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on Monetary Economics |
| By: | Lena Dräger; Maximilian Floto; Marina Schröder |
| Abstract: | We provide evidence for an expectation gap, where risk-averse as well as impatient households and experts provide significantly higher prior inflation forecasts. Using a survey randomized control trial (RCT), we can show that information about inflation forecasts closes this expectations gap. The group, whose prior expectations was farthest from the treatment information, tends to adjust posterior expectations more strongly. However, we find no such effect with respect to forecasts for energy prices, which are less informative. Our results suggest that the expectation gap seems to be partially due to differences in information seeking between different types of individuals. |
| Keywords: | inflation expectations, patience, risk preference, households, experts, survey experiment, randomized control trial (RCT) |
| JEL: | E52 E31 D84 D90 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11326 |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | We assess whether unconventional monetary and fiscal policy implemented in response to the COVID-19 pandemic contribute to the 2021-2023 inflation surge through the lens of several different empirical methodologies—event studies, vector autoregressions, and regional panel regressions using granular data—and establish a null result. The key economic mechanism works through a disinflationary channel in the Phillips curve while monetary and fiscal stimuli put positive pressure on inflation through the usual demand channel. We illustrate this negative supply-side channel both theoretically and empirically. |
| JEL: | E31 E52 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33044 |
| By: | Otaviano Canuto |
| Abstract: | Recent initiatives and policy moves by China and other countries to extend the reach of use of the renminbi in the international monetary system, while the U.S. dollar share in global reserves has slightly shrunk in relative terms, have sparked frequent discussions about a hypothetical “de-dollarization” of the global economy. We approach here what that would mean in terms of global currency functions as means of payment and store of value. While we point out a relative decline of the U.S. dollar weight in those functions more recently, we also highlight gravitational factors that tend to uphold its position. Therefore, the “exorbitant privilege” that the U.S. dollar has provided to its issuer is likely to remain. |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb_21_23 |
| By: | Liu, Liyuan; Wang, Xianshuang; Zhou, Zhen |
| Abstract: | This paper examines the consequences of Chinese regulators deviating from a long-standing full bailout policy in addressing the distress of a city-level commercial bank. This policy shift led to a persistent widening of credit spreads and a significant decline in funding ratios for negotiable certificates of deposit issued by small banks relative to large ones. Our empirical analysis reveals a novel contagion mechanism driven by reduced confidence in future bailouts (implicit non-guarantee), contributing to the subsequent collapse of other small banks. However, in the longer term, this policy shift improved price efficiency, credit allocation, and discouraged risk-taking among small banks. |
| Keywords: | Implicit guarantee, Bailout, Contagion, Price efficiency, Credit allocation, TBTF |
| JEL: | G14 G21 G28 H81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitp:305281 |
| By: | Povilas Lastauskas; Julius Stak\.enas |
| Abstract: | Do labor market policies initiated in periods of loose monetary policy yield different outcomes from those introduced when monetary tightening prevails? Using data from 11 euro-area members up to 2010 -- and extending to 17 countries up to 2020 -- we analyze three labor market policies: replacement rates, spending on active labor market policies (ALMPs), and employment protection. We find that these policies deliver different macroeconomic outcomes in low- and high-interest rate environments. In particular, ALMPs reduce unemployment if implemented under a loose monetary policy but not otherwise, whereas higher employment protection delivers expansionary effects under a tight monetary policy. These findings highlight that the effectiveness of labor market policies is significantly influenced by the monetary policy environment, emphasizing the need for coordinated policy design. Methodologically, we contribute by proposing to average local projections using Mallow's $C_{p}$ criterion, allowing for inferences that are robust to mis-specification and accommodate non-linearities. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.12024 |
| By: | Florian Huber; Karin Klieber; Massimiliano Marcellino; Luca Onorante; Michael Pfarrhofer |
| Abstract: | This paper analyzes nonlinearities in the international transmission of financial shocks originating in the US. To do so, we develop a flexible nonlinear multi-country model. Our framework is capable of producing asymmetries in the responses to financial shocks for shock size and sign, and over time. We show that international reactions to US-based financial shocks are asymmetric along these dimensions. Particularly, we find that adverse shocks trigger stronger declines in output, inflation, and stock markets than benign shocks. Further, we investigate time variation in the estimated dynamic effects and characterize the responsiveness of three major central banks to financial shocks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16214 |
| By: | Michael Reiter; Adrian Wende |
| Abstract: | We propose a generalized Rotemberg pricing scheme which is able to explain important aspects of the observed nonlinear behavior of price adjustment at the macroeconomic level, such as higher pass-through in response to larger shocks, a positive impact of trend inflation on price flexibility, and the relationship between announcement and implementation effects. This is achieved by replacing the linear marginal adjustment cost in Rotemberg pricing by a monotonically increasing, but bounded marginal cost function, specifically some version of a sigmoid function. Conditional on computing a nonlinear model solution, the generalized pricing function is equally tractable as Rotemberg pricing, and equivalent to it for small shocks around a zero-inflation steady state. We show that a suitable calibration of the model has similar effects on macroeconomic variables as standard versions of the menu cost model. It replicates the effect of trend inflation on the impulse response to money supply shocks that has been established in the literature in a model of logit-price dynamics. |
| Keywords: | price setting, nominal rigidities, inflation |
| JEL: | E13 E31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11297 |
| By: | YiLi Chien; Ashley Stewart |
| Abstract: | An analysis breaks down Japan’s consolidated balance sheet and considerations surrounding fiscal and monetary policies. |
| Keywords: | Japan; fiscal policy; monetary policy |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99027 |
| By: | Helyette Geman |
| Abstract: | On Friday, March 10 -2023, the US and the world discovered that the Federal Deposit Insurance Corporation (FDIC) had seized the Silicon Valley Bank after SVB’s customers had withdrawn an extraordinary $42 billion from their deposits on March 16. This $4.2 billion an hour, or more than $1 million per second for ten straight hours, an unprecedented event made possible by the use of Apps by many startup founders to access their accounts and advise their friends to do the same -what the Chairman of the House of Financial Services Committee called ‘the first Twitter -fueled bank run’. |
| Date: | 2023–03 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb_16-23 |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea; Dávalos, Jorge |
| Abstract: | What are the effects of political instability on the banking sector? This article examines the short-term impacts on banking activities in Mexico during the late 1920s, a decade marked by civil conflicts and political violence. Although political upheavals affected some regions more than others, banks and depositors were compelled to respond to a general atmosphere of political violence. Drawing on new qualitative and quantitative evidence, this article analyzes how banks and depositors behaved in the context of armed conflicts and assesses the consequences for the banking sector. Our results show a negative effect of political violence on bank deposits and banks' capitalization. We also account for the geographic proximity of violent regions to neighboring municipalities and observe that political instability promoted capital flight, particularly in the northern region of the country, where episodes of political violence were more severe. We conclude that political instability likely contributed to the lack of financial development in Mexico. |
| Keywords: | Political instability, Mexico, Banking fragility, Financial development, Political violence, Banking sector |
| JEL: | N16 N26 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gnv:wpaper:unige:180827 |
| By: | Meltem Chadwick (The South East Asian Central Banks (SEACEN) Research and Training Centre); Hulya Saygili (Atilim University) |
| Abstract: | This study addresses a significant gap in the existing literature by examining the association between weather variables, i.e., temperature and precipitation, and food price inflation at monthly frequency. Using a comprehensive panel dataset that spans 23 years of data for 186 countries, we explore this relationship in depth. Furthermore, we employ panel quantile regression techniques to investigate how weather-related variables influence food price inflation across different quantiles of inflation. Our findings reveal three key results. First, we establish that weather variables play a crucial role in explaining inflation, with temperature generally having a negative coefficient with inflation contemporaneously. In contrast, precipitation appears to have a positive coefficient, and the strength of these associations varies across different inflation quantiles. In addition, although the contemporaneous effect is negative, the cumulative inflationary effect of 1â—¦C temperature increase reaches up to 0.6 percentage points. Subsequently, our results demonstrate sensitivity to the method of clustering the panel of countries, indicating the importance of methodological considerations in such analyses. |
| Keywords: | Climate change; Food price inflation; Panel data; Quantile regression |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:sea:wpaper:wp55 |
| By: | Cisil Sarisoy |
| Abstract: | Option-implied volatilities of U.S. short-term interest rates have risen sharply since late 2021, reaching their highest levels in over a decade. Although these measures declined moderately since early 2023, they remain at around the 70th percentile of their historical distribution. This note links the implied volatility of short-term interest rates to macroeconomic uncertainty and highlights two fundamental drivers of short-term interest rate volatility over the past 30 years: inflation uncertainty and growth uncertainty. |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-10-24 |
| By: | Kenneth S. Rogoff; Barbara Rossi; Paul Schmelzing |
| Abstract: | Utilizing critical recent data advances, we analyze empirical evidence on long-run samples of short-maturity real interest rates as well as term spreads based on multi-century data. In contrast to an extensive literature on short-maturity real interest rates over the past few decades, we find strong and consistent evidence of trend stationarity in long horizon series, relatively fast adjustment speeds, and a paucity of structural breaks – results that we show to survive out of sample tests. The use of very long-run data offers a fresh perspective for ongoing monetary policy debates surrounding r*, and also provides a crucial missing link to reconstructing the long-run properties of term spreads. On balance and against limited post-COVID data, our evidence suggests caution on the idea of a break in short-term real interest rate behavior and instead points to elements of continuity over very long time periods. Relatedly, we show that term spreads are secularly rising while inflation volatility trends in the exact opposite direction – a finding questioning the emphasis of influential term structure models. |
| JEL: | F3 N20 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33079 |
| By: | Peter Karadi; Anton Nakov; Galo Nuño; Ernesto Pastén; Dominik Thaler |
| Abstract: | We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides micro-foundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. When facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model. |
| Keywords: | state-dependent pricing, large shocks, nonlinear Phillips curve, optimal monetary policy |
| JEL: | E31 E32 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11372 |
| By: | Otaviano Canuto |
| Abstract: | The US dollar has risen dramatically in value against other currencies recently. Three channels through which factors affecting bilateral exchange rates operate have been pulling up the U.S. dollar: yield differentials, liquidity differentials, and growth differentials. The strong appreciation of the US dollar against other currencies recently reinforced the contractionary pressures present in the global economy. Ultimately, the “turn” or “pivot” of the dollar will most likely occur when a “turn” or “pivot” occurs in US monetary policy, given the latter’s critical weight on the determination of growth and yield differentials. |
| Date: | 2022–11 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb_67-22 |
| By: | Giulio Cifarelli; Paolo Paesani |
| Abstract: | The French franc variability of the 1920-1926 time interval is often attributed to irrational speculation. A common view is that French investors, disregarding fundamentals, were prone to export their funds in response to adverse financial/political news, destabilizing in this way the exchange rate. Our analysis, based on a new dataset, qualifies these results. The estimates of a Markov-switching Heterogeneous Agents Model strongly support the hypothesis that informed speculators relied on the relative purchasing power parity paradigm and drove the short run exchange rate dynamics, bandwagon effects being but short lived. In line with previous analyses the impact of additional explanatory variables, real and financial, turns out to be rather limited. |
| Keywords: | Gold Standard, HAM French Franc pricing, Markov Switching |
| JEL: | C32 F31 F33 G15 N24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_24.rdf |
| By: | Chamon Wieles; Jan Kwakkel; Willem L. Auping; Jan Willem van den End |
| Abstract: | We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty. |
| Keywords: | Monetary policy; Scenarios; Exploratory modelling; Deep uncertainty |
| JEL: | E52 E58 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:818 |
| By: | Junko Koeda; Bin Wei |
| Abstract: | This study evaluates the effectiveness of Japan's unconventional monetary policies over the past quarter century within a unified term structure framework. It specifically examines the impact of the Bank of Japan's (BOJ) outcome-based forward guidance and yield curve control (YCC) and incorporates other policy types into the framework. The findings show that the BOJ’s forward guidance and YCC have both had a significant impact on the shadow rate. Forward guidance accounted for most of the policy impact in the early stages of unconventional monetary policies and remained influential throughout. YCC, since its introduction in 2016 until March 2022, contributed to more than a third of the policy impact. Furthermore, these policies have been effective in raising output and inflation. |
| Keywords: | forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors; yield curve control; Japan |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99037 |
| By: | Hecker, Dominik; Jang, Hun; Rubio, Margarita; Verona, Fabio |
| Abstract: | In this paper, we design countercyclical capital buffer rules that perform robustly across a wide range of Dynamic Stochastic General Equilibrium (DSGE) models. These rules offer valuable guidance for policymakers uncertain about the most appropriate model(s) for decision-making. Our results show that robust rules call for a relatively restrained response from macroprudential authorities. The cost of insuring against model uncertainty is moderate, emphasizing the practicality of following these robust countercyclical capital buffer rules in uncertain economic environments. |
| Keywords: | countercyclical capital buffers, macroprudential policy, model comparison, structural models, model uncertainty, robust rule |
| JEL: | E32 E44 E47 E60 G20 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:305273 |
| By: | Guglielmo Maria Caporale; Faek Menla-Ali |
| Abstract: | This paper analyses the short- and long-term effects of geopolitical uncertainty on cross-border portfolio flows between the US and 41 developed and emerging economies over the period January 1992-November 2022. We find that geopolitical uncertainty decreases equity inflows from other countries into the US in both the short- and long-term, with this flight home effect generally peaking after 6 months. We investigate the underlying mechanisms and show that the erosion of net financial worth, the evaporation of liquidity and rising risk premia are the key channels through which geopolitical uncertainty affects these inflows, supporting theoretical capital flow models with portfolio choice that feature information and related frictions. By contrast, the responses of other types of flows to geopolitical uncertainty are generally weak and are only found when accounting for the role of some cross-sectional heterogeneity and its time variation. |
| Keywords: | cross-border portfolio flows, equity and bond inflows and outflows, geopolitical risk, push and pull factors, local projections, risk premia |
| JEL: | F32 F36 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11337 |
| By: | Xavier Gabaix; Ralph S J Koijen; Robert Richmond; Motohiro Yogo |
| Abstract: | Asset demand systems specify the demand of investors for financial assets and the supply of securities by firms. We discuss how realistic models of the asset demand system are essential to assess ex post, and predict ex ante, how central bank policy interventions impact asset prices, the distribution of wealth across households and institutions, and financial stability. Due to the improved availability of big holdings data and advances in modelling techniques, estimating asset demand systems is now a practical reality. We show how demand systems provide improved information for policy decisions (eg in the context of financial contagion, convenience yield or the strength of the dollar) or to design optimal policies (eg in the context of quantitative easing or designing climate stress tests). We discuss how recent AI methods can be used to improve models of the asset demand system by better measuring asset and investor similarity through so-called embeddings. These embeddings can for instance be used for policymaking by central banks to understand the rebalancing channel of asset purchase programs and to measure crowded trades. |
| Keywords: | asset prices, central bank policies, artificial intelligence, embeddings |
| JEL: | C5 G11 G12 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1222 |
| By: | Andres Blanco; Pablo Ottonello; Tereza Ranošová |
| Abstract: | We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. In sum, episodes of large and persistent inflation tend to occur with government responses that depart from the prescriptions of textbook policy rules, and that instead exhibit a "fear of tightening." |
| Keywords: | inflation surges; inflation expectation; fiscal and monetary policy |
| JEL: | E31 E40 F40 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99038 |
| By: | Bhavesh Garg (Indian Institute of Technology Ropar, India) |
| Abstract: | This paper employs a two-economy model, which incorporates New Keynesian features, to examine the impact of a coronavirus disease (COVID-19) induced supply shock on economic recovery in large net oil-importing Asian countries. It examines whether and to what extent monetary and fiscal policies are effective in mitigating such supply shock risks. Our calibrations and estimations reveal that a COVID-19 induced supply shock negatively impacted both the global and domestic economies alike and delayed their economic recovery. Specifically, shocks to total factor productivity and world output negatively affected domestic macroeconomic variables such as domestic output, inflation rate, interest rate, and government expenditure, amongst others. We show that monetary and fiscal policies efficiently mitigate the adverse effects arising from the supply shock. |
| Keywords: | COVID-19, supply shock, two-economy model, NK-DSGE, monetary policy, fiscal policy |
| JEL: | C63 D58 E47 E52 E62 |
| Date: | 2023–12–22 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-20 |
| By: | Yu-Ting Chiang; Mick Dueholm; Ezra Karger |
| Abstract: | This analysis looks at how the 2021-22 inflation shock affected households based on their exposure to nominal assets and nominal liabilities. |
| Keywords: | inflation; household finances |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99007 |
| By: | Pauline Gandré; Margarita Rubio |
| Abstract: | Macroprudential policy is traditionally characterized by countercyclical rules responding to credit variables. In this paper, we augment macroprudential rules with additional indicators, including the credit spread. First, we empirically assess the validity of this extra variable by providing evidence on the correlation of a credit spread measure with credit booms. Then, we explicitly introduce this variable into a Dynamic Stochastic General Equilibrium (DSGE) model. We use our model to determine to which extent having countercyclical macroprudential measures also responding to credit spreads may be welfare improving, for both a capital requirement ratio (CRR) rule and a loan-to-value (LTV) rule. We find that the spread is a relevant indicator for credit-supply measures but not for borrower-based ones. For the latter, an additional response to house prices is more appropriate. We also find that the augmented rules deliver more financial stability, but at the expense of more inflation volatility, which reduces the welfare of the savers. Overall, the augmented rules improve welfare. |
| Keywords: | Credit spreads, financial stability, macroprudential policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/05 |
| By: | Hinh T. Dinh |
| Abstract: | This Policy Brief examines the current banking crisis in the United States and its implications for Africa. Many studies have pointed out the main factors responsible for this crisis, including poor risk-management practices in the failed banks, the sector’s weak regulatory structure, and the failure of bank supervisors. However, a key factor that has contributed to the extent and speed of the crisis is the U.S. Federal Reserve’s (Fed) policy actions, including the elimination of reserve requirements in 2020, which resulted in a surge in demand deposits, and led to banks taking excessive risks. Although this crisis will prompt the Fed to exercise more caution in raising interest rates, it will not change its commitment to bring inflation down. In the next two years, developing countries, particularly those in Africa, should anticipate a challenging environment characterized by high interest rates and reduced demand for their exports, because of sluggish growth in major trading partners. In the meantime, these countries can learn valuable lessons from the 2023 banking crisis in order to mitigate the potential risks of bank runs. |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pb_23-23 |
| By: | António Afonso; Francisco Gomes-Pereira |
| Abstract: | This paper studies the impact of monetary policy on fiscal sustainability in the euro area. Our sample includes 12 euro area countries and covers the period from 2003:Q1 to 2022:Q4. We extend a fiscal reaction function (Bohn’s rule) by including the monetary policy stance as an interaction term. Our findings are as follows: First, a contractionary (expansionary) monetary stance tends to lead to an increase (decrease) in the primary balance. Second, the ECB’s monetary policy stance significantly influences the fiscal reaction function coefficient. In other words, contractionary monetary policy induces a larger increase in primary balances in response to an increase in the debt-to-GDP ratio than if monetary policy was neutral or expansionary. Our findings suggest that expansionary monetary policy has the potential to help fiscal sustainability, and potentially mitigate fiscal fatigue. Conversely, contractionary monetary policy can exacerbate the fiscal effort required to satisfy the government intertemporal budget constraint. |
| Keywords: | monetary policy stance, fiscal sustainability, debt sustainability |
| JEL: | E52 E58 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11266 |
| By: | Schnorrenberger, Richard; Schwind, Patrick; Wieland, Elisabeth |
| Abstract: | Forecasting consumer prices for package holidays, which represent a major driver of the inflation rate in Germany, poses some practical challenges. With a substantial share in the underlying consumer basket, prices for package holidays exhibit strong seasonality, notable volatility, and methodological breaks. We present two modelling strategies for predicting this volatile component based on the unadjusted price series and the seasonally adjusted series. Moreover, we exploit the forward-looking dimension of high-frequency booking data to compile a price indicator that provides early signals about the underlying trend of the target series. Our forecasting exercise shows that accurate forecasts are obtained with a modelling strategy tailored to the seasonally adjusted target series, alongside precise projections of the future seasonal component. Finally, augmenting the forecasting model with the forwardlooking price indicator yields considerable gains that increase with the forecast horizon. Specifically, adding forward-looking information to the best-performing model increases the nowcast precision by 2.6% to 8% for short-term horizons of one to seven months, and the improvement exceeds 17% for longer horizons. |
| Keywords: | Inflation forecasting, consumer prices, seasonality, travel booking data |
| JEL: | E31 E37 C22 C53 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:305277 |
| By: | Olivo, Victor |
| Abstract: | The main purpose of this paper is to reexamine the relationship between money growth and inflation using a large (unbalanced) panel of 133 countries for the period 1961-2022. The data is split into three subcategories of countries, three subperiods of time, and two intervals of the inflation rate. Applying panel data estimation techniques, I find that money growth continues to be a fundamental variable for understanding the behavior of inflation. Although the impact of money growth on inflation diminishes at lower inflation rates, it is still statistically significant at these lower levels, and it increases markedly when inflation moves beyond the 20 percent threshold. Additionally, there is not an evident reduction in the influence of money growth on inflation in the last thirty years in comparison with the preceding thirty-year period. Finally, I found some evidence that suggests that inflation and money growth might have a negative impact on output growth in the long run. |
| Keywords: | Aggregate price levels, inflation, money supply, money growth, output growth. |
| JEL: | E31 E51 |
| Date: | 2024–10–28 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122587 |
| By: | Maxi Günnewig; Yuliyan Mitkov |
| Abstract: | Diamond and Rajan (2000, 2001) argue that banks create liquidity by issuing deposits to fund difficult, illiquid firms that otherwise cannot obtain funding. Since deposits may lead to bank runs, this resulting financial fragility is essential for liquidity creation. We revisit the Diamond-Rajan model of financial intermediation and show that a bank with an optimal financing structure is not subject to runs. Our contract rests on three simple notions. First, each bank creditor has the right to demand repayment at every instant. Second, the repayment is given by the value of a pre- specified fraction of the bank’s assets. Third, some creditors are more senior than others: their repayment demands are prioritized. In contrast to Diamond and Rajan, we find that financial fragility is detrimental to liquidity creation. |
| Keywords: | Liquidity, banking, financial fragility, optimal contracts, collateral. |
| JEL: | G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_605 |
| By: | Xiaofeng Wang; Otaviano Canuto |
| Abstract: | The surprising victory of Javier Milei, the unconventional ‘anarcho-capitalist’ candidate, in the August primaries ahead of Argentina’s October 2023 general election, can be largely credited to his commitment to dollarize the Argentine economy, a move perceived as the ultimate solution to bring an end to the nation's economic turmoil. The potential shift from the local currency to the dollar has sparked concerns about Argentina's bilateral currency swap line with China. This swap line plays a crucial role in their bilateral relations and has also served as a means for Argentina to fulfill its debt obligations to the International Monetary Fund. The swap line is seen as a key element in preventing Argentina from defaulting on its IMF obligations, which is vital for both its economic and international financial stability. Given the significance of these developments, this article explores Argentina's potential shift towards dollarization and its implications for the country's relationship with China. It does so by assessing the critical role of the bilateral currency swap line between the Central Bank of Argentina (BCRA) and the People's Bank of China (PBOC) in backing Argentina's external payments. |
| Date: | 2023–10 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pb_39-23 |
| By: | Rodrigo Sekkel; Tamon Takamura; Yaz Terajima |
| Abstract: | This paper analyzes the dynamic and heterogeneous responses of loan performance to a monetary-policy shock using loan-level panel data for small-scale private firms in Canada. Our dataset contains detailed loan characteristics information that allows us to distinguish the effects of the aggregate-demand channel, which affects loan performance through general-equilibrium effects, and the cash-flow channel that directly impacts debt service of firms through variable rates. We find that the effects on loan performance through both channels materialize with a delay and are persistent over time. The peak effect of the cash-flow channel is as large as that of the aggregate-demand channel. Moreover, we investigate whether collateral can reduce the sensitivity of variable-rate loan performance to a policy-rate shock through an ex post disciplinary effect that incentivizes loan repayment by small firms. We find that collateral induces repayment incentives of borrowers relative to unsecured loans but only for ex ante safe loans that are used for investment rather than for other purposes such as working capital. This implies that collateral has a limited impact on reducing financial frictions of small firms. |
| Keywords: | Monetary policy transmission; firm dynamics |
| JEL: | C32 E17 E37 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-41 |
| By: | Berensmann, Kathrin; Walle, Yabibal; Dufief, Elise; Esteves, Paulo; Floyd, Rob; Ye, Yu |
| Abstract: | In 2021, the G20 committed to reallocate USD 100 billion of the International Monetary Fund's (IMF) recent allocation of Special Drawing Rights (SDRs) to low-income and vulnerable middle-income countries. However, most of these donations have been made to the IMF's Poverty Reduction and Growth Trust (PRGT) and Resilience and Sustain-ability Trust (RST), which have a leverage ratio of less than one. As a result, there have been growing calls to channel SDRs to multilateral development banks (MDBs), which can leverage them up to three to six times. In this respect, the African Development Bank (AfDB) and the Inter-American Development Bank (IDB) have proposed an innovative mechanism structured as a hybrid capital instrument comple-mented by a Liquidity Support Agreement (LSA). In May 2024, the IMF Executive Board approved using SDRs for purchasing hybrid capital instruments from prescribed holders, significantly boosting the prospect of this initiative. Nevertheless, the level of participation in both the SDR channelling and the LSA remains relatively low. Against this background, this Policy Brief assesses the current positions as well as the institutional and political challenges of key players concerning the hybrid capital proposal, and it outlines how these challenges could be overcome. Some countries, in-cluding France, Japan, Spain and the United Kingdom, have announced their support for the proposal. Nevertheless, these countries have yet to translate their support into concrete action, and the precise extent of their contributions remains un-certain. Other potential donor countries with strong external positions and no legal restrictions, such as China, Qatar, Saudi Arabia, Canada and Australia, have not expressed interest in this proposal or have not done so openly. A third group of potential donor countries face legal challenges in channelling their SDRs to MDBs. In particular, it is unlikely that the United States will use its SDRs to purchase hybrid capital issued by MDBs, as this would require congressional authorisation, which seems unlikely given the current political climate. Similarly, EU member states are being advised against using SDRs outside of the IMF by a - still informal - position of the European Central Bank (ECB). To overcome these challenges, several actions are required of the various stakeholders. * First, potential donors with minimal legal constraints should act to channel their SDRs through the proposed hybrid capital vehicle. * Second, Eurozone countries should request that the ECB provide a clarification of its informal position on the channelling of European SDRs to MDBs. We discuss in this Policy Brief that there are sound reasons why the ECB could and should decide favourably. * Third, in the event that the ECB fails to formally rule on this mechanism in a timely manner, or rules unfavourably, EU member states should support this proposal by participating in the "second layer" LSA through their development budgets. * Fourth, African governments and the African Union (AU) should advocate on behalf of the AfDB in different fora such as the World Bank and IMF's Spring and Annual Meetings, the G20 and regular summits such as with China and the EU. * Finally, global and local civil society organisations (CSOs) and think tanks should advocate for potential donor countries to channel their SDRs to MDBs and provide enhanced analysis and research on the topic to inform policymakers and leaders both in donor and recipient countries. |
| Keywords: | Special Drawing Rights (SDRs), Hybrid capital, Multilateral Development Banks (MDBs), Developing countries, African Development Bank, Interamerican Development Bank, European Central Bank, International Monetary Fund, International Financial Architecture, Sustainable Development Goals (SDGs) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:idospb:305237 |
| By: | Thomas Wangi |
| Abstract: | The accumulation of excess reserves in the banking system of PNG may have undesirable implications on the financial system, macroeconomic stability and monetary policy implementation. Hence, this paper examines the factors that induce commercial banks to hold unremunerated excess reserves. The paper employs an ARDL model to estimate the determinants of excess reserves using monthly time-series data for the period January 2002 to December 2017. The model includes three precautionary variables of volatility of demand deposits, discount rate and cash reserve requirement and four involuntary variables of foreign reserve inflows, private sector lending, private sector deposits and treasury bill rate. The selection of these variables is determined by data availability and relevance to the economy of PNG. The findings suggest that the discount rate, volatility of demand deposits and private sector deposits significantly contribute to the accumulation of excess reserves. In contrast, foreign exchange reserves, private sector credit and the treasury bill rate effectively reduce excess reserves pressure in the banking system. However, the cash reserve requirement is not effective in influencing the demand for excess reserves. The empirical analysis concludes that involuntary variables are the leading determinants of excess reserves in PNG. Hence, the central bank should review the involuntary variables to take appropriate policy actions in order to reduce the level of excess reserves in the banking system. |
| Keywords: | excess reserves, precautionary variables, involuntary variables, banking system, ARDL method |
| JEL: | C29 E52 G21 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-65 |
| By: | Julien Bengui; Lu Han; Gaelan MacKenzie |
| Abstract: | Large swings in the expenditure shares of goods and services at the start of the pandemic have contributed to the inflation surge, posing new challenges for monetary policy. Using a multi-sector model featuring upward labor adjustment frictions, we analyze the transmission of monetary policy during a demand reallocation episode, focussing on sectoral heterogeneity in inflation and output responses. Following an unexpected contractionary monetary policy shock, (constrained) expanding sectors respond primarily by lowering prices, while (unconstrained) contracting sectors reduce output more significantly. At the aggregate level, monetary policy is thus more effective at curbing inflation when a larger proportion of sectors are expanding or expected to be expanding in the near future. |
| Keywords: | Domestic demand and components; Inflation and prices; Monetary policy transmission |
| JEL: | E52 E31 E24 E12 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-42 |
| By: | Jorge Miranda-Pinto; Mr. Andrea Pescatori; Martin Stuermer; Xueliang Wang |
| Abstract: | We examine the role of metals as economic inputs by using a production network model, calibrated for various countries using input-output (I-O) tables. Empirically, we employ local projections to study how metal shocks influence inflation, testing country-level heterogeneity in the sensitivity to these shocks. Our findings indicate that metals price shocks have significant and persistent effects on core and headline inflation, with particularly pronounced effects on countries that are highly exposed to metals in their production networks. This is in contrasts to oil supply shocks, which predominantly affect headline inflation. A shift of the global economy towards a higher relative metals intensity due to the energy transition could lead to commodity price shocks increasingly influencing core rather than headline inflation. This could make commodity price shocks less visible on impact but more persistent. Central banks should consider this shift when assessing inflation dynamics and risks. |
| Keywords: | International macroeconomics; inflation; metals; production networks; supply shocks.; inflation dynamics; metal shock; metals price shock; production network model; price shock; core CPI inflation; GDP deflator; Metal prices; Supply shocks; Global |
| Date: | 2024–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/215 |
| By: | Rösl, Gerhard; Seitz, Franz |
| Abstract: | We analyze the role of a well-functioning cash infrastructure for the stabilizing role of cash and the resilience of cash cycles. For that purpose, experiences from developed countries with low and high cash usage are assessed by distinguishing between demand and supply factors to demonstrate that cash has to keep a vital role as a means of payment not only to maintain its status of a highly liquid store-of-value but also as an efficient tool to combat crises. To do so, access, availability, acceptance, and affordability of cash are crucial building blocks of a robust cash infrastructure. Important aspects are also the public good characteristics of the "institution" cash which should encourage central banks to re-evaluate their position of "neutrality" as a player in the payments market to a more active role. |
| Abstract: | Wir analysieren die Rolle einer gut funktionierenden Bargeldinfrastruktur für die stabilisierende Rolle von Bargeld und die Resilienz des Bargeldkreislaufs. Zu diesem Zweck werden Erfahrungen aus entwickelten Ländern mit geringer und hoher Bargeldnutzung ausgewertet und zwischen Nachfrage- und Angebotsfaktoren unterschieden. Es wird abgeleitet, dass Bargeld als Zahlungsmittel wichtig ist, damit es als hochliquides Wertaufbewahrungsmittel fungieren kann und als effizientes Instrument zur Krisenbekämpfung zur Verfügung steht. Dementsprechend sind Zugang, Verfügbarkeit, Akzeptanz und Erschwinglichkeit von Bargeld entscheidende Bausteine einer robusten Bargeldinfrastruktur. Wichtige Aspekte sind auch die Öffentliches-Gut-Eigenschaften der "Institution" Bargeld, die impliziert, dass Zentralbanken ihre "neutrale" Position als Akteur im Zahlungsverkehr überdenken sollten, um eine aktivere Rolle bei der Unterstützung von Bargeld einzunehmen. |
| Keywords: | Cash, banknotes, ATM, cash infrastructure |
| JEL: | E41 E51 E58 O57 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:305297 |
| By: | Financial Markets Department (Bank of Japan) |
| Abstract: | While implementing a variety of unconventional monetary policy measures, the Bank of Japan has provided ample reserves that far exceed the levels of required reserves for most of the past 25 years. This report assesses the impact of the unconventional monetary policy measures on the money markets by looking back on the rate formation and transaction trends in the money markets with such excess reserves. The money markets are expected to function as (1) the starting point of the yield curve and (2) a place to adjust the excess and shortage of funds. With excess reserves, the importance of the latter function is considered to be declining. However, there is a growing importance of ensuring the uncollateralized call market consisting of diverse participants with a certain transaction volume, given the role which the uncollateralized overnight call rate (TONA) has taken as an interest rate benchmark in recent years. The period in which unconventional monetary policy measures were taken can be broadly divided into (1) the quantitative easing period from 2001 to 2006 (the first phase), (2) the period from the introduction of the complementary deposit facility in 2008 to the introduction of the negative interest rate policy in 2016 (the second phase), and (3) the negative interest rate policy period from 2016 to 2024 (the third phase), based on the interest rate on excess reserves. In the first phase, in which the complementary deposit facility did not exist and a zero percent interest rate was applied to excess reserves, trading incentives were lost in the uncollateralized call market, and the functioning of the market declined. In the second phase, the complementary deposit facility was introduced, and trading incentives arose between financial institutions eligible for the facility and those not eligible. Under these circumstances, the functioning of the uncollateralized call market gradually recovered and was maintained in the third phase as well. Meanwhile, the functioning of the GC repo market was also maintained in terms of rate formation and transaction trends. Following the decision to change the monetary policy framework in March 2024 and the termination of the negative interest rate policy, the money markets transitioned smoothly from the world of "negative interest rates" to the one with "positive interest rates." The fact that participants in the uncollateralized call market were diversified, resulting in the expansion of trading networks in the third phase, among other factors, has contributed to the smooth transition. Given the role which TONA has taken as an interest rate benchmark in recent years, in addition to the fact that the Bank set the short-term interest rate as its primary policy tool, it is becoming ever more important that the functioning of the money markets remains robust. The Bank intends to continue to carefully monitor the rate formation and trading trends in the money markets and pay attention to the market functioning. |
| Date: | 2024–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojron:ron241106a |
| By: | Enrique Martínez García; Braden Strackman |
| Abstract: | This study offers new insights into exchange rate pass-through (ERPT) using U.S. import price indexes by country-of-origin, covering two decades of monthly data. Focusing on the largest U.S. trading partners, our analysis shows that ERPT is more muted than previously estimated, with freight costs having no measurable impact on import prices and foreign production costs exerting only limited influence. We also observe significant heterogeneity in countries’ short-run responses, shaped by differences in trade composition and pricing strategies. Consistent estimates across common dynamic panel estimators underscore the robustness of these findings. The results suggest that exchange rate fluctuations may have a weaker direct effect on U.S. inflation than earlier studies implied, underscoring the need to reconsider current models of pricing behavior and inflation dynamics. |
| Keywords: | import prices; Exchange rate pass-through; dynamic panel estimation |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99030 |
| By: | Silvana Tenreyro; Ludovica Ambrosino; Jenny Chan |
| Abstract: | How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To answer these questions, we develop a heterogeneous agent, open-economy model featuring imperfect international risk-sharing. The model captures both the demand and supply side effects of fragmentation. It illustrates how the impact of fragmentation on inflationary pressures and the appropriate policy response depends not only on the direct effect of higher import prices on supply but, crucially, on how aggregate demand adjusts in response to lower real incomes and productivity stemming from fragmentation. |
| Keywords: | monetary policy, trade fragmentation, open economies, inflation, heterogeneity, globalisation |
| JEL: | F12 F15 F41 F62 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1225 |
| By: | Dimitri Goldztejn |
| Abstract: | In this paper, we analyse the recent inflation period (2021-2023) in the case of France. We first study the cost-push dimension of inflation with an Input-Output price model (Leontief price model) using the methodology developed by Weber et al (2024) for the USA, which we extend to include the sensitivity of the CPI to import prices; this allows us to identify, in the case of France, the 'systemically significant' sectors as defined by Weber et al (2024) (after Hockett & Omarova (2016)). In the second part, based on detailed National Accounts data, we study the evolution of price components and value sharing, accounting for the sector heterogeneity of the dynamics. In this section, we also provide elements to the debate on 'profit inflation'. Based on the results obtained, it seems that the term 'cost-push-profit-led inflation' (Nikiforos et al (2024)) appropriately describes the phenomenon observed in France over the period studied. These results call for a rethinking and renewing of the policy toolbox against inflation. These considerations prove particularly relevant in the context of ecological transition, because of the various issues it raises: in terms of energy, raw materials and provisioning (Miller et al (2023)), but also of satisfying essential needs through the production and distribution of specific goods and services in a post-growth context (Doyal & Gough (1984), Briens (2015), Millward-Hopkins (2020), Durand et al (2024)). |
| Keywords: | France, inflation, profit inflation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:imk:fmmpap:110-2024 |
| By: | Maximilian Gödl; Isabel Gödl-Hanisch |
| Abstract: | The recent surge in inflation led many unions and firms to alter their bargaining and wage-setting policies. Using novel German firm-level survey data, we document the extent of state dependence in wage setting across firms and workers during periods of high and low inflation. We find state dependence along the extensive and intensive margins: the average duration of wage agreements shortens from 14.2 to 12.9 months, and the adjustment per pay round increases from 2-4% to 4-6%. We complement these findings with newly compiled union-level panel data on collective bargaining outcomes. We show that the observed state dependence can be rationalized in menu cost and Calvo models of wage setting with heterogeneous firms. We examine the implications of state-dependent wage setting for the long-run effects of trend inflation, the transmission of monetary policy shocks, and the slope of the Phillips curve in an otherwise standard New Keynesian model. |
| Keywords: | state-dependent wage setting, New Keynesian model, heterogeneous firms, Phillips curve |
| JEL: | E24 E31 E50 E60 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11319 |