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on Monetary Economics |
| By: | Christopher J. Gust; J. David López-Salido |
| Abstract: | Central banks operate in a world in which there is substantial uncertainty regarding the transmission of its actions to the economy because of uncertainty regarding the formation of private-sector expectations. We model private sector expectations using a finite horizon planning framework: Households and firms have limited foresight when deciding spending, saving, and pricing decisions. In this setting, contrary to standard New Keynesian (NK) models, we show that "an inflation scares problem" for the central bank can arise where agents' longer-run inflation expectations deviate persistently from a central bank's inflation target. We formally characterize optimal time-consistent monetary policy when there is uncertainty about the planning horizons of private sector agents and a risk of inflation scares. We show how risk management considerations modify the optimal leaning-against-the-wind principle in the NK literature with a novel, additional preemptive motive to avert inflation scares. We quantify the importance of such risk management considerations during the recent post-pandemic inflation surge. |
| Keywords: | Finite horizon planning; Optimal time-consistent policy under uncertainty; Leaning against the wind; Attenuation principle |
| JEL: | C11 E52 E70 |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-59 |
| By: | Pavel Trunin (Gaidar Institute for Economic Policy); Alexandra Bozheckkova (Gaidar Institute for Economic Policy); Alexander Knobel (Gaidar Institute for Economic Policy) |
| Abstract: | In 2023, monetary policy of the Bank of Russia continued to be implemented amid significant restrictions on capital movements, freezing of international reserve assets and trade restrictions, thereby creating additional risks for macroeconomic and financial stability. During 2023, inflation accelerated, driven by rapid growth of aggregate demand in Russia amid mild fiscal policy, as well as by transfer to prices of the ruble depreciation. This marked the beginning of tightening the monetary policy cycle in H2 2023. In H1, the regulator kept the key rate unchanged at 7.5% per annum, only tightening the key rate movement signal at each subsequent meeting. |
| Keywords: | Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments, fiscal policy |
| JEL: | E31 E43 E44 E51 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gai:ppaper:ppaper-2024-1322 |
| By: | Yotzov, Ivan (Bank of England); Bloom, Nicholas (Stanford University); Bunn, Philip (Bank of England); Mizen, Paul (King’s College London); Thwaites, Gregory (University of Nottingham) |
| 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. |
| Keywords: | Inflation; inflation expectations; survey data; firms |
| JEL: | C83 D22 D84 E31 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1085 |
| By: | Hassan Afrouzi; Saroj Bhattarai; Edson Wu |
| Abstract: | We provide theory and evidence that relative price shocks can cause aggregate inflation and act as aggregate supply shocks. Empirically, we show that exogenous positive energy price shocks have a positive impact not only on headline but also on U.S. core inflation while depressing U.S. real activity. In a two-sector monetary model with upstream and downstream sectors and heterogeneous price stickiness, we analytically characterize how upstream shocks propagate to prices. Using panel IV local projections, we show that the responsiveness of sectoral PCE prices to energy price shocks is in line with model predictions. Motivated by post-COVID inflation in the U.S., a model experiment shows that a one-time relative price shock generates persistent movements in headline and core inflation similar to those observed in the data, even in the absence of aggregate slack. The model also emphasizes that monetary policy stance plays an important role in propagation of such shocks. |
| JEL: | C67 E32 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32816 |
| By: | Holtemöller, Oliver; Sardone, Alessandro |
| Abstract: | In this paper, we discuss how environmental damage and emission reduction policies affect the conduct of monetary policy in a two-sector (clean and dirty) dynamic stochastic general equilibrium model. In particular, we examine the optimal response of the interest rate to changes in sectoral inflation due to standard supply shocks, conditional on a given environmental policy. We then compare the performance of a nonstandard monetary rule with sectoral inflation targets to that of a standard Taylor rule. Our main results are as follows: first, the optimal monetary policy is affected by the existence of environmental policy (carbon taxation), as this introduces a distortion in the relative price level between the clean and dirty sectors. Second, compared with a standard Taylor rule targeting aggregate inflation, a monetary policy rule with asymmetric responses to sector-specific inflation allows for reduced volatility in the inflation gap, output gap, and emissions. Third, a nonstandard monetary policy rule allows for a higher level of welfare, so the two goals of welfare maximization and emission minimization can be aligned. |
| Keywords: | climate change, environmental policy, inflation, macroeconomic stabilization, monetary policy |
| JEL: | E32 E52 E58 Q54 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:301153 |
| By: | Juan R. Hernández (Division of Economics, CIDE); Mateo Hoyos (Division of Economics, CIDE); Daniel Ventosa-Santaulària (Division of Economics, CIDE) |
| Abstract: | In this paper, we examine the impact of global uncertainty on the effectiveness of monetary policy in reducing inflation in emerging market economies (EMEs). Specifically, we explore the repercussions of: (i) global financial stress; (ii) disruptions in the global supply chain; (iii) heightened levels of global geopolitical uncertainty; and (iv) anomalies attributed to climate change. Our main contribution is to demonstrate that monetary policy in EMEs is effective, albeit to a lesser extent, in reducing inflation when uncertainty is heightened due to global factors. We also find that, among the shocks we study, disruptions in the global supply chain affect the most the policy trans- mission mechanisms. To identify the monetary policy shocks, we use a trilemmabased instrument exploiting surprises in the federal funds rate, and cross section variation in capital account openness of each EME. Our results un derscore the complexities inherent in navigating monetary policy within an uncertain global outlook for EMES. |
| Keywords: | Inflation, Monetary Policy, Emerging Market Economies, Financial Volatility, Global Supply Chain, Policy Uncertainty, Climate Change |
| JEL: | C23 C26 C54 E31 E52 F41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte634 |
| By: | Kanngiesser, Derrick (Bank of England); Willems, Tim (Bank of England) |
| Abstract: | We propose a systematic approach for central banks to leverage past forecasts (and associated errors) with the aim of learning more about the structure and functioning of the underlying economy. Applying this method to forecasts made by the Bank of England’s Monetary Policy Committee since 2011, we find that its forecasts have tended to underestimate pass‑through from wage growth, whilst also featuring a Phillips curve that is too flat. Regarding the effects of monetary policy, our results point to transmission via inflation expectations possibly having played a bigger role than attributed to it in the forecast. We also provide a more classical evaluation of forecast errors – finding inflation forecasts to have been unbiased. At the same time, however, inflation forecasts tend to be less accurate than those for real GDP growth, unemployment, and wage growth. This seems attributable to greater inherent uncertainties in the inflation process. |
| Keywords: | Forecasting; forecast error analysis; monetary policy |
| JEL: | E32 E47 E62 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1078 |
| By: | Nikoleta Anesti (Bank of England); Vania Esady (Bank of England); Matthew Naylor (Bank of England; University of Oxford) |
| Abstract: | We construct a novel dataset to investigate the sensitivity of household inflation expectations to personal experienced inflation, testing whether households weigh price changes differently across items in the consumption basket. Food prices matter significantly more for households inflation expectations dynamics than other components, including energy. In particular, households are asymmetrically sensitive to increases in food price-driven inflation, and above-median income households are more sensitive than peers. Taken together, our findings can rationalise a number of empirical regularities related to household expectations: their upwards bias relative to actual inflation; cross-sectional heterogeneity across demographic groups; and their ‘supply-side’ oriented view of the economy. Our results imply that the risk of household expectations contributing to persistent inflationary dynamics are greatest when shocks impact prices of non-core components of the basket. |
| Keywords: | Households, inflation expectations, inflation experiences, heterogeneity, food prices |
| JEL: | C33 D84 E31 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2434 |
| By: | Charles Engel; Steve P.Y. Wu |
| Abstract: | Exchange-rate models fit very well for the U.S. dollar in the 21st century. A “standard” model that includes real interest rates and a measure of expected inflation for the U.S. and the foreign country, the U.S. comprehensive trade balance, and measures of global risk and liquidity demand is well-supported in the data for the U.S. against other G10 currencies. The monetary and non-monetary variables play equally important roles in explaining exchange rate movements. In the 1970s – early 1990s, the fit of the model was poor but the fit (as measured by t- and F-statistics, and R-squareds) has increased almost monotonically to the present day. We make the case that it is better monetary policy (inflation targeting) that has led to the improvement, as the scope for self-fulfilling expectations has disappeared. We provide a variety of evidence that links changes in monetary policy to the performance of the exchange-rate model. |
| JEL: | F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32808 |
| By: | Gluschenko, Konstantin |
| Abstract: | Freezing the reserve assets of some countries and the danger of spreading it to other countries have made the existing international monetary system a very unreliable instrument of international financial relations. This will undoubtedly lead to its transformation, first of all, to a decrease in the role of the US dollar in international trade and finance. In this respect, it is interesting to trace the evolution of the international monetary system, looking at how the US dollar came to dominate it. This is the purpose of this paper. It examines the period before World War II and the emergence of the dollar on the world stage, the rise and fall of the Bretton Woods system, and the subsequent functioning of the international monetary system up to the present. |
| Keywords: | international monetary system gold standard Bretton Woods system International Monetary Fund Jamaica Accords exorbitant privilege |
| JEL: | F01 F33 N10 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121740 |
| By: | Ales Bulir; Jan Vlcek |
| Abstract: | Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or have we observed a long sequence of shocks that have pushed market rates below the equilibrium level? In this paper we show on a sample of 12 open economies that once we account for equilibrium real exchange rate appreciation/depreciation, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero. The explicit inclusion of equilibrium real exchange rate appreciation in the identification of the natural rate is the main deviation from the Laubach-Williams approach. On top of that, we use a full-blown semi-structural model with a monetary policy rule and expectations. Bayesian estimation is used to obtain parameter values for individual countries. |
| Keywords: | Equilibrium real appreciation, natural rate of interest (r-star), Penn effect, zero lower bound |
| JEL: | E43 E52 E58 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/6 |
| By: | Carlos Alberto Durigan Junior; Mauro De Mesquita Spinola; Rodrigo Franco Gon\c{c}alves; Fernando Jos\'e Barbin Laurindo |
| Abstract: | Central Bank Digital Currency (CBDC) can be defined as a virtual currency based on node network and digital encryption algorithm issued by a country which has a legal credit protection. CBDCs are supported by Distributed Ledger Technologies (DLTs), and they may allow a universal means of payments for the digital era. There are many ways to proceed, they all require central banks to develop technological expertise. Considering these points, it is important to understand the new IT governance in the financial markets due to CBDC and digital economy. Information Technology is an essential driver that will allow the new financial industry design. This paper has the objective to answer two questions through an updated Systematic Literature Review (SLR). The first question is What IT resources and tools have been considered or applied to set the governance of CBDC adoption? The second; Identify IT governance models in the financial market due to CBDC adoption. Bank for International Settlements (BIS) publications, Scopus and Web of Science were considered as sources of studies. After the strings and including criteria were applied, fourteen papers were analyzed. This paper finds many IT resources used in the CBDC adoption and some preliminary IT design related to the IT governance of CBDC, in the results and discussion section the findings are more detailed. Finally, limitations and future work are considered. Keywords: Blockchain, Central Bank Digital Currency (CBDC), Digital Economy, Distributed Ledger Technology (DLT), Information Technology (IT), IT governance. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.07898 |
| By: | Dr. Gabriel Züllig; Valentin Grob |
| Abstract: | We investigate how the level of corporate leverage affects firms' investment response to monetary policy shocks. Based on novel aggregate time series estimates, leverage acts amplifying, whereas in the cross section of firms, higher leverage predicts a muted response to monetary policy. We use a heterogeneous firm model to show that in general equilibrium, both empirical findings can be true at the same time: When the average firm has lower leverage and therefore reduces its investment demand more strongly after a contractionary shock, the price of capital declines sharply, which incentivizes all firms regardless of their leverage to invest relatively more, muting the aggregate decline of investment. We provide empirical evidence supporting this hypothesis. Overall, if there are general equilibrium adjustments to shocks, effects estimated by exploiting cross-sectional heterogeneity in micro data can differ substantially from the macroeconomic elasticities, in our example even in terms of their sign. |
| Keywords: | Firm heterogeneity, State dependence, Financial frictions, General equilibrium |
| JEL: | D22 E32 E44 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2024-08 |
| By: | Rustam Jamilov (University of Oxford); Tobias König (University of Bonn); Karsten Müller (National University of Singapore); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | We study bank runs using a novel historical cross-country dataset that covers 184 countries over the past 200 years and combines a new narrative chronology with statistical indicators of bank deposit withdrawals. We document the following facts: (i) the unconditional likelihood of a bank run is 1.2% and that of significant deposit withdrawals 12.7%; (ii) systemic bank runs, i.e. those that are accompanied by deposit withdrawals, are associated with substantially larger output losses than non-systemic runs or deposit contractions alone; (iii) bank runs are contractionary even when they are not triggered by fundamental causes, banks are well-capitalized, and there is no evidence of a crisis or widespread failures in the banking sector; (iv) in historical and contemporary episodes, depositors tend to run on highly leveraged banks, causing a credit crunch, and a reallocation of deposits across banks; and (v) liability guarantees are associated with lower output losses after systemic runs, while having a lender of last resort or deposit insurance reduces the probability of a run becoming systemic. Taken together, our findings highlight a key role for sudden bank liability disruptions over and above other sources of financial fragility. |
| Keywords: | bank runs, financial fragility, deposits, financial crises |
| JEL: | E44 E58 G01 G21 G28 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:333 |
| By: | Efrem Castelnuovo (University of Padova, CESifo, and Centre for Applied Macroeconomic Analysis); Lorenzo Mori (University of Padova); Gert Peersman (Ghent University) |
| 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. |
| URL: | https://d.repec.org/n?u=RePEc:pad:wpaper:0311 |
| By: | Julian Ashwin; Paul Beaudry; Martin Ellison |
| Abstract: | Neural networks offer a promising tool for the analysis of nonlinear economies. In this paper, we derive conditions for the global stability of nonlinear rational expectations equilibria under neural network learning. We demonstrate the applicability of the conditions in analytical and numerical examples where the nonlinearity is caused by monetary policy targeting a range, rather than a specific value, of inflation. If shock persistence is high or there is inertia in the structure of the economy, then the only rational expectations equilibria that are learnable may involve inflation spending long periods outside its target range. Neural network learning is also useful for solving and selecting between multiple equilibria and steady states in other settings, such as when there is a zero lower bound on the nominal interest rate. |
| JEL: | C45 E19 E47 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32807 |
| By: | Woo Jin Choi (University of Seoul); Ju Hyun Pyun (Korea University); Youngjin Yun (Inha University) |
| Abstract: | A central bank's accumulation of foreign reserves can reallocate domestic savings and influence investments across different firms. Leveraging institutional features in Korea and connecting firms to their lending banks for the 2004-2019, we examine how reserve accumulation and sterilization impact credit allocation within the banking system and firm investment. We track the bonds issued by the central bank to sterilize/fund reserve purchases. Different banks take varying amounts of sterilization bonds, and those more responsive adjust their loan supply to firms. As a result, firms heavily dependent on these banks for credit decrease investment during reserve accumulation. |
| Keywords: | international reserves, sterilized intervention, firm investment, bank balance sheet |
| JEL: | C23 E22 E58 F21 F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:inh:wpaper:2024-6 |
| By: | Tufan Ekici; Martin Geiger; Marios Zachariadis |
| Abstract: | We study how poor hand-to-mouth and wealthy hand-to-mouth households form their expectations as compared to wealthy liquid households in the United States, using monthly microeconomic survey data for the period from 2005:2 to 2013:6. Utilizing a timeline of financial crisis events along with changes in stock-market values and uncertainty around those events, we assess the differential responses of these households’ expectations regarding inflation, unemployment, and the interest rate. Our estimates suggest substantial differences in the expectation responses of liquidity constrained households relative to unconstrained ones. |
| Keywords: | liquidity constraints, inflation expectations, unemployment expectations, interest rate expectations, financial shocks |
| JEL: | D84 E30 E70 G01 G51 |
| Date: | 2024–08–19 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:05-2024 |
| By: | Babette Jansen (University of Antwerp); Roland Winkler (Friedrich Schiller University Jena, and University of Antwerp) |
| Abstract: | We consider a two-agent New Keynesian model with savers and hand-to-mouth households with quasi-separable utility functions as introduced by Bilbiie (2020a). This framework allows for separate parameterization of consumption-hours complementarity and income effects on labor supply. We examine how variations in the size of income effects, the degree of non-separability between consumption and hours worked, and the share of hand-to-mouth households impact aggregate dynamics and determinacy properties of interest rate rules. Complementarity between consumption and hours worked and small income effects can reverse the Taylor principle and result in expansionary monetary contractions. |
| Keywords: | Heterogeneity, Monetary policy, Nonseparable preferences, Real indeterminacy, Taylor principle, TANK |
| JEL: | E32 E52 E58 E44 E24 |
| Date: | 2024–08–23 |
| URL: | https://d.repec.org/n?u=RePEc:jrp:jrpwrp:2024-006 |
| By: | Matthew Read (Reserve Bank of Australia) |
| Abstract: | Policymakers are often interested in the degree to which changes in prices are driven by shocks to supply or demand. One way to estimate the contributions of these shocks is with a structural vector autoregression identified using sign restrictions on the slopes of demand and supply curves. The appeal of this approach is that it relies on uncontroversial assumptions. However, sign restrictions only identify decompositions up to a set. I characterise the conditions under which these sets are informative, examining both historical decompositions (contributions to outcomes) and forecast error variance decompositions (contributions to variances). I use this framework to estimate the contributions of supply and demand shocks to inflation in the United States. While the sign restrictions yield sharp conclusions about the drivers of inflation in some expenditure categories, they tend to yield uninformative decompositions of aggregate inflation. A 'bottom-up' decomposition of aggregate inflation is less informative than a decomposition that uses the aggregate data directly. |
| Keywords: | forecast error variance decomposition; historical decomposition; set identification; sign restrictions; structural vector autoregression |
| JEL: | C32 E31 E32 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-05 |
| By: | Douglas A. Irwin; Maurice Obstfeld |
| Abstract: | Korea’s real exchange rate has displayed a mild downward trend since the 1980s, with fluctuations of ±20 percent around that trend. This pattern is surprising because the classic Harrod-Balassa-Samuelson framework suggests that countries experiencing rapid growth in the productivity of their tradable industries should experience real currency appreciation over time. We decompose the sources of change behind the Korean won’s real exchange rate into internal price drivers (the relative price of nontradable goods) and external price drivers (the international relative price of tradable consumption goods, which is heavily dependent on the nominal exchange rate). We find that, on average, the variability in Korea’s real exchange rate, even over long periods, is overwhelmingly due to external price factors. Given the persistent medium-term effects of nominal exchange rate changes on the real exchange rate, the Korean policy of intervening in foreign exchange markets to smooth exchange rate fluctuations appears prudent. However, we also find that over the entire period 1985-2023, internal price factors are the main explanator of the won’s real depreciation. This finding poses a puzzle for standard accounts of the linkage between productivity growth and real exchange rates. |
| JEL: | F30 F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32769 |
| By: | Clément Landormy |
| Abstract: | This study comprehensively analyses Bitcoin’s price dynamics amidst the volatility of 2017-2018, considering various influencing factors. Drawing from Fisher’s Equation of Exchange (1911), Keynes’ liquidity preference theory (1936), and prior research insights, we formulate an Equation of Bitcoin Exchange, setting the stage for empirical testing. Employing autoregressive distributed lag models in both linear (ARDL) and nonlinear (NARDL) frameworks, we scrutinise daily data from 2017 to 2018. Our findings underscore the predominant impact of internal factors, driven by market dynamics and technological advancements, on Bitcoin prices, with investment attractiveness following closely behind. Surprisingly, macroeconomic and financial variables demonstrate relatively less influence. While Bitcoin may not serve as a direct store of value like gold or offer complete hedging against US dollar fluctuations, its potential as a diversification tool in stock markets becomes apparent, barring short-term disruptions associated with Bitcoin price crashes. Moreover, factors related to investment attractiveness frequently exert downward pressure on Bitcoin prices, emphasising the speculative nature inherent in cryptocurrencies. Noteworthy is the positive short-term connection between Bitcoin prices and tether transactions, coupled with the positive long-term interaction between Bitcoin prices and crypto fundraising efforts at the peak of the ICO boom, signalling a pre-crash surge in 2017. Conversely, the long-term negative relationship between Bitcoin prices and Tether transactions suggests that Tether acts as a hedge against Bitcoin price crashes. |
| Keywords: | MBitcoin, NARDL, Market forces, Safe haven, Tether. |
| JEL: | E42 E44 G11 G12 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-31 |
| By: | Mikhail Mamonov; Christopher Parmeter; Artem Prokhorov |
| Abstract: | We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. {\it First}, we document that Revals constitute the largest part of the banks' total costs, 26.5\% on average, with considerable variation across banks. {\it Second}, we find that stochastic estimates of cost efficiency are both severely downward biased -- by 30\% on average -- and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. {\it Third}, we show that Revals are triggered by the mismatch in the banks' FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble's exchange rate. {\it Fourth}, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks' distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.05688 |
| By: | Tobias J. Moskowitz; Chase P. Ross; Sharon Y. Ross; Kaushik Vasudevan |
| Abstract: | Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks’ positioning in this context. Using confidential supervisory data (covering $25 trillion in daily notional exposures) we examine banks’ positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that have largely challenged existing theories, we document three novel forces that drive bases: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different markets, and 3) concentration of demand. Our findings shed empirical light on the interplay of frictions influencing banks’ provision of dollar funding. |
| Keywords: | Basis; Covered-interest parity deviation; Foreign exchange; Safe assets |
| JEL: | F30 F31 F65 G10 G13 G15 G20 G23 |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-61 |
| By: | Jaqueline Terra Marins; Marta Baltar Areosa; José Valentim Machado Vicente |
| Abstract: | The Covid-19 pandemic period was unprecedented. In this paper, we analyze the behavior of the Brazilian real exchange rate during that period. To this end, we estimate an equilibrium |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:596 |
| By: | Kim, Taehoon (Korea Institute for Industrial Economics and Trade); Han, Jung Min (Korea Institute for Industrial Economics and Trade) |
| Abstract: | Recently, the behavior of the Korean won (KRW) versus the US dollar (USD) has exhibited significant volatility. In 2023 alone, the exchange rate fluctuated by more than KRW 10 on over 50 different days, which has made it difficult to predict future trends. In this paper, we explore how the volatility of the KRW-USD exchange rate has influenced the fortunes of domestic Korean manufacturers. Specifically, we quantitatively examine the impact of exchange rate fluctuations on corporate performance through an empirical analysis of exchange rate data and financial records, and use the findings of the analysis to determine implications for policy. For this work we utilized real effective exchange rate data from the Organisation for Economic Co-operation and Development (OECD) and Japanese think tank Research Institute of Economy, Trade, & Industry (RIETI). Real effective exchange rate data present exchange rate data in terms of a currency’s purchasing power relative to foreign currencies. A decrease in the real effective exchange rate implies a decrease in any given currency’s purchasing power compared to foreign currencies. Thank you for reading this abstract of a paper by the Korea Institute for Industrial Economics and Trade! We are South Korea's premier think tank studying the nexus where trade and industry intersect. |
| Keywords: | exchange rates; exchange rate risk; exchange rate volatility; manufacturing; manufacturing industry; industrial competitiveness; Korean won; US dollar; KRW-USD exchange rate; exchange rate fluctuations; corporate performance; Korea; KIET |
| JEL: | F30 F31 O24 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kieter:2024_015 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We derive these results from a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| JEL: | F31 F41 F62 F65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32810 |
| By: | Juan Imbet (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique); J. Anthony Cookson (Leeds School of Business [Boulder] - University of Colorado [Boulder]); Corbin Fox; Christoph Schiller; Javier Gil-Bazo |
| Abstract: | Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects werefelt broadly in the U.S. banking industry. We employ comprehensive Twitter data toshow that preexisting exposure to social media predicts bank stock market losses inthe run period even after controlling for bank characteristics related to run risk (i.e., mark-to-market losses and uninsured deposits). Moreover, we show that social mediaamplifies these bank run risk factors. During the run period, we find the intensity ofTwitter conversation about a bank predicts stock market losses at the hourly frequency.This effect is stronger for banks with bank run risk factors. At even higher frequency, tweets in the run period with negative sentiment translate into immediate stock marketlosses. These high frequency effects are stronger when tweets are authored by membersof the Twitter startup community (who are likely depositors) and contain keywordsrelated to contagion. These results are consistent with depositors using Twitter tocommunicate in real time during the bank run. |
| Keywords: | Bank Runs, Social Media, Social Finance, FinTech |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04660083 |
| By: | Kris James Mitchener; Gary Richardson |
| Abstract: | Bank distress was a defining feature of the Great Depression in the United States. Most banks, however, weathered the storm and remained in operation throughout the contraction. We show that surviving banks cut lending when depositors withdrew funds en masse during panics. This panic-induced decline in lending explains about one-third of the reduction in aggregate commercial bank lending between 1929 and 1932, more than twice as much as attributed to the failure of banks. |
| JEL: | N1 N10 N12 N2 N22 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32783 |
| By: | Coen, Jamie (Imperial College London); Coen, Patrick (Toulouse School of Economics); Hüser, Anne-Caroline (Bank of England) |
| Abstract: | Repo markets are systemically important funding markets, but are also used by firms to obtain the assets provided as collateral. Do these two functions complement each other? We build and estimate a model of repo trade between heterogeneous firms, and find that the answer is no: volumes and gains to trade would both be higher absent collateral demand. This is because on average the firms that need funding are also those that value the collateral to speculate or hedge interest rate risk. These results have implications for policies that affect collateral demand in repo markets, including rules on short selling. |
| Keywords: | Repo; collateral demand; intermediation; financial crises |
| JEL: | G01 G11 G21 G23 L14 |
| Date: | 2024–08–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1082 |
| By: | Bruno Pires Tiberto; Francisco Fernando Viana Ferreira |
| Abstract: | The COVID-19 pandemic had a strong impact on the global economy, causing turmoil in financial markets and instability in the dynamics of capital flows. Using quarterly data extracted from Local Banking Statistics, published by the Bank for International Settlements, this study examines the effects of the COVID-19 pandemic on cross-border banking flows in recipient countries. Using an unbalanced panel of 20 advanced economies and 34 emerging market economies, we investigate the effects of COVID-19 pandemic on cross-border banking total flows. In addition, we also assess the effects of COVID-19 pandemic on the distribution of cross-border banking flows to the bank and non-bank sectors as well as to the instruments: loans and debt securities. Our results suggest the COVID-19 pandemic changed the destination of cross-border banking flows, deepening the concentration of capital flows to advanced economies. We also found evidence that the COVID-19 pandemic led to a reallocation of cross-border banking flows across economic sector, from the bank to the non-bank sector, as well as by type of financial instrument, from loans to debt securities. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:598 |
| By: | Thordur Jonasson; Sheheryar Malik; Kay Chung; Mr. Michael G. Papaioannou |
| Abstract: | This paper presents some sound practices for foreign-currency risk management in developing countries and outlines instruments for managing sovereign debt portfolio currency exposures. Adoption of a debt management strategy with well-defined targets for foreign exchange risk is a critical element of public debt risk management. To this end, public debt managers often need to face with complex strategic and operational matters related to public debt hedging practices, including the use of derivatives. In this context, we highlight the main institutional challenges in the management of foreign exchange risk in sovereign debt portfolios and discuss the overall implementation of a foreign exchange risk-management strategy. |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/167 |