nep-mon New Economics Papers
on Monetary Economics
Issue of 2023‒12‒11
33 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The Effects of CBDC on the Federal Reserve's Balance Sheet By Christopher J. Gust; Kyungmin Kim; Romina Ruprecht
  2. Replacing bank money with base money: Lessons for CBDCs from the ending of private banknotes in Sweden By Ögren, Anders
  3. The pass through of monetary policy to euro area bank interest rates By Kyriaki G. LouKa; Nektarios A. Michail
  4. Anchoring of Inflation Expectations and the Role of Monetary Policy and Cost-Push Factors By Czudaj, Robert L.
  5. Lending of Last Resort in Monetary Unions: Differing Views of German Economists in the 19th and 21st Centuries By Trautwein, Hans-Michael
  6. Expectations and the neutrality of interest rates By John Cochran
  7. Time-Varying Identification of Monetary Policy Shocks By Annika Camehl; Tomasz Wo\'zniak
  8. The inefficiency of Quantitative Easing in the Euro Area By Nektarios A. Michail; Kyriaki G. LouKa
  9. Risk, monetary policy and asset prices in a global world By Bekaert, Geert; Hoerova, Marie; Xu, Nancy R.
  10. Financial stability considerations in the conduct of monetary policy By Bochmann, Paul; Dieckelmann, Daniel; Fahr, Stephan; Ruzicka, Josef
  11. Monetary policy and herding behaviour in the ZAR market By Xolani Sibande
  12. Hawkish or Dovish Fed? Estimating a Time-Varying Reaction Function of the Federal Open Market Committee's Median Participant By Manuel Gonzalez-Astudillo; Rakeen Tanvir
  13. The Transmission of Monetary Policy to Corporate Investment: The Role of Loan Renegotiation By Eunkyung Lee
  14. US monetary policy spillovers to European banks By Jung, Alexander
  15. Pandemic-Era Inflation Drivers and Global Spillovers By Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
  16. Foreign Exchange Implications of CBDCs and Their Integration via Bridge Coins By Alexis Derviz
  17. On the Source of Seasonality in Price Changes: The Role of Seasonality in Menu Costs By Ko Munakata; Takeshi Shinohara; Shigenori Shiratsuka; Nao Sudo; Tsutomu Watanabe
  18. The Debauchery of Currency and Inflation: Chile, 1970-1973 By Sebastian Edwards
  19. Monetary/fiscal policy regimes in post-war Europe By Bouabdallah, Othman; Jacquinot, Pascal; Patella, Valeria
  20. Monetary Policy, Segmentation, and the Term Structure By Rohan Kekre; Moritz Lenel; Federico Mainardi
  21. Monetary Policy Under Financial Exclusion By Lahiri, Amartya; Singh, Rajesh
  22. Fed Transparency and Policy Expectation Errors: A Text Analysis Approach By Eric Fischer; Rebecca McCaughrin; Saketh Prazad; Mark Vandergon
  23. What drives core inflation? The role of supply shocks By Bańbura, Marta; Bobeica, Elena; Martínez Hernández, Catalina
  24. Who bears the costs of inflation? Euro area households and the 2021–2022 shock By Pallotti, Filippo; Paz-Pardo, Gonzalo; Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
  25. What Drives Sectoral Differences in Currency Derivate Usage in a Small Open Economy? Evidence from Supervisory Data By Zuzana Gric; Jan Janku; Simona Malovana
  26. The Pass-through of Wages to Consumer Prices in the COVID-19 Pandemic: Evidence from Sectoral Data in the U.S. By Moya Chin; Ms. Li Lin
  27. The efficiency of the London Gold Fixing: From Gold Standard to hoarded commodity (1919-68) By O'Connor, Fergal A.; Lucey, Brian M.
  28. Global inflation and Russian macroeconomic indicators: FAVAR framework By Rybak, Konstantin (Рыбак, Константин)
  29. LCR Premium in the Federal Funds Market By Alyssa G. Anderson; Manjola Tase
  30. Causal effects of the Fed's large-scale asset purchases on firms' capital structure By Andrea Nocera; M. Hashem Pesaran
  31. The Evolution of Consumer Payments in Australia: Results from the 2022 Consumer Payments Survey By Tanya Livermore; Jack Mulqueeney; Thuong Nguyen; Benjamin Watson
  32. Supply and Demand and the Term Structure of Interest Rates By Robin Greenwood; Samuel Hanson; Dimitri Vayanos
  33. Listed Real Estate as an Inflation Hedge across Regimes By Jan Muckenhaupt; Martin Hoesli; Bing Zhu

  1. By: Christopher J. Gust; Kyungmin Kim; Romina Ruprecht
    Abstract: We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve's balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve's balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet to accommodate CBDC issuance.
    Keywords: Central bank digital currency; Monetary policy implementation; Bank disintermediation; Central bank balance sheet
    JEL: E50 E51 E52 E58
    Date: 2023–11–03
  2. By: Ögren, Anders (Department of Economic History, Uppsala University)
    Abstract: A number of central banks have started to investigate the possibility of issuing so-called Central Bank Digital Currencies (CBDCs). The aim may be to compete with cryptocurrencies of different kinds but also to replace digital commercial bank money with central bank issued digital money, i.e. replacing bank money with central bank issued base money. In this paper we study a similar experiment when the Swedish central bank, the Riksbank, in 1903 replaced private banknotes with their own notes. The result of this policy was a massive increase in commercial bank credit due to the increase in base money, spurring the ongoing boom even further. A boom that worsened the 1907 crisis. The result is thus questioning the notion that increased monetary issuance by a monetary authority to replace other financial assets as private money or cryptoassets should lead to increased financial stability – as, in fact, it led to the opposite.
    Keywords: Central banking; Commercial banks; Crises; Cryptoassets; Financial stability
    JEL: E42 N13 N23
    Date: 2022–10–25
  3. By: Kyriaki G. LouKa (Central Bank of Cyprus); Nektarios A. Michail (Central Bank of Cyprus)
    Abstract: We examine the transmission of monetary policy to bank interest rates in the euro area, using rolling 10-year samples. The results suggest that the pass through of policy rates to bank interest rates was relatively stable prior to the use of unconventional monetary policy measures, in which case the multiplier increased, especially for housing and short-term NFCs loans. It appears that Quantitative Easing (QE) operations allow for bank lending rates to further decline, however, this could lead to higher lending in those particular loan categories, with certain repercussions to the economy. In addition to the excess liquidity created by asset purchases, other factors such as credit risk and house price growth also appear to impact the pass through.
    Keywords: pass through, deposit beta, error correction, euro area, asset purchases
    JEL: E43
    Date: 2023–08
  4. By: Czudaj, Robert L.
    Abstract: This paper proposes a new measure proxying the degree of anchoring of inflation expectations on an individual forecaster level and studies the co-movement of this measure with expectations regarding monetary policy and different cost-push factors. In doing so, we rely on data taken from the ECB Survey of Professional Forecasters for both parts of the analysis. First, we construct a measure for the degree of anchoring of inflation expectations for each forecaster based on his inflation expectations taking into account both point and density forecasts. Second, we regress this anchoring measure on the professional forecasters' expectations regarding the policy rate of the ECB and three different cost factors potentially affecting the inflation rate: the crude oil price, the USD/EUR exchange rate, and unit labor costs. The main findings indicate that expectations regarding a tightening of monetary policy are generally able to enhance the degree of anchoring while an expected increase in both the crude oil price and unit labor costs seems to lower the degree of anchoring. The latter finding is more pronounced for shorter horizons.
    Keywords: Anchoring, Inflation expectations, Monetary policy, Crude oil, Unit labor costs
    JEL: E31 E52 Q43
    Date: 2023–11–02
  5. By: Trautwein, Hans-Michael (Department of Economics, Carl von Ossietzky Universität Oldenburg)
    Abstract: The European Central Bank’s activities as lender of last resort are especially controversial in Germany. The overriding concern of the critics is an alleged tendency of creating moral hazard on the side of public and private borrowers in the European Monetary Union. This contrasts with the predominant views among German economists in the classical gold standard era, when the newly founded German empire merged the many currency areas in its realm into monetary union. Prominent experts and policy advisors, such as Erwin Nasse, Adolph Wagner and Friedrich Bendixen, argued that in view of the costs of system failures moral hazard ought not to be a predominant consideration at times of crisis. In critical assessments of the Currency vs. Banking debates in England, German commentators questioned the credibility and sustainability of strict rules for monetary policy in banking crises. Some even developed evolutionary views, in which monetary integration is driven by financial markets and lending of last resort becomes a constitutive characteristic of central banking, in particular in the formation of a monetary union. This paper compares the older German views about lending of last resort in monetary unions with the current discourse and explores possible explanations for the differences.
    Keywords: monetary union; banking crises; lending of last resort; gold standard
    JEL: B15 E58 F45 G01
    Date: 2022–02–01
  6. By: John Cochran
    Abstract: Our central banks set interest rate targets, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule. The zero bound era is confirmatory evidence. Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality as well: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a much more limited picture than standard beliefs. We either need a model with a stronger effect, or to accept that higher interest rates have quite limited power to lower inflation. Empirical understanding of how interest rates affect inflation without fiscal help is also a wide-open question.
    Keywords: interest rates, inflation, neutrality, non-neutrality
    JEL: E4 E5
    Date: 2023–10
  7. By: Annika Camehl (Erasmus University Rotterdam); Tomasz Wo\'zniak (University of Melbourne)
    Abstract: We propose a new Bayesian heteroskedastic Markov-switching structural vector autoregression with data-driven time-varying identification. The model selects alternative exclusion restrictions over time and, as a condition for the search, allows to verify identification through heteroskedasticity within each regime. Based on four alternative monetary policy rules, we show that a monthly six-variable system supports time variation in US monetary policy shock identification. In the sample-dominating first regime, systematic monetary policy follows a Taylor rule extended by the term spread and is effective in curbing inflation. In the second regime, occurring after 2000 and gaining more persistence after the global financial and COVID crises, the Fed acts according to a money-augmented Taylor rule. This regime's unconventional monetary policy provides economic stimulus, features the liquidity effect, and is complemented by a pure term spread shock. Absent the specific monetary policy of the second regime, inflation would be over one percentage point higher on average after 2008.
    Date: 2023–11
  8. By: Nektarios A. Michail (Central Bank of Cyprus); Kyriaki G. LouKa (Central Bank of Cyprus)
    Abstract: We examine whether quantitative easing had an impact on output and inflation in the euro area. Using a BVAR model, over the March 2015 - December 2021 period, our results suggest that quantitative easing is an inefficient policy tool. In particular, following a shock that increases asset purchases by around 1% of euro area GDP, inflation increases by around 0.01%, while industrial production rises by 0.3%. The biggest beneficiary of quantitative easing is the stock market, rising more than 2% after the shock. Since only a very small share of the general populace holds stocks, this has adverse inequality effects.
    Keywords: quantitative easing; euro area; inequality; asset purchases
    JEL: E58 E52 C32
    Date: 2023–10
  9. By: Bekaert, Geert; Hoerova, Marie; Xu, Nancy R.
    Abstract: We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan, differentiating between “traditional” monetary policy and communication events, each decomposed into “pure” and information shocks. Communication shocks from the US spill over to risk in the euro area and vice versa, but traditional US shocks show no spillover effects to risk. Both monetary policy and communication shocks spill over to stocks, with euro area information spillovers being particularly strong. US spillovers are consistent with global CAPM intuition whereas euro area spillovers are larger. Importantly, we document a strong global component of risk shocks which is not driven by monetary policy. JEL Classification: E44, E52, G12, G20, E32
    Keywords: central bank communications, global financial cycle, interest rate, international spillovers, monetary policy, risk, stock returns, trilemma
    Date: 2023–11
  10. By: Bochmann, Paul; Dieckelmann, Daniel; Fahr, Stephan; Ruzicka, Josef
    Abstract: We empirically analyze the interaction of monetary policy with financial stability and the real economy in the euro area. For this, we apply a quantile vector autoregressive model and two alternative estimation approaches: simulation and local projections. Our specifications include monetary policy surprises, real GDP, inflation, financial vulnerabilities and systemic financial stress. We disentangle conventional and unconventional monetary policy by separating interest rate surprises into two factors that move the yield curve either at the short end or at the long end. Our results show that a build-up of financial vulnerabilities tends to be accompanied initially by subdued financial stress which resurges, however, over a medium-term horizon, harming economic growth. Tighter conventional monetary policy reduces inflationary pressures but increases the risk of financial stress. [...] JEL Classification: E31, E52, G01, G10
    Keywords: macroprudential policy, monetary policy, monetary policy identification, quantile regressions, financial stability
    Date: 2023–11
  11. By: Xolani Sibande
    Abstract: This paper investigates the presence of herding and its interactions with monetary policy in the ZAR market. We use both the standard herding tests and Sim and Zhous (2015) quantile-on-quantile regressions. Similar to previous results in other markets, we found that extreme market events mainly drove herding behaviour in the ZAR market. This result is significant in the presence of monetary policy announcements. However, herding in the ZAR markets was not related to market fads. It therefore was, in the main, a rational response to public information, indicating central bank credibility. This credibility gives scope to the central bank to improve communication in periods of market crisis to dampen potential volatility. Further studies on the herding of specific ZAR market participants can be invaluable.
    Date: 2023–11–14
  12. By: Manuel Gonzalez-Astudillo; Rakeen Tanvir
    Abstract: This paper estimates a time-varying reaction function of the median participant of the Federal Open Market Committee, using a Taylor rule with time-varying coefficients estimated on one- to three-year ahead median forecasts of the federal funds rate, inflation, and the unemployment rate from the Summary of Economic Projections (SEP). We estimate the model with Bayesian methods, incorporating the effective lower bound on the median federal funds rate projections. The results indicate that the monetary policy rule has become significantly more persistent after the pandemic than in the years prior, and it currently reacts strongly to inflation, at more than twice the responsiveness estimated prior to 2020. Our proposed policy rule produces accurate predictions of the median federal funds rate projections in real time for given SEP forecasts of inflation and the unemployment rate, suggesting that the median participant's reaction function is well-represented by our assumed Taylor rule with time-varying coefficients. Our results show that the median participant's reaction function becomes less persistent and less responsive to inflation yet more responsive to the output gap in anticipation of tighter monetary policy conditions. We also find that labor market activity, inflation, and macroeconomic uncertainty correlate significantly with the evolution of the time-varying coefficients of the rule. Finally, we show that in times of a less persistent policy rule or more responsiveness to inflation, markets perceive nominal bonds as better macroeconomic hedges.
    Keywords: Summary of Economic Projections; Reaction function; Taylor rule; FOMC communications; Time-varying coefficients; Censored regression
    JEL: C32 C34 E52 E58
    Date: 2023–11–06
  13. By: Eunkyung Lee
    Abstract: I construct a novel dataset comprising over 100, 000 loan observations from U.S. firms and estimate that renegotiating existing loans — rather than originating new loans — significantly contributes to the corporate investment response to monetary policy shocks, accounting for half of the aggregate effect. Expansionary monetary policy shocks increase bank credit predominantly through renegotiations, and in turn, firms that renegotiate boost investment the most. By contrast, new loan issuance is driven by the firm’s investment growth prior to the shocks, consequently contributing only a tenth to the overall investment response. Notably, renegotiations amplify investment responses for financially constrained firms. These findings unveil novel dimensions of the channels through which monetary policy affects corporate investment.
    Keywords: monetary policy transmission; bank debt; investment; financial constraints; renegotiation; text analysis
    JEL: E22 E32 E52 G21 G32
    Date: 2023–11
  14. By: Jung, Alexander
    Abstract: The Federal Reserve’s (Fed) monetary policy announcements have created massive spillovers to global financial markets. Based on daily data for the sample from 1999 to 2019, this study finds that the Fed’s monetary policy announcements created significant international spillovers to bond yields and stock prices of European banks and non-financial corporations (NFCs), while changes in uncertainty around the expected Fed policy path and Fed information effects constituted critical additional dimensions of these spillover effects. International spillovers to bond yields of banks and NFCs were similar, while stock prices of European banks responded somewhat stronger than those of NFCs. The significant spillovers from the Fed’s forward guidance to European bond yields show that central bank communication is very relevant for international transmission. In relation to earlier studies emphasizing strong QE-related spillovers, this study suggests that Fed QE announcements created only small spillovers on bond yields and stock prices of European banks and NFCs. JEL Classification: E44, E52, F42, G14, G21
    Keywords: high-frequency event study, instrumental variables, local projections, monetary policy shocks, monetary policy uncertainty
    Date: 2023–11
  15. By: Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
    Abstract: We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.
    JEL: F40
    Date: 2023–11
  16. By: Alexis Derviz
    Abstract: When several central banks decide to introduce CBDCs, interoperability requirements create demand for a common payment infrastructure and a joint digital accounting unit (bridge coin). Many attributes of the latter resemble those of private digital currencies. At the same time, the CBDC-embracing authorities actively contribute to elevating digital wallets to the position of a household technology. Private agents discover ways to make domestic and foreign payments in the (digital) currency of their choice irrespective of the CBDC-issuing authorities' intentions. In such a world, will fiat currencies and the central banks that issue them be sidetracked by the bridge coin, or are old and new forms of international transactions able to coexist? What changes await the traditional FX market? These questions are addressed in a two-country, twogood, two-currency DSGE model with a global digital currency (digicoin). Under a certain structure of FX transaction costs, all three partial FX markets coexist and the use of fiat currency in foreign trade is unlikely to be eliminated completely as long as the bridge coin operator is unable to become a global banker as well.
    Keywords: Bridge coin, cash in advance, CBDC, digital currency, FX market
    JEL: C61 C63 D58 E02 E59 G23
    Date: 2023–07
  17. By: Ko Munakata (Financial System and Bank Examination Department, Bank of Japan); Takeshi Shinohara (Institute for Monetary and Economic Studies, Bank of Japan); Shigenori Shiratsuka (Faculty of Economics, Keio University); Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: Seasonality is among the most salient features of price changes, but it is notably less analyzed than seasonality of quantities and the business cycle component of price changes. To fill this gap, we use the scanner data of 199 categories of goods in Japan to empirically study the seasonality of price changes from 1990 to 2021. We find that the following four features generally hold for most categories: (1) The frequency of price increases and decreases rises in March and September; (2) Seasonal components of the frequency of price changes are negatively correlated with those of the size of price changes; (3) Seasonal components of the inflation rate track seasonal components of net frequency of price changes; (4) The seasonal pattern of the frequency of price changes is stable relative to that of the size of price changes. The pattern is, however, responsive to changes in the category-level annual inflation rate for the year. We conduct a simulation analysis using a simple state-dependent price model and show seasonal cycles in menu costs play an essential role in generating seasonality of price changes in the data. We then discuss the nature of seasonal cycles in menu costs and their implications for macroeconomic dynamics.
    Keywords: Scanner Data, Seasonality in Price Changes, New Keynesian Model, Menu Costs
    JEL: E31 E32 E37
    Date: 2023–11–30
  18. By: Sebastian Edwards
    Abstract: In this essay, I analyze Salvador Allende’s economic policies in Chile during the early 1970s. I argue that the explosion of inflation during his administration (above 1, 500% on a six-month annualized measure) was predictable, and that the government’s response to it, through massive and strict price controls, generated acute macroeconomic imbalances. I postulate that the combination of runaway inflation, shortages, and black markets generated major disaffection among the middle class and that that unhappiness reduced the support for the Unidad Popular government.
    JEL: E31 E40 E52 F38 F42
    Date: 2023–11
  19. By: Bouabdallah, Othman; Jacquinot, Pascal; Patella, Valeria
    Abstract: In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank independence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behavior to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy’s procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth. JEL Classification: E63, E62, E32, E52, C32
    Keywords: debt, euro area, inflation, Markov-switching, Monetary-fiscal policy mix
    Date: 2023–11
  20. By: Rohan Kekre (Chicago Booth and NBER); Moritz Lenel (Princeton and NBER); Federico Mainardi (Chicago Booth)
    Abstract: We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates. As in the preferred habitat tradition, habitat investors and arbitrageurs trade bonds of various maturities. As in the intermediary asset pricing tradition, the wealth of arbitrageurs is a state variable which affects equilibrium term premia. When arbitrageurs’ portfolio features positive duration, an unexpected fall in the short rate revalues wealth in their favor and compresses term premia. A calibration to the U.S. economy accounts for the effects of monetary shocks along the yield curve. We discuss the additional implications of our framework for state-dependence, endogenous price volatility, and trends in term premia from a declining natural rate.
    Keywords: monetary policy, term structure, segmented markets
    JEL: E44 E63 G12
    Date: 2023–09
  21. By: Lahiri, Amartya; Singh, Rajesh
    Abstract: We investigate the welfare implications of alternative monetary policy rules in a small open economy with access to world capital markets. Financial market access is costly and induces an endogenous segmentation of households into non-traders who never participate and traders who only participate intermittently in asset markets. The model can reproduce standard business cycle moments of open economies including a countercyclical current account even though the model has no capital and investment. Our main policy result is that procyclical monetary policy outperforms both the Taylor rule and inflation targeting in this environment. Given widespread evidence of endemic financial exclusion throughout the world, these results suggest caution in importing monetary policy prescriptions tailored for developed countries into emerging economies.
    Date: 2023–11–06
  22. By: Eric Fischer; Rebecca McCaughrin; Saketh Prazad; Mark Vandergon
    Abstract: This paper seeks to estimate the extent to which market-implied policy expectations could be improved with further information disclosure from the FOMC. Using text analysis methods based on large language models, we show that if FOMC meeting materials with five-year lagged release dates—like meeting transcripts and Tealbooks—were accessible to the public in real time, market policy expectations could substantially improve forecasting accuracy. Most of this improvement occurs during easing cycles. For instance, at the six-month forecasting horizon, the market could have predicted as much as 125 basis points of additional easing during the 2001 and 2008 recessions, equivalent to a 40-50 percent reduction in mean squared error. This potential forecasting improvement appears to be related to incomplete information about the Fed’s reaction function, particularly with respect to financial stability concerns in 2008. In contrast, having enhanced access to meeting materials would not have improved the market’s policy rate forecasting during tightening cycles.
    Keywords: interest rates; monetary policy; central banks and their policies; sentiment analysis
    JEL: E43 E52 E58 C80
    Date: 2023–11–01
  23. By: Bańbura, Marta; Bobeica, Elena; Martínez Hernández, Catalina
    Abstract: We propose a framework to identify a rich set of structural drivers of inflation in order to understand the role of the multiple and concomitant sources of the post-pandemic inflation surge. We specify a medium-sized structural Bayesian VAR on a comprehensive set of variables for the euro area economy. We analyse in particular various types of supply shocks, some of which were not considered relevant before the pandemic, notably global supply chain shocks and gas price shocks. The residuals of the VAR are assumed to admit a factor structure and the shocks are identified via zero and sign restrictions on factor loadings. The framework can deal with ragged-edge data and extreme observations. Shocks linked to global supply chains and to gas prices have exhibited a much larger influence than in the past. Overall, supply shocks can explain the bulk of the post-pandemic inflation surge, also for core inflation. Being able to gauge the impact of such shocks is useful for policy making. We show that a counterfactual core inflation measure net of energy and global supply chain shocks has been more stable after the pandemic. JEL Classification: E31, C32, C38, Q54
    Keywords: Bayesian VAR, gas prices, inflation, supply chain bottlenecks, supply shocks
    Date: 2023–11
  24. By: Pallotti, Filippo; Paz-Pardo, Gonzalo; Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L.
    Abstract: We measure the heterogeneous welfare effects of the recent inflation surge across households in the Euro Area. A simple framework illustrating the numerous channels of the transmission mechanism of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs –expressed as a share of 2021–22 income– were larger than a typical recession, and heterogeneous, e.g., 3% in France and 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the elderly losing up to 20%, and roughly half of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions are the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies were critical in shielding the most vulnerable households. JEL Classification: D12, D14, D31, E21, E52, E58
    Keywords: consumption, fiscal support, household heterogeneity, housing, inflation, labor income, net nominal positions, redistribution
    Date: 2023–11
  25. By: Zuzana Gric; Jan Janku; Simona Malovana
    Abstract: Using a sample of nearly 980, 000 new derivative transactions from about 1, 700 unique institutions, we explore sectoral differences in currency derivatives usage in the Czech financial sector from 2020 to 2022. We find that larger financial institutions, institutions that are part of complex financial groups, and institutions with higher foreign exposure are more likely to engage in currency derivative transactions. Contrary to other studies, we find that financially stable institutions use currency derivatives more frequently, reflecting the long-term stability of the Czech financial system. However, the significance of key characteristics varies across financial segments. Banks are less sensitive to changes in leverage, while liquidity is crucial for investment funds.
    Keywords: Currency derivatives, EMIR, FX derivatives, GLEIF, market-based finance
    JEL: F30 G15 G23 G32
    Date: 2023–10
  26. By: Moya Chin; Ms. Li Lin
    Abstract: We study the pass-through of labor costs to prices using a novel data-set that links industry-level wages to sectoral consumer prices through input-output tables. Pass-through increased during the COVID-19 pandemic recovery, temporarily in goods and persistently in services. Our analysis suggests that the elevated pass-through contributed at least 0.8 percentage points to goods inflation in 2021 and 0.7 percentage points and 0.5 percentage points to services inflation in 2021 and 2022, respectively. We find that the increase in pass-through reflects elevated demand in goods sectors and firms' difficulty in absorbing high wage growth in services sectors. The analysis suggests it will take a reduction in wage growth to bring PCE inflation back to target. Fiscal and monetary policies that help to re-balance the labor markets can facilitate this process.
    Date: 2023–11–10
  27. By: O'Connor, Fergal A.; Lucey, Brian M.
    Abstract: This paper presents and explains the newly rediscovered and transcribed daily market gold price from 1919-1968 for the world's main gold market during the period, the London Gold Fixing Auction. The paper highlights several novel features previously not discussed in the literature, such as gold prices fluctuating at the daily Gold Fixing even during the two Gold Standard periods when gold prices are often thought of as 'fixed'. It also describes key turning points during the evolution of the Gold Fixing such as its formation and the daily price reactions when Britain went on or came off the Gold Standard. This paper offers the first long-run examination of the weak form efficiency of the Gold Fixing from its inception, at a time when gold was the centre of the world's monetary system. We find that the Gold Fixing price was informationally efficient at its inception in 1919 but by the 1930s, when there was increased buying for speculation and investment (referred to as hoarding) the market became more predictable and inefficient. We also find that the market was inefficient during gold standard periods when central banks were limiting gold's ability to react to new information.
    Keywords: Daily Gold Price Data, London Market, Market Efficiency, Gold Fixing, Hoarding
    JEL: F3 G1 G2 N2 Q3
    Date: 2023
  28. By: Rybak, Konstantin (Рыбак, Константин) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The purpose of this research is to analyze the impact of global inflation and foreign monetary policy on Russian macroeconomic variables. This study provides a review and systematization of literature related to the identification and estimation of the external global shocks impact on the macroeconomic indicators of an individual economy, as well as literature related to global inflation processes. Exploiting factor augmented vector autoregression methodology we estimate impulse responses functions of Russian economy to various global shocks.
    Keywords: global model, external shocks, factor model
    JEL: C32 E17 F47
    Date: 2023
  29. By: Alyssa G. Anderson; Manjola Tase
    Abstract: We document the existence of a regulatory premium in the federal funds market related to the implementation of the Liquidity Coverage Ratio (LCR). We use difference-in-differences analysis and confidential bank level data on borrowing in the fed funds and Eurodollar markets to compare the interest rates paid by banks subject to daily reporting of their liquidity profile (daily reporters) relative to other banks. We find that, after the implementation of LCR, daily reporters paid a higher rate compared to other banks when borrowing in the fed funds market given the LCR-favorability of many of the lenders in this market. In addition, on the days that banks borrowed in both the fed funds and Eurodollar markets, daily reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market.
    Keywords: Eurodollars; Liquidity Coverage Ratio; market segmentation
    JEL: E49 E52 G21 G28
    Date: 2023–11–09
  30. By: Andrea Nocera; M. Hashem Pesaran
    Abstract: We investigate the short- and long-term impacts of the Federal Reserve's large-scale asset purchases (LSAPs) on non-financial firms' capital structure using a threshold panel ARDL model. To isolate the effects of LSAPs from other macroeconomic conditions, we interact firm- and industry-specific indicators of debt capacity with measures of LSAPs. We find that LSAPs facilitated firms' access to external financing, with both Treasury and MBS purchases having positive effects. Our model also allows us to estimate the time profile of the effects of LSAPs on firm leverage providing robust evidence that they are long-lasting. These effects have a half-life of 4-5 quarters and a mean lag length of about six quarters. Nevertheless, the magnitudes are small, suggesting that LSAPs have contributed only marginally to the rise in U.S. corporate debt ratios of the past decade.
    Date: 2023–10
  31. By: Tanya Livermore (Reserve Bank of Australia); Jack Mulqueeney (Reserve Bank of Australia); Thuong Nguyen (Reserve Bank of Australia); Benjamin Watson (Reserve Bank of Australia)
    Abstract: The Reserve Bank conducted its sixth triennial Consumer Payments Survey (CPS), which provides detailed information on how Australians make their payments. The 2022 CPS provides the first comprehensive snapshot of consumer payment behaviour following the changes brought on by the COVID-19 pandemic. The survey shows that most in-person payments are made by tapping cards or mobile devices, even for small purchases. This means the share of in-person transactions made with cash halved, from 32 per cent to 16 per cent, over the three years to 2022. The demographic groups that traditionally used cash more frequently for payments – such as the elderly, those on lower incomes and those in regional areas – saw the largest declines in cash use. Cash usage has generally been replaced with card payments. While Australians are aware of and use a range of other newer payment methods, such as digital wallets and buy now, pay later services, they still make up a small share of payments.
    Keywords: consumer payment choice; consumer survey; dual network debit cards; method of payment; payment systems
    JEL: D12 D14 E42
    Date: 2023–11
  32. By: Robin Greenwood; Samuel Hanson; Dimitri Vayanos
    Abstract: We survey the growing literature emphasizing the role that supply-and-demand forces play in shaping the term structure of interest rates. Our starting point is the Vayanos and Vila (2009, 2021) model of the term structure of default-free bond yields, which we present in both discrete and continuous time. The key friction in the model is that the bond market is partially segmented from other financial markets: the prices of short-rate and bond supply risk are set by specialized bond arbitrageurs who must absorb shocks to the supply and demand for bonds from other “preferred-habitat” agents. We discuss extensions of this model in the context of default-free bonds and other asset classes.
    JEL: E4 E40 E49 E52 E7 G02 G1 G10 G11 G12
    Date: 2023–11
  33. By: Jan Muckenhaupt; Martin Hoesli; Bing Zhu
    Abstract: This paper investigates the inflation hedging capability of listed real estate (LRE) companies from 1990 to 2021 in four economies: the US, the UK, Australia, and Japan. By using a Markov switching vector error correction model (MS-VECM), we identify that the short-term hedging ability moves towards being negative or zero during crisis periods. In non-crisis periods, LRE provides good protection against inflation. In the long term, LRE provides a good hedge against expected inflation, and shows a superior inflation hedging ability than stocks. Additionally, we propose inflation-hedging portfolios by minimizing the expected shortfall. This inflation-hedging portfolio allocation methodology suggests that listed real estate stocks should play a significant role in investor portfolios.
    Keywords: Inflation Hedging; Inflation-Hedging Portfolio; Listed Real Estate Companies; Markov-switching
    JEL: R3
    Date: 2023–01–01

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