nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒03‒25
38 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. How to conduct monetary policies: the ECB in the past, present and future By De Grauwe, Paul; Ji, Yuemei
  2. The anatomy of a peg: lessons from China’s parallel currencies By Saleem Bahaj; Ricardo Reis
  3. Out of the ELB: expected ECB policy rates and the Taylor rule By Marco Bernardini; Alessandro Lin
  4. Monetary Policy Transmission through Online Banks By Erel, Isil; Liebersohn, Jack; Yannelis, Constantine; Earnest, Samuel
  5. The Price of Money: The Reserves Convertibility Premium over the Term Structure By Kjell G. Nyborg; Jiri Woschitz
  6. Assessing Central Bank Commitment to Inflation Targeting in Emerging Economies: Evidence From India By Garga, Vaishali; Lakdawala, Aeimit; Sengupta, Rajeswari
  7. Tin the thick of it: an interim assessment of monetary policy transmission to credit conditions By Margherita Bottero; Antonio M. Conti
  8. Introducing Textual Measures of Central Bank Policy-Linkages Using ChatGPT By Leek, Lauren Caroline; Bischl, Simeon; Freier, Maximilian
  9. Macroeconomic drivers of inflation expectations and inflation risk premia By Jef Boeckx; Leonardo Iania; Joris Wauters
  10. Enhancing resilience with natural growth targeting By Orphanides, Athanasios
  11. How effective quantitative tightening can be with a higher-for-longer pledge? By Kortelainen, Mika
  12. What caused the euro area post-pandemic inflation? By Arce, Óscar; Ciccarelli, Matteo; Montes-Galdón, Carlos; Kornprobst, Antoine
  13. The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly By Marijn A. Bolhuis; Judd N. L. Cramer; Karl Oskar Schulz; Lawrence H. Summers
  14. The Heart of Monetary Economics: A Novel Diagram Depicting the Relationships Between Aggregate Monetary Variables By Zinn, Jesse Aaron
  15. For whom the bill tolls: redistributive consequences of a monetary-fiscal stimulus By Michał Brzoza-Brzezina; Julia Jabłońska; Marcin Kolasa; Krzysztof Makarski
  16. Price-Level Determination Under the Gold Standard By Jesús Fernández-Villaverde; Daniel R. Sanches
  17. From Dominant to Producer Currency Pricing: Dynamics of Chilean Exports By José De Gregorio; Pablo García; Emiliano E. Luttini; Marco Rojas
  18. On the Effects of Monetary Policy Shocks on Income and Consumption Heterogeneity By Minsu Chang; Frank Schorfheide
  19. Nonlinear Inflation Dynamics in Menu Cost Economies By Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan
  20. A New Measure of Central Bank Independence By Mr. Tobias Adrian; Mr. Ashraf Khan; Lev Menand
  21. Spillover Effects of US Monetary Policy on Emerging Markets Amidst Uncertainty By Povilas Lastauskas; Anh Dinh Minh Nguyen
  22. Firm level expectations and macroeconomic conditions underpinnings and disagreement By Monique Reid; Pierre Siklos
  23. Understanding Persistent ZLB: Theory and Assessment By Pablo A. Cuba-Borda; Sanjay R. Singh
  24. “Storm in a Teacup? The Impact of War on the English Monetary System and Thought (1797-1821)” By Ghislain Deleplace
  25. A Post-Pandemic New Normal for Interest Rates in Emerging Bond Markets? Evidence from Chile By Luis Ceballos; Jens H. E. Christensen; Damian Romero
  26. Nowcasting Inflation By Edward S. Knotek; Saeed Zaman
  27. Global Supply Chains and U.S. Import Price Inflation By Mary Amiti; Oleg Itskhoki; David E. Weinstein
  28. The Secular Decline of Bank Balance Sheet Lending By Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
  29. Co-working in the collateral factory: analyzing the infrastructural entanglements of public debt management, central banking, and primary dealer systems By Pape, Fabian; Rommerskirchen, Charlotte
  30. Monetary-Fiscal Interaction and the Liquidity of Government Debt By Cristiano Cantore; Edoardo Leonardi
  31. Expectations and the Final Mile of Disinflation By Richard K. Crump; Stefano Eusepi; Aysegul Sahin
  32. Enhancing repo market transparency: the EU Securities Financing Transactions Regulation By Bassi, Claudio; Grill, Michael; Mirza, Harun; O’Donnell, Charles; Wedow, Michael; Hermes, Felix
  33. A note on the differences between European and international methodologies of banking regulation and supervision By Goodhart, C. A. E.; Sato, Hideki
  34. Channeling of the Real Exchange Rate and price stability: An Empirical Study for the Moroccan Case By Souad Baya; Mohamed Simoh; Ghizlan Loumrhari
  35. Why Survey-Based Subjective Expectations are Meaningful and Important By Francesco D’Acunto; Michael Weber
  36. Primary and Secondary Markets for Stablecoins By Jeffrey Allen; Hamzah Daud; Jochen Demuth; Daniel Little; Megan Rodden; Amber Seira; Cy Watsky
  37. The Essentiality of Money in a Trading Post Economy with Random Matching By Alessandro Marchesiani
  38. Passive and Proactive Motivations of Cash Holdings By Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama

  1. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We study the evolving operating procedures used by the ECB since its creation. During the period up to 2015, bank reserves were scarce and the ECB, like other central banks, used a corridor system in which the money market rate could fluctuate within the bounds set by the lending and the deposit rates. With the start of Quantitative Easing (QE) the operating procedure evolved into a regime of reserve abundance. This regime has become problematic since the inflation surge forced the central banks to raise the policy rate. The result has been a massive transfer of central banks’ profits (and more) to the banks. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.
    JEL: F3 G3
    Date: 2024–02–28
  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: Marco Bernardini (Bank of Italy); Alessandro Lin (Bank of Italy)
    Abstract: We compare the path of the ECB policy rate (deposit facility rate) expected by financial market analysts with simple monetary policy rules based on their own expectations regarding inflation and the economic activity. To this end, we adopt a thick-modelling approach to account for uncertainty surrounding the exact parametrization of the rule according to analysts. We show that, since the ECB monetary policy moved away from the effective lower bound (ELB) and stopped providing explicit forward guidance on the future path of the policy rate, policy rate expectations have become largely aligned with those implied by the rules. We also document three additional findings. First, growing perceptions of downward demand-side risks since spring 2023 have been associated with an adjustment of analysts’ rate expectations to slightly-below rule-implied rates. Second, the significant and continuous upward revisions of expected ECB rates observed during the 2022-23 rate hiking cycle have mainly resulted from upward revisions of expected inflation and expectations of a higher long-run policy rate. Third, analysts’ rate expectations appear to be shaped more by expectations regarding core inflation rather than those of headline inflation.
    Keywords: monetary policy rules, expectations, ECB's survey of monetary analysts, effective lower bound.
    JEL: E52 E40
    Date: 2023–10
  4. By: Erel, Isil (Ohio State U and ECGI); Liebersohn, Jack (U of California, Irvine); Yannelis, Constantine (U of Chicago); Earnest, Samuel (U of Chicago)
    Abstract: Financial technology has reshaped commercial banking. It has the potential to radically alter the transmission of monetary policy by lowering search costs and expanding banking markets. This paper studies the reaction of online banks to changes in the federal funds rate. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in the federal funds rate leads to a 30 basis points larger increase in the rates of online banks relative to traditional banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening in 2022. Results are similar across banking markets of different competitiveness and demographics, but they vary with the stickiness of banking relationships. Our findings shed new light on the role of online banks in interest rate passthrough and the deposit channel of monetary policy.
    JEL: E52 E58 G21 G23 G28
    Date: 2023–05
  5. By: Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (BI Norwegian Business School)
    Abstract: Central bank money provides utility by serving as means of exchange for virtually all transactions in the economy. Central banks issue reserves (money) to banks in exchange for assets such as government bonds. If additional reserves have value to a bank, an asset’s degree of convertibility into reserves can affect its price. We show the existence of a government bond reserves convertibility premium, which tapers off at longer maturities. The degree of convertibility is priced, but heterogeneously so. Our findings have implications for our understanding of reserves, liquidity premia, the term structure of interest rates, and central bank collateral policy.
    Keywords: central bank, reserves, convertibility premium, liquidity premium, term structure, yield curve, collateral policy, haircut
    JEL: G12 E43 E58
    Date: 2024–02
  6. By: Garga, Vaishali (Federal Reserve Bank of Boston); Lakdawala, Aeimit (Wake Forest University, Economics Department); Sengupta, Rajeswari (Indira Gandhi Institute of Development Research)
    Abstract: We propose a novel framework to gauge the credibility of a central bank’s commitment to inflation targeting. Our framework combines survey data on macroeconomic forecasts with financial market data to estimate how market-perceived responsiveness of the central bank to inflation evolves with the adoption of inflation targeting. This approach is especially suitable for emerging economies, many of which have adopted an inflation targeting framework but lack data on long-run inflation expectations. We apply our framework to study the adoption of inflation targeting in India. We find that the Reserve Bank of India’s commitment to inflation targeting is viewed as credible.
    Keywords: Macroeconomic forecasts; Financial markets; Credibility; Inflation Targeting; Inflation expectations.
    JEL: E44 E47 E52 E58
    Date: 2024–03–04
  7. By: Margherita Bottero (Bank of Italy); Antonio M. Conti (Bank of Italy)
    Abstract: We use a thick modelling approach to assess the transmission of the unprecedented ECB’s monetary policy hiking cycle, which started in July 2022, to the cost of credit to euro area and Italian non-financial corporations. We uncover two findings. First, the range of forecasts obtained via this approach is wide; simple projections based only on a common trend between reference and lending rates fall in the lower part of it. Second, borrower riskiness emerges in the current juncture as a key driver in explaining the evolution of lending rates, improving substantially forecasts’ accuracy. We also quantify the additional upward risks on lending rates that may stem from unexpected tensions related to sudden outflows of retail deposits and the reduction of the Eurosystem’s balance sheet. Finally, we assess the impact of an adverse credit supply shock on output and inflation dynamics using a Bayesian VAR. The overall results of the paper support the conclusion that a large amount of the effects of monetary tightening is still in the pipeline.
    Keywords: monetary policy transmission, bank lending channel, credit supply, thick modelling, VAR
    JEL: E51 E52 E32 E37 C32
    Date: 2023–10
  8. By: Leek, Lauren Caroline (European University Institute); Bischl, Simeon; Freier, Maximilian
    Abstract: While institutionally independent, monetary policy-makers do not operate in a vacuum. The policy choices of a central bank are intricately linked to government policies and financial markets. We present novel indices of monetary, fiscal and financial policy-linkages based on central bank communication, namely, speeches by 118 central banks worldwide from 1997 to mid-2023. Our indices measure not only instances of monetary, fiscal or financial dominance but, importantly, also identify communication that aims to coordinate monetary policy with the government and financial markets. To create our indices, we use a Large Language Model (ChatGPT 3.5-0301) and provide transparent prompt-engineering steps, considering both accuracy on the basis of a manually coded dataset as well as efficiency regarding token usage. We also test several model improvements and provide descriptive statistics of the trends of the indices over time and across central banks including correlations with political-economic variables.
    Date: 2024–02–14
  9. By: Jef Boeckx (Economics and Research Department, National Bank of Belgium); Leonardo Iania (, Université catholique de Louvain, LFIN/CORE); Joris Wauters (Economics and Research Department, National Bank of Belgium)
    Abstract: We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflation expectation measures
    Keywords: Inflation-linked swaps, affine term structure model, inflation expectations, inflation risk premia, inflation trend, shifting endpoints
    JEL: E31 E44 E52
    Date: 2024–02
  10. By: Orphanides, Athanasios
    Abstract: Despite a number of helpful changes, including the adoption of an inflation target, the Fed's monetary policy strategy proved insufficiently resilient in recent years. While the Fed eased policy appropriately during the pandemic, it fell behind the curve during the post-pandemic recovery. During 2021, the Fed kept easing policy while the inflation outlook was deteriorating and the economy was growing considerably faster than the economy's natural growth rate-the sum of the Fed's 2% inflation goal and the growth rate of potential output. The resilience of the Fed's monetary policy strategy could be enhanced, and such errors be avoided with guidance from a simple natural growth targeting rule that prescribes that the federal funds rate during each quarter be raised (cut) when projected nominal income growth exceeds (falls short) of the economy's natural growth rate. An illustration with real-time data and forecasts since the early 1990s shows that Fed policy has not persistently deviated from this simple rule with the notable exception of the period coinciding with the Fed's post-pandemic policy error.
    Keywords: Federal Reserve, monetary policy strategy, discretion, simple rules, real-time data
    JEL: E32 E52 E58 E61
    Date: 2024
  11. By: Kortelainen, Mika
    Abstract: We study the effect of quantitative tightening both without forward guidance and with higher for longer guidance. This is done by simulating quantitative tightening strategies in a dynamic stochastic general equilibrium model estimated with the euro area data. Quantitative tightening is quantified by a bond supply shock that raises the long-term term premium. Initially, we assume that quantitative tightening comes without forward guidance, meaning that central bank does not communicate any information regarding the future path of the policy rate. Subsequently, we consider quantitative tightening with forward guidance which is communicated through a higher for longer pledge. In addition, this higher for longer pledge is assumed to be fully credible. We find that if credible, quantitative tightening implemented with forward guidance in the form a higher for longer pledge can tighten monetary policy, albeit a little.
    Keywords: monetary policy, quantitative tightening, forward guidance
    JEL: E52
    Date: 2024
  12. By: Arce, Óscar; Ciccarelli, Matteo; Montes-Galdón, Carlos; Kornprobst, Antoine
    Abstract: This paper applies the semi-structural model proposed by Bernanke and Blanchard (2023) to analyse wage growth, price inflation and inflation expectations in the euro area. It is part of a broader project coordinated by Bernanke and Blanchard to provide a unified framework for analysing and comparing global inflation dynamics across the major world economic areas, including US, euro area, Canada, UK, and Japan. The paper makes four main contributions. First, it estimates the model using quarterly data from the euro area covering the period from the first quarter of 1999 to the second quarter of 2023. Second, it conducts an empirical assessment of how euro area price inflation responds to various exogenous shocks. This includes evaluating how shock transmission evolved during the pandemic and comparing it with experience in the United States. Third, the model decomposes the drivers of wage growth and price inflation in the post-pandemic period. It emphasises the transmission channels and the respective roles of supply and demand forces that have contributed to the recent inflationary surge. Notably, it identifies the impact of labour market tightness, productivity, global supply chain disruptions and energy and food price shocks. Finally, the model generates conditional projections based on these exogenous shocks, enabling a more robust cross-check of inflation forecasts during times of significant global economic disturbances. JEL Classification: C5, E47, E52, E58, F4
    Keywords: central banking, econometric modelling, forecasting and simulation, monetary policy
    Date: 2024–02
  13. By: Marijn A. Bolhuis; Judd N. L. Cramer; Karl Oskar Schulz; Lawrence H. Summers
    Abstract: Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.
    JEL: D14 E30 E31 E43 E52 G51 R31
    Date: 2024–02
  14. By: Zinn, Jesse Aaron (Clayton State University)
    Abstract: This work introduces the Heart of Monetary Economics, a novel figure that depicts the relationships between aggregate monetary variables. The figure contains more information than the Venn diagram that shows how the monetary base and money supply have currency in circulation as their intersection. A distinguishing feature of the heart is that it illustrates how the net amount of financial capital generated by depository institutions equals the difference between the money supply and the monetary base. As such, the figure may aid students learning about money creation. This work also points out a nearly identical figure that contains the same information as the heart. It also provides a proof that these two figures are the only two with their general shape consistent with the relationships they display.
    Date: 2024–02–11
  15. By: Michał Brzoza-Brzezina; Julia Jabłońska; Marcin Kolasa; Krzysztof Makarski
    Abstract: During the COVID-19 pandemic, governments in the euro area sharply increased spending, while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers), but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, we document that young households benefited from the stimulus, while the bill was mainly paid by middle-aged and older agents. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, welfare of some actually decreased.
    Keywords: COVID-19; Fiscal expansion, Monetary policy, Redistribution
    JEL: E31 E51 E52 H5 J11
    Date: 2024–02
  16. By: Jesús Fernández-Villaverde; Daniel R. Sanches
    Abstract: We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. In particular, we formally analyze Hume’s celebrated price-specie flow mechanism. Our framework incorporates the influence of international trade on the money supply in the Home country through gold flows. In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. While the gold standard exposes the Home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies.
    Keywords: Gold standard; specie flows; non-neutrality of money; long-run price stability; inelastic money supply
    JEL: E42 E58 G21
    Date: 2024–02–29
  17. By: José De Gregorio; Pablo García; Emiliano E. Luttini; Marco Rojas
    Abstract: We revisit a central question for international macroeconomics: the response of export prices and quantities to movements in the exchange rate (ER). We use granular export data for Chile and study how the effects of ER movements vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when controlling for U.S. dollar ER, which supports dominant currency pricing. However, over longer horizons a more significant role is played by bilateral ER movements, in line with the predictions of producer currency pricing. These dynamics do not depend on the invoicing currency. The results we find for quantities support the view that bilateral exchange rate movements contribute to macroeconomic adjustment through export volumes over the medium term.
    JEL: F14 F31 F41
    Date: 2024–02
  18. By: Minsu Chang; Frank Schorfheide
    Abstract: In this paper we use the functional vector autoregression (VAR) framework of Chang, Chen, and Schorfheide (2024) to study the effects 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.
    JEL: C11 C32 C52 E32
    Date: 2024–02
  19. 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 multiproduct 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.
    Keywords: Menu costs; Inflation; Phillips curve
    Date: 2024–02–02
  20. By: Mr. Tobias Adrian; Mr. Ashraf Khan; Lev Menand
    Abstract: This paper constructs a new index for measuring de jure central bank independence, the first entirely new index in three decades. The index draws on a comprehensive dataset from the IMF’s Central Bank Legislation Database (CBLD) and Monetary Operations and Instruments Database (MOID) and weightings derived from a survey of 87 respondents, mostly consisting of central bank governors and general counsels. It improves upon existing indices including the Cukierman, Webb, and Neyapti (CWN) index, which has been the de facto standard for measuring central bank independence since 1992, as well as recent extensions by Garriga (2016) and Romelli (2022). For example, it includes areas absent from the CWN index, such as board composition, financial independence, and budgetary independence. It treats dimensions such as the status of the chief executive as composite metrics to prevent overstating the independence of statutory schemes. It distills ten key metrics, simplifying current frameworks that now include upwards of forty distinct variables. And it replaces the subjective weighting systems relied on in the existing literature with an empirically grounded alternative. This paper presents the key features of the new index; a companion, forthcoming paper will provide detailed findings by country/region, income level, and exchange rate regime.
    Keywords: Central bank independence; monetary policy; governance; transparency
    Date: 2024–02–23
  21. By: Povilas Lastauskas; Anh Dinh Minh Nguyen
    Abstract: This paper examines the impact of US monetary policy tightening on emerging markets, distinguishing between direct and indirect spillover effects using the global vector autoregression with stochastic volatility covering 32 countries. The paper demonstrates that an increase in the US interest rate significantly reduces output for emerging markets, leading to larger, more prolonged, and persistent declines. Such an impact is further intensified by global trade integration, causing a sharper yet slightly quicker rebounding output drop. The spillover effects are significantly amplified when US monetary policy tightening is accompanied by an increase in monetary policy uncertainty. Finally, emerging markets exhibit considerable heterogeneity in their responses to US monetary policy shocks.
    Date: 2024–02
  22. By: Monique Reid; Pierre Siklos
    Abstract: There is abundant evidence that financial analysts inflation expectations differ in economically important ways from those of non-financial specialists. As a result, there is an increasing demand for firm-level data to more accurately capture the views of price setters. The unusually rich firm-level survey data from South Africa allow us to explore some of the ways in which the expectations of firms differ from those of other groups surveyed. We focus specifically on forecast disagreement, which can offer insights into the level of uncertainty reflected in the data and the degree to which expectations are anchored. We find that the divergence in inflation forecasts among respondents is partly explained by differences in how respondents believe the broader macroeconomy is evolving. The effect of aggregating the data in different ways is also considered. When we construct a new measure of macroeconomic disagreement that combines all the variables being forecast, we are able to see that forecasters responded sharply in early 2020 as the COVID-19 pandemic emerged.
    Date: 2024–03–08
  23. By: Pablo A. Cuba-Borda; Sanjay R. Singh
    Abstract: We develop a theoretical framework that rationalizes two hypotheses of long-lasting low interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:Q1-2019:Q4, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.
    Keywords: Expectations-driven trap; secular stagnation; zero lower bound (ZLB)
    JEL: E31 E32 E52
    Date: 2023–12–15
  24. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: The aim of my contribution is at analysing the impact of a large-scale war of long duration on the monetary system and monetary thought. The case is that of England during and in the aftermath of the Revolutionary and Napoleonic wars with France (1793-1815). These wars provoked a major shock in the English monetary system: the Bank of England note was made inconvertible during more than twenty years and in 1813 the pound sterling had depreciated by one-third in terms of gold. After Waterloo, it took the pound four years to regain its value in gold, in the midst of a severe economic depression. However, the pre-war monetary system was resumed in 1821: the quarter-of-a-century parenthesis was simply closed. This return to "money as usual" was not for want of intense debates: it was the time of the "Bullionist Controversy" featuring among others Henry Thornton and David Ricardo. This case thus leads to a rather pessimistic conclusion: even a major shock like a long-lasting war seems to have no significant impact on either the monetary system or monetary thought. My contribution intends to account for this paradox. Publication: Deleplace, G. (2024 a), "Storm in a Teacup? The Impact of War on the English Monetary System and Thought (1797-1821), " in Marcuzzo, M. C. and Rosselli, A. (eds.), Money in Times of Crisis. Pre-Classical, Classical and Contemporary Theories, Roma: Accademia Nazionale dei Lincei Proceedings, à paraître.
    Keywords: Napoleonic wars, English monetary system, Ricardo, Thornton
    Date: 2022–12–12
  25. By: Luis Ceballos; Jens H. E. Christensen; Damian Romero
    Abstract: Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rate—the so-called equilibrium or natural rate of interest. Given the recent sharp increase in interest rates, we revisit this question in an emerging bond market context and offer a Chilean perspective using a dynamic term structure finance model estimated directly on the prices of individual Chilean inflation indexed bonds with adjustments for bond-specific liquidity risk and real term premia. We estimate that the equilibrium real rate in Chile fell about 2 and a half percentage points in the 2003-2022 period and has remained low since then.
    Keywords: affine arbitrage-free term structure model; financial market frictions; monetary policy; rstar
    JEL: C32 E43 E52 G12
    Date: 2024–02–21
  26. By: Edward S. Knotek; Saeed Zaman
    Abstract: This chapter summarizes the mixed-frequency methods commonly used for nowcasting inflation. It discusses the importance of key high-frequency data in producing timely and accurate inflation nowcasts. In the US, consensus surveys of professional forecasters have historically provided an accurate benchmark for inflation nowcasts because they incorporate professional judgment to capture idiosyncratic factors driving inflation. Using real-time data, we show that a relatively parsimonious mixed-frequency model produces superior point and density nowcasting accuracy for headline inflation and competitive nowcasting accuracy for core inflation compared with surveys of professional forecasters over a long sample spanning 1999–2022 and over a short sample focusing on the period since the start of the pandemic.
    Keywords: inflation; nowcasting; mixed-frequency models; survey nowcasts; real-time data
    JEL: C53 E3 E37
    Date: 2024–03–07
  27. By: Mary Amiti; Oleg Itskhoki; David E. Weinstein
    Abstract: Inflation around the world increased dramatically with the reopening of economies following COVID-19. After reaching a peak of 11 percent in the second quarter of 2021, world trade prices dropped by more than five percentage points by the middle of 2023. U.S. import prices followed a similar pattern, albeit with a lower peak and a deeper trough. In a new study, we investigate what drove these price movements by using information on the prices charged for products shipped from fifty-two exporters to fifty-two importers, comprising more than twenty-five million trade flows. We uncover several patterns in the data: (i) From 2021:Q1 to 2022:Q2, almost all of the growth in U.S. import prices can be attributed to global factors, that is, trends present in most countries; (ii) at the end of 2022, U.S. import price inflation started to be driven by U.S. demand factors; (iii) in 2023, foreign suppliers to the U.S. market caught up with demand and account for the decline in import price inflation, with a significant role played by China.
    Keywords: global supply chains; imports; inflation; China
    JEL: E31 F14 F42
    Date: 2024–03–04
  28. By: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70% to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation.
    JEL: E50 G2 G20 G21 G22 G23 G24 G28 G29 L50
    Date: 2024–02
  29. By: Pape, Fabian; Rommerskirchen, Charlotte
    Abstract: Scholarship on sovereign debt emphasizes the importance of central banks in backstopping markets, but less attention has been devoted to the interactions of debt management offices with private finance. To fill this gap, this article examines the market-based operations of debt management offices alongside those of central banks. Debt management has played a crucial role in constructing and nurturing liquidity conditions in primary and secondary markets for sovereign debt through the contracting of primary dealers as monetary and fiscal policy partners, the embrace of repo markets, and later through the creation of special liquidity facilities. Co-working in the collateral factory of the modern financial system creates new forms of entanglements that we term the ‘collateral triangle’, linking together central banking, debt management, and primary dealer operations in a shared convergence on repo finance as integral to public sector governability and private sector business models. Debt management and central banking jointly created and now maintain the infrastructures of this ‘collateral triangle’, not least because the inherent stability risks of repo markets threaten market-based monetary policy and market-based debt management. Routine de-risking by both actors is a core feature of the collateral system.
    Keywords: critical macrofinance; sovereign debt; primary dealers; repo markets; monetary-fiscal coordination; 1912377; ES/S011277/1; T&F deal
    JEL: J1
    Date: 2024–02–08
  30. By: Cristiano Cantore (Sapienza University of Rome); Edoardo Leonardi
    Abstract: How does the monetary and fiscal policy mix alter households’ saving incentives? And what are the resulting implications on the evolution and stabilization of the economy? To answer these questions, we build a heterogenous agents New Keynesian model where 3 different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. Our analysis highlights the presence of two competing forces on the liquidity premium: a self-insurance-driven demand channel and a policy-driven supply channel. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy.
    Keywords: monetary-fiscal interaction, liquidity, government debt, HANK
    JEL: E12 E52 E62 E58 E63
    Date: 2024–01
  31. By: Richard K. Crump; Stefano Eusepi; Aysegul Sahin
    Abstract: In the aftermath of the COVID-19 pandemic, the U.S. economy experienced a swift recovery accompanied by a sharp rise in inflation. Inflation has been gradually declining since 2022 without a notable slowdown in the labor market. Nonetheless, inflation remains above the Federal Reserve’s 2 percent target and the path of the so-called final mile remains uncertain, as emphasized by Chair Powell during his press conference in January. In this post, we examine the unemployment-inflation trade-off over the past few years through the lens of a New Keynesian Phillips curve, based on our recent paper. We also provide model-based forecasts for 2024 and 2025 under various labor market scenarios.
    Keywords: Phillips curve; inflation; unemployment; natural rate of unemployment; expectations
    JEL: D84 E24 E31 E32 J11
    Date: 2024–03–05
  32. By: Bassi, Claudio; Grill, Michael; Mirza, Harun; O’Donnell, Charles; Wedow, Michael; Hermes, Felix
    Abstract: The introduction of the Securities Financing Transactions Regulation into EU law provides a unique opportunity to obtain an in-depth understanding of repo markets. Based on the transaction-level data reported under the regulation, this paper presents an overview and key facts about the euro area repo market. We start by providing a description of the dataset, including its regulatory background, as well as highlighting some of its advantages for financial stability analysis. We then go on to present three sets of findings that are highly relevant to financial stability and focus on the dimensions of the different market segments, counterparties, and collateral, including haircut practices. Finally, we outline how the data reported under the regulation can support the policy work of central banks and supervisory authorities. We demonstrate that these data can be used to make several important contributions to enhancing our understanding of the repo market from a financial stability perspective, ultimately assisting international efforts to increase repo market resilience. JEL Classification: G10, G18, G23
    Keywords: financial stability, regulation, securities financing transactions
    Date: 2024–02
  33. By: Goodhart, C. A. E.; Sato, Hideki
    Abstract: Although monetary policy is the main tool for central banking in order to control inflation/deflation, micro- and macroprudential instruments are also essential for crisis management. In this paper, we aim to clarify the differences between European and international banking methodologies. The European approach as represented by the European Banking Union, is based on a harder legalistic approach, whereas the international approach implemented by the Basel Committee on Banking Supervision has a soft-law methodology. We propose two comparative standpoints: “uniformity” versus “diversity”, and a “legislative” versus "principle-based” approach.
    Keywords: European Banking Union (EBU); banking regulation and supervision; Basel Committee on Banking Supervision (BCBS)
    JEL: E58 F36 G28
    Date: 2024–02–16
  34. By: Souad Baya (INSEA - Institut National de Statistique et d’Economie Appliquée [Rabat]); Mohamed Simoh (UAE - Université Abdelmalek Essaâdi); Ghizlan Loumrhari (UAE - Université Abdelmalek Essaâdi)
    Abstract: The economic debate surrounding the impact of exchange rate fluctuations on prices has sparked in-depth discussions, leading to several conclusions supported by empirical literature. Fundamentally, it exerts significant pressure on competitiveness, price stability, and other fundamental macroeconomic variables. The primary objective of this study is to theoretically and empirically examine the effects of exchange rate fluctuations on inflation. Specifically, this paper aims to assess the Pass-Through coefficient from the exchange rate to domestic prices and analyze its evolution over time. To account for the reciprocal interactions between inflation and exchange rate variations, we will use a model based on quarterly data covering the period from Q1-2000 to Q4-2021. Conclusions drawn from the analysis of impulse response functions and variance decomposition indicate that any shock to the exchange rate results in a significant inflation response. Furthermore, this reaction appears to reflect an incomplete degree of the transmission mechanism. Additionally, our findings have shown that the mentioned coefficient experienced a surge from the first to the second period, similar to various advanced economies that underwent an increase in Pass-Through over time.
    Abstract: Le débat économique autour de l'impact des fluctuations des taux de change sur les prix a suscité des discussions approfondies, conduisant à plusieurs conclusions étayées par la littérature empirique. Fondamentalement, il exerce une pression importante sur la compétitivité, la stabilité des prix ainsi que d'autres variables macroéconomiques fondamentales. L'objectif fondamental de cette étude consiste à examiner de manière théorique et empirique les effets des fluctuations du taux de change sur l'inflation. Plus précisément, ce document vise à évaluer le coefficient de transmission du taux de change aux prix intérieurs et à analyser son évolution au fil du temps. Afin de prendre en compte les interactions réciproques entre l'inflation et les variations du taux de change, nous allons utiliser un modèle basé sur des données trimestrielles couvrant la période de T1-2000 à T4-2021. Les conclusions déduites de l'examen des fonctions de réponse impulsionnelle et de la décomposition de la variance indiquent que tout choc sur le taux de change génère une réponse significative de l'inflation. De plus, cette réaction semble refléter un degré incomplet du mécanisme de transmission. Également, nos résultats ont montré que ledit coefficient a subi une flambée de la première à la deuxième période, comme différente s économies avancées, ayant connu une augmentation du Pass-Through dans le temps.
    Keywords: Real Exchange Rate pass-through, SVAR, shocks, imported inflation, impulse responses, variance decomposition, Pass-through du Taux de Change Réel, chocs, inflation importé, réponses impulsionnelles, décomposition de la variance
    Date: 2024–01–22
  35. By: Francesco D’Acunto; Michael Weber
    Abstract: For decades, households' subjective expectations elicited via surveys have been considered meaningless because they often differ substantially from the forecasts of professionals and ex-post realizations. In sharp contrast, the literature we review shows household characteristics and the ways in which households collect and process economic information help us understand previously-considered puzzling facts about their subjective expectations. In turn, subjective expectations contribute to explain heterogeneous consumption, saving, investment, and debt choices as well as different reactions by similar households to the same monetary and fiscal policy measures. Matching microdata on households' characteristics with the price signals the same households observe, their subjective expectations, and their real-world economic decisions is crucial to establishing these facts. Our growing understanding of households' subjective expectations inspires several theoretical and empirical research directions and begets the design of innovative and more effective policy instruments.
    JEL: C90 D14 D84 E31 E52 E71 G11
    Date: 2024–03
  36. By: Jeffrey Allen; Hamzah Daud; Jochen Demuth; Daniel Little; Megan Rodden; Amber Seira; Cy Watsky
    Abstract: Stablecoins are increasingly important in decentralized finance (DeFi) and crypto asset markets, and their prominence has led to greater scrutiny of their unique role as expressions of the U.S. dollar running on blockchain networks. Stablecoins attempt to perform a mechanically complex function – to remain pegged to the dollar, even during periods of market volatility.
    Date: 2024–02–23
  37. By: Alessandro Marchesiani
    Abstract: This paper studies how the structure of centralized markets may affect the efficient allocation in anonymous decentralized trades. In line with previous studies, we show that e¢ ciency in decentralized markets can be sustained in a moneyless Önite-number-of-agents setting if agents are patient enough and the price is observed with noise as long as the noise disappears, but not too fast, as the number of agents grows. We also show that the Levine-Pesendorfer noise can be applied to dynamic games, not only to static games.
    Keywords: Essentiality of money, anonymity, noisy prices, trading post
    Date: 2022–09
  38. By: Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama
    Abstract: We present a novel fact called the ``V-shaped relationship'' between firms' growth opportunities and cash holdings. Specifically, cash holdings are positively correlated with growth opportunities in firms experiencing positive growth but negatively correlated with those facing adverse growth opportunities. This divergent link suggests that the motivation for cash holdings varies between these two types of firms. To account for this V-shaped relationship, we develop a new numerical model in which a manager optimally determines the levels of investment and cash holdings in response to shocks that affect the corporate production process. A unique aspect of this model is that it incorporates the dual motives of cash holdings: cash serves as a cushion against an adverse shock and simultaneously allows the provision of agile money, thereby seizing a growth opportunity. Considering these passive and proactive motives for cash holdings enables the model to replicate the V-shaped link. Furthermore, we investigate the rise in corporate cash holdings in recent decades through the model and find that tighter borrowing constraints and lower interest rates after the global financial crisis account for more than 60% of the rise in corporate cash holdings.
    Date: 2024–03

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