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on Monetary Economics |
| By: | Baumgärtner, Martin; Zahner, Johannes |
| Abstract: | Dictionary approaches are at the forefront of current techniques for quantifying central bank communication. This paper proposes embeddings - a language model trained using machine learning techniques - to locate words and documents in a multidimensional vector space. To accomplish this, we utilize a text corpus that is unparalleled in size and diversity in the central bank communication literature, as well as introduce a novel approach to text quantification from computational linguistics. This allows us to provide high-quality central bank-specific textual representations and demonstrate their applicability by developing an index that tracks deviations in the Fed's communication towards inflation targeting. Our findings indicate that these deviations in communication significantly impact monetary policy actions, substantially reducing the reaction towards inflation deviation in the US. |
| Keywords: | Word Embedding, Neural Network, Central Bank Communication, Natural Language Processing, Transfer Learning |
| JEL: | C45 C53 E52 Z13 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:280939&r=mon |
| By: | Tobias Kranz; Hamza Bennani; Matthias Neuenkirch |
| Abstract: | Climate change poses significant challenges through rising temperatures, extreme weather events, and the exposure of economic (and societal) systems to these dangers. The irreversible and potentially non-linear nature of climate change, together with evolving technological and policy landscapes, complicates matters and predictions. We review the theoretical and empirical literature on climate change's effects on prices, output, and monetary policy transmission. In addition, we describe central banks' responses, including a timeline of efforts, potential actions, data sources, and a comparison of the five largest central banks. |
| Keywords: | Central Banks, Climate Change, Financial Stability, Macroprudential Regulation, Monetary Policy |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:202401&r=mon |
| By: | Ahmed Ahmed; Boris Hofmann; Martin Schmitz |
| Abstract: | This paper uses security-level data of euro area investment funds' bond holdings to analyze their reaching for yield in the US dollar bond market. We find that they rebalance their US dollar bond portfolios toward higher yielding, riskier bonds when US monetary policy tightens, reflecting the effects of foreign exchange hedging. The effect is driven by the practice of hedging currency risk through rolling short-term hedging contracts. This gives rise to an erosion of the hedged yield earned on US dollar bonds when US monetary policy tightens and hedging costs increase, inducing reaching for yield in order to bolster portfolio returns. The hedging channel of monetary transmission is diametrically opposed to the classical risk-taking channel operating through US dollar-based investors, where a monetary tightening is associated with less reaching for yield. We further find that the US dollar bond purchases by euro area investment funds induced by their reaching for yield have meaningful effects on bond prices, implying that they affect conditions in the US dollar bond market. |
| Keywords: | monetary policy, foreign institutional investors, FX hedging, US dollar bond market |
| JEL: | E43 E52 G11 G12 G15 G23 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1153&r=mon |
| By: | Clodomiro Ferreira; José Miguel Leiva; Galo Nuño; Álvaro Ortiz; Tomasa Rodrigo; Sirenia Vazquez |
| Abstract: | We identify and study analytically three key channels that shape how inflation affects wealth inequality: (i) the traditional wealth (Fisher) channel through which inflation redistributes from lenders to borrowers; (ii) an income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels during the 2021 inflation surge in Spain using detailed and high-frequency client-level data from one of the main commercial banks. The unexpected nature and temporary perception of the inflation shock in this particular period closely maps on to the assumptions behind our theoretical decomposition. Results show that the wealth and income channels are one order of magnitude larger than the consumption channel. Middle-aged individuals were largely unaffected by inflation, while older ones suffered the most. We find similar results when using representative surveys on households’ wealth, income, and consumption. |
| Keywords: | inflation inequality, net nominal positions, nominal wage rigidities |
| JEL: | G51 D31 E31 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10854&r=mon |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that determine whether the Nash equilibrium exhibits under-tightening or over-tightening: the output gap, sectoral differences in labor intensity, and the trade balance response to changes in nominal rates. Independently of the shocks hitting the economy, we find that under-tightening is possible during economic expansions or contractions. For large shocks, the gains from coordination can be substantial. |
| Keywords: | Macroeconomic and financial spillovers; Monetary policy cooperation |
| JEL: | E23 E43 E52 E21 E62 E44 F32 |
| Date: | 2024–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:97546&r=mon |
| By: | Lennard, Jason; Kenny, Seán; Horgan, Emma |
| Abstract: | This paper studies a natural experiment in macroeconomic history: the Irish bank strike of 1966, which led to the closure of the major commercial banks for three months. We use synthetic control to estimate how the economy would have evolved had the strike not happened. We find that economic activity slowed, deviating by 6% from the counterfactual path. Narrative evidence not only supports this finding, but also depicts the struggles of households and firms managing a credit crunch, a liquidity shock, and rising transaction costs. This case study highlights the importance of banks for economic performance. |
| Keywords: | Banks, Ireland, macroeconomy, post-war |
| JEL: | E32 E44 G21 N14 N24 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:qucehw:280962&r=mon |
| By: | Clodomiro Ferreira; José Miguel Leiva; Galo Nuño Barrau; Alvaro Ortiz; Tomasa Rodrigo; Sirenia Vazquez |
| Abstract: | We identify and study analytically three key channels that shape how inflation affects wealth inequality: (i) the traditional wealth (Fisher) channel through which inflation redistributes from lenders to borrowers; (ii) an income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels during the 2021 inflation surge in Spain using detailed and high-frequency client-level data from one of the main commercial banks. The unexpected nature and temporary perception of the inflation shock in this particular period closely maps on to the assumptions behind our theoretical decomposition. Results show that the wealth and income channels are one order of magnitude larger than the consumption channel. Middle-aged individuals were largely unaffected by inflation, while older ones suffered the most. We find similar results when using representative surveys on households' wealth, income, and consumption. |
| Keywords: | inflation inequality, net nominal positions, nominal wage rigidities |
| JEL: | G51 D31 E31 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1152&r=mon |
| By: | Brent Bundick; Logan Hotz; Andrew Lee Smith |
| Abstract: | The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the potential disinflationary effects of the zero lower bound, even prior to the formal adoption of an average inflation-targeting framework. |
| Keywords: | monetary policy; inflation expectations; zero lower bound; forward guidance; asset purchases |
| JEL: | E32 E52 |
| Date: | 2023–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:97575&r=mon |
| By: | Giulio Cornelli; Fiorella De Fiore; Leonardo Gambacorta; Cristina Manea |
| Abstract: | Fintech credit, which includes peer-to-peer and marketplace lending as well as lending facilitated by major technology firms, is witnessing rapid growth worldwide. However, its responsiveness to monetary policy shifts remains largely unexplored. This study employs a novel credit dataset spanning 19 countries from 2005 to 2020 and conducts a PVAR analysis to shed some light on the different reaction of fintech and bank credit to changes in policy rates. The main result is that fintech credit shows a lower (even non-significant) sensitivity to monetary policy shocks in comparison to traditional bank credit. Given the still marginal – although fast growing – macroeconomic significance of fintech credit, its contribution in explaining the variability of real GDP is less than 2%, against around one quarter for bank credit. |
| Keywords: | fintech credit, monetary policy, PVAR, collateral channel |
| JEL: | D22 G31 R30 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1157&r=mon |
| By: | Bruno Feunou; James Kyeong |
| Abstract: | Using our new quantitative tool, we show how the risks to the inflation and growth outlooks have evolved over the course of 2023. |
| Keywords: | Business fluctuations and cycles; Econometric and statistical methods |
| JEL: | C32 C58 E44 G17 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:23-18&r=mon |
| By: | Hasan, Iftekhar; Li, Xiang; Takalo, Tuomas |
| Abstract: | This paper studies whether and how banks' technological innovations affect the bank lending channel of monetary policy transmission. We first provide a theoretical model in which banks' technological innovation relaxes firms' earning-based borrowing constraints and thereby enlarges the response of banks' lending to monetary policy changes. To test the empirical implications, we construct a patent-based measurement of bank-level technological innovation, which can specify the nature of technology and tell whether it is related to the bank's lending business. We find that lending-related innovations significantly strengthen the transmission of the bank lending channel. |
| Keywords: | Innovation, FinTech, Monetary Policy Transmission, Bank Lending Channel |
| JEL: | E52 G21 G23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:280960&r=mon |
| By: | Sara Boni (Faculty of Economics and Management, Free University of Bozen-Bolzano, Italy); Massimiliano Caporin (University of Padova, Italy); Francesco Ravazzolo (@ Department of Data Science and Analytics, BI Norwegian Business School, Norway; Faculty of Economics and Management, Free University of Bozen-Bolzano, Italy) |
| Abstract: | This paper proposes a non-parametric test for Granger causality in quantiles to detect causality from a high-frequency driver to a low-frequency target. In an economic application, we examine Granger causality between inflation, as a low-frequency macroeconomic variable, and a selection of commodity futures, including gold, oil, and corn, as high-frequency financial variables. We find that logarithmic returns on given commodity futures are a prima facie cause of inflation at the lower quantiles of the distribution and marginally around the median. In the context of a nowcasting exercise, we find that incorporating commodity futures in the model with a polynomial function enhances short-term forecasting accuracy, leveraging timely data for more precise nowcasting of inflationary trends. |
| Keywords: | MIDAS Quantile, Granger Causality, Commodities, Inflation, Nowcasting. |
| JEL: | C12 C14 C58 E31 Q02 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps102&r=mon |
| By: | Irfan Cercil; Cem Ali Gökcen |
| Abstract: | Most advanced economy central banks cut their policy rates and introduced asset purchase programs (APPs) to weather the impacts of the Covid-19 pandemic on their economies and financial systems. Similar to their advanced economy counterparts, a number of emerging market (EM) central banks also initiated APPs during the Covid-19 pandemic. In this paper, we analyze the effects of these EM APPs on financial market variables such as sovereign bond yields, nominal exchange rates vis-à-vis US dollar, and stock market indices by using a novel causal inference approach. We utilize the local projections (LP) methodology of Jordà (2005) and estimate the average treatment effect (ATE) of EM APPs by applying the augmented inverse probability weighting (AIPW) estimator that addresses the selection bias and endogeneity problems inherent in the statistical analysis of quantitative easing (QE) policies. Our empirical findings suggest that QE policies adopted by EM central banks played an instrumental role in lowering sovereign bond yields and supporting exchange rates and equity markets during Covid-19 pandemic. This suggests that QE policies may complement traditional monetary policies in EM countries especially during periods of elevated market stress and uncertainty. |
| Keywords: | Covid-19, Quantitative easing, Asset purchase program, Central banks, Emerging markets, Local projections, Augmented inverse probability weighting estimation. |
| JEL: | E5 F3 G1 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2308&r=mon |
| By: | Bogdanova, Iryna |
| Abstract: | Introduction The current discussion of Ukraine’s recovery and reconstruction takes place against the backdrop of the broad and internationally coordinated efforts to sanction Russia and its ruling elites. Given that these sanctions resulted in the assets of the Russian Central Bank and entities under its control being immobilized, the question that immediately springs to one’s mind is whether and how can these resources be used to rebuild Ukraine. While the political discussions have abounded in claims that these funds can be used as reparations and the war crimes committed by the Russian army only strengthen this resolve, this might be a thorny path to follow from a legal perspective. It is against this backdrop that this chapter aims to contribute to both academic and policy debates on the topic. The contribution is structured in the following way. Part 2 is dedicated to the analysis of whether there is a political will among the states that immobilized Russian assets to confiscate or use them. Following this, Part 3 focuses on the discussion of the legality of such a move. For this purpose, the legality of asset confiscation or their temporary use is examined against the background of immunities granted to central bank assets under international law. Subsequently, this part explores possible legal justifications for asset confiscation and their availability. Continue reading in the attached PDF. Full publication available. |
| Date: | 2024–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:wti:papers:1431&r=mon |
| By: | Jackson, Emerson Abraham |
| Abstract: | This paper explores the Economic Theory of Inflation, meticulously progressing from fundamental concepts to intricate mathematical models. Investigating causes and consequences, the study draws on pertinent economic theories and empirical evidence. Key findings elucidate the multifaceted nature of inflation, considering Demand-Pull, Cost-Push, and Phillips Curve theories. Mathematical models, including the Fisher Equation and Adaptive Expectations Model, offer quantitative insights into inflation dynamics and expectations. The paper culminates by addressing the imperative of effective economic management, advocating a judicious mix of monetary and fiscal strategies for achieving price stability and sustainable economic growth. The synthesis of economic theory, empirical analysis, and policy considerations contributes to an informed and nuanced understanding of the Economic Theory of Inflation, crucial for policymakers navigating the complexities of contemporary economies. |
| Abstract: | Cet article explore la Théorie économique de l'inflation, progressant méticuleusement des concepts fondamentaux aux modèles mathématiques complexes. En enquêtant sur les causes et conséquences, l'étude s'appuie sur des théories économiques pertinentes et des preuves empiriques. Les principales conclusions éclairent la nature multifacette de l'inflation, en considérant les théories de la demande, des coûts et de la courbe de Phillips. Les modèles mathématiques, y compris l'Équation de Fisher et le Modèle des attentes adaptatives, offrent des aperçus quantitatifs sur la dynamique et les attentes de l'inflation. L'article se termine en abordant l'impératif d'une gestion économique efficace, préconisant un mélange judicieux de stratégies monétaires et fiscales pour atteindre la stabilité des prix et une croissance économique durable. La synthèse de la théorie économique, de l'analyse empirique et des considérations politiques contribue à une compréhension éclairée et nuancée de la Théorie économique de l'inflation, cruciale pour les décideurs naviguant dans les complexités des économies contemporaines. |
| Keywords: | Inflation, Economic Theory, Inflation Control |
| JEL: | E31 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:280999&r=mon |
| By: | Sullivan, Megan |
| Abstract: | This paper investigates the determinants of countries' choice of monetary policy frameworks (MPF) for emerging and developing countries. Countries make different MPF choices and we think it is because they have different country-level characteristics (e.g. democratic strength and trade networks). By covering 87 countries from 1985-2017, we investigate the role these characteristics play in predicting MPF choice. A highlight of this paper is that it uses a tailored variable to measure the volume of trade with a network that pegs to an anchor currency. We find that a country is significantly more likely to choose an exchange rate MPF when the volume increases. The model used in this paper correctly predicts 74% of MPF choice when done via a cross-validation method. This paper enables policymakers to see which MPF countries similar to their own have chosen, and they can decide if it is suitable for them, too. |
| Keywords: | Inflation targeting, central bank independence, trade networks, cross-validation |
| JEL: | E42 E52 E58 F40 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hwuaef:280994&r=mon |
| By: | Fiorella De Fiore; Benoit Mojon; Daniel Rees; Damiano Sandri |
| Abstract: | We evaluate the performance of alternative monetary policy rules during and after the post-pandemic inflation surge. We first document that inflation expectations remained well anchored in advanced economies irrespective of differences in monetary policy frameworks. We then show that an aggressive inflation targeting (IT) rule would have contained the inflation surge very modestly relative to a benchmark average inflation targeting (AIT) rule, at the cost of larger negative output gaps. Finally, looking at the post inflation surge period, we compare monetary policy frameworks with respect to potential changes in the slope of the Phillips curve or changes in the level of r*. We illustrate that the benefits of a dual mandate relative to a single mandate increase when the Phillips curve is flatter; that AIT rules tend to stabilize inflation and interest rates relative to IT rules but at the cost of higher output volatility; and that AIT is more robust than IT to a possible misperception of r*. |
| Keywords: | monetary policy frameworks, inflation targeting, average inflation targeting, dual mandate |
| JEL: | E31 E42 E52 E58 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1156&r=mon |
| By: | Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Shapiro |
| Abstract: | The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven. |
| Keywords: | supply– versus demand–driven inflation, monetary tightening, financial stress |
| JEL: | E1 E3 E6 G01 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1155&r=mon |
| By: | António Afonso; José Alves; Oļegs Matvejevs; Oļegs Tkačevs |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10843&r=mon |
| By: | Egan, Paul; McQuinn, Kieran |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp767&r=mon |
| By: | Khan, Haider |
| Abstract: | Abstract: Dedollarization is accelerating. Inter alia, the US-led western sanctions have accelerated the thinking about dedollarization and some tentative actions in the BRICS countries in particular. Further expansion of BRICS has strengthened these tendencies. With support from the other countries in the Global South, dedollarization will receive continuing impetus. It is one of the main theses of this paper that eventually the US will be forced to settle down to its substantial but reduced role in the Global Economy while a multipolar order replaces the brief ---in historical terms--- the dollar-based US hegemony during the cold war and dollar dominance during the unipolar two decades from 1991 to 2010. However, the pace of this evolution will depend on international politics and strategic foreign policy moves by the major powers and coalitions in both the Global North and the Global South. Thus a historical nodal point has arisen with the advent of the tragic war in Ukraine and the US hostilities towards China. The sanctions regimes of the US-led Global North have compounded the instabilities in the existing system. As the world system moves towards multipolarity, an opportunity exists for the Global South to construct through partial delinking from the post WW2 financial architecture under US hegemony. Construction of an expanded BRICS-led supra regional financial architecture along with regional financial architectures will be a strategic step forward. Within two decades dedollarization will become a reality. Finally, a new non-aligned movement and construction of genuinely pro-people development programs can also become a reality. |
| Keywords: | Dedollarization, Regional and Cross-Regional Financial Architectures, New Global Financial Architecture, CBDCs, Ukraine, multipolarity, BRICS, expanded BRICS or BRICS-plus, China, Russia, The Global South |
| JEL: | E58 F33 F50 |
| Date: | 2023–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119544&r=mon |
| By: | Salle, Isabelle (University of Ottawa); Gorodnichenko, Yuriy (University of California, Berkeley); Coibion, Olivier (University of Texas at Austin) |
| Abstract: | We study how individuals' memories of inflation shape their expectations about future inflation using both surveys and laboratory experiments. Recalling having lived through prior disinflations has pronounced effects on how long-lived people expect the current inflation episode to last. Information treatments in which we show people prior disinflationary experiences similarly strongly reduce inflation expectations of individuals on average and are often recalled as inflation memories months later. We also show that when people try to forecast inflation in the lab, the inflation dynamics in the game can affect their beliefs much like the inflation experienced in real life. Methodologically, we compare and contrast surveys and lab experiments and discuss the pros and cons of each method, emphasizing the general consistency across the two methodologies. |
| Keywords: | inflation experience, experiments, surveys, randomized control trial |
| JEL: | E3 E4 E5 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16670&r=mon |
| By: | Yusuf Soner Baskaya; Ilhyock Shim; Philip Turner |
| Abstract: | Using quarterly data on macroprudential policy (MaPP) measures and capital flow management measures (CFMs) taken by 39 economies in 2000–2013, we analyse how domestic credit and cross-border capital flows respond to such measures. In doing so, we take a granular approach by considering price-based and quantity-based MaPP measures and CFMs, and also examine if the level of financial development matters in explaining policy effectiveness. We find that quantity-based MaPP measures significantly affect total credit and its components such as domestic bank credit, corporate credit and housing credit, but that the effects fade away beyond a certain level of financial development, suggesting that highly developed financial markets provide opportunities to circumvent MaPP measures imposed on banks. We also find that both price- and quantity-based CFMs are effective in slowing down bank inflows with the former effective at all levels of financial development and the latter effective at relatively high levels. Finally, we find some evidence on the existence of leakage effects. For example, tighter overall MaPP measures are associated with larger bond inflows, and tighter quantity-based MaPP measures with larger bank inflows. |
| Keywords: | bank lending, capital flow management measures, cross-border capital flows, financial development, macroprudential policy |
| JEL: | F34 G15 G28 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1158&r=mon |