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on Monetary Economics |
| By: | Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann |
| Abstract: | This paper first shows that, contrary to conventional wisdom, the European Central Bank (ECB) can influence global energy prices. Second, through Lucas critique-robust counterfactual analysis, we uncover that the ECB’s ability to affect fast-moving energy prices plays an important role in the transmission of monetary policy. Third, we empirically document that, to optimally fulfill its primary mandate, the ECB should swiftly tighten policy in response to an increase in energy prices. Crucially, the tightening required depends on the ECB’s ability to influence global energy prices. Finally, we find this policy strategy could have largely prevented the post-pandemic inflation episode. |
| Keywords: | Inflation, energy prices, monetary policy transmission mechanism |
| JEL: | C22 E31 E52 Q43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2089&r= |
| By: | Lukas Hack; Klodiana Istrefi; Matthias Meier |
| Abstract: | Conventional strategies to identify monetary policy shocks rest on the implicit assumption that systematic monetary policy is constant over time. We formally show that these strategies do not isolate monetary policy shocks in an environment with time-varying systematic monetary policy. Instead, they are contaminated by systematic monetary policy and macroeconomic variables, leading to contamination bias in estimated impulse responses. Empirically, we show that Romer and Romer (2004) monetary policy shocks are indeed predictable by fluctuations in systematic monetary policy. Instead, we propose a new monetary policy shock that is orthogonal to systematic monetary policy. Our shock suggests U.S. monetary policy has shorter lags and stronger effects on inflation and output. |
| Keywords: | Systematic monetary policy, monetary policy shocks, identification |
| JEL: | E32 E43 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_557&r= |
| By: | J. David López-Salido; Emily J. Markowitz; Edward Nelson |
| Abstract: | By examining statements made by the Federal Reserve leadership since the early 1950s, we establish that there has been considerable continuity in policymakers’ perceptions of the benefits of price stability. Policymakers have consistently contended that deviations from price stability give rise to greater cyclical instability, and they have also frequently suggested that potential output is significantly lowered by inflation. The recurrent support for price stability that comes through in these statements implies that it is invalid to take periods in the U.S. record of deviations from price stability as indicating a policymaker belief in the desirability of inflation. |
| Keywords: | Dual mandate; Federal Reserve; Price stability; Costs of inflation; Phillips curve; Superneutrality; Monetary policy objectives |
| JEL: | E31 E52 E58 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-41&r= |
| By: | Ochen, Ronald |
| Abstract: | This paper investigates the underlying dynamic relationships between monetary policy, bank lending, and inflation during the post-pandemic recovery era in the East African Community. To achieve this, I analysed monthly macroeconomic data on central bank rates, consumer price index, lending interest rates, commercial bank foreign assets, net foreign assets, bank loans, and the US Fed funds rates from January 2021 to June 2023 using a panel Vector Autoregressive model. Empirical results from the East African Community as a bloc and in specific countries indicate that when the central bank rate increases by one standard deviation, there is a decrease in the bank loans available for lending. Additionally, there is a decline in the consumer price index, although it remains positive. Also, a one standard deviation shock in consumer price index leads to a decrease in bank loans in first periods but later, bank loans pick up and gain a positive stance while central bank rates remain positive throughout the 12 periods. Conversely, commercial bank lending interest rates increase when the central bank rate increases by one standard deviation. Moreover, when the US Fed funds rate increases by one standard deviation, there is a decrease in commercial bank foreign assets (loans and deposits), but an increase in the central bank rate and lending interest rates. These findings emphasize that the bank lending channel of transmission of monetary in EAC is susceptible to domestic and external shocks thus commercial bank's capacity to create credit is compromised in response to a tight monetary policy stance. |
| Keywords: | Monetary Policy, Bank Lending, Inflation, Post-Pandemic Recovery Era, PVAR, East African Community |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297993&r= |
| By: | Hilpert, Hanns Günther |
| Abstract: | In China, money, currency and payment transactions are manifestations of state sovereignty and political power. The primary objective of Chinese monetary policy is to maintain domestic stability, expand the scope of its own influence internationally, and reshape the global financial and monetary system to make it more compatible with the structures of the Chinese one-party state. China is pursuing the internationalisation of the renminbi on several tracks in small persistent steps and with a long-term perspective, but it has so far shied away from the decisive transition to convertibility. For the time being, the renminbi does not play a significant role on the global financial and currency markets. However, it is gaining ground as a trading, credit and reserve currency in Asia and the Global South. China is a pioneer in the development and introduction of digital central bank money. It is striving to play a leading role in the digitalisation of international payment transactions. Prospectively, the technology and infrastructure developed in China and the standards set for cross-border payments using blockchain and real-time transactions could replace the current international banking and clearing system in a cost-effective manner. The Chinese leadership believes that digital central bank money offers great potential: In terms of domestic policy, it creates further opportunities for surveillance and repression. Internationally, it would become easier for China and third countries to circumvent Western financial sanctions. In response to China's currency campaign, the European Union and the European Central Bank should step up their own efforts to internationalise and digitise the euro. Europe should avoid dependence on China when it comes to the future critical infrastructure of an interoperable system for international payments with digital central bank money. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swprps:298842&r= |
| By: | Arndt, Sarah |
| Abstract: | In this paper, I investigate how inflation signals from different types of newspapers influence household inflation expectations in Germany. Using text data and the large language model GPT-3.5-turbo-1106, I construct newspaper-specific indicators and find significant heterogeneity in their informativeness based on the genre—tabloid versus reputable sources. The tabloid’s indicator is more effective for predicting perceived inflation among low-income and lower-education households, while reputable newspapers better predict higher-income and more educated households’ expectations. Local projections reveal that tabloid sentiment shows an immediate decrease following a monetary policy shock, whereas responses from reputable newspapers are smaller and delayed. Household expectations also vary depending on the type of newspaper affected by the sentiment shock and the socioeconomic background of the household. These findings underscore the differentiated impact of media on inflation expectations across various segments of society, providing valuable insights for policymakers to tailor communication strategies effectively. |
| Keywords: | Inflation expectations; text mining; forecasting; monetary policy; LLM; ChatGPT |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:awi:wpaper:0748&r= |
| By: | Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Jamel Saadaoui; Gazi Salah Uddin |
| Abstract: | We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004 - 2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience. |
| Keywords: | Monetary policy cycle, emerging market, resilience, macroeconomic fundamentals, Federal Reserve. |
| JEL: | E58 F31 F62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-26&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:camdae:2432&r= |
| By: | D.M. Nachane (Indira Gandhi Institute of Development Research) |
| Abstract: | During episodes of severe depression, interest rates can approach the zero lower bound (ZLB) and stay there for a fairly long time. Mainstream macroeconomic theory (the so-called New Consensus Economics) then fails to provide adequate guidance under a Taylor type rule to conventional monetary policy. Various alternatives have been suggested to revitalize monetary policy in such a situation. The major alternatives can be divided into three categories viz. (i) those that do not recognize the ZLB as an effective floor (ii) those based on the Keynesian liquidity trap and (iii) those based (implicitly) on Hawtrey's credit deadlock. We discuss these alternatives with a special focus on QE (Quantitative Easing). In particular, we draw attention to the largely ignored fact that QE had been suggested by the British economist Hawtrey at least as early as 1931 in the policy debates on ways to emerge from the Great Depression. |
| Keywords: | Zero lower bound, Price-gap target, Currency depreciation, Forward guidance, Quantitative easing, Liquidity trap, Credit deadlock |
| JEL: | E4 E5 N1 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-005&r= |
| By: | Lidiema, Caspah |
| Abstract: | The aim of this study was to examine the effectiveness of monetary and fiscal policies with a view to establishing the existence of fiscal dominance in Kenya. The study employed monthly data for the period Jan 2010 - Dec 2022. Using Structural Vector Autoregressive (SVAR) Model, the study captured price dynamics through the three channels of foreign exchange, inflation and lending rates. All data was obtained from the Central Bank of Kenya online repositories. The empirical assessment of this paper leads to three broad insightful conclusions. First, from policy front, monetary policy is not fully effective in controlling and stabilizing prices especially inflation; two, expansionary fiscal policy is not only inflationary but leads to higher interests' rates as well and three: there exists traces of fiscal dominance even though it does not appear to very high form of fiscal dominance (which this study calls the slow intrusion of fiscal policy into the monetary policy space). The study therefore concludes that while fiscal dominance may not be very pronounced, there is need to review the interplay between monetary and fiscal policies to fully gain from the interdependence of the two policies by stabilizing prices and enhancing growth as expected and avoid macro-economic instability that comes with fiscal dominance. The paper recommends reducing government borrowing especially domestic borrowing, cutting unnecessary spending, directing spending towards development projects like infrastructure or social-economic projects and sectors that support or influence growth; establish the necessity of currency pegging to avoid unpleasant multiplier effect of fiscal dominance, review the emergence and effects of dollarization in Kenya and lastly review of fiscal policy and establish if there is a need for a Fiscal Policy Committee (FPC). |
| Keywords: | Monetary Policy, Fiscal Policy, Fiscal dominance, inflation, interest rates, interest rates, dollarization, SVAR |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297992&r= |
| By: | Lee, Neil; Pardy, Martina; Mcneil, Andrew |
| Abstract: | The early 2020s saw a spike in inflation across much of the advanced world, with pervasive economic consequences. There is strong evidence that economic shocks generally have political consequences, but few studies have specifically focused on inflation. In this paper, we address this gap using an original, pre-registered survey experiment in the United Kingdom, a country which saw the highest consumer price inflation in 40 years and a major cost of living crisis. First, we describe how individuals, on average, are only neutral in their confidence in the Bank of England’s and economists’ ability to tackle inflation. The population is even more pessimistic regarding the government’s abilities. Second, using an experimental survey vignette, we causally identify the effect of reminding and/or informing participants about the high levels of inflation. While our treatment shifts inflation expectations, we find no evidence that it reduces trust in government, the bank of England, nor economists more generally. Instead, we find weak evidence that respondents blame corporations. Inflation also makes citizens less likely to support public sector pay rises although we find no effect on authoritarianism, redistribution attitudes, attitudes towards overseas trade, or optimism towards the future. |
| Keywords: | inflation; political attitudes; political trust; authoritarianism; survey experiment |
| JEL: | N0 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123926&r= |
| By: | Stefano Gnocchi; Fanny McKellips; Rodrigo Sekkel; Laure Simon; Yinxi Xie; Yang Zhang |
| Abstract: | We explain how the Bank of Canada’s policy models capture the trade-off between output and inflation in Canada. We start by briefly revisiting the determinants of the New Keynesian Phillips curve. Next, we provide an overview of the Phillips curves that are currently embedded in the two main policy models the Bank uses for macroeconomic projections and analysis, known for short as ToTEM and LENS. We then discuss the challenges in identifying the trade-off between output and inflation and provide new estimates of the trade-off using recently proposed methods. Finally, we contrast these estimates with the ones in the Bank’s policy models. |
| Keywords: | Business fluctuations and cycles; Econometric and statistical methods; Inflation and prices; Monetary policy transmission |
| JEL: | E3 E31 E5 E52 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-07&r= |
| By: | Francesco Furlanetto; Antoine Lepetit |
| Abstract: | We review recent developments in the estimation and identification of the Phillips curve and its slope. We have three main objectives. First, we describe the econometric challenges faced by traditional approaches of estimating the Phillips curve, explain how new approaches address those challenges, and assess which limitations still remain. Second, we review the findings of those new approaches and examine the evidence regarding a potential flattening of the Phillipscurve in the pre-pandemic period. Third, we provide an account of inflation dynamics in the post-pandemic period with a particular emphasis on the role of nonlinearities. |
| Keywords: | Inflation dynamics; Phillips curve flattening; Phillips curve nonlinearities; Phillips curve slope |
| JEL: | C51 E24 E31 E52 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-43&r= |
| By: | Francisca Sara-Zaror |
| Abstract: | In standard macroeconomic models, the costs of inflation are tightly linked to the price dispersion of identical goods. Therefore, understanding how price dispersion empirically relates to inflation is crucial for welfare analysis. In this paper, I study the relationship between steady-state inflation and price dispersion for a cross section of U.S. retail products using scanner data. By comparing prices of items with the same barcode, my measure of relative price dispersion controls for product heterogeneity, overcoming an important challenge in the literature. I document a new fact: price dispersion of identical goods increases steeply around zero inflation and becomes flatter as inflation increases, displaying an Upsilon-shaped pattern. Current sticky-price models are inconsistent with this finding. I develop a menu-cost model with idiosyncratic productivity shocks and sequential consumer search that reproduces the new fact and exhibits realistic price-setting behavior. In the model, inflation-induced price dispersion increases shoppers' incentives to search for low prices and thus competition among retailers. The positive welfare-maximizing inflation rate optimally trades off the efficiency gains from lower markups and the resources spent on search. |
| Keywords: | Consumer search; Welfare; Microdata; Inflation |
| JEL: | E31 E50 L11 L16 |
| Date: | 2024–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-47&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:camdae:2436&r= |
| By: | Jeremy Majerovitz |
| Abstract: | How soon can economists predict inflation over a full year if they have only the first few months of data? This statistical analysis examines that question. |
| Keywords: | inflation predictions |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98457&r= |
| By: | Vaishali Garga; Giovanni P. Olivei; J. Christina Wang |
| Abstract: | Wage inflation remains higher than it was before the onset of the COVID-19 pandemic, raising concerns that it could hinder progress toward a return of price inflation to the Federal Reserve’s 2 percent target. The impact of wage inflation on price inflation, however, cannot be considered independently of the behavior of productivity and firms’ markups. In that context, there are scenarios in which wage inflation could stay above trend for a few more quarters without contributing to higher price inflation. |
| Keywords: | wage inflation; productivity |
| JEL: | E24 E31 E39 |
| Date: | 2024–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:98463&r= |
| By: | Yoichi Ueno (Bank of Japan) |
| Abstract: | This paper investigates changes in the linkage between wages and prices in Japan by using a dynamic factor model of disaggregated wages and prices with heteroscedasticity- and autocorrelation-robust inference. The empirical results show that the model is better at identifying the underlying trends in wage and price inflation than models using only aggregate data. In addition, the trend component of services price inflation is the best indicator to gauge the underlying trend in price inflation among indicators examined in this paper. Further, wages and prices decoupled around 1998, but they have recoupled to some extent in the post-COVID-19 era. Lastly, the volatility of the common trend component of wage and price inflation determines the strength of the linkage between wages and prices, and it closely tracks an indicator which shows importance on price inflation when firms revise wages in negotiations. |
| Keywords: | Price Inflation; Wage Inflation; Unobserved Components Model; Factor Model |
| JEL: | E31 E37 J31 |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e07&r= |
| By: | Miguel Acosta; Connor M. Brennan; Margaret M. Jacobson |
| Abstract: | Eurodollar futures were the bedrock for constructing high-frequency series of monetary policy surprises, so their discontinuation poses a challenge for the continued empirical study of monetary policy. We propose an approach for updating the series of Gurkaynak et al. (2005) and Nakamura and Steinsson (2018) with SOFR futures in place of Eurodollar futures that is conceptually and materially consistent. We recommend using SOFR futures from January 2022 onward based on regulatory developments and trading volumes. The updatedseries suggest that surprises over the recent tightening cycle are larger in magnitude than those seen over the decade prior and restrictive on average. |
| Keywords: | Monetary surprises; Causal estimates of monetary policy; High-frequency identification |
| JEL: | E32 E52 E31 E58 |
| Date: | 2024–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-34&r= |
| By: | Masuda, Kazuto (Bank of Japan) |
| Abstract: | We introduce the quantity theory of money into the Harrod–Balassa–Samuelson effect model. Our policy rule specifies the impossibility of perfect exchange rate stability with monetary policy, as Friedman (1953) suggests. We discover the importance of inflation to technological progress, while the rent-seeking behaviors in firms foster their productivity slowdowns and disinflations. Their forward-looking behaviors, like animal spirit (Keynes, 1936/1997), control outputs under the marginal productivity hypothesis with the Cobb-Douglus production function. Baumol’s (1959) sales revenue maximization hypothesis explains full employment and deflations but breaks the marginal productivity hypothesis. We briefly argue the downward stickiness of nominal wages (incomes). |
| Date: | 2024–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:nxshd&r= |
| By: | Cars Hommes (University of Amsterdam, Tinbergen Institute, Bank of Canada); Julien Pinter (Minho University, Universidad de Alicante); Isabelle Salle (University of Ottawa, University of Amsterdam, Tinbergen Institute) |
| Abstract: | We conduct an information-provision experiment within a large-scale household survey on public finance in France, The Netherlands and Italy. We elicit prior opinions via open-ended (OE) questions and introduce a measure of macroeconomic policy literacy. A central bank (CB) educational blogpost explaining the mechanics of CB money preceded by a short video clip on public finance can persistently induce less support for monetary-financed proposals, which induces more support for fiscal discipline and CB independence, no matter the respondents’ level of policy literacy. However, prior beliefs matter and contradictory information may be polarizing. Information is shown to affect views by shifting the respondents’ inflation and tax expectations associated to policy options. |
| Keywords: | Large-scale household survey, information-provision experiment, RCT, central bank communication, expectations |
| JEL: | E |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2024.9&r= |
| By: | Xie, Oliver |
| Abstract: | I develop a theory on the optimal currency choice for invoicing international goods trade in the presence of imperfect financial hedging of currency risk. I demonstrate that the classic irrelevance result—that the cost of external financial hedging does not impact the choice of currency for invoicing—rests on the assumption that sellers set prices ex-ante and commit to fulfill any order size ex-post. I refer to this set-up as sticky prices and flexible quantities. I show that when quantities are also sticky, in the sense that the order quantity is pre-specified, then financial hedging affects the optimal currency of invoicing choice. My theory of jointly sticky prices and quantities incorporates financial frictions into existing theories of real hedging. I show that this financial hedging channel is quantitatively relevant and that it generates a feedback between macroprudential policies that affect the cost of hedging, such as capital controls on domestic versus foreign borrowing, and the optimal currency of invoicing. As a result, macroprudential policies can affect the expenditure switching properties of the exchange rate by inducing a different choice of optimal currency of invoicing. |
| Date: | 2024–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:v8zdk&r= |
| By: | Tony Chernis; Gary Koop; Emily Tallman; Mike West |
| Abstract: | The macroeconomy is a sophisticated dynamic system involving significant uncertainties that complicate modelling. In response, decision makers consider multiple models that provide different predictions and policy recommendations which are then synthesized into a policy decision. In this setting, we introduce and develop Bayesian predictive decision synthesis (BPDS) to formalize monetary policy decision processes. BPDS draws on recent developments in model combination and statistical decision theory that yield new opportunities in combining multiple models, emphasizing the integration of decision goals, expectations and outcomes into the model synthesis process. Our case study concerns central bank policy decisions about target interest rates with a focus on implications for multi-step macroeconomic forecasting. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.03321&r= |
| By: | Pavlova, Lora |
| Abstract: | In a randomized experiment embedded in a survey, I test the effects of variations in question wording and format on consumer response behavior and the corresponding inflation expectations. To this end, survey participants from a representative sample of German consumers are broken down into four treatment groups and presented with different versions of a question asking for their subjective distribution for inflation over the next 12 months. As part of the experiment, two competing wordings, previously known from leading consumer surveys, are considered: (i) the change in prices in general or (ii) the inflation rate. In addition, I compare the responses to a question asking for consumers' probabilistic beliefs about future inflation, to those from a simpler one asking for the expected minimum, maximum, and most likely inflation rate over the short term. I find that response behavior varies strongly with framing. Simpler wording such as 'prices in general' and a less restrictive format lead to higher mean expected inflation, on average. While simpler wording increases individual uncertainty derived from the subjective histograms, asking for minimum, maximum and mode leads to lower uncertainty about expected inflation. |
| Keywords: | probabilistic expectations, survey design, household inflation expectations |
| JEL: | C83 D84 E31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:300015&r= |
| By: | Christopher Henry; Matthew Shimoda; Doina Rusu |
| Abstract: | We present key results from the 2023 Methods-of-Payment (MOP) Survey, including updated payment shares based on a three-day shopping diary. Results show that measures of cash management and use have remained fairly stable since 2020, along with the estimated share of payments made online. In 2023, Canadians increased their adoption of payment alternatives such as mobile apps and Interac e-Transfer. New questions were introduced into the MOP survey instrument in 2023 to measure perceived access to cash from automated banking machines and banks. |
| Keywords: | Bank notes; Digital currencies and fintech; Financial services |
| JEL: | D83 E41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-08&r= |
| By: | Schmitz, Martin; Dietrich, Andreas; Brisson, Rémy |
| Abstract: | The nominal effective exchange rate (EER) of a currency is an index of the trade-weighted average of its bilateral exchange rates vis-à-vis the currencies of selected trading partners, while the real EER is derived by adjusting the nominal index for relative prices or costs. The nominal EER provides a summary measure of a currency’s external value, while the real EER is the most commonly used indicator of the international price and cost competitiveness of an economy. Additionally, for all individual euro area countries, harmonised competitiveness indicators (HCIs) are published by the European Central Bank (ECB) based on the same methodology as the euro EERs. This paper describes how the calculation of the ECB’s EERs and HCIs has been enhanced to take into account in the underlying trade weights the evolution of international trade linkages and, in particular, the growing importance of trade in services. The paper includes an in-depth description of the methodology used to calculate these enhanced EERs and HCIs. In particular, it presents how to overcome the challenges arising from the inclusion of services trade, foremost in terms of data availability, with imputation and estimation techniques. Importantly, the ECB’s well-established methodology – which in particular accounts for competition faced by euro area exporters in third markets – did not have to be changed with the inclusion of services trade. Finally, the paper provides some evidence on the usefulness of the enhanced indicators for policymakers, economic analysts and the public at large. JEL Classification: C82, F10, F17, F30, F31, F40 |
| Keywords: | competitiveness, effective exchange rate (EER), gravity model, harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), services trade, trade weights |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbsps:202449&r= |
| By: | Sebastian Heise; Aysegul Sahin |
| Abstract: | U.S. inflation surged in the early post-COVID period, driven by several economic shocks such as supply chain disruptions and labor supply constraints. Following its peak at 6.6 percent in September 2022, core consumer price index (CPI) inflation has come down rapidly over the last two years, falling to 3.6 percent recently. What explains the rapid shifts in U.S. inflation dynamics? In a recent paper, we show that the interaction between supply chain pressures and labor market tightness amplified the inflation surge in 2021. In this post, we argue that these same forces that drove the nonlinear rise in inflation have worked in reverse since late 2022, accelerating the disinflationary process. The current episode contrasts with periods where the economy was hit by shocks to either imported inputs or to labor alone. |
| Keywords: | inflation; supply chain disruptions; COVID |
| JEL: | E31 |
| Date: | 2024–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98462&r= |
| By: | Christian Moser; Farzad Saidi; Benjamin Wirth; Stefanie Wolter |
| Abstract: | We study the distributional consequences of monetary policy-induced credit supply in the German labor market. Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages and employment. Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages. Between firms, wages fall by more at initially higher-paying employers. Our results suggest that credit affects the distribution of pay and employment both within and between firms. |
| Keywords: | Wages, Employment, Worker and Firm Heterogeneity, Credit Supply, Monetary Policy |
| JEL: | J31 E24 J23 E51 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_558&r= |
| By: | Osoro, Jared; Cheruiyot, Kiplangat Josea |
| Abstract: | Persistence of profitability in the Kenyan banking industry masks the limited understanding of the adjustment process of the profit seeking behavior during economic shocks. Whether the adjustment is in response to the adverse outcomes of the shocks, or the inevitable macroeconomic policy response is an open question. This paper seeks to assess the implication of fiscal-monetary interactions on banks' profitability. We deploy both static and dynamic panel models to estimate the influence of the macro policies using bank-level as well as macroeconomic data in Kenya for the period 2003 - 2022. We establish that both monetary policy and fiscal policy matter for bank profitability, their influence revealing the attribute of interconnectivity between the two policies. The banks' profitability is positively influenced by an expansionary fiscal policy, with a similar influence associated with a tightening monetary policy. We contend that for a given set of bankspecific attributes, if monetary and fiscal policies are prominent influencers of profitability, it signals that the banks' reaction function as profit seekers is more a response to policy adjustment to shocks than the underlying economic outcomes. The key inference based on the assessment is that banks' profit seeking attribute while riding on an expansionary fiscal policy and a tightening monetary policy entails risk taking behavior that can potentially push the economy to the boundary of the "region of stability". That puts the spotlight on the attitude of the banks' regulator and that of banks towards profitability and risk-taking and calls for two policy considerations. One is the need for a robust stresstesting framework that takes into account capital adequacy and asset quality optimal thresholds whose breaching we determine to be a possible triggers of market jitters. Two is the necessity of a stable market-based funding mechanism supported by the regulator's liquidity window and complemented by a conservative dividend policy even as profitability may persists. The two policy considerations will potentially obviate a situation where there is a realization that elusive boundaries of "the region of stability" have been breached ex post and the banking system is stable until suddenly it is not. |
| Keywords: | Bank profitability, dynamic panel threshold model, fiscal policy and monetary policy interaction |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297985&r= |
| By: | David P. Glancy; Felicia Ionescu; Elizabeth C. Klee; Antonis Kotidis; Michael Siemer; Andrei Zlate |
| Abstract: | We use high-frequency data to examine the effectiveness of the Bank Term Funding Program (BTFP) in supporting the liquidity positions of vulnerable banks during the March 2023 banking turmoil. We uncover three key findings. First, our high-frequency data confirm that banks with high reliance on uninsured deposits and large unrealized losses on securities holdings suffered larger deposit outflows at the onset of the episode. Second, the BTFP played an outsized role in meeting these outflows at banks with larger securities losses, reflecting the at-par valuation of securities collateral at the BTFP (banks at the 90th percentile in securities losses replaced 26 cents of every dollar of outflows with BTFP borrowing, compared to only 7 cents on average). Third, in addition to funding loan growth and deposit outflows, banks used the BTFP to build cash holdings, indicating that the program enabled banks to position themselves against potential future funding needs. Overall, we demonstrate that the BTFP enabled banks to meet funding needs and preserve liquidity during the period of stress. |
| Keywords: | 2023 banking turmoil; Deposit outflows; Uninsured deposits; Securities losses; Bank Term Funding Program (BTFP); Emergency liquidity facilities |
| JEL: | E52 E58 G01 G21 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-45&r= |
| By: | Christophe Lebrun (HEG - Haute Ecole de Gestion de Genève); Oetske Leroux-Fankhauser (HEG - Haute Ecole de Gestion de Genève); Natkamon Tovanich (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique); Thibault Vatter (HEG - Haute Ecole de Gestion de Genève); Arnaud Gaudinat (HEG - Haute Ecole de Gestion de Genève) |
| Abstract: | As stablecoins address the challenges of price stability in the cryptocurrency market, this paper provides a comprehensive taxonomy of stablecoins, categorizing them based on governance, value, and design dimensions. Our study aims to enrich the ongoing discourse in digital currency and provide insights into the future trajectory of stablecoins in decentralized finance. |
| Keywords: | Stablecoins, Taxonomy, Cryptocurrencies, Blockchain, Decentralized Finance (DeFi) |
| Date: | 2024–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04607181&r= |