nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒01‒15
thirty-two papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The International Supply of Reserve Currency By Pierpaolo Benigno
  2. Macro-Financial Impacts of Foreign Digital Money By Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
  3. Expectations and the Neutrality of Interest Rates By John H Cochrane
  4. Monetary Policy Frameworks and Communication in the Caucasus and Central Asia By Omer Faruk Akbal; Klakow Akepanidtaworn; Ezequiel Cabezon; Mariarosaria Comunale; Mrs. Marina Conesa Martinez; Ms. Filiz D Unsal
  5. The effectiveness of macroprudential policies in managing extreme capital flow episodes By David de Villiers; Hylton Hollander; Dawie van Lill
  6. Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability By Sebastian Infante; Kyungmin Kim; Anna Orlik; André F. Silva; Robert J. Tetlow
  7. Optimal Taxation of Inflation By Mr. Damien Capelle; Yang Liu
  8. Navigating the Well-Being Effects of Monetary Policy: Evidence from the Euro Area By Mehdi El Herradi; Aurélien Leroy
  9. How Important Is the Information Effect of Monetary Policy? By Zhao Han; Chengcheng Jia
  10. Inflation and Inequality: How High Inflation is Affecting Different Australian Households By Danielle Wood; Iris Chan; Brendan Coates
  11. Can Fiscal Consolidation help Central Banks Fight Inflation? By Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé
  12. Pandemic-era Inflation Drivers and Global Spillovers By Julian di Giovanni; Åžebnem Kalemli-Özcan; Alvaro Silva; Muhammed A Yildirim
  13. Choosing Exchange Regimes in Oil-Exporting Countries:Frankel’s Proposal (CCB) versus the Actual Regime:The Case of Algeria (In Arabic) By Abderazak Madouri; Hacene Tchoketch-Kebir
  14. Inflation Dynamics in the Gulf Cooperation Council (GCC): What is the Role of External Factors? By Fozan Fareed; Abolfazl Rezghi; Charlotte Sandoz
  15. The International Spillovers of Synchronous Monetary Tightening By Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
  16. Dollar Shortages, CIP Deviations, and the Safe Haven Role of the Dollar By Philippe Bacchetta; J. Scott Davis; Eric van Wincoop
  17. Financial Dimensions of Inflationary Pressure in Developing Countries: An In-depth Analysis of Policy Mix By Ali, Amjad; Khokhar, Bilal; Sulehri, Fiaz Ahmad
  18. Borrowing and Spending in the Money: Debt Substitution and the Cash-out Refinance Channel of Monetary Policy By Elliot Anenberg; Tess C. Scharlemann; Eileen van Straelen
  19. Decomposing Supply and Demand Driven Inflation By Adam Hale Shapiro
  20. Wage-Price Spirals: What is the Historical Evidence? By Jorge Alvarez; John Bluedorn; Niels-Jakob Hansen; Youyou Huang; Evgenia Pugacheva; Alexandre Sollaci
  21. Forecasting Core Inflation and Its Goods, Housing, and Supercore Components By Todd E. Clark; Matthew V. Gordon; Saeed Zaman
  22. Can Passive Monetary Policy Decrease the Debt Burden? By Ruoyun Mao; Wenyi Shen; Shu-Chun S. Yang
  23. Is the Bond Market Competitive? Evidence From the ECB's Asset Purchase Programme By Johannes Breckenfelder; Pierre Collin-Dufresne; Stefano Corradin
  24. Forecasting Inflation in Argentina: A Probabilistic Approach. By Marinozzi Tomas
  25. Inflation, Fiscal Policy and Inequality By AMORES Antonio F.; BASSO Henrique; BISCHL Simeon; DE AGOSTINI Paola; DE POLI Silvia; DICARLO Emmanuele; FLEVOTOMOU Maria; FREIER Max; MAIER Sofia; GARCÍA-MIRALLES Esteban; PIDKUYKO Myroslav; RICCI Mattia; RISCADO Sara
  26. Commodity Prices, Financial Frictions, and Macroprudential Policies By Shigeto Kitano; Kenya Takaku
  27. Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility By Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
  28. Competition, Markups, and Inflation: Evidence from Australian Firm-level Data By Monique Champion; Chris Edmond; Jonathan Hambur
  29. Inflation Expectations: Rationality, Disagreement and the Role of the Loss Function in Colombia By Andrey Duván Rincón-Torres; Andrés Felipe Salas-Avila; Juan Manuel Julio-Román
  30. Supply Chain Shortages, Large Firms' Market Power, and Inflation By Francesco A. Franzoni; Mariassunta Giannetti; Roberto Tubaldi
  31. Does Globalization Promote Financial Integration in South Asian Economies? Unveiling the Role of Monetary and Fiscal Performance in Internationalization By Audi, Marc; Ehsan, Rehan; Ali, Amjad
  32. Uncovered interest rate, overshooting, and predictability reversal puzzles in an emerging economy By Rehim Kılıç

  1. By: Pierpaolo Benigno
    Abstract: This paper provides insights into the historical inefficiencies and instabilities of the international monetary system. These inefficiencies are primarily linked to the limited supply of international liquidity and wedges in various money-market rates. The instabilities encompass both macroeconomic and financial aspects, particularly focusing on the challenges of stabilizing inflation and economic activity. Innovations stemming from the competition of cryptocurrencies and the associated blockchain technology hold the potential for improving these outcomes.
    Date: 2023–12
  2. By: Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat
    Abstract: We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects.
    Keywords: Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy
    Date: 2023–12–06
  3. By: John H Cochrane
    Abstract: Our central banks set interest rate targets, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule. The zero bound era is confirmatory evidence. Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality as well: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a much more limited picture than standard beliefs. We either need a model with a stronger effect, or to accept that higher interest rates have quite limited power to lower inflation. Empirical understanding of how interest rates affect inflation without fiscal help is also a wide-open question.
    Keywords: inflation; fiscal theory of the price level; fiscal policy and inflation; interest rate theory; adaptive expectations models
    Date: 2023–11
  4. By: Omer Faruk Akbal; Klakow Akepanidtaworn; Ezequiel Cabezon; Mariarosaria Comunale; Mrs. Marina Conesa Martinez; Ms. Filiz D Unsal
    Abstract: Central banks in Caucasus and Central Asia (CCA) have been enhancing their monetary policy frameworks in the last decade, and are at different stages of the transition to a type of inflation targeting regimes. This paper documents their progress and the current state of their monetary policy framework, utilizing the IAPOC index developed by Unsal and others (2022) covering Independence and Accountability, Policy and Operational Strategy, and Communications, as well as drawing from central banks’ laws and websites. Additionally, an analysis of press releases from CCA central banks is conducted to evaluate their features, content, and tones. The findings highlight the need for further improvements in the areas of Independence and Accountability, as well as Communications, despite some recent advancements in the latter.
    Keywords: Caucasus and Central Asia; Monetary Policy Frameworks; Communication.
    Date: 2023–12–08
  5. By: David de Villiers (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University); Dawie van Lill (Department of Economics, Stellenbosch University)
    Abstract: Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode.
    Keywords: macroprudential policy, capital controls, foreign exchange interventions, extreme capital flows, financial stability
    JEL: E58 F3 F4 G01 G1
    Date: 2023
  6. By: Sebastian Infante; Kyungmin Kim; Anna Orlik; André F. Silva; Robert J. Tetlow
    Abstract: This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays an important role in determining the economic consequences of the introduction of a CBDC. A CBDC also raises important questions regarding the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, of which remuneration is the one discussed most often in the literature.
    Keywords: Central bank digital currency; Bank disintermediation; Financial stability; Central bank balance sheet; Payment system
    JEL: E40 G20 E50
    Date: 2023–11–20
  7. By: Mr. Damien Capelle; Yang Liu
    Abstract: When inflation originates from distributional conflicts, shifts in inflation expectations, or energy price shocks, monetary policy (MP) is a costly stabilization instrument. We show that a tax on inflation policy (TIP), which would require firms to pay a tax proportional to the increase in their prices, would effectively correct externalities in firms’ pricing decisions, tackle excessive inflation and reduce output volatility, without exacerbating price distortions. While proposals from the 1970s saw TIP as a substitute to MP, we find that it is a complement, with TIP addressing markups and inflation expectation shocks, and MP addressing demand shocks.
    Keywords: Inflation; Markup Shock; Monetary Policy; Tax on Inflation; Taxbased Incomes Policies; Externality
    Date: 2023–12–08
  8. By: Mehdi El Herradi; Aurélien Leroy
    Abstract: Central banks have recently adjusted their communication strategies to enhance engagement with the general public, yet there is limited understanding of public sentiment regarding monetary policy announcements. This paper investigates whether monetary policy announcements influence household (subjective) well-being in Germany over the period 2002-2018 and finds that tightening surprises reduce life satisfaction. Notably, the impact of a one standard deviation monetary policy shock on well-being is equivalent to a 4% decline in household income. This effect is particularly pronounced among middle-aged individuals and those belonging to the middle-class.
    Keywords: Monetary policy; Subjective Well-Being; Survey data; Euro Area
    Date: 2023–12–01
  9. By: Zhao Han; Chengcheng Jia
    Abstract: Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector.
    Keywords: monetary policy; information frictions; asymmetric information
    JEL: E52 E58 D84
    Date: 2023–12–18
  10. By: Danielle Wood; Iris Chan; Brendan Coates
    Keywords: inflation; distributional effects of monetary policy; wealth and income inequality; poverty; effective inflation rates
    Date: 2023–11
  11. By: Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé
    Abstract: This paper argues case that a tighter fiscal policy stance can meaningfully support central banks in fighting inflation in both advanced and emerging market economies. While the standard textbook result suggest that monetary policy is much more effective than fiscal policy in battling inflation in open economies due to the exchange rate channel, we show that a tighter fiscal stance is notably more effective in the current situation. This is so because when many countries currently need to tighten the policy stance simultaneously, the exchange rate channel does not provide monetary policy with an edge over fiscal policy. We also show that fiscal consolidation can be helpful in small open emerging markets and developing economies by reaffirming their commitment to price stability, and by putting the fiscal house in order which reduces risk premiums and strengthens the currency. Furthermore, we show that spillovers from major economies can be more adverse from tighter monetary policy. By applying a two-agent New Keynesian modeling framework with unconstrained and hand-to-mouth households, we show that any adverse effects of tighter fiscal policy (relative to tighter monetary policy) on consumption inequality can be handled with a combination of general spending cuts and targeted transfers to vulnerable households.
    Keywords: Policy Coordination; Monetary Policy; Fiscal Policy; High Inflation
    Date: 2023–12–15
  12. By: Julian di Giovanni; Åžebnem Kalemli-Özcan; Alvaro Silva; Muhammed A Yildirim
    Abstract: We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries' inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.
    Keywords: inflation; supply chains; trade economics; structural global network model; supply shocks
    Date: 2023–11
  13. By: Abderazak Madouri (Research Center in Applied Economics for Development –CREAD-Algeria); Hacene Tchoketch-Kebir (Research Center in Applied Economics for Development –CREAD-Algeria)
    Abstract: This paper analyzes the potential benefits of an alternative exchange rate regime proposed by Jeffrey Franke, called the Commodity-Currency Basket (CCB) regime, over the current exchange rate regime in Algeria. The CCB regime, which combines the advantages of both floating and fixed exchange rate systems, has been suggested as a way to mitigate the negative impacts of oil price volatility on the economies of countries that heavily rely on oil exports. We use wavelet analysis and quantile-on-quantile regression techniques to estimate and evaluate the impact of the CCB regime on internal and external balance indicators in Algeria, including inflation rates and foreign exchange reserves, over the period of 2001-2021. The findings suggest that the CCB regime is superior to the current floating exchange rate system in terms of maintaining monetary stability and achieving internal and external balance, while also providing more flexibility and stimulation to the domestic economy due to its ability to achieve terms of trade stability through an active countercyclical monetary policy. However, the proposed regime remains subject to further discussion, adjustment, experimentation, and development
    Date: 2023–11–20
  14. By: Fozan Fareed; Abolfazl Rezghi; Charlotte Sandoz
    Abstract: Inflationary pressures have intensified in the Gulf Cooperation Council (GCC) in 2021-2022, mainly driven by a pick-up in tradeable goods inflation. Despite this increase, inflation remained relatively contained as compared to regional comparators. This paper aims to provide a comprehensive analysis of inflation dynamics in the region, with a focus on external factors because of GCC’s high reliance on international trade. Using a Global Vector Autoregressive model with quarterly data from 1987 to 2022, we find that external factors such as the imported inflation from main trading partners, mainly driven by China, and nominal effective exchange rate (NEER) are the main drivers of inflation in the GCC region. Additionally, we find that the direct pass-through of international commodity price shocks such as oil and raw agricultural materials is somewhat limited, after controlling for trading partners’ inflation, which can be explained by the prevalence of subsidies and administered prices in the region. Overall, since external factors are the main drivers of domestic inflation in the GCC, an increased focus on diversification, promoting food security, and ensuring prudent central bank policies, including through effective liquidity management frameworks, can play a key role in managing this impact.
    Keywords: Inflation; external shocks; GCC; panel data; GVAR.
    Date: 2023–12–15
  15. By: Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó
    Abstract: We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy.
    Keywords: Monetary Policy; Inflation; International Spillovers; Financial Frictions; Open Economy Macroeconomics; Panel Data Estimation
    JEL: C33 E32 E44 F42
    Date: 2023–11–29
  16. By: Philippe Bacchetta (University of Lausanne Swiss Finance Institute and CEPR); J. Scott Davis (Federal Reserve Bank of Dallas); Eric van Wincoop (University of Virginia and NBER)
    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.
    Date: 2023–11
  17. By: Ali, Amjad; Khokhar, Bilal; Sulehri, Fiaz Ahmad
    Abstract: This study explores the relationship between inflationary pressure and policy mix in developing countries over the period of 1995 to 2022. Money supply, unemployment rate, regulatory policies, currency rate, remittances, and amount of foreign debt are explanatory factors, whereas inflationary pressure is the dependent variable. To assess the influence of these factors on inflation, panel least squares, and fixed effect models are utilized. The study's findings shed light on the complicated links between financial factors and inflationary pressures in developing nations. The study demonstrates that in developing nations, the money supply has a negative and considerable influence on inflation. The study found that unemployment had a favorable but insignificant influence on inflation pressures in emerging nations. Furthermore, the research demonstrates that regulatory measures have a negative and considerable influence on inflationary pressures. The exchange rate has been proven to have a positive and considerable impact on inflationary pressures in emerging nations, highlighting the necessity of prudent exchange rate management in mitigating the inflationary implications of currency decline. Furthermore, remittances have a negative and considerable influence on inflationary pressures, implying that increasing financial inclusion and investment possibilities for remittance-receiving families might help to stabilize inflation in developing countries. Finally, the study emphasizes that the quantity of foreign debt in emerging nations has a positive and considerable influence on inflationary pressures. According to the study, careful monitoring and control of the money supply, addressing unemployment through labor market reforms and investments, implementing effective regulatory restrictions, prudent exchange rate management, promoting financial inclusion for remittance recipients, and pursuing sustainable debt levels are all important.
    Keywords: Money Supply, Unemployment Rate, Regulatory Policies, Currency Rate, Foreign Debt, Remittances
    JEL: E24 E51
    Date: 2023
  18. By: Elliot Anenberg; Tess C. Scharlemann; Eileen van Straelen
    Abstract: We show that the strong negative effect of higher mortgage rates on cash-out refinancing reflects substitution into other borrowing products, not large changes in total new household borrowing. We exploit an exogenous increase in long-term rates to show that, in the cross-section of outstanding mortgage rates, changes in cash-out and alternative borrowing are offsetting. Additionally, we instrument using monetary policy surprises to show that, over the period from 2006-2021, changes in cash-out refinancing are offset by alternative borrowing. Our results suggest that debt substitution substantially weakens the cash-out refinance channel of monetary policy and reduces its path-dependence.
    Keywords: Equity extraction; Mortgages and credit; Cash out refinancing; Monetary policy; Refinancing
    JEL: G51
    Date: 2023–11–21
  19. By: Adam Hale Shapiro
    Abstract: The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply- and demand-driven components. I generate two new data series, the supply- and demand-driven contributions to personal comsumption expenditures (PCE) inflation, which quantify the degree to which either demand or supply is driving inflation in a current month. The series show expected time-series patterns. The demand-driven contribution tends to decline during recessions, while the supply-driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand-driven contribution of inflation. Oil-supply shocks act to increase the supply-driven contribution, but decrease the demand-driven contribution of inflation. The decompositions can be used to test theory or by policymakers and practitioners to track inflation drivers in real time.
    Keywords: inflation; supply-demand decomposition; sign restrictions; structural VAR model
    Date: 2023–11
  20. By: Jorge Alvarez; John Bluedorn; Niels-Jakob Hansen; Youyou Huang; Evgenia Pugacheva; Alexandre Sollaci
    Abstract: How often have wage-price spirals occurred, and what has happened in their aftermath? We investigate this by creating a database of past wage-price spirals among a wide set of advanced economies going back to the 1960s. We define a wage-price spiral as an episode where at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages. Perhaps surprisingly, only a small minority of such episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged. A decomposition of wage dynamics using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels that are consistent with observed inflation and labor market tightness. When focusing on episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow – thus allowing real wages to catch up. We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.
    Keywords: inflation; wages; wage-price spirals; labor markets
    Date: 2023–09
  21. By: Todd E. Clark; Matthew V. Gordon; Saeed Zaman
    Abstract: This paper examines the forecasting efficacy and implications of the recently popular breakdown of core inflation into three components: goods excluding food and energy, services excluding energy and housing, and housing. A comprehensive historical evaluation of the accuracy of point and density forecasts from a range of models and approaches shows that a BVAR with stochastic volatility in aggregate core inflation, its three components, and wage growth is an effective tool for forecasting inflation's components as well as aggregate core inflation. Looking ahead, the model's baseline projection puts core inflation at 2.6 percent in 2026, well below its 2023 level but still elevated relative to the Federal Reserve's 2 percent objective. The probability that core inflation will return to 2 percent or less is much higher when conditioning on goods or non-housing services inflation slowing to pre-pandemic levels than when conditioning on these components remaining above the same thresholds. Scenario analysis indicates that slower wage growth will likely be associated with reduced inflation in all three components, especially goods and non-housing services, helping to return core inflation to near the 2 percent target by 2026.
    Keywords: Supercore inflation; forecast aggregation; Bayesian vector autoregression; scenario analysis
    JEL: C32 C53 E17 E31 E37
    Date: 2023–12–20
  22. By: Ruoyun Mao (Department of Economics, University of Arkansas); Wenyi Shen (Department of Economics, Oklahoma State University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Large expansionary fiscal measures are often implemented with monetary accommoda- tion during an economic crisis. When a government is highly indebted, and the timing of switching to the conventional regime M (passive fiscal/active monetary policies) is uncertain, a government spending increase in regime F (active fiscal/passive monetary policies) increases government debt. Such regime uncertainty dampens inflation and debt revaluation effects. Also, as regime uncertainty generates a smaller real interest rate decline, debt servicing costs fall less, and tax revenues increase less, than in the fixed regime F. These factors contribute to reversing the debt decline for a spending increase in the fixed regime F. The result holds under adverse supply shocks and po- tentially higher capital taxes, relevant factors in the post-COVID U.S. economy.
    JEL: E62 E63 E52 H30 E32
    Date: 2023–12
  23. By: Johannes Breckenfelder (European Central Bank); Pierre Collin-Dufresne (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; NBER); Stefano Corradin (European Central Bank)
    Abstract: We document a recurring pattern in German sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. We propose a sequential search-bargaining model, capturing salient elements of the PSPP's implementation, such as the commitment to transact within an explicit time horizon. The model suggests that this predictable pattern emerges as a consequence of imperfect competition among dealers who are counterparties to the Eurosystem. Predicated on the model's implications, we find that the price fluctuations are markedly accentuated: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem aims for a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs.
    Keywords: Quantitative Easing, Sequential Search-Bargaining Model, Imperfect Competition, Dealers, Financial Market Design
    JEL: G12 G21 E52 E58
    Date: 2023–11
  24. By: Marinozzi Tomas
    Abstract: Probability forecasts are gaining popularity in the macroeconomic discipline as point forecasts lack the ability to capture the level of uncertainty in fundamental variables like inflation, growth, exchange rate, or unemployment. This paper explores the use of probability forecasts to predict inflation in Argentina. The paper tests 30 different probabilistic models and evaluates them using scoring rules. Results show that parsimonious univariate models have a relatively similar performance to that of the multivariate models around central scenarios but fail to capture tail risks, particularly at longer horizons.
    JEL: C4 E3
    Date: 2022–11
  25. By: AMORES Antonio F. (European Commission - JRC); BASSO Henrique; BISCHL Simeon; DE AGOSTINI Paola (European Commission - JRC); DE POLI Silvia; DICARLO Emmanuele; FLEVOTOMOU Maria; FREIER Max; MAIER Sofia (European Commission - JRC); GARCÍA-MIRALLES Esteban; PIDKUYKO Myroslav; RICCI Mattia (European Commission - JRC); RISCADO Sara
    Abstract: This paper analyses the distributional impact of high consumer inflation in the euro area and government measures to compensate households in 2022. The study uses the tax-benefit microsimulation model for the European Union (EUROMOD) with microdata as the input – EU statistics on income and living conditions (EU-SILC) and household budget surveys (HBS) – to quantify the distributional impact of inflation, income support measures and measures aimed at containing prices. The analysis confirms that purchasing power and welfare were more severely affected by the 2022 inflation surge in lower-income households than in higher-income households. Fiscal measures compensated households for about a third of their welfare loss, though with significant differences between countries. At the same time, fiscal measures closed around 60% of the inequality gap between lower and higher-income households. Most fiscal measures were not particularly well targeted at low-income households, resulting in a higher than necessary fiscal burden to cushion the distributional impact of the inflationary shock.
    Date: 2023–12
  26. By: Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN)
    Abstract: Fluctuations in commodity prices have significant effects on output and financial stability in emerging countries. We examine the effect of macroprudential policies on commodity-exporting countries, which consist of two sectors---the commodity-producing sector and final goods sector. When a commodity-exporting country suffers from volatile fluctuations in commodity prices, we find that macroprudential policy in each sector is welfare-enhancing and that it is optimal to impose macroprudential policies in both sectors. We also show that macroprudential policies are more effective in improving welfare for commodity-exporting economies suffering from a stronger link between commodity prices and interest rate spreads, higher sensitivity of interest spreads to debt, and larger commodity price shocks.
    Keywords: Macroprudential policies; Commodity-exporting countries; DSGE model; Financial frictions; Emerging economies; Mongolia
    JEL: E32 E44 F32 O20 Q48
    Date: 2023–12
  27. By: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: Building on the work of Jiang et al. (2023) we develop a framework to analyze the effects of credit risk on the solvency of U.S. banks in the rising interest rate environment. We focus on commercial real estate (CRE) loans that account for about quarter of assets for an average bank and about $2.7 trillion of bank assets in the aggregate. Using loan-level data we find that after recent declines in property values following higher interest rates and adoption of hybrid working patterns about 14% of all loans and 44% of office loans appear to be in a “negative equity” where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges. A 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end -- would result in about $80 ($160) billion of additional bank losses. If CRE loan distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. However, after more than $2 trillion decline in banks’ asset values following the monetary tightening of 2022, additional 231 (482) banks with aggregate assets of $1 trillion ($1.4 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities. To assess the risk of solvency bank runs induced by higher rates and credit losses, we expand the Uninsured Depositors Run Risk (UDRR) financial stability measure developed by Jiang et al. (2023) where we incorporate the impact of credit losses into the market-to-market asset calculation, along with the effects of higher interest rates. Our analysis, reflecting market conditions up to 2023:Q3, reveals that CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs. These findings carry significant implications for financial regulation, risk supervision, and the transmission of monetary policy.
    JEL: G2 L50
    Date: 2023–12
  28. By: Monique Champion; Chris Edmond; Jonathan Hambur
    Abstract: Do variable profit margins play a substantial role in amplifying inflationary dynamics? Using detailed administrative micro data for Australia we find that: (i) there is some evidence that prices tended to increase by more in industries that had increasing markups over the 2004-2017 period, but (ii) passthrough from cost shocks to prices appears to be incomplete with no statistically significant increase in passthrough in the recent period, and (iii) there is evidence that passthrough is lower in less competitive industries. Viewed through the lens of macroeconomic models with variable markups, these facts are inconsistent with substantial inflation amplification. To generate substantial inflation amplification requires both that average passthrough is higher than is observed in Australian data and that passthrough is higher in less competitive industries. We calibrate a model with variable markups to match key facts from the Australian data. For our benchmark parameterization we find that, if anything, variable markups are predicted to dampen inflation.
    Keywords: inflation; markups; microdata; cost shocks; pass-through; industry concentration; competition
    Date: 2023–11
  29. By: Andrey Duván Rincón-Torres; Andrés Felipe Salas-Avila; Juan Manuel Julio-Román
    Abstract: We study the behaviour of three quantitative sample surveys and a non sample inflation expectation report for Colombia. We found that expectations in Colombia; (i) are not strongly, i.e. a la Muth, rational because they show cross-section disagreement, (ii) expectations, however, show some features of weak rationality, (iii) expectations disagreement is time varying and relate to inflation, inflation changes and the output gap, thus suggesting a staggered information flow to agents, (iv) the forecast error loss function employed by agents is not symmetric and increasingly penalizes higher expectations than finally observed inflation as the horizon grows, and (v) this fact also explains the stylised fact that observed expectation share with theoretical rational expectations that expectations look like lagged versions of inflation that dampen with the horizon. The latest finding also arises from a very general econometric set up we develop in this paper. These results imply that the effect of weakening the rational expectations assumption in Colombian monetary policy models should be assessed, especially when compared to sticky information and heterogeneous agents choosing non Mean Square forecast Error losses. **** RESUMEN: Analizamos tres encuestas cuantitativas muestrales y un reporte no muestral de expectativas de inflación para Colombia. Encontramos que las expectativas en Colombia:(i) no son fuertemente, a la Muth, racionales debido a que exhiben descuerdo en cada corte transversal; (ii) sin embargo, muestran características de racionalidad débil; (iii) el desacuerdo es tiempo variante y se relaciona con la inflación, sus cambios y la brecha del PIB, sugiriendo un flujo escalonado de la información para formularlas; (iv) la función de pérdida ante errores de expectativas no es simétrica y penaliza de forma creciente las expectativas más altas que la inflación observada en la medida que se extiende el horizonte; y (v) este resultado explica también el hecho estilizado que comparten las expectativas observadas y las teóricas que las expectativas parecen versiones rezagadas de la inflación observada que se suavizan con el horizonte. Este hallazgo surge también de un esquema econométrico muy general que desarrollamos en este artículo. Estos resultados implican que se debe establecer el efecto de debilitar el supuesto de expectativas racionales en los modelos para la política monetaria, especialmente cuando se comparan con modelos con flujos escalonados de información y agentes heterogéneos que escogen funciones de pérdida distintas al Error Cuadrático Medio de pronósticos.
    Keywords: Inflation Expectations, expectation disagreement, near unit root, weak and strong rationality, non symmetric loss function, Expectativas de inflación, desacuerdo de las expectativas, cercanía a una raíz unitaria, Racionalidad débil y fuerte, función de pérdida asimétrica
    JEL: C53 C82 E31 E37
    Date: 2023–12
  30. By: Francesco A. Franzoni (Universita della Svizzera italiana; Swiss Finance Institute; CEPR); Mariassunta Giannetti (Stockholm School of Economics; Swedish House of Finance; CEPR; ECGI); Roberto Tubaldi (BI Norwegian Business School)
    Abstract: We suggest an equilibrium mechanism for the widely debated argument that “greedflation” has fostered widespread price hikes. We construct firm and industry-level measures of supply chain backlogs and delivery delays and provide evidence that supply chain shortages lead to a decrease in competition at the industry level. We show that “star” firms acquire market shares and increase their markups and profitability relative to the smaller firms in the industry. We also show that the large increase in supply chain backlogs during the COVID-19 pandemic can help explain about 19% of the US inflation in industries with more asymmetric firm size distribution, where supply chain shortages are more likely to benefit large firms at the expense of smaller firms. Economic magnitudes are comparable in the international sample.
    Keywords: Supply Chains, Market Power, Inflation, Production Networks
    JEL: D2 E31 L11 G3
    Date: 2023–11
  31. By: Audi, Marc; Ehsan, Rehan; Ali, Amjad
    Abstract: Presently, monitoring and analysing financial integration has become a key function and requirement of the financial regulatory bodies and central banks of the countries. It has also been observed that financial integration is important to make the financial system streamlined and efficient which is eventually used to make monetary policies and to judge a country’s financial performance. Financial integration also highlights disruption in the financial system of the country if it does not work properly. This study has examined the impact of globalization on financial integration in the case of South Asian countries from 1996 to 2020. The results show that level of political instability has a negative and insignificant impact on financial integration. The outcome shows that monetary performance, globalization, and economic misery have positive and significant impacts on financial integration. Fiscal performance has a negative and significant impact on financial integration. Based on the results, it suggested that South countries should make stable monetary and fiscal performance with a rise in globalization to raise financial integration. Moreover, political instability and economic misery should be discouraged for higher financial integration.
    Keywords: globalization, financial integration, political instability, monetary performance, fiscal performance, economic misery
    JEL: F36 F50 F60 O23
    Date: 2022
  32. By: Rehim Kılıç
    Abstract: By using realized and survey-based expected exchange rate data, the paper presents five key findings regarding the Uncovered Interest rate Parity (UIP) and related puzzles in an Emerging Market (EM). First, Fama regressions, when not accounting for shifts in the UIP relationship, yield slopes that are statistically identical to one, irrespective of whether survey-based expected exchange rates or realized exchange rates are used. Second, caution is necessary however, as our analysis identifies three distinct sub-periods within each exchange rate measure, each exhibiting varying levels of puzzling behavior. Third, under realized exchange rates, expectation errors can introduce both downward and upward biases or no bias at all, depending on the sub-period. On the other hand, currency risk premiums consistently lead to a downward bias. Under expected exchange rates, currency risk premiums continue to exert a downward bias at varying degrees across sub-periods. Fourth, responses to interest rate differential shocks by expectation errors are pivotal in inducing both downward and upward biases or removing biases altogether when utilizing realized exchange rate data. Fifth, evidence concerning overshooting and reversal puzzles, as well as their link to the UIP puzzle, varies depending on the specific sub-period and the choice of exchange rate measurement, making it more intricate than the previous literature has documented.
    Keywords: UIP Puzzle; FX Rate Overshooting Puzzle; Predictability Reversal Puzzle; Fama Regression; Expectations
    JEL: F31 F41 G11 G15
    Date: 2023–11–22

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