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on Monetary Economics |
| By: | Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini |
| Abstract: | When inflation picks up, central banks are most concerned that the de-anchoring of inflation expectations and the ignition of wage-price spirals will trigger inflation dynamic instability. However, such scenarios do not materialize in the standard New Keynesian theoretical framework for monetary policy. Using a simulative model, we show that they can materialize upon introducing in particularly strong doses boundedly-rational expectations that de-anchor endogenously, as they are updated according to the actual inflation process, with indexed wages, and persistent inflation shocks. In these cases, a more hawkish central-bank stance on inflation expands the stability region of the system, which however remains bounded. On the other hand, the critical combinations of factors that trigger instability can be regarded as extreme in empirical terms, while in "normal times" the system is resilient to shocks and expectation de-anchoring even with more dovish monetary policy. |
| Keywords: | cost-push inflation, New Keynesian models for monetary policy, wage-price spiral, de-anchoring of inflation expectations |
| JEL: | E17 E30 E50 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10966&r=mon |
| By: | Parrado, Eric |
| Abstract: | This paper introduces a novel monetary policy framework where the exchange rate becomes the central instrument. Using Singapore as a case study, it explores the Monetary Authority's adoption of the exchange rate as the primary tool since 1981, diverging from conventional approaches centered on interest rates or monetary aggregates. The estimated exchange rate reaction function aligns well with actual deviations, supporting the hypothesis that Singapore's forward-looking policy rule effectively responds to inflation and output volatility, especially during economic crises. This framework offers a promising alternative for countries with open economies and challenges in implementing traditional interest rate instruments. |
| Keywords: | exchange rate;Inflation;monetary policy rules;Singapore |
| JEL: | E31 E52 E58 F41 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13347&r=mon |
| By: | Muhammed Bulutay |
| Abstract: | How do households perceive the forecasting performance of the central bank? Using two novel experiments embedded in the Bundesbank's Survey on Consumer Expectations (total N=9500), this article shows that the majority of German households underestimate the ECB's inflation forecasting accuracy. In particular, they believe that the ECB is overly optimistic. Communication that challenges these perceptions improves the anchoring of inflation expectations, reduces inflation uncertainty and discourages consumption of durable goods. Treated households also report higher trust in the ECB, perceive the ECB's inflation target as more credible, the ECB's communication as more honest, and the ECB's policy as more beneficial to them. Finally, the causal effect of central bank trust on inflation expectations is quantified using instruments to deal with endogeneity. |
| Keywords: | Inflation Expectations, Central Bank Trust, Inflation Forecasts, Central Bank Communication, Information Provision Experiments |
| JEL: | C83 D91 E71 |
| Date: | 2024–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:bdp:dpaper:0034&r=mon |
| By: | Tatar, Balint; Wieland, Volker |
| Abstract: | The Federal Reserve has been publishing federal funds rate prescriptions from Taylor rules in its Monetary Policy Report since 2017. The signals from the rules aligned with Fed action on many occasions, but in some cases the Fed opted for a different route. This paper reviews the implications of the rules during the coronavirus pandemic and the subsequent inflation surge and derives projections for the future. In 2020, the Fed took the negative prescribed rates, which were far below the effective lower bound on the nominal interest rate, as support for extensive and long-lasting quantitative easing. Yet, the calculations overstate the extent of the constraint, because they neglect the supply side effects of the pandemic. The paper proposes a simple model-based adjustment to the resource gap used by the rules for 2020. In 2021, the rules clearly signaled the need for tightening because of the rise of inflation, yet the Fed waited until spring 2022 to raise the federal funds rate. With the decline of inflation over the course of 2023, the rules' prescriptions have also come down. They fall below the actual federal funds rate target range in 2024. Several caveats concerning the projections of the interest rate prescriptions are discussed. |
| Keywords: | Monetary policy, interest rates, Federal Reserve, Taylor rule, New Keynesian macroepidemic models |
| JEL: | E42 E43 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:285356&r=mon |
| By: | Yuteng Cheng; Ryuichiro Izumi |
| Abstract: | We examine the optimal amount of user anonymity in a central bank digital currency (CBDC) in the context of bank lending. Anonymity, defined as the lender’s inability to discern an entrepreneur’s actions that enable fund diversion, influences the choice of payment instrument due to its impact on a bank’s lending decisions. We show that moderate anonymity in CBDC leads to an inefficient pooling equilibrium. To avoid this, CBDC anonymity should be either low, reducing attractiveness, or high, discouraging bank lending. Specifically, the anonymity should be high when CBDC significantly benefits sales, and low otherwise. However, competition between deposits and CBDC may hinder the implementation of low anonymity. |
| Keywords: | Digital currencies and fintech |
| JEL: | E42 E58 G28 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-9&r=mon |
| By: | Becker, Christoph; Dürsch, Peter; Eife, Thomas A.; Glas, Alexander |
| Abstract: | Central bank surveys frequently elicit households' probabilistic beliefs about future inflation. However, most household surveys use a response scale that is tailored towards low-inflation regimes. Using data from a randomized controlled trial included in the Bundesbank Online Panel Households, we show (i) that keeping the original scale in high-inflation regimes distorts estimates of histogram moments and forces households to provide probabilistic expectations that are inconsistent with the point forecasts and (ii) how shifting the scale improves the consistency of predictions by allowing respondents to state more detailed beliefs about higher inflation ranges. We also explore potential disadvantages of adjusting the response scale. |
| Keywords: | Probabilistic expectations, inflation, survey data |
| JEL: | D84 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:283596&r=mon |
| By: | Alessandro Cantelmo (Bank of Italy); Nikos Fatouros (University of Birmingham); Giovanni Melina (International Monetary Fund); Chris Papageorgiou (International Monetary Fund) |
| Abstract: | With climate change increasing the frequency and intensity of natural disasters, how should central banks respond to these catastrophic events? Looking at IMF reports for 34 disaster-years, which occurred in 16 disaster-prone countries from 1999 to 2017, what emerges is a non-negligible heterogeneity in central banks' responses to climate-related disasters. Using a standard small-open-economy New-Keynesian model with disaster shocks, we show that, consistently with textbook theory, inflation targeting remains the welfare-optimal regime. The best strategy for monetary authorities is to resist the impulse to accommodate in the face of catastrophic natural disasters, and rather to continue to focus on price stability. |
| Keywords: | natural disasters, climate change, DSGE, monetary policy, exchange rate regimes |
| JEL: | E5 E52 E58 F41 Q54 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1443_24&r=mon |
| By: | Parrado, Eric; Heresi, Rodrigo |
| Abstract: | Singapore's unique monetary policy consists of a managed exchange rate framework that can be characterized as a Taylor-like reaction function with the nominal devaluation rate instead of the nominal interest rate as the main policy instrument. We build a small open economy New Keynesian model to estimate and characterize such a monetary rule from a welfare perspective. Welfare gains under an exchange rate rule (ERR) relative to the more standard interest rate-based Taylor rule (IRR) are unambiguously increasing in the degree of trade openness (defined as exports plus imports as a share of GDP). For Singapore, where trade openness is 280% of GDP, we estimate welfare gains of 1.48% of permanent consumption under an ERR. In a counterfactual thought experiment, we find that Chile, an established inflation-targeting economy using an IRR, would be better off under an ERR for any degree of openness above 100% (currently at 70%). |
| Keywords: | Monetary policy;Exchange rate management;Open economy macroeconomics |
| JEL: | E52 E58 F41 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13346&r=mon |
| By: | Ariadne Checo; Francesco Grigoli; Damiano Sandri |
| Abstract: | Doubts persist about the effectiveness of monetary transmission in emerging markets, but the empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using novel analysts' forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting, allowing them to incorporate any relevant data release. Using these shocks, we show that monetary transmission in emerging markets operates similarly to advanced economies. Monetary tightening leads to a persistent increase in bond yields, a contraction in real activity, and a delayed reduction in inflation. Furthermore, monetary policy impacts leveraged firms more strongly. |
| Keywords: | monetary policy shocks, financial markets, emerging markets |
| JEL: | E50 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1170&r=mon |
| By: | Rodolfo G. Campos (Banco de Espana); Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, CEPR); Galo Nuno (BIS, Banco de Espana, CEMFI, CEPR); Peter Paz (Banco de Espana) |
| Abstract: | We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which the steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of the natural rates. We validate our findings with a series of empirical estimates. |
| Keywords: | HANK models, natural rates, fiscal shocks |
| JEL: | E32 E58 E63 |
| Date: | 2024–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-007&r=mon |
| By: | Martha Elena Delgado; Juan Herreño; Marc Hofstetter; Mathieu Pedemonte |
| Abstract: | We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures. |
| Keywords: | expectations; exchange rate; firms |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97957&r=mon |
| By: | Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú.); Luis Surco (Departamento de Economía de la Pontificia Universidad Católica del Perú.) |
| Abstract: | This paper estimates and analyzes the dynamics of trend inflation, as well as the persistence and volatility of the inflation gap in the Pacific Alliance countries (Chile, Colombia, Mexico, and Peru). For this purpose, the econometric approach is based on methodologies proposed by Stock and Watson (2007) and Chan et al. (2013). Among these, the AR-Trend-Bound model considers the implications of inflation targeting in estimating the unobserved components of inflation. The results indicate that this model effectively allocates most of the permanent component to trend inflation. Additionally, a decreasing trend in inflation in the 1990s, stabilization in the first two decades of the 21st century, and a growing trend inflation following the onset of the COVID-19 pandemic are observed in all four countries. The low levels of inflation gap persistence prior to the pandemic reflect the effectiveness of central banks in maintaining inflation close to its trend level. Finally, the volatility of the inflation gap identifies the “Great Moderation” of inflation, with increases in volatility during the pandemic reaching levels similar to those estimated in the 1990s. JEL Classification-JE: C32, E32, E51. |
| Keywords: | Inflation, Trend Inflation, Inflation Gap Persistence, Inflation Gap Volatility, Inflation Targets, Pacific Alliance. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00533&r=mon |
| By: | Gregory de Walque (Economics and Research Department, National Bank of Belgium); Thomas Lejeune (Economics and Research Department, National Bank of Belgium) |
| Abstract: | This paper reports the estimation and simulation of the Bernanke and Blanchard (2023) model on Belgian data. The model offers a consistent framework that ties together wage growth, inflation expectations and price inflation. It is used to study the surge and persistence of inflation in the post-pandemic period in Belgium. According to the model, a sequence of shocks to product shortage, energy and food components is found to be the main reason behind the duration of high Belgian inflation in this period. Though the Belgian replication of the model predicts sensitive short-term inflation expectations to realised inflation, a large wage catch-up - reflecting automatic wage indexation - and some role for labour market tightness in wage growth, their contribution to a persistent inflation is strongly attenuated by a weak estimated wage-price pass-through. |
| Keywords: | Inflation, wage indexation, inflation expectations, shortages, energy prices, food prices |
| JEL: | E31 E24 E37 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202403-447&r=mon |
| By: | Michael Bleaney |
| Abstract: | Nearly half of the government bonds purchased under the Bank of England’s Quantitative Easing (QE) programme were bought in 2020-21, when long-term real yields on indexed debt were well below zero and therefore almost bound to entail a sizeable loss to taxpayers. In addition to this expansion of QE, some maturing issues from earlier rounds were rolled over at this time. In so far as QE had the intended effect of raising the prices of the assets bought, the marginal loss per £ increased with the size of the QE programme. There is no evidence that this marginal effect, or the risk that a sizeable QE programme might have a substantial fiscal cost, was taken into account by the Bank’s Monetary Policy Committee or by the Government in its instructions to the Committee. |
| Keywords: | interest rate, monetary policy, quantitative easing |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2024/01&r=mon |
| By: | Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Casimir Hesse (Rothschild & Co.) |
| Abstract: | In 2012, Draghi put an end to rising euro area sovereign bond yield spreads by resolving to do 'whatever it takes'. The crisis rhetoric and institutional practices of unlimited liquidity have since become commonplace, as countermeasures to recent market turmoil show. This paper sets out to explain how and why 'unlimited liquidity' ideas moved to the ECB's center of economic analysis during the euro crisis. Previous work fails to decipher that the ideational shift was highly anomalous when viewed against German ordoliberalism or scholarly support for 'expansionary austerity'. Addressing this relative neglect in other accounts, we draw on qualitative text analysis and expert interviews to argue that this shift was due to norm entrepreneurs who capitalized on the uncertainty of the crisis. We employ constructivist arguments to identify four scoping conditions that account for the ascendance of 'unlimited liquidity': an indicative reference, credibility, institutional positioning, and -- as an extension to the literature -- intellectual sensitivity. Our analysis suggests that the euro crisis changed economic ideas, and fundamentally remodels the constructivist framework for studying monetary policy in crisis times. |
| Keywords: | European Central Bank, euro crisis, monetary policy, unlimited liquidity, economic ideas, constructivism |
| JEL: | E52 E58 F50 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp357&r=mon |
| By: | Weber, Michael; Candia, Bernardo; Afrouzi, Hassan; Ropele, Tiziano; Lluberas, Rodrigo; Frache, Serafin; Meyer, Brent; Kumar, Saten; Gorodnichenko, Yuriy; Georgarakos, Dimitris; Coibion, Olivier; Ponce, George; Kenny, Geoff |
| Abstract: | Using randomized control trials (RCTs) applied over time in different countries, we study whether the economic environment affects how agents learn from new information. We show that as inflation rose in advanced economies, both households and firms became more attentive and informed about publicly available news about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low-and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment. JEL Classification: E3, E4, E5 |
| Keywords: | inattention, inflation expectations, RCTs |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242914&r=mon |
| By: | Christina Anderl; Guglielmo Maria Caporale |
| Abstract: | This paper uses the endogenous regime switching model with dynamic feedback and interactions developed by Chang et al. (2023) to estimate global food price mean and volatility indicators, the latter measuring uncertainty and risk in the global food market. Both are then included in structural VAR models to examine their effects on domestic food price inflation for a range of countries with different food shares in total consumption and in the CPI basket. Next, counterfactual analysis is carried out to assess the effects on core inflation. The results suggest that both global food price mean and volatility shocks have sizeable effects on food price inflation in all countries and persistent second-round effects on core inflation in most countries. An extension of the analysis using disaggregate global food price data shows that the existence of second-round effects is independent of the size of the response of domestic food inflation to global food price shocks. These findings imply that policymakers should distinguish carefully between the two types of global food price shocks (namely mean or volatility) and their effects on core inflation to formulate appropriate policy responses. |
| Keywords: | food price volatility, core inflation, endogenous regime switching, second-round effects |
| JEL: | C13 C58 E31 Q10 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10992&r=mon |
| By: | Ms. Mai Hakamada; Carl E. Walsh |
| Abstract: | Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation. |
| Keywords: | monetary policy; inflation policy delay; behavioral expectations; falling behind the curve |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/042&r=mon |
| By: | Meyer, Justus; Teppa, Federica |
| Abstract: | This paper contributes to understanding consumers' retail payment preferences and digitalisation in personal finances. We focus on the acceptance of cashless payments in everyday situations and the use of mobile banking apps in the euro area, where the payment services market has changed significantly in recent years. In particular, we study app-based tools for day-to-day (offline) purchases that involve small amounts of money as well as digital tools for managing personal finances. By looking at factors associated with using non-cash payment methods, and app-based financial services solutions, we shed light on the topic of financial inclusion in payment services that concern consumers’ everyday choices. Using granular microdata from the European Central Bank's Consumer Expectations Survey, we find that most people prefer to use only one payment instrument. After the COVID-19 pandemic, it has mostly been cash and contactless cards. The use of cash is partly due to limited perceived acceptance of non-cash payments by merchants. We also find substantial cross-country heterogeneity and highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools when managing personal finances. While mobile banking is already popular amongst euro area consumers, the use of smart payment methods remains very limited. Our findings suggest that financial service providers should recognize the growing preference of the younger generations for alternative payment methods. Creating awareness among consumers might also lead to positive feedback effects by reducing consumers’ reliance on cash through higher perceived availability of non-cash payment options. JEL Classification: C13, D12, E42, O33 |
| Keywords: | cash, Consumer Expectations Survey (CES), digitalisation, FinTech, payment preferences |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242915&r=mon |
| By: | Alessandro Lin (Bank of Italy); Marcel Peruffo (University of Sydney) |
| Abstract: | We propose a novel methodology for solving Heterogeneous Agent New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regime shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the extent of this amplification; and 3) the effects of forward guidance are stronger when there is aggregate uncertainty. |
| Keywords: | monetary policy, new Keynesian model, HANK, liquidity traps, Zero Lower Bound, computational methods |
| JEL: | D14 E44 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1442_24&r=mon |
| By: | Steininger, Lea; Hesse, Casimir |
| Abstract: | In 2012, Draghi put an end to rising euro area sovereign bond yield spreads by resolving to do 'whatever it takes'. The crisis rhetoric and institutional practices of unlimited liquidity have since become commonplace, as countermeasures to recent market turmoil show. This paper sets out to explain how and why 'unlimited liquidity' ideas moved to the ECB's center of economic analysis during the euro crisis. Previous work fails to decipher that the ideational shift was highly anomalous when viewed against German ordoliberalism or scholarly support for 'expansionary austerity'. Addressing this relative neglect in other accounts, we draw on qualitative text analysis and expert interviews to argue that this shift was due to norm entrepreneurs who capitalized on the uncertainty of the crisis. We employ constructivist arguments to identify four scoping conditions that account for the ascendance of 'unlimited liquidity': an indicative reference, credibility, institutional positioning, and -- as an extension to the literature -- intellectual sensitivity. Our analysis suggests that the euro crisis changed economic ideas, and fundamentally remodels the constructivist framework for studying monetary policy in crisis times. |
| Keywords: | European Central Bank; euro crisis; monetary policy; unlimited liquidity; economic ideas; constructivism |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:61209747&r=mon |
| By: | William Ginn; Jamel Saadaoui |
| Abstract: | How do geopolitical risk shocks impact monetary policy? Based on a panel of 20 economies, we develop and estimate an augmented panel Taylor rule via linear and nonlinear local projections (LP) regression models. First, the linear model suggests that the interest rate remains relatively unchanged in the event of an uncertainty shock. Second, the result turns out to be different in the nonlinear model, where the policy reaction is muted during an expansionary state, which is operating in a manner proportional to the transitory shock. However, geopolitical risks can amplify the policy reaction during a non-expansionary period. |
| Keywords: | monetary policy, linear and nonlinear local projections, geopolitical risk, economic policy uncertainty |
| JEL: | E |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2024.03&r=mon |
| By: | Tommaso Gasparini; Vivien Lewis; Stéphane Moyen; Stefania Villa |
| Abstract: | Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks. |
| Keywords: | Bank Default, Capital Buffer, Firm Risk, Macroprudential Policy |
| JEL: | E44 E52 E58 E61 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:944&r=mon |
| By: | Wales, Christopher |
| Abstract: | The current system for taxing mobile money in Uganda is widely disliked, unbalanced, and arguably distortionary. We show there is a case to re-evaluating it, with a view to principled reform. But there is also a case for leaving it alone. This Policy Brief explores that tension. |
| Keywords: | Finance, |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:18275&r=mon |
| By: | Apeti, Ablam Estel; Edoh, Eyah Denise |
| Abstract: | Digital financial services like mobile money are increasingly prevalent in developing countries as an alternative to traditional financial services. For many governments, they have become critical components of domestic revenue mobilisation, tax administration modernisation, and broader tax reform. However, making tax administration more efficient and maximising voluntary compliance is a very difficult task. The existing literature on the relationship between mobile money and tax performance in developing countries is limited, although it does show the potential of mobile money to improve tax performance. This paper aims to fill the gap by investigating the relationship between mobile money and the quality of tax policy and administration in developing economies and highlighting some mechanisms underlying these findings, including a lower tax compliance burden, a smaller informal sector, and lower corruption. |
| Keywords: | Finance, |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:18265&r=mon |
| By: | Flavio Pérez Rojo (Pontificia Universidad Católica del Perú.); Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú.) |
| Abstract: | We investigate the evolution of the impact of monetary policy (MP) shocks in Peru in 1996Q1-2018Q2 using a set of time-varying parameter vector autoregressive models with stochastic volatility (TVP-VAR- SV), as proposed by Chan and Eisenstat (2018). The main results are: (i) the volatilities, intercepts, and contemporaneous coe cients change more gradually than VAR coe cients over time; (ii) the volatility of MP shocks falls from 4% to 0.3% on average during the In ation Targeting (IT) regime; (iii) in the long run, a contractionary MP shock decreases both gross domestic product (GDP) growth and in ation by 0.28% and 0.1%, respectively; (iv) the interest rate reacts faster to aggregate supply shocks than to both aggregate demand shocks and exchange rate shocks; (v) under the pre-IT regime, MP shocks explain almost 20%, 10%, and 85% of the uncertainty in GDP growth, in ation, and the interest rate, respectively; and under the IT regime, all these percentages shrink to 1-2%. The sensitivity analysis con rms the robustness of the main results across various prior speci cations, measures of external and domestic variables, and recursive identi cations. In general, the results show that MP has contributed to diminishing macroeconomic volatility in Peru. JEL Classification-JE: C32, E32, E51, E52. |
| Keywords: | Deviance Information Criterion, Peru, Monetary policy, time, Time-Varying Parameter VAR, Marginal Likelihood, Stochastic Volatility. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00523&r=mon |
| By: | Eiglsperger, Martin; Ganoulis, Ioannis; Goldhammer, Bernhard; Kouvavas, Omiros; Roma, Moreno; Vlad, Aurelian |
| Abstract: | The Harmonised Index of Consumer Prices (HICP) currently only includes rentals for housing (paid by tenants) and auxiliary housing expenditures (paid by both tenants and owners). The inclusion of an item for owner-occupied housing (OOH) would be desirable for both representativeness and cross-country comparability. This paper reviews the potential options for including OOH in the HICP to derive a new inflation index. We discuss the conceptual and measurement issues involved. Additionally, we present our analytical calculations on the impact and economic properties of this index as compared to the HICP. We show that since 2011 the estimated impact of including OOH in HICP annual inflation, based on either the “net acquisition” approach or the “rental equivalence” approach, would have been within a band of between -1.2 and +0.4 percentage points. The net acquisition approach could result in bigger differences in future, should the fluctuations in the housing market cycles in the euro area be more pronounced and synchronised. The results should be interpreted keeping in mind that the period of observation is relatively short in relation to housing market cycles. In general, the empirical evidence suggests that including OOH based on the rental equivalence approach decreases the cyclicality of the new inflation index, while the net acquisition approach implies a small amplification of its cyclical properties compared to the HICP. JEL Classification: C43, E31, E51 |
| Keywords: | euro area, inflation, owner-occupied housing |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbsps:202447&r=mon |
| By: | Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang |
| Abstract: | In a previous post, we described the rapid growth of the stablecoin market over the past few years and then discussed the TerraUSD stablecoin run of May 2022. The TerraUSD run, however, is not the only episode of instability experienced by a stablecoin. Other noteworthy incidents include the June 2021 run on IRON and, more recently, the de-pegging of USD Coin’s secondary market price from $1.00 to $0.88 upon the failure of Silicon Valley Bank in March 2023. In this post, based on our recent staff report, we consider the following questions: Do stablecoin investors react to broad-based shocks in the crypto asset industry? Do the investors run from the entire stablecoin industry, or do they engage in a flight to safer stablecoins? We conclude with some high-level discussion points on potential regulations of stablecoins. |
| Keywords: | stablecoins; runs; money market funds (MMFs); financial stability |
| JEL: | G10 G20 G23 |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97932&r=mon |
| By: | Mr. Nicolas E Magud; Samuel Pienknagura |
| Abstract: | Using individual-level survey data for both advanced economies and emerging markets spanning over 45 years for 42 countries, we show that cohorts who have had higher exposure to past inflationary episodes (levels, as well as to more persistent or to more volatile inflation), systematically express higher concerns over rising prices. The link between past high inflation exposure and expressed concerns over price stability is particularly strong when an individual’s exposure occurs in the latter part of her working-age (as in lifecycle theory). The impact of past exposure to high inflation on contemporaneous preferences over price stability increases when surveyed in the midst of high ongoing inflation and with macroeconomic instability (as measured by GDP growth volatility), but diminishes with the quality of institutions. |
| Keywords: | Price Stability; Inflation; Individual Preferences; Learning from Experience |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/040&r=mon |
| By: | Mr. Serhan Cevik; Alice Fan; Sadhna Naik |
| Abstract: | Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics. |
| Keywords: | Inflation; firm performance; productivity; profitability; fixed investment; Baltics; Estonia; Latvia; Lithuania |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/043&r=mon |
| By: | Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek |
| Abstract: | This paper evaluates the efficacy of the Secondary Market Corporate Credit Facility, a program designed to stabilize the U.S. corporate bond market during the COVID-19 pandemic. The program announcements on March 23 and April 9, 2020, significantly reduced investment-grade credit spreads across the maturity spectrum—irrespective of the program’s maturity-eligibility criterion—and ultimately restored the normal upward-sloping term structure of credit spreads. The Federal Reserve’s actual purchases reduced credit spreads of eligible bonds 3 basis points more than those of ineligible bonds, a sizable effect given the modest volume of purchases. A calibrated variant of the preferred habit model shows that a “dash for cash”—a selloff of shorter-term lowest-risk investment-grade bonds—combined with a spike in the arbitrageurs’ risk aversion, can account for the inversion of the investment-grade credit curve during the height of turmoil in the market. Consistent with the empirical findings, the Fed’s announcements, by reducing risk aversion and alleviating market segmentation, helped restore the upward-sloping credit curve in the investment-grade segment of the market. |
| Keywords: | COVID-19; SMCCF; credit spreads; credit market support facilities; event study; purchase effects; preferred habitat |
| JEL: | E44 E58 G12 G14 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:97967&r=mon |
| By: | Ciccarelli, Matteo; Darracq Pariès, Matthieu; Priftis, Romanos; Angelini, Elena; Bańbura, Marta; Bokan, Nikola; Fagan, Gabriel; Gumiel, José Emilio; Kornprobst, Antoine; Lalik, Magdalena; Montes-Galdón, Carlos; Müller, Georg; Paredes, Joan; Santoro, Sergio; Warne, Anders; Zimic, Srečko; Rigato, Rodolfo Dinis; Kase, Hanno; Koutsoulis, Iason; Brunotte, Stella; Cocchi, Sara; Giammaria, Alessandro; Invernizzi, Marco; Von-Pine, Eliott |
| Abstract: | This paper takes stock of the ECB’s macroeconometric modelling strategy by focusing on the models and applications used in the Forecasting and Policy Modelling Division. We focus on the guiding principles underpinning the current portfolio of the main macroeconomic models and illustrate how they can in principle be used for economic forecasting, scenario and risk analyses. We also discuss the modelling agenda which is currently under development, focusing notably on heterogeneity, machine learning, expectation formation and climate change. The paper makes it clear that the large macroeconometric models typically developed in central banks remain stylised descriptions of our modern economies and can fail to predict or assess the nature of economic events (especially when big crises arise). But even in highly uncertain economic conditions, they can still provide a meaningful contribution to policy preparation. We conclude the paper with a roadmap which will allow the ECB and the Eurosystem to exploit technological advances and cooperation across institutions as a useful means of ensuring that the modelling framework is not only resilient to disruptive events but also innovative. JEL Classification: C30, C53, C54, E52 |
| Keywords: | economic models, forecasting, macroeconometrics, monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024344&r=mon |
| By: | 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); Dudi Levy (Department of Economics, Bar-Ilan University, Israel); Haipeng Allan Chen (Tippie College of Business, University of Iowa, USA) |
| Abstract: | We report the results of surveys we conducted in the US and Israel in 2020, a time when many prices increased following the spread of the COVID-19 pandemic. To assess respondents’ perceptions of price increases, we focus on goods whose prices have increased during the pandemic, including some essential goods. Consistent with the principle of dual entitlement, we find that respondents perceive price increases as more acceptable if they are due to cost shocks than if they are due to demand shocks. However, we also find large differences across the two populations, as well as across goods. |
| Keywords: | Fairness Perceptions, Price Increases, The Pandemic, Dual Entitlement, Consumer Antagonism |
| JEL: | E31 E70 D90 M31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:24-03&r=mon |