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on Monetary Economics |
| By: | Ekaterina Pirozhkova (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Giovanni Ricco (CREST, Ecole Polytechnique, 5 Av. Le Chatelier, 91120 Palaiseau, France); Nicola Viegi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Four factors drive the high-frequency impact of monetary policy announcements in South Africa: affecting short-, mid-, and long-term yield curve, as well as country risk. Controlling for information effects, we build IVs to study the transmission of conventional monetary policy, forward guidance, term premia, country risk and information shocks. Our findings reveal textbook contractionary effects of conventional monetary policy. Policy communication, particularly forward guidance, has persistent effects on output and prices. Country risk is a novel and powerful channel of monetary policy communication in emerging markets. By defending its independence, re-stating its inflation target objective, and addressing external shocks, the central bank can mitigate country risk and generate strong expansionary effects. |
| Keywords: | Monetary policy, Small Open Economy, Inflation Targeting, Exchange Rates. |
| JEL: | E5 F3 F4 C3 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202442 |
| By: | Bhattacharjee, Arnab; Holly, Sean; Wasseja, Mustapha |
| Abstract: | Transcripts from the US Federal Open Markets Committee provide, albeit with a lag, valuable information on the monetary policymaking process at the Federal Reserve Bank. We use the data compiled by Chappell et al. (2005b) on preferred interest rates (not votes) of individual FOMC members. Together with information on which monetary policy decisions are based, we use these preferred rates to understand decision making in the FOMC, focussing both on cross-member heterogeneity and interaction among the members of the committee. Our contribution is to provide a method of unearthing otherwise unobservable interactions between the members of the FOMC. We find substantial heterogeneity in the policy reaction function across members. Further, we identify significant interactions between individuals on the committee. The nature of these interdependencies tell us something about information sharing and strategic interactions within the FOMC and provide interesting comparisons with the Bank of England's Monetary Policy Committee. |
| Keywords: | Monetary policy, Interest rates, FOMC decision making, Spatial Weights Matrix, Spatial Lag Model |
| JEL: | E42 E43 E50 E58 C31 C34 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hwuaef:303042 |
| By: | Leonardo Gambacorta; Byeungchun Kwon; Taejin Park; Pietro Patelli; Sonya Zhu |
| Abstract: | We introduce central bank language models (CB-LMs) - specialised encoder-only language models retrained on a comprehensive corpus of central bank speeches, policy documents and research papers. We show that CB-LMs outperform their foundational models in predicting masked words in central bank idioms. Some CB-LMs not only outperform their foundational models, but also surpass state-of-the-art generative Large Language Models (LLMs) in classifying monetary policy stance from Federal Open Market Committee (FOMC) statements. In more complex scenarios, requiring sentiment classification of extensive news related to the US monetary policy, we find that the largest LLMs outperform the domain-adapted encoder-only models. However, deploying such large LLMs presents substantial challenges for central banks in terms of confidentiality, transparency, replicability and cost-efficiency. |
| Keywords: | large language models, gen AI, central banks, monetary policy analysis |
| JEL: | E58 C55 C63 G17 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1215 |
| By: | Valentin Burban (Banque de France and Aix-Marseille University, Aix-Marseille School of Economics); Andreaa Liliana Vladu (European Central Bank); Bruno De Backer (National Bank of Belgium, Economics and Research Department) |
| Abstract: | This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, πt*, is applied to inflation-linked swap (ILS) rates, while taking into account survey-based inflation forecasts. Estimates of πt* have been close to 2 % since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadly anchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of πt* are much above 2 % in the early 1990s, but they converge to levels below 2 % by the end of the decade when the ECB was established. |
| Keywords: | Inflation-linked swap rates, surveys, no-arbitrage, shifting endpoint, inflation expectations |
| JEL: | E31 E43 E47 E58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202409-457 |
| By: | Ángelo Gutiérrez-Daza |
| Abstract: | Empirical evidence suggests consumers rely on their shopping experiences to form beliefs about inflation. In other words, they "learn by shopping". I introduce this empirical observation as an informational friction in the New Keynesian model and use it to study its consequences for the transmission of aggregate shocks and the design of monetary policy. Learning by shopping anchors households' beliefs about inflation to its past, causing disagreement with firms over the value of the real wage. The discrepancy allows nominal shocks to have real effects and makes the slope of the Phillips curve a function of the monetary policy stance. As a result, a more hawkish monetary policy reduces the volatility and persistence of inflation, increases the degree of anchoring of households' inflation expectations, and flattens the slope of the Phillips curve of the economy. |
| Keywords: | Inflation;Inflation Expectations;Monetary Policy;Business Cycle;Informational Frictions |
| JEL: | D84 E31 E32 E52 E58 E70 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-12 |
| By: | Carlos Alba; Julio A. Carrillo; Raúl Ibarra |
| Abstract: | This paper analyzes, using a VAR model, the effects of US central bank monetary policy announcements, and information shocks from this authority regarding its economic outlook on Mexican financial and macroeconomic variables. Shocks are identified by combining a high-frequency strategy with sign restrictions, which exploits the co-movement between the policy rate and the stock market in the US around FOMC announcements. A restrictive monetary policy shock in the US is identified by an increase in the interest rate and a drop in stock prices, while a positive information shock is identified when both variables rise simultaneously. The results show that positive information shocks from the US central bank improve financial conditions in Mexico, appreciate the peso/dollar exchange rate, lower the sovereign risk premium and forex volatility, and increase stock prices, real activity and prices in Mexico. In contrast, restrictive US monetary policy shocks tighten financial conditions, and reduce real activity and prices in Mexico. |
| Keywords: | Monetary policy;international policy transmission;high-frequency identification;central bank information;VAR model |
| JEL: | E43 E52 E58 F42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-14 |
| By: | Ekaterina Pirozhkova (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Nicola Viegi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | This paper studies the bank lending channel of monetary policy transmission in South Africa in a context where the bank-loan level data, typically used for this type of analysis, are unavailable. Supply-side changes in credit provision are measured with data on composition of homeloan supply by banks versus nonbanks. High-frequency surprises in forward rate agreements are used to instrument for exogenous shifts in monetary policy in a proxy-SVAR model. The bank lending channel is found to be operative, as banks reduce the supply of homeloans following monetary tightening with a negative effect on housing market. The effectiveness of the deposits channel is shown: banks widen the deposit spread after monetary tightening, and the volume of deposits shrinks. As retail deposits provide a unique stable source of funding for banks, the deposits channel underlies the operativeness of the bank lending channel in South Africa consistent with theory. |
| Keywords: | monetary policy transmission, bank lending channel, credit channel, nonbank financial institutions, housing finance |
| JEL: | E52 G21 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202443 |
| By: | Dvoskin, Ariel (CONICET – University of San Martín, EIDAES); Libman, Emiliano (CONICET – Center for the Study of State and Society) |
| Abstract: | Following Aspromourgos’ (2007) steps, in this paper we examine the role of the interest rate as a “conventional” variable under different assumptions regarding price and quanti-ty determination, that aim to characterize the reaction functions of Central Banks, repre-sented in standard New Consensus models. More specifically, we lay out a minimal model and suggest a taxonomy that helps examining under which conditions prices and quantities can be determined independently of each other, and whether there is or there is not a unique natural rate of interest consistent with the equilibrium level of output. We argue that the natural rate of interest need not exist even if, as the New Consensus ar-gues, we allow prices and quantities to be somehow connected. |
| Keywords: | Inflation Targeting; Interest Rates; Monetary Theory of Distribution; New Consensus Model |
| JEL: | E31 E52 E58 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:ris:sraffa:0068 |
| By: | Gonzalo Cisternas; Aaron Kolb |
| Abstract: | Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a type of Keynesian beauty contest: its main novelty is that each side attempts, with varying degrees of accuracy, to forecast the other’s beliefs, resulting in new findings regarding the levels and trajectories of inflation. |
| Keywords: | central banks; credibility; forecasts |
| JEL: | D82 E5 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98892 |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan; Akhilesh Verma (ESRI & Trinity College) |
| Abstract: | This paper explores the role of bank capital in monetary policy transmission within the Indian economy, where the banking sector is the primary channel for financial intermediation. Using a panel dataset of 18 commercial banks from 2002 to 2018, we assess how varying levels of bank capital influence monetary policy transmission. Our findings reveal that though monetary contractions reduce credit growth, yet banks holding higher capital show significantly lower sensitivity to monetary policy changes compared to those with lower capital. This effect is stronger in well-capitalized private sector banks. Our results suggest that bank capital helps mitigate the adverse impact of higher interest rates on credit supply, thereby weakening the overall effectiveness of monetary transmission. However, the buffering effect of bank capital on credit growth diminishes during periods of high nonperforming assets (NPAs). These results highlight the Reserve Bank of India's challenge in balancing financial stability with effective monetary policy implementation. |
| Keywords: | Bank capital, Monetary transmission, Balance sheet channel, Non-performing assets, Public-sector banks |
| JEL: | E4 E5 G2 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-019 |
| By: | Ester Faia; Karen K. Lewis; Haonan Zhou |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers' monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| JEL: | E44 F32 F33 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32986 |
| By: | Peteris Kloks (University of St. Gallen); Edouard Mattille (University of St. Gallen); Angelo Ranaldo (University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen) |
| Abstract: | Using novel granular data on the global flows of wholesale and synthetic dollar funding, we show that constrained non-US banks substitute dollar borrowing from US repo markets with foreign exchange (FX) swaps at the quarter-end. As wholesale borrowing is encumbered by shadow costs, non-US banks satisfy their inelastic dollar demand by obtaining synthetic funding, for which they are willing to pay a heightened cross currency basis. Eurozone banks in particular hunt for dollars by engaging in such repo-FX swap substitution, with the benefits largely accruing to US dealers. Our study explains the increase in synthetic dollar borrowing and deviations from covered interest rate parity (CIP) observed at the quarter-end and uncovers how global banks manage short-term dollar liquidity across multiple money markets. |
| Keywords: | US Dollar, Global Banks, FX Swaps, Repos, Intermediary Constraints, Covered Interest Parity, Regulation |
| JEL: | F31 G12 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2452 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. |
| JEL: | E44 F31 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32976 |
| By: | Ratcliff, Ryan D. |
| Abstract: | Badinger and Schiman (2023) use a narrative high-frequency analysis of news and financial markets to develop a small set of restrictions on the structural shocks of a VAR of the Euro area. Their approach does not uniquely identify a structural representation, so their results are based on the distribution of a randomly generated set of parameters that satisfies the restrictions. Their method generates impulse responses that are consistent with macroeconomic theory, but that differ from previous studies that use alternative highfrequency identification strategies. They use this difference to argue that, unlike previous studies, their method is able to separate monetary policy surprises from confounding central bank information shocks - an important new contribution to the literature. I conducted two replication studies of their work on behalf of the Institute for Replication (I4R). First, I used the code provided in their replication package to replicate all of their main results, aside from the small variations expected in replicating a Monte Carlo study. Second, I attempted to use their original data to recreate their results using a different statistical software (Eviews 13). I was unable to replicate their results for two reasons. First, my program is unable to exactly replicate the custom prior they used to generate their reduced-form results. Second, my models routinely generated nonstationary VARs that nevertheless satisfied the identification restrictions. This differs from the author's results, but is not surprising given the ambiguous stationarity of the underlying macro variables. |
| Keywords: | Structural VAR, Residual Sign Restrictions, Replication |
| JEL: | C32 E43 E44 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:i4rdps:160 |
| By: | Luca Benati, Juan-Pablo Nicolini |
| Abstract: | We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation for 11 low-inflation and 5 high-inflation countries, and for Weimar Republic’s hyperinflation. Our evidence suggests that, contrary to the implicit assumption in much of the literature, these costs are far from negligible. For the U.S. our point estimates are equal to about one-third of those computed by Lucas (2000), and an order of magnitude larger than those obtained by Ireland (2009). Crucially, the most empirically plausible moneydemand functional form points towards sizeable ‘upward risks’ for these costs, with the 90% confidence interval associated with a 4% nominal interest rate stretching beyond 0.5 per cent of GDP. The welfare costs of inflation in the Euro area are about twice as large as in the U.S., thus suggesting that, ceteris paribus, the inflation target should be materially lower. At the peak of the inflation episodes, welfare costs had ranged between 0.3 and 1.9 per cent of GDP for low-inflation countries; between 4 and nearly 7 per cent for highinflation ones; and between 26 and 36 per cent for Weimar’s hyperinflation. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2408 |
| By: | Fabien Rondeau (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France); Yushi Yoshida (Shiga Unversity) |
| Abstract: | The theoretical model a la Amiti, Itskhoki, and Konings (2014, AER) suggests that the inclusion of exporters’ market share and import intensity in the exchange rate pass-through regression is sufficient to reflect the underlying deep parameters. We suggest using value-added by importing and other countries and invoicing currency ratio as proxies for the import intensity measure. By examining 33 exporting countries and 13 importing countries for 18 industries between 1995 and 2018, our results show that exchange rate pass-through decreases for industries with a higher contribution of the other country’s value-added. Moreover, we find that a higher US dollar invoicing ratio decreases the exchange rate pass-through. |
| Keywords: | Exchange Rate Pass-through, Global Value Chains, Invoicing Currency, Market Share, Value-Added by Importers. |
| JEL: | F14 F61 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-09 |
| By: | Ufuk Can; Oguzhan Cepni; Abdullah Kazdal; Muhammed Hasan Yilmaz |
| Abstract: | This study examines the impact of climate anomalies on inflation and its subcomponents in Turkiye. Using a dataset spanning January 2003 to February 2024, we employ local projections methods to examine the short- and medium-term impacts of various climate anomalies on inflation indicators, such as headline CPI, food CPI, unprocessed food prices, rent, and producer prices. Our findings reveal that climate shocks significantly influence headline inflation, food prices, particularly unprocessed food prices, and producer prices in the short term, while also affecting rent prices. However, these effects often reverse or diminish in the medium term. We also uncover distinct responses to cold winters versus hot summers, highlighting the asymmetric impact of temperature anomalies. Cold winters tend to create inflationary pressures, particularly on food and producer prices, while hot summers can induce deflationary effects. Additionally, we observe that the impact of wind anomalies on prices is muted, while precipitation shocks primarily affect unprocessed food prices. These results underscore the complex and multifaceted relationship between climate change and inflation, emphasizing the need for a nuanced understanding of these dynamics. |
| Keywords: | Climate anomalies, Inflation, Local projections |
| JEL: | E31 Q54 C22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2412 |
| By: | Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | In the past decade, a new paradigm for fiscal and monetary policy analysis has emerged, combining the canonical macro model of income and wealth inequality with the New Keynesian model. These Heterogeneous-Agent New Keynesian (“HANK”) models feature new transmission channels and allow for the joint study of aggregate and distributional effects. We review key developments in this literature through the lens of a unified “canonical HANK model”. Monetary and balanced-budget fiscal policy have similar aggregate effects as in the standard new Keynesian model, while deficit-financed fiscal policy is much more expansionary. We discuss the split between direct and indirect effects of policy, and also the implications of cyclical income risk, maturity structure, nominal assets, behavioral frictions, and many other extensions to the model. Throughout, we highlight the benefits of using sequence-space methods to solve and analyze this class of models. |
| JEL: | D1 E21 E31 E32 E43 E52 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32991 |
| By: | Arpan Chakraborty |
| Abstract: | Modern macroeconomic models, particularly those grounded in Rational Expectation Dynamic Stochastic General Equilibrium (DSGE), operate under the assumption of fully rational decision-making. This paper examines the impact of behavioral factors, particularly 'animal spirits' (emotional and psychological influences on economic decisions) and 'inflation extrapolators', on the communication index/sentiment index of the US Federal Reserve. Utilizing simulations from a behavioral New Keynesian model alongside real-world data derived from Federal Reserve speeches, the study employs an Auto-Regressive Distributed Lag (ARDL) technique to analyze the interplay between these factors. The findings indicate that while the fraction of inflation extrapolators do not significantly affect the Fed's sentiment index, various aspects of animal spirits exert a notable impact. This suggests that not only is the US output gap influenced by animal spirits, but the Federal Reserve's communication is also substantially shaped by these behavioral factors. This highlights the limitations of rational expectation DSGE models and underscores the importance of incorporating behavioral insights to achieve a more nuanced understanding of economic dynamics and central bank communication. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.10938 |
| By: | Andrew Powell (Center for Global Development; Distinguished Visiting Professor, Williams College) |
| Abstract: | World leaders are calling on the multilateral development banks (MDBs) to greatly increase development and climate finance for developing countries using their capital more efficiently. MDBs hold large amounts of liquidity on their balance sheets as well as capital. The International Bank for Reconstruction and Development (IBRD) and the four main regional development banks manage more than US$200 billion of high credit-quality, liquid assets principally from the world’s leading economies. This paper describes how a liquidity line from major central banks backed by SDRs, a natural liquidity instrument, could save MDBs money. A US$50 billion line, about 8 percent of the top 20 central banks’ SDR holdings, could boost MDB net income between US$413 million and US$792 million per year under normal market conditions. This would deploy unused SDRs, assist G20 countries comply with their SDR rechanneling commitments, be a step forward towards a more coherent and integrated MDB system, as recommended by various G20 committees, and promote international financial stability. If the savings were retained as additional MDB capital, it could drive between US$31.3 billion to US$60.4 billion of additional development lending over 20 years, complementing other reforms to enhance balance sheet efficiency. |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:cgd:ppaper:340 |
| By: | Omar Barbiero; Falk Bräuning; Gustavo Joaquim; Hillary Stein |
| Abstract: | We leverage supervisory microdata to uncover the role of global banks' risk limits in driving exchange rate dynamics. Consistent with a model of currency intermediation under risk constraints, shocks to dealers’ risk limits lead to price and quantity adjustments in the foreign exchange market. We show that dealers adjust their net position and increase the bid–ask spread in response to granularly identified limit shocks, leading to lower turnover and an adjustment in currency returns. These shocks exacerbate the effects of net currency demand on exchange rate movements, as predicted by theory, and trigger deviations from covered interest parity. |
| Keywords: | exchange rates; currency returns; market making; risk constraints; financial intermediation |
| JEL: | F31 G15 G21 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98847 |
| By: | Matthew S. Jaremski; David C. Wheelock |
| Abstract: | The Federal Reserve Act was the outcome of compromises among competing economic and political interests. Numerous studies examine how the act came together but largely take the makeup of Congress and the Administration as given rather than considering the unique circumstances that led to that political distribution. This paper examines how the election of 1912 changed the makeup of Congress and increased the likelihood of central banking legislation and shaped the act. The decision of Theodore Roosevelt and other Progressives to run as third-party candidates split the Republican Party and enabled Democrats to capture the White House and Congress. We show that the election produced a less polarized Congress and that newly-elected members were more likely to vote for the act. Absent their interparty split, Republicans would likely have held the White House and Congress, and any legislation to establish a central bank almost certainly would have been quite different. |
| JEL: | G28 N42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32987 |
| By: | Hélène Rey; Vania Stavrakeva; Jenny Tang |
| Abstract: | The paper explores empirically the tight links between exchange rates and the global network of equity holdings. Exchange rates can be expressed in terms of “equity net currency supplies”, i.e. local currency stock market capitalization minus equity holdings, denominated in investors’ currencies, as well as elasticities, reflecting the “centrality” of currencies in global equity markets. The observed components of our exchange rate decomposition account for, on average, 95% of the monthly variation of 28 bilateral currency crosses vis-à-vis the USD and 98% vis-à-vis the EUR. We use the decomposition to elucidate the unique role of the USD in transmitting risk aversion and U.S. macroeconomic news throughout the global equity network. Our findings contribute towards explaining global financial cycles and “risk-on”/“risk-off” episodes. |
| JEL: | F30 F32 F40 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33003 |
| By: | Teodoro Criscione |
| Abstract: | Transaction data from digital payment systems can be used to study economic processes at such a detail that was not possible previously. Here, we analyse the data from Sarafu token network, a community inclusion currency in Kenya. During the COVID-19 emergency, the Sarafu was disbursed as part of a humanitarian aid project. In this work, the transactions are analysed using network science. A topological categorisation is defined to identify cyclic and acyclic components. Furthermore, temporal aspects of circulation taking place within these components are considered. The significant presence of different types of strongly connected components as compared to randomized null models shows the importance of cycles in this economic network. Especially, indicating their key role in currency recirculation. In some acyclic components, the most significant triad suggests the presence of a group of users collecting currency from accounts active only once, hinting at a misuse of the system. In some other acyclic components, small isolated groups of users were active only once, suggesting the presence of users only interested in trying out the system. The methods used in this paper can answer specific questions related to user activities, currency design, and assessment of monetary interventions. Our methodology provides a general quantitative tool for analysing the behaviour of users in a currency network. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.13674 |
| By: | Taniya Ghosh (Indira Gandhi Institute of Development Research); Abhishek Gorsi (Indira Gandhi Institute of Development Research) |
| Abstract: | This study examines how relative income factors and social comparisons affect Indian households' inflation expectations. The study uses a one-time primary survey conducted in Nahan, Himachal Pradesh, India, covering 200 households, followed by repeated crosssectional data from the Reserve Bank of India's Consumer Confidence Survey, covering 5000 households, for further generalization. The results suggest that households that are relatively worse off and find it difficult to maintain their relative position tend to report higher inflation expectations. Furthermore, a measure of households aspirations is constructed based on the reference group's consumption and income outlook, which the households attempt to match. The findings suggest that as reference group's consumption and income rise, households report higher inflation expectations. Moreover, when the households experience an increase in personal income, they are more likely to report higher inflation expectations with an increase in the reference group's consumption and income outlook. However, the relative factors do not impact their inflation expectations when they experience a decrease in personal income. The study thus contributes to a better understanding of the behavioral factors that influence inflation expectations, the heterogeneity in household responses, and the upward bias in inflation expectations among Indian households. |
| Keywords: | Consumption Outlook, Income Outlook, Inflation, Inflation Expectations, Reference Group, Social Comparisons |
| JEL: | E31 E71 D12 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-018 |
| By: | Sebastian Hernandez; Alexandra Sutton-Lalani; John Miedema; Virginie Cobigo; Fatoumata Bah; Munazza Tahir; Danika Lévesque; Badr Omrane |
| Abstract: | We explore how digital payments, which dominate the payment landscape in Canada, can be made more cognitively accessible. In particular, we are focused on removing cognitive barriers present in many digital interfaces and products. We propose an inclusive approach since involving people with cognitive disabilities in design, testing, and refinement is crucial. The proposed framework centers on system learnability and user workload as the two key measures of cognitive accessibility in digital payment and banking interfaces. System learnability is determined by measuring first use learnability, steepness of the learning curve and efficiency of the ultimate plateau. Workload is determined by the sub-measures mental demand, temporal demand, frustration and performance. The framework is broadly applicable to digital and electronic payment methods. We develop and test a prototype interface for voice payments, which successfully demonstrates that the framework provides an effective iterative design approach to enhance cognitive accessibility and usability. The Bank of Canada can use this framework to create guidelines for more cognitively accessible electronic payment products, including a potential Digital Canadian Dollar. While the framework facilitates efficient evaluation, further validation is still needed. This framework should also be used with broader holistic usability and accessibility testing, recognizing that cognitive accessibility is just one aspect of the user experience. |
| Keywords: | Accessibility; Bank notes; Central bank research; Digital currencies and fintech; Digitalization; Financial services |
| JEL: | A14 C90 D83 O33 Y80 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:24-15 |
| By: | Michael J. Fleming |
| Abstract: | Standard metrics point to an improvement in Treasury market liquidity in 2024 to levels last seen before the start of the current monetary policy tightening cycle. Volatility has also trended down, consistent with the improved liquidity. While at least one market functioning metric has worsened in recent months, that measure is an indirect gauge of market liquidity and suggests a level of current functioning that is far better than at the peak seen during the global financial crisis (GFC). |
| Keywords: | market liquidity; Treasury market; Treasury securities |
| JEL: | G12 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98808 |
| By: | Dr. Terhi Jokipii; Dr. Jayson Danton |
| Abstract: | We analyse the impact of interest rates on Swiss banks' profitability. Our assessment is based on annual data on individual bank balance sheets and income statements in a standard panel regression setting for a sample of domestically focused commercial banks. We find that net interest rate margins (NIM) and return on assets (ROA) exhibit different sensitivities to market interest rate levels and highlight the non-linear effect of compressed liability margins on NIM. In addition, we show that initial bank characteristics affect the link between falling interest rates and profitability. However, bank characteristics that amplify/alleviate NIM pressure from falling interest rates differ from those that affect ROA pressure. Furthermore, banks have taken measures to safeguard profitability: (i) with respect to risk-taking, all banks increased their exposure to rising interest rates by increasing their asset durations. Moreover, banks that started with lower mortgage ratios increased these ratios considerably, particularly during the second half of the sample period (2015-2019); and (ii) Some banks actively worked to curb deposit growth when other sources of funding became relatively cheaper. Overall, these adjustments have helped alleviate the downward pressure of falling interest rates on bank profitability. |
| Keywords: | Bank profitability, Net interest margin, Low interest rates, Liability margin |
| JEL: | E43 E52 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2024-10 |
| By: | Andres Fernandez; Martin Hiti; Asani Sarkar |
| Abstract: | Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a “dash for cash” in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors. Even though these sectors have heterogeneous business models, ranging from insurance to trading and asset management, we find that their systemic risk has common variation, and this commonality has increased over time. Moreover, nonbank sectors tend to become more systemic when banking sector systemic risk increases. |
| Keywords: | nonbank financial institutions (NBFIs); nonbanks; banks; systemic risk; Interconnections |
| JEL: | G01 G21 G22 G23 G24 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98893 |
| By: | Kevin Cedric Guyard; Michel Deriaz |
| Abstract: | The Foreign Exchange market is a significant market for speculators, characterized by substantial transaction volumes and high volatility. Accurately predicting the directional movement of currency pairs is essential for formulating a sound financial investment strategy. This paper conducts a comparative analysis of various machine learning models for predicting the daily directional movement of the EUR/USD currency pair in the Foreign Exchange market. The analysis includes both decorrelated and non-decorrelated feature sets using Principal Component Analysis. Additionally, this study explores meta-estimators, which involve stacking multiple estimators as input for another estimator, aiming to achieve improved predictive performance. Ultimately, our approach yielded a prediction accuracy of 58.52% for one-day ahead forecasts, coupled with an annual return of 32.48% for the year 2022. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.04471 |