nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒12‒04
thirty papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The effect of monetary policy on inflation heterogeneity along the income distribution By Ampudia, Miguel; Ehrmann, Michael; Strasser, Georg
  2. Central banks and policy communication: How emerging markets have outperformed the Fed and ECB By Tatiana Evdokimova; Piroska Nagy Mohacsi; Olga Ponomarenko; Elina Ribakova
  3. Is high debt constraining monetary policy? Evidence from inflation expectations By Luis Brandao-Marques; Marco Casiraghi; Gaston Gelos; Olamide Harrison; Güneş Kamber
  4. Monetary Policy in the COVID Era and Beyond: the Fed vs the ECB By Carlo A. Favero; Ruben Fernandez-Fuertes
  5. Forceful or persistent: Wow the ECB's new inflation target affects households' inflation expectations By Hoffmann, Mathias; Mönch, Emanuel; Pavlova, Lora; Schultefrankenfeld, Guido
  6. What we know on Central Bank Digital Currencies (so far) By Shalva Mkhatrishvili; Wim Boonstra
  7. The Optimal Supply of Central Bank Reserves under Uncertainty By Gara Afonso; Gabriele La Spada; Thomas M. Mertens; John C. Williams
  8. Deposit insurance pricing and monetary policy transmission By Steve BILLON; Natalia ANDRIES
  9. Greater Than the Sum of Its Parts: Aggregate vs. Aggregated Inflation Expectations By Alexander Dietrich; Edward S. Knotek II; Kristian O. Myrseth; Robert W. Rich; Raphael Schoenle; Michael Weber
  10. Monetary policy in Latin America: The easing cycle has begun By Alejandro Werner
  11. FOMC Actions and Recent Movements in Five-Year Inflation Expectations By Julie Bennett; Michael T. Owyang
  12. Market Liquidity and the Quantity Theory of Money By Samuel Jordan-Wood; Julian Kozlowski
  13. Application of Artificial Intelligence for Monetary Policy-Making By Mariam Dundua; Otar Gorgodze
  14. Negative Externalities of Financial Dollarization By Valida Pantsulaia; Ana Jangveladze; Shalva Mkhatrishvili
  15. The Effects of the Federal Reserve Chair’s Testimony on Interest Rates and Stock Prices By Matthew V. Gordon; Kurt Graden Lunsford
  16. Federal Reserve Balance-Sheet Policy in an Ample Reserves Framework: An Inventory Approach By Joseph G. Haubrich
  17. What Do Financial Markets Say about Future Inflation? By Julie Bennett; YiLi Chien
  18. Energy prices and inflation expectations: Evidence from households and firms By Wehrhöfer, Nils
  19. On Some Myths about Ricardo’s Theory of Money By Ghislain Deleplace
  20. Tweeting Inflation: Real-Time measures of Inflation Perception in Colombia By Jonathan Alexander Muñoz-Martínez; David Orozco; Mario A. Ramos-Veloza
  21. Rethinking Inflation in an Agent-Based Macroeconomic Model By Leonardo Ciambezi; Mattia Guerini; Mauro Napoletano; Andrea Roventini
  22. A Model of Greedflation By Paul Scanlon;
  23. Power Relations and Monetary Ideas: The Case of the Gold-Exchange Standard in India By Ghislain Deleplace
  24. Fiscal Influences on Inflation in OECD Countries, 2020-2022 By Robert J. Barro; Francesco Bianchi
  25. 2021: The Year of High Inflation By Fernando M. Martin
  26. How Much Are We “Taxed” by Surprise Inflation? By Yu-Ting Chiang; Jesse LaBelle
  27. Modelling the Term Structure with Trends in Yields and Cycles in Excess Returns By Carlo A. Favero; Ruben Fernandez-Fuertes
  28. Breaking Down the Contributors to High Inflation By Julie Bennett; YiLi Chien
  29. Inflation and the Real Value of Debt: A Double-edged Sword By Christopher J. Neely
  30. The transmission of macroprudential policy in the tails: evidence from a narrative approach By Lloyd, Simon; Fernández-Gallardo, Álvaro; Manuel, Ed

  1. By: Ampudia, Miguel; Ehrmann, Michael; Strasser, Georg
    Abstract: This paper studies the effect of monetary policy on inflation along the income distributionin several euro area countries. It shows that monetary policy has differential effects and identifies twochannels which point in opposite directions. On the one hand, different consumption shares imply thatthe inflation experienced by high-income households responds less to monetary policy. On the otherhand, the paper provides novel evidence that there are substantial differences in shopping behaviourand its reaction to monetary policy, which imply that the inflation experienced by high-income householdsresponds more to monetary policy. JEL Classification: E31, E52, D30
    Keywords: distributional effects, inflation, monetary policy, shopping behaviour, substitution
    Date: 2023–10
  2. By: Tatiana Evdokimova (Joint Vienna Institute); Piroska Nagy Mohacsi (London School of Economics and Political Science); Olga Ponomarenko (Caplight); Elina Ribakova (Peterson Institute for International Economics)
    Abstract: This paper uses innovative natural language processing techniques to analyze central bank communication in emerging-market (EM) central banks and compare it with that of the Federal Reserve (Fed) and the European Central Bank (ECB). Once laggards of the central banking policy scene, EM central banks have made remarkable progress in improving their policy frameworks in the past two decades. They adopted many of the principles of advanced-economy (AE) central banks both in policy conduct and communication, but with modifications that reflect their specific circumstances of capital flow volatility, financial dollarization, and traditionally weaker credibility. The authors find that EM central banks' transparency has improved dramatically; their statements' readability has overall been better than in AEs; their focus on inflation has been sharper; and they have used data-shy "forward guidance" sparingly and flexibly. Worryingly though, most central banks do not communicate on inflationary pressures until after inflation already happens. EMs have outperformed AEs in two critical respects recently: addressing rising post-COVID inflationary pressures in a timely manner and, related, avoiding banking sector stress during the monetary policy tightening cycle. Systemic support in the form of currency swaps and repo operations by the Fed and the ECB with powerful signaling at times of acute market stress also helped. EM central banks have also started moving towards easing monetary policy already, ahead of the Fed and the ECB. Bringing down inflation fast and sustainably will be the ultimate test for the quality of EM central bank frameworks. The authors conclude with policy lessons for both EM and AE central banks. These include better forecasting and communication of inflation by the majority of central banks; more consistent delivery by EM central banks of communicated policy action; discarding pure "forward guidance" that hampers data dependency and thus fast policy action particularly at times of rapid change; consistent focus on supply-side factors of inflation; and for multiple-goal central banks, a clear choice and communication of policy priorities at times of possible conflict among some of the goals. The paper also suggests a more transparent communication of coordination with fiscal authorities that would improve the credibility of both the monetary and fiscal authorities.
    Keywords: central banking, monetary policy, emerging markets, Federal Reserve, ECB, communication, inflation-targeting, currency swaps, supply-side inflation, forward guidance, Chat GPT, AI
    JEL: B22 C55 E42 E52 E58
    Date: 2023–10
  3. By: Luis Brandao-Marques; Marco Casiraghi; Gaston Gelos; Olamide Harrison; Güneş Kamber
    Abstract: This paper examines whether high public debt levels pose a challenge to containing inflation. It does so by assessing the impact of public debt surprises on inflation expectations advanced- and Emerging Market Economies. It finds that debt surprises raise long-term inflation expectations in Emerging Market Economies in a persistent way, but not in advanced economies. The effects are stronger when initial debt levels are already high, when inflation levels are initially high, and when debt dollarization is significant. By contrast, debt surprises have only modest effects in countries with inflation targeting regimes. Increased debt levels may complicate the fight against inflation in Emerging Market Economies with high and dollarized debt levels, and weaker monetary policy frameworks.
    Keywords: inflation expectations, monetary policy, fiscal dominance, debt
    JEL: E31 E41 E52 E62
    Date: 2023–11
  4. By: Carlo A. Favero; Ruben Fernandez-Fuertes
    Abstract: This study examines monetary policy during and post-COVID by analysing innovative specifications for monetary policy rules based on data from before the pandemic. It models trends in short-term rates using a stochastic trend, driven by potential output growth, demographic age distribution, and inflation expectations both the US and the Eurozone. The cyclical variations in shortterm rates are associated with monetary policy through the conventional Taylor rule indicators. Whilst the standard model is robust for the US both in and outof- sample, the Eurozone displays less consistent in-sample results and marked deviations in out-of-sample tests. Addressing the ECB’s concerns about bond market fragmentation doesn’t yield better results. Instead, a model in which the ECB follows the US example with caution and delay proves more effective.
    Keywords: Monetary Policy Rules, Trends and Cycles, Fed, ECB.
    JEL: E43 E52 G12
    Date: 2023
  5. By: Hoffmann, Mathias; Mönch, Emanuel; Pavlova, Lora; Schultefrankenfeld, Guido
    Abstract: We study how households adjust their medium-term inflation expectations under the new ECB strategy. We find that survey respondents make little difference between the previous strategy of targeting inflation rates close to but below 2% and the new strategy with a symmetric 2% target. Yet, participants informed that the ECB might tolerate rates exceeding the target for some time, expect somewhat higher medium-term inflation. Respondents asked to assume inflation currently running below target place a significantly higher probability on outcomes above 2% in the medium term. Participants do not expect an undershooting when inflation is currently running above target.
    Keywords: Monetary Policy Strategy, Household Inflation Expectations, Randomized Control Trial, Survey Data
    JEL: F33 E31 E32
    Date: 2023
  6. By: Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Wim Boonstra (Special Economic Advisor at Rabobank, Endowed Professor at Vrije Universiteit Amsterdam)
    Abstract: A central bank digital currency (CBDC) is a topic that is only going to gain importance as a couple of nations have recently went line with a retail CBDC system, dozens of them are piloting it and there are even more who actively research the topic. In the process, many studies have already identified several important potential benefits of a CBDC as well as potential risks and costs. As is already well understood, a CBDC introduction can have a profound impact on all three monetary policy, financial stability and payment systems. This paper, trying to be a go-to starting point for those just exposed to the topic, thoroughly reviews all the benefits and risks/costs associated with a CBDC in the current literature as well as underlines key areas of this topic that need more research. In addition, we try to lay some ground for systematizing three-dimensional linkages between benefits, costs/risks and design choices by (i) discussing probable design choices needed for each item in the list of benefits and costs/risks to-be-mitigated and (ii) overviewing what other benefits and cost/risk-mitigation aims these design choices may be in conflict with.
    Keywords: Central bank digital currencies, monetary policy, financial stability, payment systems
    JEL: E42 E50 G20
    Date: 2022–09
  7. By: Gara Afonso; Gabriele La Spada; Thomas M. Mertens; John C. Williams
    Abstract: This paper provides an analytically tractable theoretical framework to study the optimal supply of central bank reserves when the demand for reserves is uncertain and nonlinear. We fully characterize the optimal supply of central bank reserves and associated market equilibrium. We find that the optimal supply of reserves under uncertainty is greater than that absent uncertainty. With a sufficient degree of uncertainty, it is optimal to supply a level of reserves that is abundant (on the flat portion of the demand curve) absent shocks. The optimal mean spread between the market interest rate and administered rates under uncertainty may be higher or lower than that absent uncertainty. Our model is consistent with the observation that the variability of interest rate spreads is a function of the level of reserves.
    Keywords: monetary policy implementation; rate control; federal funds rate
    JEL: E52 E58 E41 E42
    Date: 2023–11–01
  8. By: Steve BILLON (LaRGE Research Center, Université de Strasbourg); Natalia ANDRIES (ERUDITE, Université Paris-Est)
    Abstract: This paper provides a theoretical model that examines the effect of deposit insurance pricing on monetary policy transmission. An increase in the key policy rate benefits bank deposits when the deposit insurance premium is lower than the fair value. This leads firms to withdraw from the capital market and boosts their demand for bank lending. Thus, a lower than the fair value deposit insurance premium strengthens the monetary policy transmission on bond returns and bank interest rates. In contrast, a fair valuation of risks ensures the neutrality of the deposit insurance on the interest rate pass-through.
    Keywords: Deposit insurance, Monetary policy transmission, Bank imperfect competition
    JEL: E52 G21 G22
    Date: 2023
  9. By: Alexander Dietrich; Edward S. Knotek II; Kristian O. Myrseth; Robert W. Rich; Raphael Schoenle; Michael Weber
    Abstract: This paper introduces a novel measure of consumer inflation expectations: We elicit and combine inflation forecasts across categories of personal consumption expenditure to form an aggregated measure of inflation expectations. Drawing on nearly 60, 000 respondents, our data comprise the early low-inflation environment of the COVID pandemic and the 2021 inflation surge. Conventionally elicited inflation expectations consistently exceed aggregated measures constructed under plausible weighting schemes. Aggregated measures display less disagreement and volatility and are stronger predictors of consumers’ spending plans. The relative informational value of aggregated measures rises with the individual-level gap between conventional and aggregated inflation expectations. Our results chart a new course for designing measurement of inflation expectations.
    JEL: C83 E31 E52
    Date: 2023–11
  10. By: Alejandro Werner (Peterson Institute for International Economics)
    Abstract: Latin America's central banks acted promptly and decisively to contain the medium-term consequences of the global inflation shock. Since then, however, headline and core inflation have come down within the region, real growth has slowed, and the US Federal Reserve appears to have settled on a (however brief) pause of its own tightening cycle. Werner says the time has come for a gradual return to looser financial conditions in Latin America. Brazil, Chile, and Peru have already started the process of cutting rates, and there seems to be significant space to continue; Mexico should follow, with Colombia waiting for more clear signals.
    Date: 2023–11
  11. By: Julie Bennett; Michael T. Owyang
    Abstract: Though the five-year breakeven inflation rate is still higher than the Fed’s 2% target, recent FOMC actions appear to be moderating inflation expectations.
    Keywords: inflation expectations; Federal Open Market Committee (FOMC)
    Date: 2022–07–07
  12. By: Samuel Jordan-Wood; Julian Kozlowski
    Abstract: A rising federal funds rate means there is less liquidity in the market, which could help reduce the inflation rate in the months ahead.
    Keywords: federal funds rate; market liquidity; inflation
    Date: 2022–08–29
  13. 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
  14. 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
  15. By: Matthew V. Gordon; Kurt Graden Lunsford
    Abstract: We study how congressional testimony about monetary policy by the Chair of the Board of Governors of the Federal Reserve System affects interest rates and stock prices. First, we study testimony associated with the Federal Reserve’s Monetary Policy Reports (MPRs) to Congress. Testimony for a particular MPR is usually given on two days, one day for each chamber of Congress. We separately study the first day and second day of MPR testimony. We also study testimonies not associated with MPRs but that are still related to monetary policy. We find that first-day MPR testimonies cause the largest movements in interest rates and generate negative co-movement between interest rates and stock prices. Testimonies not associated with MPRs have similar but weaker effects. Second-day MPR testimonies cause the smallest movements in interest rates and generate no co-movement between interest rates and stock prices.
    Keywords: Eurodollar future; event study; forward guidance; S&P 500; Treasury note
    JEL: E43 E52 E58 G12 G14
    Date: 2023–11–13
  16. By: Joseph G. Haubrich
    Abstract: I apply techniques from stochastic inventory theory to calibrate the optimal balance-sheet buffer needed to implement monetary policy in an ample reserves regime. I quantify the size of the buffer to be about $60 billion. This is small relative to the reserves needed for an ample reserves regime, even though the FOMC appears to act as if the cost of too few reserves is over 20 times as high as the cost of too many.
    Keywords: reserves; monetary policy
    JEL: E58 D25
    Date: 2023–11–08
  17. By: Julie Bennett; YiLi Chien
    Abstract: Though U.S. inflation has been unexpectedly high in the past year, inflation swap data indicate that longer-term inflation expectations remain relatively steady.
    Keywords: inflation; financial markets
    Date: 2022–06–23
  18. By: Wehrhöfer, Nils
    Abstract: I investigate how households and firms adjust their inflation expectations when experiencing an increase in their energy prices. I use monthly panel survey data in combination with a difference-in-difference approach to show that households increase their inflation expectations when they personally experience an increase in their electricity prices. This result is inconsistent with full-information rational expectations but can be rationalized by households extrapolating their personal experience. The effect is driven by low-income households, households who are uninformed about past inflation, and those not trusting the ECB. Due to households extrapolating, their inflation forecasts become less accurate and diverge more from professional forecasts. Contrary to households, firms do not extrapolate energy price increases to their inflation expectations. Thus, decision-makers in firms form their expectations similarly to high-income households.
    Keywords: inflation expectations, households, firms, energy prices, extrapolation
    JEL: D14 D22 D84 E31 Q41
    Date: 2023
  19. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: The purpose of the chapter is to challenge two widely-held myths about Ricardo's theory of money and to suggest another view in which the relationship between the value and the quantity of money owes nothing to a commodity-theory of money (Section 2) or to the Quantity Theory of Money (Section 3) but puts the market price of the standard of money centre-stage (Section 4). Ricardo's applied pronouncements on money then appear as direct consequences of this theory (Section 5).
    Keywords: Ricardo David, Money, Standard of money, Quantity theory of money, Monetary policy
    Date: 2023
  20. By: Jonathan Alexander Muñoz-Martínez; David Orozco; Mario A. Ramos-Veloza
    Abstract: This study follows a novel approach proposed by Angelico et al. (2022) using Twitter to measure inflation perception in Colombia in real time. By applying machine learning techniques, we implement two real-time indicators of inflation perception and show that both exhibit a dynamic similar to inflation and inflation expectations for the sample period January 2015 to March 2023. Our interpretation of these results suggests that our indicators are closely linked to the underlying factors that drive inflation perception. Overall, this approach provides a valuable instrument for gauging public sentiment towards inflation and complements the traditional inflation expectations measures used in the inflation–targeting framework. **** RESUMEN: Este estudio sigue un enfoque novedoso propuesto por Angelico et al. (2022) para la medición en tiempo real de la percepción de la inflación en Colombia utilizando Twitter. Mediante la aplicación de técnicas de aprendizaje automático, calculamos dos indicadores en tiempo real de la percepción de la inflación y mostramos que exhiben una dinámica comparable a la inflación y las expectativas de inflación, lo que sugiere que nuestros indicadores están estrechamente relacionados con los factores subyacentes que impulsan la percepción de la inflación entre enero de 2015 y marzo de 2023. En general, este enfoque proporciona un medio valioso para evaluar el sentimiento público hacia la inflación y ofrece una perspectiva complementaria a las medidas de expectativas de inflación tradicionales utilizadas en el marco de la política de inflación objetivo.
    Keywords: Inflation perceptions, Twitter, Real-time data, Central banks, Percepción de inflación, Twitter, medición en tiempo real, Bancos centrales.
    JEL: E31 E37 E52
    Date: 2023–11
  21. By: Leonardo Ciambezi (Université Côte d'Azur, CNRS, GREDEG, France); Mattia Guerini (Universita di Brescia; Fondazione ENI Enrico Mattei; Université Côte d'Azur, CNRS, GREDEG, France; Sant'Anna School of Advanced Studies); Mauro Napoletano (Université Côte d'Azur, CNRS, GREDEG, France; Sciences Po, OFCE, France; Sant'Anna School of Advanced Studies); Andrea Roventini (Institute of Economics and EMbeDS, Scuola Superiore Sant'Anna; Sciences Po, OFCE)
    Abstract: We develop an Agent-Based model to study the role of demand vs. supply in determining inflation dynamics. Heterogeneous firms and households, downward money wage rigidity, and imperfect selection in the goods markets characterize the model. We show that the importance of demand vs. supply factors in determining inflation is related to the degree of imperfect selection in the market for goods. In particular, when the matching between firms and customers depends on firm size as well as on firm price, aggregate demand loses relevance in determining inflation, which is then driven by an increase in mark up rates caused by changes in the structure of the market of goods. Finally, we investigate the impact of different kinds of aggregate demand and supply shocks on output-inflation dynamics in the model. We show that aggregate shocks induce “profit-push” price increases, to the extent that they are able to impact market structure.
    Keywords: Inflation, agent-based models, market selection, market structure, excess demand, mark up rates
    JEL: E31 E32 C63
    Date: 2023–08
  22. By: Paul Scanlon (Department of Economics, Trinity College Dublin);
    Abstract: I present a model where firms' pricing power increases with the volatility of the general price level. Confronted with a change in the price of a good, consumers solve a signal extraction problem to infer the good's relative price. Yet general price volatility obscures price signals, and consumers attribute part of any price change to variation in the price level. Ultimately, imperfect information confers firms with greater market power, raises the profit share, and magnifies inflationary shocks. These predictions are in line with recent empirical evidence.
    Keywords: Pricelevel, Inflation, InformationalFrictions, InflationVolatility, CorporateProfits, Markups
    JEL: E30 E31 E32 E52
    Date: 2023–11
  23. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: For de Cecco power relations are central in the working of the pre-WWI international gold standard. He gives an illustration of that in the chapter of Money and Empire devoted to the relationship between Britain and India, where the gold-exchange standard is presented as a way for Britain to get hold of India's trade surplus with the rest of the world in order to balance her own international accounts. On the contrary, Keynes praised the Indian gold-exchange standard as a system which not only allowed stabilising India's relations with the outside world but also pointed the way to a better-regulated monetary system for any country, in the line of Ricardo's Ingot Plan nearly one century older. The same notion may thus be seen alternatively as a powerful tool of domination or as a good practical idea. The paper describes how Lindsay adapted Ricardo's scheme to India and contrasts de Cecco's and Keynes's interpretations of the Indian gold-exchange standard, before suggesting that monetary ideas can prevail in their own right when they are theoretically well-founded and practically feasible, independently of the power relations they may reflect.
    Keywords: Gold exchange Standard, India, De Cecco, Keynes John M, Lindsay, Ricardo David
    Date: 2023
  24. By: Robert J. Barro; Francesco Bianchi
    Abstract: The fiscal theory of the price level (FTPL) has been active for 30 years, and the interest in this theory grew with the recent global surges in inflation and government spending. This study applies the FTPL to 37 OECD countries for 2020-2022. The theory’s centerpiece is the government’s intertemporal budget constraint, which relates a country’s inflation rate in 2020 2022 (relative to a baseline rate) to a composite government-spending variable. This variable equals the cumulative increase in the ratio of government expenditure to GDP from 2020 to 2022, divided by the ratio of public debt to GDP in 2019 and the duration of the debt in 2019. This specification has substantial explanatory power for recent inflation rates across 20 non-Euro-zone countries and an aggregate of 17 Euro-zone countries. The estimated coefficients of the composite spending variable are significantly positive, implying that 40-50% of effective government financing came from the inverse effect of unexpected inflation on the real value of public debt, whereas 50 60% reflected conventional public finance (increases in current or future taxes or cuts in future spending). Within the Euro area, inflation reacts mostly to the area-wide government-spending variable, not to individual values.
    JEL: E3 H20 H5 H60
    Date: 2023–11
  25. By: Fernando M. Martin
    Abstract: Inflationary pressure appears to have been widespread last year. And pent-up demand by consumers with plenty of savings may pressure prices further.
    Keywords: inflation
    Date: 2022–04–12
  26. By: Yu-Ting Chiang; Jesse LaBelle
    Abstract: When inflation surprises to the upside, borrowers pay back less in real terms. And Uncle Sam is America’s biggest borrower.
    Keywords: inflation; taxation; borrowing
    Date: 2022–03–02
  27. By: Carlo A. Favero; Ruben Fernandez-Fuertes
    Abstract: This paper proposes an Affine Macro Term Structure model in which yields are drifting, sharing a common stochastic trend driven by the drift in short-term (monetary policy) rates and excess returns are stationary as the compensation for risk is driven by the cycles in yields. We apply the approach to US data and compare the empirical results from the new specification with those obtained from standard Affine Term Structure models. The cycle-trend decompositionbased Affine Term Structure model produces much better forecasts of the dynamics of yields and, consequently, different and stationary dynamics for the term premia.
    Keywords: Affine Term Structure Models, Trends and Cycles, Term Premia
    JEL: E43 E52 G12
    Date: 2023
  28. By: Julie Bennett; YiLi Chien
    Abstract: Sharp increases in prices of durable and nondurable goods have been behind the recent rise in U.S. inflation.
    Keywords: inflation; durable goods; nondurable goods
    Date: 2022–03–28
  29. By: Christopher J. Neely
    Abstract: The recent bout of inflation will immediately reduce the real value of existing debts, but it will also tend to raise expected inflation. This could raise future borrowing costs.
    Keywords: inflation; real value of debt
    Date: 2022–08–01
  30. By: Lloyd, Simon; Fernández-Gallardo, Álvaro; Manuel, Ed
    Abstract: We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth for advanced European economies using a narrative-identification strategy in a quantile-regression framework. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, tighter policy brings benefits by reducing the variance of future growth, significantly boosting the left tail while simultaneously reducing the right. Assessing a range of channels through which these effects materialise, we find that macroprudential policy particularly operates through ‘credit-at-risk’: it reduces the right tail of future credit growth, dampening booms, in turn reducing the likelihood of extreme GDP-growth outturns. JEL Classification: E32, E58, G28
    Keywords: growth-at-risk, macroprudential policy, narrative identification, quantile local projections
    Date: 2023–11

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