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on Monetary Economics |
| By: | Mr. Philip Barrett; Josef Platzer |
| Abstract: | Activity and inflation responded slowly to the Federal Reserve’s rate hikes in 2022. Was this because the transmission of monetary policy had changed? Or did other shocks offset tighter policy? We use pre-pandemic data to estimate a VAR with monetary policy shocks identified from high-frequency data, and use it as a filter to back out the sequence of monetary policy shocks consistent with data since 2022. We compare these implied shocks to the actual shocks and find the difference statistically significant during February-July 2022. These differences imply that monetary transmission was around 25 percent weaker than normal. Our method accounts for other shocks; allowing them to change to match the post-COVID covariance of the data produces similar results but in a shorter period. We decompose changes in the uncertainty of our estimate and find that colinearity of shocks is generally more important than uncertainty over model parameters. We extend our analysis to central bank information shocks and find Federal Reserve communication was less powerful than usual during 2021. |
| Keywords: | Monetary Policy; Semi-structural Identification; VAR; Filtering |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/129&r= |
| By: | Michaelis, Henrike |
| Abstract: | This paper uses a time-varying vector autoregressive (VAR) model for the euro area to explore the changes in the interest rate pass-through to bank retail rates following conventional and unconventional monetary policy shocks. The median estimate of the impulse responses shows a considerably higher pass-through during crisis periods, especially the financial crisis and the coronavirus pandemic. From mid-2013 to 2015-16, the monetary policy pass-through to the bank lending rate becomes slightly stronger. In the remainder of 2016, the pass-through weakens. From then until the end of 2019, it hovers at a lower level. However, the credible intervals reveal a large uncertainty concerning the pass-through over the entire sample. Therefore, a constant and complete pass-through is clearly within the realms of possibility. Since the standard deviation of monetary policy shocks grows substantially since the onset of unconventional measures in 2011, changes in bank retail rates seem to be driven mainly by such shocks in this period. |
| Keywords: | Euro area, interest rate pass-through, time-varying vector autoregressive model, sign restrictions |
| JEL: | C11 E40 E43 E52 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299243&r= |
| By: | Emina Milišić (Central Bank of Bosnia and Herzegovina); Emina Žunić Dželihodžić (Central Bank of Bosnia and Herzegovina) |
| Abstract: | This paper examines the pass-through of European Central Bank (ECB) monetary policy to deposit rates in Bosnia and Herzegovina (B&H). We use aggregate and bank-level data to study interest rate pass-through by bank size and ownership for the period 2012-2023. In extensions, we also study pass-through by counterparty and maturity of deposit contracts. Our results suggest that average pass-through is slow and incomplete. We document that pass-through is faster and more complete for banks which are small and foreign-owned, as compared to banks which are large (and foreign-owned), or banks which are small and domestic. This finding suggests that pass-through depends both on domestic market power of banks as well as their access to foreign money markets. |
| Keywords: | monetary policy; transmission mechanism; deposit rates; currency board |
| JEL: | E42 E52 E58 E60 |
| Date: | 2024–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp10-2024&r= |
| By: | Mervyn A. King |
| Abstract: | Inflation targets were introduced well ahead of the development of the theory of inflation targeting. The practice was successful because it comprised a new set of procedures and institutions for setting monetary policy in a transparent and accountable fashion – “constrained discretion”; the later theory was less useful because it purported to be a theory of the determination of the price level. But inflation targeting does not constitute a new theory of the monetary transmission mechanism. The belief that it does led to the replacement of Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” by the new dictum that “inflation is always and everywhere a transitory phenomenon”. This had unfortunate consequences during the recent inflation. The paper concludes with a discussion of the challenges facing inflation targets in the future. |
| JEL: | E42 E43 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32594&r= |
| By: | Michael T. Kiley |
| Abstract: | Activity shortfalls are more costly than strong activity. I consider optimal monetary policy under discretion with an asymmetric (activity shortfalls) loss function. The model satisfies the natural rate hypothesis. The asymmetric loss function and resulting optimal monetary policy exacerbates shortfalls in activity. The additional frequency of activity shortfalls arises from the adjustment of expectations implied by the natural rate hypothesis. The shortfalls asymmetry leads to an inflationary bias, similar to results in the time-consistency literature. Mandating a central bank objective with greater symmetry than the social loss function improves outcomes. Greater symmetry lowers the magnitude of activity shortfalls. Greater symmetry also reduces inflation bias. The model also implies that an optimal monetary policy does not accommodate fluctuations from aggregate demand shocks, as is standard in such models. As a result, the analysis implies that monetary accommodation of strength in economic activity likely requires justifications other than asymmetric costs of shortfalls. |
| Keywords: | Monetary Policy; Rules; Discretion; Symmetric loss function; Asymmetric loss function |
| JEL: | E52 E58 E37 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-32&r= |
| By: | Paul Castillo; Mr. Ruy Lama; Juan Pablo Medina |
| Abstract: | Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In this paper we evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. We first show empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. We then develop a small open economy model with foreign currency debt and balance sheets effects. Our quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies (Christiano et al., 2021) and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization. |
| Keywords: | Foreign Exchange Intervention; Global Financial Cycle; Financial Dollarization; Balance Sheet Effects; Emerging Economies. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/127&r= |
| By: | Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post. |
| Keywords: | HANK model; heterogenous agent New Keynesian (HANK); monetary policy; inflation; inequality |
| JEL: | E12 E31 E52 D31 |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98471&r= |
| By: | Raphael Auer; Mathieu Pedemonte; Raphael Schoenle; Raphael A. Auer |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | globalization, inflation, Phillips curve, monetary policy, global value chain, international inflation synchronization |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11148&r= |
| By: | Fares Bounajm; Jean Garry Junior Roc; Yang Zhang |
| Abstract: | We explore the drivers of the surge in inflation in Canada during the COVID-19 pandemic. This work is part of a joint effort by 11 central banks using the model developed by Bernanke and Blanchard (2023) to identify similarities and differences across economies. |
| Keywords: | Economic models; Inflation and prices; Labour markets |
| JEL: | E2 E24 E3 E31 E37 E5 E52 E6 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-13&r= |
| By: | Kimundi, Gillian |
| Abstract: | Capital is central to efficient intermediation and is a core indication of the financial health of a bank. Recent shifts in monetary policy, economic shocks and contextspecific events in interbank liquidity flow in Kenya call for a revisit of banks' response through the lens of their capitalization. Using data from 27 banks between 2001 and 2021, this study first reveals that there is heterogeneity in how banks respond to policy, economic and market shifts, and that capital plays a key role in maintaining (and in some cases amplifying) balance sheet activity and cushioning operating profitability. Small, lesser-capitalized banks are more sensitive to monetary policy and shifts in interbank market liquidity, whereas large, higher-capitalized banks are more sensitive to GDP shocks. Collectively, the role of capital depends on the nature of the shock, the size of the bank and the sub-period studied. The study concludes with relevant policy and bank-level implications from these findings. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297990&r= |
| By: | Ndwiga, David |
| Abstract: | Using a Panel VAR model and annual bank level data for the period 2008-2022, this study investigated banks risk taking behaviour amid monetary policy tightening considering the role of banks' non-interest-bearing deposits and equity levels. Estimation results found monetary policy tightening and equity levels reduces the bank risk taking behavior thus evidence of monetary policy risk-taking transmission channel. However, the contrary was reported with regard to bank liability: - non - interest bearing deposit "pseudo assets". However, interaction between policy rate, equity and "pseudo assets" was found to increase bank risk appetite significantly. This study is important since under the risk-taking channel view, a change in the policy rate is immediately transmitted to money-market instruments of different maturity and to other short-term rates, such as interbank deposits and this quickly affects the interest rates that banks charge their customers for variable-rate loans, including overdrafts. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kbawps:297987&r= |
| By: | Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | This post discusses the distributional consequences of an aggressive policy response to inflation using a Heterogeneous Agent New Keynesian (HANK) model. We find that, when facing demand shocks, stabilizing inflation and real activity go hand in hand, with very large benefits for households at the bottom of the wealth distribution. The converse is true however when facing supply shocks: stabilizing inflation makes real outcomes more volatile, especially for poorer households. We conclude that distributional considerations make it much more important for policy to take into account the tradeoffs between stabilizing inflation and economic activity. This is because the optimal policy response depends very strongly on whether these tradeoffs are present (that is, when the economy is facing supply shocks) or absent (when the economy is facing demand shocks). |
| Keywords: | HANK model; heterogeneous-agent New Keynesian (HANK); monetary policy; inflation; inequality |
| JEL: | E12 E31 E52 D31 |
| Date: | 2024–07–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98472&r= |
| By: | Adam, Klaus; Alexandrov, Andrey; Weber, Henning |
| 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. |
| JEL: | E31 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299245&r= |
| By: | Michael T. Kiley |
| Abstract: | I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing to economic stability. Make-up strategies address ELB risks. These strategies call for policy to accommodate some period of inflation above its long-run objective following an ELB episode. I also consider an asymmetric shortfalls approach to policy. This approach provides accommodation in response to weak activity while foregoing tightening in response to strong activity. While the approach can, in principle, address ELB risks by raising inflation, it performs poorly. The shortfalls approach exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures. Mismeasurement is not sufficient to limit the importance of strong responses to measured slack. Overall, monetary policy can promote price stability and labor market strength by focusing on economic stability, with a strategy targeted to address ELB risks. |
| Keywords: | Monetary policy; Rules and discretion; Effective lower bound; Symmetric loss function; Asymmetric loss function |
| JEL: | E52 E58 E37 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-33&r= |
| By: | Bidder, Rhys; Jackson, Timothy P.; Rottner, Matthias |
| 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. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299237&r= |
| By: | Efrem Castelnuovo; Lorenzo Mori; Gert Peersman |
| Abstract: | We employ a structural VAR model with global and US variables to study the relevance and transmission of oil, food commodities, and industrial input price shocks. We show that commodities are not all alike. Industrial input price changes are almost entirely endogenous responses to other shocks. Exogenous oil and food price shocks are relevant drivers of global real and financial cycles, with food price shocks exerting the greatest influence. We then conduct counterfactual estimations to assess the role of systematic monetary policy in shaping these effects. The results reveal that pro-cyclical policy reactions exacerbate the real and financial effects of food price shocks, whereas counter-cyclical responses mitigate those of oil shocks. Finally, we identify distinct mechanisms through which oil and food shocks affect macroeconomic variables, which could also justify opposing policy responses. Specifically, along with a sharper decrease in nondurable consumption, food price shocks raise nominal wages and core CPI, intensifying inflationary pressures. Conversely, oil price shocks act more like adverse aggregate demand shocks absent monetary policy reactions, primarily through a decrease in durable consumption and spending on goods and services complementary to energy consumption, which are amplified by financial frictions. |
| Keywords: | commodity price shocks, transmission mechanisms, monetary policy |
| JEL: | E32 E52 F44 G15 Q02 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11140&r= |
| By: | William F. Diamond; Tim Landvoigt; Germán Sánchez Sánchez |
| Abstract: | We analyze the impact of fiscal and monetary stimulus in an economy with mortgage debt, where inflation redistributes from savers to borrowers. We show theoretically that fiscal transfers without future tax increases cause a surge in inflation, increasing consumption demand and house prices. The power of fiscal stimulus grows when borrowers are more indebted. We then show quantitatively that transfers followed by easy monetary policy cause a surge in inflation which helps explain features of the post-Covid boom, including a boom in output and house prices. This boom comes with a longer-term contraction, since redistribution reduces borrower labor supply. |
| JEL: | E44 E52 E63 G51 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32573&r= |
| By: | Victor Musa; Bertrand Gilles Umba; Lewis Mambo; Jonas Kibala; Josephine Mushiya; Yannick Luvezo; Jules Nsunda; Grégoire Lumbala; Yves Siasi; Serge Mfumukanda; Lubaki Ange; Kabata Olivier; Luc Shindano; Dyna Heng; Diego Rodriguez Guzman; Barna Szabo |
| Abstract: | The paper introduces a semi-structural Quarterly Projection Model (QPM) tailored for the Democratic Republic of the Congo (DRC), highlighting its resource richness and high degree of dollarization. We provide an overview of the model's specifications to elucidate key features of the DRC economy and present its properties, evaluating its alignment with DRC data and assessing its goodness of fit. Additionally, the paper demonstrates the QPM's practical application through a counterfactual scenario, comparing policy recommendations with the actual policy responses of the Central Bank of the Republic of Congo to observed exchange rate and inflation pressures in 2023. Beyond the QPM, the paper showcases supplementary tools that enhance its utility for generating medium-term forecasts and developiong narratives in support of monetary policymaking. Specifically, we introduce the Nowcasting and Near-Term Forecast models, designed to assess the economy in real-time and predict short-term inflationary trends. |
| Keywords: | Resource-rich; Dollarization; Monetary policy; Inflation; Exchange Rate Policies |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/126&r= |
| By: | Khalil, Makram; Lewis, Vivien |
| Abstract: | Price setting has become more flexible following a string of large adverse shocks (Covid-19, the Ukraine War). We argue that a shift to a high-uncertainty regime incentivizes firms to invest in their ability to adjust prices. We formalize this idea in a general equilibrium model with endogenous price flexibility and entry-exit. Faced with higher productivity uncertainty, firms set prices more flexibly. This improves their resilience, reducing exit and output losses in response to negative supply shocks. Uncertainty regarding monetary policy has similar effects. We show that higher monetary policy uncertainty can be welfare-improving when productivity shocks are large. |
| Keywords: | entry, exit, price flexibility, supply shocks, uncertainty |
| JEL: | E22 E31 E32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299235&r= |
| By: | Han, Wontae (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Hyo-Sang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Song, Saerang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Junhyong (Korea Development Institute (KDI)) |
| Abstract: | This study analyzed the effects of uncertainty and interest rate hike shocks on capital flows, as well as the effectiveness of economic stabilization policies. When comparing the impacts of global economic policy uncertainty shocks and individual country economic policy uncertainty shocks, empirical analysis showed that global economic policy uncertainty shocks had a significant effect on capital flows. This suggests that global factors are more closely associated with capital flows than country-specific factors, relating to discussions on the global financial cycle. Although classified as an advanced economy, Korea has a shallow foreign exchange market and its financial markets are sensitive to external shocks, so the spillover effects of uncertainty shocks need to be analyzed through various channels like trade, capital transactions, industrial structure, and monetary policy. As financial globalization progresses with Fintech and digital finance, the spillover effects of external shocks through capital transactions are expected to increase, especially requiring close monitoring of shocks from countries with similar industrial structures to Korea. An integrated policy framework analysis found that for emerging economies without anchored inflation expectations and shallow foreign exchange markets, a combination of monetary policy and foreign exchange intervention was effective for economic stabilization. Recently, major international organizations like the IMF, BIS, and OECD have shifted towards allowing some foreign exchange intervention and capital flow management measures to reduce exchange rate and capital flow volatility and achieve financial stability. Since there is a general consensus that Korea does not have a deep foreign exchange market, an appropriate combination of monetary policy, foreign exchange intervention, and capital flow management measures can help reduce exchange rate volatility. As Korea's foreign exchange market advances and if Korea succeeds to join major global bond indices, its sensitivity to external factors may increase, so measures to assess the depth and maturity of Korea's foreign exchange and financial markets are needed to determine the optimal policy mix. |
| Keywords: | external shocks; capital flow response; policy effectiveness |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_017&r= |
| By: | Kieren, Pascal; König-Kersting, Christian; Schmidt, Robert J.; Trautmann, Stefan T.; Theurich, Franziska |
| Abstract: | We study first-order and higher-order inflation expectations of German households and firms elicited from surveys. The data allows to shed light on the relation between different orders of beliefs, and to derivate implications for noisy-information models with infinite regress. Moreover, since the elicited data is identical for households and firms, it also allows studying whether the relation between first-order and higher-order beliefs differs between the two samples. While we find that this relation is mostly identical between households and firms in our data, we identify differences to previously elicited data in the literature. We discuss potential sources for these differences and their theoretical implications. |
| Keywords: | Inflation expectations, higher-order beliefs, noisy-information models, surveys |
| JEL: | D84 E31 G17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299240&r= |
| By: | Klaus Adam; Henning Weber |
| Abstract: | We review the academic literature investigating the economic determinants of the welfare optimal inflation target. We start with a bird’s-eye review of the academic literature covering the past 60 years. Up to the year 2010, the academic literature recommended optimal inflation targets that are either negative or zero. The subsequent literature incorporated new economic features and can rationalize also positive inflation targets. In our review, we discuss these features, especially the role of (i) productivity and unaccounted quality progress, (ii) the lowerbound constraint on nominal rates, (iii) nominal wage rigidity, and (iv) product turnover and product aggregation. In a final setup, we provide suggestions for further research on the topic. |
| Keywords: | optimal inflation, Ramsey policy, optimal rules, lower-bound constraint, wage rigidity, relative price trends |
| JEL: | E31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_572&r= |
| By: | Koivisto, Tero |
| Abstract: | This study aims to explore the extent to which changes in wealth contributes to inflation utilizing a highly flexible non-Gaussian SVAR framework which minimizes the risk of distributional misspecification. We employ narrative sign restrictions to label the asset price shock and leverage the property of the Bayesian approach to compute the posterior probability of each shock satisfying these proposed restrictions. The structural shock associated with wealth has a positive impact on private consumption and GDP. The asset price shock is also positively related on consumer prices. Therefore, variations in wealth appear to stimulate the real economy. |
| Keywords: | Asset price shocks, wealth effect, inflation, structural vector autoregression, non-Gaussianity |
| JEL: | E31 E44 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:300078&r= |
| By: | Clemens M. Graf von Luckner; Mr. Robin Koepke; Ms. Silvia Sgherri |
| Abstract: | This paper shows how cryptocurrency markets can fuel cross-border capital flight by serving as marketplaces that match counterparts with and without (illicit) access to FX. In countries where international transactions are restricted, crypto exchanges effectively allow domestic agents to pay a premium to buy foreign currency. The counterparts to these transactions are agents with access to FX, who sell crypto holdings purchased abroad. A stylized model illustrates that restricted foreign currency amid economic imbalances incentivizes these transactions via persistent crypto premia in local relative to global markets. We analyze relative crypto pricing data in several country case studies, providing empirical support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight. We make available a novel dataset on crypto market premia, which we propose as indicators of excess demand for foreign currency and capital control intensity. The dataset will be posted along with this paper and updated periodically. |
| Keywords: | Capital flows; digital money; capital controls |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/133&r= |
| By: | Annie Soyean Lee; Charles Engel |
| Abstract: | Empirical work finds that flows of investments from the U.S. and other high income countries to emerging markets increase during times of quantitative easing by the U.S. Federal Reserve, and the reverse movement occurs under quantitative tightening. We offer new evidence to confirm these findings, and then propose a theory based on the liquidity of U.S. government liabilities held by the public. We hypothesize that QE, by increasing liquidity, offers greater flexibility for investors that might be concerned their funds will be tied up when shocks to income or investment opportunities arise. With the assurance that some of their portfolio can be readily sold in liquid markets, rich country investors are more willing to increase investments in illiquid loans to emerging markets. The effect of increasing the liquidity of U.S. government liabilities on investments in EMs may even be stronger during times of greater uncertainty. |
| JEL: | E5 F30 F40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32572&r= |
| By: | Bulat Gafarov; Madina Karamysheva; Andrey Polbin; Anton Skrobotov |
| Abstract: | We propose a novel approach to identification in structural vector autoregressions (SVARs) that uses external instruments for heteroscedasticiy of a structural shock of interest. This approach does not require lead/lag exogeneity for identification, does not require heteroskedasticity to be persistent, and facilitates interpretation of the structural shocks. To implement this identification approach in applications, we develop a new method for simultaneous inference of structural impulse responses and other parameters, employing a dependent wild-bootstrap of local projection estimators. This method is robust to an arbitrary number of unit roots and cointegration relationships, time-varying local means and drifts, and conditional heteroskedasticity of unknown form and can be used with other identification schemes, including Cholesky and the conventional external IV. We show how to construct pointwise and simultaneous confidence bounds for structural impulse responses and how to compute smoothed local projections with the corresponding confidence bounds. Using simulated data from a standard log-linearized DSGE model, we show that the method can reliably recover the true impulse responses in realistic datasets. As an empirical application, we adopt the proposed method in order to identify monetary policy shock using the dates of FOMC meetings in a standard six-variable VAR. The robustness of our identification and inference methods allows us to construct an instrumental variable for monetary policy shock that dates back to 1965. The resulting impulse response functions for all variables align with the classical Cholesky identification scheme and are different from the narrative sign restricted Bayesian VAR estimates. In particular, the response to inflation manifests a price puzzle that is indicative of the cost channel of the interest rates. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03265&r= |
| By: | Mr. Kevin Fletcher; Veronika Grimm; Thilo Kroeger; Thilo Kroeger; Ms. Aiko Mineshima; Christian Ochsner; Mr. Andrea F Presbitero; Paul Schmidt-Engelbertz; Jing Zhou |
| Abstract: | Global geopolitical tensions have risen in recent years, and European energy prices have been volatile following Russia’s invasion of Ukraine. Some analysts have suggested that these shifting conditions may significantly affect FDI both to and from Germany. To shed light on this issue and other factors affecting German FDI, we leverage two detailed and complementary FDI datasets to explore recent trends in German FDI and how it is affected by geopolitical tensions and energy prices. In doing so, we also develop a new measure of geopolitical alignment. Our main findings include the following: (i) the post-pandemic recovery in Germany’s inward and outward FDI has been weaker than in the US or the rest of the European Union (EU27) as a whole; (ii) Germany’s outward FDI linkages with geopolitically distant countries have been weakening since the Global Financial Crisis; (iii) the relationship between Germany’s outward FDI and geopolitical distance has become more pronounced over the last six years; (iv) Germany’s outward FDI to China-Russia bloc countries is more sensitive to recent geopolitical developments compared with that to US-bloc countries; and (v) Germany’s outward FDI in energy-intensive sectors decreases as destination countries’ energy costs increase, but energy costs do not appear to have a statistically significant effect on outward FDI in non-energy intensive sectors. |
| Keywords: | Germany; foreign direct investment; geopolitical fragmentation |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/130&r= |