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on Monetary Economics |
| By: | Barry Eichengreen (University of California, Berkeley); Poonam Gupta (National Council of Applied Economic Research, Delhi) |
| Abstract: | We assess India’s inflation-targeting regime at the eight-year mark. The Reserve Bank of India continues to be a flexible inflation targeter: it responds to both the output gap and inflation when setting policy rates. It has become neither more hawkish nor more reactive with the transition to inflation-targeting. Evidence points to improved outcomes: inflation is lower and less volatile; inflation expectations are better anchored; and the transmission of monetary policy is more effective. Given this record, radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favor of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive. One obvious area for improvement entails updating the weight of food prices in the CPI basket. We estimate the correct weight of food at today’s per capita income to be closer to 40 percent instead of the current 45.8 percent. This would likely fall further to around 30 percent in a decade from now due to the projected increase in per capita incomes. This correction should ameliorate concerns about the design and practice of the current inflation targeting regime. |
| Keywords: | Inflation Targeting, Monetary Policy, India |
| JEL: | E5 E52 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:174 |
| By: | Kim, Minseong |
| Abstract: | We show that the first-order optimality conditions in the baseline New Keynesian model relating to central bank reserves become invalid due to a corner solution, with future budget constraints plus rational expectation requiring zero central bank reserves today even for a disequilibrium. The use of a multiple-agent variant does not resolve the issue. The corrected understanding of the baseline New Keynesian model supports the MMT view that despite endogenous money, HPM can be crucial for efficacy of monetary and government policies. We leave the question of whether a fully Post-Keynesian analysis invalidates such a conclusion to future works. |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:dzjsc |
| By: | Umar Isah, Yahaya |
| Abstract: | The study investigates effect of monetary policy variables on performance of prices of stock in Nigeria. The study covered the period 1986 –2022. Data were generated from the Central Bank of Nigeria Statistical Bulletin, 2023 edition. The method of data analyses used are ARDL technique as All Share Index (ASI) was used to measure stock price, while explanatory variables included inflation rate (INF), Broad money supply (M2), Monetary Policy Rate (MPR) and Real exchange rate (REXR). The ARDL bound test result indicates a long run association between monetary policy variables and stock prices in Nigeria. The long run estimates shows that only real exchange rate has significant effect on stock prices further findings reveal that monetary policy rate has significant impact on prices in stock market. The findings inform the conclusion that most monetary policy variables do not create necessary directions in market prices in Nigeria and recommends that the Nigerian stock market cannot yet be regarded as good policy monetary policy channel in Nigeria as the market is yet to absorb monetary policy impulses to an extent that monetary policy tools and instruments may significantly influence its direction and development. |
| Keywords: | Monetary policy; stock market prices; Exchange rate; Money supply; ARDL |
| JEL: | G18 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122083 |
| By: | Rafael Guerra; Steven Kamin; John Kearns; Christian Upper; Aatman Vakil |
| Abstract: | This paper estimates empirical Taylor rules to analyze the recent monetary policy of the five main Latin American inflation-targeting central banks. We find that during the inflationary surge of 2021–23, monetary policy reacted more strongly and more quickly to changes in inflation than predicted by a standard linear Taylor rule, estimated on data from the pre-pandemic period. Although this appears to represent a shift in the monetary reaction function, we think it more likely that Latin American central banks have been following a non-linear strategy, responding more aggressively to inflation, the higher it rose. We confirmed this by adding the square of inflation to the Taylor rule model: its coefficient was positive and significant, indicating that policy interest rates exhibited a non-linear response to inflation, even during the pre-pandemic period, and the model did a better job of predicting the sharp rise in interest rates during 2021–23. |
| Keywords: | Latin America, central banks, monetary policy, Covid-19, interest rates |
| JEL: | E52 E58 E50 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1209 |
| By: | Dominic Cucic; Denis Gorea |
| Abstract: | We analyze the role of nonbank lenders in the transmission of monetary policy using data on the universe of unsecured credit to firms and households in Denmark. Nonbanks increase their credit supply after a monetary contraction, both relative to banks and in absolute terms. The nonbank credit expansion is driven by long-term debt funding flowing to nonbanks. The attenuation of the traditional bank lending channel of monetary policy has real effects: nonbank credit insulates corporate investment and household consumption from adverse consequences of monetary contractions. |
| Keywords: | monetary policy, nonbanks, shadow banks, banks, real effects |
| JEL: | E51 E52 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1211 |
| By: | Mariana García-Schmidt |
| Abstract: | Central Bank policy decisions affect the economy not only by influencing market conditions through its market interventions but also by shaping the people’s expectations of economic conditions via the announcement of those decisions. This paper studies how forecasts of inflation and output growth respond to unexpected policy rate decisions using datasets for Brazil and Chile that satisfy three conditions: high enough frequency, short-term horizons, and the same source for the dependent and independent variables. The results show that inflation and output forecasts increase in the short run after an unexpected increase in the policy rate, which supports the existence of an information shock behind the monetary policy decision. These results can be explained by a baseline Neo-Keynesian model only when the interest rate provides information about shocks other than the monetary policy shock. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1017 |
| By: | Joao Guerreiro; Jonathon Hazell; Chen Lian; Christina Patterson |
| Abstract: | How costly is inflation to workers? Answers to this question have focused on the path of real wages during inflationary periods. We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises. We study a menu-cost style model, where workers choose whether to engage in conflict with employers to secure a wage increase. We show that, following a rise in inflation, wage catchup resulting from more frequent conflict does not raise welfare. Instead, the impact of inflation on worker welfare is determined by what we term “wage erosion”—how inflation would lower real wages if workers' conflict decisions did not respond to inflation. As a result, measuring welfare using observed wage growth understates the costs of inflation. We conduct a survey showing that workers are willing to sacrifice 1.75% of their wages to avoid conflict. Calibrating the model to the survey data, the aggregate costs of inflation incorporating conflict more than double the costs of inflation via falling real wages alone. |
| JEL: | E24 E31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32956 |
| By: | Olena Kostyshyna; Luba Petersen |
| Abstract: | We use a new Canadian household survey to examine how inflation uncertainty influences inflation expectations and spending. Through randomized information interventions, we provide inflation statistics with or without second moments, creating variations in households' inflation uncertainty. All information types effectively lower inflation expectations and uncertainty. While communicating inflation uncertainty does not affect expectations or uncertainty levels, it increases the probability assigned to expected inflation near communicated ranges. Using Nielsen IQ Homescanner data, we find that higher inflation expectations and uncertainty reduce household spending on goods. Communicating inflation statistics with ranges increases spending by lowering expectations and reducing uncertainty. |
| JEL: | C93 D84 E59 E7 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32939 |
| By: | Velasco, Sofia |
| Abstract: | This paper introduces a Bayesian Quantile Factor Augmented VAR (BQFAVAR) to examine the asymmetric effects of monetary policy throughout the business cycle. Monte Carlo experiments demonstrate that the model effectively captures non-linearities in impulse responses. Analysis of aggregate responses to a contractionary monetary policy shock reveals that financial variables and industrial production exhibit more pronounced impacts during recessions compared to expansions, aligning with predictions from the ’financial accelerator’ propagation mechanism literature. Additionally, inflation displays a higher level of symmetry across economic conditions, consistent with households’ loss aversion in the context of reference-dependent preferences and central banks’ commitment to maintaining price stability. The examination of price rigidities at a granular level, employing sectoral prices and quantities, demonstrates that during recessions, the contractionary policy shock results in a more pronounced negative impact on quantities compared to expansions. This finding provides support for the notion of stronger downward than upward price rigidity, as suggested by ’menu-costs models’. JEL Classification: C11, C32, E32, E37, E52 |
| Keywords: | asymmetric effects of monetary policy, Bayesian Quantile VAR, disaggregate prices, FAVAR, non-linear models |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242983 |
| By: | Lara Coulier; Alessio Reghezza |
| Abstract: | We match granular supervisory and credit register data to assess the implications of banks' exposure to interest rate risk on the monetary policy transmission to bank lending supply in the euro area. We exploit the largest and swiftest increase in interest rates since the creation of the euro and find that banks with a higher exposure to interest rate risk, i.e., with a larger duration gap after accounting for hedging, curtailed corporate lending more than their peers. Ceteris paribus, greater interest rate risk entails closer supervisory scrutiny and potential capital surcharges in the short term, and lower expected profitability and capital accumulation in the medium to long term. We then proceed to dissect banks' credit allocation and find that banks with higher net duration reshuffled their loan portfolio away from long-term loans in an attempt to limit the increase in interest rate risk and targeted their lending contraction to small and micro firms. Firms exposed to banks with a larger exposure to interest rate risk were unable to fully rebalance their borrowing needs with other lenders, thus experiencing a relatively larger decrease in total borrowing during the monetary tightening episode. |
| Keywords: | interest rate risk, duration gap, bank lending channel, financial stability |
| JEL: | E51 E52 G21 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1202 |
| By: | Kevin L. Kliesen |
| Abstract: | At their September 2024 meeting, the FOMC began reducing the federal funds target rate and indicating the likelihood of additional reductions by the end of the year and into 2025. The FOMC took this action because of favorable inflation trends and some developing weakness in labor markets. A similar dynamic was at work from 1994 to early 1996. During this period, the FOMC undertook, first, a pre-emptive tightening in policy to combat emerging price pressures and then, second, a pre-emptive easing of monetary policy to counter the expectations of slower real GDP growth or outright recession. One key difference between the two episodes was the marked acceleration in inflation rate in 2021-2022 compared to 1994-95. Nevertheless, the end result of the 1994-96 episode was that the US economy avoided a recession and inflation by the end of 1997 was effectively at a level that is now deemed price stability. The purpose of this article is to outline the key arguments that Chairman Greenspan and the other FOMC participants deployed during the 1995-96 pre-emptive easing episode. |
| Keywords: | Federal Open Market Committee (FOMC); monetary policy; macroeconomy; inflation; recession |
| JEL: | E3 E4 E5 N1 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98865 |
| By: | Elias Albagli; Luis Ceballos; Sebastian Claro; Damian Romero |
| Abstract: | We evaluate the behavior of the UIP relationship around monetary policy and global uncertainty shocks using event studies. We find that the covariance between exchange rate movements and changes in long-term yield differentials is conditional on the nature of shocks. A model of partial arbitrage between domestic and US bond markets predicts that tighter US monetary policy appreciates the dollar while increasing US yields relative to domestic bonds, a response that is consistent with UIP forces, while global uncertainty shocks appreciate the dollar while raising domestic yields relative to US bonds, exacerbating the widely documented UIP violation. The empirical analysis supports these mechanisms, specially for developed economies. For emerging economies, both relationships are weaker, consistent with more pervasive currency stabilization policies that mute the FX response at the expense of higher volatility in longer yields. Our results suggest a more nuanced interpretation of the unconditional failure of the UIP. |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1007 |
| By: | Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This paper explores a monetary experiment, the adoption of Bitcoin as legal tender in El Salvador in 2021, to analyze the impact of digital currencies on international capital flows. Using a difference-in-differences approach, we find that, instead of making transfers easier, El Salvador’s official cross-border financial activity has decreased after the monetary change. This finding may reflect an increase in uncertainty. However, it is also in line with findings that link digital assets to illegal activity as previously officially recorded financial transfers may have been replaced by unrecorded activities. |
| Date: | 2024–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:149484 |
| By: | Lin William Cong; Pulak Ghosh; Jiasun Li; Qihong Ruan |
| Abstract: | Using proprietary data from the predominant cryptocurrency exchange in India together with the country's Household Inflation Expectations Survey, we document a significantly positive association between inflation expectations and individual cryptocurrency purchases. Higher inflation expectations are also associated with more new investors in cryptocurrencies. We investigate investment heterogeneity in multiple dimensions, and find the effect to be concentrated in Bitcoin (BTC) and Tether (USDT) trading. The results are robust after controlling for speculative demand captured by surveys of investors' expected cryptocurrency returns, and admit causal interpretations as confirmed using multiple instrumental variables. Our findings provide direct evidence that households already adopt cryptocurrencies for inflation hedging, which in turn rationalizes their high adoption in developing countries without a globally dominant currency. |
| JEL: | G0 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32945 |
| By: | Buchheim, Lukas (TU Dortmund); Link, Sebastian (Ifo Institute for Economic Research); Möhrle, Sascha (Ifo Institute for Economic Research) |
| Abstract: | We study the link between expected inflation and wages using novel panel data from German firms and employees. We find that pass-through—the percentage point change in wage growth given a one percentage point change in expected inflation—is small: 0.11–0.17 for firms and 0.03–0.07 for employees. Utilizing variation in the coverage length of collective agreements, we estimate that passthrough at the intensive margin is 1.4-2 times larger than average pass-through, highlighting the importance of wage rigidities for pass-through. Pass-through also rises with the bargaining power of employees. At the extensive margin, expected inflation has little effect on additional wage negotiations. |
| Keywords: | wage expectations, inflation, pass-through, wage-price spirals, bargaining, firms, employees, survey data |
| JEL: | E24 E31 D84 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17269 |
| By: | Antoine Ebeling |
| Abstract: | This paper study the impact of the European Central Bank’s (ECB) climate related speeches on European stock markets. Using the database of 2594 speeches between 1997 and 2022 of the European Central Bank, we employ advanced textual analysis techniques, including keyword identification and topic modeling, to isolate speeches related to climate change. We then conduct an event study to estimate the differences in abnormal returns of a large panel of listed companies in response to the European Central Bank’s speeches on climate change. Our analysis reveals that the ECB’s communication on climate issues has intensified significantly since 2015. Using topic modelling methods, we classify climate speeches into two main themes: (i) green finance and economic policies, and (ii) climate-related risks The event study shows that financial markets tend to reallocate portfolios towards greener ones in the days following the ECB’s climate speeches. Our results show that following a climatic speech by the ECB, green financial markets are benefiting from positive abnormal returns by around 1 percentage point. More specifically, we find that climate speeches dealing with green monetary policy and other economic policy instruments have a larger effect on green stock prices than speeches dealing with different types of climate risk. |
| Keywords: | Central bank communication ; Climate change ; Event Study ; Textual Analysis. |
| JEL: | E52 G14 Q54 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-38 |
| By: | Titouche Souhila (UMBB - Université M'Hamed Bougara Boumerdes); Arkoub Nabila (UMBB - Université M'Hamed Bougara Boumerdes) |
| Abstract: | Monetary policy in Algeria aims to control money supply to stimulate economic growth. This study examines the role of monetary policy tools in achieving economic growth from 1990 to 2020, focusing on the impact of Law 90-10. The findings suggest that monetary policy has had limited success in boosting growth due to the economy's heavy dependence on oil revenue for financing development projects. Despite efforts in implementing reforms and developmental schemes, desired growth rates have not been achieved. |
| Keywords: | Monetary policy economic growth money supply code of money and credit JEL Classification Codes: E52 E63 F43 O23 O40 The Theoretical Framework of Economic Growth. Third Axis: The Reality, Monetary policy, economic growth, money supply, code of money and credit JEL Classification Codes: E52, E63, F43, O23, O40 The Theoretical Framework of Economic Growth. Third Axis: The Reality |
| Date: | 2023–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04680589 |
| By: | Bonga-Bonga, Lumengo |
| Abstract: | This paper makes a significant contribution to the literature on the policy trilemma by evaluating potential policy combinations that are relevant for the BRICS grouping within the context of the Impossible Trinity. Additionally, the paper introduces a new modeling approach for assessing the policy trilemma, based on establishing a boundary for the linear combination of variables related to the trilemma. The findings reveal that adopting a fixed exchange rate system presents considerable challenges for BRICS countries within the framework of the Impossible Trinity. Specifically, the results suggest that if BRICS countries opt for a fixed exchange rate system, they would likely have to forgo free capital flow. This loss of flexibility could be particularly detrimental, given their significant international influence and their role as major recipients of capital flows for trade and financial transactions. |
| Keywords: | impossible trinity; exchange stability; monetary policy independence; BRICS. |
| JEL: | C2 E61 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121839 |
| By: | Brzezinski, Adam; Palma, Nuno; Velde, François R. |
| Abstract: | Debates about the nature and economic role of money are mostly informed by evidence from the twentieth century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past is a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy. |
| Keywords: | identification in macroeconomics; monetary history; monetary policy; natural experiments; policy experiments |
| JEL: | E40 E50 N10 |
| Date: | 2024–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125356 |
| By: | Kristy Jansen; Hyun Song Shin; Goetz von Peter |
| Abstract: | How do exchange rates affect the asset allocation of bond portfolio investors? Using detailed security-level holdings, we find that euro area-based investors systematically shed sovereign bonds as the dollar strengthens, confirming the role of the dollar as a global risk factor even for euro-based investors. More distinctively, they also shed local currency bonds when the euro strengthens, due to currency mismatches on their own balance sheets. There is no such effect for foreign currency bonds of the same sovereign issuers. These findings are consistent with a Value-at-Risk portfolio choice model that brings out separate roles for local, foreign and reference currencies. |
| Keywords: | Currency mismatch, balance sheet effects, emerging markets, exchange rates, institutional investors, sovereign bonds |
| JEL: | F31 G11 G15 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1210 |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | This study examines the effects of geopolitical risk and global uncertainty on energy prices, conditioned by different exchange rate regimes, for 185 economies over the period 1980-2023. The central question is how uncertainty impacts energy prices and whether exchange rate flexibility mediates these effects. Using panel data techniques, including OLS and Panel VAR, we assess both demand and supply-side channels, exploring country-specific differences. Our key findings indicate that uncertainty shocks significantly raise energy prices, particularly in countries with flexible exchange rates, where currency depreciation amplifies global price fluctuations. Asymmetric results are found regarding emerging markets, with flexible exchange rates, which tend to have lower energy prices, while oil-exporting countries and OPEC members experience distinct pricing dynamics. These results underscore the importance of exchange rate policy choices in shaping energy market responses to global shocks. Policymakers may need to adopt complementary measures to manage the volatility arising from global uncertainty. |
| Keywords: | Geopolitical Risk; World Uncertainty Index; Global Energy Markets; Exchange Rate Regimes; Asymmetric Effects. |
| JEL: | C23 E44 G32 H63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03442024 |
| By: | Ackah, Charles; Hanley, Aoife; Hecker, Lars; Kodom, Michael |
| Abstract: | Our analysis of over 500 Ghanaian firms sheds light, for the first time, on how certain firms managed to extract value from mobile money. Our regressions point to the usefulness of this form of cashless payments in stabilizing sales during the COVID pandemic. Perhaps the most important message from our analysis is the recognition that the benefits from mobile money extend beyond its purpose as a tool for transacting cashless payments. We reveal that firms using these additional tools supported by MoMo (e.g. for planning or saving purposes) report higher sales resilience, all things equal. Our findings appear to echo the literature on private householders (e.g. Jack and Suri, 2014). However, while the latter report a positive effect due to remittances, our finding is more likely driven by enhanced ability of businesses to streamline their planning and sales. |
| Keywords: | Mobile Money, Africa, Firm, Urbanization |
| JEL: | G23 G21 L25 O14 O18 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kcgwps:303046 |
| By: | Chetan Ghate (Indian Statistical Institute – Delhi); Kenneth Kletzer (University of California); Mahima Yadav (Indian Statistical Institute – Delhi) |
| Abstract: | India accumulated a sizable stock of foreign reserves over the past two decades, in common with many other emerging economies. Its current reserves comfortably surpass conventional thresholds for adequacy used by the International Monetary Fund and others. An assessment of whether the stock of reserves is appropriate should depend on an evaluation of the benefits and costs of reserves looking forward. Reserves provide self-insurance against sudden financial outflows by non-resident investors or resident savers and liquidity for managing exchange rates. While India’s reserves appear to be ample for meeting both these needs, additional reserves can reduce vulnerability to capital flow reversals that can be crisis inducing. The empirical analysis of India’s external portfolio capital flows finds that reserves lower outflows in the event of global financial distress at the margin. Reserve holdings reduce the volatility of portfolio debt flows in response to relative policy interest rate shocks. The results indicate that additions to reserves reduce the economy’s exposure to global financial risk. The precautionary benefits of reserves could well increase as India becomes further integrated to international financial markets. Estimates of the costs of holding reserves give evidence that increases in the reserves to output ratio reduce the risk premium on reserves, so that the sovereign interest rate spread overestimates the marginal cost of reserves. |
| Keywords: | Foreign exchange reserves, foreign portfolio flows, precautionary reserves, global financial shocks. |
| JEL: | F31 F32 E52 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:168 |
| By: | Lambert, Claudia; Larkou, Chloe; Pancaro, Cosimo; Pellicani, Antonella; Sintonen, Meri |
| Abstract: | By applying a structural demand model to unique consumer-level survey data from the euro area, we assess how different CBDC design options, combined with individual (revealed) preferences, influence the potential demand for a digital euro. Estimating the demand for a digital euro, we find that if it were unconstrained, it could range, in steady state, between 3-28% of household liquid assets or €0.12 - €1.11 trillion, depending on whether consumers would perceive the digital euro to be more cash-like or deposit-like. With an illustrative €3, 000 holding limit per person, it could instead range between 2-9% or €0.10 -€0.38 trillion. Privacy, automatic funding, and instant settlement raise its potential demand. JEL Classification: E41, E50, E58 |
| Keywords: | Central bank digital currency, demand estimation, design attributes, structural model |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242980 |
| By: | Jakree Koosakul; Ms. Longmei Zhang; Maryam Zia |
| Abstract: | After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, this paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions. Since World War II, the global currency landscape has remained relatively stable, with the U.S. dollar serving as the dominant currency. Using country-level SWIFT transaction data, our analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape, consistent with existing studies. On geopolitical proximity, we find that closer proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, although the impact is rather muted in the full sample. The effect on RMB usage in the full sample is more pronounced during periods of heightened trade policy uncertainty. These findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role. |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/189 |
| By: | Bouvard, Matthieu; Casamatta, Catherine |
| Abstract: | We study agents that provide Cash-In/Cash-Out (CICO) services to mobile money consumers. A moral hazard friction constrains these agents’ ability to hold liquid reserves, which creates an endogenous cost for operators of ensuring reliable CICO services. Interoperability that allows agents to contract with multiple operators tends to decrease the amount of liquidity held by agents when the moral hazard problem is mild through a higher utilization rate but can increase it when the moral hazard problem is severe. In the latter case, the fees paid by operators to agents become strategic complements sustaining multiple equilibria with different levels of liquidity. Fees from operators to agents tend to be inefficiently low from a welfare perspective, both because operators internalize agents’ agency rents as a cost and because they do not internalize that higher fees, by expanding agents’ capacity to hold liquidity, benefit consumers from other operators. In that context, authorizing interoperability can decrease (when moral hazard is mild) or increase (when moral hazard is severe) welfare. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129703 |
| By: | Jennifer La'O; Wendy A. Morrison |
| Abstract: | We study optimal monetary policy in a general equilibrium economy with heterogeneous agents and nominal rigidities. Households differ in type-specific, state-contingent labor productivity and initial firm ownership, yet markets are complete. The fiscal authority has access to a linear tax schedule with non-state-contingent tax rates and uniform, lump-sum taxes (or transfers). We derive sufficient conditions under which implementing flexible-price allocations is optimal. We then show that when there are fluctuations in relative labor productivity across households, it is optimal for monetary policy to abandon the flexible-price benchmark and target a state-contingent markup. The optimal markup covaries positively with a sufficient statistic for labor income inequality. In a calibrated version of the model, countercyclical earnings inequality implies countercyclical optimal markups. |
| JEL: | D61 D63 E32 E52 E63 H21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32921 |
| By: | Lydia Cox; Jiacheng Feng; Gernot Müller; Ernesto Pastén; Raphael Schoenle; Michael Weber |
| Abstract: | The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved. |
| JEL: | E32 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32914 |
| By: | Gulener, Kaan |
| Abstract: | This study examines the complex relationship between unemployment and inflation in Turkey over a 64-year period, from 1960 to 2023. Utilizing correlation analysis and simple linear regression, we investigate the long-term connection between these two key macroeconomic indicators. Our findings reveal a moderate positive correlation between unemployment and inflation, challenging the traditional inverse relationship proposed by the Phillips Curve. This unexpected result suggests that, in Turkey's economic context, periods of higher unemployment have generally coincided with higher inflation rates. The paper provides a comprehensive review of relevant literature, analyzing the historical data within the framework of Turkey's evolving economic landscape. Our research contributes to the ongoing debate on the validity of the Phillips Curve in emerging economies and offers insights into the unique economic dynamics of Turkey. The study's results highlight the need for tailored economic models and policies that account for Turkey's specific economic conditions. Furthermore, our analysis reveals patterns of economic stability and turbulence throughout the studied period, providing a valuable historical perspective on Turkey's economic development. These findings have significant implications for policymakers navigating the complex interplay between unemployment and inflation in Turkey and potentially in other emerging economies. |
| Keywords: | Inflation; Unemployment; Phillips Curve; Turkish Economy |
| JEL: | E31 J60 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121932 |
| By: | Ryoji Koike (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ryouji.koike@boj.or.jp)) |
| Abstract: | This paper overviews the developments of the Bank of Japan's balance sheet from the Meiji era to postwar reconstruction. The paper assesses balance sheet items in terms of both nominal values and ratios to nominal GNP, using semiannual and monthly data reassembled from historical materials. In the semiannual data, the ratio of total assets to GNP remained at 10-15 percent in peacetime but increased to 19-48 percent in wartime, whereas it was 16 percent at most during financial crises. Meanwhile, banknotes remained stable, at 8-11 percent, except in the Bank's early years and at end of the Pacific War in 1941-45. The monthly data capture short-term changes during financial crises and rapid changes in economic and financial institutions, such as the 1923 earthquake, the return to the gold standard in 1930, and the emergency measures in 1946 that voided old banknotes to reduce money in circulation. These data provide useful information for research in history fields such as the identification of exogenous shocks. |
| Keywords: | from the Meiji era to postwar reconstruction, the Bank of Japan's balance sheet, historical records, semiannual data, monthly data |
| JEL: | N25 Y10 E58 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:24-e-07 |
| By: | Mario Tamez; Hans Weenink; Akihiro Yoshinaga |
| Abstract: | Well-designed legal frameworks and institutional arrangments support the legitimacy of central banks’ autonomous decision-making when grounded on sound legal basis and can prevent over-stepping in the remit of other authorities. This paper explores the key legal intersections of climate change and central banks. Climate change could impact price and finanical stability, which are at the core of a central bank’s mandate. While central banks’ legal frameworks can support climate change efforts they also determine the boundaries of the measures they can adopt. Central banks need to assess their mandate and authority under their current legal frameworks when considering measures to contribute to the global response to climate change, while taking actions to fulfill their legal mandates. |
| Keywords: | Climate Change; Central Bank; Legal Framework |
| Date: | 2024–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/192 |
| By: | Mosk, Benjamin; Vassallo, Danilo |
| Abstract: | This paper presents an event-study methodology that combines market data and survey-based probabilities to infer the full effect of a policy decision, as seen through the lens of financial markets. The market reaction to an event’s outcome reflects its surprise or announcement effect, and generally not its full effect. However, under certain conditions, the unobserved full effect can be derived from the observed surprise effect. Most importantly, the ex-ante probabilities of different outcomes must be known. We apply this methodology to a real-world example: the European Central Bank’s announcement of its third series of targeted longer-term refinancing operations (TLTROIII). The introduction of TLTROIII was highly anticipated, and therefore partially priced in, as market participants feared a “cliff effect” with the preceding operations under TLTROII coming due. We estimate the announcement’s full effect, focusing on its impact on a set of asset prices, as compared to a baseline wherein TLTROIII would not have been introduced. The full market impact surpasses the surprise effect by a factor of fifteen. We also find that the announcement had a highly heterogeneous impact on euro area sovereign bond yields. JEL Classification: G12, G13, G14 |
| Keywords: | event-study, targeted longer-term refinancing operations |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242982 |
| By: | Asim Ghosh; Soumyajyoti Biswas; Bikas K. Chakrabarti |
| Abstract: | We study the fluctuations, particularly the inequality of fluctuations, in cryptocurrency prices over the last ten years. We calculate the inequality in the price fluctuations through different measures, such as the Gini and Kolkata indices, and also the $Q$ factor (given by the ratio between the highest value and the average value) of these fluctuations. We compare the results with the equivalent quantities in some of the more prominent national currencies and see that while the fluctuations (or inequalities in such fluctuations) for cryptocurrencies were initially significantly higher than national currencies, over time the fluctuation levels of cryptocurrencies tend towards the levels characteristic of national currencies. We also compare similar quantities for a few prominent stock prices. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.03676 |
| By: | Claire Greene; Fumiko Hayashi; Alicia Lloro; Oz Shy; Joanna Stavins; Ying Lei Toh |
| Abstract: | U.S. households that lack digital means of making and receiving payments cannot participate fully in an increasingly digitized economy. Assessing the scope of this problem and addressing it requires a definition of households that are underserved in digital payments. Traditional definitions of households underserved in the banking system—those that are unbanked and those that are underbanked—are not suitable because they do not account for the ownership of nonbank transaction accounts that can be used to make and receive digital payments. In this paper, we define households underserved in digital payments by considering four key elements—access, use, safety, and affordability—and discuss how researchers may assess these elements to quantify the share of households underserved in digital payments. |
| Keywords: | payment systems; digital currencies; fintech |
| JEL: | D12 D18 G21 G23 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98816 |
| By: | Kim, Minseong |
| Abstract: | Typical New Keynesian models assume that the aggregate price level P can be treated as a given constant in firm optimization problems as the number n of firms goes to infinity. We show that this always holds only when there are actually infinitely many firms and not for the infinitely many firms limit. While largely an irrelevant issue for the flexible-price model, it becomes critical for the flexible-price limit of the sticky price model. Although the flexible-price model has a unique equilibrium, there are infinitely many flexible-price limits of the sticky-price model without interventions even in non-nominal real terms. This does not require dynamic effects, such as the binding zero lower bound. We discuss other defenses of the New Keynesian model assumption and find them either implausible or in need of further discussion due to significant deviations from the conventional analysis. |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:fvc9x |
| By: | Auriol, Emmanuelle; Gonzalez Fanfalone, Alexia |
| Abstract: | This paper studies how Mobile Network Operator (MNO) impacts traditional banks’ coverage decision in a model of vertical and horizontal differentiation with asymmetric transportation costs. The competitive pressure triggered by MNOs entry on traditional banking sector leads to prices decrease and broadens financial inclusion as the traditional banking sector expands its network in response to the entry of MNOs. The model’s predictions are checked against data from Kenya, where mobile banking has been most successful. Results from the econometric model for the period 2000-2011, suggest that, roughly, for each 7 new mobile agents in a sub-locality, one new bank branch opened. |
| Keywords: | Financial inclusion; Regulation; Mobile banking; Development |
| JEL: | G18 L51 L88 L96 O16 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129721 |