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on Monetary Economics |
| By: | Christian Bittner; Alexander Rodnyansky; Farzad Saidi; Yannick Timmer |
| 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: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_552&r= |
| By: | Gerald P. Dwyer (Banco de España); Biljana Gilevska (Banco de España); María J. Nieto (Banco de España); Margarita Samartín (Banco de España) |
| Abstract: | We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB policies are longer-term refinancing operations (LTROs), the asset purchase programmes and the ECB’s interest rate on its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank lending across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), were conditional on banks increasing their lending. This change had a substantially larger effect on total lending by banks. The computed effects of the LTROs and TLTROs, based on average size, indicate that in non-crisis countries LTROs increased bank loans by 7.6% of assets and TLTROs increased bank loans by 16.4% of assets, whereas in crisis countries the increases were 8.4% and 14.6% for LTROs and TLTROs, respectively. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries, while the LTROs were associated with increases in government securities held by banks in crisis countries. |
| Keywords: | euro area, unconventional monetary policy, banks, financial crisis |
| JEL: | E44 E52 G01 G21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2416&r= |
| By: | Michael T. Kiley; Frederic S. Mishkin |
| Abstract: | The world economy has experienced the largest financial crisis in generations, a global pandemic, and a resurgence in inflation during the first quarter of the 21st century, yielding important insights for central banking. Price stability has important benefits and is the responsibility of a central bank. Achieving price stability in a complex and uncertain environment involves a credible commitment to a nominal anchor with a strong response to inflation and pre-emptive leaning against an overheating economy. Associated challenges imply that central bank communication and transparency are key elements of monetary policy strategies and tactics. Crises have emphasized the role of central banks in promoting financial stability, as financial stability is key to achieving price and economic stability, but this role increases risks to independence. Goals for central banks other than price and economic stability, complemented by financial stability, can make it more difficult for them to stabilize both inflation and economic activity. |
| Keywords: | Central bank governance; Central banking; Financial stability; Monetary policy; Science of central banking |
| Date: | 2024–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-35&r= |
| By: | Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak |
| Abstract: | Exploiting the heteroscedasticity of the changes in short-term and long-term interest rates and exchange rates around the FOMC announcement, we identify three structural monetary policy shocks. We eliminate the predictable part of the shocks and study their effects on financial variables and macro variables. The first shock resembles a conventional monetary policy shock, and the second resembles an unconventional monetary shock. The third shock leads to an increase in interest rates, stock prices, industrial production, consumer prices, and commodity prices. At the same time, the excess bond premium and uncertainty decrease, and the U.S. dollar depreciates. Therefore, this third shock combines all the characteristics of a central bank information shock. |
| Keywords: | Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR |
| JEL: | C36 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2084&r= |
| By: | Paul Beaudry; Paolo Cavallino; Tim Willems |
| Abstract: | This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions. |
| JEL: | E21 E43 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32511&r= |
| By: | Damjan Pfajfar; Fabian Winkler |
| Abstract: | We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and unemployment. These preferences also exhibit sizable demographic heterogeneity. |
| Keywords: | Household Survey; Attention; Inflation Target; Sacrifice Ratio; Dual Mandate |
| JEL: | D12 E52 E58 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-36&r= |
| By: | Linta, Tanja |
| Abstract: | This paper measures variation in central bank credibility through the level of agree-ment in a monetary policy committee and empirically studies its relevance for the effectiveness of forward guidance. In the European Central Bank’s (ECB) insti-tutional framework, high-frequency identification shows that non-unanimity within the Governing Council makes financial markets doubt the credibility of their com-mitment to forward guidance promises. Instead, they expect a change in policy direction, regardless of the ECB promising the opposite. Reduced credibility of the commitment then dampens the effect the easing bias in communication has on expectations while confirming unanimity does not seem to reinforce it. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129332&r= |
| By: | Rhys Bidder; Timothy Jackson; Matthias Rottner |
| Abstract: | We examine the impact of central bank digital currency (CBDC) on banks and the broader economy - drawing on novel survey evidence and using a structural macroeconomic model with endogenous bank runs. A substantial share of German respondents would include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. This is hypothetical evidence for `slow’ disintermediation of the banking system. During periods of banking distress, households' willingness to shift to CBDC is even larger, implying a risk of `fast’ disintermediation. Our structural model captures both phenomena and allows for policy prescriptions. We calibrate to the Euro area and then introduce CBDC, exploiting our survey to parameterize its demand. We find two contrasting effects of CBDC on financial stability. `Slow' disintermediation shrinks a run-prone banking system with positive welfare effects. But the ability of CBDC to offer safety at scale makes bank-runs more likely. For reasonable calibrations, this second `fast disintermediation' effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results such that CBDC is welfare improving. Such policies retain the gains of increased stability arising from `slow' disintermediation while limiting the downsides of `fast' disintermediation. |
| Keywords: | CBDC, Financial Crises, Disintermediation, Run, Banking System, Money |
| JEL: | E42 E44 E51 E52 G21 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202407&r= |
| By: | Joshua Brault; Qazi Haque; Louis Phaneuf |
| Abstract: | Taylor rules and their implications for monetary policy analysis can be misleading if the inflation target is held fixed while being in fact time-varying. We offer a theoretical analysis showing why assuming a fixed inflation target in place of a time-varying target can lead to a downward bias in the estimated policy rate response to the inflation gap and wrong statistical inference about indeterminacy. Our analysis suggests the bias is stronger in periods where inflation target movements are large. This is confirmed by simulation evidence about the magnitude of the bias obtained from a New Keynesian model featuring positive trend inflation. We further estimate medium-scale NK models with positive trend inflation and a time-varying inflation target using a novel population-based MCMC routine known as parallel tempering. The estimation results confirm our theoretical analysis while favouring a determinacy outcome for both pre and post-Volcker periods and shedding new light about the type of rule the Fed likely followed. |
| Keywords: | Taylor rule estimation, time-varying inflation target, omitted variable bias |
| JEL: | E50 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-39&r= |
| By: | Omid Asadollah (Florida International University); Linda Schwartz Carmy (Florida International University); Md. Rezwanul Hoque (Florida International University); Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper investigates the effects of global geopolitical risks and global supply chain pressures on global inflation for the monthly period of 1999M1-2022M12. The investigation is based on a structural vector autoregression model, where the effects of global oil prices and global monetary policy are controlled for. Four alternative measures of inflation are used, including headline, core, food, and energy inflation. The empirical results show that disruptions in global supply chains are the main drivers of global inflation in the long run as the corresponding shocks explain the lion's share of volatilities in headline inflation (by 32%), core inflation (by 30%) and food inflation (by 22%), followed by oil price shocks and policy rate shocks. In comparison, energy inflation is explained the most by oil price shocks (by 55%) followed by supply chain shocks and policy rate shocks. Positive supply chain pressure and oil price shocks have positive and statistically significant effects on headline inflation even after five years, whereas positive policy rate shocks have negative and statistically significant effects on headline inflation in the long run. In contrast, positive shocks to geopolitical risk result in higher headline inflation only up to one year, with insignificant effects in the long run. Several policy implications follow. |
| Keywords: | Geopolitical Risk, Supply Chains, Global Inflation, Oil Prices, Policy Rates |
| JEL: | E31 E52 E58 F62 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:fiu:wpaper:2406&r= |
| 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 G21 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202408&r= |
| By: | Francois de Soyres; Zina Saijid |
| Abstract: | Many central banks are at a critical juncture in their current monetary policy cycles as they assess whether it would be appropriate to embark on an easing phase following one of the most aggressive episodes of monetary tightening in recent history. In this note, we highlight key aspects of past monetary policy easing episodes in selected advanced economies and what lessons we may learn from these past experiences. |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-31-1&r= |
| By: | Patrick Alexander; Lu Han; Oleksiy Kryvtsov; Ben Tomlin |
| Abstract: | We study how the interaction of market power and nominal price rigidity influences inflation dynamics. We formulate a tractable model of oligopolistic competition and sticky prices and derive closed-form expressions for the pass-through of idiosyncratic and common cost shocks to firms’ prices. Using unpublished micro data for Canadian wholesale firms, we estimate that the pass-through of idiosyncratic costs is incomplete at 70% and independent of the degree of sector-price-stickiness. The pass-through of common costs declines with price stickiness, from nearly complete in flexible-price sectors to below 70% in sectors with the stickiest prices. An increase in the degree of sector or firm market power reduces the pass-through of both types of cost shocks. These estimates imply a degree of strategic complementarity that lowers the slope of the New Keynesian Phillips curve by 30% in a one-sector model and by 74% in a multi-sector model. |
| Keywords: | Firm dynamics; Inflation and prices; Market structure and pricing; Monetary policy transmission |
| JEL: | D43 E31 L13 L81 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-20&r= |
| By: | Changhyun Lee (Department of Economics, University of California Davis) |
| Abstract: | I suggest a new channel through which central bank asset purchase programs could have effects on asset prices: The outside option channel. After the global financial crisis, central banks have widened the variety of assets they can purchase. Secondary markets for the majority of the newly targeted assets are characterized by the OTC market structure with matching frictions and bargaining features. In bargaining, the central bank’s asset purchase announcement could affect the outside option value of the asset seller by providing one more option of selling the asset to the central bank to the seller. The effect of the outside option channel materializes even without actual purchases by the central bank since once the asset seller is matched with the buyer, she would exploit the announcement to require a higher price in the bargaining but not actually sell the asset to the central bank. I show how the outside option channel could work through a two-period model and discuss its empirical relevance by comparing two episodes of the Fed’s asset purchases during the global financial crisis and the COVID crisis. |
| Keywords: | Unconventional monetary policy, OTC markets, Asset pricing |
| JEL: | E50 E58 G12 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:363&r= |
| By: | Ursel Baumann; Annalisa Ferrando; Dimitris Georgarakos; Yuriy Gorodnichenko; Timo Reinelt |
| Abstract: | This paper provides new survey evidence on firms’ inflation expectations in the euro area. Building on the ECB’s Survey on the Access to Finance of Enterprises (SAFE), we introduce consistent measurement of inflation expectations across countries and shed new light on the properties and causal effects of these expectations. We find considerable heterogeneity in firms’ inflation expectations and show that firms disagree about future inflation more than professional forecasters but less than households. We document that differences in firms’ demographics, firms’ choices and constraints, and cross-country macroeconomic environments account for most of the variation in inflation expectations by roughly equal shares. Using an RCT approach, we show that firms update their inflation expectations in a Bayesian manner. Moreover, they revise their plans regarding prices, wages, costs and employment in response to information treatments about current or future inflation. |
| JEL: | E20 E31 E52 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32504&r= |
| By: | Maxi Guennewig |
| Abstract: | Blockchain capacity constraints induce congestion when many users want to transact at the same time, challenging the usability of cryptocurrencies as money. This paper argues that blockchain capacity constraints, coupled with the need to incentivize miners (validators) to maintain blockchain security, lead to low inflation outcomes when cryptocurrencies compete for user demand. If two coins are both used as medium of exchange, a low-inflation coin must experience higher congestion than a high-inflation coin; otherwise demand for the latter is zero. Coin issuers then strategically undercut each other’s money growth rates to boost transaction demand, limiting the overall inflation rate of the economy. However, the equilibrium is necessarily inefficient given unrealized gains from trade due to congestion and the cost of maintaining blockchain security. |
| Keywords: | Cryptocurrencies, currency competition, blockchain, inflation |
| JEL: | E40 E42 E5 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_549&r= |
| By: | Quentin Vandeweyer; Minghao Yang; Constantine Yannelis |
| Abstract: | This paper studies the transmission of monetary policy to the stock market through investors’ discount factors. To isolate this channel, we investigate the effect of US monetary policy surprises on the ratio of prices of the same stock listed simultaneously in Hong Kong and Mainland China, and thereby control for revisions in cash-flow expectations. We find this channel to be strong and asymmetric, with the effect driven by surprise monetary policy interest rate cuts. A 100 basis point surprise cut results in a 30 basis point increase in the ratio of stock prices over 5 days. These results suggest significant slow-moving reductions in stock market risk premia following accommodating monetary policy surprises. |
| JEL: | E5 E51 E58 G12 G14 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32499&r= |
| By: | BOUAKEZ, Hafedh; KANO, Takashi |
| Abstract: | The neo-Fisherian effect typically refers to the short-run increase in inflation associated with a permanent increase in the nominal interest rate. This positive comovement between the two variables is commonly viewed — and empirically identified — as being conditional on permanent monetary shocks, which are often interpreted as permanent shifts in the inflation target. Such a view, however, implies that inflation and the nominal interest rate share a common stochastic trend, a property that is hardly supported by the data, especially during episodes of stable inflation. Moreover, in countries that have adopted formal inflation targeting, changes in the inflation target occur very infrequently, if at all, calling into question the interpretation of inflation target shocks identified within standard time-series models based on quarterly data. In this paper, we propose a novel empirical strategy to detect the neo-Fisherian effect, which we apply to U.S. data. Our procedure relaxes the commonly used identifying restriction that inflation and the nominal interest rate are cointegrated, and, more importantly, is agnostic about the nature of the shock that gives rise to a neo-Fisherian effect. We find that the identified shock has no permanent effect on the nominal interest rate or inflation, but moves them in the same direction for a number of quarters. It also accounts for the bulk of their variability at any given forecasting horizon, while explaining a non-negligible fraction of output fluctuations at businesscycle frequencies. Using Bayesian techniques, we show that the data favors the interpretation of the identified shock as a liquidity preference shock rather than an inflation target shock. |
| Keywords: | Identification, Inflation, Liquidity preference, neo-Fisherian effect |
| JEL: | E12 E23 E31 E43 E52 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-140&r= |
| By: | Markus K. Brunnermeier; Sergio Correia; Stephan Luck; Emil Verner; Tom Zimmermann |
| Abstract: | This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.13296&r= |
| By: | James Graham; Avish Sharma |
| Abstract: | How does monetary policy affect the homeownership rate? A monetary contraction may have contrasting effects on ownership due to rising interest rates, falling incomes, and lower house prices. To investigate, we build a heterogeneous household life-cycle model with housing tenure decisions, mortgage finance, and an exogenous stochastic process to capture the macroeconomic effects of monetary policy. Following a contractionary shock, homeownership initially falls due to rising mortgage rates, but rises over the medium term given falling house prices. We also show that differences in mortgage credit conditions, mortgage flexibility, and household expectations formation can amplify homeownership dynamics following a shock. |
| Keywords: | Homeownership; monetary policy; interest rates; house prices; heterogeneous households |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-11&r= |
| By: | Noah, Alphonse; Tacneng, Ruth |
| Abstract: | Mobile money taxation gives African governments an opportunity to broaden their fiscal base and explore new revenue-generating possibilities. Cameroon introduced a 0.2 per cent tax on mobile money transfers and withdrawals from 1 January 2022. Our research analyses the behaviour of agents, who act as intermediaries between mobile money account holders and mobile money service providers, before and after the tax on mobile money (MM tax). Agents play a key role in the distribution of mobile money services. Their presence is vital for achieving financial inclusion, especially in areas less served by banks and other traditional financial service providers. An agent’s revenue is mainly derived from commission earned on each transaction – they receive an average of 40–45 per cent of the commission, and the remaining 55–60 per cent is shared between the mobile network operator, partner banks, and agent’s manager (superagent). Given their importance in the mobile money ecosystem, factors that negatively affect the attractiveness of the business for agents could have policy implications on financial inclusion. Summary of ICTD Working Paper 192. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idq:ictduk:18367&r= |
| By: | Hassan Afrouzi; Joel P. Flynn; Choongryul Yang |
| Abstract: | This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%. |
| JEL: | E31 E32 E71 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32541&r= |
| By: | Joebges, Heike; Herr, Hansjörg; Kellermann, Christian |
| Abstract: | Crypto assets' partial money-like use promotes toxic developments in the financial system. Even though crypto assets might be regarded as close substitutes to traditional money, we show that they lack important functions of money. Traditional fiat money requires several interacting institutions to stabilize its value and regulate its use. In our analysis, we elaborate on the risks associated with the difficulty of setting up regulatory institutions in the crypto sphere and the likelihood of periods of high volatility as well as their repercussions on the traditional financial system due to reciprocal integration. The shift of banking functions into the unregulated area of decentralized finance triggers a new quality of instability in the global financial system with an increasing probability of effects on the real economy. Regulation of crypto assets remains an urgent issue. |
| Keywords: | crypto assets, Bitcoin, stablecoins, financial crisis |
| JEL: | E42 G01 G23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:296490&r= |
| By: | Arewa, Moyo |
| Abstract: | This paper explores the potential benefits and risks to tax administrations of implementing central bank digital currencies (CBDCs), a digital version of national currencies that is gaining momentum worldwide. It outlines some of the key features of CBDCs and then considers their implications for tax administration in low- and middle-income countries (LMICs) generally. The emergence of CBDCs provides LMICs with a significant opportunity to improve financial inclusion, improve payment systems and increase tax collection. CBDCs provide greater transparency, security and traceability, which could help tax authorities track income and net worth, detect tax evasion and increase tax revenue. However, there are also complex combinations of risks associated with deploying CBDCs. The revenue authorities need to thoroughly assess how they should adapt to these challenges. Governments must also ensure that CBDCs are developed and implemented transparently, fairly and consistently with broader public policy goals. This will help maximise the potential benefits of CBDC adoption while mitigating the risks – which may be particularly significant in LMICs. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idq:ictduk:18361&r= |
| By: | Mishel Ghassibe |
| Abstract: | I develop a tractable dynamic sticky-price model, where input-output linkages are formed endogenously. The model delivers cyclical properties of networks that are consistent with those I estimate using sectoral and firm-level data, conditional on identified real and nom- inal shocks. A novel source of state dependence in nominal rigidities arises: the strength of complementarities in price setting and monetary non-neutrality increase in the number of suppliers optimally chosen by firms. As a result, the model simultaneously rationalizes the following observed non-linearities in monetary transmission. First, there is cycle dependence: the magnitude of real GDP’s response to a monetary shock is procyclical. Second, there is path dependence: non-neutrality of real GDP is higher following previous periods of loose monetary policy. Third, there is size dependence: larger monetary contractions shrink the net- work and generate a less than proportional decrease in GDP relative to smaller contractions. |
| Keywords: | monetary transmission; state dependence; endogenous production networks |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1449&r= |
| By: | Pablo de la Vega; Guido Zack; Jimena Calvo; Emiliano Libman |
| Abstract: | This paper analyzes the empirical relationship between the inflation rate and its proximate determinants in Argentina, using quarterly data over the period 2004-2022 and an error-correction vector model approach. Unlike previous literature, this paper uses a theoretical framework to motivate the inclusion of variables that are expected to contribute to explain inflation, thus reducing the risk of omitting relevant variables and formalizing key mechanisms. Inference is performed through Granger causality analysis, impulse response functions and forecast errors variance decomposition. The results suggest that an anti-inflationary plan for Argentina should take into consideration both the greater relevance of the inertial component, the exchange rate and the interest rate in the short-run dynamics of the price level, and the long-run relationship between prices, interest rate and activity level. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2405.20822&r= |
| By: | Niesten, Hannelore |
| Abstract: | This policy brief examines the effects of cumulative, specific 7.2 per cent taxes on mobile money (MM) service providers in Côte d’Ivoire. It assesses the unique tax framework, which deviates from the consumer-centric trend observed in many African countries, where end-users typically bear the burden. Initially targeting telecom companies, the tax expanded to encompass MM providers created by licensed telecom operators (Orange Money, MTN Money, and Moov Money) and, later, all companies providing MM operations. Concerns over potential investment declines persist, yet concrete evidence is absent. The data available suggests a decrease in MM turnover, partially due to lowered MM service prices, though telecom regulator reports note a lack of communication in MM revenue reporting. If specific taxes were reduced or abolished, the funds originally allocated could be reinvested, particularly to bolster agent commissions in rural zones, given the heightened competition between diverse payment service players in Côte d’Ivoire. The study emphasises the importance of a level playing field with other money transfer services provided by banks, local businesses, and fintech. |
| Keywords: | Finance, |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idq:ictduk:18359&r= |
| By: | Hongyu Xiao |
| Abstract: | Recent trends suggest that domestic demand alone may not be enough to explain the increase in overall demand for Canadian banknotes (Engert et al., 2019). Estimating foreign cash demand is difficult due to data availability issues and confounding factors that simultaneously affect domestic demand. In this paper, I provide a quantitative causal estimate of banknote demand from international visitors to Canada by exploiting the exogenous shock from COVID-19 international travel restrictions, which led to an unprecedented drop in cross-border travel. To identify international visitor demand shocks from contemporaneous domestic demand shocks due to the pandemic, I apply a difference-in-differences strategy, taking advantage of foreign traveler demand’s distinct regional patterns and data from the Bank of Canada’s Bank Note Distribution System. I find that each international visitor brought on average $165 worth of hundred-dollar notes with them to Canada prior to the pandemic. Under plausible assumptions, total holdings by international visitors constitute roughly 10% of total $100 CAD notes in circulation at the end of 2019. |
| Keywords: | Bank notes; Central bank research; Coronavirus disease (COVID-19); Financial services; International topics |
| JEL: | E41 E42 E58 F22 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-23&r= |
| By: | Scarpini, Celeste; Santoro, Fabrizio; Abounabhan, Mary; Diouf, Awa |
| Abstract: | Mobile money-enabled digital merchant payments have significant promise for enhancing tax compliance in lowincome countries, and addressing persistent challenges. First, digital merchant payments offered by mobile money providers guarantee greater accessibility to safer and faster formal payment. Second, they help businesses to keep comprehensive records of their activities, expenses, and receipts – enhancing accuracy of tax filing, and perceptions of the tax administration’s monitoring and enforcement capabilities. Third, they improve businesses’ perceptions of the transparency and predictability of the tax system, by using more precise digital information for tax calculations. In addition, governments can use digital merchant payments to encourage business formalisation, by exempting them from new taxes on mobile money transactions. Many African governments use this strategy, while taxing other transaction types – such as mobile money withdrawals and person-to-person transfers. |
| Keywords: | Finance, |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:idq:ictduk:18363&r= |
| By: | Colicev, A.; Hoste, J.; Konings, J. |
| Abstract: | We use retailer scanner data to analyze the impact of a large and sudden exchange rate shock on the cost of living of consumers. While the marginal cost of foreign-sourced products increases by 7 percent more than the costs of locally-sourced products, the retail markup on foreign products decreases by 4 percent relative to local products. At the same time, we document increased entry and exit of both foreign and local varieties around the depreciation. To analyze the impact on consumers we decompose the change in the cost of living into a cost, a retail markup, a substitution, and a variety effect. As richer consumers spend, on average, more on foreign varieties, we find that they are disproportionally affected by the cost effect. However, lower retail markups on foreign products offset this relative cost increase. Since richer consumers have lower elasticities of substitution and benefit more from changes in product variety, their cost of living increased only by 16 percent, while for poor consumers the cost of living increased by 24 percent. |
| Keywords: | Currency depreciation, Pass-through into consumer prices, Cost-of-living |
| JEL: | F33 F61 |
| Date: | 2024–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2419&r= |
| By: | Ana M. Aizcorbe; Jan de Haan |
| Abstract: | We apply the Oaxaca-Blinder decomposition method used in the labor literature to split changes in average prices into inflation and quality components. The inflation measure is a full imputation Törnqvist price index. Using this index to deflate nominal spending properly allocates changes in the quality of goods to changes in real spending, not inflation. |
| JEL: | C43 E31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bea:papers:0126&r= |
| By: | S. Borağan Aruoba; Eugene Oue; Felipe Saffie; Jonathan Willis |
| Abstract: | We develop a simple menu-cost model with non-constant elasticity of demand that features idiosyncratic productivity and demand shocks. The model is calibrated to match firm-level productivity and demand processes estimated from U.S. data. Despite its simplicity, the calibrated model delivers untargeted pricing dynamics and a markup distribution that are consistent with U.S. micro data. Moreover, it also generates sizable monetary non-neutrality that rivals more complicated alternative menu cost models that explicitly target pricing dynamics. The key in reconciling firm and pricing dynamics comes from the interaction between non-constant elasticity of demand and idiosyncratic demand shocks. Thus, this framework effortlessly unifies pricing, markup, and firm dynamics. |
| JEL: | E30 E52 L11 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32518&r= |
| By: | Andrés Blanco; Andrés Drenik; Emilio Zaratiegui |
| Abstract: | We study the distribution of labor income during large devaluations. Across countries, inequality falls after large devaluations within the context of a surge in inflation and a fall and subsequent recovery of real labor income. To better understand inequality dynamics, we use a novel administrative dataset covering the 2002 Argentinean devaluation. We show that following a homogeneous fall in real labor income across workers, the bottom of the income distribution recovers faster than the top. Low labor mobility and lack of union coverage among high-income workers explain their slow recovery. |
| JEL: | F0 F31 F41 F44 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32494&r= |
| By: | Jonathan D. Rose |
| Abstract: | The 1985 thrift crises in Ohio and Maryland show how the Fed, as a lender of last resort, took proactive steps to enhance the effectiveness of its discount window. |
| Keywords: | thrift crises of 1985; lender of last resort; discount window |
| Date: | 2024–05–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98303&r= |
| By: | Ken Armstrong; Leslie Conner Warren; Asani Sarkar |
| Abstract: | Spot bitcoin exchange-traded products (ETPs) began trading in the U.S. on January 11, 2024. For investors, these ETPs purport improved liquidity and price efficiency, and more convenient access to bitcoin trading compared to other means of trading bitcoin in spot markets. Proponents also cite bitcoin holdings as a portfolio diversification opportunity due to historically low correlation with traditional financial securities. Others argue that bitcoin remains a speculative asset and that ETPs increase its interconnections with the traditional financial system. In this post, we examine the initial performance, trading costs, and price efficiency of spot bitcoin ETPs in the U.S. |
| Keywords: | bitcoin; exchange-traded products (ETPs) |
| JEL: | G23 G14 G00 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98297&r= |
| By: | Tomohiro Ando; Jushan Bai; Lina Lu; Cindy M. Vojtech |
| Abstract: | We characterize the U.S. interbank liquidity risk network based on a supervisory dataset, using a scenario-based quantile network connectedness approach. In terms of methodology, we consider a quantile vector autoregressive model with unobserved heterogeneity and propose a Bayesian nuclear norm estimation method. A common factor structure is employed to deal with unobserved heterogeneity that may exhibit endogeneity within the network. Then we develop a scenario-based quantile network connectedness framework by accommodating various economic scenarios, through a scenario-based moving average expression of the model where forecast error variance decomposition under a future pre-specified scenario is derived. The methodology is used to study the quantile-dependent liquidity risk network among large U.S. bank holding companies. The estimated quantile liquidity risk network connectedness measures could be useful for bank supervision and financial stability monitoring by providing leading indicators of the system-wide liquidity risk connectedness not only at the median but also at the tails or even under a pre-specified scenario. The measures also help identify systemically important banks and vulnerable banks in the liquidity risk transmission of the U.S. banking system. |
| Keywords: | nuclear norm; Bayesian analysis; scenario-based quantile connectedness; bank supervision; financial stability |
| JEL: | C11 C31 C32 C33 C58 G21 G28 |
| Date: | 2024–04–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbqu:98335&r= |
| By: | Sonali Chowdhry |
| Abstract: | This paper investigates the heterogeneous responses of exporters to policy reforms undertaken by the People’s Bank of China to internationalize the Renminbi (RMB). Using detailed customs data from France for the initial years of these reforms (2011-2017), it documents several novel stylized facts on RMB adoption, highlighting both the growth and extreme skewness in RMB’s uptake across firms and varieties. It further examines various mechanisms underpinning self-selection into RMB and proposes a novel channel that strongly predicts RMB adoption. This channel exploits information on firms’ invoicing currency strategies in existing markets and is observed to be a valid instrument for RMB adoption. Leveraging this new instrument, the paper shows that invoicing in RMB significantly boosted exports for varieties sold to China. Overall, the findings suggest that early RMB adoption, although limited across firms, provided an important competitive edge when exporting to China. |
| Keywords: | Firm heterogeneity, invoicing currency, trade transactions, China |
| JEL: | F14 F23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2085&r= |