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on Monetary Economics |
| By: | Dräger, Lena |
| Abstract: | This paper surveys the literature on the role and effects of central bank communication with the general public, particularly regarding the formation of macroeconomic expectations. It starts by giving a brief overview of the recent “communication revolution†in central bank communication. The challenges for central bank communication with the public are outlined by surveying the evidence about low average knowledge on inflation and monetary policy in the population. Next, I evaluate the effects of direct communication, distinguishing between challenges to getting the attention of the public and effects of information on the public’s inflation expectations once attention is gained. Finally, I review the role of the media as transmitter of central bank communication to the public. |
| Keywords: | Central bank communication, consumers, households, literature survey, RCT studies. |
| JEL: | E52 E58 D84 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-713&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | Central bank digital currency is non-physical money or the digital equivalent of physical money issued by a central bank. Nigeria is the first African country to issue a central bank digital currency, popularly known as the eNaira. This paper highlights the redesign features which the eNaira should possess for it to become very effective in offering payment solution and for macroeconomic stability. The eNaira should have an interest-bearing status, have enhanced security features and should offer zero transaction cost on eNaira transactions. |
| Keywords: | eNaira, central bank digital currency, Nigeria, interest-bearing CBDC, cryptocurrency, blockchain, payment system. |
| JEL: | E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118807&r=mon |
| By: | Ruimin Song; TIntian Zhao; Chunhui Zhou |
| Abstract: | This paper takes the development of China's Central bank digital currencies as a perspective, theoretically analyses the impact mechanism of the issuance and circulation of Central bank digital currencies on China's monetary policy and various variables of the money multiplier; at the same time, it selects the quarterly data from 2010 to 2022, and examines the impact of the Central bank digital currencies on the money supply multiplier through the establishment of the VECM model. The research results show that: the issuance of China's Central bank digital currencies will have an impact on the effectiveness of monetary policy and intermediary indicators; and have a certain positive impact on the narrow money multiplier and broad money multiplier. Based on theoretical analyses and empirical tests, this paper proposes that China should explore a more effective monetary policy in the context of Central bank digital currencies in the future on the premise of steadily promoting the development of Central bank digital currencies. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.07326&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | This paper discusses how the eNaira central bank digital currency (CBDC) might be used to solve some economic problems in Nigeria. It presents the eNaira as a payment option, a monetary policy tool and a financial stability tool to solve some economic problems in Nigeria. I show that the eNaira can be instrumental in solving fiscal revenue challenges, controlling inflation, increasing foreign exchange accretion, managing exchange rate, addressing food insecurity, reducing financial stability risks, reducing poverty level, and recovering from a recession. The implication is that the eNaira can support the monetary, fiscal and regulatory authorities in preserving macroeconomic stability. However, a trade-off might arise among policy objectives if the eNaira cannot achieve multiple policy objectives at the same time. |
| Keywords: | eNaira, CBDC, central bank digital currency, fiscal revenue, inflation, foreign exchange, food insecurity, financial stability, poverty, Nigeria, blockchain, exchange rate, recession. |
| JEL: | E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118805&r=mon |
| By: | Dräger, Lena; Lamla, Michael J. |
| Abstract: | After the financial crisis of 2008, central banks around the world have increased their communication efforts to reach consumers, with the aim of both guiding and anchoring their inflation expectations. For the expectations channel of monetary policy to work as intended, central banks need a thorough understanding of the formation process of expectations by the general public and of the relationship between expectations and economic choices. This warrants reliable and detailed data on consumers’ expectations of macroeconomic variables such as inflation or interest rates. We thus survey the available survey data and issues regarding the measurement of macroeconomic expectations. Furthermore, we discuss the research frontier on important aspects of the expectations channel: We evaluate the evidence on whether expectations are formed consistently with standard macroeconomic relationships, discuss the insights with respect to the anchoring of inflation expectations, explore the role of narratives and preferences and lastly, we survey the research on causal effects of central bank communication on expectations and economic choices. |
| Keywords: | Consumers’ macroeconomic expectations, central bank communication, survey data |
| JEL: | E52 E30 D84 C83 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-714&r=mon |
| By: | Aleksander Berentsen; Romina Ruprecht; Hugo van Buggenum |
| Abstract: | Major central banks remunerate reserves at negative rates (NIR). To study thelong-run effects of NIR, we focus on the role of reserves as intertemporal stores of value that are used to settle interbank liabilities. We construct a dynamic general equilibrium model with commercial banks holding reserves and funding investments with retail deposits. In the long run, NIR distorts investment decisions, lowers welfare, depresses output, and reduces bank profitability. The type of distortion depends on the transmission of NIR to retail deposits. The availability of cash explains the asymmetric effects of policy-rate changes in negative vs positive territory. |
| Keywords: | Monetary policy; Interest rates; Money market; Negative interest rate |
| JEL: | E40 E42 E43 E50 E58 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-64&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | This article explores the potential effect of central bank digital currency activity on bank loan loss provisions. We show that the effect of CBDC activity on bank loan loss provisions depends on the nature of CBDC activity and whether CBDC activity is regulated or non-regulated. As more people use CBDCs, it could lead to shortfall in bank deposits and increase funding and liquidity risk and generate a pass-through to credit risk which would require banks to increase loan loss provisions in anticipation of loan loss arising from CBDC activity. CBDC regulation may dampen this effect. |
| Keywords: | digital innovation, loan loss provision, central bank digital currency, bank |
| JEL: | E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118797&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | The paper presents a survey of central bank digital currency (CBDC) adoption in African countries. Secondary data based on desk research were used to conduct the survey. Data for each African country were collected from publicly available information about each country’s interest and efforts in issuing a central bank digital currency. The survey shows that 70 per cent of African countries have not shown any interest in central bank digital currency. The West African region has the highest number of countries that have not shown any interest in central bank digital currency. Only 4 African countries have a robust payment system infrastructure that can support central bank digital currency. Only 14 African countries have officially indicated interest in central bank digital currency. Only 13 African countries have announced that they are studying central bank digital currency to determine whether they will pursue central bank digital currency as a short-term or long-term goal. Only 4 African countries have reached the pilot test stage of issuing a central bank digital currency. Finally, only one African country has formally issued a central bank digital currency. The policy implication of the findings is that there is low interest in central bank digital currency in the African continent. The low interest in central bank digital currency in African is attributed to the strong preference for cash payments, lack of a robust payment system, low use of digital payments, central banks’ focus on other priorities, fear of failure, lack of government interest in digital currency and concerns about CBDC privacy risk and security threats. These factors can slowdown the level of development and economic inclusion in African countries. There is need to accelerate the issuance of CBDC in African countries. |
| Keywords: | central bank digital currency, CBDC, Africa, blockchain, distributed ledger technology, CBDC survey. |
| JEL: | E50 E51 E52 E58 E59 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118794&r=mon |
| By: | Natalia Martín Fuentes (University of Málaga); Elena Bárcena Martín (University of Málaga); Salvador Pérez Moreno (University of Málaga) |
| Abstract: | This work provides evidence on the heterogeneous effects of ECB’s monetary policy across income classes in the euro area. In particular, this investigation focuses on the macroeconomic channel and analyses how expansionary monetary policy affects income inequality through the labour market, that is, by stimulating economic activity which ultimately affects income classes differently. Based on European Union Statistics on Income and Living Conditions (EU-SILC) data, we compute specific labour market metrics for each income class (lower, lower-middle, upper-middle, and upper) for the countries that originated the Economic and Monetary Union (EMU-11). Covering the period between 2006Q1 and 2019Q4, we estimate a series of country-specific structural Vector Autoregressive (SVAR) models to analyse the impact of an unexpected decline in the euro area shadow rate. As a robustness check, we estimate local projections models using exogenous monetary policy surprises. The results suggest that past monetary easing shocks helped decrease unemployment rates for lower- and middle-income class households, to a larger extent for the former. This differential impact across income classes is accounted for a substantially stronger improvement in job finding rates for those located at the bottom of the income distribution. In contrast, job separation rates have been homogeneously affected across the distribution. Conversely, the employment status of those located at the rightmost side of the income distribution seems to have been less elastic to monetary policy shocks. The analysis identifies a positive impact of expansionary monetary policy on real labour income. Overall, our results suggest that expansionary monetary policy has helped decrease labour income inequality. |
| Keywords: | Monetary policy, income inequality, income class, structural vector autoregressions (SVARs), local projections, euro area. |
| JEL: | C11 D31 E52 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2023-657&r=mon |
| By: | Nuwat Nookhwun; Rawipha Waiyawatjakorn |
| Abstract: | The experience of flexible inflation targeting in ASEAN-5 has been favorable. This paper shows improvements in macroeconomic outcomes consistent with the framework’s mandated objectives: lower levels and volatility of inflation, more stable economic growth and a well-functioned financial system. ASEAN-5 economies can cope well with a se- quence of past shocks and crises, although the marginal contribution of the inflation targeting framework itself is still not clear-cut. Over the past 20 years, policy frameworks of ASEAN-5, similar to other emerging market economies, have continuously evolved to incorporate various policy tools, which include foreign exchange intervention, macropru- dential policy and capital flow measures. This reflects challenges emanated from capital flow volatility and domestic financial imbalances. A multitude of policy tools are ar- guably one of the key factors contributing to the sound macroeconomic outcome during the post-targeting periods. |
| Keywords: | flexible inflation targeting; monetary policy; ASEAN; financial stability; integrated policy |
| JEL: | E52 E58 D78 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:pui:dpaper:208&r=mon |
| By: | Priit Jeenas |
| Abstract: | I study the role of firms' balance sheet liquidity in the transmission of monetary policy to investment. In response to monetary contractions, U.S. firms with fewer liquid asset holdings reduce investment relatively more. This can be explained by their higher likelihood to issue debt and the implied exposure to borrowing cost fluctuations. I rationalize these results using a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on cash and borrowing. Compared to a framework which ignores liquidity considerations, monetary transmission to aggregate investment is slightly dampened and depends on liquid asset portfolios beyond net worth. |
| Keywords: | monetary policy, investment, financial frictions, firm heterogeneity |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1409&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | This article explores the benefits and issues surrounding the digital Rupee, also known as the eRupee or the central bank digital currency in India. The study found that Indian people who were interested in ‘cryptocurrency’ information were also interested in ‘central bank digital currency’ information. The study also showed that the introduction of CBDC has potential benefits such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk. However, the India CBDC has associated risks that need to be carefully evaluated against the potential benefits. The introduction of a digital rupee or CBDC in India will require legal and regulatory changes to make the phased CBDC implementation possible. |
| Keywords: | India, CBDC, cryptocurrency, digital rupee, central bank digital currency, blockchain, distributed ledger technology. CBDC design, financial stability, monetary policy. |
| JEL: | E40 E42 E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118801&r=mon |
| By: | Elif Feyza Özcan Kodaz; Serdar Yürek |
| Abstract: | In this paper, we examine firms’ price-setting decisions to identify underlying pricing behaviour and discuss their implications for aggregate inflation dynamics. By employing retail-product level micro price data from Türkiye, we first construct aggregate indicators of the average frequency and size of individual price changes. Second, we i) compare the behaviours of these indicators across low and high inflation environments, ii) utilize two large exchange rate shocks, three value-added tax (VAT) adjustments, and thirteen hikes in a sectoral cost indicator to show how firms react to large and sudden shocks. Our results indicate that firms adjust their prices more frequently during periods of high inflation and change their prices immediately after large-scale shocks. Despite the substantial variation in the frequency of price changes, there is either moderate or no movement in the size of price changes, suggesting that firms’ pricing behaviour fits perfectly into state-dependent pricing. These findings also show that pass-through of shocks to prices accelerates after large shocks and in high-inflation environments. Thus, standard models, which assume constant speed of pass-through from macroeconomic conditions to prices, may produce misleading forecasts. |
| Keywords: | Firm behavior, Inflation, Inflation forecasting |
| JEL: | L20 E31 E37 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2304&r=mon |
| By: | Guimaraes, Rodrigo (Bank of England); Pinter, Gabor (Bank of England); Wijnandts, Jean-Charles (Bank of England) |
| Abstract: | The large reactions of long-term government bond yields to monetary policy shocks occur during periods of higher market liquidity, and there is very little reaction during periods of lower liquidity. This newly documented liquidity state-dependence persistently affects real yields, term premia as well as long-term mortgage rates. Balance sheet constraints on both hedge funds and dealers contribute to the liquidity state-dependence. Conditioning on market liquidity yields stronger state-dependence than simply conditioning on macroeconomic indicators. Our results underscore the importance of market functioning, and the financial health of key intermediaries that support it, for implementing stabilisation policies. |
| Keywords: | Monetary Policy Shocks; Market Liquidity; Real Term Premium; Intermediary Asset Pricing. |
| JEL: | E40 E50 G12 G23 |
| Date: | 2023–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1045&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | This paper examines the role of central bank digital currency (CBDC) in achieving the United Nations sustainable development goals (SDGs). It was argued that a central bank digital currency can unlock financing for each of the sustainable development goals, provide suitable access to capital and increase payment efficiency. CBDC can also increase the speed of transaction chains and provide greater capital efficiency for investment in sustainable development activities and projects. |
| Keywords: | central bank digital currency, CBDC, sustainable development, sustainable development goals, United Nations, SDGs |
| JEL: | E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118806&r=mon |
| By: | Dusan Stojanovic |
| Abstract: | This study examines how and to what extent quantitative easing of the ECB affects household income and wealth inequality in the euro area. Previous theoretical models have investigated the dynamics of inequality measures through differential access of households to financial/capital market (the portfolio rebalancing channel), neglecting the labor market differential (the earnings heterogeneity channel). Although the portfolio rebalancing channel may provide insight into wealth inequality and non-labor income inequality, this is not the case with labor (and thus total) income inequality. To be in line with the empirical evidence on labor income inequality, this study also considers segmented labor market on the basis of capital-skill complementarity in production and asymmetric real wage rigidities. When only financial market segmentation is considered, the quantitative results indicate a drop in total income inequality that is diminished over time, while wealth inequality experiences a rise that gradually becomes weaker. The introduction of the segmented labor market significantly mitigates the observed drop in total income inequality, while a rise in wealth inequality is largely amplified. Given the possible broadening of the ECB’s mandate towards distributional issues in the future, the analysis of segmented labor and financial markets can be more beneficial to the ECB as it provides a clearer picture of the inequality effects. |
| Keywords: | quantitative easing, capital-skill complementarity, asymmetric real wage rigidity, skill premium, portfolio rebalancing channel, earnings heterogeneity channel |
| JEL: | E21 E22 E44 E52 E58 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp760&r=mon |
| By: | Mariam Dundua (Financial and Supervisory Technology Development Department, National Bank of Georgia); Otar Gorgodze (Head of Financial and Supervisory Technologies Department, National Bank of Georgia) |
| Abstract: | The recent advances in Artificial Intelligence (AI), in particular, the development of reinforcement learning (RL) methods, are specifically suited for application to complex economic problems. We formulate a new approach looking for optimal monetary policy rules using RL. Analysis of AI generated monetary policy rules indicates that optimal policy rules exhibit significant nonlinearities. This could explain why simple monetary rules based on traditional linear modeling toolkits lack the robustness needed for practical application. The generated transition equations analysis allows us to estimate the neutral policy rate, which came out to be 6.5 percent. We discuss the potential combination of the method with state-of-the-art FinTech developments in digital finance like DeFi and CBDC and the feasibility of MonetaryTech approach to monetary policy. |
| Keywords: | Artificial Intelligence; Reinforcement Learning; Monetary policy |
| JEL: | C60 C61 C63 E17 C45 E52 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:aez:wpaper:02/2022&r=mon |
| By: | Pacheco, André Sanchez |
| Abstract: | I construct a novel data-set containing monthly inflation surprises for a set of developed and emerging economies. These data are used in a panel setting to analyze the relationship between inflation surprises and changes in short- and long-term interest rates as well as exchange rates on CPI release days. I find that a 1% upward surprise in monthly inflation is associated with (1) a +7.4bps daily change in the two-year benchmark interest rate; (2) a +5.1bps daily change in the ten-year rate and (3) an appreciation in the domestic exchange rate relative to the U.S. Dollar. Such sensitivities are heterogeneous across country groups. Interest rates in emerging economies are more sensitive to inflation surprises than those in developed markets. In contrast, exchange rates in emerging markets appear to be less sensitive to such surprises relative to developed counterparts. |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:566&r=mon |
| By: | Bazán, Walter; Ortiz, Marco; Terrones, Marco; Winkelried, Diego |
| Abstract: | This paper inquires how private bank regulation and liquidity in the US are related to the deviations from the covered interest parity (CIP) condition. We find evidence that bank liquidity effects on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports an old conjecture that changes in private banks' liquidity and regulation could significantly affect the wedge between liquid US dollars and illiquid foreign exchange forward contracts in international financial markets. Interestingly, the effects of liquidity on CIP deviations become more important when the impact of bank regulation intensifies, reflecting the presence of interaction effects. |
| Keywords: | Cross-currency bases; covered interest rate parity; bank regulation; liquidity |
| JEL: | E44 F31 G14 G15 O24 |
| Date: | 2023–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118600&r=mon |
| By: | Régis Barnichon; Geert Mesters |
| Abstract: | How should we evaluate and compare the performances of policy institutions? We propose to evaluate institutions based on their reaction function, i.e., on how well they reacted to the different shocks that hit the economy. We show that reaction function evaluation is possible with only two sufficient statistics (i) the impulse responses of the policy objectives to non-policy shocks, which capture what an institution did on average to counteract these shocks, and (ii) the impulse responses of the policy objectives to policy shocks, which capture what an institution could have done to counteract the shocks. A regression of (i) on (ii) —a regression in impulse response space— allows to compute the distance to the optimal reaction function, and thereby evaluate and rank institutions. We use our methodology to evaluate US monetary policy; from the Gold standard period, the early Fed years and the Great Depression, to the post World War II period, and the post-Volcker regime. We find no material improvement in the reaction function over the first 100 years, and it is only in the last 30 years that we estimate large and uniform improvements in the conduct of monetary policy. |
| Keywords: | optimal policy, reaction function, structural shocks, impulse responses, monetary history |
| JEL: | C14 C32 E32 E52 N10 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1410&r=mon |
| By: | Carlo Altavilla (European Central Bank, CSEF and CEPR.); Marco Pagano (University of Naples Federico II, CSEF, EIEF, and CEPR.); Miguel Boucinha (European Central Bank); Andrea Polo (Luiss University, EIEF, CEPR and ECGI.) |
| Abstract: | Combining euro-area credit register and carbon emission data, we provide evidence of a climate risk-taking channel in banks’ lending policies. Banks charge higher interest rates to firms featuring greater carbon emissions, and lower rates to firms committing to lower emissions, controlling for their probability of default. Both effects are larger for banks committed to decarbonization. Consistently with the risk-taking channel of monetary policy, tighter policy induces banks to increase both credit risk premia and carbon emission premia, and reduce lending to high emission firms more than to low emission ones. While restrictive monetary policy increases the cost of credit and reduces lending to all firms, its contractionary effect is milder for firms with low emissions and those that commit to decarbonization. |
| Keywords: | climate risk, carbon emissions, interest rate, lending, monetary policy. |
| JEL: | E52 G21 Q52 Q53 Q54 Q58 |
| Date: | 2023–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:687&r=mon |
| By: | R\'edempteur Ntawiratsa; David Niyukuri; Ir\`ene Irakoze; Menus Nkurunziza |
| Abstract: | The term structure of interest rates (yield curve) is a critical facet of financial analytics, impacting various investment and risk management decisions. It is used by the central bank to conduct and monitor its monetary policy. That instrument reflects the anticipation of inflation and the risk by investors. The rates reported on yield curve are the cornerstone of valuation of all assets. To provide such tool for Burundi financial market, we collected the auction reports of treasury securities from the website of the Central Bank of Burundi. Then, we computed the zero-coupon rates, and estimated actuarial rates of return by applying the Nelson-Siegel and Svensson models. This paper conducts a rigorous comparative analysis of these two prominent parametric yield curve models and finds that the Nelson-Siegel model is the optimal choice for modeling the Burundian yield curve. The findings contribute to the body of knowledge on yield curve modeling, enhancing its precision and applicability in financial markets. Furthermore, this research holds implications for investment strategies, risk management, second market pricing, financial decision-making, and the forthcoming establishment of the Burundian stock market. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.00321&r=mon |
| By: | Michael E. Glinsky; Sharon Sievert |
| Abstract: | This paper fundamentally reformulates economic and financial theory to include electronic currencies. The valuation of the electronic currencies will be based on macroeconomic theory and the fundamental equation of monetary policy, not the microeconomic theory of discounted cash flows. The view of electronic currency as a transactional equity associated with tangible assets of a sub-economy will be developed, in contrast to the view of stock as an equity associated mostly with intangible assets of a sub-economy. The view will be developed of the electronic currency management firm as an entity responsible for coordinated monetary (electronic currency supply and value stabilization) and fiscal (investment and operational) policies of a substantial (for liquidity of the electronic currency) sub-economy. The risk model used in the valuations and the decision-making will not be the ubiquitous, yet inappropriate, exponential risk model that leads to discount rates, but will be multi time scale models that capture the true risk. The decision-making will be approached from the perspective of true systems control based on a system response function given by the multi scale risk model and system controllers that utilize the Deep Reinforcement Learning, Generative Pretrained Transformers, and other methods of Artificial Intelligence (DRL/GPT/AI). Finally, the sub-economy will be viewed as a nonlinear complex physical system with both stable equilibriums that are associated with short-term exploitation, and unstable equilibriums that need to be stabilized with active nonlinear control based on the multi scale system response functions and DRL/GPT/AI. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.04986&r=mon |
| By: | Boeckx, Jef (National Bank of Belgium); Iania, Leonardo (Université catholique de Louvain, LIDAM/LFIN, Belgium); Wauters, Joris (National Bank of Belgium) |
| Abstract: | We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically-grounded, determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights as to how macroeconomic variables affect market-based inflation expectation measures. |
| Date: | 2023–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ajf:louvlf:2023003&r=mon |
| By: | Alberto Prati |
| Abstract: | Some people face sharper increases in the prices they pay than others - and since inflation makes everyone miserable, they also experience greater loss of happiness. Alberto Prati assesses the costs of such inflation inequalities in France, and explains why measuring them is important for a policy agenda that places citizens' wellbeing at its centre. |
| Keywords: | Wellbeing, happiness, inflation, equality |
| Date: | 2023–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepcnp:657&r=mon |
| By: | Cathal ODonoghue; Beenish Amjad; Jules Linden; Nora Lustig; Denisa Sologon; Yang Wang |
| Abstract: | This paper developed a microsimulation model to simulate the distributional impact of price changes using Household Budget Survey data, Income Survey data and an Input-Output Model. We use the model to assess the distributional and welfare impact of recent price changes in Pakistan. Particular attention is paid to price changes in energy goods and food. We firstly assessed the distributional pattern of expenditures, with domestic energy fuels concentrated at the bottom of the distribution and motor fuels at the top. The budget share of electricity and motor fuels is particularly high, while domestic fuels is relatively low. While the distributional pattern of domestic fuel and electricity consumption is similar to other countries, there is a particularly high budget elasticity for motor fuels. The analysis shows that despite large increases in energy prices, the importance of energy prices for the welfare losses due to inflation is limited. The overall distributional impact of recent price changes is mildly progressive, but household welfare is impacted significantly irrespective of households position along the income distribution. The biggest driver of the welfare loss at the bottom was food price inflation, while other goods and services were the biggest driver at the top of the distribution. To compensate households for increased living costs, transfers would need to be on average 40 percent of disposable income. Behavioural responses to price changes have a negligible impact on the overall welfare cost to households. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.00231&r=mon |
| By: | Jeffrey R. Campbell; Filippo Ferroni; Jonas D. M. Fisher; Leonardo Melosi |
| Abstract: | The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This guide describes its specification, estimation, dynamic characteristics, and how it is used to forecast the U.S. economy. In many respects the model resembles other medium-scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes anticipated future deviations, productivity is driven by both neutral and investment specific technical change, multiple price and wage indices identify price and wage inflation, the data are measured in a model consistent way, and market-expected interest rates are used to measure the expected path of the federal funds rate that is taken into account by the model’s agents when they make their decisions. The model also incorporates a new method introduced by Ferroni, Fisher, and Melosi (2023) to address the unusual Covid pandemic macroeconomic dynamics. |
| Keywords: | New Keynesian model; DSGE models; covid-19; Pandemic; Survey of Professional Forecasters; Business cycles; Forecasting; Policy analysis |
| JEL: | E1 E2 E3 E4 E5 |
| Date: | 2023–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:97211&r=mon |
| By: | Popova, Olga; See, Sarah Grace; Nikolova, Milena; Otrachshenko, Vladimir |
| Abstract: | What are the broad societal implications of inflation and unemployment? Analyzing a dataset of over 1.9 million individuals from 156 countries via the Gallup World Poll spanning 2005 to 2021, alongside macroeconomic data at the national level, we find that both inflation and unemployment have a negative link with confidence in financial institutions. While inflation is generally unassociated with confidence in government and leadership approval, unemployment still has a strong negative association with these outcomes. While we find no gender differences in the consequences of inflation and unemployment for confidence in political and financial institutions, the associations we document are more substantial for the cohorts that are likely to bear a disproportionate burden from inflation and unemployment-the middle-aged, lower-educated, and unmarried individuals, and for those living in rural areas. Uncertainty about the country's economic performance and one's own economic situation are the primary channels behind the associations we identify. These findings hold significant implications for policymakers, Central Banks, and public discourse, necessitating targeted strategies to alleviate the social consequences of inflation and unemployment. |
| Keywords: | inflation, unemployment, trust, confidence in institutions, Gallup World Poll |
| JEL: | D12 D83 E31 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1341&r=mon |
| By: | Nell, Kevin |
| Abstract: | This paper pays tribute to Professor Thirlwall’s substantive work in growth and development economics by providing a review of his book Inflation, Saving and Growth in Developing Economies (1974b) [hereafter ISGD]. Indeed, the hallmark of a good economics book is whether its theoretical content and empirical predictions made several decades ago remain relevant when assessed against more recent evidence. Thirlwall’s ISGD book exhibits all these qualities. It emphasises the importance of distinguishing between different types of inflation. Structural inflation and, to a lesser extent, cost inflation, should be seen as the inevitable outcomes of the growth and development process, whereas demand inflation may act as a direct stimulus to growth, as predicted by the Kaldor-Thirlwall model of forced saving and the inflation tax model. These theoretical insights remain highly relevant in today’s developing economies. Studies tend to show that inflation thresholds, up until the point where the effect of inflation on growth is positive, tend to be higher in developing economies relative to advanced countries, owing to a combination of structural, cost and demand-side sources of inflation. The analysis further argues that inflationary finance of development, as advanced in ISGD, remains a viable development strategy when open-economy constraints are considered. |
| Keywords: | Developing economies; inflation; investment; growth; saving; Thirlwall; threshold |
| JEL: | O11 O23 O47 |
| Date: | 2023–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118757&r=mon |
| By: | Ceren Eldemir; Serdar Yurek |
| Abstract: | Among the measures implemented in Türkiye during the COVID-19 pandemic, extensive restrictions were applied for restaurants, such as prohibitions regarding dine-in services. As the pandemic was brought under control to a certain degree, restrictions were loosened and normalization processes were begun. In this study, we estimate the causal impact of those normalization processes on restaurant pricing via regression discontinuity design. During the normalization processes that have begun following three main periods of restrictions, an increase of approximately 1.11% and 1.37% in the prices of food services occurred for the first and third normalization periods, respectively, whereas no significant impact is found for the second period. |
| Keywords: | Firm behaviour, Inflation, Microeconometrics |
| JEL: | L20 E31 C50 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2303&r=mon |
| By: | Ummya Salma; Md. Fazlul Huq Khan |
| Abstract: | This study explores the relationship between political stability and inflation in four South Asian countries, employing panel data spanning from 2001 to 2021. To analyze this relationship, the study utilizes the dynamic ordinary least square (DOLS) and fully modified ordinary least square (FMOLS) methods, which account for cross-sectional dependence and slope homogeneity in panel data analysis. The findings consistently reveal that increased political stability is associated with lower inflation, while reduced political stability is linked to higher inflation. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.08415&r=mon |
| By: | Giese, Julia (Bank of England); Grace, Charlotte (Nuffield College, University of Oxford) |
| Abstract: | We compare the product-mix auction (PMA) – the mechanism used by the Bank of England (BoE) for its Indexed Long-Term Repo (ILTR) operations – to simpler alternative auction designs, namely a pair of separate simultaneous auctions, and a ‘reference price auction’. Using data from the auctions held in June 2010 to January 2014, we find that the PMA increased welfare (defined by the difference between the spreads that financial institutions were willing to pay and the spreads that the BoE was willing to accept) by approximately 50%, or 2 basis points per loan, relative to these alternatives. We would expect larger welfare gains in a less stable period than the period studied, and simulations confirm this. Broader benefits of the auctions of reducing systemic risk, while mitigating moral hazard, informing the BoE about stress in the market, and communicating the ‘correct’ price to the market, are taken into account in our approach, to the extent that the BoE’s supply curve internalises some of these externalities. We also find that the PMA always gave the BoE more (or occasionally the same) surplus and revenue relative to if one of the alternative designs had been used. However, the effect of the PMA on aggregate bidder surplus was ambiguous. The latter result may be a property of the period studied, and of the fact that there were only two sets of eligible collateral in this period. |
| Keywords: | Product mix auction; auction design; central bank liquidity provision |
| JEL: | D44 E58 |
| Date: | 2023–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1044&r=mon |
| By: | Zhenkun Zhou; Zikun Song; Tao Ren |
| Abstract: | Scanner big data has potential to construct Consumer Price Index (CPI). The study introduces a new weighted price index called S-FCPIw, which is constructed using scanner big data from retail sales in China. We address the limitations of China's CPI especially for its high cost and untimely release, and demonstrate the reliability of S-FCPIw by comparing it with existing price indices. S-FCPIw can not only reflect the changes of goods prices in higher frequency and richer dimension, and the analysis results show that S-FCPIw has a significant and strong relationship with CPI and Food CPI. The findings suggest that scanner big data can supplement traditional CPI calculations in China and provide new insights into macroeconomic trends and inflation prediction. We have made S-FCPIw publicly available and update it on a weekly basis to facilitate further study in this field. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.04242&r=mon |
| By: | Martin Feldkircher; Karin Klieber |
| Abstract: | This paper examines the degree of integration at euro area financial markets. To that end, we estimate overall and country-specific integration indices based on a panel vector-autoregression with factor stochastic volatility. Our results indicate a more heterogeneous bond market compared to the market for lending rates. At both markets, the global financial crisis and the sovereign debt crisis led to a severe decline in financial integration, which fully recovered since then. We furthermore identify countries that deviate from their peers either by responding differently to crisis events or by taking on different roles in the spillover network. The latter analysis reveals two set of countries, namely a main body of countries that receives and transmits spillovers and a second, smaller group of spillover absorbing economies. Finally, we demonstrate by estimating an augmented Taylor rule that euro area short-term interest rates are positively linked to the level of integration on the bond market. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.07790&r=mon |