nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒01‒01
thirty-six papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Fighting Inflation More Effectively without Transferring Central Banks’ Profits to Banks By Paul De Grauwe; Yuemei Ji
  2. Global spillovers from multi-dimensional US monetary policy By Georgiadis, Georgios; Jarociński, Marek
  3. State-dependent inflation expectations and consumption choices By Michal MarenÄ ák
  4. The Impact of Currency Carry Trade Activity on the Transmission of Monetary Policy By Steshkova, Alina; Böck, Maximilian; Zörner, Thomas
  5. Estimation of firms' inflation expectations using the survey DI By NAKAJIMA, Jouchi
  6. Does inflation come and go in the same way? By Juhana Hukkinen; Matti Viren
  7. Inflation is always and everywhere … a conflict phenomenon: Post-Keynesian inflation theory and energy price driven conflict inflation By Hein, Eckhard
  8. Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model By Huifeng Chang; Federico Grinberg; Lucyna Gornicka; Mr. Marcello Miccoli; Brandon Tan
  9. Taming Financial Dollarization: Determinants and Effective Policies – The Case of Uruguay By Mr. Mauricio Vargas; Jesus Sanchez
  10. Who Bears the Costs of Inflation? Euro Area Households and the 2021–2022 Shock By Filippo Pallotti; Gonzalo Paz-Pardo; Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
  11. Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE By Gulnara Nolan; Jonathan Hambur; Philip Vermeulen
  12. Monetary Policy Design with Recurrent Climate Shocks By Mr. Vimal V Thakoor; Engin Kara
  13. Using Core Inflation to Predict Headline Inflation By Michael W. McCracken; Trần Khánh Ngân
  14. Imperfect Information and Hidden Dynamics By Paul Levine; Maryam Mirfatah; Joseph Pearlman; Stylianos Tsiaras
  15. A Financial New Keynesian Model By Thomas M. Mertens; Tony Zhang
  16. On par: A Money View of stablecoins By Iñaki Aldasoro; Perry Mehrling; IDaniel H. Neilson
  17. Wage Setting in Times of High and Low Inflation By Gödl, Maximilian; Gödl-Hanisch, Isabel
  18. Hyperinflation in Venezuela. An Analysis Based on Cagan's Conceptual Framework By Olivo, Victor
  19. A Theory of The Procyclical Effectiveness of Forward Guidance By Paweł Kopiec
  20. Federal Reserve Structure and the Production of Monetary Policy Ideas By Michael D. Bordo; Edward Simpson Prescott
  21. Policymakers' Uncertainty By Anna Cieslak; Stephen Hansen; Michael McMahon; Song Xiao
  22. The Optimal Supply of Central Bank Reserves under Uncertainty By Gara Afonso; Gabriele La Spada; Thomas M. Mertens; John C. Williams
  23. Mobile Money, Perception about Cash, and Financial Inclusion: Learning from Uganda’s Micro-Level Data By Felix F. Simione; Tara S Muehlschlegel
  24. Inflation and fiscal policy: is there a threshold effect in the fiscal reaction function? By Briodeau, Clémence; Checherita-Westphal, Cristina
  25. Inflation Expectations Measurement and its Effect on Inflation Dynamics in Colombia By Andres Sanchez-Jabba; Erick Villabon-Hinestroz; Bernardo Romero-Torres
  26. Predicting the Law: Artificial Intelligence Findings from the IMF’s Central Bank Legislation Database By Khaled AlAjmi; Jose Deodoro; Mr. Ashraf Khan; Kei Moriya
  27. Modelling the Distributional Effects of the Cost-of-Living Crisis in Turkey and the South Caucasus: A Microsimulation Analysis By Can, Zeynep Gizem; O'Donoghue, Cathal; Sologon, Denisa Maria; Smith, Darius; Griffin, Rosaleen; Murray, Una
  28. Currencies of External Balance Sheets By Mr. Cian Allen; Deepali Gautam; Luciana Juvenal
  29. The fragility of the Eurozone: has it disappeared? By De Grauwe, Paul; Ji, Yuemei
  30. Sustainable Development Goal (SDG) 8: New Zealand Prospects while Yield Curve Inverts in Central Bank Digital Currency (CBDC) Era By Qionghua Chu
  31. The impact of unexpected inflationary shock in 2022 and 2023 on the welfare of families: The case of Slovakia By Jana Valachyova; Matus Senaj
  32. The Theory of Reserve Accumulation, Revisited By Corsetti, G.; Maeng, S. H.
  33. Efforts to Improve Payments Using DLT- Focusing on Wholesale CBDC Experiments in Various Countries - By Jiro Sugie; Junichiro Hatogai
  34. Price Stickiness and Strategic Uncertainty: An Experimental Study By Yukihiko Funaki; Kohei Kawamura; Nobuyuki Uto; Kozo Ueda
  35. An Interview Study of Pricing By Truman F. Bewley
  36. The Role of the Monetary Policy Stance for the Goverment Spending Multiplier in Poland ​ By Alfred A. Haug; Tomasz Łyziak; Anna Sznajderska

  1. By: Paul De Grauwe; Yuemei Ji
    Abstract: The major central banks now operate in a regime of abundance of bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of the central banks’ profits (and more) to commercial banks that will become unsustainable and makes the transmission of monetary policies less effective. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.
    Keywords: monetary policy, bank reserves, minimum reserve requirements
    JEL: E52 E58
    Date: 2023
  2. By: Georgiadis, Georgios; Jarociński, Marek
    Abstract: We estimate spillovers from US monetary policy for different measures in the Federal Reserve’s toolkit. We make use of novel measures of exogenous variation in conventional rate policy, forward guidance and large-scale asset purchases (LSAPs) based on high-frequency asset-price surprises around Federal Open Market Committee meetings. The identification relies on relatively weak assumptions and accounts for the possible presence of residual endogenous components—such as central bank information effects—in these monetary policy surprises. We find that: (i) forward guidance and LSAPs trigger much larger spillovers than conventional rate policy; (ii) spillovers transmit predominantly through financial channels centering on global investors’ risk appetite and manifest in changes in equity prices, bond spreads, capital flows and the dollar exchange rate; (iii) LSAPs trigger immediate international portfolio re-balancing between US and advanced-economy bonds, but generally entail only rather limited term premium spillovers;(iv) both forward guidance and LSAPs entail trade-offs for emerging-market-economy central banks, either between stabilizing output and prices or between additionally ensuring financial stability in terms of capital inflows. JEL Classification: F42, E52, C50
    Keywords: central bank information effects, high-frequency identification, Monetary policy spillovers, US monetary policy shocks
    Date: 2023–12
  3. By: Michal MarenÄ ák (National Bank of Slovakia)
    Abstract: This paper shows that the impact of inflation expectations on consumption depends on prevailing inflation. Beyond the quantitative-qualitative distinction in inflation expectations, differentiating among qualitative expectations of higher, constant, or positive inflation is key. Qualitative expectations have a greater impact on consumption than expected levels and changes in inflation, and the significance of specific qualitative expectations is contingent upon the prevailing inflation conditions. The effect of expecting qualitatively higher inflation on the willingness to consume is more pronounced during periods of inflation surges than in times of low and stable inflation, and is insignificant during periods of decline or deflation. Policy implications are discussed.
    JEL: D1 D8 E2 E3 E5
    Date: 2023–11
  4. By: Steshkova, Alina; Böck, Maximilian; Zörner, Thomas
    JEL: C32 E52 F31
    Date: 2023
  5. By: NAKAJIMA, Jouchi
    Abstract: This study uses the Bank of Japan's Tankan (Short-Term Economic Survey of Enterprises in Japan) data to estimate the long-run time series of Japanese firms' inflation expectations since 1990. In the Tankan, the series for "consumer price inflation expectations" and "output price inflation expectations" go back to 2014, while that for "output price DI" features a longer time series. Using the relationship between these series for 2014–2022, we estimate the one-year ahead consumer price inflation expectations for 1990–2013 based on the output price DI. The firms' inflation expectations obtained are found to have information that improves forecast accuracy when forecasting consumer price inflation, which is not included in the lag in inflation or the output gap, and enhances forecast accuracy more than economists' inflation expectations.
    Keywords: Inflation expectations, Output price expectations, Tankan
    JEL: C22 E31 E37
    Date: 2023–12
  6. By: Juhana Hukkinen (Monetary Policy and Research Department of Bank of Finland); Matti Viren (Monetary Policy and Research Department of Bank of Finland & Economics Department of University of Turku)
    Abstract: The failure to predict the surge in inflation in 2021 raises questions about whether we are better equipped to anticipate a future decline in inflation. What tools do we intend to use for predicting the trajectory of inflation? Are we still primarily relying on survey data regarding inflation expectations, and are we still employing a Calvo-type structure to model inflation, in which only the intensive margin (the size of price increases) adjusts in response to changes in demand and supply? We would like to emphasize that our highly disaggregated consumer price data for the Euro area, consisting of 280 commodity categories, strongly suggests that price increases (inflation) are influenced not only by aggregate trends but also by sector-specific developments that result in state-dependent price adjustments. These factors may lead to more volatile fluctuations in the inflation rate. Furthermore, these reactions do not appear to be entirely symmetric when it comes to rising and falling inflation. When the inflation rate is close to zero, the role of state-dependent pricing is diminished, and nonlinearities become less significant.
    Keywords: inflation, state-dependent pricing, menu costs
    JEL: D22 E31 F41
    Date: 2023–11
  7. By: Hein, Eckhard
    Abstract: This paper reviews the post-Keynesian theory of inflation against the background of the simultaneous rise in inflation and profit shares in the course of the Covid-19 recovery and the Russian war in Ukraine. It distinguishes between the Keynes, Kaldor, Robinson, and Marglin tradition, and the Kalecki, Rowthorn, and Dutt tradition. Two prototype models in the latter tradition-the Dutt, Blecker/Setterfield and Lavoie variant, and the Rowthorn and Hein/Stockhammer variant-are discussed. The paper applies the latter to elucidate recent inflation trends propelled by increasing imported energy prices and then rising mark-ups. The effects of inflation-targeting central bank interest policies versus a post-Keynesian alternative macroeconomic policy approach are evaluated. It is argued that from a post-Keynesian perspective inflation is always and everywhere a conflict phenomenon, with different potential triggers. Adequate policies should thus focus on moderating distribution conflict by incomes policies, complemented by central banks targeting low long-term real interest rates, functional finance fiscal policies and international coordination of inflation targets.
    Keywords: conflict inflation, post-Keynesian models, imported energy inflation shock
    JEL: E12 E25 E31 E61
    Date: 2023
  8. By: Huifeng Chang; Federico Grinberg; Lucyna Gornicka; Mr. Marcello Miccoli; Brandon Tan
    Abstract: Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower deposits (disintermediation) and lending in the banking sector? This paper develops a model where households heterogeneous in wealth allocate between an illiquid asset and assets that can be used for payments: bank deposits, cash, and CBDC. CBDC is more efficient as a means of payment and has lower access cost than deposits. Deposits are offered by an imperfectly competitive banking sector which raises deposit interest rates after CBDC introduction to prevent substitution away from deposits to CBDC. We find that there are two opposing margins of impact on the level of aggregate deposits: (1) the intensive margin gain in deposits by richer households increasing their holdings of deposits because of higher interest rates, and (2) the extensive margin loss of deposits among poorer households who switch from deposits to the CBDC. The extensive margin loss in deposits is more likely to dominate (yielding a fall in aggregate deposits) when the mass of poorer households is large and when it is relatively costly to access bank accounts. This tends to be the case in developing and emerging market economies. However, even when the extensive margin loss of deposits dominates and there is disintermediation, the impact on lending is quantitatively small if banks have access to other forms of funding, such as wholesale or central bank financing.
    Keywords: CBDC; banking disintermediation; financial inclusion; monetary policy
    Date: 2023–11–17
  9. By: Mr. Mauricio Vargas; Jesus Sanchez
    Abstract: With some of the most significant levels of financial dollarization in the Western Hemisphere, Uruguay is characterized by extensive dollarization in both deposits and loans. While traditional factors like high inflation and substantial devaluations have been associated with such outcome, the enduring nature of dollarization in Uruguay also underscores the importance of structural elements. In formulating a holistic strategy to reduce dollarization, not only should there be an enhancement of the monetary policy framework aimed at maintaining low, stable inflation, but it should also consider the calibration of prudential policies such as currency-differentiated reserve requirements and foreign-currency credit repos.
    Keywords: Dollarization; Prudential Policies; Monetary Policy; Uruguay; Peru.
    Date: 2023–11–24
  10. By: Filippo Pallotti; Gonzalo Paz-Pardo; Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
    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: E31 E58 G51
    Date: 2023–11
  11. By: Gulnara Nolan (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Philip Vermeulen (University of Canterbury, New Zealand)
    Abstract: We provide new evidence on the effect of monetary policy on investment in Australia using firm-level data. We find that contractionary monetary policy makes firms less likely to invest and lowers the amount they invest if they do so. The effects are similar for young and old firms, indicating that the decline in the number of young firms in Australia over time is unlikely to have weakened the effect of monetary policy. The effects are also broadly similar for smaller and larger firms. This suggests that evidence that some, particularly large, firms have sticky hurdle rates does not mean that they do not respond to monetary policy. It also suggests that overseas findings that expansionary monetary policy lessens competition by supporting the largest firms likely do not apply to Australia. We find evidence that financially constrained firms, and sectors that are more dependent on external finance, are more responsive to monetary policy, highlighting the important role of cash flow and financing constraints in the transmission of monetary policy. Finally, we find evidence that monetary policy affects firms' actual and expected investment contemporaneously, suggesting that expectations are reactive and will tend to lag over the cycle.
    Keywords: investment; monetary policy; financial constraints
    JEL: E22 E52
    Date: 2023–12
  12. By: Mr. Vimal V Thakoor; Engin Kara
    Abstract: As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. We develop a New Keynesian Dynamic Stochastic General Equilibrium model to analyze the impact of these events on monetary policy. Our model conceptualizes these disasters as left-tail productivity shocks with a quantified likelihood, leading to a skewed distribution of outcomes. This creates a significant trade-off for central banks, balancing increased inflation risks against reduced output. Our results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climateexacerbated economic fluctuations.
    Keywords: Climate change; monetary policy; fiscal policy; Taylor rule
    Date: 2023–11–24
  13. By: Michael W. McCracken; Trần Khánh Ngân
    Abstract: An analysis of CPI data suggests that a measure of inflation excluding food and energy and a measure excluding only energy are useful predictors of overall inflation 12 months in the future.
    Keywords: core inflation; headline inflation; Consumer Price Index (CPI)
    Date: 2023–11–28
  14. By: Paul Levine (University of Surrey); Maryam Mirfatah (King’s College London); Joseph Pearlman (City University); Stylianos Tsiaras (Ecole Polytechnique Federale de Lausanne)
    Abstract: We study central bank liquidity provisions to the banking sector in a DSGE model estimated for the Euro Area with financial frictions on the supply and demand side of credit. We show that liquidity provisions, as in the ECB’s recent Long Term Refinancing Operations, can be welfare-enhancing or welfare-reducing when both these financial frictions exist. They relax the banks’ leverage constraint and induce banks to provide more credit. This reduces the credit spread facing firms and increases investment, but this comes at the cost of implementing the liquidity policy. We compute a welfare optimized liquidity rule for the central bank responding to output, inflation and the interest rate spread that can increase welfare in comparison with the case of no liquidity provision. Crucially, this result is conditional on a high level of central bank monitoring of the its loanable funds to banks.
    JEL: C11 E44 E52 E58 E61
    Date: 2023–11
  15. By: Thomas M. Mertens; Tony Zhang
    Abstract: This paper solves a standard New Keynesian model in terms of risk-neutral expectations and estimates it using a cross-section of longer-dated financial assets at a single point in time. Inflation risk premia appear in the theory and cause inflation to deviate from its target on average. We re-estimate the model based on each day’s closing prices to capture high-frequency changes in the expected path of the economy. Our estimates show that financial markets reacted to the post-COVID surge in inflation with higher short-run inflation expectations, an increase in the inflation risk premium, and an increase in the long-run neutral real rate, 𝑟∗, while long-term inflation expectations remained well anchored. Our model produces long term inflation forecasts that outperform several standard alternative measures.
    Keywords: Keynesian models; financial markets; covid19; inflation forecasts
    Date: 2023–11–13
  16. By: Iñaki Aldasoro; Perry Mehrling; IDaniel H. Neilson
    Abstract: This paper presents a money view analysis of the recent crypto innovation of stablecoins, which have seen a remarkable rise and more recently some spectacular collapses. By analogizing on-chain with offshore, and developing an extended analogy of stablecoins with Eurodollars, we reveal the primitive character of the existing on-chain liquidity mechanism which supports the promise of par settlement by existing on-chain stablecoin models. Liquidity, not solvency, is the issue confronted by par settlement.
    Keywords: stablecoins, Eurodollar, forward market, dealer function, liquidity
    JEL: E42 F33 G21 G23
    Date: 2023–11
  17. By: Gödl, Maximilian; Gödl-Hanisch, Isabel
    JEL: E24 E31 E50 E60
    Date: 2023
  18. By: Olivo, Victor
    Abstract: The purpose of this work is to provide a detailed descriptive analysis of the hyperinflationary process that affected Venezuela between December 2017 and January 2020. The analysis is based on the approach of Cagan (1956) in the sense that it uses the criteria defined by Cagan to identify hyperinflationary episodes, and places special emphasis on the behavior of monetary factors (the supply of and demand for money) as the main direct determinants of hyperinflationary dynamics. Evidence is presented that the change in monetary dynamics through a jump in the rate of growth of the monetary base was a fundamental factor in the process of acceleration of the price level. The study also confirms that Cagan's condition of stability of the money demand was met during the hyperinflationary episode, and that the essential impulse of the hyperinflationary process was generated via expansion of the money supply and not an unstable behavior of the demand for money.
    Keywords: Hyperinflation, money supply, money demand, monetary base, fiscal deficit, monetary financing.
    JEL: E41 E51 E63
    Date: 2023–11–11
  19. By: Paweł Kopiec
    Abstract: I study the dependence of the forward guidance effectiveness on the level of economic slack. I use the model with price rigidities and uninsured unemployment risk and apply both analytical and numerical methods to study the forward guidance transmission in both''normal time'' and the crisis during which the unemployment rate rises by 150 percent. High unemployment accompanied by low job-finding rates raises the unemployment risk and increases precautionary motives. This, in turn, constrains the ability of the monetary authority to boost current demand by announcing cuts in future policy rates. The severity of that limitation increases with the time horizon of the announced change in interest rate. Quantitatively, the drop in the interest rate elasticity of aggregate consumption between the horizon of the interest rate cut equal to zero (i.e. the standard monetary policy shock) and the horizon equal to 15 quarters is 35.3% larger in the crisis than in ''normal time''. These more pronounced horizon effects imply that the forward guidance effectiveness is in general lower in the crisis than in''normal times''.
    Keywords: forward guidance, monetary policy, heterogeneous agents, frictional narkets, unemployment
    JEL: D30 D31 D52 E21 E24 E43 E52 E58
    Date: 2022–12
  20. By: Michael D. Bordo; Edward Simpson Prescott
    Abstract: We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on monetary policy over the 1960 - 2000 period. We document the introduction of monetarism, rational expectations, credibility, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s and the increased ties with academia that developed in this period. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure. We illustrate this with a time-consistency model in which a decentralized organization is better at producing new ideas than a centralized one. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure by allowing for more competition in formulating ideas and by reducing groupthink.
    Keywords: Federal Reserve System; monetary policy; governance; time consistency
    JEL: B0 E58 G28 H1
    Date: 2023–11–20
  21. By: Anna Cieslak; Stephen Hansen; Michael McMahon; Song Xiao
    Abstract: Uncertainty is a ubiquitous concern emphasized by policymakers. We study how uncertainty affects decision-making by the Federal Open Market Committee (FOMC). We distinguish between the notion of Fed-managed uncertainty vis-a-vis uncertainty that emanates from within the economy and which the Fed takes as given. A simple theoretical framework illustrates how Fed-managed uncertainty introduces a wedge between the standard Taylor-type policy rule and the optimal decision. Using private Fed deliberations, we quantify the types of uncertainty the FOMC perceives and their effects on its policy stance. The FOMC's expressed inflation uncertainty strongly predicts a more hawkish policy stance that is not explained either by the Fed's macroeconomic forecasts or by public uncertainty proxies. We rationalize these results with a model of inflation tail risks and argue that the effect of uncertainty on the FOMC's decisions reflects policymakers' concern with maintaining credibility for the inflation anchor.
    JEL: E58
    Date: 2023–11
  22. 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: central bank reserves; uncertainty
    Date: 2023–11–09
  23. By: Felix F. Simione; Tara S Muehlschlegel
    Abstract: Will mobile money render cash less dominant over time in Africa? Can it promote financial inclusion? We shed light on these questions by exploring individual-level and nationally representative survey data for Uganda, a country in a region that pioneered mobile money in the world. We use the Propensity Score Matching method to robustly compare mobile money users and non-users across a range of indicators that capture individuals’ perceptions about cash, and the extent to which they remit, save, and borrow money. We present the first evidence that mobile money users, compared to non-users, are more likely to perceive cash as risky and less likely to prefer carrying large amounts of cash. We also confirm that mobile money users are more likely to receive and send remittances, save, and borrow. They also save and borrow larger amounts.
    Keywords: Developing Country; Innovation; Digital Divide
    Date: 2023–11–17
  24. By: Briodeau, Clémence; Checherita-Westphal, Cristina
    Abstract: This paper estimates a fiscal reaction function (FRF) framework for euro area countries to test for the impact of changes in inflation on fiscal policy. We find evidence of non-linear short-term effects of HICP inflation on the primary balance after controlling for other relevant factors. Over the period 1999-2022, we unveil an inverse U-turn relationship and an inflation turning point - beyond which its short-term (contemporaneous) impact on the primary balance starts being negative - at somewhat above 4% for the sample of mature euro area economies (EA-12, first twelve EA members) and around 6% for the whole sample of euro area countries in 2022 (EA-19). Using an alternative measure of “inflation surprise” (available for the period 2003-2022) yields robust results in the larger EA-19 sample and lowers the threshold to just below 5%. In terms of channels, the non-linear effects are found to propagate through both the primary expenditure and the revenue ratio (more robustly through the former) in the EA-12 sample, while only the combined effect on the primary balance seems to prevail for EA-19. These results reflect primarily the most recent high inflation episode and indicate that in such conditions inflation can be costly for public finance flows even in the shorter run. JEL Classification: H60, E62, E31, C33
    Keywords: euro area, fiscal reaction function, inflation, panel models
    Date: 2023–12
  25. By: Andres Sanchez-Jabba; Erick Villabon-Hinestroz; Bernardo Romero-Torres
    Abstract: The main objective of this study is to determine whether the effect of inflation expectations on inflation dynamics in Colombia depends on the measurement of this variable. For this purpose, we estimate New-Keynesian Phillips Curves measuring expectations with data from financial markets, economic surveys, and macroeconomic models. Our findings show that a one percentage point increase in financial market expectations (BEI) leads to a median increment in inflation of 0.96 percentage points, while economic survey (QSEE) and macroeconomic model (4GM) expectations yield median effects of 0.78 and 0.50 percentage points, respectively. Possible explanations for the differences in the effect of expectations on inflation relate to asymmetric losses in forecast errors, variations in forecasting costs, rigidities in information transmission, and economic modelling limitations. **** RESUMEN: El objetivo principal de este estudio es determinar si el efecto de las expectativas de inflación en la dinámica de la inflación en Colombia depende de la medición de esta variable. Para este propósito, estimamos Curvas de Phillips Neokeynesianas midiendo las expectativas con datos de mercados financieros, encuestas económicas y modelos macroeconómicos. Nuestros resultados muestran que un aumento de un punto porcentual en las expectativas del mercado financiero (BEI) conduce a un incremento medio en la inflación de 0.96 puntos porcentuales, mientras que las expectativas de encuestas económicas (QSEE) y de modelos macroeconómicos (4GM) producen efectos medios de 0.78 y 0.50 puntos porcentuales, respectivamente. Las posibles explicaciones de estas diferencias en el efecto de las expectativas en la inflación están relacionadas con pérdidas asimétricas en los errores de pronóstico, variaciones en los costos de pronóstico, rigideces en la transmisión de información y limitaciones en la modelización económica.
    Keywords: Inflation expectations, inflation dynamics, New-Keynesian Phillips Curve, Generalized Method of Moments, expectativas de inflación, dinámica inflacionaria, curva de Phillips neokeynesiana, método generalizado de momentos
    JEL: C26 D84 E12 E31
    Date: 2023–12
  26. By: Khaled AlAjmi; Jose Deodoro; Mr. Ashraf Khan; Kei Moriya
    Abstract: Using the 2010, 2015, and 2020/2021 datasets of the IMF’s Central Bank Legislation Database (CBLD), we explore artificial intelligence (AI) and machine learning (ML) approaches to analyzing patterns in central bank legislation. Our findings highlight that: (i) a simple Naïve Bayes algorithm can link CBLD search categories with a significant and increasing level of accuracy to specific articles and phrases in articles in laws (i.e., predict search classification); (ii) specific patterns or themes emerge across central bank legislation (most notably, on central bank governance, central bank policy and operations, and central bank stakeholders and transparency); and (iii) other AI/ML approaches yield interesting results, meriting further research.
    Keywords: central bank legislation; central banking; artificial intelligence; machine learning; Bayesian algorithm; Boolean algorithm; central bank governance; law and economics
    Date: 2023–11–17
  27. By: Can, Zeynep Gizem (Adana Alpaslan Türkeş Science and Technology University); O'Donoghue, Cathal (National University of Ireland, Galway); Sologon, Denisa Maria (LISER (CEPS/INSTEAD)); Smith, Darius (National University of Ireland, Galway); Griffin, Rosaleen (Cathal O’Donoghue & Associates); Murray, Una (National University of Ireland, Galway)
    Abstract: This study addresses the different distributional and welfare implications of price volatility amid the ongoing cost-of-living crisis, focusing on both Turkey and the South Caucasus region, which have different welfare regimes and patterns of price changes. This paper explores the impact of inflation and uses compensating variations and equivalized incomes to measure shifts in welfare in a cross-country comparative context. The effects of inflation are closely related to specific price increases for various goods and the distribution of household budgets. In particular, lower-income countries and individuals allocate a higher share of their budgets to essential goods such as food, heating oil, and electricity. Consequently, the pronounced price escalation in these essential goods has led to a stronger inflationary effect in the less affluent countries. Consistent with media narrative, we find that the distributional consequences of these price changes are more pronounced than originally thought. Nevertheless, there are notable differences across countries in the level of inflation, its composition, and the relative increase within the income spectrum. It is worth noting that comparable levels of inflation regressivity are due to different interactions between the magnitude of price inflation and its disproportionate impact on the income distribution. Our analysis quantifies the offsetting fluctuations associated with inflation and reveals a significant behavioural component, largely due to the fact that those exposed to significant price fluctuations predominantly purchase necessities. An important aspect to consider in the potential impact on households is the savings rate. Households with lower savings are disproportionately affected by these shifts in spending behaviour.
    Keywords: inflation, distributional effect, welfare effect
    JEL: E21 D12 D31 I30
    Date: 2023–11
  28. By: Mr. Cian Allen; Deepali Gautam; Luciana Juvenal
    Abstract: This paper assembles a comprehensive dataset of the currency composition of countries’ external balance sheets for 50 economies over the period 1990–2020. We document the following findings: (i) the US dollar and the euro still dominate global external balance sheets; (ii) there were striking changes in the currency composition across countries since the 1990s, with many emerging markets having moved from short to long positions in foreign currency, thus moving away from the so-called “original sin”; (iii) financial and tradeweighted exchange rates are weakly correlated, suggesting the commonly used trade indices do not adequately reflect the wealth effects of currency movements, and (iv) the large wealth transfers across countries during COVID-19 and the global financial crises increased global imbalances in the former, and reduced them in the latter.
    Keywords: currency composition; international investment position; foreign currency exposure
    Date: 2023–11–17
  29. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We revisit the fragility of the Eurozone which arises because the sovereigns in the Eurozone issue debt in a currency (the euro) over which they have no control. This prevents them from giving a guarantee to bond holders that they will always be repaid at maturity. This fragility can trigger self-fulfilling liquidity crises, such as those that erupted during 2010–12. We document how this fragility has evolved over time and how it has been affected by the reforms in the governance of the Eurozone since the sovereign debt crisis of 2010–12. This will allow us to analyze the most recent episode that started with the emergence of the pandemic in 2020. The latter has, up to now, not led to a new debt crisis in the Eurozone, despite the fact that the shock produced by the pandemic was at least as large as the financial crisis of 2007–08. We document how during the pandemic the new governance of the Eurozone prevented this shock from leading to a new sovereign debt crisis. We end with a discussion of the prospects for the future and ask the question of whether the fragility of the Eurozone is a thing of the past.
    JEL: F3 G3
    Date: 2022–02–01
  30. By: Qionghua Chu
    Abstract: In the inverted yield curve environment, whether the sixteen SDGs set up by the United Nations could be realized by 2030 sparks interesting considerations. Meanwhile, as the Reserve Bank of New Zealand is considering the potential issuance of the CBDC, the boost to SDG 8 - decent work and economic growth, as examined from the perspectives of Cobb-Douglas production function, growth accounting relation from Solow, and Theory of Aggregate Demand from Keynes, intrigues further analysis. How twelve targets of SDG 8 could be achieved with the possible issuance of the CBDC in the backdrop is analyzed. Despite the inverted yield curve, bright prospects exist for New Zealand to realize SDG 8 with the issuance of the CBDC in mind.
    Date: 2023–11
  31. By: Jana Valachyova (Council for Budget Responsibility); Matus Senaj (Council for Budget Responsibility)
    Abstract: We analyse the impact of an unexpected and steep increase in price level on the purchasing power of Slovak families in 2022 and 2023. This is the first and the only paper that looks at distributional impacts of an inflationary shock in Slovakia. We combine a microsimulation model SIMTASK with the data on expenditure from the Household Budget Survey to quantify the net effect of an inflationary shock together with the cushioning effects of government measures and economic adjustments in the form of inflation-induced wage growth and an additional valorisation of social benefits. We show that in 2022, the government measures were well targeted and succeeded in offsetting a significant part of a purchasing power drop for low-income families. For high-income families, economic adjustments were the crucial component offsetting a significant part of their purchasing power drop. However, the overall net effect on purchasing power was negative (6 % for an average family) and it holds true for each income decile and family type. The story is different in 2023. It turns out that despite the high inflation, the macroeconomic adjustment hand in hand with adopted government measures, including a generous price cap on energy prices, more than compensate for the effects of unexpected inflation (3 % increase for an average family). This holds true for all analysed income categories, except for the lowest income decile. When looking at family types, the best off are families without children, often consisting of pensioners.
    Keywords: microsimulation, inflationary shock, distributional effect, tax and transfer policy
    JEL: C81 D31 E31 H24 I38
    Date: 2023–11
  32. By: Corsetti, G.; Maeng, S. H.
    Abstract: Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises.
    Keywords: Debt Sustainability, Discretionary Fiscal Policy, Expectations, Foreign Reserves, Self-Fulfilling Crises, Sovereign Default
    JEL: E43 E62 F34 H50 H63
    Date: 2023–11–08
  33. By: Jiro Sugie (Bank of Japan); Junichiro Hatogai (Bank of Japan)
    Abstract: In recent years, central banks of various countries have conducted experiments to distribute wholesale CBDC using DLT. Underlying these developments are the growing momentum for upgrading existing payment systems and efforts by the private sector to provide new payment services. A closer look at the experiments confirms a broadening of the focus areas covered by the experiments, from payments to securities settlement and cross-border settlement. While the findings of these experiments suggest that the introduction of wholesale CBDC has the potential to bring about improvements including the shortening of long transaction chains and the reduction of costs, they also point to further needs, such as adjusting the rules for establishing a distribution platform that spans multiple countries and examining the macroeconomic impact of the introduction of such a platform. Meanwhile, as an approach that does not involve the establishment of a DLT platform or the introduction of wholesale CBDC, there are moves to improve payments by enhancing and utilizing existing payment and settlement systems. It is important to continue to carefully monitor these developments and work closely with relevant parties both at home and abroad
    Date: 2023–11–30
  34. By: Yukihiko Funaki; Kohei Kawamura; Nobuyuki Uto; Kozo Ueda
    Abstract: We identify a minimal set of components to generate price stickiness by a laboratory experiment on an oligopolistic price setting game. Our design involves repeated aggregate shocks to the market but features no uncertainty in their timing and magnitude, no real-nominal distinction, or no need to compute the best response to the prices of the other subjects. We find persistent price stickiness when prices are strategic complements and fully anticipated shocks lower the equilibrium price. We argue that the observed downward stickiness can be attributed to the presence of strategic uncertainty and strategic complementarity, combined with an asymmetric payoff structure such that adjusting an individual price faster than others toward the lower equilibrium price can potentially lead to a significant loss, compared to faster adjustment to the higher equilibrium price.
    Keywords: strategic complements; sticky prices; bounded rationality
    JEL: C92 E32 E52
    Date: 2023–12
  35. By: Truman F. Bewley (Yale University)
    Abstract: Why do the prices of some products change little during business cycles while the prices of others vary wildly and tend to rise during economic booms and fall during recessions? In particular, why do the prices of some products not fall or fall only a little when the demand for them declines dramatically. It is not surprising that in highly competitive industries prices fluctuate with shifts in demand and supply, but what explains the stability of prices in markets where firms have more direct control of prices? These questions are central to an understanding of business cycles, and good answers would also help us predict how prices will behave.
    Date: 2023–12–11
  36. By: Alfred A. Haug; Tomasz Łyziak; Anna Sznajderska
    Abstract: We empirically explore monetary and fiscal policy coordination in Poland. In particular, we study whether the empirical effects of a government spending shock on output depend on the stance of monetary policy. We find no such dependency and conclude after various sensitivity checks, including to slack in the economy, that the government spending multiplier is not dependent on monetary policy or the business cycle. The cumulative multiplier reaches a peak value of 1.11 one year after a government spending shock: a 1 złoty increase in government spending, be it government consumption purchases or government investment or any combination of both, increases real GDP by 1.11 złoty. We identify a crowding-out effect of private investment, but it is relatively small and the overall impact of the government investment shock on GDP is above unity
    Keywords: government spending multiplier, monetary policy, local projections, Poland
    JEL: E62 E63 H50
    Date: 2022–11

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