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on Monetary Economics |
| By: | Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université); Davide Romelli (Trinity College Dublin) |
| Abstract: | This paper examines the informativeness and drivers of the tone used by FOMC members to gain insights into the decision-making process of the FOMC. We use a bag-of-words approach to measure the tone of transcripts at the speaker-meeting-round level from 1992-2009 and find persistent differences in tone among FOMC members. We also document how Presidents of regional Federal Reserve Banks use a more volatile and positive tone than the members of the Federal Reserve Bank Board of Governors. Next, we investigate whether the tone used during FOMC deliberations is associated with future monetary policy decisions and study the drivers of differences in tone among FOMC members. Our results suggest that tone is useful to predict future policy decisions and that differences in tone are mainly associated with the differences in the individual inflation projections of FOMC members. |
| Keywords: | Central banks, Federal Reserve, FOMC, monetary policy committees, text analysis |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04670309 |
| By: | Bjarni G. Einarsson |
| Abstract: | This paper presents a framework for testing the optimality of monetary policy decisions made by a central bank in a monetary union. Applying the framework to test the European Central Bank’s monetary policy decisions we find several instances of optimization failures in its use of the Forward Guidance and Quantitative Easing instruments. We cannot reject optimality in its use of the Target Rate instrument. We find signs of heterogeneity in the optimal prescriptions for the individual member countries with respect to the union level prescription. Additionally, we find many instances of optimization failure at the country level for all instruments. Assuming each country has a country specific version of the union loss function we provide a measure of the cost of abandoning independent monetary policy by joining a union. The results indicate that the price of Euro membership is higher for the peripheral economies. |
| JEL: | C32 E31 E32 E52 E58 E61 E65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ice:wpaper:wp96 |
| By: | Hassani Bouhassoun (Université Ahmed Draia d’Adrar) |
| Abstract: | This study aims to evaluate the effectiveness of the exchange rate channel in transmitting the impact of monetary policy to inflation in Algeria during the period (1990 -2017 ), by trying to answer the problem of the study which is: in measuring the effectiveness of the exchange rate channel in transmitting the effects of monetary policy to inflation in Algeria, relying on the SVAR autoregressive methodology.The results of the study led to the acceptance of the second hypothesis, which is that there is little relative effectiveness of the exchange rate channel in transmitting the effects of monetary policy to inflation in Algeria, which reached a rate of (0.09%). |
| Keywords: | exchange rate channel monetary policy inflation auto regression (Svar) JEL classification: E43 E52 O44 C32, exchange rate channel, monetary policy, inflation, auto regression (Svar) JEL classification: E43, E52, O44, C32 |
| Date: | 2024–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04678430 |
| By: | Hudepohl, Tom; Malderez, Suzanne |
| Abstract: | The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs). The period covered by this report (2022-23) was dominated by high inflation, which led to a change from an easing to a tightening monetary policy environment in line with the mandate of the European Central Bank (ECB) to pursue price stability. This report focuses on the accompanying shift in the use of MPIs. Key ECB interest rates were hiked to an unprecedented extent and at exceptional speed, leading to an exit from negative interest rates. This was accompanied by a gradual phasing-out of reinvestments under the asset purchase programmes, revisions to the conditions of targeted longer-term refinancing operations (TLTROs) and their subsequent substantial early repayments, and a phasing-out of pandemic collateral easing measures. This report discusses these developments and provides a full overview of the Eurosystem’s monetary policy implementation from 2022-23. JEL Classification: D02, E43, E58, E65, G01 |
| Keywords: | asset purchase programmes, central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures, refinancing operations |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024355 |
| By: | Seo, Jinyoung (Wake Forest University, Economics Department) |
| Abstract: | I show that Treasuries’ role as hedge assets is determined by the level of trend inflation and the conduct of monetary policy, using a Generalized New Keynesian habit model. A novel prediction from the model is that when trend inflation is high, nominal bonds exhibit a positive correlation with stock returns, making them risky assets. As trend inflation rises, inflation becomes more countercyclical because any transitory inflation generates temporary output loss due to endogenous cost-push effects, which emerge under positive trend inflation. When countercyclical inflation prevails, bond returns drop when stocks underperform, leading to a positive bond-stock correlation. The model explains the shift in US bond-stock correlation from positive to negative in 1997 as a consequence of stabilized trend inflation. |
| Keywords: | Bond-stock correlation; trend inflation; monetary policy; output gap-inflation correlation; bond risk premium |
| JEL: | E31 E43 E44 E52 G12 |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0115 |
| By: | Domenico Giannone; Giorgio Primiceri |
| Abstract: | Post-covid inflation was predominantly driven by unexpectedly strong demand forces, not only in the United States, but also in the Euro Area. In comparison, the inflationary impact of adverse supply shocks was less pronounced, even though these shocks significantly constrained economic activity. With output already weakened by these unfavourable supply conditions, any attempt by the European Central Bank to further mitigate the demand-driven inflationary pressures---to maintain inflation near its 2-percent target---would have severely hampered an already anaemic recovery. |
| JEL: | E30 E31 E32 E37 E52 E58 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32859 |
| By: | Ivan Yotzov (Bank of England); Nicholas Bloom (Stanford University); Philip Bunn (Bank of England); Paul Mizen (King’s College London); Gregory Thwaites (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: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2425 |
| By: | Kimolo, D.W; Odhiambo, N.M; Nyasha, S |
| Abstract: | This paper undertakes an exploratory examination of inflation dynamics in Kenya between 1970 and 2021, employing a descriptive research design and secondary data from various sources, coupled with qualitative analysis of the literature. The paper comprehensively analyzes the impact of diverse policy changes, including monetary and fiscal policies. Overall, this paper provides a beneficial resource for anyone interested in comprehending the intricacies of inflation dynamics in Kenya and the relevant measures employed to manage rising prices. The government implemented various measures to fight inflation over the years, including tight monetary policy and fiscal policy measures. The Central Bank of Kenya implemented various monetary policies to control inflation, such as increasing interest rates and tightening credit. Factors such as rising food and fuel prices, droughts, and political instability have driven inflation in Kenya over the years. Despite Kenya's implementation of several reforms aiming to promote stable inflation over time, challenges regarding inflation persist. To achieve long-term economic growth and stability, it may be wise for the government to consider implementing policies that promote fiscal discipline, strengthen institutional frameworks, and encourage private sector development. By doing so, the government can ensure sustainable economic growth and stability. |
| Keywords: | Price Level; Inflation; Deflation; Kenya |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:uza:wpaper:31541 |
| By: | Frantisek Masek (National Bank of Slovakia); Jan Zemlicka (University of Zurich) |
| 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 infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger 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 depends on the speed of return to the target path when myopia plays a bigger role. We quantify the welfare effect of uncertainty due to the ELB (downward inflation bias) and show how it varies across window lengths and cognitive discounting degrees. |
| JEL: | E31 E32 E52 E58 E71 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1108 |
| By: | Tobias Berg; Jan Keil; Felix Martini; Manju Puri |
| Abstract: | We analyze the effect of a major central bank digital currency (CBDC) – the digital euro – on the payment industry to find remarkably heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. We estimate a loss in market capitalization of USD 127 billion for U.S. payment firms, vis-à-vis a gain of USD 23 billion for European payment firms. Our results emphasize the medium-of-exchange function of CBDCs and point to a novel geopolitical dimension of CBDCs: enhanced autonomy in payments. |
| JEL: | G1 G20 G21 G22 G23 G24 G28 G29 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32857 |
| By: | Fengqi Xie (Tomsk State University); Marina V. Ryzhkova (Tomsk State University / Tomsk Polytechnic University) |
| Abstract: | With the rapid growth of the digital economy, digital currency has emerged as a prominent area of research. Central Bank Digital Currency (CBDC), issued by the central bank and backed by its liability, has garnered significant attention. This article builds upon Baumol's money demand theory to conduct an extensive analysis of the factors influencing the choice between cash and CBDC, as well as the selection of currency usage. It finds that the decision to adopt either cash or CBDC is often driven by the lower holding costs associated with the latter. Additionally, various factors such as public perception, government policies, and social acceptance contribute to the prolonged coexistence of cash and CBDC. Although CBDC in their current state may not completely replace traditional currencies, they are projected to have a substantial impact on the future of financial transactions. |
| Keywords: | Digitalization, central bank digital currency, CBDC, cash, Baumol's money demand theory |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:14416317 |
| By: | Saleem Bahaj (University College London); Marie Fuchs (London School of Economics (LSE)); Ricardo Reis (London School of Economics (LSE)) |
| Abstract: | At the end of 2023, there were 175 cross-border connections between central banks in a global network of liquidity lines that gave access to foreign currency for countries accounting for 79% of world GDP. This paper presents a comprehensive dataset of this network and its characteristics between 2000 and 2023. While the Federal Reserve drove growth in 2007-09, the network expanded as much between 2010 and 2015 through bilateral arrangements involving the ECB and the People’s Bank of China. The network structure means that banks without direct access to a source central bank can still have indirect access to its currency. The central intermediaries in the network for all major currencies are the PBoC and the ECB. We find support using cross-country data that the lines reduce CIP deviations at the tails. Liquidity lines are often signed to substitute for a bleeding of FX reserves, but once in place they complement reserves. |
| Keywords: | swap lines, capital flows, financial crises, IMF, cross-currency basis |
| JEL: | E44 F33 G15 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2423 |
| By: | Rong-An Chou (Kyoto University) |
| Abstract: | The secretive Taiwanese foreign exchange intervention (FXI) and hidden reserve issue have posed difficulties for studying the exchange rate policy taken by the Central Bank of Taiwan. To get a clear grasp of the Taiwanese exchange rate policy even in lack of officially disclosed FXI records, firstly, I find out the most accurate proxy for the Taiwanese FXI in the existing literature. Secondly, I estimate the central bank's FXI policy reaction function, using the most accurate proxy. It turns out that there exists one structural change within the central bank's FXI around December 2011. Before December 2011, the central bank basically adopted lean-against-the-wind intervention in the short run, enhanced the New Taiwan Dollar's value in the long run, and asymmetrically conducted the interventions. In contrast, after December 2011, the central bank became less engaged in the outright purchasing/selling operations in the FX spot market. |
| Keywords: | Foreign exchange intervention; Hidden reserves; Exchange rate policy; Structural change |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1107 |
| By: | Lampe, Florian |
| Abstract: | The West African Economic and Monetary Union (WAEMU) is a currency and customs union that is made up of the eight low-income countries Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Except for Guinea-Bissau, all member countries of the WAEMU have a shared history as former French colonies. The WAEMU's common currency, the CFA franc, is today pegged to the euro at a fixed exchange rate that is guaranteed by the French treasury. France's influence on monetary policy issues of the WAEMU is still highly present and increasingly contested by political economists, and part of the member countries' civil society. These critics denounce the bilateral exchange rate arrangements as monetary colonialism that outlasted the political independence process from 1954 till 1960 and prevents the West African countries from implementing growth-oriented macroeconomic policies. The proponents of the fixed exchange-rate regime emphasize monetary stability in the form of relatively low inflation rates and a stable external value of the domestic currency. Indeed, the WAEMU zone has shown a remarkably long period of exchange rate stability for the past 30 years. This distinguishes it from Developing and Emerging Economies (DEE) in Latin American or Asian countries in the 1990s and early 2000s, which reacted to balance of payments crises with the introduction of floating exchange rate regimes. The present paper connects to that controversial debate and addresses the important research question if the argument of monetary stability holds considering the current development path of the WAEMU. More concretely, it contrasts the monetary union's resilience against the adverse effects of exchange rate volatility with international competitiveness and a long-term perspective on external debt. On the theoretical level, the study draws on the post-Keynesian liquidity preference theory to elaborate the exchange rate challenges that DEE with internationally integrated financial markets are confronted with. This approach highlights the hierarchical structure of the international monetary system and the resulting adverse implications for peripheral currency areas regarding monetary stability. Furthermore, monetary Keynesian economist have worked out the limitations of an exchange rate-based stabilization strategy arguing that it comes at the expense of losing international competitiveness and a rising international debtor position. These findings serve as a theoretical basis for studying the sustainability of the WAEMU's development path. |
| Keywords: | WAEMU, CFA franc, Post-Keynesian Economics, international currency hierarchy |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cessdp:301871 |
| By: | Takashi Nakazawa (Bank of Japan); Mitsuhiro Osada (Bank of Japan) |
| Abstract: | This paper quantitatively examines the effects of the Bank of Japan's (BOJ's) purchases of Japanese government bonds (JGBs) - especially the large-scale purchases since the introduction of Quantitative and Qualitative Monetary Easing in 2013 - on the formation of long-term interest rates in Japan using time series analysis. The results can be summarized as follows. First, having quantified the effect of BOJ JGB purchases taking market participants' expectations about the future path of such purchases into account, we find that the effect of JGB purchases on interest rates has been driven by the increase in JGB holdings (i.e., the stock effect), which affects market participants' risk allocation, rather than by the daily conduct of JGB purchases (i.e., the flow effect), which affects supply and demand in the secondary market. Second, in addition to the flow and stock effects, the Yield Curve Control framework introduced in September 2016 had the effect of restraining interest rate increases when long-term interest rates approached the upper bound of the announced range. This effect tended to be larger when the BOJ took countermeasures and market participants expected such countermeasures. Finally, our analysis of interest rates at different maturities suggests that the framework of government bond purchases and Yield Curve Control had an effect on interest rates across a wide range of maturities, and that the recent large-scale monetary easing had the effect of pushing down the entire yield curve. |
| Keywords: | unconventional monetary policy; long-term interest rates; government bond purchases; flow effect; stock effect; announcement effect; yield curve control |
| JEL: | G12 E44 E52 E58 |
| Date: | 2024–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e10 |
| By: | Valentin Grob and Gabriel Züllig |
| 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: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:irn:wpaper:24-04 |
| By: | Marco Moreno (Central Bank of Ireland and Department of Economics, Trinity College Dublin); Simone Cima (Central Bank of Ireland and Department of Economics, Trinity College Dublin) |
| Abstract: | We use new data on the distribution of wealth in the euro area and employ panel local projections to estimate the different impact of ECB monetary policy shocks on households across the wealth distribution. We look at how policy affects the composition of their balance sheets, their investment decisions, and overall wealth inequality. We find that in response to a contractionary shock, poorer households display a substantial decline in their assets and a reduction in their debt. Conversely, the balance sheet of the very wealthiest shows the opposite evolution, ultimately leading to an increase in overall wealth inequality. Evidence also suggests that the investment behaviour of poorer and wealthier households differs in response to the shock. Our results further indicate that contractionary shocks lead to a shift in balance sheet composition towards housing assets across the whole wealth distribution, at the expense of financial assets. |
| Keywords: | Wealth Inequality; Monetary Policy; Distributional Wealth Accounts; Local Projections |
| JEL: | D31 E44 E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0524 |
| By: | Campana, Juan Manuel |
| Abstract: | The article develops a stylized medium-run post-Kaleckian open economy model with conflict inflation and combines two existing specifications of the income share targets of workers and firms. In the model, only the target of firms is directly affected by the real exchange rate. Workers do not set nominal wages in direct consideration of international relative prices. The target of workers is affected by the rate of capacity utilization, which reflects their wage bargaining position. We analyze the dynamic stability of the model, where a profit-led domestic demand regime or a weakly wage-led domestic regime with low nominal wage setting power of workers and a negative or sufficiently small direct impact of the real exchange rate on the trade balance are necessary conditions for stability. It is shown that the effects of a devaluation on aggregate demand, growth, trade balance, and inflation are generally ambiguous and highly contingent on the parameter constellation of the economy. The effectiveness of a currency devaluation as a stabilization policy remains unclear, its adoption is not without risk, and its negative social and distributional consequences may be large. |
| Keywords: | currency devaluation, distribution conflict, inflation, open economy, Kaleckian model |
| JEL: | E11 E12 E31 F31 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:301876 |
| By: | Marco Bassetto; Luca Benzoni; Jason Hall |
| Abstract: | The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the Covid pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the magnitude of this redistribution caught them by surprise. |
| Keywords: | Macroeconomics; Monetary Economics; Financial Economics |
| JEL: | E31 E51 E62 G10 |
| Date: | 2024–07–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:98723 |
| By: | Luca Dedola; Erwan Gautier; Chiara Osbat; Sergio Santoro |
| Abstract: | This chapter reviews the empirical evidence on price stickiness in the euro area. We provide an overview of the different sources of granular consumer and producer price data now available in the euro area. We document new stylized facts on price adjustment in the euro area over the last 20 years. We first present results on the frequency and size of price adjustment in the cross-section dimension. Then we describe some results on the evolution of price stickiness over time. We also derive some implications for the micro-foundations of macro models, discussing the consistency of available evidence with predictions of state- and time-dependent models. |
| Keywords: | Nominal Rigidities, Inflation, Micro Data, Euro Area |
| JEL: | D40 E31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:958 |
| By: | Leo Michelis (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Cathy Ning (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Jeremey Ponrajah |
| Abstract: | This paper presents a unique approach to investigating the safe haven properties of five major currencies: the US dollar, the Japanese yen, the Swiss franc, the euro, and the British pound. Unlike other studies, we employ a flexible dependence-switching copula model to examine the joint tail dependence between these currencies and global market risk. This innovative method allows us to measure the strength of safe haven currencies directly. Using daily data from January 1999 to June 2024, our empirical findings reveal the US dollar’s continued status as a safe haven currency during periods of heightened global risk aversion. The yen also maintains its safe haven attributes, even in the presence of the US dollar’s safe haven behaviour. The Swiss franc exhibits safe haven characteristics, albeit less pronounced than the US dollar. In contrast, the euro and the pound demonstrate the weakest safe haven characteristics among the five currencies. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rye:wpaper:wp091 |
| By: | Stefan Nagel; Zhengyang Xu |
| Abstract: | We show that the stock market price reaction to monetary policy surprises upon announcements of the Federal Open Market Committee (FOMC) is explained mostly by changes in the default-free term structure of yields, not by changes in the equity premium. We reach this conclusion based on a new model-free method that uses dividend futures prices to obtain the counterfactual stock market index price change that results purely from the change in the default-free yield curve induced by the monetary policy surprise. The yield curve change in turn partly reflects a change in expected future short-term interest rates, as measured by changes in professional forecasts, and partly a change in the term premium. We further find that the even/odd week FOMC cycle in stock index returns is also largely due to an FOMC cycle in the yield curve rather than the equity premium. |
| JEL: | E52 G12 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32884 |
| By: | Hiroya Tanaka (Kyoto University); Keiichi Hori (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | This study analyzes the impact of investors' search-for-yield behavior on home bias in the bond market. We conduct a regression analysis using data from 27 countries, including both developed and emerging economies, for 2001–2021. We use two types of home bias indicators as dependent variables and the yield on 5-year government bonds denominated in the local currency as independent variables to analyze search-for-yield behavior. Considering that central banks in many countries, including major advanced economies, have made substantial domestic bond purchases over the past 20 years, we examine the effect of excluding central banks' domestic bond holdings from the home bias calculation. The results show that, with a few exceptions, both domestic and foreign investors in advanced and emerging economies tend to increase their demand for higher-yield bonds, which is consistent with the search-for-yield behavior. This trend is further reinforced when the central banks' domestic bond holdings are excluded. Specifically, we found that the significance of bond yields for foreign investors’ home bias in emerging economies increased after the global financial crisis. This indicates that emerging economies became more attractive to yield-seeking investors in a post-crisis low-interest-rate environment. In addition, by excluding the domestic bond holdings of central banks from the home bias calculation, we observed a higher coefficient of bond yields for the home bias of domestic investors in advanced economies. This suggests that when excluded, central banks' substantial domestic bond holdings in developed countries allow investors' decisions to be better reflected in the country's overall asset composition. |
| Keywords: | search for yield, monetary policy, home bias, foreign bond investment, portfolio selection |
| JEL: | E52 G11 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1106 |
| By: | Nils M. Gornemann; Sebastian Hildebrand; Keith Kuester |
| Abstract: | In a simple New Keynesian open economy setting, we analyze how local input shortages influence policy transmission and equilibrium determinacy. Shortages increase the elasticity of the local price of the scarce factor to domestic economic activity, affecting the cyclicality of marginal costs and incomes. As a result, the slope of both the Phillips and the IS curve is altered, crucially influencing monetary and fiscal policy transmission. These changes are affected by factor ownership and propensities to consume. Theoretically, shortages can also raise the risk of self-fulfilling fluctuations if a rising price of the constrained factor boosts incomes for agents with high propensities to consume. We illustrate these channels for the 2022 German energy crisis. |
| Keywords: | Supply constraints; Heterogeneous households; Monetary transmission; Transfer multiplier; Sunspots |
| JEL: | E31 E32 E52 F41 Q43 |
| Date: | 2024–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1395 |
| By: | Marco Garofalo (Centre for Macroeconomics (CFM); University of Oxford; Bank of England); Giovanni Rosso (University of Oxford); Roger Vicquery (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | We explore an episode of aggregate transition to dominant currency pricing in a large developed economy, relying on transaction-level data on the universe of UK trade between 2010 and 2022. Until 2016, the majority of UK non-EU exports were invoiced in British pounds, the ”producer” currency. However, in the aftermath of the June 2016 Brexit referendum and the subsequent depreciation of the pound, the share of non-EU UK exports invoiced in pounds started to sharply decrease– by more than 20 percentage points. This was mirrored by an increase of similar magnitude in the share of US dollar invoicing, which by 2019 overtook the pound as the main non-EU export invoicing currency. Using shift-share and event-study identification strategies, we show that large foreign-exchange movements can generate a transition in invoicing choices for firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that that this currency-mismatch valuation channel accounts for most of the transition away from producer currency pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that this shift in export pricing paradigm has important aggregate consequences for export pass-through and the allocative effects of price rigidities. Exports exhibit significantly higher elasticity to USD exchange-rate movements after the Brexit referendum: a USD dollar appreciation depresses demand for exports by twice as much than before this ‘dominant currency pricing transition'. |
| Keywords: | Invoicing currency of trade, Dominant currency pricing, Foreign-exchange mismatch, Firm-level data, Exchange-rate pass-through |
| JEL: | F14 F31 F41 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2419 |
| By: | Jean-Charles Bricongne; Baptiste Meunier; Raquel Caldeira |
| Abstract: | As text mining has expanded in economics, central banks appear to also have ridden this wave, as we review use cases of text mining across central banks and supervisory institutions. Text mining is a polyvalent tool to gauge the economic outlook in which central banks operate, notably as an innovative way to measure inflation expectations. This is also a pivotal tool to assess risks to financial stability. Beyond financial markets, text mining can also help supervising individual financial institutions. As central banks increasingly consider issues such as the climate challenge, text mining also allows to assess the perception of climate-related risks and banks’ preparedness. Besides, the analysis of central banks’ communication provides a feedback tool on how to best convey decisions. Albeit powerful, text mining complements – rather than replaces – the usual indicators and procedures at central banks. Going forward, generative AI opens new frontiers for the use of textual data. |
| Keywords: | Text Mining, Sentiment Analysis, Central Banking, Generative AI, Language Models |
| JEL: | C38 C55 C82 E58 L82 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:950 |
| By: | Salomé Fofana (London School of Economics (LSE)); Paula Patzelt (London School of Economics (LSE)); Ricardo Reis (London School of Economics (LSE)) |
| Abstract: | This paper surveys the major facts from research on disagreement between households on what they expect inflation to be. We document them using figures and correlations that capture: the statistical regularities on the observable drivers of disagreement, the measurement of residual disagreement, the usefulness of disagreement to forecast inflation, the response of disagreement to shocks, the disagreement between households and professionals, and the relation between disagreement, risk, and uncertainty. |
| Keywords: | Inflation Expectations, Dispersion of Beliefs, Survey Data |
| JEL: | D84 D90 E31 E70 G40 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2418 |
| By: | Kornher, Lukas; Balezentis, Tomas; Santeramo, Fabio Gaetano |
| Abstract: | Since the Covid-19 pandemic and the Russia-Ukraine War, global food markets have been in turmoil. Agricultural input and energy prices doubled between 2020 and 2022, with immediate consequences on food accessibility. We examine the drivers of the EU food inflation patterns, and how trade integration shapes these dynamics. We find that food price inflation has been mainly driven by surges in agricultural production costs and, to a lesser extent, by global food price increases. Trade openness has not exacerbated the inflating dynamics during this period. |
| Keywords: | Europe, food price inflation, Russia–Ukraine War, trade policy uncertainty, geopolitical risk |
| JEL: | E31 Q11 Q18 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121673 |
| By: | Kimolo, D.W; Odhiambo, N.M; Nyasha, S |
| Abstract: | This article provides a comprehensive chronological analysis of Uganda's inflation performance and policy reforms aimed at reducing inflation and stabilising the economy from 1970 to 2021. The impetus for this article lies in the growing interest in Uganda as a prototype for other developing countries grappling with high inflation rates. To achieve the objective, the study adopts a rigorous methodology involving a detailed analysis of selected statistical and academic literature. Uganda faced persistent hyperinflation for much of the 1970s and 1980s and early 1990s. In response, the Ugandan government implemented a series of inflation policy reforms aimed at reducing inflation and stabilizing the economy. The policy reforms in Uganda can be analysed episodically through five distinct periods, starting with the first 10 years after independence (1962-1971), followed by 15 years of political instability (1971- 1985), 10 years of recovery (1986-1995), 10 years of economic growth and poverty reduction (1996-2006), and the most recent episode of reforms consolidation (2007-2021). The impact of these reforms has been significant, with inflation rates falling to single digits and the economy experiencing sustained growth. The decline in inflation has helped to stabilize the economy, reduce the cost of living for Ugandans, and attract foreign investment. The study underscores the importance of implementing sound macroeconomic policies, strong political will and leadership, investing in infrastructure, diversifying the economies, communicating effectively with the public, and cooperating regionally to build a robust and sustainable economy that benefits all its citizens. |
| Keywords: | Price Level; Inflation; Deflation; Uganda |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:uza:wpaper:31543 |
| By: | Stefania D'Amico; Corey Feldman |
| Abstract: | Using textual analysis of the largest dealers’ newsletters to their clients, we construct a measure of uncertainty about the Federal Reserve’s balance sheet policy (BSP). This measure of uncertainty tends to spike during the introduction of novel aspects of BSP or at its turning points, with the largest spike occurring during the “Taper Tantrum” period. We find that positive shocks to BSP uncertainty increase longer-term Treasury yields, private borrowing costs, private MBS duration, and reduce mortgage refinance volumes. As a result, an increase in BSP uncertainty has contractionary effects similar to those of a monetary-policy tightening shock. Further, post-2008, these effects seem quite different from those of broader monetary policy uncertainty and fiscal policy uncertainty. Overall, our findings suggest that explicit forward guidance about the Fed’s balance-sheet path might be warranted. |
| Keywords: | Macroeconomics; Interest rates |
| JEL: | E40 E50 |
| Date: | 2024–07–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:98724 |
| By: | Bill Dupor; Marie Hogan |
| Abstract: | Goods and services bought on behalf of consumers, such as health care, are weighted differently in the consumer price index and the personal consumption expenditures price index. |
| Keywords: | inflation; Consumer Price Index (CPI); Personal Consumption Expenditures Price Index (PCEPI) |
| Date: | 2024–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:98716 |
| By: | Marina Tkalec (The Institute of Economics, zagreb) |
| Abstract: | Consumer expenditure went through major shifts during the COVID-19 pandemic, but these were not reflected in household basket weights used for measuring inflation. Using real-time credit and debit transactions for the US, we update consumer expenditure for 27 EU member states on a month-by-month basis from January 2020 to December 2023. We thereby consider expenditure changes and calculate an alternative measure of inflation?inflation with the Covid consumption basket. We find that the Covid inflation rate in May 2020 is higher than the official CPI in 25 out of 27 countries. Our fixed-effects econometric exercise suggests that government intervention to fight the pandemic tended to decrease the Covid inflation rate, by as much as 0.05 percentage points in the whole sample, and by 0.18 percentage points in the year 2022 alone. Government response, containment and health, and stringency measures were statistically significant in reducing inflation, while economic support measures proved not to be correlated with Covid inflation in the whole sample. |
| Keywords: | consumption basket; COVID-19; inflation; pandemic |
| JEL: | E01 E21 E31 |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:14216251 |
| By: | Philippe Bacchetta; J. Scott Davis; Eric van Wincoop |
| Abstract: | Recent theories of exchange rate determination have emphasized limited UIP arbitrage by international financial institutions. New regulations since 2008 have also lead to imperfect CIP arbitrage. We show that under limited CIP arbitrage the exchange rate and CIP deviation are jointly determined by equilibrium in the FX spot and swap markets. The model is used to investigate the impact of a wide range of financial shocks. The exchange rate is affected by a new set of financial shocks that operate through the swap market, which have no effect under perfect CIP arbitrage. More familiar financial shocks that impact the spot market have an amplified effect on the exchange rate as a result of their feedback to the swap market. Implications of the model are consistent with a broad range of evidence. |
| JEL: | F30 F31 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32876 |
| By: | Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | We provide cross-country evidence that variations in capital flow management measures (CFMs) result in differences in wealth inequality and distribution by using counterfactual estimators for causal inference. The imposition of aggregate CFMs increases wealth inequality in advanced economies, and the imposition of aggregate CFMs on outflows increases wealth inequality in emerging economies significantly. Diverging from previous studies, we analyze the impacts of ten distinct asset-specific CFMs. In particular, the imposition of the related CFMs to money market and derivatives reduces wealth inequality significantly. The decrease in wealth inequality is due to a decrease in the wealth shares of the top 1% and 10% groups along with an increase in the wealth shares of the middle 40% and bottom 50%. Overall, the effects of CFMs on wealth inequality and distribution are quite heterogeneous; they depend on income levels, capital flow directions, and asset categories. |
| Keywords: | Capital flow management measures (CFMs); Wealth inequality; Gini coefficient; Wealth distribution; Counterfactual estimator |
| JEL: | D63 E21 F38 G15 G28 O16 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-30 |
| By: | Körner, Tobias; Papageorgiou, Michael |
| Abstract: | We analyze the impact of the announcement of the banking union on stock market returns of euro area banks against the backdrop of three commonly held views of the banking union. We document positive individual abnormal returns for most banks. Abnormal returns are large and positive on average, and they vary substantially across banks. The more systemically important a bank is, the higher are the abnormal returns, both in 'crisis countries' and 'non-crisis countries'. Moreover, abnormal returns of banks are positively related to sovereign risk, with Greek banks experiencing extremely high abnormal returns. By contrast, abnormal returns are not robustly related to bank risk. These findings reveal market expectations consistent with the view that the banking union makes banks less dependent on their home country's sovereign strength and mitigates a financial trilemma. However, market participants do not seem to take the view that the banking union reduces a moral hazard problem that may emerge from a common lender of last resort and national responsibilities for banking supervision and resolution. |
| Keywords: | Euro area crisis, banking union, sovereign-bank nexus, systemic risk, event study |
| JEL: | G01 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:302175 |
| By: | Bianchi, Milo; Rhodes, Andrew |
| Abstract: | We consider a model in which consumers live in isolated villages and need to send money to each other. Each village has (at most) one digital payment provider, which acts as a bridge to other villages. With fully rational consumers interoperability is beneficial: it raises financial inclusion, which in turn increases consumer surplus. With behavioural consumers who have imperfect information or incorrect beliefs about off-net fees, interoperability can reduce consumer welfare. Policies that cap transaction fees have an ambiguous effect on consumers, depending on how the cap is implemented, whether consumers are rational, and on how asymmetric providers are in terms of coverage. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129664 |
| By: | Benjamin Collier; Daniel Hartley; Benjamin J. Keys; Jing Xian Ng |
| Abstract: | We estimate the causal effect of emergency credit on households’ finances after a negative shock. To do so, we link application data from the U.S. Federal Disaster Loan program, which provides loans to households that have uninsured damages from a federally-declared natural disaster, to a panel of credit records before and after the shock. We exploit a discontinuity in the loan approval rules that led applicants with debt-to-income ratios below 40% to be differentially likely to be approved. Using an instrumented difference-in-differences research design, we find that credit provision at the time of a shock significantly reduces severe financial distress, decreasing the likelihood of filing for bankruptcy by 61% in the three years following the disaster. We explore mechanisms using additional quasi-experimental variation in interest rates, finding support for a liquidity-based explanation. Credit provision in a time of crisis has real consumption effects in the form of additional car purchases even 3 years after loan receipt. Our findings suggest that well-timed liquidity provided to households in acute need can have substantial and persistent positive effects. |
| Keywords: | Consumer credit; Personal bankruptcy; Delinquency; Auto loan; Climate risk |
| JEL: | D14 G23 G28 H81 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:98720 |