nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒03‒04
forty-five papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The Transmission of Supply Shocks in Different Inflation Regimes By Sarah Arndt; Zeno Enders
  2. The anatomy of a peg: lessons from China’s parallel currencies By Saleem Bahaj; Ricardo Reis
  3. Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring By Beckmann, Joscha; Czudaj, Robert L.
  4. CBDC and the Operational Framework of Monetary Policy By Jorge Abad; Galo Nuño; Carlos Thomas
  5. Safe Asset Scarcity and Monetary Policy Transmission By Benoit Nguyen; Davide Tomio; Miklos Vari
  6. Rational inattention to inflation among New Zealand households By Gerelmaa Bayarmagnai
  7. Asymmetric expectations of monetary policy By Busetto, Filippo
  8. Monetary Policy Wedges and the Long-term Liabilities of Households and Firms By Jules H. van Binsbergen; Marco Grotteria
  9. Anchoring Boundedly Rational Expectations By Stephane Dupraz; Magali Marx
  10. Deposit market concentration and monetary transmission: evidence from the euro area By Kho, Stephen
  11. Monetary policy in Sweden after the end of Bretton Woods By Bylund, Emma; Iversen, Jens; Vredin, Anders
  12. Welfare implications of nomimal GDP targeting in a small open economy By Ortiz, Marco; Inca, Arthur; Solf, Fabrizio
  13. Bank Market Power and Monetary Policy Transmission: Evidence from Loan-Level Data By Nadezhda Ivanova; Svetlana Popova; Konstantin Styrin
  14. What can keep euro area inflation high? By Reis, Ricardo
  15. Public money as a store of value, heterogeneous beliefs and banks: implications of CBDC By Muñoz, Manuel A.; Soons, Oscar
  16. Macroprudential Policies and Dollarisation: Implications for the Financial System and a Cross-Exchange Rate Regime Analysis By Fisnik Bajrami
  17. Words of the RBNZ: Textual analysis of Monetary Policy Statements By Rennae Cherry; Eric Tong
  18. Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply By Fatih Altunok; Yavuz Arslan; Steven Ongena
  19. Currency misalignments, international trade in intermediate inputs, and inflation targeting By Liutang Gong; Chan Wang; Liyuan Wu; Heng-fu Zou
  20. How changes in the share of constrained households affect the effectiveness of monetary policy By Felipe Alves; Sushant Acharya
  21. The ECB Press Conference Statement Deriving a New Sentiment Indicator for the Euro Area By Dimitrios Kanelis; Pierre L. Siklos
  22. Inflation heterogeneity across households By Kiss, Regina; Strasser, Georg
  23. Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data By Omer Majeed; Jonathan Hambur; Robert Breunig
  24. Inflation heterogeneity across Austrian households. Evidence from household scanner data By Messner, Teresa; Rumler, Fabio
  25. The "real" exchange rate regime in China since 2015's exchange rate reform By Jinzhao Chen
  26. Non-Linear Inflation Dynamics in Menu Cost Economies By Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan
  27. Trust and monetary policy By De Grauwe, Paul; Ji, Yuemei
  28. Great Expectations: Performance of survey inflation expectations at improving model-based inflation forecasts By Meltem Chadwick; Tyler Smith
  29. Decomposing the Inflation Response to Weather-Related Disasters By Erwan Gautier; Christoph Grosse Steffen; Magali Marx; Paul Vertier
  30. On the Effects of Monetary Policy Shocks on Income and Consumption Heterogeneity By Minsu Chang; Frank Schorfheide
  31. Investigating the “Debt-Money-Prices” Triangle: Irving Fisher’s Theoretical Journey Toward the 100% Money Proposal By Demeulemeester, Samuel
  32. Whatever-It-Takes Policymaking during the Pandemic By Kathryn M.E. Dominguez; Andrea Foschi
  33. Robert Triffin, Japan and the quest for Asian Monetary Union By Maes, Ivo; Pasotti, Ilaria
  34. US Dollar swaps after LIBOR By Heidorn, Thomas; Meier, Rebecca
  35. A Choice-Based Approach to the Measurement of Inflation Expectations By Goldfayn-Frank, Olga; Kieren, Pascal; Trautmann, Stefan
  37. Agreement is money: Beyond the chartalist reading of Adam Smith By Michele Bee; Luiz Felipe Bruzzi Curi
  38. Quantitative Theory of Mony or Prices? A Historical, Theoretical, and Econometric Analysis By Gómez Julián, José Mauricio
  39. How Do Agents Form Macroeconomic Expectations? Evidence from Inflation Uncertainty By Tao Wang
  40. What Caused the Pandemic-Era Inflation?: Application of the Bernanke-Blanchard Model to Japan By Koji Nakamura; Shogo Nakano; Mitsuhiro Osada; Hiroki Yamamoto
  41. L’impact de l’inflation sur la distribution des gains de productivité de l’agriculture française By Jean-Philippe Boussemart; Salomé Kahindo; Raluca Parvulescu
  42. The reflux phase in monetary circuit theory and stock–flow consistent models By Edouard Cottin-Euziol; Hassan Bougrine; Louis-Philippe Rochon
  43. Interplay between Cryptocurrency Transactions and Online Financial Forums By Ana Fern\'andez Vilas; Rebeca P. D\'iaz Redondo; Daniel Couto Cancela; Alejandro Torrado Pazos
  44. WHERE IS CREDIT IN THE PRICE SPECIE FLOW? By Berdell, John; Menudo, José M.
  45. Silent elements of policy change: inflation and uprating mechanisms in the Low Countries By Bea Cantillon;; Anna Lemmens;; Wouter Neelen;; Rebecca van den Broeck;

  1. By: Sarah Arndt; Zeno Enders
    Abstract: We show that the impact of supply and monetary policy shocks on consumer prices is state-dependent. First, we let the data determine two inflation regimes and find that they are characterized by high and low inflation volatility. We then identify upstream supply shocks using instrumental variables based on data outliers in the producer price series. Such shocks exhibit a more substantial and more persistent effect on downstream prices during periods of elevated inflation volatility (State 2) compared to phases of more stable consumer price growth (State 1). Similarly, monetary policy shocks are more effective in State 2. Differenti-ating regimes by the level of inflation or the shock size does not reveal state dependency. The evidence supports a model in which producers optimally invest in price flexibility. This model predicts that stricter inflation targeting reduces price flexibility and, consequently, the pass-through of all shocks to inflation, beyond the standard demand channel.
    Keywords: Inflation Regimes, Supply Shocks, Monetary Policy, Cost Pass-Through, Producer Prices
    JEL: E31 E52 E32
    Date: 2024
  2. By: Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar.
    Keywords: Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB
    JEL: F31 F33 E51 G15
    Date: 2024–01
  3. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper focuses on the uncertainty effect on consumer price inflation based on a panel of 82 advanced, emerging, and developing economies studied over a sample period running from 1995 to 2022. In contrast to the previous literature, we particularly control for the role of monetary policy credibility by considering the monetary control classification of Cobham (2021) and by measuring the degree of anchoring of inflation expectations. We argue that the interpretation of uncertainty as a negative demand shock is appealing from a theoretical perspective but is unlikely to reflect uncertainty dynamics for countries with high inflation and/or low monetary policy credibility. We find that higher uncertainty boosts inflation. However, this effect is significantly reduced (or even eliminated) by both a strong degree of monetary control and a strong anchoring of inflation expectations, illustrating that both factors are of key importance for the propagation of uncertainty shocks.
    Keywords: Anchoring; Inflation expectations; Monetary policy; Survey data; Uncertainty
    JEL: E31 E52 E58
    Date: 2024
  4. By: Jorge Abad; Galo Nuño; Carlos Thomas
    Abstract: We analyze the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facilities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks’ deposit funding. However, this ‘deposit crunch’ has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of CBDC on the central bank’s operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a ‘floor’ system –with ample reserves– to a ‘corridor’ one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a ‘ceiling’ one with scarce reserves.
    Keywords: central bank digital currency, interbank market, search and matching frictions, excess reserves
    JEL: E42 E44 E52 G21
    Date: 2024
  5. By: Benoit Nguyen; Davide Tomio; Miklos Vari
    Abstract: Most central banks exited their decade-long accommodative monetary policy cycle by first raising rates, rather than starting by reducing their balance sheet. We show that the scarcity of government bonds---which were purchased under QE and held by the Eurosystem---reduces the transmission of rate hikes to money market rates. In July 2022, when the ECB increased its policy rates by 50bp for the first time in a decade, rates of repo transactions collateralized by the scarcest bonds increased by only 35bp. We show that this imperfect pass-through to repo rates is priced in treasury yields. Heterogeneous bond holdings across institutions imply that collateralized funding costs vary significantly across European institutions.
    Keywords: Natural Disasters; Extreme Weather; Inflation; Disaggregate Inflation; Inequality; Price Gouging
    JEL: E51 E52 E58 G21
    Date: 2023
  6. By: Gerelmaa Bayarmagnai (Reserve Bank of New Zealand)
    Abstract: This analytical note looks at how New Zealand households’ inflation expectations respond to changing prices — what inflation is now and how that shapes what people think it will be in future. Key findings - This Note presents empirical evidence suggesting that New Zealand households tend to pay more attention to inflation when it is high than when it is low. In the academic literature, this is known as rational inattention. - Rational inattention can result in a non-linear relationship between actual inflation and households’ inflation expectations. Once inflation rate rises above a certain threshold, for example, 2%, household inflation expectations line up closely with actual inflation. Thus, inflation expectations may be slow to respond to monetary policy announcements, and this may make it more difficult for the central bank to rein in high inflation by raising interest rates. - It is important for monetary policymakers to monitor this potential non-linearity in how households perceive and internalise inflation data. The Analytical Notes series encompasses a range of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank.
    Date: 2023–12
  7. By: Busetto, Filippo (Bank of England)
    Abstract: We study the determinants of the asymmetric behaviour of monetary policy expectations in the United States, Germany and the United Kingdom. A common factor based on macroeconomic data and survey variables has predictive ability above and beyond yield based factors for negative changes in expected rates during an easing cycle, but not for increases in expected rates during a tightening in monetary policy. At the same time, macroeconomic information does not have any asymmetric effect on the conditional distribution of term premia. We complement previous findings on the asymmetric predictability of expected rates by showing that monetary policy easing during crises is predictable. This is also relevant for policymakers, as the yield curve does not always provide an accurate picture of the expected future stance of monetary policy at turning points.
    Keywords: Interest rates; monetary policy; macro-finance; quantile regressions
    JEL: E43 E44 E52 E58
    Date: 2024–02–08
  8. By: Jules H. van Binsbergen; Marco Grotteria
    Abstract: We examine the transmission of monetary policy shocks to the long-duration liabilities of households and firms using high-frequency variation in 10-year swap rates around FOMC announcements. We find that four weeks after the announcement mortgage rates move one-for-one with 10-year swap rates, leaving little explanatory power for mortgage concentration, bank market power, or credit risk. Variation in credit risk does materially affect monetary policy transmission to corporate bonds. Expected future short rates and term premia play a significant role in driving both mortgage rates and corporate bond yields, which explains the Federal Reserve’s increased focus on these quantities.
    JEL: E40 E43 E44 E5 E50 E52 E58 G21 G51
    Date: 2024–02
  9. By: Stephane Dupraz; Magali Marx
    Abstract: How can a central bank avoid losing control over inflation expectations in the face of a large supply shock ? Under rational expectations, respecting the Taylor principle - increasing rates more than one for one with inflation - prevents self-fulfilling inflation and defines an active monetary policy. We reconsider the issue away from rational expectations, for a large class of boundedly rational expectations featuring both limited foresight and long-term learning. We show three results. (1) When restricting monetary policy to a Taylor rule, the Taylor principle does not prevent self-fulfilling inflation but hyperinflation spirals, unless for unrealistically high degrees of foresight. (2) Against hyperinflation spirals, active monetary policy can be characterized without restricting policy to a Taylor rule, as a sufficient increase of a weighted average of present and future expected policy rates. (3) The weights on future policy rates first increase but then decrease with the horizon, implying that delaying hikes too much requires larger hikes later, with a larger drop in output. Yet, being slow in hiking rates can be optimal provided a large cost on output stabilization, as it spreads the output cost over time.
    Keywords: De-anchoring, Taylor Principle, Bounded Rationality
    JEL: E52 E31 E43
    Date: 2023
  10. By: Kho, Stephen
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on asymmetries and the role of banking sector concentration. Using a local projections framework with 2003-2023 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to an unexpected tightening or easing of monetary policy. However, more concentrated domestic banking sectors do pass-on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy to deposit rates, which in turn may affect banking sector profitability. JEL Classification: D40, E43, E52, G21
    Keywords: banking sector, deposit rates, market power, monetary policy
    Date: 2024–01
  11. By: Bylund, Emma (Monetary Policy Department, Central Bank of Sweden); Iversen, Jens (Monetary Policy Department, Central Bank of Sweden); Vredin, Anders (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper discusses how monetary policy in Sweden has evolved since 1973. We provide a chronology of the different monetary policy regimes in place during the past fifty years and identify two main regimes, the pegged-but-adjustable exchange rate regime (1973 – 1992) and the inflation targeting regime (1993 – 2022). Inflation in Sweden has been more stable under the inflation targeting regime than under both the Bretton Woods system, and the pegged-but-adjustable exchange rate regime. GDP growth was higher and more stable during the Bretton Woods System. We argue that inflation targeting was implemented according to the simple text book version only during a short period, 1999-2007. We illustrate that economic developments in Sweden have in many respects been similar to that of Denmark. Lastly, we identify and discuss recurrent themes in the discussions of monetary policy under inflation targeting.
    Keywords: monetary policy; inflation targeting; exchange rate regimes
    JEL: E42 E52 E58 E65
    Date: 2023–11–01
  12. By: Ortiz, Marco; Inca, Arthur; Solf, Fabrizio
    Abstract: Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy.
    Keywords: Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics.
    JEL: E31 E32 E52 F41
    Date: 2024–01–28
  13. By: Nadezhda Ivanova (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: This paper asks the following questions. How does market structure reshape the transmission of monetary policy to bank lending? How are loan characteristics such as loan volume, maturity, lending rate, risk, and the extensive margin of lending affected? Is there a trade-off between financial stability and the strength of monetary transmission? We find that, on more concentrated markets, the effect of monetary policy on lending rate and risk taking is amplified whereas the effect on loan volume is muted. Our current findings may imply the existence of a trade-off between the strength of monetary policy transmission and financial stability, but are subject to further investigation.
    Keywords: Monetary policy transmission; Market concentration.
    JEL: E44 E52 G21 C14
    Date: 2024–01
  14. By: Reis, Ricardo
    Abstract: A central bank that faces inflation above target may fail to bring it down. This article discusses six ways in which this happens because the central bank is dominated by: misjudgment, expectations, fiscal policy, financial markets, recession fears, or external forces. It applies this approach to the challenge facing the ECB in 2023-24. The hope is that the factors identified can serve as warning signs for what to avoid.
    Keywords: monetary policy; interest rates; central bank independence; OUP deal
    JEL: E58 E50 E31
    Date: 2023–11–14
  15. By: Muñoz, Manuel A.; Soons, Oscar
    Abstract: The bulk of cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty and only a fraction of the population choosing to hoard cash. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Only consumers who are sufficiently pessimistic about bank stability hold cash. The introduction of a central bank digital currency (CBDC) as a store of value lowers the storage cost of public money and induces partial bank disintermediation, which is nevertheless mitigated by an increase in relative maturity transformation. This has heterogeneous welfare consequences across the population. While cash holders always benefit by switching to CBDC, each of all other consumers may be better off or not depending on the probability of a bank run, her (and all others’) belief about such probability and the degree of technological superiority of CBDC. JEL Classification: E41, E58, G11, G21
    Keywords: bank stability, cash hoarding, central bank digital currency, disagreement, uncertainty shocks, welfare, flight-to-safety
    Date: 2024–02
  16. By: Fisnik Bajrami (Charles University, Institute of Economic Studies, Faculty of Social Sciences, Prague, Czech Republic.)
    Abstract: Macroprudential policy has gained prominence for promoting financial stability. In this paper, we assess the effectiveness of macroprudential policy in reducing credit growth over a 22-year period across 129 countries. Additionally, we investigate the interaction between macroprudential policy, dollarisation, and various exchange rate regimes, examining their impact on different financial stability indicators. Our findings indicate that macroprudential policy significantly reduces credit growth within a quarter of implementation, though this is not evident in the case of soft peg exchange rate regimes. Furthermore, our analysis reveals that dollarised countries exhibit superior outcomes in financial stability when compared to alternative exchange rate regimes.
    Keywords: macroprudential policy, dollarisation, exchange rate, credit growth, non-performing loans, inflation, interest rates, empirical evaluation
    JEL: E42 E52 E58
    Date: 2024–02
  17. 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
  18. By: Fatih Altunok; Yavuz Arslan; Steven Ongena
    Abstract: While a higher monetary policy rate increases the payments for borrowers with adjustable-rate mortgages (ARMs) and reduces their disposable income, it increases the interest income of lenders, thereby improving lenders’ balance sheets. We find that when monetary policy tightens, banks with a higher share of ARMs experience better stock price performance, exhibit a stronger credit supply, and generate higher interest income compared to banks with a low ARM share. Therefore, our results imply that a higher ARM share might weaken monetary policy transmission through banks. In the event of a banking crisis, for instance, when interest income becomes vital, a decline in policy rates might even prove harmful if the ARM share is high.
    Keywords: Monetary policy, Adjustable rate mortgages, Fixed rate mortgages
    JEL: E50 E52 E58
    Date: 2023–07
  19. By: Liutang Gong (Guanghua School of Management and LMEQF, Peking University; School of International Economics and Management, Beijing Technology And Business University); Chan Wang (School of Finance, Central University of Finance and Economics); Liyuan Wu (Institute of World Economics and Politics, Chinese Academy of Social Science); Heng-fu Zou (Economics and Management School, Wuhan University)
    Abstract: In the literature on optimal monetary policy in open economies, the presence of local-currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production.
    Date: 2023–03–31
  20. By: Felipe Alves; Sushant Acharya
    Abstract: We measure how the change in the share of constrained households in Canada following the COVID-19 recession has impacted the effectiveness of monetary policy.
    Keywords: Coronavirus disease (COVID-19); Monetary policy transmission
    JEL: E21 E40 E50
    Date: 2024–02
  21. By: Dimitrios Kanelis; Pierre L. Siklos
    Abstract: We analyze the introductory statements of the ECB president and derive new sentiment indicators for the euro area based on a novel approach. To evaluate sentiment, we utilize a Large Language Model, namely FinBERT, which classifies the verbal sentiment of economics and finance-related textual data. We find that the ECB's conveyed sentiment about monetary policy, which is influenced by the economic outlook and the state of the euro area macroeconomy as expressed in speeches, plays a significant role in shaping the content of press conferences following a Governing Council decision. In contrast, speech sentiment regarding financial stability does not significantly influence introductory statements.
    Keywords: ECB, communication, financial stability, FinBERT, monetary policy, sentiment analysis
    JEL: E50 E58
    Date: 2024–01
  22. By: Kiss, Regina; Strasser, Georg
    Abstract: This paper studies the nature, evolution, and sources of inflation heterogeneity across households in France and Germany. Inflation differences are large and persistent. The two main sources of inflation heterogeneity are spatial differences in the prices paid for the same product and differences in the household-specific variety choice within a category. Income heterogeneity by itself is not a relevant determinant of inflation heterogeneity, but due to its correlation with household behaviour, a significant and timevarying inflation difference between income groups emerges. Substitution is strongly behaviour-driven and largely detached from the relative price. The dispersion of the household-level elasticity of substitution does not fully account for the heterogeneity of substitution behaviour. Substitution does not reduce the dispersion of inflation, confirming the central role of preference heterogeneity in inflation measurement. JEL Classification: D12, D30, E31, F45
    Keywords: household heterogeneity, inequality, inflation, shopping behaviour, substitution
    Date: 2024–01
  23. By: Omer Majeed (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Robert Breunig (Crawford School of Public Policy, Australian National University)
    Abstract: Recent papers have argued that monetary policy and economic conditions can influence the amount of innovative activity in the economy, and therefore productivity and living standards in the future. This paper examines whether this is the case for Australia, a small open economy that tends to import innovation from overseas. We find that contractionary (expansionary) monetary policy reduces (increases) aggregate research and development (R&D) spending, and that lower (higher) R&D spending reduces (increases) future productivity. However, using firm-level data and a broader survey measure of innovation that also captures adoption, we find heterogeneous responses across different firm types. Small firms decrease innovation in response to contractionary monetary policy shocks whereas large firms increase innovation. This heterogeneity appears to reflect differing exposure to the channels through which monetary policy affects innovation. These channels include affecting demand or affecting financial conditions and constraints. We also find that US monetary policy spills over and affects Australian firms' innovation. Overall, our results suggest that monetary policy and economic conditions have medium-run effects on productivity, though the effects are more heterogeneous than previously documented. While the effects may cancel out over a cycle, this finding highlights the importance of stabilisation policy in preventing medium-run economic scarring.
    Keywords: innovation; monetary policy; firm-level data
    JEL: E52 O30
    Date: 2024–02
  24. By: Messner, Teresa; Rumler, Fabio
    Abstract: It has been widely documented that households experience different inflation rates which are generally concealed in aggregate price indices. Using scanner data from a large household panel for Austria, we analyse price dynamics faced by individual households and try to explain the causes for the observed inflation differences. Considering not only consumption shares but also the specific product prices paid by households, we find a considerable and persistent degree of heterogeneity among household inflation rates. These are also quite variable over time, resulting from varying consumption baskets and active product substitution, allowing households to reduce their inflation exposure substantially. Factors like age and shopping behavior of households explain some of the inflation differences, whereas income does not seem to have a notable influence in normal times. However, during high inflation periods, the lowest income group is found to face higher inflation rates than other income groups. JEL Classification: D12, D30, E31
    Keywords: heterogeneity, household inflation, micro data
    Date: 2024–01
  25. By: Jinzhao Chen (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne, ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand)
    Abstract: Moving away from a fixed exchange rate in 2005, China has gradually enlarged the band of fluctuations of Renminbi (RMB) and implemented various reforms on its central parity to have a more flexible exchange rate regime. This paper studies the nature of the exchange rate regime in China since the exchange regime reform of August 2015. Relying on the selfexciting threshold autoregressive (SETAR) model, it identifies endogenously the band of inaction beyond which the People's bank of China (China's central bank) starts to intervene in the foreign exchange market to restrict further fluctuations. Based on the comparison of the estimated threshold with the official band, this paper shows that the RMB/USD exchange rate followed an intermediate regime similar to the crawling band but with only one single threshold of intervention which is much lower than the upper boundary of the announced band.
    Keywords: Exchange rate regime, self-exciting threshold autoregressive model (SETAR), Renminbi (RMB), Central bank intervention
    Date: 2023
  26. By: Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan
    Abstract: Canonical menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. They also predict implausibly large menu costs and misallocation in the presence of strategic complementarities. We resolve these shortcomings by extending the multi-product menu cost model along two dimensions. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to standard models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve.
    JEL: E0 E30
    Date: 2024–01
  27. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We analyze how trust affects the transmission of negative demand and supply shocks using a behavioural macroeconomic model. We define trust to have two dimensions: trust in the central bank’s inflation target and trust in the central bank’s capacity to stabilize the business cycle. We find, first, that when large negative shocks occur the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories trust collapses, in the good trajectories it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations matters. Unfavorable initial expectations drive the economy into a bad trajectory, favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks.
    Keywords: behavioral macroeconomics; monetary policy; trust; Wiley deal
    JEL: E32 E52
    Date: 2024–01–26
  28. 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
  29. By: Erwan Gautier; Christoph Grosse Steffen; Magali Marx; Paul Vertier
    Abstract: This paper provides empirical evidence on the compositional effect of weather-related disasters on consumer prices. We combine data on monthly granular inflation for 12 CPI product categories with data on extreme weather events for four French overseas territories sporadically hit by large weather-related disasters. We find that disasters lead to a maximum rise in consumer prices of 0.5 percent with substantial heterogeneity in the price response. An immediate strong surge in the prices of food, and notably of fresh products, is partially offset by a decline in the prices of manufactured products and services. The effects of weather-related disasters dissipate after four months and differ along the income distribution, notably raising inflation for low-income households by more. Price controls dampen the price response on impact, but lead to similar adjustments in the price level after six months.
    Keywords: Natural Disasters; Extreme Weather; Inflation; Disaggregate Inflation; Inequality; Price Gouging
    JEL: E31 Q54
    Date: 2023
  30. By: Minsu Chang (Georgetown University); Frank Schorfheide (University of Pennsylvania)
    Abstract: In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2024) to study the eeffects of monetary policy shocks (conventional and informational) on the cross-sectional distribution of U.S. earnings (from the Current Population Survey), consumption, and financial income (both from the Consumer Expenditure Survey). We find that a conventional expansionary monetary policy shock reduces earnings inequality, in large part by lifting individuals out of unemployment. There is a weakly positive effect on consumption inequality and no effect on financial income inequality, but credible bands are wide.
    Keywords: Consumption Distribution, Earnings Distribution, Financial Income Distribution, Functional Vector Autoregressions, Monetary Policy Shocks
    JEL: C11 C32 C52 E32
    Date: 2024–02–14
  31. By: Demeulemeester, Samuel
    Abstract: This paper aims to show how the 100% money proposal, which Irving Fisher came to support in 1935, connects to the rest of his work on monetary instability—in particular, to his credit cycle analysis of 1911, and his debt-deflation theory of 1932-33. Behind these respective analyses, we identify a common explanatory pattern of monetary fluctuations, the “debt-money-prices” triangle, which we use to show how Fisher’s explanations evolved over time, and how his advocacy of 100% money came as a logical conclusion.
    Date: 2024–01–26
  32. By: Kathryn M.E. Dominguez; Andrea Foschi
    Abstract: Central banks across the globe introduced large-scale asset purchase programs to address the unprecedented circumstances experienced during the pandemic. Many of these programs were announced as open-ended to shock-and-awe market participants and restore confidence in financial markets. This paper examines whether these whatever-it-takes announcements had larger effects than announcements with explicit limits on scale. We use a narrative approach to categorize announcements made by twenty-two central banks, and event study, propensity-score-matching, and local projection methods to measure the short-term effects of policy announcements on exchange rates and sovereign bond yields. We find that on average a central bank's first whatever-it-takes announcement lowers 10-year bond yields by an additional 25 basis points relative to size-limited announcements, suggesting that communication of potential policy scale matters. Our results for yields hold for both advanced and emerging economies, while exchange rates go in opposing directions, muting their response when we group all countries together.
    JEL: E44 E58 F42 G14
    Date: 2024–02
  33. By: Maes, Ivo; Pasotti, Ilaria
    Abstract: Especially with the Asian financial crisis of 1997-1998, Asian countries have advocated a profound reform of the international financial architecture. Their proposals focused on two main axes: a reform of the global financial system and stronger regional monetary integration in Asia. There are here significant parallels with the ideas of Robert Triffin (1911-1993). Triffin became famous with trenchant analyses of the vulnerabilities of the international monetary system. Also now, the Triffin dilemma is still present among international monetary policymakers, also in Asia. Triffin put forward several proposals for reforming the global monetary system, but he also developed proposals for regional monetary integration. These were very much based on his experience with the European Payments Union, and focused on the creation of a (European) Reserve Fund and a (European) currency unit. In this paper we focus on Triffin’s proposals for an Asian payments union in the late 1960s, giving special attention to Japan (in Triffin’s time the biggest Asian economy, moreover Triffin had an important Japanese network).
    Date: 2024–01–26
  34. By: Heidorn, Thomas; Meier, Rebecca
    Abstract: The main focus of this paper is a comprehensive overview of the US$ reference rate reform, with a particular focus on its implications for USD interest rate swaps (IRS). This paper aims to shed light on the current situation and future developments in a changing financial landscape. This paper discusses the change from US$-LIBOR to the Secured Overnight Financing Rate (SOFR) and the Chicago Mercantile Exchange (CME) Term SOFR as new reference rates. Main changes for US$ IRS against SOFR is a fixing-in-arrears, a loss in the money market term structure, and a change of implicit credit spreads. As only clients are allowed to use CME Term SOFR, banks face basis risk in hedging in the interbank market. As the SOFR is linked to treasuries instead of bank risk, in a crisis the difficulties of banks will increase. Corporate treasuries face a less efficient IRS market, wider ask-bid-spreads, changes in credit spreads, and an increase in complexity as the US money market now differs considerably from the EURO world.
    Keywords: LIBOR Reform, LIBOR, Secured Overnight Financing Rate, SOFR, Term SOFR, CME Term SOFR, RFRs, US$ overnight rate, interest rate swaps, US$ interest rate swaps, Bank Treasury, Corporate Treasury
    Date: 2024
  35. By: Goldfayn-Frank, Olga; Kieren, Pascal; Trautmann, Stefan
    Abstract: In macroeconomic surveys, inflation expectations are commonly elicited via density forecasts in which respondents assign probabilities to pre-specified ranges in inflation. This question format is increasingly subject to criticism. In this study, we propose a new method to elicit inflation expectations which is based on prior decision theoretic research. We demonstrate that it leads to well-defined expectations with central tendencies close to the corresponding point forecasts and to lower forecast uncertainty than density forecasts. In contrast to currently employed methods, the approach is robust to differences in the state of the economy and thus allows comparisons across time and across countries. Additionally, the method is not very time consuming and portable in the sense that it can be applied to different macroeconomic measures.
    Keywords: Inflation expectations; measurement; surveys
    Date: 2024–02–14
  36. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: The main monetary issue in Britain during the early 19th-century war with France was about prolonging the suspension of the convertibility of the Bank of England note, which had been decided in 1797. Amidst a difficult return to a peacetime economy it would also be the main issue in the post-war period, since it would take six years after Waterloo before the pre-war monetary situation was re-enacted. During more than two decades, Lord Grenville's views on the monetary system did not change. They were mostly centred on two aspects. First, the suspension of cash payments of its notes by the Bank of England was a calamity: justified at the outset as a temporary measure of necessity, it should not be prolonged year after year, even in time of war. Second, the substitution of country banks' notes for coins which had taken place all over England outside the London area was a threat to economic and social stability. These unflagging views did not prevent Grenville from advocating gradualism in what was to be implemented in order to return to a sound monetary system – that is, one endowed with a metallic standard thanks to the convertibility of the Bank of England note into coin and to the pre-eminence of specie in the country circulation. This mixture of monetary orthodoxy and gradualism led Grenville in 1819 to support Ricardo's novel plan for convertibility into bullion, provided it was understood as a temporary scheme aiming at facilitating the resumption of convertibility into coin. It also led him in the 1820s to resist the pressures in favour of the return to a double standard (gold and silver). Based on Grenville's speeches in Parliament and on private correspondence, the present paper is a contribution to the special session "Money, Finance and Trade at War. The case of early nineteenth-century Britain".
    Keywords: Lord Grenville, Bank of England note, convertibility, monetary system
    Date: 2023–06–15
  37. By: Michele Bee (Cedeplar/UFMG); Luiz Felipe Bruzzi Curi (Cedeplar/UFMG)
    Abstract: This article shows that Adam Smith is the precursor of neither the orthodox nor the heterodox view of money, as has been doubly argued. According to him, money arose neither as a medium of exchange introduced to overcome the difficulties of barter, as in the orthodox view, nor as a unit of account established by the state, as in the heterodox view. On the contrary, as this article shows, for him money arises from that agreement on the valuation of mutual services that originally takes place in exchange. Money, thus, emerges spontaneously in exchange, but, contrary to the orthodox view, it emerges primarily as a measure of value. At the same time, if the state can intervene to guarantee the universality of a means of payment to settle claims and debts, for Smith this is only the fruit of the historical process and not its beginning, as in the heterodox view.
    Keywords: Adam Smith; chartalism; money; agreement; self-esteem.
    JEL: B10 B12 B31 D46 E40 Z13
    Date: 2024–02
  38. By: Gómez Julián, José Mauricio
    Abstract: This research studies the relation between money and prices and its practical implications analyzing quarterly data from United States (1959-2022), Canada (1961-2022), United Kingdom (1986-2022), and Brazil (1996-2022). The historical, logical, and econometric consistency of the logical core of the two main theories of money is analyzed using objective bayesian and frequentist machine learning models, bayesian regularized artificial neural networks, and ensemble learning. It is concluded that money is not neutral at any time horizon and that, despite money is ultimately subordinated to prices, there is a reciprocal influence over time between money and prices which constitute a complex system. Non-neutrality is transmitted through aggregate demand and is based on the exchange value of money as a monetary unit.
    Date: 2024–02–05
  39. By: Tao Wang
    Abstract: This paper studies the behaviors of uncertainty through the lens of several popular models of expectation formation. The full-information rational expectations model (FIRE) predicts that both the ex ante uncertainty and the variance of ex post forecast errors are equal to the conditional volatility of shocks to the fundamentals. Incomplete-information models such as Sticky Expectation (SE) and Noisy Information (NI) and non-rational models such as Diagnostic Expectations (DE) predict distinctive rankings of these moments. The paper also shows that uncertainty provides additional parametric restrictions to favor SE over NI as a model of information rigidity, although both predict similar aggregate patterns of forecast errors and disagreement.
    Keywords: Business fluctuations and cycles; Inflation and prices; Monetary policy and uncertainty
    JEL: D84 E31 E71
    Date: 2024–02
  40. By: Koji Nakamura (Bank of Japan); Shogo Nakano (Bank of Japan); Mitsuhiro Osada (Bank of Japan); Hiroki Yamamoto (Bank of Japan)
    Abstract: Many countries have experienced high inflation since the COVID-19 pandemic. Japan is no exception, albeit lower levels than those of other countries. This paper analyzes the direct and indirect effects of product-market and labor-market shocks on prices and nominal wages using the model proposed by Bernanke and Blanchard (2023). With minor modifications to incorporate the dual structure of the Japanese labor market, the model achieved a good fit to actual Japanese data. The main findings are as follows. First, the high inflation that Japan has experienced in the wake of the pandemic can be explained mostly by product-market specific shocks such as energy and food price spikes, but not by labor market tightness. This result is similar to the U.S. results presented in the Bernanke-Blanchard paper, which is somewhat surprising given the differences between Japan and the U.S. in labor market structure and firms' price- and wage-setting behavior. Second, Japan's low inflation relative to the U.S. during this period can be explained by a difference in the initial conditions of the underlying inflation trend before the pandemic and a difference in the degree of labor market tightness. Lastly, the model suggests that the impact on inflation of changes in labor market tightness was weaker in Japan.
    Keywords: Inflation; Wages; Labor Market; Inflation Expectation; COVID-19
    JEL: E31 E24 E52
    Date: 2024–02–16
  41. By: Jean-Philippe Boussemart (Univ. Lille, CNRS, IESEG School of Management, UMR 9221 – LEM, F-59000, France); Salomé Kahindo (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 – LEM, F-59000, France); Raluca Parvulescu (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 – LEM, F-59000, France)
    Abstract: It is imperative to consider the impact of monetary erosion when examining the distribution of productivity gains through variations in the prices of inputs and outputs within the agricultural sector. In this study, we will utilize productivity surplus accounts to comprehensively analyze how monetary erosion affects the allocation of price advantages among stakeholders involved in agricultural production. In light of the current backdrop of resurging general inflation and a reversal in food price trends, we then present an empirical analysis of productivity gains in the French agriculture sector spanning from 1959 to 2022. Our objective is to precisely assess how inflation affects the distribution of the productivity surplus among the various participants in the process, including customers, farmers, suppliers, the government, landowners, financial institutions, and others.
    Keywords: total factor productivity, surplus account, inflation, agriculture
    Date: 2024–01
  42. By: Edouard Cottin-Euziol (LC2S - Laboratoire caribéen de sciences sociales - CNRS - Centre National de la Recherche Scientifique - UA - Université des Antilles); Hassan Bougrine (Laurentian University); Louis-Philippe Rochon (Laurentian University)
    Abstract: Stock–flow consistent (SFC) modelling and monetary circuit theory (MCT) have many similarities. However, an important difference concerns the reflux phase, during which the credits issued by banks are repaid. This phase is constitutive of MCT models, but does not generally appear explicitly in SFC models. The authors propose here to develop an SFC model in which the bank loans issued at the beginning of a period are explicitly repaid at the end of it. The repayment of long-term bank loans financing investments will then represent a leakage outside the monetary circuit and affect the level of aggregate demand and the dynamics of the model. The authors show that considering these repayments could have a lasting effect on corporate profits, corporate indebtedness, and growth of production. This result suggests that it could be interesting to focus more on the reflux phase within SFC models, taking inspiration from MCT.
    Keywords: monetary circuit, stock–flow consistency, reflux, bank loans
    Date: 2024
  43. By: Ana Fern\'andez Vilas; Rebeca P. D\'iaz Redondo; Daniel Couto Cancela; Alejandro Torrado Pazos
    Abstract: Cryptocurrencies are a type of digital money meant to provide security and anonymity while using cryptography techniques. Although cryptocurrencies represent a breakthrough and provide some important benefits, their usage poses some risks that are a result of the lack of supervising institutions and transparency. Because disinformation and volatility is discouraging for personal investors, cryptocurrencies emerged hand-in-hand with the proliferation of online users' communities and forums as places to share information that can alleviate users' mistrust. This research focuses on the study of the interplay between these cryptocurrency forums and fluctuations in cryptocurrency values. In particular, the most popular cryptocurrency Bitcoin (BTC) and a related active discussion community, Bitcointalk, are analyzed. This study shows that the activity of Bitcointalk forum keeps a direct relationship with the trend in the values of BTC, therefore analysis of this interaction would be a perfect base to support personal investments in a non-regulated market and, to confirm whether cryptocurrency forums show evidences to detect abnormal behaviors in BTC values as well as to predict or estimate these values. The experiment highlights that forum data can explain specific events in the financial field. It also underlines the relevance of quotes (regular mechanism to response a post) at periods: (1) when there is a high concentration of posts around certain topics; (2) when peaks in the BTC price are observed; and, (3) when the BTC price gradually shifts downwards and users intend to sell.
    Date: 2023–11
  44. By: Berdell, John; Menudo, José M.
    Abstract: Standard models of the price specie flow do not consider credit. Yet Hume and preceding authors were reacting to the implosion of Law’s financial bubble. We delineate the anti-credit thesis contained within the evolution of eighteenth century balance of payments analyses. A string of eighteenth century authors argued over whether the balance of payments constituted a binding constraint on credit creation. As part of their analysis they considered how changes in the money supply might alter output, prices, employment, capital, and population. How new money entered the economy was often critical. We start with Law and then consider Melon, Gervaise, Vanderlint, Cantillon, Montesquieu, Hume, Steuart, Forbonnais, and Smith. In closing we pay particular attention to the idea that Hume and Smith effectively displaced preceding, often ‘mercantilist’, analyses of credit and the balance of payments.
    Date: 2024–02–02
  45. By: Bea Cantillon;; Anna Lemmens;; Wouter Neelen;; Rebecca van den Broeck;
    Abstract: Policy responses to the inflation crisis in Belgium and the Netherlands show great similarities but also significant differences. In both countries responses were quick and substantial. Measures covered prices more than household incomes while universal, not earmarked measures exceeded selective interventions. However, there were also major differences between the two countries. Because Belgium, unlike the Netherlands, could fall back on the mechanism of automatic indexation of wages and social benefits it relied more on existing universal policy instruments while in the Netherlands more targeted ad hoc measures were taken which also allowed for innovation in policy making. These different policy paths have their origins in the 1980s when policy models began to diverge and different legacies emerged.
    Date: 2023–12

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