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on Monetary Economics |
| By: | Bonciani, Dario (Sapienza University of Rome); M Masolo, Riccardo (Universitá Cattolica del Sacro Cuore, Milano); Sarpietro, Silvia (University of Bologna) |
| Abstract: | Food price changes have a strong and persistent impact on UK consumers’ inflation expectations. Over 60% of households report that their inflation perceptions are heavily influenced by food prices and display a stronger association between their inflation expectations and perceptions. We complement this finding with a Structural Vector Autoregression (SVAR) analysis, illustrating that food price shocks have a larger and more persistent effect on expectations compared to a ‘representative’ inflation shock. Finally, we augment the canonical New-Keynesian model with behavioural expectations that capture our empirical findings and show that monetary policy should respond more aggressively to food price shocks. |
| Keywords: | Inflation expectations; inflation perceptions; monetary policy |
| JEL: | D10 D84 E31 E52 E58 E61 |
| Date: | 2024–10–11 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1094 |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | The advent of macroprudential policy alongside monetary policy raises the issue whether macroprudential policy has an additional effect on bank interest rate margins to that of monetary policy, and if so, whether it accentuates or offsets the interest rate effect. In light of this, we estimate combined effects of macroprudential policies and monetary policies on bank interest margins for up to 3, 723 banks from 35 advanced countries over 1990-2018. In the short run, tightening of both types of policy tends to narrow the margin, while in the long run, monetary policy typically widens the margin while effects of macroprudential policies are mostly zero or positive, suggestive of countervailing action by banks. There are also significant interactions between macroprudential and monetary policy for several macroprudential policies; a tighter monetary stance is widely found to offset the negative effect of macroprudential policies on margins while a loose monetary policy leaves the negative effects intact, with potential consequences for financial stability. These results are of considerable relevance to policymakers, regulators and bank managers, not least when monetary policies are tight to reduce inflationary pressures. |
| Keywords: | Macroprudential policy, monetary policy, short-term interest rate, yield curve, bank interest margin |
| JEL: | E44 E52 E58 G21 G28 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:560 |
| By: | Kumhof, Michael (Bank of England); Salgado-Moreno, Mauricio (Bank of England) |
| Abstract: | We develop a DSGE model in which commercial banks interact with the central bank through the reserves market, with each other through reserves and interbank markets, and with the real economy through retail loan and deposit markets. Because banks disburse loans through deposit creation, they never face financing risks (being unable to fund new loans), only refinancing risks (being unable to settle net deposit withdrawals in reserves). Permanent quantitative tightening, while reducing the equilibrium real interest rate, has significant negative effects on financial and real variables, by increasing the cost at which reserves-scarce parts of the banking sector create money. Temporary net deposit withdrawals, which affect the funding cost and loan extension of one part of the banking sector at the expense of another part, have highly asymmetric financial and real effects. The quantity and distribution of central bank reserves, and the extent of frictions in the interbank and reserves markets, critically affect the size of these effects, and can matter even in a regime of ample aggregate reserves. Countercyclical reserve injections can help to smooth the business cycle. We find that countercyclical reserve quantity rules can make sizeable contributions to welfare that can reach a similar size to the Taylor rule. |
| Keywords: | Quantitative easing; quantitative tightening; monetary policy; central bank reserves; interbank loans; bank deposits; bank loans; money demand; money supply; credit creation |
| JEL: | E51 E52 E58 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1090 |
| By: | HA, JONGRIM; Kim, Dohan; Kose, Ayhan M. |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy; emerging market economies; prize puzzle; foreign exchange puzzle |
| JEL: | E31 E32 E43 E47 E52 E58 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122624 |
| By: | Neepa Gaekad (Department of Economics, State University of New York, Fredonia, NY 14063, USA); William A. Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City) |
| Abstract: | Keywords: In light of the "two-pillar strategy" of the European Central Bank, good measures of aggregated money across countries in the Euro area are policy relevant. The objective of this paper is to focus on the multilateral Divisia monetary aggregates for the Euro area. Based on theory developed in Barnett (2007), this paper produced the multilateral Divisia monetary aggregates for the economic union of all the 19 Euro area countries, EMU-19, (and the Divisia monetary aggregates for the individual 19 Euro area countries), which is a theoretically consistent measure of monetary services for the Euro area monetary union. The multilateral Divisia monetary aggregate indices for EMU-19 is found to provide a better signal of recession, when compared to the corresponding simple sum monetary aggregates. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kan:wpaper:202416 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | As central banks, including the European Central Bank (ECB), adopt climate-related responsibilities, gauging public support becomes essential. Drawing on a June 2023 Bundesbank household survey, we find that 69% of households report increased trust in the ECB due to its climate actions, valuing the institution's broader scope and concern. While 17% and 20% of households express concerns over risks to price stability or independence, 23% believe climate engagement reinforces the ECB's core objectives. An information intervention indicates minimal impact on household inflation expectations, suggesting a disconnect between institutional trust and inflation outlooks. An internal survey reveals that central bankers accurately gauge trust impacts but tend to overestimate effects on inflation expectations. Overall, our findings indicate broad public support for the ECB’s climate initiatives. |
| JEL: | C93 D84 E59 E7 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33103 |
| By: | Hugo Spring-Ragain (HEIP) |
| Abstract: | This article examines how emerging economies use countercyclical monetary policies to manage economic crises and fluctuations in dominant currencies, such as the US dollar and the euro. Global economic cycles are marked by phases of expansion and recession, often exacerbated by major financial crises. These crises, such as those of 1997, 2008 and the disruption caused by the COVID-19 pandemic, have a particular impact on emerging economies due to their heightened vulnerability to foreign capital flows and exports.Counter-cyclical monetary policies, including interest rate adjustments, foreign exchange interventions and capital controls, are essential to stabilize these economies. These measures aim to mitigate the effects of economic shocks, maintain price stability and promote sustainable growth. This article presents a theoretical analysis of economic cycles and financial crises, highlighting the role of dominant currencies in global economic stability. Currencies such as the dollar and the euro strongly influence emerging economies, notably through exchange rate variations and international capital movements. Analysis of the monetary strategies of emerging economies, through case studies of Brazil, India and Nigeria, reveals how these countries use tools such as interest rates, foreign exchange interventions and capital controls to manage the impacts of crises and fluctuations in dominant currencies. The article also highlights the challenges and limitations faced by these countries, including structural and institutional constraints and the reactions of international financial markets.Finally, an econometric analysis using a Vector AutoRegression (VAR) model illustrates the impact of monetary policies on key economic variables, such as GDP, interest rates, inflation and exchange rates. The results show that emerging economies, although sensitive to external shocks, can adjust their policies to stabilize economic growth in the medium and long term. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.23002 |
| 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:rpaeco:pb_21_23 |
| By: | Ha, Jongrim (World Bank); Kim, Dohan (World Bank); Kose, M. Ayhan (World Bank); Prasad, Eswar (Cornell University) |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| Keywords: | monetary policy, emerging market economies, prize puzzle, foreign exchange puzzle |
| JEL: | E31 E32 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17431 |
| By: | Renzhi, Nuobu (Capital University of Economics and Business); Beirne, John (Asian Development Bank) |
| Abstract: | This paper empirically investigates how the level of peer-to-peer (P2P) lending affects monetary policy transmission in the People’s Republic of China (PRC). Using state-dependent local projection methods, we find that the macroeconomic effects of unanticipated changes in monetary policy are dampened during the boom phase of the P2P lending market. The impulse responses of industrial production and inflation are significantly negative in the non-boom state. In contrast, the responses of industrial production and inflation are muted in the boom state. Set against the context of stricter regulation on P2P lending since 2017, our results indicate that the significant scaling back of P2P lending activity and its gradual decline in the PRC could enhance the effectiveness of monetary policy transmission. Our paper also suggests that further work is needed to study the interaction between financial innovation and monetary policy |
| Keywords: | peer-to-peer lending; monetary policy transmission; fintech |
| JEL: | E44 E52 F33 F42 |
| Date: | 2024–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0749 |
| By: | R T Ferreira, Thiago (Federal Reserve Board); A Ostry, Daniel (Bank of England); Rogers, John (Fudan University) |
| Abstract: | We re-examine how financial frictions shape the transmission of monetary policy using firms’ excess bond premia (EBPs), the risk premium component of credit spreads. While monetary policy easing shocks compress credit spreads more for higher-EBP (riskier) firms, lower-EBP firms’ investment responds more. Further, credit supply shocks replicate monetary policy’s heterogeneous effects, whereas credit demand shocks elicit homogeneous firm responses. A model with financial frictions in which lower-EBP firms have flatter marginal benefit curves for capital rationalises firms’ price and quantity reactions to these three shocks. In contrast, previously examined channels, while complementary, are inconsistent with our more comprehensive set of empirical moments. |
| Keywords: | Monetary policy; investment; credit spreads; excess bond premium; firm heterogeneity; credit supply; risk premium. |
| JEL: | E22 E44 E50 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1093 |
| By: | Hilpert, Hanns Günther; Tokarski, Paweł |
| Abstract: | The number of digital currencies has increased significantly in recent years. So-called central bank digital currencies (CBDCs), created by central banks, are at the forefront of this development. Combining the advantages of an electronic means of payment - namely the speed and efficiency of transactions - with the stability and confidence that central banks enjoy, CBDCs will surely have a significant influence on the development of international payment systems in the coming years. Work on this topic has accelerated significantly in many parts of the world following the imposition of sanctions against Russia by the G7. The European Union (EU) and China are also engaged in planning and shaping their own CBDCs, but there are significant differences in the motivations, pace of progress and ambitions associated with these projects. |
| Keywords: | Central Bank, money, digitalisation, digital currencies, central bank digital currencies (CBDCs), sanctions against Russia, G7, European Union (EU), China, eurozone, blockchain technologies, People's Bank of China (PBoC), e-CNY, European Central Bank (ECB) |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swpcom:305241 |
| By: | Alicia Aguilar (National Bank of Slovakia) |
| Abstract: | This paper provides a novel and high-frequency index of sovereign fragmentation in the euro area. The proposed methodology offers a decomposition of sovereign yields into the common trend, market conditions, and fundamentals-based divergence, which are uncorrelated to fragmentation. Therefore, the fragmentation index constitutes a bottom-line indicator for euro area Central Banks, as measuring disorderly market dynamics in sovereign markets not warranted by fundamentals. In that sense, this paper provides relevant conclusions about the effectiveness of monetary policy interventions, pointing to a significant effect of market stabilization announcements, such as TPI, in reducing sovereign fragmentation. I contribute to the literature as estimating the uncorrelated drivers of euro area yields divergence using a Restricted Principal Components Analysis. The estimated factors are later used to assess the effect of fragmentation, market and fundamentals on country's yields through several economic regimes, pointing to differences across countries and time. |
| JEL: | C38 E52 E58 H63 G01 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1113 |
| By: | Alvaro Silva; Julian di Giovanni; Muhammed A. Yildirim (Center for International Development at Harvard University); Sebnem Kalemli-Ozcan |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | Russia, Ukraine, China, COVID-19, Inflation |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:224 |
| By: | Sebastiao OLIVEIRA (University of Illinois at Urbana-Champaign); Jay RAFI (University of Illinois at Urbana-Champaign); Pedro SIMON (University of Illinois at Urbana-Champaign) |
| Abstract: | We provide novel evidence that corporate debt maturity plays an important role in the transmission of United States (US) monetary policy to foreign firms. Using an identification strategy that explores the ex-ante maturity structure of long-term debt to predict firms’ financial positions in a given year, we show that the effect of US monetary policy shocks on foreign firms is amplified by financing constraints. After a contractionary shock, financial conditions in foreign countries become tighter, and firms with a high proportion of long-term debt maturing right after the shock significantly decrease investment and sales. We find that firms in emerging economies are much more affected by these shocks compared to those in advanced economies, and the amplification effect of US monetary policy shocks by financing constraints is present only in emerging economies. |
| Keywords: | Monetary policy, financial constraints, foreign firms |
| JEL: | E52 F30 G32 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2024-27 |
| By: | Peter Jorgensen; Kevin J. Lansing |
| Abstract: | We show that the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, provides a simple measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Higher values of the anchoring measure imply less sensitivity of rational inflation forecasts to movements in actual inflation. The approximate value of the model’s anchoring measure can be inferred from observable data generated by the model itself, as given by 1 minus the autocorrelation statistic for quarterly inflation. We show that a shift in the collective indexing behavior of firms allows the model to account for numerous features of evolving U.S. inflation behavior since 1960. |
| Keywords: | inflation expectations; Phillips Curve; Indexation (Economics); inflation persistence |
| JEL: | E31 E32 E37 |
| Date: | 2024–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99054 |
| By: | Chafwehé, Boris (Bank of England); Colciago, Andrea (University of Milan-Bicocca); Priftis, Romanos (European Central Bank) |
| Abstract: | This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labour productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labour productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilising aggregate activity and business dynamism. |
| Keywords: | Energy; productivity; firm entry and exit; monetary policy |
| JEL: | E62 L16 O33 Q43 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1091 |
| By: | Lukas Buchheim; Sebastian Link; Sascha Möhrle |
| 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 pass-through 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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11329 |
| By: | Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof; Jabłońska, Julia |
| Abstract: | During the COVID-19 pandemic, governments in the euro area sharply increased spending while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers) but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, and assuming that the deficit was partly unfunded by future taxes, we document that young households benefited from the stimulus, while middle-aged and older agents mainly paid the bill. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, the welfare of some actually decreased. JEL Classification: E31, E51, E52, H5, J11 |
| Keywords: | COVID-19, fiscal expansion, monetary policy, redistribution |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242998 |
| By: | George-Marios Angeletos; Chen Lian; Christian K. Wolf |
| Abstract: | In HANK models, fiscal deficits drive aggregate demand and thus inflation because households are non-Ricardian; in the Fiscal Theory of the Price Level (FTPL), they instead do so via equilibrium selection. Because of this difference, the mapping from deficits to inflation in HANK is robust to active monetary policy and free of the controversies surrounding the FTPL. Despite this difference, a benchmark HANK model with sufficiently slow fiscal adjustment predicts just as much inflation as the FTPL. This is true even in the simplest FTPL scenario, in which deficits are financed entirely by inflation and debt erosion. In practice, however, unfunded deficits are likely to trigger a persistent boom in real economic activity and thus the tax base, substituting for debt erosion. In our quantitative explorations, this reduces the inflationary effects of unfunded deficits by about half relative to that simple FTPL arithmetic. |
| JEL: | E3 E6 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33102 |
| By: | Yanan Niu; Ilja Kantorovitch |
| Abstract: | This research expands the existing literature on Bitcoin (BTC) price misalignments by incorporating transaction-level data from a peer-to-peer (P2P) exchange, LocalBitcoins.com (LB). It examines how broader economic and regulatory factors influence cryptocurrency markets and highlights the role of cryptocurrencies in facilitating international capital movements. By constructing shadow exchange rates (SERs) for national currencies against the US dollar based on BTC prices, we calculate discrepancies between these SERs and their official exchange rates (OERs), referred to as BTC premiums. We analyze various factors driving the BTC premiums on LB, including those sourced from the BTC blockchain, mainstream centralized BTC exchanges, and international capital transfer channels. Unlike in centralized markets, our results indicate that the microstructure of the BTC blockchain does not correlate with BTC premiums in the P2P market. Regarding frictions from international capital transfers, we interpret remittance costs as indicators of inefficiencies in traditional capital transfer systems. For constrained currencies subject to severe capital controls and managed exchange rate regimes, increased transaction costs in conventional currency exchange channels almost entirely translate into higher BTC premiums. Additionally, our analysis suggests that BTC premiums can serve as short-term predictors of future exchange rate depreciation for unconstrained currencies. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.22443 |
| By: | Checherita-Westphal, Cristina; Pesso, Tom |
| Abstract: | This paper investigates the interplay between discretionary fiscal policy and inflation in the euro area, emphasizing the role of public debt levels in modulating this relationship. It explores how fiscal expansions or contractions influence inflationary pressures, particularly under varying debt conditions. The analysis reveals that fiscal policy’s effect on inflation is non-linear, with debt levels significantly affecting the inflationary outcome of fiscal measures. High debt levels tend to amplify the inflation response to fiscal expansions, a finding that holds under multiple analytical frameworks and robustness checks. This paper contributes to the empirical literature by highlighting the critical role of fiscal policy, especially in high-debt environments, and its implications for inflation dynamics in the euro area. JEL Classification: E31, E62, H63 |
| Keywords: | fiscal policy, inflation, local projections, public debt |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242996 |
| By: | Blagov, Boris; Guljanov, Gaygysyz; Kharazi, Aicha |
| Abstract: | Carvalho et al. (2023) propose a theoretical framework that explains longrun inflation expectations' dynamic using short-run inflation surprises and beliefs about monetary policy. In an empirical exercise, they show that this concise framework predicts long-term inflation expectations well over long periods and across a multitude of countries. In this study we look at the reproducibility of the work and the robustness of the results across two dimensions - the strength of the empirical results and the robustness of the estimation methodology. Across the empirical dimension, we extend the model with data past the global pandemic and study the robustness of the results before 2020 as well as the strength of the conclusion after 2020. With respect to the methodological application, we utilise a different sampler to estimate the main non-linear specification. The original findings remain intact across both dimensions. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:i4rdps:174 |
| By: | Zhengyang Jiang |
| Abstract: | I propose a model of the reserve currency paradigm that centers on liquidity demand for safe assets. In global recessions, the demand for U.S. safe assets increases and raises their convenience yields, giving rise to stronger dollar and countercyclical seigniorage revenues. The seigniorage revenues raise the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from external positions. This asset demand channel also connects exchange rates to bond holdings, which provides new perspectives on exchange rate disconnect and the exchange rate-capital flow relationship. Under this safe-asset view, exorbitant privilege does not require exorbitant duty. |
| Keywords: | exorbitant privilege, reserve assets, international monetary system, capital flows |
| JEL: | E44 F32 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11279 |
| By: | Ignacio Garr\'on; C. Vladimir Rodr\'iguez-Caballero; Esther Ruiz |
| Abstract: | In a globalised world, inflation in a given country may be becoming less responsive to domestic economic activity, while being increasingly determined by international conditions. Consequently, understanding the international sources of vulnerability of domestic inflation is turning fundamental for policy makers. In this paper, we propose the construction of Inflation-at-risk and Deflation-at-risk measures of vulnerability obtained using factor-augmented quantile regressions estimated with international factors extracted from a multi-level Dynamic Factor Model with overlapping blocks of inflations corresponding to economies grouped either in a given geographical region or according to their development level. The methodology is implemented to inflation observed monthly from 1999 to 2022 for over 115 countries. We conclude that, in a large number of developed countries, international factors are relevant to explain the right tail of the distribution of inflation, and, consequently, they are more relevant for the vulnerability related to high inflation than for average or low inflation. However, while inflation of developing low-income countries is hardly affected by international conditions, the results for middle-income countries are mixed. Finally, based on a rolling-window out-of-sample forecasting exercise, we show that the predictive power of international factors has increased in the most recent years of high inflation. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.20628 |
| By: | Hinh T. Dinh |
| Abstract: | The current banking crisis in the United States began with the Silicon Valley Bank (SVB) run in March 2023 and was followed by other bank failures, raising concerns about the health and stability of the financial sector. This Policy Paper traces the root causes of these bank failures and examines the U.S. monetary policy decisions during this period. These bank failures were caused by the poor risk management practices of the failed banks, the sector’s weak regulatory structure, and the failure of bank supervisors. However, a key factor that contributed to the extent and speed of the current bank crisis is the U.S. Federal Reserve’s (Fed) actions. The Fed's decisions to keep zero or near-zero interest rates over the long period of 2009-2022, to continue with the zero-reserve requirement for banks after the pandemic, and to delay raising the Federal Funds rate in 2021, despite emerging inflationary signs, have contributed to the risk-taking behavior of the banks and to the current banking crisis. The Fed's decision in 2021 also diverged from Taylor rule prescriptions, which it had adhered to since 1995. Given the long lag between Fed decisions and actual results on the ground, a question may be asked if it is time to go back and rely more on rules-based monetary policy, as Milton Friedman (1968) suggested over half a century ago. |
| Date: | 2023–05 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:rpaeco:pp_10-23 |
| 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:ifwkwp:305274 |
| By: | Victor Le Coz; Michael Benzaquen; Damien Challet |
| Abstract: | We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.18145 |
| By: | Victor Le Coz; Nolwenn Allaire; Michael Benzaquen; Damien Challet |
| Abstract: | Using the secured transactions recorded within the Money Markets Statistical Reporting database of the European Central Bank, we test several stylized facts regarding interbank market of the 47 largest banks in the eurozone. We observe that the surge in the volume of traded evergreen repurchase agreements followed the introduction of the LCR regulation and we measure a rate of collateral re-use consistent with the literature. Regarding the topology of the interbank network, we confirm the high level of network stability but observe a higher density and a higher in- and out-degree symmetry than what is reported for unsecured markets. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16021 |
| 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:rpaeco:pb_16-23 |
| By: | Menzie D. Chinn; Hiro Ito |
| Abstract: | We re‐examine the determinants of current account balances (CAB) and the saving-investment nexus with focus on emerging market and developing economies (EMDEs). We are in a new age in terms of facing not just economic challenges but also other non-economic challenges such as global climate changes, increasing natural disasters, and wars. We face the need to reexamine the determinants of CAB along with national saving and investment. We first take an event study approach, examining how these variables have evolved historically in the wake of wars, natural disasters, and pandemics. The second is a cross‐country panel investigation of CAB, national saving, and of investment. In the presence of global financial instability, EMDEs tend to experience an improvement in CAB due to a fall in investment. A rise in oil prices increases both national saving and investment, but the change in investment is greater than the change in national saving, which worsens CAB. Contractionary monetary policy by the U.S. Federal Reserve Board tends to lower both national saving and investment, but the impact on CAB is not statistically different from zero. The more frequently a country experiences wars, on average, its CAB tends to improve. When a climatological or geographical disaster occurs, its CAB, national saving, and investment tend to improve. A rise in the level of U.S. monetary policy uncertainty leads to an improvement in CAB, mainly due to a fall in investment. |
| JEL: | F32 F41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33106 |
| By: | Tao Chen (Institute for Fiscal Studies); Peter Levell (Institute for Fiscal Studies); Martin O'Connell (Institute for Fiscal Studies) |
| Date: | 2024–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:36 |
| By: | Sonnleitner, Benedikt; Stapf, Jelena; Wulff, Kai |
| Abstract: | Among the most important tasks of central banks is to ensure the availability of cash to credit institutions and retailers. Forecasting the demand for cash on a granular level is crucial in the process to keep logistics costs low, while being resilient to demand or supply shocks. Whereas to date, cash forecasts with central banks mostly comprise structural models to define banknote production for the coming years, our contribution is to combine features of macro level forecasting with more granular and short term regional forecasts methods. We show in an inventory simulation, that elaborate forecasting methods on granular level can substantially improve inventory performance for this use-case. To guide the implementation of a forecasting process at the Bundesbank, we benchmark statistical and machine learning methods on demand and supply of cash, using anonymized data on transactions of six regional branches of Deutsche Bundesbank. We use a pseudo out of sample predictive performance framework to evaluate the accuracy of our forecasts and perform an inventory cost simulation. We find that (i) DeepAR outperforms the other benchmarks substantially on all data sets. (ii) ETS, ARIMA, and DeepAR clearly outperform the naive benchmark in terms of accuracy across all data sets, and inventory performance. |
| Keywords: | Global learning, Forecasting, Machine Learning |
| JEL: | E31 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:305276 |