|
on Monetary Economics |
| By: | NAKAJIMA, Jouchi |
| Abstract: | This study develops a regime-switching Phillips curve model to estimate trend inflation. Extending the earlier work, we allow trend inflation, the slope of the Phillips curve, and the oil price pass-through rate to follow a regime-switching process. An empirical analysis using Japan’s consumer price index illustrates that including the oil price and its time-varying passthrough rate improves the model’s ability to forecast inflation. The empirical results also show that the obtained trend inflation highly correlates with firms’ inflation expectations. |
| Keywords: | Inflation expectations, Oil prices, Phillips curve, Regime-switching model, Trend inflation |
| JEL: | C22 E31 E42 E52 E58 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:750&r=mon |
| By: | Marwil J. Dávila-Fernández; Germana Giombini; Edgar J. Sánchez-Carrera |
| Abstract: | Recent empirical evidence is challenging the conventional paradigm in macroeconomics, which assumes money is neutral in the long run. On the other hand, central banks are gradually acknowledging that climate change can potentially impact price stability, and the term climateflation has entered the vocabulary of policymakers. This paper contributes to current developments between these two major themes. We present an Overlapping Generations (OLG) model to study the interplay between conventional monetary policy and the environment in a context where the so-called “independence hypothesis” does not hold. Individuals are assumed to derive utility from consumption and environmental quality. Firms operate in a competitive market, but output is weighted by a damage function reflecting a negative externality from ecological degradation. We innovate by linking the environment to inflation through inflationary expectations in a modified Phillips curve. Central banks set the nominal interest rate using a generalised Taylor rule. They affect wealth composition via the individual’s intertemporal optimisation problem. Numerical experiments allow us to assess the robustness of the trade-off between environmental quality and economic activity when (i) expectations are more responsive to climateflation, (ii) the monetary authority is more inflation-averse, (iii) the central bank increases the inflation target, and (iv) fiscal policy is less stringent. |
| Keywords: | Monetary policy; Inflation targeting; Green transition; OLG. |
| JEL: | E52 E60 O44 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:905&r=mon |
| By: | Ferrara, Federico M.; Masciandaro, Donato; Moschella, Manuela; Romelli, Davide |
| Abstract: | Previous scholarship on central bank accountability has generally focused on monetary authorities’ deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB's primary mission. These findings reveal the existence of a “political” Phillips curve reaction function, which enriches our understanding of the principal–agent accountability relationship between politicians and central bankers. |
| Keywords: | accountability; central bank independence; European Central Bank; European Parliament; politicians |
| JEL: | E50 E52 E58 |
| Date: | 2022–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:114278&r=mon |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | We develop a general policy analysis framework for an open economy that features nominal rigidities and financial frictions giving rise to endogenous PPP and UIP deviations. The efficient allocation can be implemented with monetary policy closing the output gap and FX interventions eliminating UIP deviations. When the “natural” real exchange rate is stable, both goals can be achieved solely by monetary policy that fixes the exchange rate — an open-economy divine coincidence. More generally, optimal policy features a managed float/crawling peg complemented with FX forward guidance and macroprudential accumulation of FX reserves, in line with the “fear of floating” observed in the data. Capital controls are not necessary to achieve the frictionless allocation, but they facilitate the extraction of rents in the currency market. Constrained unilateral policies are not optimal from the global perspective, and international cooperation features a complementary use of FX interventions across countries. |
| JEL: | F30 F40 G10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31933&r=mon |
| By: | Anton Nakov (ECB and CEPR); Carlos Thomas (Banco de España) |
| Abstract: | We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transitions to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads. |
| Keywords: | Ramsey optimal monetary policy, climate change externalities, Pigouvian carbon taxes, green QE |
| JEL: | E31 E32 Q54 Q58 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2334&r=mon |
| By: | Kateryna Savolchuk (National Bank of Ukraine); Tetiana Yukhymenko (National Bank of Ukraine) |
| Abstract: | This study investigates the influence of central bank credibility in forming inflation expectations, using data obtained from business surveys conducted by the National Bank of Ukraine. We employ a two-stage treatment model to mitigate the potential bias of the endogeneity of firms' answers. The results confirm the vital role of credibility in shaping inflation expectations. Notably, credibility reduces sensitivity to past inflation deviations. Robustness checks, which are based on bootstrapping, reinforce the reliability of the findings. Our study underscores the importance of central bank credibility in anchoring inflation expectations. |
| Keywords: | credibility, inflation expectations, endogeneity, surveys |
| JEL: | C51 E58 E70 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:04/2023&r=mon |
| By: | Beatriz González; Galo Nuño Barrau; Dominik Thaler; Silvia Albrizio |
| Abstract: | This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism. |
| Keywords: | monetary policy, firm heterogeneity, financial frictions, capital misallocation |
| JEL: | E12 E22 E43 E52 L11 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1148&r=mon |
| By: | Chadwick, Meltem (South East Asian Central Banks Research and Training Centre); Cherry, Rennae (Reserve Bank of New Zealand); Galimberti, Jaqueson (Asian Development Bank) |
| Abstract: | This paper uses microdata from the Reserve Bank of New Zealand’s Household Inflation Expectations survey to obtain an accurate read of households’ true inflation expectations by studying how different demographic groups respond (or do not respond) to the inflation expectations question in the survey. We find nonresponses lead to substantial underrepresentation of some demographic groups in the survey: young, female, low-income, and minority ethnic groups have lower response rates. How the survey is conducted also affects item response rates. The survey response rates increase when the survey is conducted online and when inflation rates deviate from the central bank’s target range. Using a sample selection model, we assess whether the survey has item nonresponse bias by comparing the demographic characteristics of responders and nonresponders. After accounting for selection, we find that observed differences in inflation expectations by gender, ethnicity, and income decrease substantially, while differences by age increase. We quantify and demonstrate how to adjust average inflation expectations for bias caused by item nonresponse. We show that there is a positive bias, and the aggregate inflation expectation series shifts down after the adjustment. |
| Keywords: | inflation expectations; household surveys; item nonresponse; demographic heterogeneity |
| JEL: | C83 D84 E31 E71 |
| Date: | 2023–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0706&r=mon |
| By: | Meltem Chadwick; Tyler Smith (Reserve Bank of New Zealand) |
| Abstract: | This note explores which survey measures of inflation expectations improve the forecast performance of linear time series models for headline inflation in New Zealand over the period 1996-2021. We use inflation expectations from surveys of consumers, businesses and professional forecasters in a pseudo-out-of-sample forecasting exercise for headline inflation up to 12 quarters ahead. Incorporating survey-based inflation expectations data in linear models typically enhances the accuracy of headline inflation forecasts across different horizons. Among different survey measures, the mean of RBNZ 1-year household inflation expectations survey demonstrates the strongest predictive ability. For policy purposes, a range of measures of expectations are always taken into account, and many different measures contain useful information for policy. Key findings: - Inflation expectations are essential for effective monetary policy as expectations affect current pricing behaviour. - Our results indicate that forecasts for headline inflation that include inflation expectations are significantly better than similar forecasts without survey inflation expectations. - The 1-year mean RBNZ survey of household inflation expectations has the best predictive power for the headline inflation, although the difference is small relative to other survey measures. |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2023/2&r=mon |
| By: | Metiu, Norbert; Prieto, Esteban |
| Abstract: | The uncertainty of U.S. core inflation, measured by the stochastic volatility of forecast errors, has soared to a level not seen in nearly five decades since the COVID-19 pandemic hit the global economy. Prices, consumption, and production increase after a positive shock to core inflation uncertainty in a vector autoregression. Endogenous changes in household inflation expectations help to understand the transmission mechanism through which an inflation uncertainty shock generates positive demand effects. Households expect significantly higher inflation when confronted with a surprise increase in the uncertainty of core consumer prices. In turn, they consume more, which boosts aggregate demand. |
| Keywords: | Household Expectations, Inflation, Uncertainty, Stochastic Volatility, Structural VAR |
| JEL: | E31 E32 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:280419&r=mon |
| By: | Christina Anderl; Guglielmo Maria Caporale |
| Abstract: | The recent Covid-19 pandemic has disrupted global supply chains and led to large increases in shipping costs. This paper first provides shipping cost mean and uncertainty measures by using the endogenous regime switching model with dynamic feedback and interactions developed by Chang et al. (2023). The uncertainty indicator measures overall risk in the shipping market and is shown to represent a useful addition to the existing set of economic and financial uncertainty indices. Both the shipping cost mean and uncertainty measures are then included in structural VAR models for the US, the UK and the euro area to examine the pass-through to headline CPI, core CPI, PPI and import price inflation vis-à-vis other global and domestic shocks. The results suggest that shipping cost uncertainty shocks have sizeable effects on all inflation measures and are characterised by a stronger pass-through than that of other domestic or global shocks. Unlike the latter, they also affect significantly core CPI inflation. These findings imply that shipping cost mean and uncertainty should also be considered by policymakers when assessing the global drivers of inflation. |
| Keywords: | shipping cost uncertainty, inflation pass-through, endogenous regime switching |
| JEL: | C13 E31 E37 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10798&r=mon |
| By: | Rennae Cherry; Eric Tong (Reserve Bank of New Zealand) |
| Abstract: | Clear communication helps New Zealanders understand monetary policy and its relationship to them. Communication explains to the public the purpose and rationale behind monetary policy decisions and, when done right, may enhance monetary policy transmission via different channels (RBNZ, 2020; Blinder et al. 2008; Blot and Hubert, 2018). With this motivation, we apply textual analysis to flagship publications of the Reserve Bank—with the aim of assessing Reserve Bank communications and supporting its mandates of maintaining price stability over the medium term and supporting maximum sustainable employment. Key findings: - Textual analysis shows that keywords mentioned in the Monetary Policy Statements (MPS) align with the objectives in the Remit. - The tone of MPS has been neutral and objective, even as the sentiment in the MPS moves in tandem with household and business confidence surveys. - Similar to monetary policy documents published by central banks overseas, the MPS are complex and may not be accessible to the general public. However, readability, which measures the complexity of a text based on sentence length and the number of syllables in words, has remained stable over 1997Q1-2021Q4 and has marginally improved recently. - The Monetary Policy Snapshots, introduced in 2018, are easier to read than the main part of the MPS – they are accessible to a high school graduate rather than a university graduate. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2023/4&r=mon |
| By: | Julian di Giovanni; Şebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim; Muhammed Ali 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. |
| Keywords: | inflation, international spillovers, global production network |
| JEL: | E20 E30 E60 F10 F40 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10789&r=mon |
| By: | Kevin L. Kliesen |
| Abstract: | The 1994-95 Fed tightening episode was one of the most notable in the Fed’s history. First, the FOMC raised the policy rate by 300 basis points in a year, even though headline and core inflation were trending lower prior to the liftoff that occurred in February 1994. Second, the Fed’s actions caught the Treasury market by surprise, triggering a sharp decline in long-term bond prices. Third, Fed Chair Alan Greenspan and the Federal Open Market Committee were regularly surprised that inflation was not rising by more than the forecasts suggested during the episode. This article presents some evidence that the Greenbook forecast systemically, albeit modestly, overpredicted CPI inflation during the tightening period. Greenspan eventually concluded that the nascent strengthening in labor productivity growth that was a key factor in restraining the growth of unit labor costs, and thus in keeping inflation pressures in check. At the same time, the success of the episode stemmed importantly from the decision by Greenspan and the FOMC to increase the policy rate to a level deemed restrictive for most of 1995. This effort reduced longer-run inflation expectations without triggering a recession. By that metric the 1994-95 tightening episode was a roaring success. Although not the focus of this article, the 1994-95 tightening episode holds important lessons for the FOMC in late 2023, which is attempting to defuse a sharp and unexpected increase in headline and core inflation to levels not seen since the early 1980s without triggering a recession. |
| Keywords: | monetary policy; inflation; forecasts |
| JEL: | E31 E32 E52 E58 E65 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:97435&r=mon |
| By: | Sangyup Choi; Tim Willems; Seung Yong Yoo |
| Abstract: | Combining industry-level data on output and prices with novel monetary policy shock estimates for 102 countries, we analyze how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our findings are informative on the importance of various transmission mechanisms, as they are thought to vary systematically with the included characteristics. Results suggest that monetary policy has greater output effects in industries featuring assets that are more difficult to collateralize or consisting of smaller firms, consistent with the credit channel, followed by industries producing durables, as predicted by the interest rate channel. The credit channel is stronger during bad times as well as in countries with lower levels of financial development, in line with financial accelerator logic. We do not find support for the cost channel of monetary policy, and only limited support for a channel running via exports. Our database (containing monetary policy shock estimates for 176 countries) may be of independent interest to researchers. |
| Keywords: | monetary policy transmission, industry growth, financial frictions, heterogeneity in transmission, monetary policy shocks |
| JEL: | E32 E52 F43 G20 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-64&r=mon |
| By: | Elosegui Pedro Luis; Sangiacomo Maximo |
| Abstract: | The Central Bank of Argentina (BCRA) implements a monthly Survey of Business Economic Perspectives to capture the business climate and economic perspectives. The survey, includes both qualitative and quantitative questions on past and expected change in different economic variables of the main companies in Argentina. This unique proprietary data is used to approximate the price setting behaviour of the firms in the domestic markets. We postulate an econometric model where the firms’ dynamic on their expected domestic prices are based on (i) firm’s past and expected information (prices, input costs and inventories) and (ii) macroeconomic variables (economic activity, foreign exchange rate, interest rate and inflation rate). The results indicate the importance of input costs (domestic and imported) and the macroeconomic variables (especially the exchange rate and the inflation rate) in the expected price dynamics of the analyzed companies and are in line with the literature analyzing price setting behaviour under macroeconomic uncertainty. Foreign exchange rate pass-through, markups on input prices and forward-looking behaviour in price setting generate important challenges for the anti inflationary monetary policy. |
| JEL: | E30 E50 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4650&r=mon |
| By: | Lucas Herrenbrueck, Zijian Wang (Simon Fraser University) |
| Abstract: | The Euler equation of a representative consumer – or its long-run counterpart, the Fisher equation – is at the heart of modern macroeconomics. But it prices a bond – short-term, perfectly safe, yet perfectly illiquid – that does not exist in reality, where most safe assets can be easily traded or pledged as collateral to obtain money, or even for goods and services directly, and their prices reflect their moneyness as much as their dividends. In this paper, we deploy a New Monetarist framework to capture these facts and derive implications for monetary policy and asset pricing. Consistent with the model, we find that the return on a hypothetical illiquid bond, estimated via inflation and consumption growth, behaves very differently from the return on safe and liquid assets. This distinction helps resolve a great number of puzzles associated with the Euler/Fisher equation, and points to a better way of understanding how monetary policy affects the economy |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp23-11&r=mon |
| By: | Antonio Afonso (ISEG - School of Economics and Management, Universidade de Lisboa; REM - Research in Economics and Mathematics; UECE - Research Unit on Complexity and Economics; CESifo); Josee Alves (ISEG - School of Economics and Management, Universidade de Lisboa; REM - Research in Economics and Mathematics; UECE - Research Unit on Complexity and Economics; CESifo); Olegs Matvejevs (Latvijas Banka); Olegs Tkacevs (Latvijas Banka) |
| Abstract: | We examine the relationship between inflation and fiscal sustainability with a two-step approach.In the first step, we estimate to estimate a country-specific time-varying measure of fiscal sustainability using the fiscal reaction function. This function captures the response of the primary balance to changes in the public debt ratio. In the second step, we examine how various measures of inflation such as headline inflation, core inflation, energy inflation, and food inflation affect the estimate of fiscal sustainability found previously. Our findings indicate that higher inflation rates contribute positively to the measure of fiscal sustainability, specifically through core inflation causing an improvement in fiscal sustainability, while the effect of energy inflation is conversely found to be negligible or even negative. These results imply that the initial burst of inflation caused by the energy price shock in 2021 probably did not help improve fiscal sustainability, whereas the subsequent high core inflation had a positive effect. |
| Keywords: | fiscal sustainability, fiscal reaction function, time-varying coefficients, euro area, inflation, core inflation, panel data |
| JEL: | C23 E31 E62 H50 H62 |
| Date: | 2023–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:202308&r=mon |
| By: | Dávila-Ospina, Andrés O. (Universidad de los Andes) |
| Abstract: | What would happen if the central bank makes a mistake facing a crisis? This paper argues that it would leave scars in the long-run trend of production. If monetary policy is not expansionary-enough during crises, an inefficient rise of the interest rate intensifies the scarring effects of recessions. The hysteresis effect comes from higher innovation costs that induce a drop in productivity growth, an indiscriminate firms’ exit process, and a rise in unemployment. This article presents a theoretical model that rationalizes these mechanisms. The theory suggests that, in the longrun, even though growth recovers to its pre-shock rate and the economy converges to full firms’ survival and full employment, the long-term output level is persistently lower than the level it would have reached in the absence of errors. |
| Keywords: | Hysteresis; Monetary Policy; Endogenous Growth; Productivity; Firms’ Exit; Unemployment. |
| JEL: | E52 E58 O11 O40 O41 O42 O47 |
| Date: | 2023–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:021003&r=mon |
| By: | Leonor Coutinho; Mirko Licchett |
| Abstract: | Inflation differentials in the euro area widened in 2022 to historically high levels in the context of a surge in energy and other commodity prices. On the one hand, some degree of inflation differentials within the euro area may be seen as a natural part of an adjustment process, rather than a problem per se for economic policy. On the other hand, persistent inflation differentials can adversely affect competitiveness in higher inflation countries. This paper uses principal component and panel regression models to investigate the drivers of inflation differentials. Our empirical estimates suggest that the asymmetric impact of a common shock – mostly related to the increase in energy and food prices – can explain around half of the increase in headline inflation in 2022 in the euro area. The estimated responses to the common factor increase with energy intensity, reflecting the important role of energy prices in driving global shocks to inflation, and decline with the share of services in Gross Value Added (GVA), suggesting that countries with a larger manufacturing sector have been more sensitive to common factors. The common factor is also found more prominent in 2020-22 than in previous periods. The remainder of inflation developments can be explained by inflation persistence, along with more local and crisis related factors. This persistence might be associated with a relatively long pass-through for the energy shock, related to the staggered nature of supply contracts and price setting in the euro area. Indeed, when estimated without the lagged dependent variable, controlling for residual autocorrelation, our results suggest that common factors can account for up to two thirds of the increase in inflation in 2022 while the contribution of local drivers remains more limited. |
| JEL: | E31 F45 Q43 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:197&r=mon |
| By: | Suveg, Melinda (Research Institute of Industrial Economics (IFN)) |
| Abstract: | The New Keynesian model, augmented with the working capital channel, predicts that a rise in the policy rate causes firms that use more working capital to increase their prices more, and that the pass-through is gradual because of price rigidity. Using a unique dataset on firm-product-level price indices, I show that a one percentage point monetary policy shock leads to a 6 percent increase in the firm’s price and that the pass-through takes about 4 months. The pass-through in the microdata is 6 times larger than it is implemented in the supply-side block of standard New Keynesian DSGE models. |
| Keywords: | Working capital; Price setting; Inflation; Monetary policy; Pass-through |
| JEL: | E31 E37 E52 L11 |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1482&r=mon |
| By: | Karsten O. Chipeniuk; Gulnara Nolan (Reserve Bank of New Zealand) |
| Abstract: | The paper investigates the effect of monetary policy shocks on the distribution of wealth using a stylised model of the New Zealand economy. We find that a 50 basis point reduction in the OCR leads to a more equal distribution of wealth in the economy – with the Gini coefficient falling by approximately 0.5 percentage points. This drop occurs gradually and reaches its trough after 5 quarters, remaining persistently lower thereafter. NB. The key missing channel in the model used in this Analytical Note is asset prices, which may also change following a monetary policy shock - this is the portfolio composition (capital gains) channel, which will be investigated in future work. In New Zealand there has been a sharp increase in house prices over the past 18 months, in part due to lower mortgage interest rates. This research aims to take initial steps in analysing the distributional implications of low interest rates by building a macroeconomic model that captures changes in savings and income flows of different households. The version of the model used in this note does not yet capture the impact of capital gains, but future versions will aim to cast more light on asset prices. About the research programme: The Reserve Bank is carrying out a wide range of research about the different ways changes in interest rates could affect the distribution of wealth and income in New Zealand. Each research paper is aimed at giving the bank (and other decision-makers) parts of the jigsaw puzzle, to help our understanding, rather than a complete picture all at once. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2022/01&r=mon |
| By: | Diego Comin; Robert C. Johnson; Callum J. Jones |
| Abstract: | We develop a multisector, open economy, New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up, similar to reduced-form markup shocks. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff. |
| Keywords: | Monetary policy; Goods constraints; Import constraint; Inflation; Occasionally binding constraint; Supply chain constraints |
| JEL: | E30 E50 |
| Date: | 2023–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-75&r=mon |
| By: | Michael D. Bordo; Edward S. 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. |
| JEL: | B0 E58 G28 H1 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31915&r=mon |
| By: | Yoosoon Chang; Fabio Gómez-Rodríguez; Christian Matthes |
| Abstract: | We investigate the influence of the U.S. government’s spending and taxation decisions, along with the monetary policy choices made by the Federal Reserve, on the dynamics of the nominal yield curve. Aggregate government spending moves the long end of the yield curve, whereas monetary policy and changes in taxation move the short end of the yield curve on impact. Disentangling different types of government spending, we find that only government consumption exerts a discernible influence on the short end of the yield curve. The effects are generally transient and disappear after one year. |
| Keywords: | yield curve, fiscal policy, monetary policy, functional time series |
| JEL: | E50 E62 G10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-65&r=mon |
| By: | António Afonso; José Alves; Olegs Matvejevs; Olegs Tkacevs |
| Abstract: | We examine the relationship between inflation and fiscal sustainability with a two-step approach. In the first step, we estimate to estimate a country-specific time-varying measure of fiscal sustainability using the fiscal reaction function. This function captures the response of the primary balance to changes in the public debt ratio. In the second step, we examine how various measures of inflation such as headline inflation, core inflation, energy inflation, and food inflation affect the estimate of fiscal sustainability found previously. Our findings indicate that higher inflation rates contribute positively to the measure of fiscal sustainability, specifically through core inflation causing an improvement in fiscal sustainability, while the effect of energy inflation is conversely found to be negligible or even negative. These results imply that the initial burst of inflation caused by the energy price shock in 2021 probably did not help improve fiscal sustainability, whereas the subsequent high core inflation had a positive effect. |
| Keywords: | fiscal sustainability; fiscal reaction function; time-varying coefficients; euro area; inflation; core inflation; panel data. |
| JEL: | C23 E31 E62 H50 H62 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03032023&r=mon |
| By: | Ko Munakata (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail: kou.munakata@boj.or.jp)); Takeshi Shinohara (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: takeshi.shinohara@boj.or.jp)); Shigenori Shiratsuka (Professor, Keio University (E-mail: shigenori.shiratsuka@keio.jp)); Nao Sudo (Associate Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Tsutomu Watanabe (Professor, University of Tokyo (E-mail: watanabe@e.u-tokyo.ac.jp)) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:23-e-07&r=mon |
| By: | Pianta, Mario |
| Abstract: | In order to understand the rise and fall of inflation of 2022-2023, new theories and analytical frameworks are needed, closely connected the profound changes in monetary and fiscal policies that have accompanied the wave of price increases. This paper proposes a view of inflation as a set of distributive conflicts, develops a set of conceptual tools, reviews the recent empirical evidence and discusses policy responses. The rise of inflation was set in motion by the production distortions that emerged at the end of the covid-19 pandemic and by major rises in energy prices, accelerated by the start of the Ukraine war. Price rises then spread throughtout the economy, due to business search for higher profits. Price levels are now stabilizing at a significantly higher level, with lasting consequences on income distribution, the purchasing power of wages, and financial values. Facing inflation, economic policies have experienced a major turn, with monetary authorities in the United States and Europe turning to restrictive policies. The macroeconomic outlook, the trajectories of structural change, the distribution of income and the dynamics of finance are deeply affected by the new context; possible policy alternative, with a more coordinated framework for public action, are discussed in the conclusions of the paper. |
| Keywords: | Inflation, income distribution, finance, economic policies |
| JEL: | E31 E51 E61 E64 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119345&r=mon |
| By: | Michał Greszta (Narodowy Bank Polski); Marcin Humanicki (Narodowy Bank Polski); Mariusz Kapuściński (Narodowy Bank Polski); Tomasz Kleszcz (Narodowy Bank Polski); Andrzej Kocięcki (Narodowy Bank Polski); Jacek Kotłowski (Narodowy Bank Polski); Michał Ledóchowski (Narodowy Bank Polski); Michał Łesyk (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Mateusz Pipień (Narodowy Bank Polski); Piotr Popowski (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski); Karol Szafranek (Narodowy Bank Polski); Grzegorz Szafrański (Narodowy Bank Polski); Dorota Ścibisz (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski); Ewa Wróbel (Narodowy Bank Polski) |
| Abstract: | This report presents the current body of knowledge on the monetary transmission mechanism in Poland. The presented findings confirm the impact of short-term interest rates on a range of macroeconomic variables, indicating in particular that following a monetary policy tightening there is – ceteris paribus – an appreciation of the domestic currency, and, with a lag, a decrease in the volume of credit, economic activity, and inflation. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:365&r=mon |
| By: | Maurice Obstfeld |
| Abstract: | This paper surveys the decline in real interest rates in advanced and emerging economies over the past several decades, linking that process to a range of global factors that have operated with different force in different periods. The paper argues that estimates of long-run equilibrium real rates (r̄) may not always furnish an accurate guide to the rate appropriate for short-term monetary policy (r*). It argues further that effective monetary should consider not only equilibrium in the market for domestic goods, but also the current account balance, financial conditions (including capital flows), and imperfect policy credibility. Equilibrium long-term real interest rates have risen recently according to market indicators. However, the main underlying factors that have pushed real interest rates down since the 1980s and 1990s – notably demographic shifts, lower productivity growth, corporate market power, and safe asset demand relative to supply – do not appear poised to reverse strongly enough to drive a big and durable rise in global real interest rates over the coming years. Low equilibrium interest rates may well continue periodically to bedevil monetary policy and financial stability. |
| JEL: | E43 E44 E52 F36 N10 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31949&r=mon |
| By: | Meltem Chadwick; Aynaz Nahavandi (Reserve Bank of New Zealand) |
| Abstract: | Housing matters- the big picture: House prices in New Zealand are driven by a wide range of factors – interest rates are just one part of the big picture. A global decline in interest rates and strong population growth in New Zealand has had an outsized impact on house prices because the supply of new homes has been slow to respond. This includes both opening up new land and building new homes. Tax rules in NZ favour housing against other investments. House prices are influenced by employment and incomes, as well as bank lending rules and the availability of mortgages. House prices were boosted by falling interest rates around the world in the past decade (post GFC). The Reserve Bank of NZ moves short-term interest rates to keep inflation low and stable and support employment at its maximum sustainable level. We consider the impact of our interest rate changes on house prices and how they affect the Government policy for sustainable house prices. We do not aim to drive house prices up or to stop them falling. The factors affecting house prices have changed. Building consents are now high, population growth has slowed dramatically, interest rates are rising and we are seeing house prices cool down in 2022, after a rapid rise last year. We are carrying out a wide range of research to understand the key drivers of house prices. We need to be clear about what the Reserve Bank can and cannot do and what others could do to fix this problem, which has been many decades in the making. Key findings of Analytical Note: - We analyse the effect of a monetary policy shock on household credit and real house prices in New Zealand through one of the channels of transmission, the credit channel. - We confirm that monetary policy stimulus triggers moderate house price movements in New Zealand. - We find out that an unanticipated increase in policy rate reduces real house prices by up to -1.6% and the growth rate of residential loans by -0.6% after 2.5 years. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2022/09&r=mon |
| By: | Chao Gu (University of Missouri); Janet Hua Jiang (Bank of Canada); Liang Wang (University of Hawaii) |
| Abstract: | We study the effects of the firm's credit condition on labor market performance and the relationship between expected inflation and unemployment in a new monetarist model. Better credit condition improves labor market outcomes as fi rms save on their cash financing cost, improve pro tability, and create more vacancies. Inflation affects unemployment through two opposing channels. First, inflation increases the firm's fi nancing cost, which discourages job creation and increases unemployment. Second, inflation lowers wages through bargaining because unemployed workers more heavily rely on cash transactions and suffer more from inflation compared to employed workers. This encourages job creation. The overall effect of inflation on employment depends on the firm's credit condition. We calibrate the model to match U.S. data. The calibrated model suggests a downward-sloping Phillips curve with flexible wages. Finally, we fi nd that improvement in firm credit conditions is consistent with the flattening of the Phillips curve. |
| Keywords: | toxic assets, market freezes, negative returns, liquidity |
| JEL: | E24 E31 E44 E51 |
| Date: | 2023–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:2314&r=mon |
| By: | Rezk Ernesto |
| Abstract: | Argentina is being subject to periods of long lasting high inflation (also known as chronic inflation), in which stabilisation plans, based upon different tools (e.g.use of interest rates or monetary aggregates) fell short of being successful and various explanations were resorted io for explaining failed experiences; in this connection, whereas in some cases the blame was put on fiscal policies favouring high fiscal deficits and excessive money printing, there were also explanations seeking the cause for inflation on supply rigidities as well as on oligopolist behaviours by determined economic agents, let alone some natural causes. In trying to more precisely enquire over this long lasting problem in Argentina, as well as on the reasons for stabilisation plans´ poor performance in Argentina, the paper includes an anylisis of stylized facts during four presidential terms (period 2007-2019) based upon the theoretical content of G. Calvo´s seminal paper "Fighting Chronic Inflation with Interest Rates". |
| JEL: | E58 E63 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4689&r=mon |
| By: | Darracq Pariès, Matthieu; Dées, Stéphane; Parisi, Laura; Sun, Yiqiao; De Gaye, Annabelle |
| Abstract: | In this paper we analyse the sensitivity of the macroeconomic outcomes under the Network for Greening the Financial System’s (NGFS’s) Phase III net-zero and delayed transition scenarios to different monetary and fiscal policy settings. In doing so, we provide a rare application of the NGFS climate scenarios to economic assessment through the lens of the macroeconomic modelling frameworks underlying the scenario construction (e.g. NiGEM). Using the model to disentangle the main drivers of the scenarios, we show that gross domestic product (GDP) growth is shaped by physical and transition shocks jointly, whereas transition shocks account for most of the inflationary pressure. As regards alternative policy settings within the model, it turns out that Fiscal recycling options become more discriminant in terms of GDP impact in the medium term. Full recycling through government investment yields the strongest output multiplier, whereas recycling through household transfers or reduced income taxes yields the lowest multiplier. During the transition, euro area macroeconomic variables respond very similarly if two-pillar or price level-targeting monetary policy rules are followed. The Taylor- rule, reacting to inflation and output gap, yields higher and more persistent inflation as well as stronger short-term interest rate increases. These findings are certainly model-specific but do reflect the policy sensitivity embedded of the NGFS scenarios, within the confines of the very model used to build them up. JEL Classification: Q54, E3, E6, D6 |
| Keywords: | climate scenarios, fiscal policy, modelling strategy, monetary policy |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2023336&r=mon |
| By: | Philippe Bacchetta; J. Scott Davis; Eric van Wincoop |
| Abstract: | Since 2007, an increase in risk or risk aversion has resulted in a US dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007), (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the absence of global dollar demand shocks. Central bank swap lines mitigate these effects. |
| JEL: | E44 F31 G15 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31937&r=mon |
| By: | Khadija Essalhi (Doctorante à la faculté des sciences juridiques, économiques et sociales, Cadi Ayyad, Marrakech); Salah Eddine (Enseignant chercheur à la Faculté des sciences juridiques économiques et sociales, Cadi Ayyad, Marrakech.) |
| Abstract: | The aim of this article is to analyze the relationship between monetary policy and private investment in Morocco. It explains how private sector investors react to changes in monetary policy decisions. Our study aims to understand the effect of monetary policy action on private investment in Morocco over the period 1995-2020, using the VECM method. The results indicate that in the long term, the policy rate and the money supply have a negative and significant impact on private investment, while the exchange rate and credit granted to the private sector have a positive and significant impact on private investment. |
| Abstract: | Résumé L'objectif de cet article est d'analyser la relation entre la politique monétaire et les investissements privés au Maroc. Il explique comment les investisseurs du secteur privé réagissent aux modifications des décisions de la politique monétaire. Notre étude vise à comprendre l'effet de l'action de la politique monétaire sur les investissements privés au Maroc durant la période 1995-2020 en utilisant la méthode VECM. Les résultats indiquent que dans le long terme, le taux directeur et la masse monétaire ont un impact négatif et significatif sur les investissements privés, tandis que le taux de change et les crédits accordés au secteur privé ont un impact positif et significatif sur les investissements privés. Mots clés : Investissement privé, taux directeur, Politique monétaire Abstract The aim of this article is to analyze the relationship between monetary policy and private investment in Morocco. It explains how private sector investors react to changes in monetary policy decisions. Our study aims to understand the effect of monetary policy action on private investment in Morocco over the period 1995-2020, using the VECM method. The results indicate that in the long term, the policy rate and the money supply have a negative and significant impact on private investment, while the exchange rate and credit granted to the private sector have a positive and significant impact on private investment. Keywords: Private investment, Policy rate, Monetary policy |
| Keywords: | Private investment, Policy rate, Monetary policy, Investissement privé, taux directeur, Politique monétaire, African Scientific Journal, Investissement privé, taux directeur, Politique monétaire |
| Date: | 2023–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04303914&r=mon |
| By: | Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge; Hakan Yilmazkuday |
| Abstract: | This paper examines the drivers of fluctuations in global inflation, defined as a common factor across monthly headline consumer price index (CPI) inflation in G7 countries, over the past half-century. We estimate a Factor-Augmented Vector Autoregression model where a wide range of shocks, including global demand, supply, oil price, and interest rate shocks, are identified through narrative sign restrictions motivated by the predictions of a simple dynamic general equilibrium model. We report three main results. First, oil price shocks followed by global demand shocks explained the lion’s share of variation in global inflation. Second, the contribution of global demand and oil price shocks increased over time, from 56 percent during 1970-1985 to 65 percent during 2001-2022, whereas the importance of global supply shocks declined. Since the pandemic, global demand and oil price shocks have accounted for most of the variation in global inflation. Finally, oil price shocks played a much smaller role in global core CPI inflation variation, for which global supply shocks were the main source of variation. These results are robust to various sensitivity exercises, including alternative definitions of global variables, different samples of countries, and additional narrative restrictions. |
| Keywords: | oil prices, demand shocks, supply shocks, interest rate shocks |
| JEL: | E31 E32 Q43 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-66&r=mon |
| By: | Philippe Bacchetta; J. Scott Davis; Eric Van Wincoop |
| Abstract: | Since 2007, an increase in risk or risk aversion has resulted in a U.S. dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007) and (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the absence of global dollar demand shocks. Central bank swap lines mitigate these effects. |
| Keywords: | dollar; CIP deviations; Central Bank Swap Lines |
| JEL: | E44 F31 G15 |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:97492&r=mon |
| By: | Miguel C. Herculano (Reserve Bank of New Zealand) |
| Abstract: | Financial conditions refer to the state of financial variables such as interest rates, share prices, house prices and exchange rates. If financial conditions in the economy are ‘loose’, they stimulate real economic activity, and if they are ‘tight’, economic activity is constrained. The implications of financial conditions for macroeconomic outcomes has motivated the development of financial conditions indices (FCIs) that summarise common movements in financial and macroeconomic data. In general, an FCI offers a gauge of how shifts in central bank policy and economic outlooks, including foreign financial condition shocks, are filtering out into the real world. A timely FCI would help the policy-maker assess, almost in real time, whether financial conditions in the economy are loose or tight. However, the development of a timely FCI is not a straightforward task because the data used to estimate it may be available at different frequencies – semi-annual or quarterly or weekly or daily intervals - and are also often incomplete. Financial data are available at ‘high frequencies’, that is, sometimes even at a daily or hourly frequency, but may be hampered by missing values. On the other hand, macroeconomic time series such as Gross Domestic Product, GDP, or household consumption are only available at quarterly frequencies. In this paper, Miguel Herculano constructs a monthly FCI for New Zealand, using novel estimation techniques that resolve problems posed by missing data, and also enable the use of data that are available at different time frequencies. Since the new FCI is timelier than other alternatives that are available only at a quarterly frequency, it makes it more appealing to policymakers. The new FCI summarises information from 73 relevant financial and macroeconomic variables that are available at either monthly or quarterly frequencies. Interest rate spreads and mortgage lending are found to be the most relevant contributors to the dynamics of the monthly FCI. Estimates suggest that changes in the FCI have exerted relatively stronger influences on the New Zealand business cycle in more recent years. The predictive content of the financial conditions index for forecasting GDP and unemployment is not explored in the current version of the paper and is left for future research. About the research programme The Reserve Bank carries out a wide range of research related to monetary policy. This research programme may or may not change our overall view of monetary policy- whether rates should be raised or cut and by how much. The Reserve Bank’s overarching aim is to promote the prosperity and well-being of all New Zealanders. With monetary policy, our core focus is to support full employment and low and stable inflation. Monetary policy remains an effective, but blunt, tool to achieve these goals |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2022/1&r=mon |
| By: | Garcia-Cicco Javier; Bucacos Elizabeth; Mello Miguel |
| Abstract: | We study the effects of exchange rate interventions in Uruguay on relevant macroeconomic variables such as the exchange rate, inflation, activity, and interest rates. Instead of attempting to identify exogenous variations in the intervention policy (a frequent strategy in the related literature, but that raises many endogeneity concerns), we investigate the effect of interventions in dampening the impact of external shocks that are relevant determinants of exchange rate movements. This estimation is carried out through a novel econometric tool called constrained impulse response functions, which allows to construct counterfactual scenarios that are locally valid (i.e. marginal effects around average responses). We find that interventions can help dampen exchange rate effects, and may have non-trivial effects inflation as well, but generally no consequences in terms of activity. Importantly, these effects depend on the type and sign of the external shock under consideration. |
| JEL: | E58 E42 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4657&r=mon |
| By: | Meltem Chadwick; Karan Dasgupta; Punnoose Jacob (Reserve Bank of New Zealand) |
| Abstract: | Housing matters- the big picture: House prices in New Zealand are driven by a wide range of factors – interest rates are just one part of the big picture. A global decline in interest rates and strong population growth in New Zealand has had an outsized impact on house prices because the supply of new homes has been slow to respond. This includes both opening up new land and building new homes. Tax rules in NZ favour housing against other investments. House prices are influenced by employment and incomes, as well as bank lending rules and the availability of mortgages. House prices were boosted by falling interest rates around the world in the past decade (post GFC). The Reserve Bank of NZ moves short-term interest rates to keep inflation low and stable and support employment at its maximum sustainable level. We consider the impact of our interest rate changes on house prices and how they affect the Government policy for sustainable house prices. We do not aim to drive house prices up or to stop them falling. The factors affecting house prices have changed. Building consents are now high, population growth has slowed dramatically, interest rates are rising and we are seeing house prices cool down in 2022, after a rapid rise last year. We are carrying out a wide range of research to understand the key drivers of house prices. We need to be clear about what the Reserve Bank can and cannot do and what others could do to fix this problem, which has been many decades in the making. Key findings of Analytical Note: - House prices are expected to respond more to monetary stimulus when housing supply is less responsive to prices. We test this theory using data for New Zealand’s territorial authorities. - We confirm that monetary policy stimulus triggers stronger house price movements in those New Zealand territories where the supply of housing is relatively less responsive. - We consider an unanticipated increase of 40 basis points in the Official Cash Rate (OCR). The real median house price in the least supply responsive areas declined by over six times that of the most responsive areas, 12 months after the OCR increase (17.2% compared with 2.8%). |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2022/08&r=mon |
| By: | Gulnara Nolan; Eric Tong (Reserve Bank of New Zealand) |
| Abstract: | This Analytical Note is released as part of our review and assessment of monetary policy (RAFIMP). As part of a package to deliver monetary stimulus to the economy during the pandemic, in 2020, the Reserve Bank deployed the Funding for Lending Programme (FLP) to offer low-cost, 3-year funding to banks. The purpose of the FLP is to lower the funding costs of banks and, consequently, encourage banks to pass on the lower cost to households and businesses and increase lending. This paper evaluates this objective using a counterfactual analysis. Key findings: - The Funding for Lending Programme lowered the weighted-average funding spread of commercial banks by about 15 basis points from the policy announcement date — 12 August 2020 to the end of 2020. - Pass-through from funding costs to mortgage rates is slow. - As a result, the 6 month, 1-year, and 2-year mortgage rates would fall by about 10 to 20 basis points over a period of up to 1 year. These results may underestimate the full impact of the programme, as pass-through likely continues beyond the sample period of this study. Other estimation approaches may also yield higher estimated effects of FLP than those reported in this paper. |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2022/12&r=mon |
| By: | Jongrim Ha (World Bank, Prospects Group); M. Ayhan Kose (World Bank, Prospects Group; Brookings Institution; CEPR, and CAMA); Franziska Ohnsorge (World Bank, South Asia Region, CEPR, and CAMA); Hakan Yilmazkuday (Florida International University) |
| Abstract: | This paper examines the drivers of fluctuations in global inflation, defined as a common factor across monthly headline consumer price index (CPI) inflation in G7 countries, over the past half-century. We estimate a Factor-Augmented Vector Autoregression model where a wide range of shocks, including global demand, supply, oil price, and interest rate shocks, are identified through narrative sign restrictions motivated by the predictions of a simple dynamic general equilibrium model. We report three main results. First, oil price shocks followed by global demand shocks explained the lion’s share of variation in global inflation. Second, the contribution of global demand and oil price shocks increased over time, from 56 percent during 1970-1985 to 65 percent during 2001-2022, whereas the importance of global supply shocks declined. Since the pandemic, global demand and oil price shocks have accounted for most of the variation in global inflation. Finally, oil price shocks played a much smaller role in global core CPI inflation variation, for which global supply shocks were the main source of variation. These results are robust to various sensitivity exercises, including alternative definitions of global variables, different samples of countries, and additional narrative restrictions. |
| Keywords: | Oil prices; demand shocks; supply shocks; interest rate shocks. |
| JEL: | E31 E32 Q43 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2310&r=mon |
| By: | Uroš Herman (Aix-Marseille Univ., CNRS, AMSE, Marseille, France); Matija Lozej (Central Bank of Ireland, Macroeconomic Modelling) |
| Abstract: | This paper first provides empirical evidence that labour market outcomes for the less educated workers, who also tend to be poorer, are substantially more volatile than those for the well-educated, who tend to be richer. We estimate job finding rates and separation rates by educational attainment for several European countries and find that job finding rates are smaller and separation rates larger at lower educational attainment levels. At cyclical frequencies, fluctuations of the job finding rate explain up to 80% of unemployment fluctuations for the less educated. We then construct a stylised HANK model augmented with search and matching and ex-ante heterogeneity in terms of educational attainment. We show that monetary policy has stronger effects when the job market for the less educated and, hence, poorer workers is more volatile. The reason is that these workers have the most procyclical income coupled with the highest marginal propensity to consume. An expansionary monetary policy shock that increases labour demand disproportionally affects the labour market segment for the less educated, causing a strong increase in consumption. This further amplifies labour demand and increases the labour income of the poor even more, amplifying the initial effect. The same mechanism carries over to forward guidance. |
| Keywords: | heterogeneous agents, Search and matching, monetary policy, business cycles, Employment |
| JEL: | E40 E52 J64 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2334&r=mon |
| By: | Greppmair, Stefan; Jank, Stephan |
| Abstract: | We utilize the Eurosystem securities lending facilities as a laboratory to investigate the impact of collateral scarcity on market functioning. The reduction of securities lending fees, implemented in November 2020, provides a natural experiment for our analyses. This policy change results in a surge in the utilization of securities lending facilities, particularly for bonds with limited supply elasticity in the repo market. We find no evidence of substitution effects; instead, the overall activity in the repo market expands through the collateral multiplier. The improved pricing conditions alleviate collateral scarcity and enhance market quality in both the repo and cash markets. |
| Keywords: | safe assets, collateral scarcity, monetary policy, quantitative easing, securities lending facilities, repo, market functioning |
| JEL: | G10 G21 E50 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:280417&r=mon |
| By: | Boniface Ngah EPO (University of Yaoundé II, Cameroon); Jules Médard NANA DJOMO (University of Yaoundé II, Cameroon); Mark Wiykiynyuy TANGWA (University of Yaoundé II, Cameroon); Éric Dieudonné OBAMA OBAMA (University of Yaoundé II, Cameroon) |
| Abstract: | This study investigates the role that of mobile money on the effect of banking on income inequalities on a panel of 105 developing countries over a period from 1990-2019. We use the system GMMs estimator to examine this relationship for income inequality before as well as after taxes and transfers. Results show that increased in banking contributes to the upsurge in income inequalities in developing countries. Likewise, an increase in bank borrowing also contributes to an increase in income inequality in developing countries. These results were robust to spatial analysis for Sub-Saharan Africa and Latin America and the Caribbean. Policy enactment wise, developing countries should ameliorate mobile money services and access points to significantly reduce inequality. |
| Keywords: | Mobile banking; developing countries; poverty; inequality |
| JEL: | G20 O40 I10 I20 I32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:23/073&r=mon |
| By: | Casey Pender (Department of Economics, Carleton University) |
| Abstract: | This paper reexamines the traditional view that all unanticipated deflation can lead to bank panics. I identify two distinct deflationary shocks by employing a sign-restricted VAR on U.S. National Banking era with monthly data for prices, real output, and bank panics. While a negative aggregate demand shock increases the likelihood of a bank panic by 3.4%-8.4%, a positive aggregate supply shock has no significant effect. My results, therefore, align with recent theoretical work arguing that deflation's impact on banking panics also hinges on real output dynamics. Hence, not all deflation is cause for panic. |
| Keywords: | Bank Panics, Deflation, U.S. Monetary History, Sign Restrictions |
| JEL: | E31 E32 E44 E50 N11 N21 |
| Date: | 2023–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:23-04&r=mon |
| By: | Georgios Georgiadis; Gernot J. Müller; Ben Schumann |
| Abstract: | We develop a two-country business-cycle model of the US and the rest of the world with dollar dominance in trade invoicing, in cross-border credit, and in safe assets. The interplay between these elements—dollar trinity—rationalizes salient features of the Global Financial Cycle in the data: When its tide subsides, the dollar appreciates, financial conditions tighten, the world business cycle slows down, and emerging-market central banks face a trade-off between mitigating the recession and dampening price pressures. We find the dollar is no sideshow in this, but central for the transmission of the Global Financial Cycle to the world economy. |
| Keywords: | Dollar dominance, dominant currency paradigm, Bayesian proxy structural VAR model, convenience yield |
| JEL: | F31 F42 F44 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2058&r=mon |
| By: | Rafael Berriel; Eugenia Gonzalez-Aguado; Patrick J. Kehoe; Elena Pastorino |
| Abstract: | We apply ideas from fiscal federalism to reassess how fiscal authority should be delegated within a monetary union. In a real-economy model with fiscal externalities, in which local fiscal authorities have an informational advantage about the preferences of their citizens for public spending relative to a fiscal union, a decentralized regime is optimal for small federations of countries, whereas a centralized regime is optimal for large ones. We then consider a monetary-economy model, in which governments finance their expenditures with nominal debt, and inflation has a negative impact on aggregate productivity. When the monetary authority lacks commitment, the resulting time inconsistency problem generates an indirect endogenous fiscal externality. When a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more to reduce the level of distortionary taxes needed to finance the higher debt. The resulting fiscal externality naturally becomes more severe as the number of countries in the monetary union increases. Here also a decentralized fiscal regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority. |
| JEL: | E61 E63 F34 F42 F45 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31953&r=mon |