nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒04‒01
33 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Excess reserves and monetary policy tightening By Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
  2. The Effects and Side Effects of Unconventional Monetary Policy: Summary of the First Workshop on the "Review of Monetary Policy from a Broad Perspective" By Bank of Japan
  3. The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates since 1950 By Michael D. Bordo; Pierre Siklos
  4. The Natural Rate of Interest in the Euro Area: Evidence from Inflation-Indexed Bonds By Jens H. E. Christensen; Sarah Mouabbi
  5. Monetary Policy Shocks: Data or Methods? By Connor M. Brennan; Margaret M. Jacobson; Christian Matthes; Todd B. Walker
  6. Broad Divisia Money and the Recovery of U.S. Nominal GDP from the COVID-19 Recession By Michael D. Bordo; John V. Duca
  7. Central Bank Cooperation 1930-1932, A Reappraisal By Flores Zendejas, Juan; Nodari, Gianandrea
  8. What Drives Inflation? Lessons from Disaggregated Price Data By Elisa Rubbo
  9. Money growth and consumer price inflation in the euro area: An update By Mandler, Martin; Scharnagl, Michael
  10. How Oil Shocks Propagate: Evidence on the Monetary Policy Channel By Wataru Miyamoto; Thuy Lan Nguyen; Dmitry Sergeyev
  11. The Money Doctor Raimundo Fernández Villaverde and the Classical Gold Standard in Spain By Nogues-Marco, Pilar
  12. Monetary Policy Has a Long-Lasting Impact on Credit: Evidence from 91 VAR Studies By Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
  13. Fiscal Events and Anchored Inflation Expectations By Ethan Ilzetzki
  14. Modelling Monetary and Fiscal Policy to Achieve Climate Goals By Yener Altunbas; Xiaoxi Qu; John Thornton
  15. Inflation persistence in the UK 1993-2019: from months to years By Dixon, Huw David; Li, Yiyi; Meenagh, David; Tian, Maoshan
  16. A Continuous-Time Stochastic Model of the Fiscal Theory of the Price Level and Consistency of Its Critique By Andrey Kofnov
  17. Idiosyncratic Risk, Government Debt and Inflation By Matthias H\"ansel
  18. The Changing Drivers of Food Inflation – Macroeconomics, Inflation, and War By Algieri, Bernardina; Kornher, Lukas; von Braun, Joachim
  19. Eurozone enlargement in the Balkans By Nebojša Vukadinović
  20. “Power Relations and Monetary Ideas: The Case of the Gold-Exchange Standard in India” By Ghislain Deleplace
  21. “On Two Myths about Ricardo’s Theory of Money” By Ghislain Deleplace
  22. Early warning system for currency crises using long short‐term memory and gated recurrent unit neural networks By Sylvain Barthélémy; Virginie Gautier; Fabien Rondeau
  23. The impact of exchange rate fluctuations on markups - firm-level evidence for Switzerland By Elizabeth Steiner
  24. Harnessing Machine Learning for Real-Time Inflation Nowcasting By Richard Schnorrenberger; Aishameriane Schmidt; Guilherme Valle Moura
  25. Deciphering Dollar Exchange Rates and Interest Parity By Yang Yang; Ren Zhang; Shuwei Zhang
  27. In vi(vi)no veritas? Expertise, review accuracy and reputation inflation By Janßen, Rebecca; Ribar, Matthew K.
  28. Small Price Changes, Sales Volume, and Menu Cost By Doron Sayag; Avichai Snir; Daniel Levy
  29. Consumer participation in the credit market during the COVID-19 pandemic and beyond By Evangelos Charalambakis; Federica Teppa; Athanasios Tsiortas
  30. Macroprudential capital regulation and fiscal balances in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  31. Cashless payments and tax evasion: Evidence from VAT gaps in the EU By Bohne, Albrecht; Koumpias, Antonios M.; Tassi, Annalisa
  32. COVID-19 and the fragmentation of the European interbank market By Pala, Melissa
  33. High Frequency Monitoring of Credit Creation: A New Tool for Central Banks in Emerging Market Economies By Giraldo, Carlos; Giraldo, Iader; Gomez-Gonzalez, Jose E.; Uribe, Jorge M.

  1. By: Fricke, Daniel; Greppmair, Stefan; Paludkiewicz, Karol
    Abstract: We show that the transmission of the European Central Bank's (ECB) recent monetary policy tightening differs across banks depending on their level of excess reserves. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the ECB's 2022 rate hiking cycle, we show that reserve-rich banks' credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.
    Keywords: interest rates, bank lending, excess liquidity, monetary policy
    JEL: E43 E44 E52 G21
    Date: 2024
  2. By: Bank of Japan (Bank of Japan)
    Abstract: On December 4, 2023, the first workshop on the "Review of Monetary Policy from a Broad Perspective, " entitled "The Effects and Side Effects of Unconventional Monetary Policy, " was held at the Bank of Japan's Head Office. At the workshop, economists and financial and economic experts participated in a lively discussion on the effects and side effects of monetary policy over the past 25 years, focusing on four topics: financial markets, the financial system, the Bank of Japan's balance sheet, and unconventional monetary policy. Session 1 provided an overview of domestic financial markets over the past 25 years and the impact of monetary policy on the degree of market functioning. Participants discussed whether it would be possible to assess the impact of monetary policy from a broader perspective, for example by broadening the scope of the analysis. Session 2 focused on the impact of the low interest rate environment on the risk-taking behavior of financial institutions. Participants discussed issues such as developments in the demand for funds and the allocation of funds. Session 3 looked at issues concerning central bank finances. Participants discussed topics such as central banks' external communication. Session 4 examined the impact of unconventional monetary policy on factors such as economic activity and prices. Participants discussed a range of issues, including issues not covered in the presentations at the workshop such as the formation mechanism of inflation expectations and linkages between wages and prices. The panel discussion in Session 5 mainly covered issues such as methods for analyzing the effects and side effects of monetary policy and the mechanisms underlying price developments. Participants pointed out that it was difficult to assess the effects and side effects of unconventional monetary policy in a comprehensive manner given that multiple policy tools were used at the same time, and that it was therefore important to gather experts with different backgrounds to discuss a variety of issues, as in this workshop. Furthermore, participants also noted that in assessing the impact of monetary policy, it was necessary to deepen the analysis not only of the formation of inflation expectations but also of firms' behavior and its impact on economic developments and the formation of wages and prices.
    Date: 2024–03–11
  3. By: Michael D. Bordo (Rutgers University); Pierre Siklos (Wilfred Laurier University)
    Abstract: In this paper we revisit the Canadian experience with floating exchange rates since 1950. Canada was a pioneer in successfully adopting a floating exchange rate during the Bretton Woods pegged exchange rate regime. Since then, most advanced countries have followed the Canadian example. A key finding of our paper based on historical narrative and econometric analysis is that economic performance under floating depended on its monetary policy performance as Milton Friedman originally argued in his seminal 1953 article making the case for floating exchange rates. Canadian monetary policy achieved low and stable inflation once it adopted inflation targeting as a nominal anchor. Also, Canada’s floating exchange rate provided it with a modicum of insulation from external shocks, especially commodity price shocks that influenced both the level and volatility of the real exchange rate over the past three decades. The Canadian experience with floating (along with that of other small open economies such as Australia, New Zealand and Sweden) combined with inflation targeting became a global model for sound monetary policy.
    Keywords: floating exchange rates, commodity price shocks, insulation, sound monetary policy, Canada
    JEL: E32 E52 F31 F32 N10
    Date: 2024–12
  4. By: Jens H. E. Christensen; Sarah Mouabbi
    Abstract: The so-called equilibrium or natural rate of interest, widely known as r*t, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic.
    Keywords: affine arbitrage-free term structure model; financial markets; frictions; monetary policy; rstar; covid19
    JEL: C32 E43 E52 G12
    Date: 2024–03–08
  5. By: Connor M. Brennan; Margaret M. Jacobson; Christian Matthes; Todd B. Walker
    Abstract: Different series of high-frequency monetary shocks can have a correlation coefficient as low as 0.5 and the same sign in only two-thirds of observations. Both data and methods drive these differences, which are starkest when the federal funds rate is at its effective lower bound. Methods that exploit the differential responsiveness of short- and long-term asset prices can incorporate additional information. After documenting differences in monetary shocks, we explore their consequence for inference. We find that empirical estimates of monetary policy transmission from local projections and VARs are less affected by shock choice than forecast revision specifications.
    Keywords: High-frequency monetary policy shocks; Monetary policy transmission; Empirical monetary economics
    JEL: E52 E58 E31 E32
    Date: 2024–02–28
  6. By: Michael D. Bordo (Rutgers University, NBER, Hoover Institution, Stanford University); John V. Duca (Oberlin College, Federal Reserve Bank of Dallas)
    Abstract: The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because of past instability in the demand for simple-sum monetary aggregates. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that these aggregates provide useful information about nominal GDP. Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are stable and can be empirically modeled through the Covid-19 pandemic. In the long run these velocities depend on regulation and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and the stringency of government pandemic restrictions to control for the unusual pandemic effects. The velocity of broad Divisia money declines during crises like the Great and COVID Recessions, but later rebounds. In these recessions, monetary policy lowered short-term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, likely reflecting a less impaired banking system that could promote rather than hinder deposit creation. Our framework implies that nominal GDP growth and inflations rebounded more quickly from the COVID Recession versus the Great Recession. Our different scenarios for future Divisa money growth and the unwinding of the pandemic have different implications for medium-term nominal GDP growth and inflationary pressures.
    Keywords: Velocity, Monetary Services Index, Divisia, Liquidity, Money, Shadow Banks, Mutual Funds
    JEL: E51 E41 E52 E58
    Date: 2023–12
  7. By: Flores Zendejas, Juan; Nodari, Gianandrea
    Abstract: The literature on interwar monetary history has argued that the lack of central bank cooperation contributed to the pervasive economic outcome of the 1930s. The reasons for this failure are still an object of debate. In this paper, we revisit the attitude of individual central banks to the attempts led by the Bank for International Settlements (BIS) to institutionalise central bank cooperation. We present original archival evidence to show that the 1931 crisis in central Europe emerged as an exogenous shock, prompting the BIS to become an international lender of last resort and increase the resources at its disposal. However, the BIS relied on member central banks' discretionary behaviour and did not impose a rules-based system. We observe a contrasting attitude towards international cooperation between central banks from creditor and borrowing countries. Some governments prevented their central banks from supporting the BIS' attempts to increase its financial resources. We conclude that this interference was a relevant means through which politics hindered a multilateral response to the crises of the 1930s.
    Keywords: Central banking, Great Depression, Financial crises, International monetary cooperation.
    JEL: N0
    Date: 2023
  8. By: Elisa Rubbo
    Abstract: The Covid pandemic disrupted supply chains and labor markets, with heterogeneous effects on demand and supply across industries. Meanwhile governments responded with unprecedented stimulus packages, and inflation increased to its highest values in 40 years. This paper investigates the contribution of aggregate monetary and fiscal policies to inflation compared to industry-specific disruptions. I argue that, in an economy where multiple industries and primary factors have heterogeneous supply curves, industry-specific shocks to inelastically supplied goods increase aggregate inflation beyond the control of monetary policy. Moreover, industry-specific and aggregate shocks have different effects on relative prices, which allows me to identify their respective contribution to aggregate inflation. For US consumer prices, I find that deflation and subsequent inflation in 2020 were due to industry-specific shocks, while since 2021 inflation is primarily driven by aggregate factors.
    JEL: E30 E5
    Date: 2024–03
  9. By: Mandler, Martin; Scharnagl, Michael
    Abstract: We update the wavelet-based analysis of the relationship between money growth and inflation in the euro area in Mandler and Scharnagl (2014). The relationship between headline M3 growth and inflation at low frequencies has weakened over the 1990s. However, we find evidence of stable comovement between money growth adjusted by real GDP growth and consumer price inflation for cycles of 24 years and longer duration. The long-run fluctuations of adjusted money growth and inflation move roughly about 1:1 and are contemporaneous, i.e. there is no lead of money growth. Our analysis of cycles in both variables of 24 years and longer provides information on the relationship between the variables from the late 1980s to the early 2000s.
    Keywords: money growth, inflation, euro area, wavelet analysis
    JEL: C30 E31 E40
    Date: 2023
  10. By: Wataru Miyamoto; Thuy Lan Nguyen; Dmitry Sergeyev
    Abstract: Using high-frequency responses of oil futures prices to prominent oil market news, we estimate the effects of oil supply news shocks when systematic monetary policy is switched off by the zero lower bound (ZLB) and when it is not (normal periods) in Japan, the United Kingdom, and the United States. We find that negative oil supply news shocks are less contractionary (and even expansionary) at the ZLB compared to normal periods. Inflation expectations increase during both periods, while the short nominal interest rates remain constant at the ZLB, pointing to the importance of monetary policy for oil shock propagation.
    Keywords: oil price shocks; high-frequency identification; Zero Lower Bound (ZLB); monetary policy
    JEL: E5 E7 G4
    Date: 2023–12–10
  11. By: Nogues-Marco, Pilar
    Abstract: This paper focuses on the Money Doctor Raimundo Fernández Villaverde, a prominent politician during the Restoration of the Bourbon monarchy in Spain during the Classical Gold Standard period. He reformed the fiscal system and proposed monetary reforms to transition Spain to the Gold Standard after the 1898 Cuban War of Independence. <p>His monetary reform ultimately failed due to two primary reasons. Firstly, there was a lack of political consensus, as politicians were more inclined to prioritise the distribution of spoils to sustain unstable alliances forged by local political leaders and their clientelist networks, rather than focusing on the development of long-term policies aimed at achieving party political goals. Secondly, the resistance from the Bank of Spain to reduce the circulation of banknotes to deflate the economy, with the aim of preserving its profits as a private institution that distributed dividends to its shareholders, took precedence over its role as the guarantor of exchange rate stability.
    Keywords: Money Doctors, Gold Standard, Monetary Orthodoxy, Exchange Rate Stability, Monetary Reform.
    JEL: B31 E42 E58 N13 N0
    Date: 2023
  12. By: Josef Bajzik; Jan Janku; Simona Malovana; Klara Moravcova; Ngoc Anh Ngo
    Abstract: We synthesized 3, 175 estimates (454 impulse responses) of the semi-elasticity of credit with respect to changes in the monetary policy rate from 91 vector autoregression studies. We found that monetary policy tightening consistently yields a negative and long-lasting response in both credit volume and credit growth. Several factors contribute to the substantial heterogeneity of the effect sizes in this literature. First, publication selectivity significantly exaggerates the mean reported estimate, because insignificant results are under-reported. Second, researchers' choice of estimation design has a significant impact on the estimated response. Studies using Bayesian methods and including house prices report a smaller decline in credit, while studies with sign restrictions show a larger drop than those using recursive identification.
    Keywords: Bayesian model averaging, credit, interest rates, meta-analysis, monetary policy transmission, publication bias
    JEL: C83 E52 R21
    Date: 2023–12
  13. By: Ethan Ilzetzki (London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR))
    Abstract: With inflation surging worldwide, some commentators have speculated whether inflation expectations have become unanchored. This policy note presents a framework to evaluate whether an inflationary spike is due to temporary shifts in policy or the real economy on one hand, or due to an unanchoring of inflation expectations. The model is a conventional “textbook” model, but accommodates many of the views of unanchored expectations in the existing literature. I then review several economic shocks of the past few years through the lens of the conceptual framework, with a particular focus on fiscal and other policy shocks. I find little to suggest that inflation expectations have become unanchored in the US, the UK, or Japan, although expectations are stubbornly below the central bank’s target in Japan, and above the target in the UK. In contrast, inflation expectations show substantial signs of unanchoring in some emerging market economies, particularly Brazil and Turkey.
    Date: 2024–03
  14. By: Yener Altunbas (Bangor University); Xiaoxi Qu (Bangor University); John Thornton (University of East Anglia)
    Abstract: We present and estimate a Bernanke et al. (1999)-type dynamic general equilibrium model modified to allow the authorities to use monetary and fiscal policy to shape bank behavior in support of climate goals. In the model, central bank refinancing and reserve requirements are employed to support bank lending for environmentally friendly projects at lower rates of interest than for other projects. At the same time, fiscal policy supports green bank lending through loan guarantees, which also reduces the relative cost of borrowing by green firms. Under reasonable parameters of the model, rediscount lending is shown to be the most effective policy tool for directing bank lending to support climate goals
    Date: 2024–03
  15. By: Dixon, Huw David (Cardiff Business School); Li, Yiyi; Meenagh, David (Cardiff Business School); Tian, Maoshan
    Abstract: In this paper we model monthly UK inflation and find that there is some small but significant autocorrelation, particularly at 12 months. We find that this autocorrelation in monthly inflation leads to significant persistence in the headline annual inflation figure. A one-off shock to monthly inflation will have an effect on the headline figure equal to 10% of the original shock after 24 months. We find that this 12-month effect is also present in most of the different types of expenditure. We also find that the 12-month effect is present when we introduce a variety of other demand and cost variables. We also look at core inflation (excluding food and energy) across 9 large market economies (including the USA, Germany, Japan and UK) and find that the 12-month effect is significant in all of them.
    Keywords: inflation, persistence, UK, CPI
    JEL: E17 E31 E71
    Date: 2024–03
  16. By: Andrey Kofnov
    Abstract: The paper tests the validity of the critique of the fiscal theory of the price level. A stochastic general equilibrium model with continuous time is constructed. An active fiscal policy and a passive monetary policy have been set. Monetary policy manages the interest rate through the Taylor rule. The stochastic default factor in the special form is introduced. A complete definite system of equations is obtained for the detection of equilibrium. It is asserted that the peculiarities of the approach to modeling are of critical importance for verifying the presence of certain hypotheses and formulating conclusions. The results of this work are in support of the fiscal theory of the price level.
    Date: 2024–03
  17. By: Matthias H\"ansel
    Abstract: How does public debt matter for price stability? If it is useful for the private sector to insure idiosyncratic risk, government debt expansions can increase the natural rate of interest and create inflation. As I demonstrate using a tractable model, this holds in the presence of an active Taylor rule and does not require the absence of future fiscal consolidation. Further analysis using a full-blown 2-asset HANK model reveals the quantitative magnitude of the mechanism to crucially depend on the structure of the asset market: under standard assumptions, the effect of public debt on the natural rate is either overly strong or overly weak. Employing a parsimonious way to overcome this issue, my framework suggests relevant effects of public debt on inflation under active monetary policy: In particular, persistently elevated public debt may make it harder to go the last "mile of disinflation" unless central banks explicitly take its effect on the neutral rate into account.
    Date: 2024–03
  18. By: Algieri, Bernardina; Kornher, Lukas; von Braun, Joachim
    Abstract: The inflation surge in recent years is having profound social, economic, and political consequences. With food price changes being an integral part of inflation, low income segments of the population are strongly impacted. What makes this period so unusual is the breadth of price pressures that are affecting both low and high-income countries. In essence, this phenomenon shows that inflation is increasingly synchronised across borders. This study examines price developments across countries and over time and investigates the driving factors behind food price hikes. Our analysis reveals that a complex mix of causes has led to the soaring food prices seen in 2021-2022. The spread of COVID-19 produced disruptions in the world’s supply chains, pushing the cost of producing and transporting food upward. The increase in fertilizer and energy prices has further exacerbated production costs for agricultural products. Adverse climatic phenomena (e.g., La Niña), generated droughts in parts of Africa, Asia, and the Americas, damaged harvests, and fuelled inflation. The war in Ukraine and the associated trade blockade of grain exports made things worse. Additional pressures included speculative activities in financial markets, which were already at play before the Russia-Ukraine war. In spite of all these increases in costs, inflation could perhaps have been kept under control by immediate, sufficiently restrictive monetary policies by Central Banks. Most likely, the main cause of the strong inflationary surge in several countries seems to have been the failure of some Central Banks to rapidly intervene to counteract the effects of overall price increases including key staples. Soaring inflation is continuing to make vulnerable countries hungrier and poorer and, therefore, prompt actions are necessary to help them.
    Keywords: Agricultural and Food Policy, Food Security and Poverty
    Date: 2024–03–05
  19. By: Nebojša Vukadinović (IRM - Institut de Recherche Montesquieu - UB - Université de Bordeaux, Sciences Po - Sciences Po)
    Abstract: Since the end of communism in the 1990s, the new currencies have had a triple function in the Balkans, particularly in the Yugoslav area. When they were first adopted, the idea was that they should primarily serve an economic function. But their symbolic and political functions must not be overlooked. After the disintegration of Yugoslavia, adopting new currencies enabled the new governments to pursue an independent monetary policy.
    Keywords: Eurozone, Monetary policies, Europe, Balkans
    Date: 2024–02
  20. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: For de Cecco power relations are central in the working of the pre-WWI international gold standard. He gives an illustration of that in the chapter of Money and Empire devoted to the relationship between Britain and India, where the gold-exchange standard is presented as a way for Britain to get hold of India's trade surplus with the rest of the world in order to balance her own international accounts. On the contrary, Keynes praised the Indian gold-exchange standard as a system which not only allowed stabilising India's relations with the outside world but also pointed the way to a better-regulated monetary system for any country, in the line of Ricardo's Ingot Plan nearly one century older. The same notion may thus be seen alternatively as a powerful tool of domination or as a good practical idea. The paper describes how Lindsay adapted Ricardo's scheme to India and contrasts de Cecco's and Keynes's interpretations of the Indian gold-exchange standard, before suggesting that monetary ideas can prevail in their own right when they are theoretically well-founded and practically feasible, independently of the power relations they may reflect. Publication: Deleplace, G. (2023 a), "Power Relations and Monetary Ideas: The Case of the Gold-Exchange Standard in India, " Review of Political Economy, 35 (2): 394-406. hal-04253424
    Keywords: Gold exchange Standard, India, De Cecco, Keynes, Lindsay, Ricardo
    Date: 2022–06–28
  21. By: Ghislain Deleplace (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis)
    Abstract: The purpose of the paper is to challenge two widely-held myths about Ricardo's theory of money and to suggest between the value and the quantity of money owes nothing to a commodity-theory of money (Section 2) or to the Quantity Theory of Money (Section 3) but puts the market price of the standard of money centre-stage (Section 4). Ricardo's applied pronouncements on money then appear as direct consequences of this theory (Section 5). Publication: Deleplace, G. (2023 b), "On Some Myths about Ricardo's Theory of Money, " in King, J. E. (ed.), The Anthem Companion to David Ricardo, London: Anthem Press: 9-28. hal-04257033
    Keywords: Ricardo David Money Standard of money Quantity theory of money Monetary policy
    Date: 2022–06–09
  22. By: Sylvain Barthélémy; Virginie Gautier; Fabien Rondeau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Currency crises, recurrent events in the economic history of developing, emerging, and developed countries, have disastrous economic consequences. This paper proposes an early warning system for currency crises using sophisticated recurrent neural networks, such as long short‐term memory (LSTM) and gated recurrent unit (GRU). These models were initially used in language processing, where they performed well. Such models are increasingly being used in forecasting financial asset prices, including exchange rates, but they have not yet been applied to the prediction of currency crises. As for all recurrent neural networks, they allow for taking into account nonlinear interactions between variables and the influence of past data in a dynamic form. For a set of 68 countries including developed, emerging, and developing economies over the period of 1995–2020, LSTM and GRU outperformed our benchmark models. LSTM and GRU correctly sent continuous signals within a 2‐year warning window to alert for 91% of the crises. For the LSTM, false signals represent only 14% of the emitted signals compared with 23% for logistic regression, making it an efficient early warning system for policymakers.
    Keywords: currency crises, early warning system, gated recurrent unit, long short-term memory, neural network
    Date: 2024
  23. By: Elizabeth Steiner
    Abstract: This paper estimates the impact of exchange rate fluctuations on markups. Firm-level markups are estimated for a comprehensive panel of Swiss manufacturing firms for the period 2012-2017 using a production-function approach. The pass-through of the exchange rate is then estimated using an event-study design exploiting the large, sudden and persistent appreciation of the Swiss franc against the euro in January 2015. The results show that following an appreciation, Swiss manufacturing firms adjust their markup very heterogeneously. Large firms, especially those that invoice in foreign currency or are highly profitable, substantially decrease their markup. Owing to their sheer size, large firms shape the aggregate response. In contrast, the average firm does not respond significantly. This suggests that smaller firms, which are in the majority, are either unable or unwilling to absorb exchange rate movements by adjusting their markup.
    Keywords: Markup, Exchange rate, Pass-through, Firm-level data
    JEL: D22 D24 F12 F14 F41 F23 L11
    Date: 2024
  24. By: Richard Schnorrenberger; Aishameriane Schmidt; Guilherme Valle Moura
    Abstract: We investigate the predictive ability of machine learning methods to produce weekly inflation nowcasts using high-frequency macro-financial indicators and a survey of professional forecasters. Within an unrestricted mixed-frequency ML framework, we provide clear guidelines to improve inflation nowcasts upon forecasts made by specialists. First, we find that variable selection performed via the LASSO is fundamental for crafting an effective ML model for inflation nowcasting. Second, we underscore the relevance of timely data on price indicators and SPF expectations to better discipline our model-based nowcasts, especially during the inflationary surge following the COVID-19 crisis. Third, we show that predictive accuracy substantially increases when the model specification is free of ragged edges and guided by the real-time data release of price indicators. Finally, incorporating the most recent high-frequency signal is already sufficient for real-time updates of the nowcast, eliminating the need to account for lagged high-frequency information.
    Keywords: inflation nowcasting; machine learning; mixed-frequency data; survey of professional forecasters;
    JEL: E31 E37 C53 C55
    Date: 2024–03
  25. By: Yang Yang (School of Finance, Zhongnan University of Economics and Law); Ren Zhang (Department of Finance & Economics, Texas State University); Shuwei Zhang (Department of Economics, Towson University)
    Abstract: This paper explores exchange rate dynamics and the uncovered interest parity (UIP) violation in the context of multiple shocks. Our key contribution lies in reveal- ing that exchange rate dynamics emanate from the collective influence of different shocks, in contrast to prevailing literature emphasizing the dominance of a single shock. While verifying the unconditional UIP reversals, we are the ï¬ rst to show that there is no signiï¬ cant evidence of conditional UIP reversal with an innovative test method developed in this paper. Additionally, through rigorous mathematical proof, we establish that conditional UIP reversal is not a prerequisite for unconditional UIP reversal in models featuring a moving averaging representation. This insight relaxes stringent prerequisites in earlier theoretical studies, offering broad applicability for understanding reversal patterns in UIP and other asset returns.
    Keywords: Bayesian SVAR, Exchange rate, New Fama puzzle, Uncovered interest parity.
    JEL: E32 E44 E52 F31 F41
    Date: 2024–03
  26. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski)
    Abstract: We analyze the impact of macroprudential policies on corporate loans. We utilize a dataset of over 4, 800 syndicated loans from 1999-2017, matched with detailed macroprudential policy data from the European Central Bank. We investigate how overall policy stance and specific tools influence key loan terms at origination, including the amount, maturity, collateral, and covenants. Drawing upon hypotheses related to credit growth, risk-taking, and efficiency transmission channels, we show that a tighter macroprudential policy leads to an increase in loan amounts and collateralization. These effects are most prominent for tools that tighten lending standards and capital buffers, particularly in domestic credit markets. Additionally, we provide insights into the influence of loan, borrower, and lender characteristics on the impact of macroprudential policy on loan terms. Our findings offer novel empirical evidence of macroprudential transmission occurring through risk-shifting and compensating behaviors in private debt markets.
    Keywords: macroprudential policy, bank loans, financial contracting, Europe
    JEL: G21 G28 G32
    Date: 2024
  27. By: Janßen, Rebecca; Ribar, Matthew K.
    Abstract: Review systems including quantitative measures as well as text-based expression of experiences are omnipresent in today's digital platform economy. This paper studies the existence of reputation inflation, i.e. unjustified increases in ratings, with a special focus of heterogeneity between experienced and non-experienced users. Using data on more than 5 million reviews from an online wine platform we compare consistency between numerical feedback and textual reviews as well as sentiment measures. We show that overall the wine platform displays strongly increasing numerical feedback over our time period from 2014 to 2020 while this is not the case for our control measures. This gap appears to be even stronger for users with less experience or expertise in wine reviewing. We conclude, that online platforms as well as potential customers should be aware of the phenomenon of reputation inflation and simplifying feedback to one number might do a disservice to review platforms' goal of providing a representative quality assessment.
    Keywords: reputation inflation, online reviews, expert reviews, sentiment, text data
    JEL: C53 D02 L15 L81
    Date: 2023
  28. By: Doron Sayag (Department of Economics, Bar-Ilan University, Israel); Avichai Snir (Department of Economics, Bar-Ilan University, Israel); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; ICEA; ISET, TSU; Rimini Centre for Economic Analysis)
    Abstract: The finding of small price changes in many retail price datasets is often viewed as a puzzle. We show that a possible explanation for the presence of small price changes is related to sales volume, an observation that has been overlooked in the existing literature. Analyzing a large retail scanner price dataset that contains information on both prices and sales volume, we find that small price changes are more frequent when products’ sales volume is high. This finding holds across product categories, within product categories, and for individual products. It is also robust to various sensitivity analyses such as measurement errors, the definition of “small” price changes, the inclusion of measures of price synchronization, the size of producers, the time horizon used to compute the average sales volume, the revenues, the competition, shoppers’ characteristics, etc.
    Keywords: Menu cost, (S, s) band, price rigidity, sticky prices, small price changes, small price adjustments, sales volume
    JEL: E31 E32 L16 L81 M31
    Date: 2024–03
  29. By: Evangelos Charalambakis; Federica Teppa; Athanasios Tsiortas
    Abstract: Abstract This paper analyses the consumer’s decision to apply for credit and the probability of the credit being accepted in the euro area during a period characterized by the unprecedented concomitance of events and changing borrowing conditions linked to the global COVID-19 pandemic and the Russian invasion of Ukraine. We use data between 2020Q1 and 2023Q2 from the ECB’s Consumer Expectations Survey. We find that the credit demand is highest when the first lockdown ends and drops when supportive monetary compensation schemes are implemented. There is evidence that constrained households are significantly less likely to apply for credit. Credit is more likely to be accepted under favourable borrowing conditions and after the approval of national recovery plans. We also find that demographic, economic factors, perceptions and expectations are associated with the demand for credit and the credit grant.
    Keywords: Consumer finance; Liquidity constraints; Credit applications; Consumer Expectations Survey
    JEL: C23 D12 D14 G51
    Date: 2024–03
  30. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We examine the fiscal footprint of macroprudential policy in euro area countries arising through the bond market channel (Reis, 2021). Using local projections, we estimate impulse responses of the fiscal balance to an unexpected tightening in macroprudential capital regulation. Our findings suggest a dichotomy between country groups. In peripheral countries, the cyclically adjusted primary balance ratio deteriorates after a restrictive capital-based macroprudential policy shock. Since banks are important investors in domestic government debt, the shift in the public budget toward higher borrowing after the innovation might pose a threat to financial stability to the extent that sovereign risk increases. By contrast, in core countries, the cyclically adjusted primary balance ratio barely reacts to a sudden tightening in capital regulation.
    Keywords: Fiscal footprint, macroprudential capital regulation, sovereign-bank nexus, local projections
    JEL: C33 G28 H63 K33
    Date: 2024
  31. By: Bohne, Albrecht; Koumpias, Antonios M.; Tassi, Annalisa
    Abstract: This paper explores the connection between the proliferation of cashless, or e-money, payments and value-added tax (VAT) compliance. We present both visual and descriptive evidence that illustrates a negative correlation between e-money use and VAT evasion, proxied by the VAT compliance gap for countries in the European Union, from 2001 until 2021. We find that increased e-money usage by 100 percentage points (pp) is associated with a reduction in the VAT gap of 0.3pp or 1.92% of the aggregate VAT compliance gap over time. Moreover, we contribute a novel estimate of the causal impact of cashless payments on VAT evasion during the COVID-19 public health emergency. We identify a link between mobility restrictions in the European Union and reductions in VAT compliance gaps, facilitated by changes in payment norms. An estimated rise of 1pp or 5.51% in e-money use results in an 11.9% reduction in the VAT compliance gap. Our findings suggest that changes in transaction payment behavior such as the adoption of cashless payments may yield significantly more tax revenues by curbing non-compliance. Policies aimed at promoting e-money usage and limiting cash circulation are relevant steps forward in this direction.
    Keywords: Tax evasion, VAT gap, cashless payments, e-money, mobility restrictions, COVID-19 pandemic
    JEL: H26 K42
    Date: 2023
  32. By: Pala, Melissa
    Abstract: This paper provides evidence of a highly fragmented European interbank market that is tightened during the COVID-19 pandemic, when the interbank market was under stress. Using a unique dataset of unsecured, overnight interbank loans at the transactional level allows me to apply advanced panel methods. Furthermore, this paper shows liquidity hoarding during the pandemic and relationship lending as a German phenomenon. In addition, there is evidence that borrowers who have to pay higher rates in the market are more likely to participate in tender auctions and that the COVID-19 pandemic had the greatest impact on smaller interbank borrowers.
    Keywords: nterbank Market, Relationship Lending, Liquidity, COVID-19, Monetary Policy
    JEL: G01 G15 G18 G21 D85
    Date: 2024
  33. By: Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya)
    Abstract: This study utilizes weekly datasets on loan growth in Colombia to develop a daily indicator of credit expansion using a two-step machine learning approach. Initially, employing Random Forests (RF), missing data in the raw credit indicator is filled using high frequency indicators like spreads, interest rates, and stock market returns. Subsequently, Quantile Random Forest identifies periods of excessive credit creation, particularly focusing on growth quantiles above 95%, indicative of potential financial instability. Unlike previous studies, this research combines machine learning with mixed frequency analysis to create a versatile early warning instrument for identifying instances of excessive credit growth in emerging market economies. This methodology, with its ability to handle nonlinear relationships and accommodate diverse scenarios, offers significant value to central bankers and macroprudential authorities in safeguarding financial stability.
    Keywords: Credit growth; Machine learning methodology; Excessive credit creation; Financial stability
    JEL: C45 E44 G21
    Date: 2024–03–10

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