nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒04‒15
37 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Anchoring Households' Inflation Expectations when Inflation is High By Nghiem, Giang; Dräger, Lena; Dalloul, Ami
  2. Drivers of Dollar Share in Foreign Exchange Reserves By Linda S. Goldberg; Oliver Zain Hannaoui
  3. FX interventions as a form of unconventional monetary policy By Dr. Tobias Cwik; Dr. Christoph Winter
  4. Central Banking Post Crises By Michael Kiley; Frederic S. Mishkin
  5. CBDC and the banking system By Simone Auer; Nicola Branzoli; Giuseppe Ferrero; Antonio Ilari; Francesco Palazzo; Edoardo Rainone
  6. Four Facts about International Central Bank Communication By Bertsch, Christoph; Hull, Isaiah; Lumsdaine, Robin L.; Zhang, Xin
  7. Big money reigns, small money gains - but who will fix the International Monetary System? By Jeremy Samer Srouji
  8. Estimating the Impact of Official and Parallel Exchange Rates on Inflation in Sierra Leone. By Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph
  9. There has been an awakening. The rise (and fall) of inflation in the euro area By Stefano Neri
  10. Monetary Policy with Uncertain Inflation Persistence By Mr. Luis Brandão-Marques; Mr. Roland Meeks; Vina Nguyen
  11. Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa By Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum
  12. Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates By Rodolfo G. Campos; Jesús Fernández-Villaverde; Galo Nuño; Peter Paz
  13. The Effect of Monetary Policy Shocks on Inequality in the Eurozone By Makram El-Shagi
  14. Monetary Policy Transmission Through Shadow and Traditional Banks By Amina Enkhbold
  15. The ECB’s Future Monetary Policy Operational Framework: Corridor or Floor? By Mr. Luis Brandão-Marques; Mr. Lev Ratnovski
  16. A Structural Measure of the Shadow Federal Funds Rate By Callum Jones; Mariano Kulish; James Morley
  17. Talking in a language that everyone can understand? Clarity of speeches by the ECB Executive Board By Glas, Alexander; Müller, Lena
  18. Understanding Inflation Dynamics: The Role of Global Shocks in CEMAC By Johanna Tiedemann; Olivier Bizimana; Lluis Dalmau; Martin Ambassa
  19. The Digital Euro: A Materialization of (In)Security. By Westermeier, Carola
  20. Subjective Monetary Policy Shocks By Kento Tango; Yoshiyuki Nakazono
  21. The Relationship Between Central Banks And Governments: What Are Central Banks For? By Sheila Dow
  22. Detecting turning points in the inflation cycle By Marco Hoeberichts; Jan Willem van den End
  23. Regional Effects of Monetary Policy in China By Makram El-Shagi; Kiril Tochkov
  24. The Simple Macroeconometrics of the Quantity Theory And the Welfare Cost of Inflation By Kenneth G. Stewart
  25. Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations? By Mr. Antonio David; Samuel Pienknagura; Juan Yepez
  26. Estimating Deposit Interest Rate Pass-Through in Central and Eastern European Countries Using Wavelet Transform and Error Correction Model By Gabor Hajnal; Zsuzsanna Hosszu; Akos Attila Ozoroczy; Balint Dancsik
  27. The Proposed Tollgate Price Hike's Potential Impact on Inflation in Sierra Leone: A Counterfactual Estimation By Kpukumu, Kabineh; Barrie, Mohamed Samba
  28. High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness By Alice Fan; Bingjie Hu; Sadhna Naik; Neree C.G.M. Noumon; Keyra Primus
  29. The Effect of Monetary Policy Shocks on Income Inequality across US states By Makram El-Shagi; Steven Yamarik
  30. What has been putting upward pressure on CORRA? By Boran Plong; Neil Maru
  31. Gender Disparities in Inflation during the Cost-of-Living Crisis in Europe: A Novel Decomposition By Sologon, Denisa Maria; Doorley, Karina; O'Donoghue, Cathal
  32. US monetary policy is more powerful in low economic growth regimes By De Santis, Roberto A.; Tornese, Tommaso
  33. Macroprudential Capital Regulation and Fiscal Balances in the Euro Area By Nikolay Hristov; Oliver Hülsewig; Benedikt Kolb
  34. Price controls against “greedflation”: lessons from the debate over incomes policy By Basile Clerc
  35. Contagious stablecoins? By van Buggenum, Hugo; Gersbach, Hans; Zelzner, Sebastian
  36. Whither Liquidity Shocks? Implications for R∗ and Monetary Policy By Giorgio Massari; Luca Portoghese; Patrizio Tirelli
  37. Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination By Nadav Ben Zeev; Daniel Nathan

  1. By: Nghiem, Giang; Dräger, Lena; Dalloul, Ami
    Abstract: This paper explores communication strategies for anchoring households' medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB's inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank.
    Keywords: anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT)
    JEL: E52 E31 D84
    Date: 2024–04
  2. By: Linda S. Goldberg; Oliver Zain Hannaoui
    Abstract: The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks is sometimes taken as an indicator of dollar status. We show that the observed decline in the aggregate share of U.S. dollar assets does not stem from a systematic shift in currency preferences away from holding dollar assets. Instead, a small group of countries with large foreign exchange reserve balances drive the dollar share decline observed in aggregate statistics. This arises either due to countries conducting monetary policy vis-à-vis the euro or due to preference shifts away from dollars. Regression analysis shows that interest rate differentials between traditional and nontraditional reserve currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares, especially if the primary foreign currency liquidity needs of the central bank are already satisfied.
    Keywords: foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves
    JEL: F3 F31 F33
    Date: 2024–03–01
  3. By: Dr. Tobias Cwik; Dr. Christoph Winter
    Abstract: In the aftermath of the Great Financial Crisis (GFC), central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms.
    Keywords: Monetary policy, FX intervention, Shadow rate, DSGE model
    JEL: C54 E52 F41
    Date: 2024
  4. By: Michael Kiley; Frederic S. Mishkin
    Abstract: The world economy has experienced the largest financial crisis in generations, a global pandemic, and a resurgence in inflation during the first quarter of the 21st century, yielding important insights for central banking. Price stability has important benefits and is the responsibility of a central bank. Achieving price stability in a complex and uncertain environment involves a credible commitment to a nominal anchor with a strong response to inflation and pre-emptive leaning against an overheating economy. Associated challenges imply that central bank communication and transparency are key elements of monetary policy strategies and tactics. Crises have emphasized the role of central banks in promoting financial stability, as financial stability is key to achieving price and economic stability, but this role increases risks to independence. Goals for central banks other than price and economic stability, complemented by financial stability, can make it more difficult for them to stabilize both inflation and economic activity.
    JEL: E4 E5 E52 E58
    Date: 2024–03
  5. By: Simone Auer (Bank of Italy); Nicola Branzoli (Bank of Italy); Giuseppe Ferrero (Bank of Italy); Antonio Ilari (Bank of Italy); Francesco Palazzo (Bank of Italy); Edoardo Rainone (Bank of Italy)
    Abstract: This paper describes the role of central bank and commercial bank money in a modern monetary system and the possible implications of the introduction of a central bank digital currency (CBDC) for the banking system and the economy as a whole. The analysis shows that the impact of a CBDC depends on a number of design choices and on how credit institutions re-optimize their balance sheets in response to the outflow of deposits caused by the substitution of private money with public digital money. We provide a set of illustrative simulations on the impact of a CBDC on the funding structure and profitability of credit institutions using data on Italian banks between June 2021 and March 2023. The analysis suggests that the overall impact on banks' funding could be manageable in the presence of individual holding limits and in an environment characterized by ample liquidity and stable funding for credit institutions. The cost of covering the reduction of deposits would be relatively higher for intermediaries with low excess reserves and for those that may need to issue long-term liabilities to maintain stable funding levels above regulatory requirements.
    Keywords: central bank digital currency, monetary policy, financial stability, banks, money
    JEL: E41 E42 E43 E44 E51 E58 G21
    Date: 2024–02
  6. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (BI Norwegian Business School; CogniFrame); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication.
    Keywords: Exchange Rates; Natural Language Processing (NLP); International Spillovers; Monetary Policy
    JEL: C55 E42 E50 F31 F42
    Date: 2024–03–01
  7. By: Jeremy Samer Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur, Erasmus University Rotterdam)
    Abstract: The evolution of the international monetary system towards a more multipolar configuration is not only reflective of fundamentals but of increasing fragilities and uncertainty. In this paper, we map the trajectories of the big four (EUR, GBP, JPY, USD) and secondary currencies (AUD, CAD, CHF, CNY) in the past decade and argue that the system is increasingly illadapted to thereconfiguration of the globaleconomy, bringing to theforefront the need, in particular, for a reliable alternative international reserve asset.
    Keywords: currency internationalization, functions of money, international monetary system, international reserves, payments
    Date: 2024
  8. By: Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph
    Abstract: This study examines the duality of the exchange rate market in Sierra Leone, delving into the distinct impacts of the official and parallel exchange rates (between the Leone and the United States Dollar) on inflation. Employing the Autoregressive Distributed Lag (ARDL) approach and utilizing annual time series data from 1980 to 2020, the research reveals that the depreciation of the Leone significantly influences inflation. This effect is more pronounced in the case of the parallel exchange rate, where a 1% depreciation results in a 1.26 percentage point increase in inflation, gradually decreasing to 0.92 percentage point over two years. Conversely, the depreciation of the official rate leads to a 0.43 percentage point increase inflation and subsequently to 0.52 percentage point increase in inflation for every 1% depreciation of the official exchange rate in the second year. The findings confirm the significance of both official and parallel exchange rates in influencing inflation, highlighting a substantial difference in their effects on the economy. Nevertheless, the results indicate no statistically significant long-term relationship between inflation and both the official and parallel exchange rates in Sierra Leone. Exchange rate depreciation, particularly in the parallel market, is shown to have a pronounced impact on inflation, necessitating careful oversight and regulation of the parallel market to ensure price stability. The study also uncovers the presence of foreign exchange market fragmentation, posing challenges to effective monetary policy and exchange rate management. Policy implications drawn from the research underscore the importance of regulating the parallel market to enhance transparency and stability. Integrating fragmented foreign exchange markets is deemed crucial for minimizing exchange rate pass through to inflation. Acknowledging the data limitations, the research suggests enriching future investigations by incorporating recent data, global economic factors, and investor sentiments, all of which have the tendency to affect exchange rate movements.
    Keywords: Official Exchange Rate, Parallel Exchange Rate, Inflation, exchange-rate-market-duality, Sierra Leone
    Date: 2023
  9. By: Stefano Neri (Bank of Italy)
    Abstract: In the summer of 2021, inflation woke up for the first time in many years. The period of low inflation in the euro area ended abruptly with the recovery from the Covid-19 pandemic and the energy crisis. Supply bottlenecks and energy prices played an important role in pushing up core inflation. Despite the rise in consumer prices, the ECB's monetary policy response helped to re-anchor long-term inflation expectations to the new symmetric 2 per cent target. With expectations well anchored, the risks of second-round effects limited and the downside risks to growth heightened, it is time to take stock of the effects of monetary policy so far and those still to come, and wait for the effects of past shocks on inflation to fade.
    Keywords: inflation energy prices, supply bottlenecks, long-term inflation expectations, monetary policy
    JEL: C32 E31 E32 E37
    Date: 2024–03
  10. By: Mr. Luis Brandão-Marques; Mr. Roland Meeks; Vina Nguyen
    Abstract: When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence.
    Keywords: Robust policy; monetary policy; uncertainty; inflation persistence; wage and price dynamics.; Monetary Policy stance; policy rule parameter; price Persistence; IMF working paper 2024/47; inflation expectation; Inflation; Central bank policy rate; Output gap; Wages; Europe; Central and Eastern Europe; Eastern Europe
    Date: 2024–03–08
  11. By: Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum
    Abstract: This paper provides new evidence on the exchange rate passthrough to domestic inflation in Sub-Saharan Africa (SSA) using both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER), and monthly data. We find that depreciations cause sizable increases in domestic inflation. The passthrough in SSA is higher than in other regions and its magnitude depends on the exchange rate regime, type of exchange rate (bilateral versus NEER), natural resource endowment and domestic market competitiveness. The passthrough is found to be disproportionately larger and more persistent for large depreciation shocks, and for exchange rate changes that are more persistent. We also find evidence of asymmetry, with passthrough eight times stronger during depreciations than appreciations. Additional findings suggest that improved monetary policy effectiveness is an important driver of our observed declining estimates of exchange rate passthrough over time, supporting the long-standing view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation.
    Keywords: Exchange rage passthrough; inflation; nonlinearities; Sub-Saharan Africa
    Date: 2024–03–15
  12. By: Rodolfo G. Campos; Jesús Fernández-Villaverde; Galo Nuño; Peter Paz
    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.
    JEL: E32 E52 E58
    Date: 2024–03
  13. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: In this paper, we assess the impact of monetary policy shocks on the income distribution in the Eurozone after the Global Financial Crisis, i.e., a time of unconventional monetary policy. Unlike previous papers that focus on the precrisis era, where monetary policy was primarily conducted through interest rates, expansionary policy typically increases inequality. This can be mitigated by highly developed financial markets and sound institutions that limit rent seeking.
    Keywords: monetary policy, inequality, Eurozone
    JEL: D33 E52
    Date: 2024–03
  14. By: Amina Enkhbold
    Abstract: I investigate how monetary policy transmits to mortgage rates via the mortgage market concentration channel for both traditional and shadow banks in the United States from 2009 to 2019. On average, shadow and traditional banks exhibit only a slight disparity in transmitting monetary shocks to mortgage rates. Nonetheless, in highly concentrated mortgage markets, shadow banks transmit marginally 35 basis points (bps) more, whereas traditional banks transmit marginally 25 bps less in response to a monetary policy surprise of more than 100 bps. Lastly, banks serve different parts of the mortgage rate distribution: (i) fintech lenders compete with traditional banks for the highest rates, (ii) traditional banks target primarily the middle of the mortgage rate distribution, and (iii) non-fintech lenders specialize in the lowest rates by transmitting monetary policy the least.
    Keywords: Monetary policy transmission; interest rates; financial institutions
    JEL: E44 E52 G21
    Date: 2024–03
  15. By: Mr. Luis Brandão-Marques; Mr. Lev Ratnovski
    Abstract: This paper reviews the trade-offs involved in the choice of the ECB’s monetary policy operational framework. As long as the ECB’s supply of reserves remains well in excess of the banks’ demand, the ECB will likely continue to employ a floor system for implementing the target interest rate in money markets. Once the supply of reserves declines and approaches the steep part of the reserves demand function, the ECB will face a choice between a corridor system and some variant of a floor system. There are distinct pros and cons associated with each option. A corridor would be consistent with a smaller ECB balance sheet size, encourage banks to manage their liquidity buffers more tightly, and facilitate greater activity in the interbank market. But it would require relatively more frequent market operations to ensure the money markets rate stays close to the policy rate and could leave the banking system vulnerable to intermittent liquidity shortages that may have financial stability implications and impair monetary transmission. The floor, on the other hand, would allow for more precise control of the overnight rate and a lower risk of liquidity shortages, but it would entail a somewhat larger ECB balance sheet, weaken the incentives for banks to manage their liquidity buffers, and discourage interbank market activity. The analysis of tradeoffs suggests that, on balance, in steady state, a hybrid system that combines the features of the “parsimonious floor” (with a minimal volume of reserves) with a lending facility or frequent short-term full-allotment lending operations priced at or very close to the deposit rate, making it a “zero (or near-zero) corridor”, would be most conducive for achieving the ECB’s monetary policy objective.
    Keywords: Central bank operations; Monetary policy; The ECB
    Date: 2024–03–15
  16. By: Callum Jones; Mariano Kulish; James Morley
    Abstract: We propose a shadow interest rate for structural macroeconomic models that measures the interest-rate-equivalent stance of monetary policy at the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance that extends the expected duration of zero-interest-rate policy beyond the lower bound constraint is expansionary and decreases the shadow rate. Quantitative easing that shortens the expected duration of the binding constraint also decreases the shadow rate. We find that the estimated shadow federal funds rate from a workhorse structural model of the US economy better captures the stance of monetary policy than a shadow rate based only on the term structure of interest rates. Furthermore, both forward guidance and quantitative easing appear to be important drivers of our shadow federal funds rate.
    Keywords: zero lower bound; forward guidance; quantitative easing; shadow rate; monetary policy
    Date: 2024–03
  17. By: Glas, Alexander; Müller, Lena
    Abstract: We use data on speeches held by members of the European Central Bank's (ECB) Executive Board to analyze whether clarity of central bank communication has increased over time. Employing readability measures as proxy variables, we find that clarity of information provision is trending upward since the inception of the ECB. The increase is gradual, rather than being induced by changes in the board composition or major macroeconomic events. Clarity is higher for speeches aimed at general audiences and for speeches by female speakers. We also show that media sentiment about the ECB is negatively related to complexity.
    Keywords: Central Bank Communication, Monetary Policy Transparency, Clarity, Readability
    JEL: E52 E58
    Date: 2023
  18. By: Johanna Tiedemann; Olivier Bizimana; Lluis Dalmau; Martin Ambassa
    Abstract: As in the rest of the world, inflation in CEMAC surged more quickly and persistently than expected during the 2021–23 period. This paper examines the drivers of inflation dynamics and the contribution of global shocks to inflation persistence in CEMAC. We use a Phillips curve framework combined with the local projections method. Our results confirm the prominent role of global factors in driving inflation dynamics. Global commodity food and oil price fluctuations, and shipping costs are the main factors explaining the large variability in headline inflation. Further, we find that global price shocks have sizable and persistent effects on domestic headline inflation, with differences in the magnitude and speed of pass-through. The pass-through from commodity food price fluctuations to headline inflation is higher and more persistent than that of other global price shocks, reflecting the large share of food in the consumption baskets, which makes inflation more vulnerable to direct effects of international food shocks, but also larger second-round effects.
    Keywords: Inflation; underlying inflation; Phillips curve; commodity prices; shipping costs; CEMAC; inflation dynamics; price shock; commodity food price fluctuation; baseline result; inflation expectation; inflation development; Oil prices; Commodity price shocks; Food prices; Global
    Date: 2024–03–08
  19. By: Westermeier, Carola
    Abstract: The European Central Bank (ECB) has entered the preparation phase for the potential issuance of a digital euro. The digital euro under consideration represents a retail Central Bank Digital Currency (CBDC), a digital representation of central bank money that is intended for use by the general public. This article foregrounds the digital euro as an infrastructure that furthers European security ambitions. It argues that the development of the digital euro is a materialization of European (in)security rationales that aim to secure pan-European financial transactions amid growing geopolitical tensions. It focuses on the development of the technology and analyses how central bankers’ scenarios of the future manifest in the anticipated design and prototypes. While the provision of a financial infrastructure is the most decisive security-related implication of the digital euro, the introduction of a new form of public money is the decisive financial feature with potentially wide-ranging implications for banks. Although the ECB seeks to balance the interests of banks and other financial actors in the development of the digital euro, its plans are still met with criticism. Finally, the paper argues that the European Central Bank exerts itself more explicitly than before as geopolitical actors in its own regard.
    Date: 2024–03–21
  20. By: Kento Tango; Yoshiyuki Nakazono
    Abstract: We propose a new concept of monetary policy shocks: subjective monetary policy shocks. Using a unique survey on both consumption expenditures and forecasts of interest rates, we identify a cross-sectionally heterogeneous monetary policy shock at the micro level. We first distinguish between exogenous and endogenous interest rate changes and define the exogenous component as a subjective monetary policy shock for each household. We then estimate the impulse responses of consumption expenditures to a subjective monetary policy shock. We find the stark contrasts in the dynamics of consumption expenditures between borrowers and lenders; in response to an unexpected rise in interest rates, consumption expenditures by borrowers decrease, whereas those of asset holders increase. We also find large and quick responses of consumption expenditures when households are attentive to interest rates. Our findings support the theoretical prediction of not only heterogeneous agent New Keynesian models, but also behavioral macroeconomics under imperfect information.
    Date: 2024–03
  21. By: Sheila Dow (Department of Economics, University of Victoria)
    Abstract: In order to consider the problem of the relationship between central banks and governments, it is necessary to go back to first principles and consider what society needs from central banks. The role of the central bank is explored as being to provide a stable financial environment as a basis for real economic activity. This involves the provision of a safe money asset; an appropriate level and composition of lending to the corporate sector to finance capital investment; and lending to government as required, subject to maintaining the value of the currency. The evolution of this traditional role in relation to banks and government is analysed in terms of collateral, emphasising their interdependencies. The argument developed here is that the problem of insufficient collateral for the financial system is a product of weak economic conditions and financial instability which has eroded confidence in the valuation of assets, and that this has been compounded by central bank independence. As a result, it is argued that central banks should not be independent of government, but rather that the traditional constructive mutual relationships between central banks and government (and retail banks) be restored.
    Keywords: central banks, monetary policy, bank regulation
    Date: 2024–03–21
  22. By: Marco Hoeberichts; Jan Willem van den End
    Abstract: Based on a non-parametric method we construct a leading indicator for turning points in the inflation cycle. We extract the cycle by a band pass filter and identify the turning points by the Bry Boschan algorithm. The selection of variables in the leading indicator is based on turning point matching and dynamic correlation, while the weights are adjusted for cross-correlation between the variables. We apply the method to core inflation in the Netherlands and the euro area. We show that turning points in the core inflation cycle explain inflation forecast errors. Moreover, we show that since the pandemic the cycle of core inflation has mainly been driven by external factors and that the inflation cycle will remain below trend well into 2024.
    Keywords: Euro area inflation; Trend-cycle decomposition; Leading indicators; (Turning point) forecasts; Real-time analysis
    JEL: C82 E31 E37 E58
    Date: 2024–03
  23. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US)
    Abstract: Unitary monetary policy in large emerging economies with substantial regional disparities is likely to have heterogeneous effects with unintended consequences. This paper explores the regional effects of monetary policy in China by estimating the response of a series of provincial variables to a national monetary policy shock using quarterly data over the period 1999-2022. Regional heterogeneity is assessed by comparing the results from a fixed-effects and a mean-group estimator. The response of consumer prices and loans is found to be homogeneous across provinces, while that of output and property prices exhibits significant regional variation. Further analysis of the differential response for two provincial clusters indicates that output in Western China experiences faster drops after a contractionary monetary policy shock and takes longer to recover than in Eastern and Central China. In the same context, property prices react with a delay and endure a more gradual recovery after the shock. The advancement of market institutions, the share of state-owned enterprises, and the size of the private sector are identified as potential determinants of the differential response across the two regional clusters.
    Keywords: monetary policy, regional effects, China
    JEL: E52 E58
    Date: 2024–03
  24. By: Kenneth G. Stewart (Department of Economics, University of Victoria)
    Abstract: The quantity theory of money hypothesizes that the price level is determined through the equilibration of money supply and demand. Predicated on this causal structure, a single-equation error correction model decomposes from a larger vector autoregressive system so as to make available bounds tests for a levels relationship that are robust to the univariate integration properties of the variables. This model is estimated using three alternative money stock measures and three standard specifications for money demand. The hypothesis of a long run relationship between the levels of money, prices, and income is generally supported by a century of U.S.\ data. Across this range of models and aggregates, the classic quantity theory proposition of one-for-one associations between prices and each of money and income is best satisfied when M2 is the monetary aggregate. Based on a preferred model in which money demand is loglinear in the rate of interest, and with structural change treated by indicator saturation, the welfare cost of inflation is estimated to have ranged between 0.362 and 1.326 percent of national income at interest rates experienced by the United States during the past century.
    Keywords: quantity theory of money, money demand, bounds tests, indicator saturation, welfare cost of inflation
    Date: 2023–11–01
  25. By: Mr. Antonio David; Samuel Pienknagura; Juan Yepez
    Abstract: In this paper, we use quarterly data and a novel database on fiscal policy consolidation announcements, for a sample of advanced economies and emerging markets to quantify the effects of fiscal tightening on inflation expectations. We find that fiscal consolidation announcements reduce inflation expectations over the medium-term (three and five-years ahead), but not in the short-term (one-year ahead). There is also some evidence that consolidation announcements reduce “disagreement” about expected future inflation at longer horizons. The inflation anchoring role of consolidation announcements is enhanced by the strength of a country’s fiscal and monetary frameworks, and when fiscal and monetary policy work in tandem. In addition, we find that initial conditions matter—inflation expectation’s response to consolidation announcements is larger in periods of high contemporaneous inflation. With these results in hand, we show that the effectiveness of fiscal consolidation in controlling realized inflation depends greatly on the response of inflation expectations to consolidation announcements. These results show that fiscal policy is crucial to anchor inflation expectations and a key element of a credible disinflationary process.
    Keywords: Fiscal Consolidations; Fiscal Policy; Inflation Expectations; Narrative Approach
    Date: 2024–03–15
  26. By: Gabor Hajnal (Magyar Nemzeti Bank (the Central Bank of Hungary)); Zsuzsanna Hosszu (Magyar Nemzeti Bank (the Central Bank of Hungary)); Akos Attila Ozoroczy (Student at John Von Neumann University); Balint Dancsik (Magyar Nemzeti Bank (the Central Bank of Hungary))
    Abstract: Our study deals with interest rate pass-through for household and corporate deposits in the Central and Eastern European (CEE) region, focusing on the tightening cycle starting in the middle of 2021. This period is of particular interest for interest rate pass-through, as the sharp hikes by central banks in response to a high inflation environment followed a period characterised by a significant abundance of liquidity. We examine the relationship between interbank and deposit rates using two methods: wavelet transform and error-correction models. Based on the wavelet analysis, we found a weakening of pass-through and a slowdown in the repricing of deposit rates in the current tightening cycle among the countries of the CEE region, particularly in the household segment. Based on the error-correction models, in the sample including the tightening cycle, a weakening in the degree and speed of interest rate pass-through is consistently observed in the Hungarian and Polish deposit markets; and the extent of pass-through of the benchmark rate declined most in the Hungarian household deposit market among the CEE countries. Furthermore, a comparison of the interest rate paths estimated on the basis of the transmission correlations for the period excluding the tightening cycle starting in 2021 and the actual interest rate time series shows that the pass-through of the benchmark rate is the least efficient in the Hungarian household deposit market among the countries of the CEE region.
    Keywords: deposit interest rates, interest rate pass-through, wavelet transform, error-correction model
    JEL: C51 C69 E32 E43 E52
    Date: 2024
  27. By: Kpukumu, Kabineh; Barrie, Mohamed Samba
    Abstract: This research investigates the potential impact of proposed tollgate price adjustments on inflation dynamics in Sierra Leone using a suite of Bayesian Vector Autoregressive (VAR) models with data from 2007M1 to 2024M1. Around 2015-2016, the government of Sierra Leone initiated a crucial road expansion project in partnership with China Railway Seventh Group Co., Ltd. (CRSG), aiming to improve transportation networks by extending the road from Wellington in Freetown to Masiaka in Port Loko District. As per the agreement, three tollgates were to be erected at strategic points along this expanded route: Hastings, Songo, and Masiaka. Despite maintaining stable tollgate prices since their inception in 2017, CSRG has indicated recently that they want to revise the tollgate prices to reflect exchange rate depreciation, thus prompting an examination of this proposed move on inflation. Projections from the model simulations indicate that if the proposed toll gate price revisions are enacted in April 2024, transport inflation would surge by 1.55% month-on-month and by 5.3% year-on-year from April to July 2024 cumulatively. In dissecting the transport sector, our analysis revealed a clear pattern: without the tollgate effect, transport inflation showed a gradual upward trajectory. However, upon modeling the potential effects of the proposed tollgate price revisions, a sharp increase in transport inflation is observed. Moreover, food inflation is projected to experience a significant year on-year rise of 7.15% cumulatively, while headline inflation is expected to increase by 4.62% over the period from April to June 2024. Furthermore, an examination of food inflation patterns revealed an interesting trend: before accounting for the toll gate effect, food inflation showed a declining trend over the observation period. However, upon factoring in the tollgate effect, while food inflation continued to decline, it did so at levels higher than would have been the case without the toll gate effect. These insights hold key policy implications, such as closely monitoring, communicating transparently, and coordinating responses to mitigate inflationary impacts and foster economic stability.
    Keywords: Tollgate prices, Inflation dynamics, Bayesian VAR framework, Policy implications, Sierra Leone
    Date: 2024
  28. By: Alice Fan; Bingjie Hu; Sadhna Naik; Neree C.G.M. Noumon; Keyra Primus
    Abstract: This paper identifies and quantifies the drivers of inflation dynamics in the three Baltic economies and assesses the effectiveness of fiscal policy in fighting inflation. It also analyzes the macroeconomic impact of inflation on competitiveness by focusing on the relationship between wages and productivity in the tradeable sector. The results reveal that inflation in the Baltics is largely driven by global factors, but domestic demand matters as well, suggesting that fiscal policy can play a role in containing inflation. Also, there is robust evidence of a long-run (cointegration) relationship between (real) wages in the tradeable (manufacturing) sector and productivity in the Baltics with short-term deviations self-correcting in Estonia and Lithuania only.
    Keywords: Inflation Dynamics; Competitiveness; Baltics
    Date: 2024–03–15
  29. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Steven Yamarik (Department of Economics, California State University Long Beach, CA)
    Abstract: This paper examines the impact of Federal Reserve policy on income inequality across US states. We use the local projections method of Jordà to estimate impulse response functions for each state. We find that a restrictive monetary policy increases income inequality in almost all states, but with different magnitudes. Subsequent panel analysis examines the possible transmission mechanisms that can account for these differences. Our empirical results confirm the theoretical predictions – inequality is increased by higher inflation, home ownership, and earnings in the finance, insurance and real estate (FIRE) sector; but decreased by higher housing prices, unionization rates, educational attainment and minimum wage.
    Keywords: monetary policy, inequality, US states, local projections
    JEL: D31 D63 E52 R19
    Date: 2024–03
  30. By: Boran Plong; Neil Maru
    Abstract: From the autumn of 2023 into early 2024, the Canadian Overnight Repo Rate Average (CORRA), a measure of the cost of overnight general collateral Canadian dollar repos, was consistently well above the Bank’s target for the overnight rate. We find that, among several factors, long bond positions that require repo financing are the main driver of the recent upward pressure on CORRA.
    Keywords: Financial markets; Interest rates; Lender of last resort; Monetary policy implementation
    JEL: D4 D5 D53 E4 E43 E44 E5 E52 G1 G12
    Date: 2024–03
  31. By: Sologon, Denisa Maria (LISER (CEPS/INSTEAD)); Doorley, Karina (Economic and Social Research Institute, Dublin); O'Donoghue, Cathal (National University of Ireland, Galway)
    Abstract: This paper evaluates the gender-specific distributional impact of the recent cost-of-living crisis in six European countries using the Household Budget Survey to assess the degree of regressivity (affecting lower income households more) or progessivity (affecting higher income households more) of inflation experienced by households between April 2021 and July 2023. Despite a growing literature on the distributional impact of inflation, there is limited evidence on gender differentials. We innovate by applying distributional measures and a decomposition method adapted from the taxation literature extended with a gender dimension to assess gender differences in inflation regressivity or progressivity, isolate the average inflation rate from the inflation structure effect and identify the drivers of regressivity/progressivity by broad commodity groups (food, heating/electricity, motor fuels, other goods and services). The findings highlight the greater regressive inflation faced by female-headed households compared to men in middle-income countries like Portugal, Poland and Hungary and high-income countries like Ireland. In Germany overall inflation has a neutral impact on women, whereas Finland stands out with a progressive inflation, more pronounced for female-headed households. Consistent across countries, the burden of food and heating/electricity inflation is disproportionately borne by low-income households. Heating/electricity inflation has a larger regressive contribution to overall inflation for female-headed households in all countries, whereas for food this holds only in Poland and Hungary. The findings highlight the need for targeted policies to address potential inequalities arising from differential consumption patterns and protect the most vulnerable groups.
    Keywords: regressive inflation, inflation and gender, distributional effect and gender, progressive inflation
    JEL: D12 D31 E31 I30 J16
    Date: 2024–03
  32. By: De Santis, Roberto A.; Tornese, Tommaso
    Abstract: We use nonlinear empirical methods to uncover non-linearities in the propagation of monetary policy shocks. We find that the transmission on output, goods prices and asset prices is stronger in a low growth regime, contrary to the findings of Tenreyro and Thwaites (2016). The impact is stronger on private investment and durables and milder on the consumption of nondurable goods and services. In periods of low growth, a contractionary monetary policy implies lower expected Treasury rates and higher premia along the entire Treasury yield curve. Similarly, the corporate excess bond premium rises and the stock market drops substantially during recessions. We use the monetary policy surprises and their predictors provided by Bauer and Swanson (2023a), and identify an additional predictor, the National Financial Condition Index (NFCI), which is relevant in the nonlinear setting. A Threshold VAR, a Smooth-Transition VAR and nonlinear local projection methods all corroborate the findings. JEL Classification: C32, E32
    Keywords: asset prices, business cycles, local projections, monetary policy, non-linearities, STVAR, TVAR
    Date: 2024–03
  33. By: Nikolay Hristov; Oliver Hülsewig; Benedikt Kolb
    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
  34. By: Basile Clerc
    Abstract: Why do some economists support price controls in the face of inflation during peacetime? Our thesis is that, in the history of economic thought, understanding the role of profits in inflationary dynamics is the crucial variable. To demonstrate this, we investigate the extensive literature on incomes policy, insofar as much of the thinking on macroeconomic price controls in peacetime is part of this literature. This corpus is crossed by a major schism: some advocate price and wage controls while others limit control to wages alone. We show that the defense of price controls is always based on the thesis that profits play an autonomous role in inflationary dynamics. Conversely, the advocates of an incomes policy reduced to wage controls see margins as mere transmission belts for excessive wage increases into prices. Price controls are thus rejected ex ante, even before any criticism of the consequences of their application.
    Keywords: Price controls - Wage controls - Incomes policy - Inflation - Unemployment
    JEL: B22 E64 E12
    Date: 2024
  35. By: van Buggenum, Hugo; Gersbach, Hans; Zelzner, Sebastian
    Abstract: Can competing stablecoins produce efficient and stable outcomes? We study competition among stablecoins pegged to a stable currency. They are backed by interest-bearing safe assets and can be redeemed with the issuer or traded in a secondary market. If an issuer sticks to an appropriate investment and redemption rule, its stablecoin is invulnerable to runs. Since an issuer must pay interest on its stablecoin if other issuers also pay interest, competing interest-bearing stablecoins, however, are contagious and can render the economy inefficient and unstable. The efficient allocation is uniquely implemented when regulation prevents interest payments on stablecoins.
    Keywords: Stablecoins, currency competition, free banking, private money, digital money
    JEL: E4 E5 G1 G2
    Date: 2024
  36. By: Giorgio Massari (University of Pavia); Luca Portoghese (University of Pavia); Patrizio Tirelli (University of Pavia)
    Abstract: We show that popular models of (flight-to-) liquidity shocks rely on strongly counterfactual implications for asset returns and the composition of firms’ liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. We also uncover some counterfactual/implausible interpretations of the Fed’s monetary policy stance during recession periods, as hinted by the estimated gap between policy and natural rates. By including the relevant financial variables as observables in our empirical model, we find that liquidity shocks played a negligible role and became virtually irrelevant after 2010. Our estimates also imply that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate. Finally, our estimates provide a quite different interpretation of the monetary policy stance.
    Keywords: natural rate of interest, DSGE models, liquidity shocks, flight-to-quality, financial frictions
    JEL: C11 C32 C54 E43 E44
    Date: 2024–03
  37. By: Nadav Ben Zeev (BGU); Daniel Nathan (University of Pennsylvania and Bank of Israel)
    Keywords: Exchange Rate Determination; Equity Hedging Channel; Foreign Currency Forward Flows; Order Flow; Limits of Arbitrage; FX Dealers; Forward Exchange Rate; Spot Exchange Rate;Global Stock Prices; Institutional Investors; Granular Instrumental Variable; Bayesian Local Projections
    JEL: E44 F3 F31 G15 G23
    Date: 2023

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