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on Monetary Economics |
| By: | Berger, Tino; Ochsner, Christian |
| Abstract: | The European Central Bank (ECB) strives to maintain inflation at a 2% target rate, yet the Euro area's diverse economies pose challenges to achieving this goal with a single nominal interest rate. Effective monetary policy transmission hinges on synchronizing the Natural Rate of Interest (NRI) across constituent economies. This note investigates NRI synchronization between Germany, the largest Euro area economy, and the entire Euro area. Utilizing Bayesian estimation of the Holston et al. (2017) model, we find robust synchronization between Germany's NRI and that of the entire Euro area, even amid level differences, supporting effective monetary policy coordination. |
| Keywords: | unobserved component model, natural rate of interest, HLW model, Euro area, Germany |
| JEL: | C32 E43 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:svrwwp:300653 |
| By: | Forte, Antonio |
| Abstract: | This paper describes the transmission of the monetary policy impulses to banking interest rates in Italy from the late 1960s to the mid-1980s. The study introduces three main novelties: firstly, the use of a completely new database sourced from original papers of that period; secondly, an analysis of the monetary policy transmission for interest rates on eight different types of loans and on loans to sixteen productive sectors; thirdly, the study of monetary policy transmission to regional and provincial interest rates on loans. This comprehensive study provides further awareness into the monetary policy transmission during a period of high inflation and offers valuable insights for the present. |
| Keywords: | monetary policy, inflation, banks, interest rates |
| JEL: | E43 E58 N14 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121396 |
| By: | Afrouzi, Hassan; Priftis, Romanos; Dietrich, Alexander M.; Myrseth, Kristian Ove R.; Schoenle, Raphael S. |
| Abstract: | We document novel survey-based facts about preferred long-run inflation rates among US consumers. Consumers on average prefer a 0.20% annual inflation rate, well below the Federal Reserve’s 2% target. Inflation preferences not only correlate with demographic and socioeconomic characteristics, but also with economic reasoning. A randomized control trial reveals that two narratives based on economic models—describing how inflation lowers the real value of wages and money holdings—affect inflation preferences. While our results can inform the design of central bank communication on inflation targets, they also raise questions about the alignment between such targets and consumer preferences. JEL Classification: C83, E31, E52 |
| Keywords: | household expectations, inflation preferences, survey |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242957 |
| By: | Burban, Valentin; De Backer, Bruno; Vladu, Andreea Liliana |
| Abstract: | This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, π∗t , is applied to inflation-linked swap (ILS) rates, while taking into account survey-basedinflation forecasts. Estimates of π∗t have been close to 2% since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadlyanchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of π∗t are much above 2% in the early 1990s, but they convergence to levels below 2% by the end of the decade when the ECB was established. JEL Classification: E31, E43, E47, E58 |
| Keywords: | inflation-linked swap rates, inflation expectations, no-arbitrage, shifting endpoint, surveys |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242964 |
| By: | Jean-Marie Le Page (Université Paris-Panthéon-Assas) |
| Abstract: | Nordhaus's theory of the "destructive game" (1994) is a central analysis of the policy mix. His theory showed that a lack of cooperation between the central bank and the fiscal authorities would result in the budget deficit being higher and the inflation rate lower than either of the authorities would want. It explains indeed why Central Bank independence can lead to these suboptimal results even when the goals of monetary policy are set by the fiscal authority. But the construction of this model was based on the existence of a Phillips-type relationship between the inflation rate and the unemployment rate, which has lost its relevance in the contemporary economy. Today, the prospect of a rise in the inflation rate leads to an increase in interest rates and a subsequent rise in the unemployment rate. This paper intends to show that the main conclusions of the Nordhaus model are preserved, with a model based on an increasing relationship between the inflation rate and the unemployment rate. Moreover, as in traditional macroeconomic theory, according to this version of the model, the unemployment rate is the same in steady states for different strategic equilibria. |
| Keywords: | policy mix, Nordhaus's destructive game, monetary and fiscal policy, central banking, JEL classification: E10, E52, E58, E62, monetary and fiscal policy JEL classification: E10 |
| Date: | 2024–03–18 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04634043 |
| By: | Dalloul, Ami |
| Abstract: | This paper investigates the effectiveness of the media transmission channel of the Federal Reserve (Fed) communication with the general public. Spanning a 20-year period (2003-2023), around 5, 400 Fed communication documents and 333, 000 articles from USA Today are analyzed. A positive and significant relationship between Fed communications and media coverage is found, particularly after the introduction of post-FOMC press conferences. Crisis-related topics strongly resonate with the media, while other topics such as inflation forecasts show varied effectiveness. Changes in the Fed's communication style has been effective for topics like inflation, however the effect is not uniform across all Fed communications topics. |
| Keywords: | monetary policy, central bank communication, topic modelling, media transmission channel |
| JEL: | E52 E58 C55 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-724 |
| By: | António Afonso; Francisco Gomes-Pereira |
| Abstract: | This paper studies the impact of monetary policy on fiscal sustainability in the euro area. Our sample includes 12 euro area countries and covers the period from 2003:Q1 to 2022:Q4. We extend a fiscal reaction function (Bohn’s rule) by including the monetary policy stance as an interaction term. Our findings are as follows: First, a contractionary (expansionary) monetary stance tends to lead to an increase (decrease) in the primary balance. Second, the ECB’s monetary policy stance significantly influences the fiscal reaction function coefficient. In other words, contractionary monetary policy induces a larger increase in primary balances in response to an increase in the debt-to-GDP ratio than if monetary policy was neutral or expansionary. Our findings suggest that expansionary monetary policy has the potential to help fiscal sustainability, and potentially mitigate fiscal fatigue. Conversely, contractionary monetary policy can exacerbate the fiscal effort required to satisfy the government intertemporal budget constraint. |
| Keywords: | Monetary Policy Stance, Fiscal Sustainability, Debt Sustainability. |
| JEL: | E52 E58 E63 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03352024 |
| By: | Ivan Yotzov; Nicholas Bloom; Philip Bunn; Paul Mizen; Gregory Thwaites |
| Abstract: | This paper analyses the response of firms to monthly CPI inflation releases using high-frequency data from a large economy-wide business survey. CPI inflation perceptions respond very quickly, in a matter of hours after the release. We also find that firms’ expected own-price growth has a strong positive correlation with changes in CPI inflation, particularly for increases in inflation. This sensitivity is stronger when inflation is high. Firms are also more responsive when inflation coverage in the media is elevated and appear to have had a supply-side view of the economy since 2022: higher aggregate inflation leads to lower expected sales volume growth and higher expected cost growth. Firms also seem to anticipate the monetary policy response, as positive inflation changes are associated with higher expected borrowing rates. |
| JEL: | C83 D22 D84 E31 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32731 |
| By: | Jagjit Chadha; Corrado Macchiarelli; Satyam Goel; Arno Hantzsche; Sathya Mellina |
| Abstract: | In response to the 2016 referendum on EU Membership and the ensuing uncertainty as to the eventual consequences of Brexit, the Bank of England (BoE) adopted various methods of influencing market rates, including conventional, unconventional monetary policy measures and communications on forward guidance. To investigate the effectiveness of BoE’s communication, we first decompose long-dated yields into a risk neutral and term premium component. Text-based analysis of Monetary Policy Committee minutes is then used to measure the stance of policy, attitudes to QE and Brexit. We show that the Bank’s communication strategy acted to complement the stance of monetary policy, which had responded by lowering Bank rate and expanding QE, and acted to lower the term premium that might otherwise have risen in response to Brexit uncertainty. |
| Keywords: | UK referendum; Brexit; risk premium; monetary policy; central bank communication; text mining |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/160 |
| By: | Bruch, Jan; Seitz, Franz; Vollmer, Uwe |
| Abstract: | We assess the impact of macroprudential measures on macroeconomic stability using a DSGE model in which firms can access both direct and indirect financing. The model is calibrated with data from the euro area. We compare two different macroprudential rules (time-invariant and counter-cyclical) in the presence of a monetary policy shock and a macroprudential policy shock. We find that the macroprudential rule has little impact on the adjustment dynamics to a monetary and macroprudential shock. Direct financing increases the impact of monetary shocks on the volatility of financial variables but not on output and inflation. Simultaneous monetary policy and macroprudential policy shocks do not alter the reaction of inflation compared to a monetary policy shock but cause permanent output losses. |
| Abstract: | Wir untersuchen die Auswirkungen makroprudenzieller Maßnahmen auf die makroökonomische Stabilität mit Hilfe eines DSGE-Modells, in dem Unternehmen sowohl Zugang zu direkter als auch zu indirekter Finanzierung haben. Das Modell wird mit Daten des Euroraums kalibriert. Wir vergleichen zwei verschiedene makroprudenzielle Regeln (zeitinvariant und antizyklisch) in Gegenwart eines geldpolitischen Schocks und eines makroprudenziellen Schocks. Wir stellen fest, dass die makroprudenzielle Regel kaum Auswirkungen auf die Anpassungsdynamik bei einem geldpolitischen und makroprudenziellen Schock hat. Die direkte Finanzierung erhöht die Auswirkungen von monetären Schocks auf die Volatilität der Finanzvariablen, nicht aber der Produktion und Inflation. Gleichzeitige geldpolitische und makroprudenzielle Schocks verändern die Reaktion der Inflation im Vergleich zu einem geldpolitischen Schock nicht, verursachen aber dauerhafte Produktionsverluste. |
| Keywords: | Monetary Policy, Macruprudential Policy, Inflation, Business Cycle, DSGE |
| JEL: | E12 E31 E32 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:300658 |
| By: | Jérôme Deyris (UPN - Université Paris Nanterre) |
| Keywords: | European Central Bank climate change low-carbon transition monetary policy financial stability green central banking, European Central Bank, climate change, low-carbon transition, monetary policy, financial stability, green central banking |
| Date: | 2023–01–02 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04638404 |
| By: | Masek, Frantisek; Zemlicka, Jan |
| Abstract: | We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinitely long given a conventional degree of myopia. Finite yet long-lasting windows dominate for higher cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window may depend on the speed of return to the target path. We solve the model both locally and globally to disentangle the effects of uncertainty due to the ELB. The welfare loss difference between solution techniques is considerably decreasing in the degree of history dependence. JEL Classification: E31, E32, E52, E58, E71 |
| Keywords: | average inflation targeting, behavioral macroeconomics, heterogeneous agents, monetary policy |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242955 |
| By: | Andrés Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary non-neutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary non-neutrality predict a nearly constant fraction of price changes. |
| JEL: | E3 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32748 |
| By: | Bence Bardóczy; Mateo Velásquez-Giraldo |
| Abstract: | We study the aggregate and distributional effects of monetary policy in a heterogeneous agent New Keynesian model that explicitly represents the life cycle of households. The model matches the age patterns in the level and dispersion of labor income and financial wealth in the U.S. despite the absence of preference heterogeneity and portfolio adjustment costs. Monetary policy affects the consumption of young households mainly through labor income and the consumption of old households mainly through asset returns. More than half of the aggregate consumption response to an expansionary monetary policy shock comes from those below the age of 40. The shock redistributes welfare from the wealthiest old to the poorest young and increases average welfare of most cohorts. |
| Keywords: | Life cycle; Heterogeneous agents new keynesian (hank) models; Monetary policy transmission |
| JEL: | E52 E21 E12 |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-52 |
| By: | Adjemian, Stéphane; Bokan, Nikola; Darracq Pariès, Matthieu; Müller, Georg; Zimic, Srečko |
| Abstract: | This paper introduces ECB-(RE)BASE as the model-consistent, or rational expectation version of the ECB-BASE model. It brings new analytical capabilities to consider varying degrees of heterogeneity in expectation formation across the agents of the model. While the original version of ECB-BASE features VAR-based expectations, we examine two alternative versions either with full model-consistent expectations or with hybrid expectations. The paper provides a didactic exposition of the changes in the model properties brought by the various expectation settings. Furthermore, we conduct illustrative scenarios around the macroeconomic shocks experienced over the recent years. The simulations notably suggest that moving from VAR-based to model-consistent expectations would limit the pandemic-induced macroeconomic volatility but would exacerbate the price pressures during the inflation surge period. Overall, this model development extends the range of possibilities for risk and policy analysis which can enhance the contribution of ECB-(RE)BASE to monetary policy preparation. JEL Classification: C3, C5, E1, E2, E5 |
| Keywords: | euro area, model-consistent expectations, monetary policy, semi-structural model |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242965 |
| By: | Bobasu, Alina; Dobrew, Michael; Repele, Amalia |
| Abstract: | We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. Our model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income. JEL Classification: E52, F41, Q43 |
| Keywords: | energy prices, heterogeneous agents, monetary policy, non-homothetic preferences, open economy model |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242967 |
| By: | Christina D. Romer; David H. Romer |
| Abstract: | Why do some attempts at disinflation lead to substantial reductions in inflation while others do not? We investigate this question in the context of the Federal Reserve’s attempts at disinflation since World War II. Our central finding is that a fundamental determinant of success in reducing inflation was the strength of the Federal Reserve’s commitment to disinflation at the start of its attempts. In episodes where its commitment was high, there were significant declines in inflation that were often long-lasting, while in ones where its commitment was low, falls in inflation were at most small and short-lived. We find that although the extent of the Federal Reserve’s commitment was often clear to the public, there is no evidence that stronger commitment to disinflation directly affected expected inflation. Rather, the main channel through which weak commitment led to unsuccessful disinflation was premature abandonment of the disinflationary policy. We conclude by discussing the implications for the Federal Reserve’s current effort at disinflation. |
| JEL: | E31 E52 E58 E65 N12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32666 |
| By: | Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See |
| Abstract: | We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries. Despite both recoveries sharing similar unemployment dynamics, the recovery from the Great Recession exhibited subdued EE transitions and inflation dynamics. In our model, the optimal monetary policy involves a strong positive response to EE fluctuations, suggesting that central banks should distinguish between recovery episodes with different EE dynamics even if they have similar unemployment rates. |
| Keywords: | job mobility; monetary policy; HANK model; job search |
| JEL: | E12 E24 E52 J31 J62 J64 |
| Date: | 2024–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98509 |
| By: | Sindala, Elvin; Musonda, Gabriel; Mumba, Matrina; Basila, Moono |
| Abstract: | Inflation, exchange rate and gross domestic product (GDP) are critical variables to macroeconomic stability. For a small economy like Zambia, it is imperative for central authorities to establish the size and degree of the exchange rate pass-through (ERPT) to domestic prices and output as they formulate monetary policies. This paper examines the effect of ERPT to domestic prices and local production using the vector error correction model (VECM) for the period 1995Q1 to 2019Q4. The study utilizes the baseline and alternative models for intra study comparisons. Results show that the ERPT to domestic prices is high, persistent, and incomplete in the baseline model while the alternative model depicts a low, persistent, and incomplete ERPT in the long run. Furthermore, the long run ERPT to local production was found to be high, persistent, and complete. Policy implications are that monetary and fiscal policies should be geared towards exchange rate measures that would contribute to both internal and external balances and nurture macroeconomic stability. The measures would include management of exchange rate volatility, effective debt sustainability strategies and reviving as well as broadening the manufacturing sector in Zambia to nurture an export-oriented economy. |
| Keywords: | Price; exchange rate; local production; VECM |
| JEL: | E0 E00 E01 E02 E03 E4 E42 E44 F1 F14 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121533 |
| By: | Krenz, Johanna; Tsiaras, Stylianos |
| Abstract: | We estimate the dynamic effects of a high-frequency identified unionwide quantitative easing (QE) shock on real GDP, inflation and unemployment in all euro area countries. We document that the effects of QE are very heterogenous across countries as regards size, significance and timing, especially with respect to GDP and unemployment. Exploiting the panel structure of our dataset, we show that the effect of QE on real GDP is amplified by a larger fraction of liquidity-constrained households in a country. The latter result seems to be driven by the general equilibrium impact of QE on unemployment. |
| Keywords: | Quantitative easing, inequality, LP-IV, DSGE, Household Finance and Consumption Survey (HFCS), Europe |
| JEL: | E52 E58 E24 C23 C26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:uhhwps:300655 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | We examine public trust in the European Central Bank (ECB) and its determinants using data from the Bundesbank Household Panel survey for Germany. Employing an interdisciplinary approach that integrates insights from political science and psychology, we offer a fresh perspective on the factors influencing central bank trust that is more holistic than the conventional one. Our primary findings can be summarized as follows. Households who state that competence, which we define as the ECB's performance in maintaining stable prices and making decisions grounded in rules, science, and data, matters for their trust in the ECB, tend to express higher trust in the ECB. Conversely, those who place greater importance on values, particularly the integrity of top central bankers, honest communication and broader concern, tend to trust the ECB less. Trust in the ECB also hinges on trust in political institutions more generally and, to a lesser extent, on generalized trust (i.e. trust in others). |
| JEL: | E58 E59 E7 Z13 Z18 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32716 |
| By: | Colciago, Andrea; Priftis, Romanos; Chafwehé, Boris |
| Abstract: | This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labor productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically.As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilizing aggregate activity and business dynamism. JEL Classification: E62, L16, O33, Q43 |
| Keywords: | energy, firm entry and exit, monetary policy, productivity |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242961 |
| By: | William Allen |
| Abstract: | In the quarter-century since the Bank of England Monetary Policy Committee was established, the various financial operations of the Bank of England and of the Government have become more inter-dependent, as a result of the financial crisis, quantitative easing, the response to Covid-19, and uncertainties about fiscal policy. The separation of decision making among the various bodies within the Bank of England – the Monetary Policy Committee, the Financial Policy Committee and the executive management of the Bank – has become anomalous. In practice, important decisions involving very large financial risks have been made by the executive management of the Bank, at meetings whose minutes have not been published, and there has sometimes been a lack of transparency. This applies in particular to the decision after the global financial crisis to avoid taking credit risk as far as possible, and instead, through quantitative easing, to take enormous interest rate risks on the public sector's behalf. The paper advocates a radical simplification of the Bank of England's management structure in the interests of more efficient decision making and greater transparency. |
| Date: | 2022–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrp:38 |
| By: | Hassan Afrouzi; Joel P. Flynn; Choongryul Yang |
| Abstract: | This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%. |
| Keywords: | Measured beliefs; Nominal rigidities; Rational inattention; Monetary non-neutrality |
| JEL: | E31 E32 E71 |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-53 |
| By: | Ray C. Fair (Yale University) |
| Abstract: | This paper makes three main contributions. First, inflation expectation equations are estimated using quarterly time series data. Second, a price equation in level form is estimated that is consistent with the data, unlike Phillips-curve equations. Third, the case is considered in which an expectation variable in an inflation or price equation is not causal. The results suggest that household inflation expectations are mostly affected by current and past inflation. The Fed through interest rates has a modest effect. In the estimated price equation a measure of the expected future price level is significant, although it may not be causal. Whether it is or not, the results show that the Fed’s ability to affect inflation is modest since its effect on expectations is modest. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2401 |
| By: | Akihito Yoneyama (Bank of Japan); Akitaka Tsuchiya (Bank of Japan); Noritaka Fukuma (Bank of Japan) |
| Abstract: | In this paper, we extract the implied probability distributions from daily option prices for the future levels of yen swap rates and the U.S. dollar/yen exchange rate, which came under upward pressure amid rate hikes by central banks in the United States and Europe from 2022 to 2023, using data through the end of 2023. The extracted implied probability distributions allow us to understand the overall picture of market participants' risk perceptions, which cannot be captured by other simpler indicators such as risk reversal. The results suggest that caution about a higher interest rate increased significantly in the yen interest rate swaps market toward the middle of 2022, as overseas interest rates rose. Such caution further heightened after the Bank of Japan decided to expand the range of 10-year Japanese government bond (JGB) yield fluctuations from the target level at the Monetary Policy Meeting (MPM) held in December 2022, but subsequently eased. In the U.S. dollar/yen market, caution about future yen depreciation heightened toward fall 2022 as the yen weakened. However, when the yen weakened against U.S. dollar again to around the same level in fall 2023, market participants did not become as cautious as in fall 2022 about the future yen depreciation. |
| Keywords: | implied probability distributions; Yen interest rates; U.S. dollar/yen exchange rate |
| JEL: | F31 G12 G13 G17 |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev24e08 |
| By: | Popov, Vladimir |
| Abstract: | China was extremely successful in recent decades in managing external equilibrium in the short and medium term using three mechanisms to cushion the balance of payments shocks. First, it maintained a flexible rate, so could adjust to the fluctuations in trade balance and capital flows via devaluation/appreciation of national currency. Second, it exercised a capital account control that prevented the sudden and sizeable outflow of capital. And third, its foreign exchange reserves were the largest in the world and large even as compared to its GDP and foreign trade and capital flows, so they could have been used to absorb negative trade and capital account shocks with full sterilization (without a fear of continuous outflow of capital due to capital control). In particular, China survived the Asian currency crisis of 1997 better than the other countries – its reserves even did not decrease in 1997 and its GDP growth rates virtually did not decline. However, in the long term the abandonment of the policy of foreign exchange reserves accumulation (since the Great Recession of 2008-09) led to the considerable appreciation of the real exchange rate of yuan, the decline in the ratio of export to GDP and the share of investment in GDP. The result was the slowdown of growth: GDP growth rates fell from 14% in 2007 to 5% in 2024. |
| Keywords: | balance of payments, foreign exchange reserves, external and internal equilibrium, exchange rate, slowdown of growth in China |
| JEL: | F31 F32 F41 N15 O24 O40 |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121627 |
| By: | Sushant Acharya (CEPR - Center for Economic Policy Research); Edouard Challe (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | We study optimal monetary policy in an analytically tractable heterogeneous agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from a representative agent benchmark because monetary policy can affect consumption inequality, by stabilizing consumption risk arising from both idiosyncratic shocks and unequal exposures to aggregate shocks. The trade-off between consumption inequality, productive efficiency, and price stability is summarized in a simple linear-quadratic problem yielding interpretable target criteria. Stabilizing consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and price level relative to the representative agent benchmark. |
| Keywords: | New Keynesian Model, Incomplete Markets, Optimal Monetary Policy |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04645687 |
| By: | Schwartz, Herman M. |
| Abstract: | What explains the US dollar's role in the global economy and the tensions affecting its likely persistence? Most analyses start from Triffin's dilemma, which accurately captured specific but partial tensions of a global monetary system based on essentially fixed exchange rates, gold backing for its core currency, and relatively robust capital controls. Triffin's approach, and those based on it, struggles to explain the tensions in a system with floating exchange rates and fiat money, because Triffin and successors assume a commodity theory of money, a loanable funds model for credit creation, and the "triple coincidence" of monetary, legal, and economic zones. Approaching the question from different premises - chartalist money, endogenous credit creation, and interlocked global balance sheets - enables us to see four factors behind the antinomies or dilemmas that structure the dynamics and durability of US dollar centrality. Those four factors are adequate credit creation and thus global aggregate demand growth, current account deficits for the core, domestic legitimacy in major economies, and the dollar's status as global quasi-state money. |
| Abstract: | Wie lässt sich die Bedeutung des US-Dollars in der Weltwirtschaft erklären? Was hat das mit den Spannungen auf sich, die über den Fortbestand der Dollar-Dominanz entscheiden? Die meisten Analysen nehmen das Triffin-Dilemma zum Ausgangspunkt, das spezifische Spannungen des globalen Geldsystems einst gut erfasste. Dieses System basierte im Wesentlichen auf festen Wechselkursen, einer goldgedeckten Leitwährung und Kapitalverkehrskontrollen. Triffins Ansatz und darauf aufgebaute Analysen haben aber Schwierigkeiten, wenn es um die Spannungen in einem Geldsystem mit Fiatgeld und frei schwankenden Wechselkursen geht. Triffin und seine Nachfolger nahmen die Warentheorie des Geldes und das Loanable-Funds-Modell der Kreditschöpfung als stimmig und die dreifache Koinzidenz von Währungs-, Rechts- und Wirtschaftsräumen als gegeben an. Wenn wir das Problem hingegen unter den Prämissen des chartalistischen Geldes, der endogenen Kreditschöpfung und miteinander verzahnter globaler Bilanzen betrachten, lassen sich hinter den Unvereinbarkeiten und Dilemmata vier Faktoren erkennen, die für die Dynamiken und die Dauerhaftigkeit der Dollar-Dominanz entscheidend sind: eine angemessene Kreditschöpfung und damit ein Wachstum der globalen Gesamtnachfrage; Leistungsbilanzdefizite der Kernländer; innenpolitische Legitimität in den großen Volkswirtschaften; und der Status des Dollars als globales Quasi-Staatsgeld. |
| Keywords: | Balance of payments, foreign debt, geo-economics, international financial system, money, power, reserve currency, Auslandsverschuldung, Geld, Geoökonomie, internationales Finanzsystem, Leitwährung, Macht, Zahlungsbilanz |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:mpifgd:300666 |
| By: | Geromichalos, Athanasios; Wang, Yijing |
| Abstract: | In monetary theory, money is typically introduced as an object that can help agents bypass frictions, such as anonymity and limited commitment. Consequently, common wisdom suggests that if agents had access to more unsecured credit these frictions would become less severe and welfare would improve. In similar spirit, common wisdom suggests that as societies get access to more alternative (to money) payment instruments, i.e., more ways to bypass the aforementioned frictions, welfare would also increase. We show that for a large variety of settings and market structures this common wisdom is not accurate. If the alternative means of payment is sufficient to cover all the liquidity needs of the economy, then indeed the economy will reach maximum welfare. However, if access to this alternative payment system is relatively low to begin with, increasing it can hurt the economy’s welfare, and we characterize in detail the set of parameters for which this result can arise. Our model offers a simple explanation to a recent empirical literature suggesting that increased access to credit is often followed by declined economic activity. |
| Keywords: | monetary-search models, over-the-counter markets, credit, liquidity, welfare |
| JEL: | E31 E43 E52 G12 |
| Date: | 2024–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121388 |
| By: | Zhengyang Jiang; Jialu Sun |
| Abstract: | We document shifts in investor composition during quantitative tightening, which suggest that investors adjust their portfolios at different speeds. To understand its implications for bond valuation, we develop a general equilibrium model which highlights the dynamic interaction between heterogeneous investors. In the model, long-term investors have higher risk-taking capacity, but face a portfolio adjustment cost; liquidity traders have lower risk-taking capacity, but can trade freely. Our model predicts a novel overshooting pattern: when the central bank unwinds its bond purchase, slow adjustment by long-term investors requires liquidity traders to absorb the imbalance, who demand a higher risk premium that creates excessive bond price decline and volatility in the short run. As a result, quantitative tightening is not simply a symmetric reversal of quantitative easing. |
| JEL: | E5 G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32757 |
| By: | Eichacker, Nina |
| Abstract: | While cryptocurrencies have existed since 1990, they have come to increasing prominence after 2009, when BitCoin was created. Since 2009, a proliferation of cryptocurrencies has emerged, prompting both debate and dramatic flurries of economic activity. While some argue that cryptocurrencies may present an alternative to state-backed fiat currencies, others characterize them as volatile financial assets that are used to exploit particularly vulnerable demographic groups. This chapter examines cryptocurrencies through two lenses: a historic-institutionalist account of how they have developed as both a financial asset and an alternative to the traditional centralized financial system based on banks, and a Keynesian analysis of crypto currencies as financial assets particularly prone to the generation of bubbles and crashes. It considers both the ecological and economic fallout from the creation of these assets, as well as lessons that traditional financial institutions may learn from cryptocurrencies and the institutions through which purchasers may access these assets. |
| Date: | 2024–07–26 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:7kyrm |