nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒03‒11
twenty-six papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Managing the transition to central bank digital currency By Katrin Assenmacher; Massimo Ferrari Minesso; Arnaud Mehl; Maria Sole Pagliari
  2. The lending implications of banks holding excess capital By Neryvia Pillay; Konstantin Makrelov
  3. Report on the payment attitudes of consumers in Italy: results from the ECB SPACE 2022 survey By Gabriele Coletti; Alberto Di Iorio; Emanuele Pimpini; Giorgia Rocco
  4. On household labour supply in sticky-wage HANK models By Gerke, Rafael; Giesen, Sebastian; Lozej, Matija; Röttger, Joost
  5. The Housing Supply Channel of Monetary Policy By Bruno Albuquerque; Martin Iseringhausen; Frederic Opitz
  6. Monetary policy in the presence of supply constraints: Evidence from German firm-level data By Balleer, Almut; Noeller, Marvin
  7. The Impact of Derivatives Collateralization on Liquidity Risk: Evidence from the Investment Fund Sector By Audrius Jukonis; Elisa Letizia; Linda Rousova
  8. The Long and Unfinished Road to Friedman and Meiselman’s “The Relative Stability of Monetary Velocity and the Investment Multiplier” By Tavlas, George S.
  9. The post-pandemic inflation debate: a critical review By Diogo Martins
  10. The Role of International Financial Integration in Monetary Policy Transmission By Jing Cynthia Wu; Yinxi Xie; Ji Zhang
  11. The Italian Banking System During the 1907 Financial Crisis and the Role of the Bank of Italy By Francesco Vercelli
  12. Repo, Sponsored Repo and Macro-prudential Regulation By Miguel Fernandes; Mario Pascoa
  13. The Federal Reserve’s responses to the post-Covid period of high inflation By Jane E. Ihrig; Christopher J. Waller
  14. U.S. Inflation Expectations During the Pandemic By Euihyun Bae; Andrew Hodge; Miss Anke Weber
  15. Nowcasting consumer price inflation using high-frequency scanner data: Evidence from Germany By Beck, Günter W.; Carstensen, Kai; Menz, Jan-Oliver; Schnorrenberger, Richard; Wieland, Elisabeth
  16. The Impact of the Cost-of-Living Crisis on European Households By CHAFWEHÉ Boris; RICCI Mattia; STOEHLKER Daniel
  17. Second-Round Effects of Oil Prices on Inflation in the Advanced Foreign Economies By Harun Alp; Matthew Klepacz; Akhil Saxena
  18. Uncertainty and the Federal Reserve’s Balance Sheet Monetary Policy. By Valentina Colombo; Alessia Paccagnini
  19. What Drives U.S. Import Price Inflation? By Mary Amiti; Oleg Itskhoki; David Weinstein
  20. Insurers’ M&A in the United States during the 1990-2022 period: Is the Fed monetary policy a causal factor By Dionne, Georges; Fenou, Akouété; Mnasri, Mohamed
  21. Who Pays the Bill? Distributional and Fiscal Consequences of Elevated Inflation in Thailand By Piyaporn Chote; Ms. Corinne C Delechat; Thanaphol Kongphalee; Vatsal Nahata; Mouhamadou Sy; Pym Manopimoke; Tamon Yungvichit
  22. The transmission of bank liquidity shocks: Evidence from the Eurosystem collateral framework By Hüttl, Pia; Kaldorf, Matthias
  23. Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics By Masashige Hamano; Francesco Pappadà; Maria Teresa Punzi
  24. Predictive Power of U.S. Macroeconomic Factors for the Dollar/Won Real Exchange Rate By Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
  25. Artificial intelligence in central banking: benefits and risks of AI for central banks By Ozili, Peterson K
  26. Impact of interoperability regulation on the use of digital payments in Peru By Celene Ancalle; Maria Gracia Garcia

  1. By: Katrin Assenmacher; Massimo Ferrari Minesso; Arnaud Mehl; Maria Sole Pagliari
    Abstract: We develop a two-country DSGE model with financial frictions to study the transi- tion from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost- free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution meth- ods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand.
    Keywords: Central bank digital currency, open-economy DSGE models, steady- state transition, occasionally binding constraints
    JEL: E50 E58 F30 F41
    Date: 2024–02
  2. By: Neryvia Pillay; Konstantin Makrelov
    Abstract: Banks hold capital above microprudential and macroprudential regulatory requirements for a variety of reasons, including as a risk mitigation measure. In this study, we assess how decisions around the size of excess capital as well as monetary and financial stability actions impact sectoral lending in South Africa. Using a unique set of micro data for the South African banking sector for the period 2008 to 2020, provided by South Africas Prudential Authority, our analysis controls for bank characteristics such as bank size, profitability and liquidity. Our results suggest that banks decisions around holding additional capital affect their lending. As expected, monetary policy actions have a strong impact on bank lending and so do regulatory changes to bank capital requirements. These impacts tend to be smaller for larger banks, in line with results published in the global literature. Our results highlight the difficulties of thinking about policy in a Tinbergen rule type of world. Fiscal, microprudential, macroprudential and monetary policy actions can affect price and financial stability goals through their impact on credit extension. When policies work at cross purposes, they can easily undermine each others goals.
    Date: 2024–01–16
  3. By: Gabriele Coletti (Bank of Italy); Alberto Di Iorio (Bank of Italy); Emanuele Pimpini (Bank of Italy); Giorgia Rocco (Bank of Italy)
    Abstract: This report presents findings for Italy from the ‘Study on the payment attitudes of consumers in the euro area (SPACE) – 2022’, conducted by the European Central Bank between the end of 2021 and the first half of 2022. The primary aim of the report is to provide updated information on the prevailing trends in the use of payment methods in Italy. Additionally, where applicable and useful, the report compares Italy’s results with those of the euro area and with data from the previous run of the survey, conducted in 2019, and from the ‘Study on the use of cash by households in the euro area’ (SUCH), conducted in 2015-16. The data show that, while cash remains the dominant payment method at the Point of Sale (POS), especially for low-value purchases (up to €50), its overall usage has declined in comparison with the findings of the previous editions of the survey. In terms of value of transactions, non-cash payments have gained importance, accounting for more than half of total expenditures at POS. Cashless payments are increasing overall, supported also by an uptake in e-commerce purchases. Specifically, cards, besides being the greatest competitor of cash for POS transactions, continue to be the most used means of payment both in terms of number and value of transactions for online purchases.
    Keywords: payment instruments, cash, payment habits, consumers’ payment behaviour
    JEL: D12 D14
    Date: 2023–11
  4. By: Gerke, Rafael; Giesen, Sebastian; Lozej, Matija; Röttger, Joost
    Abstract: Heterogeneous-agent New Keynesian models with sticky nominal wages usually assume that wage-setting unions demand the same amount of hours from all households. As a result, unions do not take account of the fact that (i) households are heterogeneous in their willingness to work, and that (ii) some households might have to work more hours than they would like to. In this paper, we consider two departures from the standard modelling approach. First, we consider a model version in which unions can demand different hours from different households, directly taking household heterogeneity into account. In this case, we show that unions find it optimal to ration hours worked for all households, such that nobody works more than desired. Compared to the standard case in which all households work the same amount by assumption, the response of output, wages and inflation to monetary policy shocks becomes notably less pronounced. This attenuation reflects that hours worked respond differently across the income distribution. The second model version we consider maintains the assumption that all households work the same amount but prohibits unions from requiring any household to work more than it would like to. This modification substantially lowers the effective stickiness of nominal wages, resulting in markedly different wage and inflation dynamics.
    Keywords: Heterogeneous households, HANK, labour supply, nominal wage rigidity, monetary policy
    JEL: D31 E21 E24 E31 E52 E58 J22
    Date: 2024
  5. By: Bruno Albuquerque; Martin Iseringhausen; Frederic Opitz
    Abstract: We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates.
    Keywords: Credit conditions; FAVAR; house prices; monetary policy; regional data; supply elasticities
    Date: 2024–02–02
  6. By: Balleer, Almut; Noeller, Marvin
    Abstract: Using unique firm-level survey data from Germany, this paper investigates two measures of supply constraints: a new direct measure that indicates material shortages and capacity utilization, a widely accepted measure of bottlenecks and slack. We document substantial heterogeneity in supply constraints both across and particularly within industries and show that material constraints are not very persistent at the firm-level. We also show that high capacity utilization is not indicative of the presence of material constraints at the firm-level. We then ask how supply constraints propagate monetary policy shocks. We find that material-constrained firms increase prices substantially more often than unconstrained firms in response to expansionary monetary policy shocks, even when capacity utilization is low. Our results therefore suggest that material constraints exert substantial inflationary pressure in times of loose monetary policy.
    Abstract: Anhand einzigartiger Erhebungsdaten deutscher Industrieunternehmen untersucht diese Studie zwei Maße für Angebotsengpässe: ein neues direktes Maß für Materialengpässe sowie Kapazitätsauslastungen in der Produktion. Wir dokumentieren eine beträchtliche Heterogenität in Angebotsengpässen sowohl zwischen als auch innerhalb von Branchen und zeigen, dass Materialengpässe auf Unternehmensebene nicht sehr dauerhaft sind. Wir zeigen auch, dass eine hohe Kapazitätsauslastung nicht notwendigerweise auf das Vorhandensein von Materialengpässen auf Unternehmensebene hindeutet. Anschließend gehen wir der Frage nach, wie Angebotsengpässe die Transmission geldpolitischer Schocks beeinflussen. Wir stellen fest, dass Unternehmen mit Materialengpässen ihre Preise als Reaktion auf expansive geldpolitische Schocks wesentlich häufiger erhöhen als Unternehmen ohne Materialengpässe, selbst wenn die Kapazitätsauslastung niedrig ist. Unsere Ergebnisse deuten daher darauf hin, dass materielle Beschränkungen in Zeiten einer lockeren Geldpolitik einen erheblichen Inflationsdruck ausüben.
    Keywords: Supply constraints, capacity utilization, price setting, local projections, monetary policy
    JEL: E31 E52 C22
    Date: 2023
  7. By: Audrius Jukonis; Elisa Letizia; Linda Rousova
    Abstract: Stricter derivative margin requirements have increased the demand for liquid collateral, but euro area investment funds, which use derivatives extensively, have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, we assess whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives under a range of stress scenarios. The estimates indicate that between 13 percent and 33 percent of euro area funds with sizeable derivatives exposures may not have sufficient liquidity buffers to meet the calls under adverse market shocks. As a result, they are likely to redeem money market fund (MMF) shares, procyclically sell assets, and draw on credit lines, thus amplifying the market dynamics under such stress scenarios. Our findings highlight the importance of further work to assess the potential role of macroprudential policies for nonbanks, particularly regarding liquidity risk in funds.
    Keywords: variation margin; EMIR data; market stress; big data; nonbank financial intermediaries
    Date: 2024–02–09
  8. By: Tavlas, George S.
    Abstract: Milton Friedman and David Meiselman’s 1963 article “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897-1958, ” was one of the most influential studies to come out of the Keynesian-monetarist debates of the 1960s and 1970s. The gestation of the article, however, is shrouded with considerable inaccuracy and ambiguity. I use archival materials to provide a more accurate chronological ordering of the gestation of the article than has hitherto been available. I show that the gestation was subject to considerable delays. I provide reasons that explain why a long-promised follow-up paper was never completed and why a book sequel to Friedman’s 1956 Studies in the Quantity Theory of Money, planned as a co-edited work shortly after the appearance of the Friedman and Meiselman 1963 article, was not published until 1970 and was edited by Meiselman alone.
    Date: 2024–01–26
  9. By: Diogo Martins
    Abstract: This article provides a critical review of the post-pandemic inflation debate. The first part structures the debate through the classification of the arguments into two broad categories (the neoclassical view and the critical political economy view) along with several subcategories. The classification is informed by the positions assumed by debate participants regarding the origin and propagation mechanisms of inflation, together with the economic policy solutions advanced to face the current inflationary episode. The second part is focused on showing that the hegemony of contractionary monetary policy as a policy response to address contemporary inflation is based on weak foundations, whose theoretical and empirical arguments have been consistently and convincingly disputed in critical political economy circles over the last decades.
    Keywords: Inflation; pandemic; critical political economy; neoclassical economics; central banks; monetary policy.
    JEL: E12 E31 E32 E52 E61 E64
    Date: 2024–01
  10. By: Jing Cynthia Wu; Yinxi Xie; Ji Zhang
    Abstract: Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission.
    JEL: E40 E5 F30
    Date: 2024–02
  11. By: Francesco Vercelli (Bank of Italy)
    Abstract: This paper examines the Italian banking system during the 1907 financial crisis, from start to finish. Using bank balance sheet data from the Historical Archive of Credit in Italy, we analyse the developments of the banking system in the run-up to the crisis. We show that the four Italian mixed banks, which registered a rapid growth at the beginning of the 20th century, were little engaged in the traditional activity of bill discounting and largely involved in ‘repurchase agreements’ on stocks and in correspondent current accounts. Because of this business model, the mixed banks – and in particular the Società Bancaria Italiana – turned out to be fragile when the international crisis hit the country. Then we analyse the complex interactions between the major financial institutions and the government in order to face the crisis. We focus on the role of the Bank of Italy, which acted as a modern central bank for the first time since its creation.
    Keywords: financial crisis, history of banking
    JEL: C81 G21 N23 N24
    Date: 2022–06
  12. By: Miguel Fernandes (University of Surrey); Mario Pascoa (University of Surrey)
    Abstract: The repo market played an important role in the 2007-2008 crisis and its aftermath. The “run on repo†started in 2007 when cash lenders withdrew their repo funding due to concerns over securitized mortgages as collateral and haircuts rose dramatically as described in Gorton and Metrick (2012). The combination of very large, unprecedented haircuts with declining asset values, helped fuel the insolvency problems in the banking sector, which would eventually lead to massive bailouts throughout 2008 and the bankruptcy of some major banks. In the following years, the repo market recovered most of its influence and size, but the Basel III regulations that were imposed to prevent future banking crises and limit leverage would create new frictions in the repo market. The “leverage ratio†in particular has perverse effect on the repo markets. The “leverage ratio†demands that banks hold Tier 1 capital as a percentage of their total assets.
    Date: 2024–02
  13. By: Jane E. Ihrig; Christopher J. Waller
    Abstract: In the face of the COVID-19 pandemic in March 2020, the Federal Reserve committed to using its full range of tools to support the U.S. economy. Over the next year and a half, with progress on vaccinations and strong policy support, indicators of economic activity and employment strengthened while inflation moved higher. Faced with a tight labor market and elevated inflation, the Federal Open Market Committee (FOMC) began a process of unwinding the very accommodative stance of monetary policy and moving to a restrictive policy stance to address inflation pressures. Here we review the sequence of actions taken by the Committee between late 2020 and mid-2023 as well as discuss some issues it contemplated along the way; the table provides a chronological list of key events over this period.
    Date: 2024–02–14
  14. By: Euihyun Bae; Andrew Hodge; Miss Anke Weber
    Abstract: This paper studies how and why inflation expectations have changed since the emergence of Covid-19. Using micro-level data from the University of Michigan Survey of Consumers, we show that the distribution of consumer expectations at one-year and five-ten year horizons has widened since the surge of inflation during 2021, along with the mean. Persistently high and heterogeneous expectations of consumers with less education and lower income are mainly responsible. A simple model of adaptive learning is able to mimic the change in inflation expectations over time for different demographic groups. The inflation expectations of low income and female consumers are consistent with using less complex forecasting models and are more backward-looking. A medium-scale DSGE model with adaptive learning, estimated during 1965-2022, has a time-varying solution that produces lower forecast errors for inflation than a variant with rational expectations. The estimated model interprets the surge of inflation in 2021 mainly as the result of a price markup shock, which is more persistent and requires a larger and more persistent monetary policy response than under rational expectations.
    Keywords: Inflation Expectations; Learning; Forecasting
    Date: 2024–02–09
  15. By: Beck, Günter W.; Carstensen, Kai; Menz, Jan-Oliver; Schnorrenberger, Richard; Wieland, Elisabeth
    Abstract: We study how millions of highly granular and weekly household scanner data combined with novel machine learning techniques can help to improve the nowcast of monthly German inflation in real time. Our nowcasting exercise targets three hierarchy levels of the official consumer price index. First, we construct a large set of weekly scanner-based price indices at the lowest aggregation level underlying official German inflation, such as those of butter and coffee beans. We show that these indices track their official counterparts extremely well. Within a mixed-frequency modeling framework, we also demonstrate that these scanner-based price indices improve inflation nowcasts at this very narrow level, notably already after the first seven days of a month. Second, we apply shrinkage estimators to exploit the large set of scanner-based price indices in nowcasting product groups such as processed and unprocessed food. This yields substantial predictive gains compared to a time series benchmark model. Finally, we nowcast headline inflation. Adding high-frequency information on energy and travel services, we construct highly competitive nowcasting models that are on par with, or even outperform, survey-based inflation expectations that are notoriously difficult to beat.
    Keywords: Inflationnowcasting, machine learningmethods, scannerprice data, mixed-frequency modeling
    JEL: E31 C55 E37 C53
    Date: 2023
  16. By: CHAFWEHÉ Boris; RICCI Mattia (European Commission - JRC); STOEHLKER Daniel (European Commission - JRC)
    Abstract: We study the impact of the recent cost-of-living crisis on European households using detailed data on individual consumption, income and wealth. We account for the various channels through which inflation affects individual households, and for the monetary and fiscal policy responses to the inflationary shock. Our results indicate that the effects of inflation through the revaluation of nominal wealth and income are one order of magnitude larger than the effect arising from differences in individual consumption patterns. On average, the effect of inflation is regressive, with lower income households suffering the biggest losses. Among population subgroups, young individuals and households with mortgage debt are the biggest winners of the inflation surge, while older individuals with large nominal net savings positions are the main losers. Fiscal policy measures, especially those targeted towards low-income households, were successful in dampening the negative and regressive impact of inflation.
    Date: 2024–01
  17. By: Harun Alp; Matthew Klepacz; Akhil Saxena
    Abstract: The surge in oil prices in the wake of the post-COVID-19 economic rebound and Russia's invasion of Ukraine exerted significant upward pressure on consumer price inflation around the world. As seen in the left panel of Figure 1, Brent crude oil prices soared to nearly $130 a barrel in March 2022 and remained elevated through June, before only slowly retracing the gains.
    Date: 2023–12–15
  18. By: Valentina Colombo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Alessia Paccagnini
    Abstract: This study assesses the impact of financial uncertainty shocks in the US and explores the influence of monetary policy. Using a nonlinear Vector Autoregressive model, incorporating short-term interest rates and the Federal Reserve’s balance sheet policy, we find that the reaction of the monetary policy is asymmetric across the business cycle. The state-dependent responses in consumption and investment significantly influence GDP fluctuations. A counterfactual analysis reveals that balance sheet-related monetary policy helps reduce both the duration and severity of the recessionary impacts caused by these shocks.
    Keywords: Uncertainty, Smooth Transition VAR, Nonlinearities, Monetary Policy.
    JEL: C50 E32 E52
    Date: 2024–02
  19. By: Mary Amiti; Oleg Itskhoki; David Weinstein
    Abstract: Inflation has risen sharply in many countries since the COVID-19 outbreak. Economists have debated the underlying causes. In this paper, we examine the drivers of the global import price inflation, which peaked at approximately 11 percent a year. We find that a common global component closely tracks movements in aggregate U.S. import prices until late 2022. Afterward, idiosyncratic U.S. demand shocks started to dominate.
    JEL: E31 F14 F42
    Date: 2024–02
  20. By: Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Fenou, Akouété (HEC Montreal, Canada Research Chair in Risk Management); Mnasri, Mohamed (HEC Montreal, Canada Research Chair in Risk Management)
    Abstract: We investigate the causes of the gap in mergers and acquisitions (M&A) between life and nonlife insurers in the US from 1990 to 2022. Our DID analysis indicates a parallel trend between M&As in the life insurance and nonlife insurance sectors from 1990 to 2012, and a significant difference after 2012. There was a shock in the life insurance market that resulted in a reduction in M&As after 2012. Variable annuity sales in the life insurance sector declined after 2012. We find evidence that low interest rates observed during the implementation of the quantitative easing policy of the Fed from 2008 to 2012 caused the difference in M&As in the life sector after 2012.
    Keywords: Merger and acquisition; life insurance; nonlife insurance; US insurance market; DID methodology; quantitative easing policy; life insurance annuity; variable annuity
    JEL: C21 D40 D80 G14 G22 G34
    Date: 2024–02–21
  21. By: Piyaporn Chote; Ms. Corinne C Delechat; Thanaphol Kongphalee; Vatsal Nahata; Mouhamadou Sy; Pym Manopimoke; Tamon Yungvichit
    Abstract: This paper analyzes the distributional impacts of inflation in Thailand. For that aim, the paper uses rich micro-survey data on 46, 000 Thai households to study the effect of the recent elevated inflation on poverty, its distributional effects on different income levels, and the fiscal cost to compensate households from real income losses. To study the multidimensional impact of inflation, the paper also studies how inflation differentially affects households through the consumption, income, and wealth channel. The analysis shows that under a baseline scenario, poverty in Thailand could increase by 1.3 percentage points—about 900, 000 people—in the absence of government intervention. Targeted fiscal support to only compensate households that are below the national poverty line from rising inflation amount to 0.05 percent of GDP. However, fiscal support to compensate relatively rich households, defined as those above the median of the income distribution, amount to 1.4 percent of GDP. Moreover, due to high levels of debt, richer households benefit from inflation relative to poorer households. Finally, the paper also delves into policy responses undertaken by the Thai government and Asian and emerging economies to mitigate elevated inflation.
    Keywords: Inflation; poverty; inflation dynamics; income effect; fiscal cost.
    Date: 2024–02–02
  22. By: Hüttl, Pia; Kaldorf, Matthias
    Abstract: How does a shock to the liquidity of bank assets affect credit supply, cross-border lending, and real activity at the firm level? We exploit that, in 2007, the European Central Bank replaced national collateral frameworks by a single list. This collateral framework shock added loans to non-domestic euro area firms to the pool of eligible assets. Using loan level data, we show that banks holding a large share of newly eligible cross-border loans increase loan supply by 14% and reduce spreads by 16 basis points, compared to banks with smaller holdings of such loans. The additional credit is mainly extended to (previously eligible) domestic borrowers, suggesting only a limited cross-border effect of the collateral framework shock. However, the shock had real effects: firms highly exposed to affected banks increase their total debt, employment, and investment.
    Keywords: Bank Liquidity Shocks, Bank Lending Channel, Financial Integration, Real Effects, Eligibility Premia
    JEL: E44 E58 G21
    Date: 2024
  23. By: Masashige Hamano (Waseda University); Francesco Pappadà (Ca’ Foscari University of Venice and Paris School of Economics); Maria Teresa Punzi (Sim Kee Boon Institute, Singapore Management University)
    Abstract: In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies (foreign tariff shocks). We first provide a simple model of open economy with heterogeneous firms and derive a closed-form solution for the optimal monetary policy response to tariff shocks in presence of nominal rigidities. We show that optimal monetary policy is expansionary following foreign tariff hikes. Under nominal rigidities, uncertainty about foreign tariff hikes induces sluggish adjustments in the labor market reallocation between exporters and domestic firms, leading to an incentive for monetary authority to intervene and mitigate the impact of tariff shocks. In an extended model, we then show the response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed exchange rate regime. Finally, we provide empirical evidence for the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the US.
    Keywords: Optimal Monetary Policy; Tariff Shocks; Exporter Dynamics
    JEL: E3 E6 Q54 R1
    Date: 2023–12
  24. By: Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
    Abstract: This paper examines the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models suggest that the bilateral real exchange rate is driven by the relative economic performance of the two countries, our research demonstrates the superior predictive power of our factor-augmented forecasting models only when factors are obtained from U.S. economic variables, whereas the inclusion of Korean factors fails to enhance predictability and behaves more like noise variables. We attribute the remarkable predictability of American factors to the significant cross-correlations observed among bilateral real exchange rates vis-Ã -vis the U.S. dollar, which suggests a limited influence of idiosyncratic factors specific to small countries. Moreover, we assess our factor-augmented forecasting models by incorporating proposition-based factors instead of macro factors. While macro factors generally exhibit superior performance, it is worth noting that the uncovered interest parity (UIP)-based global factors, with the dollar as the numéraire, consistently demonstrate strong overall performance. On the other hand, the purchasing power parity (PPP) and real uncovered interest parity (RIRP) factors have a limited role in forecasting the dollar/won real exchange rate. Our major findings are grounded in pre-COVID-19 era data, highlighting key insights drawn from periods of relative tranquility. We explore how economic crises act as catalysts, precipitating a separation of the real exchange rate from macroeconomic fundamentals.
    Keywords: Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast
    JEL: C38 C53 C55 G17
    Date: 2024–02
  25. By: Ozili, Peterson K
    Abstract: Artificial intelligence (AI) is a topic of interest in the finance literature. However, its role and implications for central banks have not received much attention in the literature. Using discourse analysis method, this article identifies the benefits and risks of artificial intelligence in central banking. The benefits of artificial intelligence for central banks are that deploying artificial intelligence systems will encourage central banks to develop information technology (IT) and data science capabilities, it will assist central banks in detecting financial stability risks, it will aid the search for granular micro economic/non-economic data from the internet so that the data can support central banks in making policy decisions, it enables the use of AI-generated synthetic data, and it enables task automation in central banking operations. However, the use of artificial intelligence in central banking poses some risks which include data privacy risk, the risk that using synthetic data could lead to false positives, high risk of embedded bias, difficulty of central banks to explain AI-based policy decisions, and cybersecurity risk. The article also offers some considerations for responsible use of artificial intelligence in central banking.
    Keywords: central bank, artificial intelligence, financial stability, responsible AI, artificial intelligence model.
    JEL: E51 E52 E58
    Date: 2024
  26. By: Celene Ancalle (Central Reserve Bank of Peru); Maria Gracia Garcia (Central Reserve Bank of Peru)
    Abstract: Interoperability is the characteristic of a payment service (e.g. digital wallets) to allow its users to pay any person or company, regardless of the financial institution providing services to the payer or payee. On October 7, 2022, the Central Reserve Bank of Peru (BCRP) issued the Payment Services Interoperability Regulation to massify digital payments in the country. The main objective of this research is to study the impact of interoperability, promoted through regulation, on the use of digital payments. We analyzed transactional data provided daily by market participants in the interoperability regulation, and data obtained from digital wallet users through a survey. The results suggest that interoperability has contributed to increase the use of digital payments, but there are other factors such as fees, user experience and quality of service that can impact the adoption and use of interoperable payment services. Furthermore, our analysis shows that interoperability benefited more individuals in regions with a higher degree of financial inclusion, i.e. financial inclusion is key to benefiting from interoperability. These results serve as a basis for validating, adjusting, and reorienting the future regulatory strategies of the BCRP, aimed at fostering greater adoption and use of digital payments; as well as to guide other payment authorities seeking to implement effective digital payments regulations, drawing lessons from the Peruvian experience.
    Keywords: Interoperability; regulation; digital payments; financial inclusion; Peru
    JEL: E42 E58 E61 E65 G28
    Date: 2024–02–08

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