|
on Monetary Economics |
| By: | Chinara Azizova; Jonathan Witmer; Xu Zhang |
| Abstract: | Across several dimensions of lender of last resort policy, I highlight broad changes that have occurred since the 2008–09 global financial crisis and discuss some of the key challenges, choices and considerations facing the designers of central bank liquidity tools today. |
| Keywords: | Financial institutions, Financial markets, Financial system regulation and policies, Inflation and prices, Monetary policy, Monetary policy transmission |
| JEL: | E52 E58 G21 G28 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-05&r= |
| By: | Haavio, Markus; Heikkinen, Joni; Jalasjoki, Pirkka; Kilponen, Juha; Paloviita, Maritta; Vänni, Ilona |
| Abstract: | We depart from the common reaction function-based approach used to infer central bank preferences. Instead, we extract the tone from the textual information in the central bank communication using both a lexicon-based approach and a language model. We combine the tone with real-time information available to the monetary policy decision-maker and directly estimate the loss function. We find strong and robust evidence of asymmetry in the case of the European Central Bank during 1999-2021: the slope of the loss function was roughly three times steeper when inflation exceeded the target compared to when it was below the target. This represents a significant departure from the quadratic and symmetric monetary policy loss function typically applied in macro models. |
| Keywords: | central bank communication, textual analysis, language models, asymmetric loss function, optimal monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:298852&r= |
| By: | Olivier J. Blanchard; Ben S. Bernanke |
| Abstract: | In a collaborative project with ten central banks, we have investigated the causes of the post-pandemic global inflation, building on our earlier work for the United States. Globally, as in the United States, pandemic-era inflation was due primarily to supply disruptions and sharp increases in the prices of food and energy; however, and in sharp contrast to the 1970s, the inflationary effects of these supply shocks have not been persistent, in part due to the credibility of central bank inflation targets. As the effects of supply shocks have subsided, tight labor markets, and the rises in nominal wages, have become relatively more important sources of inflation in many countries. In several countries, including the United States, curbing wage inflation and returning price inflation to target may require a period of modestly higher unemployment. |
| JEL: | E30 E31 E32 E52 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32532&r= |
| By: | Giovanni Di Bartolomeo; Carolina Serpieri |
| Abstract: | We investigate the behavior of central banks in seven advanced economies, focusing on how observed monetary policies align with optimal ones as determined by model-consistent welfare measures. Our approach stands out by emphasizing the importance of inertia’s impact on the output gap and the dynamics of prices and wages. We incorporate inertia into our model using duration-dependent adjustments. By integrating this aspect into a simple New Keynesian model, our analysis aims to identify shared patterns and distinctive features in the monetary policy approach of central banks across different countries. |
| Keywords: | duration-dependent adjustments; intrinsic inflation persistence; DSGE models; hybrid Phillips curves; optimal policy |
| JEL: | E31 E32 C11 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp249&r= |
| By: | Skylar Brooks |
| Abstract: | Central banks play a crucial role in promoting financial stability. They act as financial system stabilizers through their capacity to create liquidity and channel it to financial institutions and markets in times of stress—a role that has evolved and expanded substantially over the past 15 years. This paper provides a stylized discussion of recent policy developments in this area and what they mean for debates and decisions about the design of central bank liquidity policy. Across several policy dimensions, the paper outlines broad changes since the 2008–09 global financial crisis and highlights some of the key challenges, choices and considerations facing the designers of central bank liquidity tools today. |
| Keywords: | Lender of last resort; Financial stability; Central bank research; Financial institutions; Financial markets |
| JEL: | D53 E58 E61 G01 G2 G21 G23 H12 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-06&r= |
| By: | Frederic Boissay; Fabrice Collard; Cristina Manea; Adam Hale Shapiro |
| Abstract: | The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven. |
| Keywords: | supply and demand; inflation; monetary policy tightening; financial stresses |
| JEL: | E1 E3 E6 G01 |
| Date: | 2023–12–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:97503&r= |
| By: | Clemens Graf von Luckner (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Carmen Reinhart (Harvard University); Kenneth Rogoff (Department of Economics, Harvard University - Harvard University) |
| Abstract: | This paper employs high frequency transactions data on the world's two oldest and most extensive centralized peer-to-peer Bitcoin markets, enabling trade in the currencies of more than 160 countries. We develop an algorithm that allows us, with high probability, to detect "crypto vehicle transactions" in which crypto currency is used to move capital across borders, and/or to exchange one fiat currency for another. The data suggest that the use of Bitcoin has become an increasingly important channel to receive remittances and evade capital controls in emerging markets. Two event studies on Venezuela and Argentina provide supporting evidence. |
| Keywords: | cryptocurrencies, bitcoin, international capital flows, transactions, speculative bubbles |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04603357&r= |
| By: | Christopher D. Cotton |
| Abstract: | The Federal Reserve currently faces a “last-mile” problem in bringing inflation back to its 2 percent target. Following the series of federal funds rate hikes that began in March 2022 and ended in July 2023, core (excluding food and energy) Personal Consumption Expenditure (PCE) inflation dropped from a year-over-year peak of 5.6 percent in February 2022 to 2.9 percent in December 2023. At the end of 2023, hopes were high that falling inflation would allow the Fed to cut interest rates several times in 2024. However, the disinflation process slowed noticeably in early 2024, prompting questions about how soon the Fed can attain its 2 percent inflation target. The price of shelter accounts for a substantial share of the indexes used to measure overall inflation—the PCE and the Consumer Price Index (CPI)—and it has remained significantly above its pre-pandemic trend in recent months. Therefore, it is important to understand how shelter prices will likely evolve during the current disinflation process. |
| Keywords: | CPI; PCE; housing; disinflation; COVID-19 |
| JEL: | E37 E31 E17 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:98435&r= |
| By: | Bilbiie, F. O. |
| Abstract: | THANK is a tractable heterogeneous-agent New-Keynesian model that captures analytically core micro heterogeneity channels of quantitative-HANK: cyclical inequality and risk; self-insurance, pre-cautionary saving, and realistic intertemporal marginal propensities to consume. I use it to elucidate key transmission mechanisms and dynamic properties of HANK models. Countercyclical inequality yields aggregate-demand amplification and makes determinacy with Taylor rules more stringent; but solving the forward guidance puzzle requires procyclical inequality: a Catch-22. Solutions include combining inequality with a distinct risk channel, with compensating cyclicalities; I provide evidence that disposable income inequality was procyclical in the last two, Great and COVID recessions, while risk is countercyclical. Alternative policy rules also solve the Catch-22, e.g. price-level-targeting or, in the model version with liquidity, setting nominal public debt. Optimal policy with heterogeneity features a novel inequality-stabilization motive generating higher inflation volatility—but is unaffected by risk, insofar as the target efficient equilibrium entails no inequality. |
| Keywords: | Determinacy, Forward Guidance Puzzle, Heterogeneity, Inequality, Interest Rate Rules, Liquidity, Multipliers, Optimal Monetary Policy, Risk |
| JEL: | E21 E31 E40 E44 E50 E52 E58 E60 E62 |
| Date: | 2024–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2420&r= |
| By: | Baumann, Ursel (European Central Bank); Ferrando, Annalisa (European Central Bank); Georgarakos, Dimitris (European Central Bank); Gorodnichenko, Yuriy (University of California, Berkeley); Reinelt, Timo (European Central Bank) |
| 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. |
| Keywords: | inflation expectations, firm decisions, price setting, surveys, randomised controlled trial |
| JEL: | E20 E31 E52 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17015&r= |
| By: | Maximilian Schr\"oder |
| Abstract: | Assessing the contribution of various risk factors to future inflation risks was crucial for guiding monetary policy during the recent high inflation period. However, existing methodologies often provide limited insights by focusing solely on specific percentiles of the forecast distribution. In contrast, this paper introduces a comprehensive framework that examines how economic indicators impact the entire forecast distribution of macroeconomic variables, facilitating the decomposition of the overall risk outlook into its underlying drivers. Additionally, the framework allows for the construction of risk measures that align with central bank preferences, serving as valuable summary statistics. Applied to the recent inflation surge, the framework reveals that U.S. inflation risk was primarily influenced by the recovery of the U.S. business cycle and surging commodity prices, partially mitigated by adjustments in monetary policy and credit spreads. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.17237&r= |
| By: | James Costain (BANCO DE ESPAÑA); Anton Nakov (BANCO DE ESPAÑA) |
| Abstract: | We review models of nominal price adjustment based on optimizing or near-optimal behavior, including menu cost models, generalized hazard function models and models of frictional decisions. We also discuss the role of real rigidities and assess the models’ success in explaining retail microdata and inflation dynamics. |
| Keywords: | sticky prices, nominal rigidities, state-dependent prices, inflation, menu costs, control costs, rational inattention |
| JEL: | E31 E71 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2416&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 in-comes, and lower house prices. To investigate, we build a heterogeneous household life-cycle model with housing tenure decisions, mortgage ï¬ nance, 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 |
| JEL: | E52 E20 R21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-43&r= |
| By: | Silvia Albrizio; Beatriz Gonzalez; Dmitry Khametshin |
| Abstract: | This paper investigates the impact of monetary policy on capital misallocation, focusing on its heterogeneous effects on firms. Using Spanish firm-level data spanning 1999 to 2019, we demonstrate that expansionary monetary policy leads to a reduction in capital misallocation, measured by the within-industry dispersion of firms’ marginal revenue product of capital (MRPK). To analyze the underlying mechanism, we first examine the intensive margin and find that high-MRPK firms exhibit a greater increase in investment and debt financing relative to low-MRPK firms following a monetary policy easing surprise. We also find that a firm’s MRPK serves as a stronger determinant of its investment sensitivity to monetary policy than factors such as age, leverage, or cash, suggesting that MRPK is a reliable proxy for financial frictions. Next, we explore the extensive margin and demonstrate that monetary policy easing stimulates entry and discourages exit, although the quantitative impact is small. Moreover, we find no significant changes in the composition of high- and low-MRPK entrants or exiters. Overall, our findings suggest that expansionary monetary policy primarily reduces capital misallocation by alleviating financial frictions among incumbent productive and constrained firms. |
| Keywords: | monetary policy; financial frictions; investment; misallocation; productivity |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/121&r= |
| By: | José-Elías Gallegos (Banco de España) |
| Abstract: | The transmission channel of monetary policy in the benchmark New Keynesian (NK) framework relies on the counterfactual Full Information Rational Expectations (FIRE) assumption, particularly at the general equilibrium (GE) dimension. I relax the Full Information assumption and build a Heterogeneous-Agents NK model under financial frictions and dispersed information. I find that the amplification multiplier of monetary policy is dampened by the lessened role of GE effects. I then conduct the standard full-fledged NK analysis: the determinacy region is widened as a result of as if aggregate myopia, and the framework beyond FIRE does not suffer from the forward guidance puzzle. Finally, I find that transitory “animal spirits” shocks generate persistent effects. |
| Keywords: | imperfect information, New Keynesian, heterogeneous agents, monetary policy |
| JEL: | E31 E43 E52 E71 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2418&r= |
| By: | Laurent Millischer; Mr. Chenxu Fu; Ulrich Volz; John Beirne |
| Abstract: | This study investigates the relationship between the adoption of renewable energy and the sensitivity of inflation to changes in fossil energy prices across 69 countries over a 50-year period from 1973 to 2022. In the wake of recently increased oil and gas prices leading to a surge in inflation, the notion of a “divine coincidence” suggests that higher levels of renewable energy adoption, in addition to fighting climate change, could mitigate fossil fuel price-induced inflation volatility. Confirming the divine coincidence hypothesis could be an argument in favor of greening monetary policy. However, our empirical results are inconsistent with the hypothesis as we find no evidence that increased renewable energy adoption reduces the impact of fossil fuel price changes on energy inflation rates. This counter-intuitive result may be attributed to idiosyncratic national energy policies, potential threshold effects, or trade linkage spillovers. As the world continues transitioning towards a low-carbon economy, understanding the implications of this shift on inflation dynamics is crucial. |
| Keywords: | Inflation; Renewable Energy; Energy Prices; Oil Price; Monetary Policy |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/111&r= |
| By: | Narayana R. Kocherlakota |
| Abstract: | This paper derives the curvature properties of the short-run Phillips curve in a class of canonical models of price-setting frictions. Contrary to conventional thinking, the Phillips curve is asymptotically horizontal for high levels of economic activity and asymptotically vertical for low levels of economic activity. Moreover, it is globally concave for a wide class of models, including many in which average real marginal cost is an unbounded convex function of economic activity. Intuitively, when economic activity is very high (low), substitution effects within the model-implied true price index imply that inflation behaves as if prices are nearly fully sticky (flexible). Using (conventional) measures of inflation that understate the relevant substitution effects may lead to misleading conclusions about the curvature of the Phillips curve, and to corresponding errors in the formulation of monetary policy. |
| JEL: | E31 E52 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32528&r= |
| By: | Olivier Armantier |
| Abstract: | One of the core responsibilities of central banks is to act as “lender of last resort” to the financial system. In the U.S., the Federal Reserve has been operating as a lender of last resort through its “discount window” (DW) for more than a century. Historically, however, the DW has been plagued by stigma—banks’ reluctance to use the DW, even for benign reasons, out of concerns that it could be interpreted as a sign of financial weakness. In this post, we report on new research showing that once a DW facility is stigmatized, removing that stigma is difficult. |
| Keywords: | lender of last resort; discount window; stigma; laboratory experiments |
| JEL: | E58 G01 C92 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98372&r= |
| By: | Tobias Adrian; Gaston Gelos; Nora Lamersdorf; Emanuel Moench |
| Abstract: | We document that U.S. monetary policy shocks have highly persistent but asymmetric effects on U.S. Treasury and global bond yields, with a clear break around the Great Financial Crisis (GFC). Prior to the GFC, tightening shocks used to lead to a pronounced hump-shaped increase of Treasury yields across maturities. Yields used to respond little to easing shocks as term premiums would rise strongly, offsetting the associated decline of expected policy rates. Since the GFC, term premiums have been declining persistently following both tightening and easing shocks. As a result, post-GFC tightening shocks only have transitory positive effects on yields, which reverse later. The response of advanced-economy and emerging market sovereign yields essentially mimics the pattern observed for Treasury yields. Consistent with recent work by Kekre et al. (2022) we find that changes in the duration of primary dealer Treasury portfolios pre- and post-GFC are highly informative about the sign of the term premium response to policy shocks, but cannot explain the full picture. The observed puzzling persistence of returns is likely to stem at least in part from slow and persistent mutual fund flows following monetary policy surprises. |
| Keywords: | spillovers, monetary policy, yield curve, capital flows |
| JEL: | F32 E43 E52 G12 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1195&r= |
| By: | Klaus Adam; Andrey Alexandrov; Henning Weber |
| Abstract: | We empirically identify the effect of inflation on relative price distortions, using a novel identification approach derived from sticky price theories with time or state-dependent adjustment frictions. Our approach can be directly applied to micro price data, does not rely on estimating the gap between actual and flexible prices, and only assumes stationarity of unobserved shocks. Using the micro price data underlying the U.K. CPI, we document that suboptimally high (or low) inflation is associated with distortions in relative prices. At the level of individual products, the marginal effect of inflation on relative price distortions is highly statistically significant and aligns well with theoretical predictions. Cross-sectional price dispersion turns out to be predominantly driven by movements in the dispersion of flexible prices and thus fails to comove with inflation over time. In contrast, cross-sectional price distortions are found to increase with aggregate inflation. |
| Keywords: | inflation, relative pric distortions, structural identification |
| JEL: | E31 E58 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_406v2&r= |
| By: | S. Borağan Aruoba; Andrés Fernández; Daniel Guzmán; Ernesto Pastén; Felipe Saffie |
| Abstract: | Uncertainty triggers two confounding effects: a realization and an anticipation effect. By using the 2019 riots in Chile as a quasi-natural experiment, we show that the pricing behavior of supermarkets is consistent with a pure anticipation effect: during the 31-day period following the start of the Riots, supermarkets reduce the frequency of price changes and, conditional on a price change, the absolute magnitude of price changes increase. A quantitative menu cost model with news about a future increase in idiosyncratic demand dispersion can deliver these pricing dynamics. The effectiveness of monetary policy crucially depends on the timing of the intervention. |
| JEL: | E31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32538&r= |
| By: | Ampudia, Miguel; Lombardi, Marco Jacopo; Renault, Théodore |
| Abstract: | This paper studies the pass-through from wages to producer prices using sectoral disaggregated data for the euro area. We find a positive and statistically significant wage-price pass-through that reaches 50% after three years, which differs across sectors. The wage-price pass-through in private servicesis significantly higher than in industry and takes longer before reaching its peak. While a higher labour intensity is a key component of the pass-through, our estimates indicate that differences in sectoral labour shares alone cannot explain the larger wage-price pass-through in private services compared to industry. Instead, the estimates hint at an important role for international competition in the domestic market for the tradeable sector. They also suggest that the sales destination matters: wage growth contributes to domestic inflation for goods but not to export inflation. Finally, we also provide evidence of an increase in the wage-price pass-through after 2020, particularly in private services. JEL Classification: E24, E31 |
| Keywords: | inflation dynamics, international competition, sectors, wage-price pass-through |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242948&r= |
| By: | Bilbiie, F. O.; Monacelli, T.; Perotti, R. |
| Abstract: | Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity-making fiscal and monetary policy inextricably linked for aggregate-demand management. Movements in inequality induced by fiscal transfers make the flexible-price equilibrium suboptimal, thus triggering a stabilization vs redistribution tradeoff. Likewise, changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives. |
| Keywords: | Inequality, Redistribution, Aggregate Demand, Fiscal Transfers, Optimal Monetary-Fiscal Policy, TANK |
| JEL: | D91 E21 E62 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2421&r= |
| By: | Andrés Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | We develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator—a feedback loop between inflation and the fraction of price changes—which significantly increases the slope of the Phillips curve during periods of high inflation. Applied to the U.S. time series, our model predicts that the slope of the Phillips curve ranges from 0.02 in the 1990s to 0.20 in the 1970s and 1980s. |
| JEL: | E3 E40 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32531&r= |
| By: | Manuel Amador; Javier Bianchi |
| Abstract: | We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts. |
| Keywords: | Self-fulfilling bank runs; Banking crises; Macroprudential policy |
| JEL: | E32 G21 G01 G33 E44 E58 |
| Date: | 2024–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:98383&r= |
| By: | Randrianarisoa, Radoniaina |
| Abstract: | This paper seeks to determine the existence of a stable demand for money relation for the case of Madagascar. We use an Engle-Granger error correction model to be able to demonstrate that in the long-run, the demand for money is negatively explained by the opportunity cost and positively by real income and the proxy for financial innovation. The latter, when taken into account, produces a less stable demand than when real income and opportunity cost are only used. Hence, the real demand for money in Madagascar is considered as stable, but fragile. This situation justified the migration to a more forward-looking monetary policy regime. |
| Keywords: | money demand, financial innovation, cointegration, vector error-correction model |
| JEL: | E41 |
| Date: | 2024–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121170&r= |
| By: | Jason Kim (Brown University); Marco Mello (University of Aberdeen); Cosimo Petracchi (DEF, University of Rome "Tor Vergata") |
| Abstract: | Compiling a novel dataset of prices for products sold in sixteen European countries starting in 1972, we establish that monetary-regime breaks, from peg to floating regimes, increase not only the volatility of nominal exchange rates, but also the volatility of product-level real exchange rates. Our result holds for any type of products—tradables versus nontradables—although the volatility of the real exchange rates of tradables responds less to breaks than the volatility of the real exchange rates of nontradables. Overall, the law of one price is less likely to hold under floating regimes for both tradables and nontradables |
| Date: | 2024–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:579&r= |
| By: | Vanessa Kunzmann |
| Abstract: | I estimate regime-dependent spillover effects from government spending shocks across the members of the European Monetary Union (EMU). I use panel regressions for a total of 14 EMU economies from 1997 to 2022. Government spending shocks are defined by unexpected innovations to forecast predictions of government purchases, similar to Auerbach and Gorodnichenko (2013). However, In contrast to business cycle dependence, I investigate the quantitative impact of different fiscal policy regimes of the targeted country, the country of origin, and the monetary union on the spillover multipliers. Thereby, I allow fiscal and monetary policy to follow a two- state Markov Switching process characterizing an active and a passive regime as in Leeper (1991). Thus, governments differ in their debt reduction efforts to satisfy their budget constraint and monetary policy varies between inflation targeting and restrained price level determination. I find that spillover multipliers are highly regime-dependent, with positive and significant effects when the targeted country is active and the country of origin is passive. These effects are consistent but even larger for members with a high level of debt. However, results suggest that the importance of union-wide fiscal behavior and that of the central bank matters more for highly indebted countries. Thus, the interest rate channel is gaining relevance when debt is high. (JEL: F41;F42;F45; E62; C23) |
| Keywords: | Fiscal Policy; Fiscal Spillovers; Fiscal Multiplier; Multiplier; European Monetary Union; Regime Switching; Fiscal Policy Rules, Monetary-Fiscal Interaction |
| Date: | 2023–08 |
| URL: | https://d.repec.org/n?u=RePEc:bav:wpaper:227_kunzmann&r= |
| By: | Takemaro Yutani (Bank of Japan); Edmundmichikazu Howard (Bank of Japan); Tomoaki Yoshino (Bank of Japan); Masato Higashi (Bank of Japan) |
| Abstract: | This paper focuses on the cost structure of services covered by the SPPI to capture the impact of labor costs on the underlying inflation of the SPPI, reclassifying price indices based on the labor cost ratio. |
| Keywords: | Wage; the Services Producer Price Index; Labor cost ratio |
| JEL: | E31 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev24e06&r= |
| By: | Mauricio Barbosa-Alves; Javier Bianchi; César Sosa-Padilla |
| Abstract: | This paper investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask, should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we uncover that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads. |
| Keywords: | International reserves; rollover crises; Sovereign debt |
| JEL: | E40 F34 F32 E50 F41 |
| Date: | 2024–04–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:98384&r= |
| By: | Kim Karlsson, Hyunjoo (Department of Economics and Statistics); Li, Yushu (Department of Mathematics, University of Bergen, Norway) |
| Abstract: | This paper investigates daily exchange rate volatility behaviors with a focus on a small open economy’s currency, the Swedish krona (SEK), against four currencies: the U.S. dollar, Euro, the Pound Sterling (GBP), and the Norwegian krone (NOK) over the whole period from Jan. 2010 to March 2023, whereas the whole period is divided into different sub-sample periods based on the economic events. In the framework of APARCH models, we find that volatility behavior of the Swedish krona (SEK) exchange rates varies across different currency pairs (SEK being included in all cases) and sub-sample periods. Precisely, a negative asymmetric return-volatility relationship was found for the case of the SEK/EUR exchange rate, while an inverted asymmetric relationship was detected in the case of SEK/NOK exchange rate. Significant asymmetric effects of volatility in the SEK/USD and SEK/GBP exchange rates were not observed for either the whole period or the three sub-sample periods. As the return of exchange rate are all non-normally distributed, we then use a distribution-free support vector machine-based regression, called support vector regression (SVR), to estimate and forecast volatility in the framework of the chosen APARCH model for each krona exchange rate. The result shows that the SVR-APARCH based volatility forecasting performs better than the forecasting based on APARCH model estimated by maximum likelihood estimation (MLE). |
| Keywords: | Conditional volatility; volatility; SVR; Wavelet; Asymmetry; APARCH |
| JEL: | C14 C53 F31 |
| Date: | 2024–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:vxesta:2024_010&r= |
| By: | Ryuichiro Izumi (Department of Economics, Wesleyan University); Yang LI (Singapore University of Social Sciences) |
| Abstract: | The banking turmoil of 2023 highlighted how technological advancements have significantly accelerated the speed of bank runs. This paper investigates the impact of these faster bank runs on the effectiveness of policy interventions by interpreting them as a constraint on the relative speed of policy responses. Using a model of bank runs and ex-post policy responses, we examine how delays caused by this constraint affect financial fragility and welfare. We find that while delays exacerbate welfare loss by distorting allocations, they may also decrease fragility by making banks more cautious. We explore the optimal level of structural delay, balancing the trade-off between distributional distortions and financial fragility. |
| Keywords: | Bank runs, Delayed Intervention, Speed of Bank Runs |
| JEL: | G21 G28 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:wes:weswpa:2024-006&r= |
| By: | Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | The Russian authorities have been battling strong depreciation pressures, with the rouble having lost around 30% of its value since early 2023 (and inflationary pressures having risen strongly). The main reason for this is the declining supply of foreign exchange from foreign trade transactions, due to (i) a steady rise in the share of export contracts denominated in roubles, and (ii) the declining share of export earnings in foreign currency converted into roubles. To address the latter problem, on 16 October the authorities imposed a surrender requirement for export proceeds, which has proved highly effective at stabilising the exchange rate. However, despite this and a sharp rise in the policy rate of 7.5 pp in total since June, inflation has continued to accelerate, reflecting the ongoing expansionary fiscal stance, but also the lengthy nature of some monetary transmission mechanisms. |
| Keywords: | surrender requirement, exchange rate, inflation, credit growth |
| JEL: | E31 E5 F31 F32 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:wii:rusmon:2&r= |
| By: | Pablo Ottonello; Diego J. Perez; William Witheridge |
| Abstract: | We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with production externalities and show that the desirability of these policies critically depends on the dynamic patterns of externalities. When they are stronger in earlier stages of development, economies that are converging to the technological frontier can improve welfare by intervening in foreign exchange markets, keeping the exchange rate undervalued, and speeding the transition; economies that are not converging to the technological frontier are better off not using the exchange rate as an industrial policy tool. Capital-flow mobility and labor market dynamism play a central role in the effectiveness of these policies. We also discuss the role of capital controls as an industrial policy tool and use our framework to interpret historical experiences. |
| JEL: | F0 F3 F4 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32522&r= |
| By: | Stephanie Ettmeier; Alexander Kriwoluzky |
| Abstract: | We investigate the interplay of the monetary-fiscal policy mix during times of crisis by drawing insights from the Great Inflation of the 1960s and 1970s. We use a Sequential Monte Carlo (SMC) algorithm to estimate a DSGE model with three distinct monetary/fiscal policy regimes. We show that in such a model SMC outperforms standard sampling algorithms because it is better suited to deal with multimodal posteriors, an outcome that is highly likely in a DSGE model with monetary-fiscal policy interactions. From the estimation with SMC a differentiated perspective results: pre- Volcker macroeconomic dynamics were similarly driven by passive monetary/passive fiscal policy and fiscal dominance. We apply these insights to study the post-pandemic inflation period. |
| Keywords: | Bayesian Analysis, DSGE Models, Monetary-Fiscal Policy Interactions, Monte Carlo Methods |
| JEL: | C11 C15 E63 E65 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_565&r= |
| By: | Daniela Balutel; Christopher Henry; Jorge Vásquez; Marcel Voia |
| Abstract: | Cryptoassets, such as Bitcoin, represent a new type of financial technology that has grown substantially in recent years in terms of market size. Previous research has documented the characteristics and motivations of early Bitcoin adopters, but less work has been done studying those who choose to exit the Bitcoin market. We develop a theoretical model of both entry and exit to the Bitcoin market, the dynamics of which are driven by agents’ beliefs about Bitcoin’s survival. We connect the model to micro-level data from Canada, allowing us to empirically test the role of beliefs in transitioning to past ownership. Using a control function approach with appropriate exclusion restrictions, we estimate the effects of beliefs while controlling both for selection into or out of Bitcoin ownership and for possible simultaneity. We find evidence that beliefs are significant predictors of exit, while the size and direction of these effects differ across time and ownership status. |
| 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:24-22&r= |
| By: | Marco Cipriani; Thomas M. Eisenbach; Anna Kovner |
| Abstract: | We use high-frequency interbank payments data to trace deposit flows in March 2023 and identify twenty-two banks that suffered a run, significantly more than the two that failed but fewer than the number that experienced large negative stock returns. The runs were driven by large (institutional) depositors, rather than many small (retail) depositors. While the runs were related to weak fundamentals, we find evidence for the importance of coordination because run banks were disproportionately publicly traded and many banks with similarly bad fundamentals did not suffer a run. Banks that survived a run did so by borrowing new funds and then raising deposit rates, not by selling liquid securities. |
| Keywords: | bank runs; payments; coordination; public signals |
| JEL: | E41 E58 G01 G21 G28 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98373&r= |
| By: | Jan Muckenhaupt (Technische Universität München (TUM)); Martin Hoesli (University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School); Bing Zhu (Technische Universität München (TUM)) |
| Abstract: | Assets’ capability to hedge against inflation has again come to the forefront given the recent surge in inflation. This paper investigates the inflation-hedging capability of an important asset class, i.e., listed real estate (LRE), using data from 1990 to the end of 2023, for the main European countries in terms of LRE market capitalization, but also the U.S. By using a Panel Markov switching vector error correction model (MS-VECM), we identify the hedging ability of LRE in crisis and non-crisis periods, both in the short and long term. We additionally compare the hedging ability of LRE with that of other asset classes. Listed real estate provides an effective hedge against inflation in the long run, both in crisis and non-crisis periods. In the short term, listed real estate only hedges against inflation in stable periods. LRE effectively serves as a hedge against inflation shocks, particularly protecting against unexpected inflation from the first month and against energy inflation during stable periods. While stocks surpass LRE in long-term inflation protection and LRE has short-term benefits, gold distinguishes itself from LRE by offering reliable long-run protection, but only in economic downturns. The results should provide important insights to investors seeking to allocate resources more efficiently in those turbulent times, both for the short and long terms. |
| Keywords: | Inflation Hedging, Listed Real Estate Companies, Markov-Switching, Unexpected Inflation, Impulse Response Functions |
| JEL: | G11 G15 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2434&r= |
| By: | Mr. Sam Ouliaris; Ms. Celine Rochon |
| Abstract: | This paper tests whether Japan's key macro policy multipliers have declined since 2013, the year that Japan introduced Qualitative and Quantitative Easing. We use the augmented Blanchard-Perotti structural VAR model introduced in Ouliaris and Rochon (2021) to study the dynamic effects of shocks in the central bank’s asset holdings, interest rates, and debt levels relative to GDP on economic activity in Japan. We find that both the expenditure and tax multipliers of Japan have fallen, implying that the effectiveness of fiscal policy in Japan declined following the change in monetary policy. Moreover, we find that the efficacy of quantitative easing is small, implying the need for huge interventions to have a significant effect on real GDP, and that the effectiveness of quantitative easing has declined since 2013. We argue that the reduction in policy multipliers can be attributed to the upward trend in the government debt level relative to GDP which, despite historically low interest rates, has increased Japan’s structural deficit, and the likelihood of reduced expenditures and higher taxes going forward. |
| Keywords: | fiscal multipliers; structural VAR |
| Date: | 2024–06–07 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/113&r= |
| By: | Tom Arend; Jarmila Botev; Emmanuelle Guidetti; Annabelle Mourougane; Minsu Park |
| Abstract: | This paper examines the presence of seasonality in CPI in 36 OECD economies that provide monthly CPI data and reviews the properties of standard methods, namely X-13 and TRAMO-SEATS, in performing the adjustment. Evidence from statistical tests points to the presence of seasonality in headline CPI and its components, with stronger seasonality in some components. There are also indications of changes in seasonal pattern from 1980 to 2022, but it is not systematic across countries. Simulations suggest that differences between the two methods are small when applied to CPI in OECD countries in normal times. Differences between the direct (adjusting all-item CPI and components independently) and the indirect (aggregating the seasonally adjusted components) approaches are also minimal when using the 12 divisions of the 1999 COICOP classification, limiting the need for a reconciliation method. Although large shocks should in theory affect seasonal adjustment, there is no strong evidence of a change in CPI seasonal patterns following the COVID-19 pandemic. This issue needs, however, to be revisited once the effects of the shock, including its impact on inflation have fully dissipated. The extent of revisions implied by the seasonal adjustment should be among the criteria for choosing a seasonal adjustment method, as CPI is often used in indexation and legal documents. The paper provides a summary of how communication is handled by selected OECD countries and provides a list of best practices that can be drawn upon by a National Statistical Office aiming to publish seasonally adjusted CPI. |
| Keywords: | CPI, seasonal adjustments |
| JEL: | C43 C82 E31 |
| Date: | 2024–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:oec:stdaaa:2024/04-en&r= |
| By: | Jonas Grangeray (CEPN - Centre d'Economie de l'Université Paris Nord - LABEX ICCA - UP13 - Université Paris 13 - Université Sorbonne Nouvelle - Paris 3 - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité - Université Sorbonne Paris Nord - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord) |
| Abstract: | During the Great Depression, the 100% reserve banking proposal was put forward by several leading economists, including Henry Simons and Irving Fisher. The central idea of 100% reserve is to make money exogenous, under the control of the State. This article demonstrate, by comparing his writings with those of Fisher, that Simons understood the fundamental limit to 100% reserves : money is and will remain endogenous even after the reform. |
| Abstract: | Durant la Grande Dépression, la proposition de 100% réserves est mise en avant par une série d'économistes de premier plan, dont Henry Simons et Irving Fisher. L'idée centrale du 100% réserves est de rendre la monnaie exogène, sous le contrôle de l'État. On montre dans cet article, en confrontant ses écrits avec ceux de Fisher, que Simons avait compris la limite fondamentale posée au 100% réserves : la monnaie est et restera endogène même une fois la réforme mise en œuvre. |
| Keywords: | Henry Simons, Irving Fisher, 100% reserve banking, fractional-reserve banking, exogenous money, endogenous money, near money, velocity of money, 100% réserves, système bancaire à réserves fractionnaires, monnaie exogène, monnaie endogène, quasi-monnaies, vélocité de la monnaie, Henry Simons Irving Fisher 100% réserves système bancaire à réserves fractionnaires monnaie exogène monnaie endogène quasi-monnaie vélocité de la monnaie Henry Simons Irving Fisher 100% reserve banking fractional-reserve banking exogenous money endogenous money near money velocity of money JEL, quasi-monnaie, vélocité de la monnaie Henry Simons, velocity of money JEL |
| Date: | 2024–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04611718&r= |
| By: | Purva Gole (EHESS, Paris); Erica Perego (CEPII, Paris); Camelia Turcu (LEO, University of Orl´eans) |
| Abstract: | In this paper, we reconsider the role of uncertainty in explaining uncovered interest rate parity (UIP) deviations by focusing on 60 emerging and developing (EMDE) and advanced (AE) economies, over the period 1995M1–2023M3. We show that differentiating between EMDE currencies and AE currencies is crucial for understanding UIP deviations as the behaviour of excess returns differs in the two groups in periods of uncertainty: deviations become wider for EMDEs and narrow for AEs. These new results are consistent with the idea that in periods of uncertainty, global investors might change their risk preferences and move from high currency-risk investments in EMDEs towards less risky ones in AEs. This evidence holds for both the short-run and long-run UIP, and becomes stronger since the Global Financial Crisis (GFC). |
| Keywords: | Uncertainty, uncovered interest rate parity, risk premia, emerging countries |
| JEL: | E |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2024.5&r= |