency Choice in Intra-Firm Trade: A Transaction-Level Analysis of Japanese Automobile Exports By Taiyo Yoshimi; Uraku Yoshimoto; Kiyotaka Sato; Takatoshi Ito; Junko Shimizu; Yushi Yoshida
  36. The Impact of Dollarisation on Economic Growth, Investment, and Trade By Fisnik Bajrami

  1. By: Nicolas Fanta (Institute of Economic Studies, Charles University, Prague); Roman Horvath (Institute of Economic Studies, Charles University, Prague)
    Abstract: We examine whether artificial intelligence (AI) can decipher European Central Bank´s communication. Employing 1769 inter-meeting verbal communication events of the European Central Bank´s Governing Council members, we construct an AI-based indicator evaluating whether communication is leaning towards easing, tightening or maintaining the monetary policy stance. We find that our AI-based indicator replicates well similar indicators based on human expert judgment but at much higher speed and at much lower costs. Using our AI-based indicator and a number of robustness checks, our regression results show that ECB communication matters for the future monetary policy even after controlling for financial market expectations and lagged monetary policy decisions.
    Keywords: Artificial intelligence, central bank communication, monetary policy
    JEL: E52 E58
    Date: 2023–09
  2. By: William F. Diamond; Zhengyang Jiang; Yiming Ma
    Abstract: We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.
    JEL: G20
    Date: 2023–09
  3. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: Portfolio rebalancing is a key mechanism through which central bank asset purchases flatten the yield curve, thus providing additional monetary policy accommodation when conventional policy rate setting is constrained by the effective lower bound. Existing literature provides ample evidence that this channel has played a major role in compressing the long-term interest rates and provided a broad-based easing of financial conditions for firms and households in the euro area. However, this evidence originates from either aggregate euro area or its largest jurisdictions, leaving the effects of the Eurosystem's asset purchases on smaller member states, such as Latvia, unclear. Therefore, we employ a bilateral structural vector autoregression, featuring both aggregate euro area and Latvian blocks, as well as a panel structural vector autoregression with cross-sectional heterogeneity to obtain evidence from both macro-level and bank-level data in order to shed some light on the transmission of QE to the Latvian economy. Our findings suggest that QE led to a compression of sovereign borrowing costs in Latvia and boosted economic activity and prices. At the same time, we also document that the further pass-through to domestic financial conditions was weak owing to limited asset rebalancing by the domestic banking sector in response to the Eurosystem's QE. Instead, we show that Latvian yields were compressed due to direct intervention of the central bank in the bond markets and portfolio readjustment of foreign investors. Our study thus provides additional evidence that the transmission of common monetary policy to the Latvian economy is impaired via the domestic banking sector.
    Keywords: quantitative easing, portfolio rebalancing, monetary policy, euro area, Latvia
    JEL: C54 E50 E52 E58
    Date: 2023–10–23
  4. By: Olk, Christopher
    Abstract: The purchasing power of a given currency varies across countries. Countries’ price levels, measured in USD, diverge significantly. The theoretical literature in Minsky’s tradition explains divergences in the other prices of money (the exchange rate, the interest rate and par) with reference to liquidity premia and monetary hierarchy. This argument has not been connected to the price level, which can be defined as the relationship between exchange rates and purchasing power parity rates. This essay presents a hypothesis for that missing connection: Different currencies with different degrees of liquidity are used as a store of value and international means of payment to different degrees. The resulting divergence between the demand for money in the foreign exchange market and the demand for money in the market for commodities moves the market exchange rate away from a level that would equalize purchasing power rates across countries. Based on a review of the Post-Keynesian literature on the links between interest rates and exchange rates, I develop an empirical measure for currencies’ liquidity premia in the foreign exchange market. I use it to empirically test my hypothesis, which I formalize as a simple regression model. My results suggest that the hypothesized effect is small, but significant. This finding points to a causal link between currency hierarchy and ecologically unequal exchange.
    Date: 2023–10–04
  5. By: Stephen Cole; Enrique Martinez-Garcia; Eric R. Sims
    Abstract: This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth, and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the overall effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany, and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19.
    JEL: E0 E32 E5
    Date: 2023–10
  6. By: Emily Greenwald; Sam Schulhofer-Wohl; Josh Younger
    Abstract: In principle, bank deposits can be withdrawn on demand. In practice, depositors tend to maintain stable balances for long periods, allowing banks to fund long-dated assets. Nevertheless, the cost of deposit funding influences banks’ capacity for maturity transformation. Banks and researchers conventionally model the response of deposit interest rates to market interest rates as constant, implying that deposits have nearly constant duration. Contrary to this standard assumption, we show empirically that the “beta” of deposit rates to market rates increases as market rates rise, causing the duration of deposits to fall. The amount of duration risk delivered to bank balance sheets via this channel from March 2022 to September 2023 is comparable in magnitude to the amount of duration risk absorbed by each of the several large-scale asset purchase programs the Federal Reserve has undertaken since 2008. Dynamic betas present a significant challenge to bank portfolio hedgers by introducing large and dynamic risks that are difficult to model and impractical to replicate on the asset side of the balance sheet. As a result, deposit convexity amplifies monetary policy transmission and increases financial fragility, mechanisms that recent banking stresses have highlighted.
    Keywords: banks; Depository institutions; interest rates; bank run; financial markets; central bank; monetary policy; Policy Effects
    JEL: E43 E44 E52 G12 G21
    Date: 2023–10–10
  7. By: Bao-We-Wal Bambe (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne)
    Abstract: Does inflation targeting foster private domestic investment in developing countries? A few studies have attempted to examine this issue, with mixed results. Here we argue that by anchoring public expectations firmly, the inflation targeting framework should enhance monetary policy credibility and macroeconomic stability, thereby promoting investment incentives. Using data from 62 countries over the period 1990-2019 and applying propensity score matching methods, we find that inflation targeting significantly increases domestic investment. However, inflation deviations from the target reduce the favorable effect of inflation targeting on investment. Furthermore, the positive effect of inflation targeting on investment is amplified in emerging economies and in countries with sound fiscal discipline. Finally, we explore the underlying mechanisms and show that macroeconomic stability, i.e., the reduction in inflation and its volatility, interest rate, exchange rate, and output volatility, is the main channel through which the monetary framework promotes domestic investment.
    Keywords: Inflation targeting, Private domestic investment, Developing countries, Propensity score matching, Monetary policy credibility
    Date: 2023–08
  8. By: Griffa, Cristina; Oliver i Vert, Miquel; Tatlow, Benjamin; Zhong, Yaolang
    Abstract: This report replicates and examines Bauer et al.'s (2021) paper on monetary policy transmission to financial markets. The paper introduces novel measures of monetary policy uncertainty and analyses its drivers. It also investigates the impact of uncertainty changes on interest rates and financial asset prices. We assess reproducibility, consolidate market uncertainty measures using PCA and Factor Analysis, and rigorously test the reduction of uncertainty after Federal Market Open Committee (FOMC) announcements. Our findings support the paper's claim of reduced uncertainty on meeting days. Additionally, we explore the implications of the uncertainty channel on various financial assets, such as Gold, the Swiss Franc, European stock indexes, and Bitcoin.
    Date: 2023
  9. By: Baxa, Jaromir; Buliskeria, Nino; Elminejad, Ali; Havranek, Tomas; Havrankova, Zuzana; Kundu, Suranjana
    Abstract: Bauer et al. (2022) derive market-based monetary policy uncertainty and uncover an 'FOMC uncertainty cycle' characterized by a fall of uncertainty after FOMC announcements and its subsequent built-up. Then, the authors show that the financial markets' response to monetary policy announcements depends on the level of short-rate uncertainty on the day before the FOMC announcement. First, we reproduced the paper's findings, though with Matlab version-specific issues. Second, we tested the robustness of the two main results of the paper. We show that the uncertainty cycle in the monetary policy uncertainty is confirmed when the crisis period is included in the sample or when the median instead of the average of changes in the monetary policy uncertainty is considered. However, the FOMC uncertainty cycle does not appear when the monetary policy uncertainty index (Husted et al. 2020) or the daily economic policy uncertainty index (Baker et al. 2016) are used as uncertainty proxies.
    Keywords: Uncertainty, Monetary policy, Replication
    JEL: E43 E52
    Date: 2023
  10. By: Tomás E. Caravello; Pedro Martinez-Bruera; Iván Werning
    Abstract: We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.
    JEL: E0 F3 F31 F33
    Date: 2023–10
  11. By: Coman, Andra
    Abstract: This paper empirically examines the extent to which prudential policies can help to reduce the macro-financial spillover effects of foreign monetary policy for all 28 EU countries. Using local projection methods, I show that EU countries with tighter prudential policies face significantly smaller, and less negative spillovers to bank credit and house prices from US, UK and EA monetary policy tightening shocks. Measures of a macroprudential policy nature such as capital buffers, lending standards restrictions and limits to credit growth appear to be particularly effective at mitigating the spillover effects of US monetary policy, while measures of a microprudential nature as minimum capital requirements, risk weights and limits on large exposures prove effective in mitigating spillovers effects of UK monetary policy. Results indicate that domestic prudential policies can dampen EU countries’ exposure to foreign monetary policy and may be a useful tool in the face of spillovers coming from centre countries and within the EU. JEL Classification: E52, E58, E61, F42, F45
    Keywords: international spillovers, local projections, monetary policy, policy interactions, prudential policy
    Date: 2023–10
  12. By: Ge Gao (Beijing Sport University); Alex Nikolsko-Rzhevskyy (Lehigh University); Oleksandr Talavera (University of Birmingham)
    Abstract: In this study, we examined the effectiveness of central bank communications during times of significant adverse shocks. Specifically, we examined how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russo-Ukrainian War in 2022. Data collected from both the black and authorized FX markets suggested that the content of the NBU’s announcements significantly impacted FX market agents. Announcements aimed at maintaining a fixed (floating) FX rate prompted an increase (decrease) in the black market premium in cash transactions. Moreover, the NBU's announcements influenced the sale side of foreign currency more than any other aspect, an area where the black market FX traders held near monopolistic power.
    Keywords: Russia-Ukraine war, central bank communications, black market premium, forex, ChatGPT
    JEL: D83 E44 E58 F31
    Date: 2023–10
  13. By: Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
    Abstract: We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the positive and normative implications of employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries, with the former exhibiting subdued EE transitions and inflation despite both episodes sharing similar unemployment dynamics. The optimal monetary policy prescribes a strong positive response to EE fluctuations, implying that central banks should distinguish between recovery episodes with similar unemployment but different EE dynamics.
    Keywords: Business fluctuations and cycles; Inflation and prices; Labour markets; Monetary policy
    JEL: E12 E24 E52 J31 J64
    Date: 2023–10
  14. By: Edward N. Wolff
    Abstract: One hallmark of U.S. monetary policy since the early 1980s has been moderation in inflation (at least, until recently). How has this affected household well-being? The paper first develops a new model to address this issue. The inflation tax on income is defined as the difference between the nominal and real growth in income. This term is always negative (as long as inflation is positive). The inflation gain on household wealth is the revaluation resulting from asset price changes directly linked to inflation. This term can be positive or negative. The net inflation gain is the difference between the two, which can also be positive or negative. The empirical analysis covers years 1983 to 2019 on the basis of the Federal Reserve Board’s Survey of Consumer Finances (SCF) and historical inflation rates. It also looks at the sensitivity of the results to alternative inflation rates, and considers the effects of inflation on real wealth growth, wealth inequality, and the racial wealth gap. The results show that inflation boosted the real income of the middle wealth quintile by a staggering two thirds. In contrast, the bottom two wealth quintiles got clobbered by inflation, losing almost half of their real income. Inflation also boosted mean and especially median real wealth growth, reduced wealth inequality, and lowered the racial and ethnic wealth gap. Both the income and wealth results are magnified at higher (simulated) rates of inflation.
    JEL: D31 H31 J15
    Date: 2023–10
  15. 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, similar 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, in stablecoins, runs have occurred in different stablecoin types across the 2022 and 2023 runs. We also show that, similar to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, we estimate a discrete “break-the-buck” threshold of $0.99 for stablecoins, below which redemptions accelerate.
    Keywords: stablecoins; money market mutual funds; financial stability; crypto assets; runs; liquidity transformation
    JEL: G10 G20 G23
    Date: 2023–08–24
  16. By: Sebastian Graves; Christopher K. Huckfeldt; Eric T. Swanson
    Abstract: Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches and find that, in contrast to the consensus view, a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to non-employment, while non-employed individuals increase their job-seeking behavior. Holding supply-driven labor market flows constant, the overall decline in employment from a contractionary monetary policy shock becomes twice as large.
    JEL: E32 E52 J22 J23 J64
    Date: 2023–10
  17. By: Madison Terrell; Qazi Haque; Jamie L. Cross; Firmin Doko Tchatoka
    Abstract: This paper investigates the relationship between monetary policy shocks and real exchange rates in several small open economies. To that end, we develop a novel identification strategy for time-varying structural vector autoregressions with stochastic volatility. Our approach combines short-run and long-run restrictions to preserve the contemporaneous interaction between the interest rate and the exchange rate. Using this framework, we find that the volatility of monetary policy shocks has substantially decreased in all countries. This leads to a considerable reduction in the significance of policy shocks in explaining exchange rate and macroeconomic fluctuations since the 1990s. However, we find that the dynamic effects of the policy shocks have remained stable over time. Finally, while we do identify violations of uncovered interest parity (UIP) in some countries, we find no evidence of the ‘exchange rate puzzle’ or the ‘delayed overshooting puzzle’ in any country.
    Date: 2023–06
  18. By: Hack, Lukas; Istrefi, Klodiana; Meier, Matthias
    Abstract: We propose a novel identification design to estimate the causal effects of systematic monetary policy on the propagation of macroeconomic shocks. The design combines (i) a time-varying measure of systematic monetary policy based on the historical composition of hawks and doves in the Federal Open Market Committee (FOMC) with (ii) an instrument that leverages the mechanical FOMC rotation of voting rights. We apply our design to study the effects of government spending shocks. We find fiscal multipliers between two and three when the FOMC is dovish and below zero when it is hawkish. Narrative evidence from historical FOMC records corroborates our findings. JEL Classification: E32, E52, E62, E63, H56
    Keywords: FOMC, government spending, monetary policy, rotation
    Date: 2023–10
  19. By: Falk Bräuning; José Fillat; Gustavo Joaquim
    Abstract: Liquidity, particularly cash holdings, may serve as an important cushion for firms to absorb macroeconomic shocks such as interest rate increases so that these shocks have only minimal effects on their operations, at least in the short term. For example, to finance their investments, firms with high levels of cash may not have to tap so deep into debt financing, the cost of which relates closely to interest rates. Understanding the role of corporate cash holdings is therefore paramount to formulating appropriate monetary policy in the current environment. This brief informs the ongoing policy debate by examining the effect of US nonfinancial corporate cash holdings on the transmission of monetary policy, both historically and in the present tightening cycle. This brief shows that in the current hiking cycle, firms have used the cash they accumulated in 2020 and 2021 to finance operations, growth, and payouts. Due to this depletion of the accumulated-cash buffer, the effects of interest rate increases to date on corporate investment will likely gain traction in the coming quarters.
    Keywords: monetary policy transmission; cash accumulation; investment
    JEL: E22 E52 G30
    Date: 2023–10–12
  20. By: Junko Koeda; Bin Wei
    Abstract: Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8 percent during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30 percent versus 0.15 percent).
    Keywords: forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors
    JEL: E43 E44 E52 E58
    Date: 2023–10–16
  21. By: Angino, Siria; Robitu, Robert
    Abstract: News media play a fundamental role in the communication between central banks and the public. Besides stimulating institutional transparency, the reporting of the news media on a central bank’s activities is also the main source of information about the institution for most citizens. To better understand how this intermediation process works, this paper explores the Q&A session of the European Central Bank (ECB)’s press conferences, where journalists have an opportunity to set the discussion and inquire into the central bank’s thinking. Using a structural topic model on a novel dataset consisting of all questions asked at ECB press conferences since May 2012, we conduct a systematic examination of the topics the ECB is questioned about and uncover differences in the focus of outlets from different geographical areas and with different types of audiences. We find that international outlets devote more attention to technical topics, relevant for market participants, while domestic media in the European Union (EU) dedicate greater focus to national affairs and the more political dimensions of the ECB’s activities. JEL Classification: E52, E58, E59
    Keywords: Central bank communication, European Central Bank, media, Structural Topic Modelling
    Date: 2023–10
  22. By: Karadi, Peter; Amann, Juergen; Bachiller, Javier Sánchez; Seiler, Pascal; Wursten, Jesse
    Abstract: We compare supermarket price setting in the US and the euro area and assess its impact on food inflation. We introduce a novel scanner dataset of Germany, the Netherlands, France, and Italy (EA4) and contrast it with an equivalent dataset from the US. We find that both higher frequency and stronger state dependence of price changes contribute to higher flexibility of supermarket inflation in the US relative to the euro area. We argue that the driving force behind both factors is higher cross-sectional volatility in the US. Larger product-level fluctuations both force retailers to adjust prices more frequently and increase price misalignments, which increase the selection of large price changes. [...] JEL Classification: E31, E32, E52, F44
    Keywords: COVID-19, duration hazard, food inflation, generalized hazard, state-dependent price setting, US and euro-area comparison
    Date: 2023–10
  23. By: Verónica Acurio Vásconez (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Olivier Damette (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); David W Shanafelt (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Although the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. This paper uses a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model with a traditional epidemiological model, we can evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (''epi loans''). To the best of our knowledge, our paper is one of the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the use of an unconventional monetary policy.
    Keywords: New-Keynesian model, Financial dsge, Covid-19, Epidemiology, Unconventional monetary policy
    Date: 2023–07–05
  24. By: Valida Pantsulaia (Financial Stability Analysis and Macro-financial Modeling Division, National Bank of Georgia); Ana Jangveladze (Financial Stability Analysis and Macro-financial Modeling Division, National Bank of Georgia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia)
    Abstract: Dollarization (usage of a foreign currency in place of a domestic one) is a widely observed phenomenon that historically emerged as a result of extended macro-financial instability and extreme price and nominal exchange rate fluctuations. Complete loss of public confidence in a local currency pushed lenders and borrowers to seek more stable foreign currencies like the US dollar and euro. What is more puzzling though is that in many countries dollarization remained at an elevated level even after taking care of its root cause (i.e. after achieving price stability). There have been several explanations of this phenomenon (the so-called dollarization hysteresis). In this short paper, we propose additional explanations in the form of several dollarization-induced negative externalities, including an amplification of credit procyclicality and exchange rate pass-through or a worsening of credit ratings of dollarized economies. We also offer some back-of-the-envelope calculations showing that these externalities could be economically significant (about 1 pp impact on real GDP growth per year) for a small and highly dollarized country like Georgia. This type of market failures underline the importance of prudential policies that internalize negative externalities and, hence, level the playing field for the local currency.
    Keywords: Financial dollarization; Negative externality
    JEL: E44 E58 F34
    Date: 2023–04
  25. By: Jamie L. Cross; Aubrey Poon; Dan Zhu
    Abstract: We present a new stylized fact about the link between uncertainty and the term structure of interest rates: Unexpectedly heightened uncertainty elicits a lower, steeper, and flatter yield curve. This result is established through a Yields-Macro model that includes dynamic Nelson-Siegel factors of U.S. Treasury yields, and accounts for endogenous feed back with observable measures of uncertainty, monetary policy, and macroeconomic aggregates. It is also robust to three distinct measures of uncertainty pertaining to the financial sector, the macroeconomy and economic policy. An efficient Bayesian algorithm for estimating the class of Yields-Macro models is also developed.
    Date: 2023–10
  26. By: Pourpourides, Panayiotis (Cardiff Business School)
    Abstract: In this empirical study I examine the influence of macroeconomic and financial fundamentals on cryptocurrency metrics over the long term. Through both parametric and non-parametric estimation methods, I establish that the relative value of the US dollar and the price of gold consistently exert significant impact on cryptocurrency metrics. Analyzing daily and monthly data reveals a robust statistical correlation, resulting in adverse effects on cryptocurrency prices, market capitalizations, and Bitcoin’s hash rate. These findings along with distinct features of Bitcoin resonate with the concept of Bitcoin as a digital asset analogous to physical gold, assuming a role similar to a substitute for the latter. Comparatively, Bitcoin’s hash rate demonstrates heightened market exposure when contrasted with its price counterpart. While the value of the US dollar exerts negative effects on both gold and Bitcoin, the latter’s response is notably greater. Moreover, the relationships of gold and Bitcoin with indicators such as the federal funds rate and the S&P 500 exhibit divergent patterns. While the US dollar primarily exerts downward pressure on Bitcoin’s price and the gold price primarily influences the hash rate, over time the significance of both factors, though dominant, gradually diminishes.
    Keywords: Bitcoin; Cryptocurrencies; Blockchain; Macroeconomic and Financial Fundamentals.
    JEL: E44 G10 G12 G19
    Date: 2023–09
  27. By: Ashok Gulati (Indian Council for Research on International Economic Relations (ICRIER)); Raya Das (Indian Council for Research on International Economic Relations (ICRIER)); Sanchit Gupta; Manish Kumar Prasad
    Abstract: India faces a challenging macroeconomic scenario as retail inflation, measured by the year-on-year Consumer Price Index (CPI), persists above the Reserve Bank of India's upper tolerance limit, reaching 6.83 percent in August 2023. This surge, primarily driven by soaring food prices. The Government of India (GOI) has implemented a series of measures, including export ban on non-basmati white rice, stocking limits on wheat, and export duties on onion, parboiled rice often seen as abrupt and reactionary and impact farmers' income. Our study estimates that these market restrictive policy measures have taken a toll on our farmers, slashing their earnings by a staggering Rs.39, 829 crores. This policy brief advocates for a more rational and dependable trade policy that balances the interests of producers and consumers while containing food inflation.
    Keywords: Food Inflation, retail inflation, Basmati, trade policy, food prices, icrier
    Date: 2023–09
  28. By: Kevin J. Fox (UNSW Sydney); Peter Levell (Institute for Fiscal Studies); Martin O'Connell (Institute for Fiscal Studies)
    Abstract: The availability of large transaction level datasets, such as retail scanner data, provides a wealth of information on prices and quantities that national statistical institutes can use to produce more accurate, timely, measures of inflation. However, there is no universally agreed upon method for calculating price indexes with such high frequency data, reflecting a lack of systematic evidence on the performance of different approaches. We use a dataset that covers 178 product categories comprising all fast-moving consumer goods over 8 years to provide a systematic comparison of the leading bilateral and multilateral index number methods for computing month-to-month inflation.
    Date: 2023–10–18
  29. By: Herman, Uroš; Lozej, Matija
    Abstract: This paper first provides empirical evidence that labour market outcomes for the less educated, who also tend to be poorer, are substantially more volatile than labour market outcomes for the well-educated, who tend to be richer. We estimate job finding rates and separation rates by educational attainment for several European countries and find that job finding rates are smaller and separation rates larger at lower educational attainment levels. At cyclical frequencies, fluctuations of the job finding rate explain up to 80% of the unemployment fluctuations for the less educated. We then construct a stylised HANK model augmented with search and matching and ex-ante heterogeneity in terms of educational attainment. We show that monetary policy has stronger effects when the job market for the less educated and hence poorer is more volatile. The reason is that these workers have the most procyclical income coupled with the highest marginal propensity to consume. An expansionary monetary policy shock that increases labour demand disproportionally affects the labour market segment for the less educated, causing a strong increase in their consumption. This further amplifies labour demand and increases labour income of the poor even more, amplifying the initial effect. The same mechanism carries over to forward guidance. JEL Classification: E40, E52, J64
    Keywords: business cycles, employment, heterogeneous agents, monetary policy, search and matching
    Date: 2023–10
  30. By: Szydlo, Jan (University of Warwick)
    Abstract: Following the financial crisis of 2008, central banks started paying more attention to the issue of financial stability and to the amount of credit circulating in the economy. However, the methods used to forecast credit often are underdeveloped and don’t make the most out of access to big data. This paper evaluates the performance of various models in forecasting the Dynamics of Credit to the Non-Financial Sector in the United States. It explores three approaches: the reduced form Vector Autoregressive model, Vector Error Correction model and Factor-Augmented Autoregressive model. The paper compares the RMSE of the models and finds that FAVAR approach outperforms traditional VAR and VEC models and produces more accurate forecasts of credit dynamics.
    Keywords: Macroeconometric Forecasting ; Big data ; Credit JEL classifications: C53 ; C55 ; E47 ; E51
    Date: 2023
  31. By: Budnik, Katarzyna; Groß, Johannes; Vagliano, Gianluca; Dimitrov, Ivan; Lampe, Max; Panos, Jiri; Velasco, Sofia; Boucherie, Louis; Jančoková, Martina
    Abstract: The Banking Euro Area Stress Test (BEAST) is a large-scale semi-structural model developed to analyse the euro area banking system from a macroprudential perspective. The model combines the dynamics of approximately 90 of the largest euro area banks with those of individual euro area economies. It reflects the heterogeneity of banks by replicat-ing the structure of their balance sheets and profit and loss accounts. Additionally, it allows banks to adjust their assets, funding mix, pricing decisions, management buffers, and profit distribution along with individual bank conditions, including their capital and liquidity re-quirements, and other supervisory limits. The responses of banks impact credit supply con-ditions and have feedback effects on the macroeconomic environment. Stochastic solutions of the model provide a solid foundation for investigating multiple scenarios, deriving at-risk measures, and estimating model uncertainty. The model is regularly utilised to assess the resilience of the euro area banking sector, including in the biennial ECB macroprudential stress tests, as well as to analyse the effects of regulatory, macroprudential, and monetary policy changes. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop
    Date: 2023–10
  32. By: Basso, Henrique S.; Flevotomou, Maria; Freier, Maximilian; Pidkuyko, Myroslav; Amores, Antonio F.; Bischl, Simeon; De Agostini, Paola; De Poli, Silvia; Dicarlo, Emanuele; Maier, Sofia; García-Miralles, Esteban; Ricci, Mattia; Riscado, Sara
    Abstract: This paper analyses the distributional impact of high consumer inflation in the euro area and government measures to compensate households in 2022. The study uses the tax-benefit microsimulation model for the European Union (EUROMOD) with microdata as the input – EU statistics on income and living conditions (EU-SILC) and household budget surveys (HBS) – to quantify the distributional impact of inflation, income support measures and measures aimed at containing prices. The analysis confirms that purchasing power and welfare were more severely affected by the 2022 inflation surge in lower-income households than in higher-income households. Fiscal measures compensated households for about a third of their welfare loss, though with significant differences between countries. At the same time, fiscal measures closed around 60% of the inequality gap between lower and higher-income households. Most fiscal measures were not particularly well targeted at low-income households, resulting in a higher than necessary fiscal burden to cushion the distributional impact of the inflationary shock. JEL Classification: D12, D31, D60, E31, H20, I30
    Keywords: distributional effect, EUROMOD, fiscal policy, inflation, welfare effect
    Date: 2023–10
  33. By: Anna Pavlovova (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic)
    Abstract: How often do online retailers change prices? Are there any differences in their price rigity? I collected and analysed more than 4 million daily prices of online grocery retailers from Czechia during the unprecedented period between January 2020 and April 2021. There are substantial differences in pricing among the four retailers. The mean number of all price changes ranges among the retailers between 3.10 and almost 11 per year. Most of the price changes are temporary. Retailers change prices permanently on average between 0.68 to 4.04 times per year. The differences in pricing persist even after the disaggregation of the products into individual categories and even in the estimation of the within-between model of the probability of price change. An in-depth analysis of temporary price adjustments is crucial to robustly assess pricing and price rigidity. It is likely to explain part of the discrepancy in pricing found across the retailers.
    Keywords: price setting, price exibility, scraped prices, temporary price changes
    JEL: E30 D22 L11 L81 M21
    Date: 2023–10
  34. By: Goebel, Josua; Heidorn, Thomas; Huang, Zizhen
    Abstract: This paper examines how the IBOR Reform affects interest rate swaps (IRS), focusing on Euro and US Dollar. The effects are derived by (1) studying publications from the standard setting bodies behind the reforms and (2) by analyzing swap conventions and clearing eligibility criteria at LCH, CME, and Eurex. The paper finds a limited impact on Euro IRS, as it has retained its credit-risky and forward-looking benchmark rate in the (hybrid) EURIBOR. The largest adjustment has been the shift from EONIA to €STR OIS discounting. USD IRS will move from USD LIBOR to the overnight rate SOFR. Consequently, interest rates are calculated by compounding the daily SOFR rates over the interest period. As the rate is no longer forward-looking, the floating rate is set at the end of the interest period ("fixed in arrears"). SOFR does not contain a term premium and is nearly risk free unlike USD LIBOR. One direct result is a lower swap rate. Moreover, banks no longer have an interest rate that captures their funding costs. Lastly, EURUSD cross currency swaps now mostly exchange €STR for SOFR instead of EURIBOR for USD LIBOR, which has increased the cross-currency basis.
    Keywords: IBOR Reform, LIBOR, SOFR, €STR, EURIBOR, RFRs, Overnight rate, OIS, Compounding in arrears, Interest rate swaps, Cross currency swaps
    JEL: G12 G23 G28
    Date: 2022
  35. By: Taiyo Yoshimi (Faculty of Economics, Chuo University, Japan / Policy Research Institute, Ministry of Finance, Japan); Uraku Yoshimoto (Policy Research Institute, Ministry of Finance, Japan); Kiyotaka Sato (Faculty of International Social Sciences, Yokohama National University, Japan / Policy Research Institute, Ministry of Finance, Japan); Takatoshi Ito (School of International Relations and Public Policy, Columbia University, The United States / National Graduate Institute for Policy Studies, Japan); Junko Shimizu (Faculty of Economics, Gakushuin University, Japan / Policy Research Institute, Ministry of Finance, Japan); Yushi Yoshida (Faculty of Economics, Shiga University, Japan / Policy Research Institute, Ministry of Finance, Japan)
    Abstract: This study empirically investigates the extent to which the choice of invoice currency differs between intra-firm and arm fs length exports. We also examine whether other firm- and product-level factors affect the choice of invoice currency. This study is the first to be granted access to highly disaggregated transaction-level data on Japanese automobile exports to France. By conducting panel logit estimation, we demonstrate that importers f currency tends to be chosen in intra-firm export invoicing, which has not been rigorously shown in previous literature. Our empirical findings remain robust when introducing different types of intra-firm export variables and other conventional explanatory variables such as firm- and product market share, exchange rate volatility, a dummy for intermediate goods exports, euro-invoiced imports, labor productivity, and research and development intensity. Amid growing intra-firm trade and expanding global value chains, Japanese parent firms tend to invoice using the importer fs currency, assuming the foreign exchange risk that arises from intra-firm trade; thus, exchange rate risk management is a significant consideration for Japanese parent firms.
    Keywords: Invoice currency; Intra-firm trade; Japan Customs data; Market share; Export competitiveness
    JEL: F14 F31
    Date: 2023–09
  36. By: Fisnik Bajrami (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic)
    Abstract: Dollarisation has been extensively debated and is often promoted as a viable monetary and exchange rate policy alternative for emerging economies. While most arguments for and against dollarisation are grounded in theory, there is a recognized scarcity of empirical evidence on the topic. This study evaluates over two decades of dollarisation experience in emerging economies. Our results suggest that dollarisation is associated with similar economic growth levels as other exchange rate regimes. However, it comes with the cost of more negative current account balance growth rates and heightened growth volatility, especially in the past decade. Nevertheless, dollarised countries benefit from higher levels of investment and trade. Contrary to a significant part of the existing literature, our findings challenge the perceived benefits of dollarisation in terms of economic growth. Additionally, we demonstrate that dollarised countries differ in various macroeconomic indicators when compared to individual exchange rate regimes, even against other fixed exchange rate regimes - which are often assumed to be homogenous.
    Keywords: dollarisation, GDP growth, growth volatility, trade, investment, exchange rate, empirical evaluation
    JEL: E42 E52 F31 F45
    Date: 2023–09

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