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on Monetary Economics |
| By: | Saroj Bhattarai; Mohammad Davoodalhosseini; Zhenning Zhao |
| Abstract: | How does the transmission of monetary policy change when a central bank digital currency (CBDC) is introduced in the economy? Do aspects of CBDC design, such as how substitutable it is with bank deposits and whether it is interest bearing, matter? We study these questions in a general equilibrium model with nominal rigidities, liquidity frictions, and a banking sector where commercial banks face a leverage constraint. In the model, CBDC and commercial bank deposits can be used as a means of payments, and they provide liquidity services to households. Banks issue deposits and extend loans to firms, and bank deposits are backed by loans and central bank reserves. We find that the effects of a canonical monetary policy shock, a shock to the Taylor rule that governs interest on central bank reserves, is magnified with the introduction of a fixed-interest-rate CBDC. More generally, whether CBDC magnifies or abates the response of the economy depends on the type of shock (e.g., interest rate or quantity of reserves shock). We also find that the response of the economy depends on the monetary policy framework—whether the central bank implements monetary policy through reserves or through CBDC—as well as central bank balance sheet rules that govern the quantity of CBDC and reserves. |
| Keywords: | Digital currencies and fintech; Monetary policy; Monetary policy framework; Monetary policy transmission; Interest rates |
| JEL: | E31 E4 E50 E58 G21 G51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-27 |
| By: | Taeyoung Doh; JiHyung Lee; Woong Yong Park |
| Abstract: | We empirically characterize the heterogeneity in the conditional distribution of household inflation expectations across demographic groups using the Survey of Consumer Expectations and investigate how monetary policy shocks affect the conditional distribution. We find that across all demographic groups, the peak of the group-specific distribution of household inflation expectations aligns closely with the Federal Reserve’s 2 percent target. However, we also find substantial heterogeneity both within and across groups, primarily on the right end of the distribution. Nevertheless, we show that a contractionary monetary policy shock identified by high-frequency financial market response reduces inflation expectations of households more vulnerable to the risk of unanchoring. |
| Keywords: | Household Inflation Expectations Project (HIEP); monetary policy; high frequency identification; quantile regression |
| JEL: | E31 E52 E58 |
| Date: | 2024–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98545 |
| By: | Ozili, Peterson K |
| Abstract: | The purpose of this article is to explore the role of artificial intelligence, or AI, in a central bank digital currency project and its challenges. Artificial intelligence is transforming the digital finance landscape. Central bank digital currency is also transforming the nature of central bank money. This study also suggests some considerations which central banks should be aware of when deploying artificial intelligence in their central bank digital currency project. The study concludes by acknowledging that artificial intelligence will continue to evolve, and its role in developing a sustainable CBDC will expand. While AI will be useful in many CBDC projects, ethical concerns will emerge about the use AI in a CBDC project. When such concerns arise, central banks should be prepared to have open discussions about how they are using, or intend to use, AI in their CBDC projects. |
| Keywords: | artificial intelligence, central bank digital currency, CBDC, machine learning, deep learning, cryptocurrency, CBDC project, CBDC pilot, blockchain |
| JEL: | E50 E51 E52 E58 O31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121567 |
| By: | Christoph E. Boehm; Niklas Kroner |
| Abstract: | Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks. |
| Keywords: | Federal Reserve; Monetary Policy; Stock Market; Exchange Rates; Asset Prices; Risk Premia; Information Effects; High-frequency Identification |
| JEL: | E43 E44 E52 E58 F31 G10 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1392 |
| By: | Jens Christensen; Sarah Mouabbi |
| Abstract: | The so-called equilibrium or natural rate of interest, widely known as rt*, is a key variable used to judge the stance of monetary policy. We offer a novel euro-area estimate based on a dynamic term structure model estimated directly on the prices of bonds with cash flows indexed to the euro-area harmonized index of consumer prices with adjustments for bond-specific risk and real term premia. Despite a recent increase, our estimate indicates that the natural rate in the euro area has fallen about 2 percentage points on net since 2002 and remains negative at the end of our sample. We also devise a related measure of the stance of monetary policy, which suggests that monetary policy in the euro area was not accommodative at the height of the COVID-19 pandemic. |
| Keywords: | Affine Arbitrage-free Term Structure Model, Financial Market Frictions, Convenience Premium, Monetary Policy, Rstar |
| JEL: | C32 E43 E52 G12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:948 |
| By: | Francesco Casalena (Geneva Graduate Institute) |
| Abstract: | We study the effects of the Federal Reserve's two Quantitative Tightening (QT) programmes implemented over the last decade. We use a high frequency identification strategy to distinguish between conventional monetary policy shocks, Treasury borrowing announcement shocks and the unwinding of the balance sheet. Further, we analyse both QT announcements and operations. Our results show that the Fed was successful in muting the signalling effect of its Balance Sheet Policy (BSP) announcements, as statements not containing quantitative information about QT did not impact significantly asset prices. Conversely, communications disclosing information over the size and the pace of QT had an effect on financial markets. We also find that QT operations have a significant and persistent deflationary effect on interest rates and asset prices. A 1-trillion USD reduction in securities holdings by the Fed is associated with an increase in 10-year Treasury yields by 2 percentage points. While the contractionary effects of QT have so far been at least partially offset by liquidity operations that have expanded the supply of reserves, our results suggest that balance sheet reductions entail in principle strong negative effects on financial markets. Although QT does not represent in the policymakers' view the primary tool to achieve price stability, it is yet far from running quietly in the background of the monetary policy stance. |
| Keywords: | Quantitative Tightening; Central Bank Balance Sheet; Unconventional Monetary Policy; Local Projections |
| JEL: | E52 E58 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp14-2024 |
| By: | Cristiano Cantore; Pascal Meichtry |
| Abstract: | his paper studies the asymmetry in the macroeconomic effects of central bank asset market operations induced by state dependency and the associated role of household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We highlight the significance of an occasionally binding zero lower bound in explaining a weaker aggregate impact of asset sales relative to asset purchases. In this context, when close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing mitigates the economic costs of monetary policy normalization. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not enhance the aggregate effects of asset market operations. |
| Keywords: | Unconventional Monetary Policy, Quantitative Tightening, Quantitative Easing, Heterogeneous Agents, Zero Lower Bound |
| JEL: | E21 E32 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:955 |
| By: | Julian Kozlowski |
| Abstract: | An analysis of inflation expectations suggests that financial market participants see a 50% probability that CPI inflation could be higher than 2.5% over the next five years. |
| Keywords: | inflation; inflation expectations; Consumer Price Index (CPI); financial markets |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98546 |
| By: | Bruno Feunou; Zabi Tarshi |
| Abstract: | We present two models for long-term inflation expectations and inflation risk premiums for Canada. First, we estimate inflation expectations using a vector autoregressive model based on the relationship of inflation with both the unemployment gap and the term structure of the Government of Canada nominal bond yields. Then we estimate the inflation risk premium by regressing the nominal term premium on a set of inflation risk factors. We find that our model-implied measure of inflation expectations generally follows a trend similar to that of break-even inflation rates. We also find that the estimated inflation risk premium is negative or near zero through most of the sample period because most of this period was dominated by low inflation and low growth, with investors concerned about deflation. However, the model-implied inflation risk premium becomes positive in 2021. Because real return bonds will eventually disappear in Canada, a market-derived indicator for long-term inflation expectations is particularly relevant for central bankers. Similarly, capturing the individual components of the nominal term premium can be highly useful from a policy perspective. |
| Keywords: | Econometric and statistical methods |
| JEL: | C58 E43 E47 G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-09 |
| By: | Donggyu Lee |
| Abstract: | This paper studies how quantitative easing (QE) affects household welfare across the wealth distribution. I build a Heterogeneous Agent New Keynesian (HANK) model with household portfolio choice, wage and price rigidities, endogenous unemployment, frictional financial intermediation, an effective lower bound (ELB) on the policy rate, forward guidance, and QE. To quantify the contribution of the various channels through which monetary policy affects inequality, I estimate the model using Bayesian methods, explicitly taking into account the occasionally binding ELB constraint and the QE operations undertaken by the Federal Reserve during the 2009-15 period. I find that the QE program unambiguously benefited all households by stimulating economic activity. However, it had nonlinear distributional effects. On the one hand, it widened the income and consumption gap between the top 10 percent and the rest of the wealth distribution by boosting profits and equity prices. On the other hand, QE shrank inequality within the lower 90 percent of the wealth distribution, primarily by lowering unemployment. On net, it reduced overall wealth and income inequality, as measured by the Gini index. Surprisingly, QE has weaker distributional consequences compared with conventional monetary policy. Lastly, forward guidance and an extended period of zero policy rates amplified both the aggregate and the distributional effects of QE. |
| Keywords: | unconventional monetary policy; inequality; Heterogeneous-agent New Keynesian (HANK) model; quantitative easing; Bayesian estimation; effective lower bound |
| JEL: | E12 E30 E52 E58 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98524 |
| By: | Stéphane Lhuissier; Aymeric Ortmans; Fabien Tripier |
| Abstract: | We introduce an approach to measure the risk of inflation dispersion among euro area countries. Our measure reflects the dissimilarity between the full predictive inflation distributions of member countries, and thus captures how "far" apart inflation levels are expected to be. The risk of inflation dispersion exhibits a countercyclical behavior along the business cycle. We document that the rising risk of inflation dispersion is mainly driven by a deterioration in financial conditions, while a robust anchoring of inflation expectations in each country tends to mitigate this risk. We further demonstrate that our measure has predictive power for future euro area inflation realizations as well as for variations in the monetary authority's interest rate. |
| Keywords: | Inflation Dispersion, Kullback-Leibler, Euro area, Quantile Regression, Phillips Curve |
| JEL: | D80 E31 E58 F45 G12 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:954 |
| By: | Aizenman , Joshua (University of Southern California); Park, Donghyun (Asian Development Bank); Qureshi , Irfan (Asian Development Bank); Saadaoui, Jamel (Université Paris 8); Uddin, Gazi Salah (Linköping University) |
| Abstract: | We investigate the determinants of the performance of emerging markets (EMs) during five United States (US) Federal Reserve monetary tightening and easing cycles from 2004 to 2023. We study how macroeconomic and institutional conditions of an 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: bilateral exchange rate against the US dollar, exchange rate market pressure, and economy-specific Morgan Stanley Capital International (MSCI) index. 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 markets; resilience; macroeconomic fundamentals; Federal Reserve |
| JEL: | E58 |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0735 |
| By: | Aurélien Espic; Lisa Kerdelhué; Julien Matheron |
| Abstract: | This paper studies the role of capital requirements in a context of monetary tightening. We build a new Keynesian model featuring costly defaults for banks, households and firms, and estimate it on Euro Area data between 2002 and 2023. We first identify the sources of this unprecedented episode before studying its propagation along financial variables. We then build various counterfactuals to assess how capital requirements have affected the transmission of this shock. We find that although capital requirements reduced the post-Covid expansion, they preserved macroeconomic stability by reducing banks probability of default. More generally, we show that capital requirements do not need to be countercyclical to be efficient: in an inflationary context, they act as automatic stabilizers, by limiting the amplitude of expansionary as well as recessionary shocks. |
| Keywords: | Monetary Tightening, Financial Stability, Macroprudential Policy. |
| JEL: | E44 E52 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:947 |
| By: | Coste, Charles-Enguerrand |
| Abstract: | This paper explores the relationship between banks and stablecoins and their issuers, focusing on the mechanical effects on banks’ capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers.The analysis reveals that converting retail deposits into stablecoin issuers’ deposits weakens a bank’s liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets. If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivise banks to issue stablecoins where they can continually identify the holders to benefit from more favourable liquidity treatment. Additionally, banks must either hold the reserves backing the stablecoins as central bank reserves or reinvest them in low-risk assets, making these funds a less effective source for economic financing and maturity transformation compared with traditional retail deposits. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits. These insights are crucial to understanding the dynamics between banks and stablecoins in the evolving financial landscape. JEL Classification: E40, E42, E49, G11, G15, G18, G20, G21, G23, G28 |
| Keywords: | bank, bank’s balance sheet, crypto-asset, e-money, MiCAR, prudential regulation, stablecoin |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024353 |
| By: | Maeng, F. S. |
| Abstract: | The share of debt denominated in domestic national currency issued by emerging economies has been rising sharply over time—progress away from the “original sin†of invoicing sovereign debt in foreign currencies. Yet this progress has been partial and subject to fluctuations. This paper develops a New Keynesian model with sovereign default where the government can manipulate expected inflation through debt issuance and default policies. High levels of national currency debt incentivize governments to reduce debt repayment by escalating (expected) inflation. Governments tilt the currency denomination of debt towards foreign currency to avoid distortions from escalating (expected) inflation, at the cost of giving up hedging consumption fluctuations of national currency debt. The model highlights default risk as a key factor driving a higher share of debt in foreign currency when expected inflation rises—a pattern observed in inflation-targeting emerging economies. Quantitatively, default risk explains up to 37 percentage points of the share of debt in foreign currency. Optimal debt management contains inflation, default frequency, and spreads. |
| Keywords: | Sovereign Default, Inflation, Currency Denomination, New Keynesian Theory |
| JEL: | E32 E52 E63 F34 H63 |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2438 |
| By: | Shaily Acharya; Nira Harikrishnan; Thomas M. Mertens; Tony Zhang |
| Abstract: | Predictions of future inflation rates shed light on the path of the economy and inform central banks’ policy rate decisions. Two commonly used sources of inflation forecasts are surveys and market-based inflation expectations. Survey-based inflation expectations, such as those from the Survey of Professional Forecasters, are derived by eliciting responses from a group of respondents about their beliefs. |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-07-19-4 |
| By: | Korenok, Oleg; Munro, David |
| Abstract: | Prior research has documented that attention to inflation shifts when inflation surpasses a 3-4% threshold. In this note we examine how attention to inflation declines in episodes of disinflation. We show that for countries where inflation has returned to "normal" (pre-threshold) levels, attention remains 2-3 times higher than it was before the run-up of inflation. We show evidence that wage growth is more strongly correlated with past inflation when attention is high. This is one possible mechanism behind the slower-than-expected disinflation in late 2023 and early 2024. |
| Keywords: | inflation, attention, persistence, threshold |
| JEL: | E31 E52 E70 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1463 |
| By: | Costas Milas (University of Liverpool, UK; Rimini Centre for Economic Analysis); Theologos Dergiades (University of Macedonia, Greece); Theodore Panagiotidis (University of Macedonia, Greece); Georgios Papapanagiotou (University of Macedonia, Greece) |
| Abstract: | The effectiveness of inflation targeting is linked to the stationarity properties of inflation. Without making apriori assumptions about the order of integration, we examine whether there is a change in the inflation persistence in one hundred and twenty-seven countries (developed and developing) using monthly data over the 1970-2021 period. For the inflation targeters, we find that the endogenously identified break dates are not consistent with the formal adoption of IT. Logit analysis reveals that inflation targeters do not experience an increased probability of a change in inflation persistence. The quality of institutions emerges as more significant for taming inflation. |
| Keywords: | persistence change, inflation targeting |
| JEL: | C12 E4 E5 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-12 |
| By: | Elena Deryugina (Bank of Russia, Russian Federation); Andrey Leonidov (Lebedev Physical Institute, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Stanislav Radionov (Lebedev Physical Institute, Russian Federation); Ekaterina Vasilyeva (Lebedev Physical Institute, Russian Federation) |
| Abstract: | We calibrate a network model and monetary shocks based on empirical data from inputoutput tables for the Russian economy. We examine various aspects of the propagation of monetary shocks, such as the dispersion of relative prices and the local peak values of the aggregated price index achieved during the convergence to the new equilibrium. We show that these developments depend significantly on the way new money is injected into the economy. |
| Keywords: | money supply, inflation, Cantillion effects, networks, input-output tables |
| JEL: | C63 C67 D57 E31 E51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps130 |
| By: | Coulier, Lara; Pancaro, Cosimo; Reghezza, Alessio |
| Abstract: | We match granular supervisory and credit register data to assess the implications of banks’ exposure to interest rate risk on the monetary policy transmission to bank lending supply in the euro area. We exploit the largest and swiftest increase in interest rates since the creation of the euro and find that banks with a higher exposure to interest rate risk, i.e., with a larger duration gap after accounting for hedging, curtailed corporate lending more than their peers. Ceteris paribus, greater interest rate risk entails closer supervisory scrutiny and potential capital surcharges in the short term, and lower expected profitability and capital accumulation in the medium to long term. We then proceed to dissect banks’ credit allocation and find that banks with higher net duration reshuffled their loan portfolio away from long-term loans in an attempt to limit the increase in interest rate risk and targetedtheir lending contraction to small and micro firms. Firms exposed to banks with a larger exposure to interest rate risk were unable to fully rebalance their borrowing needs with other lenders, thus experiencing a relatively larger decrease in total borrowing during the monetary tightening episode. JEL Classification: E51, E52, G21 |
| Keywords: | bank lending channel, duration gap, financial stability, interest rate risk |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242950 |
| By: | Julien Pascal |
| Abstract: | This paper reviews the literature examining the consequences of heterogeneity in macroeconomic modeling, especially within the context of monetary and fiscal policy transmission. This review reveals that heterogeneity can significantly alter the transmission mechanisms of monetary policy in macroeconomic models and suggests possible advantages from collaboration between fiscal and monetary policies. The paper also provides a critical evaluation of various analytical and numerical methods to solve macroeconomic models with heterogeneity, underscoring the need for a careful methodological choice based on specific circumstances. |
| Keywords: | Literature review, Heterogeneity, Monetary Policy, Fiscal Policy, Macroeconomic Modeling, HANK model. |
| JEL: | E32 E52 E62 D31 C61 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp185 |
| By: | Mr. JaeBin Ahn |
| Abstract: | Can a carbon tax reduce inflation volatility? Focusing on fuel excise taxes, this paper provides systematic evidence on their role as a shock absorber that helps mitigating the impact of global oil price shocks on domestic inflation. Exploiting substantial variation in fuel tax rates across 28 OECD countries over the period from 2014 to 2021, a simple idea that a per-unit, specific tax takes up a portion of the product price immune to cost shocks goes a long way toward explaining heterogeneity in the degree of oil price pass-through into domestic inflation across countries. A back-of-the-envelope calculation from the estimation results supports its quantitative significance---differences in fuel tax rates could explain about 30% of the variation in annual headline CPI inflation rates observed between the U.S. and U.K. during the 2021 inflation surge. |
| Keywords: | Fuel excise tax; gasoline tax; diesel tax; oil price pass-through; retail fuel price; inflation; greenflation; greensulation |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/153 |
| By: | Capasso, Salvatore; Foresti, Pasquale |
| Abstract: | This paper analyzes the design of monetary and fiscal policies in a currency union by focusing on the capacity to react to symmetric and asymmetric financial shocks. The model is constructed in order to mimic the institutional design adopted for the policy making in the EMU. The paper shows how a currency union set-up like the one adopted by the EMU can easily cope with symmetric financial shocks. However, it shows how in the face of asymmetric shocks more space for fiscal interventions is crucial, especially in more peripheral member countries. |
| Keywords: | financial shocks; monetary union; monetary-fiscal policy; EMU |
| JEL: | E52 E61 F36 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124371 |
| By: | Morgan Maneely; Mr. Lev Ratnovski |
| Abstract: | Since 2022, EU banks have been enjoying historically high profits. The profits are mostly driven by the delayed pass-through of the rapid monetary policy tightening to deposit rates and as such are likely transitory. Against this background, almost half of EU countries have introduced new taxes on banks. This paper documents the significant diversity in the design of the new bank taxes—in terms of their tax base, rate, duration, and burden. The paper discusses several trade-offs in the design of bank taxes and argues that an alternative or complementary policy response to temporarily high bank profits is to lock them in as usable bank capital, for example through an increase in countercyclical capital buffer rates. |
| Keywords: | European banks; bank profits; bank taxation; credit supply; bank capital; CCyB; European Union; the ECB |
| Date: | 2024–07–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/143 |
| By: | Andrea De Michelis; Grace Lofstrom; Mike McHenry; Musa Orak; Albert Queraltó; Mikaël Scaramucci |
| Abstract: | The sustained surge in inflation around the world following the pandemic has raised the possibility that the inflation process has become more persistent. Such a rise in persistence could result from firms and households putting greater weight on past inflation outcomes in their price- and wage-setting decisions than they did in the recent past, say, because they have less conviction that inflation will return promptly to target. |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-07-19-3 |
| By: | OECD |
| Abstract: | This background note considers how competition contributes to lower inflation, despite its unsuitability as a short-term anti-inflationary tool. It explains why competition is important for optimal inflation and summarises some of the empirical evidence of this relationship. It then considers how inflation affects competition, for example by creating conditions for firms to coordinate or by increasing the search costs of consumers. It was prepared as a background note for discussions on “Competition and Inflation” taking place at the November 2022 session of the OECD Competition Committee. |
| Date: | 2022–10–26 |
| URL: | https://d.repec.org/n?u=RePEc:oec:dafaac:286-en |
| By: | Alyssa G. Anderson; Dave Na |
| Abstract: | Following its May 2024 meeting, the Federal Open Market Committee (FOMC) announced that it would slow the pace of its balance sheet reduction starting in June 2024. This will allow for a more gradual transition from an abundant to ample supply of reserves. As reserves decline, conditions in money markets, including the federal (fed) funds market, will be important in judging whether the supply of reserves is approaching ample. |
| Date: | 2024–07–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-07-11 |
| By: | Zhang, Ying; Gong, Bing; Zhou, Peng (Cardiff Business School) |
| Abstract: | This paper presents a thorough examination of centralized use of a decentralized technology (blockchain) in monetary and financial systems at the national level. A comparative study is conducted to summarize the regulatory and legislative frameworks of currency/asset tokenization in seven major economies (US, EU, UK, Switzerland, Australia, Japan, and South Korea). China is then used as a case study to explore how blockchain technology is adopted to enable central bank digital currency, bond tokenization, and “currency bridge†. Based on various contexts analyzed, we extend the Technology Acceptance Model, highlighting the roles of perceived benefits, perceived risks, and collaborative leadership in building trust in and promoting adoption of tokenization. Policymakers and practitioners are recommended to follow a gradual, eclectic, and collaborative approach to tokenization. |
| Keywords: | Blockchain; Tokenization; CBDC; Decentralization; Collaborative Leadership |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2024/14 |
| By: | Martin, Anne; Herr, Hansjörg; Heine, Michael |
| Abstract: | Inflationary processes are closely linked to wage-price spirals - such spirals can be triggered by many factors, including natural resource price shocks, depreciation and inflationary demand. Empirically, the correlation between changes in nominal unit labour costs and the price level is strong for almost all OECD countries, at levels above 0.8. The clear policy conclusion is to make wages and the nominal exchange rate anchors for the price level, which implies that nominal wages should increase according to trends in productivity and the target inflation rate of the central bank. Wage developments without structural changes in the medium term have limited effects on functional income distribution on a macroeconomic level. The structural factors in question include the existence and spread of markets with monopolies, oligopolies and monopsonies as well as corporate governance systems and the power of trade unions to influence profit sharing in companies with rent. |
| Keywords: | Wage-price spiral, inflation, functional distribution |
| JEL: | E12 E31 E64 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:300570 |
| By: | Purva Gole; Erica Perego; Camelia Turcu |
| 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: | F21 F30 F31 F41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2024-09 |
| By: | Jonathan Hoddenbagh (Johns Hopkins University) |
| Abstract: | I develop a novel and tractable test of the degree of fiscal dominance characterizing the relationship between a country's fiscal and monetary authorities. The government's long-run fiscal rule stipulates that a given fraction of the outstanding public debt is backed by the present discounted value of current and future primary surpluses, and the remainder is backed by seigniorage revenue. The larger the proportion of debt backed by seigniorage revenue, the stronger the degree of fiscal dominance. I use my test to construct an index of |
| Date: | 2024–06–29 |
| URL: | https://d.repec.org/n?u=RePEc:boc:fsug24:20 |
| By: | Chakraborty, Lekha (National Institute of Public Finance and Policy) |
| Abstract: | Using high-frequency macrodata from a financially deregulated regime, the paper examines whether there is any evidence of financial crowding out in India. The macroeconomic channel through which financial crowding out occurs is the link between the fiscal deficit and interest rate determination. Using ARDL models, it is established that the interest rate is affected by inflationary expectations, not by the fiscal deficit. The term structure of interest rates in India is also incorporated into loanable fund models to analyze the transmission mechanism of the links between long-term and short-term interest rates, which is found to be affirmative, and the financial markets in India are not highly segmented. This result has significant policy implications for interest rate determination in India, especially when fiscal policy has remained accommodative for economic growth recovery through high public capital expenditure investment. |
| Keywords: | fiscal deficit ; interest rate determination ; asymmetric vector autoregressive model ; financial crowding out |
| JEL: | E62 C32 H6 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:24/414 |
| By: | Qichun He (China Economics and Management Academy, Central University of Finance and Economics); Xin Yang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics) |
| Abstract: | This paper explores the growth and welfare ects of monetary policy in a Schumpeterian vertical innovation model with automation. Money is introduced into the model via the cash-in-advance (CIA) constraints on consumption, production, automation and vertical innovation. We find that the relative strength of the cash constraints on automation and vertical innovations is crucial. If the CIA constraint is stronger (weaker) for automation, a higher nominal interest rate will lead to an increase (a decrease) in the amount of high-skilled labor allocated to vertical innovation. As a result, the automation level will decline (rise), but the vertical innovation and thereby aggregate economic growth will be faster (slower). We calibrate the model to the US economy and find a stronger cash constraint on automation. Our quantitative analysis shows that rising nominal interest rates are detrimental to automation but favorable to growth. In addition, higher nominal interest rates improve the welfare of dierent households and the aggregate welfare. As an empirical test, we find a signifficant, negative effect of the nominal interest rate on automation using cross-country panel data, consistent with our model prediction. |
| Keywords: | Monetary policy; Automation; Cash-in-advance; Schumpeterian model |
| JEL: | O42 E42 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:640 |
| By: | Danilo Cascaldi-Garcia; Luca Guerrieri; Matteo Iacoviello; Michele Modugno |
| Abstract: | The aftermath of the COVID-19 pandemic saw a surge in inflation around the world, reflecting rapid increases in the demand for goods, strained supply chains, tight labor markets, and sharp hikes in commodity prices exacerbated by the Russian war on Ukraine. As illustrated in figure 1, this inflation surge was synchronized across advanced and emerging economies, not only for total inflation but also for its core component. |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-06-28 |
| By: | Alfred Duncan; Charles Nolan |
| Abstract: | Adam Smith promoted free banking—private and compe ve bank notes backed by gold. He also supported restricons on banks. This paper analyses Smith’s views and the era in which they developed. We suggest his regulaons were a backstop against the risks banks posed to depositors but primarily to monetary stability. In modern parlance, Smith promoted macroprudenal regulaons to underpin monetary stability, just like Friedman and Schwartz (1963) viewed the FDIC in 1933 in the US. We discuss why Smith’s view of efficient banking was not realised. Ulmately, bank regulaon developed a microprudenal focus running aground in the 2008/9 financial crash. The rising prominence of macroprudenal regulaon may provide a chance to reorientate banking regulaon to support monetary stability. The early signs are not especially promising. |
| Keywords: | Adam Smith, banking |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2023_08 |
| By: | Thomas Klitgaard |
| Abstract: | The consumer price index for groceries has risen more than the overall price index since the start of the pandemic, with a particularly large jump in 2022. In looking for explanations, a starting place is the behavior of raw commodity prices, which surged from early 2021 to mid-2022. In addition, wages for low-paid grocery workers have gone up faster than wages for the workforce as a whole. Finally, even though profit margins for grocery stores have gone up, the increase appears to be only a small contributor to the rise in food prices relative to the increase in their operating costs. This analysis suggests that the significant moderation in food inflation since the start of 2023 is due to still-high wage inflation for grocery workers being offset by the retreat in commodity prices. |
| Keywords: | consumer food inflation; Agricultural Commodity Prices; wages; pandemic |
| JEL: | E3 |
| Date: | 2024–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98551 |
| By: | Victor Almeida; Carlos Esquivel; Timothy J. Kehoe; Juan Pablo Nicolini |
| Abstract: | We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. The first mechanism, the standard mechanism, depends on how a higher interest rate tightens the government’s budget constraint. The second mechanism, the renegotiation mechanism, depends on how a higher rate increases lenders’ opportunity cost of holding delinquent debt, which makes lenders accept larger haircuts and makes default more attractive for the government. We use the model to study the 1982 Mexican default, which followed a large increase in U.S. interest rates. We argue that our novel renegotiation mechanism is key for reconciling standard sovereign default models with the narrative that U.S. monetary tightening triggered the crisis. |
| Keywords: | Renegotiation; Sovereign default; Interest rate shocks |
| JEL: | G28 F34 F41 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:98598 |
| By: | Naohisa Hirakata (General Manager, Niigata Branch, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Mitsuru Katagiri (Associate Professor, Faculty of Business Administration, Hosei University (E-mail: mitsuru.katagiri@hosei.ac.jp)) |
| Abstract: | This paper investigates the role of foreign direct investment (FDI) in accounting for the long-term trend of capital flows under demographic changes. For this purpose, we incorporate horizontal FDI under the proximity-concentration trade-off into a two-country DSGE model and conduct a quantitative analysis using long-term Japanese data for capital flows since the 1960s. The quantitative analysis finds that the transition dynamics solely driven by demographic changes well account for the long-term trend of capital flows and that multinational firms' endogenous decision on FDI in response to population aging is key to explaining the long-term trend. |
| Keywords: | Capital flows, Demographic changes, Foreign direct investment (FDI) |
| JEL: | F12 F23 F32 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-05 |
| By: | Takuji Fueki (Hitotsubashi University (E-mail: takuji.fueki@r.hit-u.ac.jp)); Takeshi Shinohara (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: takeshi.shinohara@boj.or.jp)); Mototsugu Shintani (The University of Tokyo (E-mail: shintani@e.u-tokyo.ac.jp)) |
| Abstract: | We construct a Climate Change News (CCN) index which measures attention to climate change risk for Japan, based on text information from newspaper articles. We compare our index with the original WSJ Climate Change News index of Engle et al. (2020) for the U.S. (WSJ-CCN index), as well as other measures of macroeconomic uncertainty. We find that the correlation between the CCN indexes of the U.S. and Japan is much higher than the correlation between the CCN index and other uncertainty measures in either of those countries. We also find that shocks to the CCN indexes have significantly negative effects on economic sentiment, but have ambiguous effects on industrial production. This contrasts with the fact that, for both the U.S. and Japan, other uncertainty shocks have negative effects on both economic sentiment and industrial production. As an application of the CCN indexes, we investigate if the effectiveness of monetary policy depends on the degree of attention to climate change risks. |
| Keywords: | Climate Change, Text Analysis, Monetary Policy, Nonlinear Local Projection |
| JEL: | E32 E52 Q54 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-03 |
| By: | Marie-Hélène Felt; Angelika Welte; Katrina Talavera |
| Abstract: | Mobile phones are ubiquitous around the world, making them obvious conduits for innovative payment technologies, or mobile payments. In Canada, five out of six adults regularly use a mobile phone. However, they have not started to use mobile payments at the same rate as other payment innovations, such as contactless card payments. In this paper, we present a two-stage model of mobile phone and mobile payment use. An important feature of the model is that it controls for selectivity due to mobile device adoption. Controlling for selection into mobile phone usage reveals unobserved factors that have negative effects on mobile phone usage but a positive effect on the propensity to use mobile-type payments. These factors could be preferences or constraints. We present empirical evidence that providing people without a mobile phone access to payments with features similar to mobile payments could result in usage rates exceeding the current use among mobile phone owners. Therefore, people who are unable to acquire or choose not to own a mobile device might have unmet payment needs. |
| Keywords: | Digital currencies and fintech; Econometric and statistical methods |
| JEL: | C14 C57 C92 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-25 |
| By: | Francisco G. Dakila Jr.; Dennis M. Bautista; Jasmin E. Dacio; Rosemarie A. Amodia; Sarah Jane A. Castañares; Paul Reimon R. Alhambra; Jan Christopher G. Ocampo; Charles John P. Marquez; Mark Rex S. Romaraog; Mr. Philippe D Karam; Daniel Baksa; Mr. Jan Vlcek |
| Abstract: | The Bangko Sentral ng Pilipinas (BSP) has enhanced its macroeconomic modeling through the Forecasting and Policy Analysis System (FPAS), transitioning from a multi-equation econometric model to a modernized system centered on the Quarterly Projection Model (QPM). In its new version, the Policy Analysis Model for the Philippines (PAMPh2.0) integrates forward-looking projections, endogenous monetary policy, fiscal and macroprudential considerations, labor dynamics, and addresses complex shocks and policy trade-offs, facilitating effective policy mix determination and supporting real-time policy evaluation. The BSP’s modernization efforts also include refining forecast calendars and strengthening communication channels to accommodate the operationalization of PAMPh2.0. Detailed validation methods ensure empirical consistency. Finally, future refinements will align the model with evolving empirical findings and theoretical insights, ensuring its continued relevance. |
| Keywords: | Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Fiscal Policy; Macroprudential Policies |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/148 |
| By: | Joof, Foday |
| Abstract: | The aim of this paper is to construct an early warning signaling mechanism (exchange rate market pressure index) for predicting currency crises in The Gambia. The analysis revealed that the Gambian economy suffered six major currency crises between 2002 and 2023. These episodes stemmed from both domestic and external shocks, with more vulnerability from domestic shocks. However, the observed pressures are mostly short-lived with market absorbing shocks, on average between 1-2 months. Importantly, a threshold has been determined to identify pressures in the Forex market before a currency crisis. |
| Keywords: | Exchange rate market pressure index, Currency crises, The Gambia |
| JEL: | E6 |
| Date: | 2024–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121534 |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute) |
| Abstract: | Repo rates frequently exceed unsecured interbank rates. This apparent anomaly occurs under different institutional structures, currencies, and tenors, often over prolonged periods. I develop a theory of liquidity sourcing and provisioning under constraints that results in a trilateral linkage between unsecured and repo rates and the rate of return of the underlying collateral in the cash market. The model incorporates what differentiates repos from plain collateralized loans, namely, that cash providers get the collateral for the duration of the contract. The collateral spread (unsecured minus repo) emerges as a measure of stress. Negative spreads are symptoms of highly stressed markets. |
| Keywords: | liquidity, repo, collateral spread, trilateral linkage, liquidity premium, general collateral, financial stress |
| JEL: | G12 G13 G21 E43 E58 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2437 |