nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒04‒22
33 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. The Nature of the Inflationary Surprise in Europe and the USA By Paula Bejarano Carbo
  2. Navigating by falling stars: monetary policy with fiscally driven natural rates By Rodolfo G. Campos; Jesús Fernández-Villaverde; Galo Nuño Barrau; Peter Paz
  3. Effect of a cost channel on monetary policy transmission in a behavioral New Keynesian model By Ida, Daisuke; Kaminoyama, Kenichi
  4. The macroprudential role of central bank balance sheets By Egemen Eren; Timothy Jackson; Giovanni Lombardo
  5. The effect of the European Central Bank’s asset purchase programmes on Spain’s public finances By Pablo A. Aguilar; Mario Alloza; James Costain; Samuel Hurtado; Jaime Martínez-Martín
  6. Central Bank Capital and Shareholder Relationship By Matteo Bonetti; Dirk Broeders; Damiaan Chen; Daniel Dimitrov
  7. As interest rates surge: flighty deposits and lending By Cappelletti, Giuseppe; Marqués-Ibáñez, David; Reghezza, Alessio; Salleo, Carmelo
  8. Core Inflation Revisited: Forecast Accuracy across Horizons By Michael W. McCracken; Trần Khánh Ngân
  9. Overly reliant on central bank funding? Consequences of exiting TLTRO By Heider, Florian; Schlegel, Jonas
  10. Encumbered Security? Conceptualising Vertical and Horizontal Repos in the Euro Area By Steffen Murau; Alexandru-Stefan Goghie; Matteo Giordano
  11. Inflationary impacts since the Global Pandemic Crisis: the potential of forecasting techniques and technologies By Ojo, Marianne
  12. Output Gaps, the Taylor Rule and the Stance of Monetary Policy By Juan M. Sanchez
  13. Greed? Profits, Inflation, and Aggregate Demand By Bilbiie, F. O.; Kanzig, D. R.
  14. Deposits and the March 2023 Banking Crisis—A Retrospective By Stephan Luck; Matthew Plosser
  15. Capital Flow Reversals and Currency Crises: Do Capital Flow Types Matter? By Mengting Zhang; Andreas Steiner; Jakob de Haan; Haizhen Yang
  16. Heterogeneity and Aggregate Fluctuations: Insights from TANK Models By Davide Debortoli; Jordi Galí
  17. The Entry of BRICS Currency and Exit of Dollar: Evidence from International Trade Theories and Policy Implications By R, Pazhanisamy
  18. Distribution of Market Power, Endogenous Growth, and Monetary Policy By Yumeng Gu; Sanjay R. Singh
  19. Clarity of Central Bank Communication and the Social Value of Public Information By Jonathan G. James; Philip Lawler
  20. Tails of Foreign Exchange-at-Risk (FEaR) By Ostry, D. A.
  21. The Fed Information Effect and Firm-Level Investment: Evidence and Theory By Alex Hsu; Indrajit Mitra; Yu Xu; Linghang Zeng
  22. Estimating the OIS term premium with analyst expectation surveys By Ricardo Barahona; María Rodríguez-Moreno
  23. Small Price Changes, Sales Volume, and Menu Cost By Sayag, Doron; Snir, Avichai; Levy, Daniel
  24. International Banking and Nonbank Financial Intermediation: Global Liquidity, Regulation, and Implications By Claudia M. Buch; Linda S. Goldberg
  25. A Fresh Assessment of the Depth of the “Euro Effect" on US FDI By Camarero, Mariam; Moliner, Sergi; Tamarit, Cecilio
  26. The Theory of Reserve Accumulation, Revisited By Corsetti, G.; Maeng, S. H.
  27. Spillovers and Spillbacks By Sushant Acharya; Paolo Pesenti
  28. Exchange Rate Unification in Nigeria: Benefits and Implications By Ozili, Peterson K
  29. The Fed Information Effect and Firm-Level Investment: Evidence and Theory By Alex Hsu; Indrajit Mitra; Yu Xu; Linghang Zeng
  30. Exchange Rate Regime and Sectorial Profi tability in a Small Open Economy: A Theoretical and Empirical Analysis of Argentina (2016-2022) By Ariel Dvoskin; Germán Feldman; Gabriel Montes-Rojas
  31. Two Centuries of Systemic Bank Runs By Rustam Jamilov; Tobias König; Karsten Müller; Farzad Saidi
  32. COVID-19 Hasn’t Killed Merchant Acceptance of Cash: Results from the 2023 Merchant Acceptance Survey By Angelika Welte; Katrina Talavera; Liang Wang; Joy Wu
  33. Addressing current inflation levels through green energy technologies and techniques: recent developments By Ojo, Marianne

  1. By: Paula Bejarano Carbo
    Abstract: This paper leverages insights from data and economic theory in order to construct a narrative account of how the nature of inflation has evolved over time in the euro area, United Kingdom and United States since the onset of the Covid-19 pandemic. To this end, I decompose the recent 'inflationary surge episode' into four periods: The Covid shock period (2020 Q1 – 2020 Q2), characterised by joint a negative demand and supply shock; the economic reopening period (2020 Q3 – 2021 Q4), characterised by conflicting positive demand and negative supply shocks; the post-reopening period (2022 Q1 – 2023 Q1), also characterised by conflicting positive demand and negative supply shocks, where the latter is driven by an exogenous increase in energy prices; and the post-energy shock period (2023 Q2 – present), characterised by falling consumer price index (CPI) inflation alongside still-elevated and broad-based underlying inflationary pressures. Having established this 'inflation story', I conclude with some brief comments on the European Central Bank, Bank of England and Federal Reserve monetary policy responses during this time.
    Keywords: Inflation, Monetary Policy, Central Bank Policy, Comparative Analysis
    JEL: E31 E50 E58 E63
    Date: 2024–03
  2. By: Rodolfo G. Campos; Jesús Fernández-Villaverde; Galo Nuño Barrau; 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.
    Keywords: HANK models, natural rates, fiscal shocks
    JEL: E32 E58 E63
    Date: 2024–03
  3. By: Ida, Daisuke; Kaminoyama, Kenichi
    Abstract: This paper explores the impact of the cost channel on the monetary transmission mechanism in a behavioral New Keynesian model. In contrast to previous studies, we demonstrate that the degree of cognitive discounting significantly affects the determinacy condition in the model with a cost channel. Second, we show that the price puzzle arises only when a large value of the cost channel parameter, which is not empirically supported, is introduced with a high degree of cognitive discounting. Third, we find that the degree of cognitive discounting significantly impacts the effect of the cost channel on optimal monetary policy.
    Keywords: Cognitive discounting; New Keynesian model; Cost channel; Monetary policy rules; Price puzzle;
    JEL: E52 E58
    Date: 2024–03–12
  4. By: Egemen Eren; Timothy Jackson; Giovanni Lombardo
    Abstract: Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets.
    Keywords: optimal monetary policy, central bank balance sheet, government debt, reserves, financial frictions, macroprudential
    JEL: E42 E44 E51 E52 G2
    Date: 2024–03
  5. By: Pablo A. Aguilar (Banco de España); Mario Alloza (Banco de España); James Costain (Banco de España); Samuel Hurtado (Banco de España); Jaime Martínez-Martín (Banco de España)
    Abstract: This paper empirically quantifies the effect on Spain’s public finances of the asset purchase programmes implemented in the euro area between 2015 and 2022. Specifically, it evaluates the impact of the ECB’s Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) on Spanish public revenue, expenditure, deficit and debt. The results suggest that these programmes have had a significant cumulative downward effect on the level of public debt.
    Keywords: quantitative easing, asset purchase programmes, unconventional monetary policy, term structure models, signaling and portfolio balance effects, expectations channel, fiscal effects, Spain
    JEL: E43 E44 E52 E63 E65 G18
    Date: 2024–03
  6. By: Matteo Bonetti; Dirk Broeders; Damiaan Chen; Daniel Dimitrov
    Abstract: In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively.
    Keywords: Capital; Central Bank; Contingent Claim Analysis, Risk Management; Shareholder; Stackelberg Games
    JEL: G13 G32 E58
    Date: 2024–04
  7. By: Cappelletti, Giuseppe; Marqués-Ibáñez, David; Reghezza, Alessio; Salleo, Carmelo
    Abstract: How a historic drop in bank deposits shapes banks’ loan supply? We exploit the effects of a large, and unexpected, increase in monetary policy rates to estimate the deposit channel of monetary policy using an extensive credit register that includes all bank-firm lending relationships in all euro area countries. We find that banks experiencing large deposit outflows reduce credit, but not the interest rate they charge, to the same borrower relative to other lenders. This credit restriction is stronger for fixed rate and longer maturity loans, but not for riskier borrowers. The effect is mostly driven by banks coming into the hiking period with a larger unhedged duration gap that renders borrowers of those banks more vulnerable to credit restrictions due to the deposit outflows as interest rates surge. We resort to the deposit beta as an instrument variable and a matched estimator that bear out the thrust of our results. JEL Classification: E51, E58, G21
    Keywords: bank deposits, banks, monetary policy
    Date: 2024–04
  8. By: Michael W. McCracken; Trần Khánh Ngân
    Abstract: How far out can you forecast inflation? This analysis examines the accuracy of core inflation in predicting headline inflation for periods ranging from three to 24 months in the future.
    Keywords: core inflation; headline inflation; forecasting
    Date: 2024–03–01
  9. By: Heider, Florian; Schlegel, Jonas
    Abstract: This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem stillholds plenty of reserveseven with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines ofthe euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages. This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee.
    Date: 2024
  10. By: Steffen Murau (Global Climate Forum, Berlin; Freie Universität Berlin; Global Development Policy Center, Boston University); Alexandru-Stefan Goghie (Freie Universität Berlin); Matteo Giordano (Department of Economics, SOAS University of London)
    Abstract: Despite the paramount centrality of repurchase agreements (repos) in today’s market-based finance regime, both conceptual and empirical questions about European repo markets are insufficiently explored as contradictory legal and accounting treatments make their on-balance-sheet representation intricate. Drawing on the literature on monetary hierarchy, we make three connected conceptual arguments: First, we argue that the balance sheet mechanics of repos vary if the counterparties involved are on hierarchically different levels (“vertical repos†) or on the same hierarchical level (“horizontal repos†). While the vertical repo mechanism implies money creation, the horizontal repo mechanism only lends on pre-existing money. Second, we coherently represent the whereabouts of the security posted as repo collateral, which is held as an off-balance-sheet position of the repo lender, combined with a liability to repay it. Basel III regulations interpret this ambiguous status of the collateral as being “encumbered†and not leaving the repo borrower’s balance sheet. Third, we introduce an on-balance-sheet notation of the collateral framework as a means of the repo lender to alter the elasticity of the funding provided. Applying our methodology on two cases—vertical repos created by the Eurosystem for monetary policy implementation and horizontal repos used in the European interbank market—offers an innovative and consistent way to represent changes in the collateral frameworks that affect the elasticity space in the Euro area’s monetary architecture. Our analysis yields two main contributions: We offer a novel understanding of different mechanisms for repo creation based on monetary hierarchy, and we put forth a data-driven empirical analysis of repos in Europe aimed at supporting our conceptual elaborations.
    Keywords: repurchase agreements; collateral; market-based finance; Eurosystem; European Central Bank; Eurex clearing.
    JEL: G21 G23 E58
    Date: 2024–04
  11. By: Ojo, Marianne
    Abstract: Important lessons which were drawn from the most recent GFC - notably, the growing need for accommodative policies (unconventional and conventional) to facilitate appropriate responses - given limited monetary policy spaces, the emergence, rise and evolution of private actors and their implications for monetary policies and financial stability. Amongst other goals and objectives, this paper considers innovative possibilities - particularly those of distributed ledger technologies which constitute benefits which can be harnessed to enhance digital possibilities of the Fourth Industrial Revolution.
    Keywords: monetary policies; financial stability; innovative techniques; forecasting techniques ; accommodative policies
    JEL: E43 E47 E58 G2 M21 O1 O19
    Date: 2024–03
  12. By: Juan M. Sanchez
    Abstract: The Taylor rule offers a formula to calculate a prescribed policy rate. How do alternative measures of the output gap affect this prescribed rate?
    Keywords: Taylor rule; output gaps; monetary policy; policy rate
    Date: 2024–03–04
  13. By: Bilbiie, F. O.; Kanzig, D. R.
    Abstract: Amidst the recent resurgence of inflation, this paper investigates the interplay of corporate profits and income distribution in shaping inflation and aggregate demand within the New Keynesian framework. We derive a novel analytical condition for profits to be procyclical and inflationary. Furthermore, we show that the cyclicality of profits is a key determinant of the propagation properties of these models under household heterogeneity, but there is a catch: for aggregate-demand fluctuations and inflation to be amplified by heterogeneity, profits have to be countercyclical—an implication that is at odds with the data. Adding physical capital investment to the model can resolve this conundrum, generating aggregate-demand amplification even under procyclical profits. However, the amplification works through an investment channel and not through profits, inconsistent with the narrative attributing elevated inflation to corporate greed.
    Keywords: Aggregate demand, income distribution, inflation, profits
    JEL: D11 E32 E52 E62
    Date: 2023–07–22
  14. By: Stephan Luck; Matthew Plosser
    Abstract: In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry.
    Keywords: deposit beta; deposits; banks; funding
    JEL: G21
    Date: 2024–03–27
  15. By: Mengting Zhang; Andreas Steiner; Jakob de Haan; Haizhen Yang
    Abstract: We analyse how reversals of several types of capital flows impact currency crises in emerging market and developing economies. Estimates of logit models show that reversals of (equity and debt) portfolio flows significantly increase the likelihood of currency crises in emerging market economies. In developing economies, reversals of portfolio debt flows and banking flows have a significant positive impact on currency crises. Finally, our results suggest that countries with mature financial systems and fixed exchange rate regimes are less likely to experience a currency crisis after a capital flow shock. The mediating role of capital account liberalization varies by country type.
    Keywords: capital flow reversals, currency crises, event study approach, logit models, domestic financial factors
    JEL: E44 E51 F34 F41
    Date: 2024
  16. By: Davide Debortoli; Jordi Galí
    Abstract: We analyze the merits and limitations of simple tractable New Keynesian models (RANK and TANK) in accounting for the aggregate predictions of Heterogenous Agent New Keynesian models (HANK). By means of comparison of a number of nested HANK models, we isolate the role played by (i) idiosyncratic income risk, (ii) a binding borrowing constraint, and (iii) a portfolio choice between liquid and illiquid assets. We argue that the effects of household heterogeneity can be largely understood looking at the differential behavior of two types of households, hand-to-mouth and unconstrained, We find that a suitably specified and calibrated TANK model (which abstracts from idiosyncratic income risk) captures reasonably well the aggregate implications of household heterogeneity and the main channels through which it operates. That ability increases in the presence of a policy rule that emphasizes inflation stability. In the limiting case of a strict inflation targeting policy, heterogeneity becomes irrelevant for the determination of aggregate output.
    Keywords: monetary policy, idiosyncratic income risk, incomplete markets, representative household, New Keynesian model, HANK models
    JEL: E32 E52
    Date: 2024–03
  17. By: R, Pazhanisamy
    Abstract: The purpose of this paper is to explore the impact of BRICS unions’ currency on the Dollar and its performances on international trade among the nations. The compound reviews of literature on the classical, neo classical and modern theories of trade reveals the non existence of research works on the multinational union currencies and its impact on the validity of the dollar and the economic gain of the nations and its influence over the trade activities for which this attempt is made. Due to lack of availability of the numerical data on the new currency and its impact over the economics through trade the graphical approach is used with the logical realistic assumptions and justified how the value of currencies of BRICS nations in international market would certainly be appreciate. It also portrays that how simultaneously the dominant dollar depreciate its value through the market forces of demand and supply changes in the global scale
    Keywords: BRICS currency, Alternative to Dollar, Gain from trade, Value of currency in the international market, Foreign Exchange Exploitation, Solutions to US sanction
    JEL: E44 E51 E58 F23 F3 F33 F36 F38 F52 F55 G15 G21 P51
    Date: 2024–01–03
  18. By: Yumeng Gu; Sanjay R. Singh
    Abstract: We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary policy may increase misallocation.
    Keywords: monetary policy; markup dispersion; allocative efficiency; market power
    Date: 2024–02–01
  19. By: Jonathan G. James (Department of Economics, Swansea University); Philip Lawler (Department of Economics, Swansea University)
    Abstract: The issue of optimal central bank disclosure of its information regarding aggregate demand shocks is revisited in the context of a widely studied model featuring monopolistically competitive firms whose observations of central bank announcements are subject to private errors. Given the existence of such ‘receiver noise’, the principal conclusion drawn by previous contributions using this framework is found to be overturned when a plausible additional modification is made to the information structure: namely, the existence of public information which is exogenous in the sense that its informativeness regarding shock realizations is beyond the central bank’s influence. For plausible parameterizations, full disclosure of its own information by the central bank is found to be welfare-dominated by a policy of partial obfuscation. The key insight is found to have wider relevance beyond the specific macroeconomic framework deployed, notably to models of supply-schedule competition in homogeneous-good markets.
    Keywords: strategic complementarity; public disclosure; receiver noise
    JEL: D62 D82 E58
    Date: 2024–03–17
  20. By: Ostry, D. A.
    Abstract: I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as suggested by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators’ and hedgers’ currency futures positions substantiates my model’s mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status.
    Keywords: Disaster Risk, Exchange Rates, Liquidity Yields, Quantile regression, U.S. Safety
    JEL: C22 F31 G15
    Date: 2023–06–07
  21. By: Alex Hsu; Indrajit Mitra; Yu Xu; Linghang Zeng
    Abstract: We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes.
    Keywords: monetary policy; Fed information effect; heterogeneous investment response
    JEL: E22 E52 G31
    Date: 2023–06–20
  22. By: Ricardo Barahona (Banco de España); María Rodríguez-Moreno (Banco de España)
    Abstract: This paper estimates the euro area overnight index swap yield curve, which is considered to be the risk-free yield curve in the euro area, using an affine term structure model. We expand the Adrian, Crump and Moench (2013) procedure with survey data to dissect rates into short-term expectations and term premia. This approach reveals the market expectations of short-term interest rates and monetary policy, and gauges the premium demanded by risk-averse investors in uncertain interest rate environments. As compared to the simpler model, the use of survey information in our estimation yields estimates more aligned with professional expectations data. Our approach enables us to obtain daily forecasts of short-term rates for up to 10 years ahead which are aligned with professional surveys on interest rates. Our estimation of real-time information on short-term rate expectations proves valuable as it complements the survey data, which are typically available at longer intervals.
    Keywords: affine term structure model, interest rates, survey expectations
    JEL: E43 E44 G12
    Date: 2024–03
  23. By: Sayag, Doron; Snir, Avichai; Levy, Daniel
    Abstract: The finding of small price changes in many retail price datasets is often viewed as a puzzle. We show that a possible explanation for the presence of small price changes is related to sales volume, an observation that has been overlooked in the existing literature. Analyzing a large retail scanner price dataset that contains information on both prices and sales volume, we find that small price changes are more frequent when products’ sales volume is high. This finding holds across product categories, within product categories, and for individual products. It is also robust to various sensitivity analyses such as measurement errors, the definition of “small” price changes, the inclusion of measures of price synchronization, the size of producers, the time horizon used to compute the average sales volume, the revenues, the competition, shoppers’ characteristics, etc.
    Keywords: Menu cost; (S, s) band; price rigidity; sticky prices; small price changes; small price adjustments; sales volume
    JEL: E31 E32 E52 E58 L16 L2 L20 L81 M10 M21 M31
    Date: 2024–02–29
  24. By: Claudia M. Buch; Linda S. Goldberg
    Abstract: Global liquidity flows are largely channeled through banks and nonbank financial institutions. The common drivers of global liquidity flows include monetary policy in advanced economies and risk conditions. At the same time, the sensitivities of liquidity flows to changes in these drivers differ across institutions and have been evolving over time. Microprudential regulation of banks plays a role, influencing leverage and capitalization, changing sensitivities to shocks, and also driving risk migration from banks to nonbank financial institutions. Risk sensitivities and flightiness of global liquidity are now strongest in more leveraged nonbank financial institutions, raising challenges in stress episodes. Current policy initiatives target linkages across different types of financial institutions and associated risks. Meanwhile, significant gaps remain. This paper concludes by discussing policy options for addressing systemic risk in banks and nonbanks.
    Keywords: international banks; nonbank financial institutions; global liquidity; regulation; prudential policy
    JEL: F3 G21 G23 G28
    Date: 2024–03–01
  25. By: Camarero, Mariam (University Jaume I and INTECO, Department of Economics); Moliner, Sergi (University of Valencia and INTECO, Department of Economic); Tamarit, Cecilio (University of Valencia and INTECO, Department of Applied Economics II)
    Abstract: This paper analyzes how European monetary integration has affected US outward FDI. It finds that at a worldwide level, the Single Market had a larger impact on US FDI than the euro. However, the effect of the euro is also sizeable, ranging between 15% and 64%.
    Keywords: FDI determinants, US, European Union, BMA, PPML, G-PPML
    JEL: F21 F23 C11
    Date: 2024–02
  26. By: Corsetti, G.; Maeng, S. H.
    Abstract: Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises.
    Keywords: Debt Sustainability, Discretionary Fiscal Policy, Expectations, Foreign Reserves, Self-Fulfilling Crises, Sovereign Default
    JEL: E43 E62 F34 H50 H63
    Date: 2023–11–08
  27. By: Sushant Acharya; Paolo Pesenti
    Abstract: We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher fractions of high MPC households and more countercyclical income risk. Quantitatively, both channels amplify spillovers by 30-60 percent relative to RANK.
    Keywords: monetary policy spillovers; incomplete markets; precautionary savings; real-income channel
    JEL: E50 F41 F42
    Date: 2024–03–01
  28. By: Ozili, Peterson K
    Abstract: This paper explores the recent unification of exchange rate in Nigeria. Recently, Nigeria unified the exchange rate and adopted an imperfect free float exchange rate system that is based on the willing buyer willing seller principle. The exchange rate regime is slightly close to a free float exchange rate system. Multiple factors led to exchange rate unification in Nigeria such as exchange rate price arbitrage and the market distortion it created. The unification of exchange rate is expected to yield potential benefits such as fewer government intervention in the foreign exchange market, improve price discovery, greater foreign exchange supply, higher capital importation, reduction in budget deficit, increased investor confidence, improved sovereign credit rating, increased transparency in the foreign exchange market, improved business environment and greater competition. Adverse effects are expected in the short-term, but these effects will dissipate in the medium to long-term.
    Keywords: exchange rate, unification, parallel market, official exchange rate, Nigeria.
    JEL: E31 F31
    Date: 2024–03–02
  29. By: Alex Hsu; Indrajit Mitra; Yu Xu; Linghang Zeng
    Abstract: We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes.
    Keywords: E22; E52; G31
    JEL: E22 E52 G31
    Date: 2023–06–20
  30. By: Ariel Dvoskin (BCRA/CONICET); Germán Feldman (BCRA); Gabriel Montes-Rojas (BCRA/UBA/IIEP-CONICET)
    Abstract: This paper studies, both theoretically and empirically, tradable (T) and non-tradable (N) profit rates dynamics in a small, price-taker peripheral economy under foreign exchange controls and parallel exchange rates (ER). Using a state-space econometric representation of the Argentine economy for the period April 2016- April 2023, we found evidence to support three main hypotheses derived from the theoretical models. First, an official exchange rate depreciation increases tradable goods profit rates, but has no effect on non-tradeable goods profitability. Second, the rise of the financial exchange rate increases sector N’s profit rate but has no effect on T’s. Moreover, this effect depends on the magnitude of the ER gap in a positive, but non-linear way. Third and finally, over sufficient time, both profit rates tend to influence each other, through the action of competition. This means that, eventually, and increase (depreciation) in the official exchange rate exerts its influence on sector N’s profit rate; while, if sufficiently persistent and big enough, a rise in the financial ER ends up affecting sector T’s profit rate too.
    Keywords: Argentina, Inflation, Exchange rate, Foreign exchange controls, Sectorial profit rates, Small open economy
    JEL: E31 E11 F41
    Date: 2024–04
  31. By: Rustam Jamilov; Tobias König; Karsten Müller; Farzad Saidi
    Abstract: We study the macroeconomic causes and consequences of bank runs in 184 countries over the period of 1800-2022. A new narrative chronology of bank run events coupled with a newly constructed historical dataset on banking sector deposits allows us to distinguish between systemic bank runs—those associated with substantial declines in aggregate deposits—and non-systemic episodes. We find that bank runs are typically associated with large contractions in deposits, credit, and output, as well as exchange rate crashes and sudden stops. Whether deposits contract during runs, in turn, predicts the severity of output declines, highlighting that bank runs are particularly costly when they are systemic in nature. Using several sources of historical and contemporary bank-level data, we show that systemic bank runs are associated with a wide dispersion in deposit growth rates and a flow of deposits from more leveraged to safer banks. Taken together, our analysis highlights a key role for the liability side of banks in financial crises, and our new quantitatively validated measure of bank runs provides unprecedented scope for studying such episodes.
    Date: 2024–03–26
  32. By: Angelika Welte; Katrina Talavera; Liang Wang; Joy Wu
    Abstract: In recent years, the rise in digital payments has spurred a discussion in Canada and other countries about the future of cash at the point of sale. To better understand trends in payment methods accepted by Canadian businesses, including cash acceptance and the impact of innovations such as mobile payments, the Bank of Canada conducts the Merchant Acceptance Survey, a survey of small and medium-sized businesses. We find that 96% of these businesses in Canada accepted cash in 2023. Acceptance of debit and credit cards has increased since 2021 to 89%, and acceptance of digital payments has increased as well. However, the vast majority of merchants (92%) have no plans to go cashless in the future. Therefore, cash and digital payments continue to coexist at the point of sale, and Canada is far from being a cashless society.
    Keywords: Bank notes; Digital currencies and fintech; Econometric and statistical methods
    JEL: C8 D22 E4 L2
    Date: 2024–03
  33. By: Ojo, Marianne
    Abstract: The US Inflation Reduction Act 2022, was signed into law in August 2022. It aims amongst other objectives, “to lower energy costs for families and small businesses, accelerate private investment in clean energy solutions in every sector of the economy – as well as nationally, strengthen supply chains, and create good paying jobs and new economic opportunities for workers.” According to the section, “Investing in Clean Hydrogen”, as provided for in the Inflation Reduction Act Guidebook (2023: see page 74 of 184), “Clean hydrogen constitutes a major component of President Biden’s plan to decarbonize the industrial sector. As well as providing $9.5 billion for clean hydrogen initiatives, through the Bipartisan Infrastructure Law, $1 billion was also set aside for a “Clean Hydrogen Electrolysis program”, to reduce the cost of hydrogen produced from clean electricity.” Further, $500 million was committed towards “Clean Hydrogen Manufacturing and Recycling/Initiatives” aimed at supporting equipment manufacturing and strong domestic supply chains for clean hydrogen. Having experienced inflationary levels at unprecedented record highs – globally, in recent months, the possible impacts of recent accommodative monetary policies will be considered in this paper. The paper will aim to highlight why addressing current inflation levels – and particularly through green energy techniques and technologies – which incorporate and embrace the use of green hydrogen, constitute a much welcomed approach in addressing current inflationary levels.
    Keywords: Inflation Reduction Act 2022; Green hydrogen; Green energy, green steel ; technologies; techniques; electrolysis
    JEL: F4 F43 F47 F6 F64 H3 P5
    Date: 2024–03

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