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on Monetary Economics |
| By: | Miguel Mello (Banco Central del Uruguay); Jorge Ponce (Banco Central del Uruguay; dECON-FCS-Udelar); Juan Pablo Medina (Universidad Adolfo Ibañez) |
| Abstract: | The share of firms that differentiate their inflation expectations between one-year and two-year horizons is a relevant statistic for changes in inflation expectations. Furthermore, firms that obtain information from the central bank are more likely to distinguish between horizons and forecast convergence of inflation expectations toward the inflation target. Decision-makers tend not to differentiate between horizons, but when they do, they are more likely to predict convergence. External advisors tend to differentiate between horizons and are more likely to predict divergence. The results highlight the importance of analyzing inflation expectations formation by firms for understanding inflation dynamics and conducting effective monetary policy. |
| Keywords: | Inflation expectations, Inflation dynamics, Monetary Policy |
| JEL: | D83 D84 E31 E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023004&r=mon |
| By: | Christian Bittner (Deutsche Bundesbank and Goethe University Frankfurt); Alexander Rodnyansky (Presidential Offce of Ukraine, University of Cambridge, and CEPR); Farzad Saidi (University of Bonn and CEPR); Yannick Timmer (Federal Reserve Board) |
| Abstract: | We study the interaction of expansionary rate-based monetary policy and quantitative easing, despite their concurrent implementation, by exploiting heterogeneous banks and the introduction of negative monetary-policy rates in a fragmented euro area. Quantitative easing increases credit supply less, translating into weaker employment growth, when banks' funding costs do not decrease. Using administrative data from Germany, we uncover that among banks selling their securities, central-bank reserves remain disproportionately with high-deposit banks that are constrained due to sticky customer deposits at the zero lower bound. Affected German banks lend relatively less to firms while increasing their interbank exposure in the euro area. |
| Keywords: | Negative Interest Rates, Quantitative Easing, Unconventional Monetary Policy, Bank Lending Channel |
| JEL: | E44 E52 E58 E63 F45 G20 G21 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:292&r=mon |
| By: | Jean-Guillaume Sahuc; Grégory Levieuge; José Garcia-Revelo |
| Abstract: | The European Central Bank and the Federal Reserve introduced new policy instruments and made changes to their operational frameworks to address the global financial crisis (2008) and the Covid-19 pandemic (2020). We study the macroeconomic effects of these monetary policy evolutions on both sides of the Atlantic Ocean by developing and estimating a tractable two-country dynamic stochastic general equilibrium model. We show that the euro area and the United States faced shocks of different natures, explaining some asynchronous monetary policy measures between 2008 and 2023. However, counterfactual exercises highlight that all conventional and unconventional policies implemented since 2008 have appropriately (i) supported economic growth and (ii) maintained inflation on track in both areas. The exception is the delayed reaction to the inflationary surge during 2021-2022. Furthermore, exchange rate shocks played a significant role in shaping the overall monetary conditions of the two economies. |
| Keywords: | Monetary policy, real exchange rate dynamics, two-country DSGE model, Bayesian estimation, counterfactual exercises |
| JEL: | E32 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2024-13&r=mon |
| By: | Ferrara, Federico Maria |
| Abstract: | This study provides new evidence on the relationship between unconventional monetary policy and auction cycles in the euro area. Using proprietary data on purchases of public sector securities implemented by the Eurosystem, the paper examines the flow effects of asset purchase programmes on 10-year government bond yields in secondary markets around dates of public debt auctions. The findings indicate that Eurosystem’s asset purchase flows mitigate yield cycles during auction periods and counteract the amplification impact of market volatility. The dampening effect of central bank asset purchases on auction cycles is more sizeable and precisely estimated for purchases of securities with medium-term maturities and in jurisdictions with relatively lower credit ratings. The analysis has broader implications for monetary policy and market functioning in the euro area. JEL Classification: E52, E58, G12, G14 |
| Keywords: | bond yields, Eurosystem, flow effects, public debt auctions, unconventional monetary policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242927&r=mon |
| By: | Silke Tober (Macroeconomic Policy Institute (IMK)); ThomasTheobald (Macroeconomic Policy Institute (IMK)) |
| Abstract: | The ECB was not slow to react to the rising inflation, but rather reacted very strongly as the price shocks escalated and the supply bottlenecks persisted longer than widely expected. The ECB raised rates later and less forcefully than the Federal Reserve because the inflation dynamics in the euro area differ significantly from those in the euro area. The U.S. economy was robust on the eve of the pandemic, the unemployment rate had reached historic lows, and the key policy rate was above 2 %, whereas the ECB's policy rate was below zero, unemployment high and the economy still recovering from previous crises. During the post-pandemic recovery, high U.S. aggregate demand boosted global inflation, whereas the European economy struggled to cope with the extensive fallout of the Ukraine war. In themselves, price shocks cannot cause inflation to remain persistently above target. Although wage increases are currently not compatible with the inflation target, monetary policy restriction is not necessary because falling energy prices and lower extra profits should compensate for the slight overshooting of wage and inflation expectations are anchored. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:report:181e-2023&r=mon |
| By: | Daria Minima; Gabriele Galati; Richhild Moessner; Maarten van Rooij |
| Abstract: | This paper examines how information provision affects consumers’ inflation expectations. Using data from a representative Dutch household survey, we document that providing information about current and past inflation rates, as well as the ECB’s inflation target, brings inflation expectations closer to the target and reduces the upward bias typically found in the literature. The beneficial effect of information holds across various types of inflation expectations and time horizons. We also find that consumers' reactions to information are heterogeneous, with women, respondents with low levels of education and income, and renters showing stronger reactions to information provision. Finally, we observe that the effect of information provision on inflation expectations in times of normal economic activity is similar to its effects during periods of large economic shocks such the start of the Covid-19 pandemic, the Ukraine war and the start in 2022 of the monetary tightening cycle following a strong increase in inflation. |
| Keywords: | inflation expectations; shocks; information acquisition; monetary policy; |
| JEL: | D10 D84 D90 E31 E52 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:810&r=mon |
| By: | Sarantis Tsiaplias (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne) |
| Abstract: | This paper studies how inflation expectations are formed, how they are influenced by Inflation-as-a-Bad (IAAB) perceptions, and how these perceptions relate to economic shocks. IAAB perceptions significantly alter inflation expectations, causing spikes, positive bias, and deviations from the Phillips Curve. These perceptions have a distinct impact from canonical properties such as information rigidities, over-reaction, and rationality, which fail to adequately characterize consumer inflation expectations. A model combining rational expectations, information frictions, and consumer heuristics effectively explains the time-variation in the inflation expectations of 365, 000 consumers. |
| Keywords: | inflation expectations, inflationary dynamics, aggregate shocks, information rigidities, rationality |
| JEL: | E31 D84 E71 E52 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2024n03&r=mon |
| By: | Nina Boyarchenko; Richard K. Crump; Keshav Dogra; Leonardo Elias; Ignacio Lopez Gaffney |
| Abstract: | We re-examine the relationship between monetary policy and financial stability in a setting that allows for nonlinear, time-varying relationships between monetary policy, financial stability, and macroeconomic outcomes. Using novel machine-learning techniques, we estimate a flexible “nonlinear VAR” for the stance of monetary policy, real activity, inflation, and financial conditions, and evaluate counterfactual evolutions of downside risk to real activity under alternative monetary policy paths. We find that a tighter path of monetary policy in 2003-05 would have increased the risk of adverse real outcomes three to four years ahead, especially if the tightening had been large or rapid. This suggests that there is limited evidence to support “leaning against the wind” even once one allows for rich nonlinearities, intertemporal dependence, and crisis predictability. |
| Keywords: | monetary policy; financial stability; leaning against the wind |
| JEL: | E44 E52 E58 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98177&r=mon |
| By: | Peter Bofinger |
| Abstract: | The study discusses the distribution of roles between monetary and fiscal policy in stabilising the price level. It questions the view that price level stabilisation should be the sole responsibility of central banks. It argues that there is a case for national governments also being responsible for price stability. The main results are the following: In the case of demand shocks, fiscal policy can react in a more timely and targeted manner than monetary policy. In the case of supply shocks, fiscal policy can shift the Phillips curve by varying indirect taxes, with price brakes and income policies. This is an advantage over monetary policy, which can only influence inflation indirectly by shifting the IS curve. In the recent energy crisis, the effects of this "unconventional fiscal policy" have been assessed quite positively. The case for a price stability mandate for national fiscal policy is particularly strong in the euro area. In the case of national supply and demand shocks in individual countries, the ECB can only provide an insufficient compensation, and its reaction has counterproductive effects in the rest of the monetary union. E.g., with a national price stability mandate, between 2014 and 2016, Germany would have been obliged to stimulate its economies, thereby supporting the ECB's fight against deflation. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:studie:92-2024&r=mon |
| By: | Elizabeth Bucacos (Banco Central del Uruguay); Javier García-Cicco (Universidad de San Andrés (Argentina)); Miguel Mello (Banco Central del Uruguay) |
| Abstract: | We study the effects of exchange rate interventions in Uruguay on relevant macroeconomic variables such as the exchange rate, inflation, activity, and interest rates. Instead of attempting to identify exogenous variations in the intervention policy (a frequent strategy in the related literature, that raises many endogeneity concerns), we investigate the effect of interventions in dampening the impact of external shocks that are relevant determinants of exchange rate movements. This estimation is carried out through a novel econometric tool called constrained impulse response functions, which allows to construct counterfactual scenarios that are locally valid (i.e. marginal effects around average responses). Moreover, we exploit a detailed data on Central Bank’s operations in the exchange-rate market, leading to a clean measure of interventions that is not contaminated from other factors affecting the foreign reserves position (thus improving over most related studies). We find that interventions can help dampen exchange rate effects, and may have non-trivial effects on inflation as well, but generally the consequences in terms of activity are limited. Crucially, these effects depend on the type and sign of the external shock under consideration. |
| Keywords: | Exchange rate intervention, flotation, currency, monetary policy, local projections |
| JEL: | F31 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023008&r=mon |
| By: | Darracq Pariès, Matthieu; Kornprobst, Antoine; Priftis, Romanos |
| Abstract: | We evaluate how the euro area economy would have performed since mid-2021 under alternative monetary policy strategies. We use the ECB’s workhorse estimated DSGE model and contrast actual policy conduct against alternative strategies which differ in their ”lower-for-longer” commitment as well as policymaker preferences regarding inflation and output volatility. Assuming that the monetary authority had full knowledge of prevailing conditions from mid-2021 onwards, the alternative policy strategies would call for anticipated timing of the start of the hiking cycle: earlier tightening would prevent inflation from peaking at 10%, but the forceful tightening since 2022:Q3 prevented higher inflation from becoming entrenched. However, once evaluating monetary policy on real-time quarterly vintages of incoming data and projections, the alternative interest rate paths would be broadly consistent with the observed policy conduct. The proximity of some benchmark optimal policy counterfactuals with the baseline, brings further indication that the actual policy conduct succeeded in implementing an efficient management of the output-inflation trade-off. JEL Classification: C53, E31, E42, E52, E58 |
| Keywords: | dual mandate, estimated DSGE model, euro area, monetary policy frameworks, optimal policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242935&r=mon |
| By: | Nicolas Caramp; Dejanir H. Silva |
| Abstract: | We study the role of asset revaluation in the monetary transmission mechanism. We build an analytical heterogeneous-agents model with two main ingredients: i) rare disasters; ii) heterogeneous beliefs. The model captures time-varying risk premia and precautionary savings in a setting that nests the textbook New Keynesian model. The model generates large movements in asset prices after a monetary shock but these movements can be neutral on real variables. Real effects depend on the redistribution among agents with heterogeneous precautionary motives. In a calibrated exercise, we find that this channel accounts for the majority of the transmission to output. |
| Keywords: | monetary policy, wealth effects, asset prices, aggregate risk, heterogeneity beliefs |
| JEL: | E21 E44 E52 G12 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11049&r=mon |
| By: | Steven M. Fazzari |
| Abstract: | This article integrates monetary policy into a very simple dynamic supermultiplier model with an accommodating supply side. Results show that monetary policy guided by a conventional Taylor rule may stabilize an economy around the steady-state path of demand-led growth following temporary demand shocks. However, monetary policy is ineffective in offsetting permanent negative demand shocks even if the lower bound for interest rates is not binding. This outcome contrasts with the prevailing view among policymakers that monetary policy can usually assure full utilization of an economy's resources in the long run. The ineffectiveness of monetary policy is particularly acute if autonomous demand grows more slowly than necessary to generate full employment. In this case, if policymakers recognize the under-utilization of resources, monetary policy leads to interest rates trending necessarily to their lower bound. The analysis also shows how monetary policy may lead to counter-productive responses to supply shocks. The article concludes with observations about how the theoretical results correspond with the history of US monetary policy in recent decades. |
| Keywords: | Supermultiplier, Monetary Policy, Demand-Led Growth, Keynesian Macroeconomics |
| JEL: | E12 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:99-2024&r=mon |
| By: | Samuel Ligonnière; Salima Ouerk |
| Abstract: | Is current monetary policy making the distribution of credit more unequal? Using french householdlevel data, we document credit volumes along the income distribution. Our analysis centers on assessing the impact of surprises in monetary policy on credit volumes at different income levels. Expansionary monetary policy surprises lead to a surge in mortgage credit exclusively for households within the top 20% income bracket. Monetary policy then does not impact mortgage credit volume for 80% of households, whereas its effect on consumer credit exists and remains consistent across the income distribution. This result is notably associated with the engagement of this particular income group in rental investments. Controlling for bank decision factors and city dynamics, we attribute these results to individual demand factors. Mechanisms related to intertemporal substitution and affordability drive the impact of monetary policy surprises. They manifest through the policy’s influence on collaterals and a larger down payment. |
| Keywords: | monetary policy, credit distribution, inequality. |
| JEL: | E41 E52 G21 G23 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-19&r=mon |
| By: | François Gourio; Phuong Ngo |
| Abstract: | We develop a parsimonious New Keynesian macro-finance model with downward nominal rigidities to understand secular and cyclical movements in Treasury bond premia. Downward nominal rigidities create state-dependence in output and inflation dynamics: a higher level of inflation makes prices more flexible, leading output and inflation to be more volatile, and bonds to become more risky. The model matches well the relation between the level of inflation and a number of salient macro-finance moments. Moreover, we show that empirically, inflation and output respond more strongly to productivity shocks when inflation is high, as predicted by the model. |
| Keywords: | term premium; Bond premiums; Phillips curve; Inflation; Asymmetry |
| JEL: | E31 E32 E43 E44 G12 |
| Date: | 2024–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98104&r=mon |
| By: | William Ginn; Jamel Saadaou |
| 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: | F44 E44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-16&r=mon |
| By: | Andreas Fagereng; Magnus A. H. Gulbrandsen; Martin Holm; Gisle Natvik |
| Abstract: | Growth in household debt-to-income ratios can be attributed to nominal debt changes or mechanical “Fisher effects” from interest income and expenses, real income growth, and inflation. With microdata covering the universe of Norwegian households for more than 20 years, we decompose the importance of these channels for how debt-toincome ratios evolve over time and respond to monetary policy shocks. On average, debt changes outsize Fisher effects, and they are due to households who move. But among highly leveraged households, Fisher effects dominate. After interest rate hikes, debt changes and Fisher effects pull in opposite directions. The former dominate so that debt-to-income ratios fall. This pattern holds across sub-groups, even among highly indebted households. Hence, changes in borrowing and repayment dominate mechanical effects via nominal income growth in the transmission of monetary policy shocks to debt-to-income ratios. |
| Keywords: | Household Debt, Monetary Policy |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bbq:wpaper:0005&r=mon |
| By: | Manish Gupta (Nottingham University Business School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We examine the redistributive impact of 30-year mortgage and federal funds rates on mortgage lending between 1995 and 2021. Between 2008 and 2014, the Fed deployed Quantitative Easing (QE) by purchasing mortgage-backed securities, intendedly lowering mortgage rates. We find that lending is regressive pre-QE, becomes progressive during the QE era, and then reverts to being regressive following the QE's conclusion until 2019. Nonbank lending becomes regressive when the federal funds rate increases between 2015 and 2019, and this pattern persists during the pandemic. In contrast, while banks lend regressively until 2019, they refinance progressively during the pandemic. |
| Keywords: | Inequality, Mortgage, Financial Crisis, Quantitative Easing (QE), COVID-19, Nonbanks |
| JEL: | E52 G01 G21 G23 G51 H23 R23 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2428&r=mon |
| By: | Beckmann, Joscha; Czudaj, Robert L. |
| Abstract: | This paper provides a new perspective on the expectations building mechanism in foreign exchange markets. We analyze the role of expectations regarding macroeconomic fundamentals for expected exchange rate changes. In doing so, we assess real-time survey data for 29 economies from 2002 to 2023 and consider expectations regarding GDP growth, inflation, interest rates, and current accounts. Our empirical findings show that fundamentals expectations are more important over longer horizons compared to shorter horizons. We find that an expected increase in GDP growth relative to the US leads to an expected appreciation of the domestic currency while higher relative inflation expectations lead to an expected depreciation, a finding consistent with purchasing power parity. Our results also indicate that the expectation building process differs systematically across pessimistic and optimistic forecasts with the former paying more attention to fundamentals expectations. Finally, we also observe that fundamentals expectations have some explanatory power for forecast errors, especially for longer horizons. |
| Keywords: | Exchange rates, Expectations, Forecast errors, Fundamentals, Survey data |
| JEL: | F31 F37 G17 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120648&r=mon |
| By: | Jaccard, Ivan |
| Abstract: | The evidence suggests that monetary policy transmission is asymmetric over the business cycle. Interacting financing frictions with a preference for liquidity provides an explanation for this fact. Our mechanism generates monetary asymmetries in a model that jointly reproduces a set of asset market and business cycle facts. Accounting for the joint dynamics of asset prices and business cycle fluctuations is key; in a variant of the model that is unable to produce realistic macro-finance implications, monetary asymmetries disappear. Our results suggest that asymmetries in the transmission mechanism critically depend on the macro-finance implications of monetary policy models, and that resorting to nonlinear techniques is not sufficient to detect monetary asymmetries. JEL Classification: E31, E44, E58 |
| Keywords: | asset pricing in DSGE models, money demand, nonlinear solution methods, stochastic discount factor, term premium |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242928&r=mon |
| By: | Adam Brzezinski; Nuno Palma; Francois R. Velde |
| Abstract: | Debates about the nature and economic role of money are mostly informed by evidence from the 20th century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past acts as a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy. |
| Keywords: | Monetary policy; Monetary History; Natural Experiments |
| JEL: | E40 E50 N10 |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98103&r=mon |
| By: | Hartung, Benjamin |
| Abstract: | Banks in the euro area can generate high-quality liquid assets (HQLA) by borrowing central bank reserves from the Eurosystem against non-HQLA collateral. This paper quantifies the extent of this liquidity transformation and finds that on average EUR 0.92 of net HQLA are generated for each euro of credit provided by the Eurosystem. The paper then identifies intentional liquidity transformation using two novel approaches: The first approach compares the liquidity profile of already pledged vs new collateral, and the second approach compares the liquidity profile of the pool of pledged securities with banks' total eligible securities holdings. Both approaches show that banks use their least liquid assets as collateral first and pledge more liquid assets only at the margin. This intentional liquidity transformation is sizable and accounts for 30-60% of generated HQLA. These results are relevant for calibrating the collateral framework as well as the optimal size and composition of the Eurosystem balance sheet. JEL Classification: C23, E52, E58, G28 |
| Keywords: | central bank operational framework, collateral framework, liquidity coverage ratio, liquidity transformation, reserve demand |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242933&r=mon |
| By: | Paul Beaudry; Chenyu Hou; Franck Portier |
| Abstract: | The object of this paper is to assess the role of supply shocks, labour market tightness and expectation formation in explaining bouts of inflation. We begin by showing that a quasi-flat Phillips curve, which was popular prior to the pandemic, still fits the post-2020 US data well and that changes in short term inflation expectations induced by supply shocks likely played a major role in the recent inflation episode. We then document features of the joint dynamics of inflation and inflation expectations. Given the difficulty of reproducing these dynamics under rational expectations, we propose and evaluate a model with imperfect information and bounded rationality. In our model, agents see sectoral inflations as being driven by a component common to all the sectors of the economy and by sector-specific shocks. When supply shocks affect many sectors (what we refer to as a broad-based supply shock), agents infer that the common component of inflation has increased, which drive persistent inflation dynamics through their effect of expectations. We show that departure from full rationality is minor, but that it is enough for broad-based supply shocks to be amplified and propagated over time in a manner needed to explain the data. |
| JEL: | E31 E37 E7 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32322&r=mon |
| By: | Axelle Arquie (CEPII); Malte Thie (CEPII and Université Paris Dauphine) |
| Abstract: | We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and February 2023). Our work provides some empirical evidence in favor of a role for firms' market power in explaining inflation, and in favor of the "sellers' inflation" hypothesis (Weber and Wasner (2023)): in less competitive sectors, firms could use the energy price hike to increase their prices more than warranted by actual changes in costs. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that, in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through up to 110% of the energy shock, implying an excess pass-through of 10 percentage points. In addition, we find that the association between markup and pass-through is even higher when markup dispersion is low, consistent with the argument that firms engage in price hikes when they expect their competitors to do the same. |
| Keywords: | Inflation, Markups |
| JEL: | E31 F4 L11 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:220-2023&r=mon |
| By: | Denisa M. Sologon; Karina Doorley; Cathal O’Donoghue |
| 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: | distributional effect and gender; inflation and gender; regressive inflation; progressive inflation |
| JEL: | D31 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:irs:cepswp:2024-02&r=mon |
| By: | Wenxin Du; Kristin Forbes; Matthew N. Luzzetti |
| Abstract: | This paper uses the recent cross-country experience with quantitative tightening (QT) to assess the impact of shrinking central bank balance sheets. We analyze the experience in seven advanced economies (Australia, Canada, Euro area, New Zealand, Sweden, UK and US)—documenting different strategies and the substantive reduction in central bank balance sheets that has already occurred. Then we assess the macroeconomic and financial impact of QT announcements on yields and a range of other market prices. QT announcements increase government bond yields, steepening the yield curve and potentially signaling a greater commitment to raising policy interest rates, but have more limited effects on most other financial market indicators. Active QT has a larger impact than passive QT, particularly on longer maturities. The implementation of QT has been associated with a modest rise in overnight funding spreads and a decline in the “convenience yield” of government bonds, but QT transactions did not significantly affect the pricing and market liquidity of government debt securities. Finally, we evaluate who buys assets when central banks unwind balance sheets, an issue which will become increasingly important if central banks continue to reduce their security holdings while government debt issuance remains elevated. We find that increased demand by domestic nonbanks has largely compensated for reduced bond holdings by central banks. This series of cross-country results suggests that QT has had more of an impact than “paint drying”, but far less than simply reversing the effects of the quantitative easing programs launched during periods of market stress. Looking ahead, although QT has been smooth to date, frictions could increase in the future so that QT quickly evolves into more like watching “water boil”. |
| JEL: | E4 E5 F30 G10 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32321&r=mon |
| By: | Oliver Binz; John Graham; Matthew Kubic |
| Abstract: | Financial reports present assets, liabilities, and earnings on a nominal basis (unadjusted for inflation). Using a novel dataset of nearly a century of financial reports, this paper examines whether and how inflation affects the relation between accounting earnings and stock market value, i.e., earnings relevance. On the one hand, inflation may decrease earnings relevance as historical cost accounting relies on historical transaction prices that become less relevant when inflation changes the price level. On the other hand, inflation may increase earnings relevance by increasing firms’ discount rates and thereby shifting agents’ focus towards nearer-term payoffs. Consistent with the latter hypothesis, we document a strong positive relation between earnings relevance and inflation. Cross-sectional tests indicate that this relation is stronger for firms that are more sensitive to discount rate changes. We find that inflation is of first-order importance relative to determinants of earnings relevance explored in prior literature. |
| JEL: | E31 G10 M40 M41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32364&r=mon |
| By: | Wang, Haibo (Texas A&M International University); Sua, Lutfu; Dolar, Burak |
| Abstract: | This study explores the efficiency of Turkish banks under unconventional central bank monetary policies, a departure from studies in developed economies using CAMEL ratings. It introduces unique inputs and outputs distinct from those used in developed contexts. A notable contribution is the integrated CAMELS ratings-based data envelopment analysis, considering both desirable and undesirable variables. This integration results in a more realistic estimation of the overall system production possibility set, surpassing assumptions made by traditional CAMELS and DEA methods. The study reveals a significant relationship between Turkish bank efficiency, size, and type, with public capital deposit banks as well as banks with the highest number of branches displaying superior performance. The results show that non-performing loans (NPL), unemployment rates, government debt, exchange rates, and inflation rates have a meaningful impact on banking efficiency. Government debt and exchange rates have an inverse relationship with efficiency while the remaining variables are positively correlated. These findings in this study underline the potential for rising inflation to trigger financial instability, especially after abrupt and unforeseen inflation spikes. This study enhances our understanding of inflation's macroeconomic implications and its impact on the banking sector. |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:qx59v&r=mon |
| By: | Beck, Günter W.; Carstensen, Kai; Menz, Jan-Oliver; Schnorrenberger, Richard; Wieland, Elisabeth |
| Abstract: | We study how millions of granular and weekly household scanner data combined with machine learning can help to improve the real-time nowcast of German inflation. Our nowcasting exercise targets three hierarchy levels of inflation: individual products, product groups, and headline inflation. At the individual product level, we construct a large set of weekly scanner-based price indices that closely match their official counterparts, such as butter and coffee beans. Within a mixed-frequency setup, these indices significantly improve inflation nowcasts already after the first seven days of a month. For nowcasting product groups such as processed and unprocessed food, we apply shrinkage estimators to exploit the large set of scanner-based price indices, resulting in substantial predictive gains over autoregressive time series models. Finally, by adding high-frequency information on energy and travel services, we construct competitive nowcasting models for headline inflation that are on par with, or even outperform, survey-based inflation expectations. JEL Classification: E31, C55, E37, C53 |
| Keywords: | inflation nowcasting, machine learning methods, mixed-frequency modeling, scanner price data |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242930&r=mon |
| By: | Olga Bilyk; Mikael Khan; Olena Kostyshyna |
| Abstract: | Using the microdata underlying the Canadian consumer price index, we study how often and by how much firms changed their prices during the COVID-19 pandemic. We find that the surge in inflation was mainly associated with retailers raising prices much more often than before. We also find that more recently, corporate price-setting behaviour appears to be approaching pre-pandemic norms. |
| Keywords: | Firm dynamics, Inflation and prices, Recent economic and financial developments |
| JEL: | D2 D22 E3 E31 L1 L11 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:24-6&r=mon |
| By: | Altavilla, Carlo; Gürkaynak, Refet S.; Quaedvlieg, Rogier |
| Abstract: | We establish basic facts about the external finance premium. Tens of millions of individual loan contracts extended to euro area firms allow studying the determinants of the external finance premium at the country, bank, firm, and contract levels of disaggregation. At the country level, the variance in the premium is closely linked to sovereign spreads, which are important in understanding financial amplification mechanisms. However, country-level differences only explain half of the total variance. The rest is predominantly attributed to variances at the bank and firm levels, which are influenced by the respective balance sheet characteristics. Studying the response of the external finance premium to monetary policy, we find that balance sheet vulnerabilities of banks and firms strengthen the transmission of policy measures to financing conditions. Moreover, our findings reveal an asymmetrical effect contingent upon the sign and type of the policies. Specifically, policy rate hikes and quantitative easing measures exert a more pronounced impact on lending spreads, further magnified through their repercussions on the external finance premium. JEL Classification: E44, E58, F45, G15, G21 |
| Keywords: | euro area, external finance premium, financial accelerator, loan pricing |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242934&r=mon |
| By: | Erdinc Akyildirim (University of Zurich); Shaen Corbet (Dublin City University ; University of Waikato - Management School); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); David Staunton (Dublin City University) |
| Abstract: | This study examines the repercussions of banks’ reputational damages on affiliated Money Market Funds (MMFs). It reveals that such events depress bank valuations and induce heightened outflows from MMFs despite their financial independence from sponsoring banks. Highlighting a secondary behavioural effect, we demonstrate that investor sensitivity to reputational risks amplifies the contagion risk between banks and MMFs. The effect is particularly pronounced for shocks related to governance. Our findings underscore the significant impact of reputational events on the stability and liquidity of financial institutions and their investment vehicles, enriching the discourse on investor behaviour and systemic financial interdependencies. |
| Keywords: | Reputational Risk, Banks, MMFs, corporate governance, Contagion |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2424&r=mon |
| By: | Rong Li (School of Finance, Renmin University of China); Dongzhou Mei (School of International Economics and Trade, Central University of Finance and Economics); Bing Tong (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | We introduce gradual adjustment costs for both domestic and foreign bonds in a New Keynesian small open economy model, unifying the theories of foreign exchange intervention and the liquidity effect. With gradual adjustment for foreign bonds, interest rate differentials lead to persistent capital flows. With adjustment costs for domestic bonds, open market operations generate a stronger liquidity effect, which has real effects in an environment with costly intermediation. Furthermore, under gradual portfolio adjustment, nominal interest rates change temporarily in response to asset transactions, so that the model can restore equilibrium when the steady-state asset ratios have changed. |
| Keywords: | Gradual portfolio adjustment, Foreign Exchange intervention, Open market operations, Capital flows, Liquidity effect, Small open economy, New Keynesian model |
| JEL: | E44 E58 E63 F31 F32 F41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202406&r=mon |
| By: | Dennis Bonam; Bart Hobijn |
| Abstract: | We show that a negative relative demand shock in a sector with downwardly rigid prices, like the service sector, can generate substantial inflation. Such a shock induces an equilibrium decline in the relative price of services. If price adjustment costs are non-existent or symmetric, then this takes place through a simultaneous decline in services prices and increase in goods prices, resulting in, on net, little inflation. If prices in the services sector are downwardly rigid, however, this takes place mostly through an increase in goods prices, resulting in inflation. To illustrate the relevance of this mechanism in practice we provide evidence on the downward rigidity of person-to-person service prices during the Covid pandemic of 2020-2021. We then introduce downward price rigidities in a multisector New-Keynesian model and show how they can result in inflationary relative demand shocks. |
| Keywords: | Inflation; multisector models; price rigidity |
| JEL: | E12 E31 E52 |
| Date: | 2024–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98101&r=mon |
| By: | Cecilia Dassatti (Banco Central del Uruguay) |
| Abstract: | During the first half of 2008, the Central Bank of Uruguay introduced changes in the regulation of reserve and liquidity requirements, increasing the requirements for short-term funding and funding from non-residents as well as introducing a requirement for interbank funding. The combination of these reforms with data that follows all loans granted to non-financial firms in Uruguay, allows me to identify their impact on the supply of credit. Following a difference-in-difference approach, I compare lending before and after the introduction of the policy changes among banks with different degrees of exposition to the funds targeted by the policies. The results suggest that restrictions to short-term finance from banks imply a reduction of credit availability as predicted by the literature. |
| Keywords: | banks, reserve requirements, monetary policy, macroprudential policy |
| JEL: | G20 G28 E65 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bku:doctra:2023001&r=mon |
| By: | Boris Chafwehe; Andrea Colciago; Romanos Priftis |
| Abstract: | This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term. |
| Keywords: | Energy; productivity; firm entry and exit; monetary policy |
| JEL: | E62 L16 O33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:811&r=mon |
| By: | Goutsmedt, Aurélien (UC Louvain - F.R.S-FNRS); Sergi, Francesco |
| Abstract: | This article introduces a new conceptual framework for examining the transformation of central banks’ activities at the intersection of science and politics. The article relies on the results of four historical case studies gathered by the special issue “The Scientization of Central Banks. National Patterns and Global Trends”—to which this article provides also an introduction. We start with an analysis of Martin Marcussen’s concept of “scientization”, originally formulated to describe the changes within central banks since the 2000s. After highlighting how Marcussen’s concept has raised different interpretations, we broaden our scope to examine how “scientization” is applied in the wider social sciences, extending beyond the study of central banks. This brings to the fore two ideas: scientization as “boundary work” (redrawing the line between “science” and “non-science”) happening both in the public-facing (“frontstage”) and internal (“backstage”) activities of organizations. Finally, we suggest how these two ideas can be used to reinterpret “scientization” of central banks as the emergence of central banks as “boundary organizations”. This reframing allows us to untangle and clarify the phenomena previously conflated under the original concept of scientization, offering a more coherent framework for ongoing research on central banks. |
| Date: | 2024–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:dxvfp&r=mon |
| By: | Jean N. Lee (World Bank); Jonathan Morduch (Robert F. Wagner Graduate School of Public Service, New York University); Saravana Ravindran (Lee Kuan Yew School of Public Policy, National University of Singapore); Abu S. Shonchoy (Department of Economics, Florida International University) |
| Abstract: | Behavioral household finance shows that people are often more willing to spend when using less tangible forms of money like debit cards or digital payments than when spending in cash. We show that this “payment effect†cannot be generalized to mobile money. We surveyed families in rural Northwest Bangladesh, where mobile money is mainly received from relatives working in factories. The surveys were embedded within an experiment that allows us to control for the relationships between senders and receivers of mobile money. The finding suggests that the source of funds matters, and mobile money is earmarked for particular purposes and thus less fungible than cash. In contrast to the expectation of greater spending, the willingness to spend in the rural sample was lower by 24 to 31 percent. In urban areas, where the sample does not receive remittances on net, there are no payment effects associated with mobile money. |
| Keywords: | payment effect, digital finance, willingness to pay, social meaning of money, earmarks |
| JEL: | O15 G41 G50 D91 D14 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:2402&r=mon |
| By: | Amador, João; Mehl, Arnaud; Schmitz, Martin; Garcia, Joana |
| Abstract: | We analyze, for the first time, how firms choose the currency in which they price transactions in international trade of services and investigate, using direct evidence, whether the US dollar (USD) plays a dominant role in services trade. Drawing on a new granular dataset on extra-European Union exports of Portuguese firms broken down by currency, we show that currency choices in services trade are active firm-level decisions. Firms that are larger and rely more on inputs priced in foreign currencies are less likely to use the domestic currency to export services. Importantly, we show that the USD has a dominant role as a vehicle currency in trade of services – but to a lesser extent than in trade of goods – and that this is not just due to differences in the geography of trade. An external validity test based on macro data available for Portugal and six other European countries confirms this finding. In line with predictions from recent theoretical models, our results are consistent with the lower prevalence of USD in services trade arising from a lower openness of services markets and a stronger reliance of services on domestic inputs. JEL Classification: F14, F31, F41 |
| Keywords: | dominant currency paradigm, international trade, services |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242932&r=mon |
| By: | Yuki Tada; Kazuhiro Kurose |
| Abstract: | There are increasing concerns in Japan that unconventional monetary policy (UMP) accelerates inequality by the asset price mechanism, allowing the higher income group to gain extra capital income. The UMP does have limited accounting in creating real wage growth as well as restoring demand and growth as the overall economy has been stagnant. We revisit the issue of income inequality in Japan by using Pasinetti’s approach of measuring personal income distribution and also examine its effect on the effective demand and functional income distribution. We implement workers’ debt-augmented Pasinetti Index (PI) as a proxy of personal income distribution, moving away from workers towards rentiers in their interpersonal lending and borrowing relations. Our empirical result with the VAR model for the case of Japan shows 1) higher PI restrains the effective demand. 2) Higher rentier income also affects the wage share negatively through a decrease in capacity utilization. |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tergaa:488&r=mon |
| By: | MASUJIMA Yuki; SATO Yuki |
| Abstract: | This paper tries to investigate the driving factors of FX rates, focusing on the roles of sovereign credit risks and energy prices in the post-pandemic period. We find that the yen’s safe-haven status has weakened, and the European currencies became more sensitive to debt risks and fragile to uncertainty. The yen’s sensitivity to higher sovereign risks increased after the introduction of the yield curve control (YCC) policy implemented by the Bank of Japan (BOJ), even if its policy could have reduced the volatility of Japan’s credit default swap (CDS) rates. Moreover, the type of shock (supply or demand) may change the impacts of oil prices on FX moves. Our results hint at the policy implication that the government’s fiscal policy stance is important not only for sovereign risk premiums but for exchange rate movement. The BOJ’s YCC could unintentionally limit some sovereign risks, but it may cause a rapid depreciation of the home currency when debt sustainability becomes more doubtful. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24054&r=mon |
| By: | Serena Merrino; Keagile Lesame; Ilias Chondrogiannis |
| Abstract: | In 2013, South Africa amended its bank regulatory framework in line with the Basel III accord, which introduced system-wide capital and liquidity adequacy requirements designed to curb the economys financial cycle so-called macroprudential policy. These regulations aim to create a more resilient banking system, but they can also lead to changes in lending behaviour, potentially affecting the availability and terms of loans to specific segments of the credit market. This is especially important in emerging markets such as South Africa, where market segmentation and inequality are more prominent than elsewhere. This paper examines how South Africas credit market has responded to macroprudential policy measures, with a focus on borrowers heterogeneity, to evaluate whether financial stability objectives are achieved at the expense of an equitable credit allocation. Our empirical approach is two-fold and employs both panel and time-series data for the period 20082023. We find that macroprudential regulation has reduced lending to households, especially if poor, to the benefit of firms, especially if large. We also find that this regulation triggers lenders adverse selection by penalising more creditworthy enterprises. Our results suggest that while Basel III has reduced reckless consumer credit, it has also redistributed finance in ways that are not beneficial to long-term growth and financial stability. |
| Date: | 2024–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:11062&r=mon |
| By: | Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Ganesh Viswanath-Natraj (Warwick Business School); Junxuan Wang (University of Cambridge - Centre for Endowment Asset Management, Cambridge Judge Business School) |
| Abstract: | We conduct the first comprehensive study of blockchain currencies, stablecoins pegged to traditional currencies and traded on decentralized exchanges. Our findings reveal that the blockchain market generally operates efficiently, with blockchain prices and trading volumes closely aligned with those of their traditional counterparts. However, blockchain-specific factors, such as gas fees and Ethereum volatility, act as frictions. Blockchain prices are determined by macroeconomic fundamentals and order flow. We use a rich transaction-level database of trades and link it to the characteristics of market participants. Traders with significant market share and access to the primary market have a greater impact on pricing, likely due to informational advantages. |
| Keywords: | Stablecoins, foreign exchange, blockchain, price efficiency, market resilience, microstructure |
| JEL: | D53 E44 F31 G18 G20 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2429&r=mon |
| By: | Corentin Roussel |
| Abstract: | Output floor has emerged as a possibly important tool to ensure financial stability within the banking system. This paper proposes to assess the quantitative potential of output floor to ensure financial stability through the lens of a general equilibrium model for the Euro Area. We get three main results. First, implementation of output floor entails macrofinancial stabilization benefits for Euro Area activities in the long run, which confirms results found by financial European regulators. Second, along financial and economic cycles, output floor activation reduces volatility of banks capital to risk-weighted-asset ratio and the dispersion of this ratio between core and periphery banks, consistently with the desired outcome defined by financial regulators. Third, moderate banking openness in Euro Area limits cross-border credit flows spillovers, which does not affect output floor efficiency. However, full banking openness (i.e. banking union) produces high spillovers and erodes this efficiency. |
| Keywords: | Output Floor, Credit Risk, Banking System, Euro Area, DSGE. |
| JEL: | G21 F36 F41 E44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-18&r=mon |
| By: | Matteo Cacciatore; Bruno Feunou; Galip Kemal Ozhan |
| Abstract: | The decline in safe real interest rates over the past three decades has reignited discussions on the neutral real interest rate, known as R*. We review insights from the literature on R*, addressing its determinants and estimation methods, as well as the factors influencing its decline and its future trajectory. While there is a consensus that R* has declined, alternative estimation approaches can yield substantially different point estimates over time. The estimated neutral range is large and uncertain, especially in real-time and when comparing estimates based on macroeconomic data with those inferred from financial data. Evidence suggests that factors such as increased longevity, declining fertility rates and scarcity of safe assets, as well as income inequality, contribute to lowering R*. Existing evidence also suggests the COVID-19 pandemic did not substantially impact R*. Going forward, there is an upside risk that some pre-existing trends might weaken or reverse. |
| Keywords: | Interest rates, Monetary policy, Monetary policy framework |
| JEL: | C8 D22 E4 L2 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:24-03&r=mon |