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on Monetary Economics |
| By: | Andreas Hornstein; Francisco J. Ruge-Murcia; Alexander L. Wolman |
| Abstract: | Monthly U.S. inflation from 1995 through 2019 is well explained by statistics summarizing the monthly distribution of relative price changes. We document this relationship and use it to evaluate the behavior of inflation during and after the COVID-19 pandemic. In earlier periods when inflation was not stable, the relationship between inflation and the distribution of relative price changes shifts, much like the Phillips curve. We use that shifting relationship to derive a measure of underlying inflation that complements existing measures used by central banks. |
| Keywords: | inflation; monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99276 |
| By: | Charles A.E. Goodhart (Financial Markets Group, London School of Economics and CEPR); M. Udara Peiris (Oberlin College); Dimitrios P. Tsomocos (Saïd Business School and St. Edmund Hall, University of Oxford); Xuan Wang (Vrije Universiteit Amsterdam and Tinbergen Institute) |
| Abstract: | We investigate how corporate legacy debt, through heterogeneous household portfolios, affects monetary policy’s ability to control inflation. We find that (1) corporate debt generates an income effect that counters the traditional substitution effect, reducing the effectiveness of rate changes on inflation; (2) higher corporate debt exacerbates the trade-off between output and inflation stabilization. The income is positive on aggregate demand and inflation despite declining output. Local projections using U.S. monetary policy shocks show that over six quarters the cumulative difference in output and inflation for high and low corporate debt-to-household asset ratios is 3 percent and 1.2 percent. |
| Keywords: | Household heterogeneity, Inflation, Monetary policy, Corporate debt, Giffen good |
| JEL: | E31 E32 E52 G11 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240071 |
| By: | Brent Bundick; Andrew Lee Smith; Luca Van der Meer |
| Abstract: | This paper provides evidence that inflation targeting delivered well-anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we first illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. Then, we evaluate these predictions using high-frequency financial market data from nine advanced economies. Specifically, we examine whether inflation expectations embedded in asset prices remained anchored as inflation climbed in the aftermath of the pandemic. Our results suggest that inflation expectations were just as well, or in some countries better anchored, after the pandemic. We show that this favorable outcome was broadly accompanied by perceptions of an aggressive monetary policy response to above-target inflation. |
| Keywords: | monetary policy; inflation expectations; COVID-19 |
| JEL: | E32 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99296 |
| By: | Swapan-Kumar Pradhan; Előd Takáts; Judit Temesvary |
| Abstract: | We use a rarely accessed BIS database on bilateral cross-border bank claims by bank nationality to examine the interaction of monetary and fiscal policies. We find significant interactions: the transmission of the monetary policies of major currency issuers is significantly influenced by the fiscal stance of source (home) lending banking systems. Fiscal consolidation in a source country amplifies the effect of currency issuers' monetary policy on lending. For instance, a reduction in the German debt-to-GDP ratio amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from German banks. The interaction effects are the strongest for US monetary policy. |
| Keywords: | Monetary policy; Government debt; Cross-border claims; Difference-in-differences |
| JEL: | E63 F34 F42 G21 G38 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1400 |
| By: | Radhika Pandey (National Institute of Public Finance and Policy); Ila Patnaik (Aditya Birla Group of Companies); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | It has been eight years since India adopted the inflation targeting (IT) framework for its monetary policy. In this paper we present a comprehensive analysis of the IT regime, addressing several critical aspects. We evaluate the performance of inflation over this period, and review the conduct of monetary policy during and after the Covid-19 pandemic. We also identify key challenges that persist particularly in context of the Impossible Trilemma and highlight issues that may require further examination in order to improve the effectiveness of the IT framework in the future. |
| Keywords: | Inflation Targeting, Reserve Bank of India, Monetary Policy Committee, CPI Inflation, Impossible Trilemma |
| JEL: | E4 E5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-022 |
| By: | Ritsu Yano; Yoshiyuki Nakazono; Kento Tango |
| Abstract: | Following Miranda-Agrippino and Ricco (2021), we identify a monetary policy shock in Japan. We construct this shock to be orthogonal to the Bank of Japan’s macroeconomic forecasts, as well as a central bank’s information shock (Nakamura and Steinsson, 2018). Our findings indicate that a surprise policy tightening is contractionary, leading to a deterioration in output and decline in prices. There are no lagged effects of monetary policy on inflation. In response to a tightening shock, prices fall immediately. Furthermore, we demonstrate that a positive central bank information shock increases both output and prices. An unexpected positive outlook from the Bank of Japan raises stock prices and depreciates the Japanese yen. This evidence suggests that information effects play a crucial role in the Japanese economy, even under the effective lower bound. |
| Date: | 2024–11–28 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:57 |
| By: | Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott |
| Abstract: | We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger effects on debt maturity but smaller effects on output and inflation than conventional monetary policy. |
| Keywords: | Monetary policy; Investment; Corporate debt; Debt maturity |
| JEL: | E32 E44 E52 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1402 |
| By: | Walter Engert; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | We simulate the impact of a central bank digital currency (CBDC) on consumer adoption, merchant acceptance and use of different payment methods. Modest frictions that deter consumer adoption of a CBDC inhibit its market penetration. Minor pricing responses by financial institutions and payment service providers further reduce the impact of a CBDC. |
| Keywords: | Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services |
| JEL: | C51 D12 E42 L14 L52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-27 |
| By: | Christopher J. Erceg; Jesper Lindé; Mathias Trabandt |
| Abstract: | A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial. |
| Keywords: | Inflation Dynamics; New Keynesian Model; Inflation Risk; Monetary Policy; Linearized Model; Nonlinear Model; State-Dependent Pricing |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/260 |
| By: | Karen Davtyan (Departament d'Economia Aplicada, Universitat Autònoma de Barcelona (UAB)); Omar Elkaraksy (Departament d'Economia Aplicada, Universitat Autònoma de Barcelona (UAB)) |
| Abstract: | We evaluate the financial effects of monetary policy over the transition period from a fixed to a floating exchange rate regime in Egypt. The baseline evaluation is implemented through an event study methodology (high frequency identification) by estimating the effects of monetary policy announcements on financial indicators. The results reveal that a currency devaluation leads to a significant increase in stock prices. A change in the monetary policy interest rate significantly affects treasury yields. It takes more time for treasury yields with longer maturities to reflect the effects of monetary policy announcements. The results are mainly driven by the period when the exchange rate regime was closer to a floating system. The results also highlight the importance of politically and economically stable environment for the efficient transmission of monetary policy. |
| Keywords: | monetary policy, financial markets, exchange rate regime, developing economy, Egypt |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:uab:wprdea:wpdea2407 |
| By: | Atsuki Hirata (Bank of Japan); Yuichiro Ito (Bank of Japan); Yoshiyasu Kasai (Bank of Japan) |
| Abstract: | This paper uses financial data from individual banks to quantitatively analyze how the Bank of Japan's "Fund-Provisioning Measure to Stimulate Bank Lending, " decided for introduction in October 2012, affected banks' outstanding loans. We estimated the causal impact of the measure using propensity score matching to address the selection bias stemming from the voluntary basis of participation in this program. The results indicate a statistically significant difference in the outstanding loans between the participating and non-participating banks, suggesting that the Fund-Provisioning Measure to Stimulate Bank Lending helped increase lending. |
| Keywords: | Unconventional monetary policy; Lending facility; Bank lending; Propensity score matching |
| JEL: | E50 E51 E52 E58 G21 C23 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e24 |
| By: | Knut Are Aastveit (Norges Bank); Jamie Cross (Melbourne Business School); Francesco Furlanetto (Norges Bank); Herman K van Dijk (Erasmus University Rotterdam, Tinbergen Institute, Norges Bank) |
| Abstract: | The Fed's policy rule shifts during different phases of the business cycle, particularly in relation to monetary easing and tightening phases. This finding is established through a dynamic mixture model, which estimates regime-dependent Taylor-type rules using US quarterly data from 1960 to 2021. This approach supports partitioning the data into two regimes corresponding to business cycle phases, closely linked to monetary easing and tightening. The estimated policy rule coefficients differ in two key ways between the regimes: the degree of gradualism is significantly higher during normal times than during recessions, when rates are typically cut; and the output gap coefficient is higher in the recessionary regime than in the normal regime. Notably, the estimate of the inflation coefficient satisfies the Taylor principle in both regimes. These results are further strengthened when using real-time data. |
| Keywords: | Monetary policy, Taylor rules, mixed distributions, regime-switching |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240074 |
| By: | Yadavindu Ajit (Indira Gandhi Institute of Development Research); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | This study examines the effects of inflation targeting on inflation levels, its volatility, and its persistence in emerging market economies. To better estimate the dynamic treatment effects of inflation targeting the study uses a larger set of data, including 59 emerging market economies, an extended sample spanning 1985-2019, and a methodology that takes into account the staggered adoption of inflation targeting by these economies. Traditional models used in the literature failed to account for staggered adoption, resulting in biased estimates. Inflation targeting has been shown to significantly reduce inflation levels in emerging markets, especially when hyperinflationary economies are excluded. Results indicate significant reductions in inflation three to four years after adoption. In comparison, the findings for inflation volatility and persistence are more nuanced. Standard models indicate initial volatility reductions, but models that account for staggered adoption show no significant long-term impact. Moreover, inflation targeting has no significant impact on inflation persistence, even in more stable environments. These findings highlight the effectiveness of using models that account for staggered policy adoption when evaluating long-term policy impacts, and they suggest that, while inflation targeting is a viable tool for reducing inflation in emerging markets, its broader effects on inflation volatility and persistence have been limited. |
| Keywords: | Dynamic treatment effect, Emerging market economies, Inflation, Inflation persistence, Inflation targeting, Inflation volatility |
| JEL: | C21 C22 E52 E31 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2024-024 |
| By: | Shunsuke Haba (Bank of Japan); Yuichiro Ito (Bank of Japan); Shogo Nakano (Bank of Japan); Takahiro Yamanaka (Bank of Japan) |
| Abstract: | The "hysteresis effect, " in which short-term economic shocks can influence long-term economic trends, has been widely recognized. This paper presents empirical analyses of the long-term impact of monetary policy on the supply side (productivity and potential GDP, etc.) of the Japanese economy. First, we identify monetary policy shocks using various methods and examine their long-term impact on potential GDP over the past 25 years through the local projection method. The results suggest that monetary easing may have had a positive impact on potential GDP through capital accumulation, but no statistically significant relationship is confirmed. Next, we examine the impact of monetary policy on productivity, using firm-level data. The results indicate that while monetary easing could enhance productivity within individual firms, it may also act to suppress productivity growth by causing distortions in resource allocation among firms. However, in the long-term, the analysis reveals no evidence of a statistically significant relationship. Thus, from the empirical analyses using currently available data, no clear conclusions about the impact of monetary easing on the supply side of the economy have been reached, either positive or negative. There are various mechanisms at work in the long-term impact of monetary policy, and these effects may vary, depending on economic conditions. Ongoing examination from a broad perspective remains essential to deepen our understanding of the long-term impact of monetary policy. |
| Keywords: | Monetary Policy, Hysteresis Effect, Productivity, Reallocation |
| JEL: | C32 C33 E22 E24 E52 O47 |
| Date: | 2024–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e19 |
| By: | Munseob Lee; Claudia Macaluso; Felipe Schwartzman |
| Abstract: | Our paper addresses the heterogeneous effects of monetary policy on households of different races. The cyclical volatility of real income differs significantly for households of different races and income levels, reflecting differential exposure to fluctuations in employment and consumer prices. All Black households are disproportionately affected by employment fluctuations, whereas price volatility is only particularly pronounced for Black households with income above the national median. The latter face 40 percent higher price volatility than both poorer households of the same race and white households of similar income. To evaluate the effects of policy, we propose a New Keynesian framework with heterogeneous exposure to employment and price volatility. We find that an accommodative monetary stance generates asymmetric outcomes within race groups. Low-income households experience unemployment stabilization benefits, while high-income ones incur real income volatility costs. Differences are especially large among Black households. Reducing the volatility of unemployment by 1 percentage point engenders a 1.17 percentage point reduction in overall income volatility for poorer Black households, but an increase of 0.6 percentage points in income volatility for richer Black households. |
| Keywords: | inflation; monetary policy; Employment and labor markets; economic inequality |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99275 |
| By: | Guido Ascari; Dennis Bonam; Lorenzo Mori; Andra Smadu |
| Abstract: | We investigate the relationship between fiscal policy and inflation dynamics in the Euro Area, with a focus on the post-pandemic inflation surge. Using a BVAR identified via sign restrictions, we disentangle the effects of various demand- and supply-side shocks, including fiscal policy, on inflation. First, while both positive demand and adverse supply shocks contributed to the inflation surge, demand shocks were relatively more important. Second, fiscal stimulus played a substantial and progressively increasing role, particularly in influencing domestic-based measures of inflation. Finally, the relative impact of fiscal shocks on inflation dynamics varies across (selected) Euro Area countries. |
| Keywords: | E30; E31;E50 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:820 |
| By: | Patrick Aldridge; Jabir Sandhu; Sofia Tchamova |
| Abstract: | We find that foreign central banks own a large share of Government of Canada (GoC) bonds and tend to hold their positions for longer than other types of asset managers. This buy-and-hold behaviour could offer benefits. For example, foreign central banks may be less likely than other asset managers to sell bonds and add to strains on market liquidity in periods of turmoil. However, foreign central banks’ buy-and-hold behaviour combined with their minimal lending of GoC bonds in securities-financing markets, as observed in our available data, can potentially lower liquidity because fewer GoC bonds are available for others to transact in secondary markets. Indeed, we find that higher levels of foreign central banks’ GoC bond holdings are related to lower liquidity. |
| Keywords: | Exchange rates; Financial institutions; Financial markets, Financial stability; Foreign reserves management; International financial markets; Market structure and pricing |
| JEL: | E5 E58 F3 F30 F31 G0 G01 G1 G11 G12 G15 G2 G23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-26 |
| By: | Gabriel Rodriguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Paola Alvarado Silva (Departamento de Economía de la Pontificia Universidad Católica del Perú); Moisés Cáceres Quispe (Departamento de Economía de la Pontificia Universidad Católica del Perú) |
| Abstract: | This paper utilizes regime-switching VAR models with stochastic volatility (RS-VAR-SV) to analyze the impact and evolution of monetary policy shocks and their contribution to the dynamics of GDP growth, inflation, and the interest rate in Peru for the period from 1994Q3 to 2019Q4. The main findings are: (i) the best-fifting models incorporate only SV; (ii) there are two distinct regimes coinciding with the implementation of the inflation targeting (IT) scheme; (iii) the volatility of GDP growth and inflation began to decrease in the early 1990s, while interest rate volatility declined following IT implementation; and (iv) pre-IT, monetary policy shocks accounted for 15%, 30%, and 90% of the forecast error variance decomposition for in ation, GDP growth, and the interest rate in the long term, respectively. Following IT adoption, monetary policy ceased to be a source of uncertainty for the economy. These results are robust to changes in priors, domestic and external variables, the number of regimes, and the ordering and number of variables of the model. Palabras claves: Regime-Switching VAR, Stochastic Volatility, Marginal Likelihood, Bayesian Models, Monetary Policy, Peru. JEL Classification-JE: C11, C32, C52, E51, E52 |
| Keywords: | Regime-Switching VAR, Stochastic Volatility, Marginal Likelihood, Bayesian Models, Monetary Policy, Peru. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pcp:pucwps:wp00537 |
| By: | Maximiliano Dvorkin; Cassandra Marks |
| Abstract: | Because of local variations in inflation and nominal wage growth, regional real wage gains can differ, according to an analysis of the largest U.S. cities. |
| Keywords: | inflation; nominal wages; real wages |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:99191 |
| By: | Weinig, Max; Fritsche, Ulrich |
| Abstract: | In recent years, there has been increasing interest in the analysis of narratives in macroeconomic research. Our paper contributes to this research by proposing a way to identify and extract economic narratives from media reports. Therefore, this paper applies state-of-the-art bag-of-words text analysis methods to a large news corpus covering five years of news coverage in combination with results from a survey study on recent inflation narratives (Andre et al., 2023) in the US. This approach enables us to measure the prevalence and spread of inflation narratives over time and to examine the role of these narratives in aggregate macroeconomic expectations. Using Granger causality tests and local projections, we provide empirical evidence on the dynamics between inflation narratives and inflation expectations. Moreover, the paper highlights the vast heterogeneity across shortterm and mid-term inflation expectations as well as socioeconomic groups. |
| Keywords: | narratives, expectations, inflation, media, textual data, machine learning |
| JEL: | D84 E31 E32 E52 E71 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:uhhwps:307613 |
| By: | Carolyn A. Wilkins (Princeton University and Bank of England) |
| Keywords: | United Kingdom |
| JEL: | E52 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:336 |
| By: | Michael D. Bauer; Eric Offner; Glenn D. Rudebusch |
| Abstract: | Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric methods, and sample periods, and it is not explained by other firm characteristics. This evidence suggests that higher interest rates may not skew investment away from a sustainable transition. |
| Keywords: | Monetary transmission; carbon premium; ESG; climate finance |
| JEL: | E52 G14 Q54 Q58 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99301 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Central bank asseUsing a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that the magnifying effect from liquidity risks can be more consequential. In this context, asset purchases can stabilize economic conditions especially under scenarios of elevated financial stress.t purchases can effectively stabilize economic conditions, especially in scenarios of elevated financial stress. |
| Keywords: | Monetary and fiscal policy interaction; unconventional monetary policy; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99294 |
| By: | Kaiji Chen; Mr. Yunhui Zhao |
| Abstract: | We construct a daily Chinese Housing Market Sentiment Index by applying GPT-4o to Chinese news articles. Our method outperforms traditional models in several validation tests, including a test based on a suite of machine learning models. Applying this index to household-level data, we find that after monetary easing, an important group of homebuyers (who have a college degree and are aged between 30 and 50) in cities with more optimistic housing sentiment have lower responses in non-housing consumption, whereas for homebuyers in other age-education groups, such a pattern does not exist. This suggests that current monetary easing might be more effective in boosting non-housing consumption than in the past for China due to weaker crowding-out effects from pessimistic housing sentiment. The paper also highlights the need for complementary structural reforms to enhance monetary policy transmission in China, a lesson relevant for other similar countries. Methodologically, it offers a tool for monitoring housing sentiment and lays out some principles for applying generative AI models, adaptable to other studies globally. |
| Keywords: | Chinese Housing Market Sentiment; Generative AI; Monetary Policy Transmission; Consumption; Crowding-Out |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/264 |
| By: | Adam Copeland; R. Jay Kahn |
| Abstract: | This paper evaluates the salient forces behind a dealer-intermediary’s decision to move a bilateral repo transaction with a customer into central clearing. We provide evidence that dealers turn to sponsored repo on occasions when balance sheet space is scarce, such as when there is a large issuance of Treasury coupon securities and end-of-month dates. We also find that sponsored repo spreads tend to be affected by a range of factors, with the three largest drivers being money market fund assets, a proxy for hedge fund demand for repo funding, and end-of-month dates. |
| Keywords: | repo; sponsored services; central clearing; money markets |
| JEL: | G12 G23 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99298 |
| By: | Kris James Mitchener; Kirsten Wandschneider |
| Abstract: | The Great Depression is the canonical case of a widespread currency war, with more than 70 countries devaluing their currencies relative to gold between 1929 and 1936. What were the currency war’s effects on trade flows? We use newly-compiled, high-frequency bilateral trade data and gravity models that account for when and whether trade partners had devalued to identify the effects of the currency war on global trade. Our empirical estimates show that a country’s trade was reduced by more than 21% following devaluation. This negative and statistically significant decline in trade suggests that the currency war destroyed the trade-enhancing benefits of the global monetary standard, ending regime coordination and increasing trade costs. |
| JEL: | F13 F14 F33 F42 N10 N70 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33313 |
| By: | Barbaglia, Luca (European Commission - JRC); Bellia, Mario (European Commission - JRC); Di Girolamo, Francesca (European Commission - JRC); Rho, Caterina (European Commission - JRC) |
| Abstract: | Digital and crypto currencies are becoming an integral part of financial markets. Nevertheless, regulation of these markets seems still at an early stage and the literature evaluating the impact of policy interventions is scarce. We investigate the reaction of crypto markets in the aftermath of a policy announcement using textual information from news and sentiment analysis. Our findings are threefold. First, there is evidence of peaks in news about crypto-assets in correspondence of the date of new developments in EU legislation, in particular about Central Bank Digital currencies. Second, we find that both returns of cryptocurrencies and general stock market returns are directly proportional to the news sentiment about crypto markets. Third, our event study shows that the introduction of regulation on digital and crypto currencies is perceived as a negative shock by financial markets, especially for digital currencies. |
| Keywords: | cryptocurrencies, digital finance, text mining |
| JEL: | C55 E42 G41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202407 |
| By: | Allayioti, Anastasia; Arioli, Rodolfo; Bates, Colm; Botelho, Vasco; Fagandini, Bruno; Fonseca, Luís; Healy, Peter; Meyler, Aidan; Minasian, Ryan; Zahrt, Octavia |
| Abstract: | This paper looks back on the 25-year history of the ECB Survey of Professional Forecasters (SPF). Since its launch in the first quarter of 1999, it has served as an important input for policymaking and analysis, especially over the past five years, where the euro area has, following a period of low inflation, navigated a global pandemic, Russia’s invasion of Ukraine and an unprecedented surge in inflation. The survey has evolved over time and provides not only a long time series of economic expectations and forecasts, but also valuable insights on key topical issues and on economic risks and uncertainties. We show that, for each of the three main macroeconomic variables forecast – HICP inflation, real GDP growth and the unemployment rate – the track record of the ECB SPF in forecasting has been broadly comparable to that of the Eurosystem. In addition, its combination of quantitative point forecasts and probability distributions with qualitative explanations has provided useful input for macroeconomic analysis. Beyond analyses of the forecasts for the main macroeconomic variables, there are also two further sections that examine the technical assumptions (oil prices, policy rates, exchange rates and wages) underlying SPF expectations and an analysis and assessment of measures of macroeconomic uncertainty. Technical assumptions are shown to account for the lion’s share of the variance in the inflation forecast errors, while uncertainty is shown to have increased considerably relative to that which prevailed during the early years of the SPF (1999-2008). Looking ahead, the SPF – with its long track record, its large and broad panel (spanning both financial and non-financial forecasters) and committed panellists – will undoubtedly continue to provide timely and useful insights for the ECB’s policymakers, macroeconomic experts, economic researchers and the wider public. JEL Classification: D84, E31, E37, E52, E66 |
| Keywords: | expectations, forecasts, inflation, SPF, survey |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024364 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Evidence from a 160-year-long panel of U.S. banks suggests that the ultimate cause of bank failures and banking crises is almost always a deterioration of bank fundamentals that leads to insolvency. As described in our previous post, bank failures—including those that involve bank runs—are typically preceded by a slow deterioration of bank fundamentals and are hence remarkably predictable. In this final post of our three-part series, we relate the findings discussed previously to theories of bank failures, and we discuss the policy implications of our findings. |
| Keywords: | bank runs; financial crises; deposit insurance; bank failures |
| JEL: | G01 G2 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99176 |
| By: | Justin Bloesch (Cornell University) |
| Abstract: | This paper reviews evidence on the role of the labor market in driving inflation and analyzes the US labor market, and its contribution to inflation, during the COVID-19 pandemic and recovery. The author argues that the quits rate is a good measure of labor market tightness and is the best predictor of nominal wage growth. He further argues that wages largely pass through into prices, but other factors like sector-specific supply shocks are needed to explain the dynamics of price inflation. The COVID pandemic created large disruptions in the labor market, resulting in an increase in job openings and quits, high nominal wage growth, and temporary labor market mismatch. The shocks associated with COVID have subsequently faded, and nonlinearities in both the wage Phillips curve and Beveridge curve allowed for nominal wage growth to normalize without a large increase in unemployment. Lastly, the author argues that the relationship between wages and prices is mostly one-directional: Past price increases are not a major driver of wage gains. The period of high nominal wage growth in the recovery from COVID therefore reflected temporarily high labor demand as the economy quickly reopened, but not a classic wage-price spiral. |
| Keywords: | Labor Market Tightness, Inflation, Wage Growth |
| JEL: | J63 E31 E24 J31 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp24-23 |
| By: | Wendy E. Dunn; Raakin Kabir; Ellen E. Meade; Nitish R. Sinha |
| Abstract: | In an era increasingly shaped by artificial intelligence (AI), the public’s understanding of economic policy may be filtered through the lens of generative AI models (also called large language models or LLMs). Generative AI models offer the promise of quickly ingesting and interpreting large amounts of textual information. |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-06-1 |
| By: | Peter M. DeMarzo; Arvind Krishnamurthy; Stefan Nagel |
| Abstract: | We develop a framework to estimate bank franchise value. Contrary to existing models, sticky deposits and low deposit rate betas do not imply negative duration. While operating costs could generate negative duration, they are offset by fixed interest rate spreads from lending activity. Consequently, franchise value declines as interest rates rise, further exacerbating losses on banks’ securities holdings. Banks with less responsive deposit rates tend to invest more in long-term securities, aiming to hedge cash flows rather than market value. Despite significant recent rate hike losses, most U.S. banks still retain sufficient franchise value to remain solvent, justifying forbearance. |
| JEL: | G2 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33308 |
| By: | Héctor M. Zárate-Solano; Norberto Rodríguez-Niño |
| Abstract: | Colombia’s annual infation reached 13.3% in March of 2023, the highest rate since the start of the infation-targeting regime for monetary policy in 2000. However, some groups in the basket show signs of lower infation, while others show higher infation. The persistence of this trend is a matter of active debate that involves analyzing the trend component of both year-to-year and month-to-month changes in the price indices. This paper employs time series models to identify infation shift levels based on the 188 price indices in the basket. We categorize trend breaks as positive or negative and further classify them into tradable versus non-tradable, core versus regulated, and other CPI categories. Using trend models that incorporate these breaks, we forecast total and group infation. Our results show that including trend breaks enhances prediction accuracy for monthly annual infation across all time horizons. **** RESUMEN: En marzo de 2023, la inflación anual en Colombia alcanzó el 13, 3%, la tasa más alta desde que se implementó el régimen de inflación objetivo en el año 2000. Sin embargo, mientras algunos grupos de la canasta básica muestran signos de menor inflación, otros experimentan un aumento. La persistencia de esta tendencia es objeto de un debate activo, que ha utilizado las variaciones anuales y mensuales en los índices de precios para detectar posibles cambios en la tendencia. En este documento, empleamos modelos de series de tiempo para identificar cambios en los niveles de inflación, basándonos en los 188 índices de precios que conforman la canasta. Clasificamos las rupturas de tendencia como positivas o negativas y las agrupamos según diversas categorías, tales como transables y no transables, básicos y regulados, entre otros grupos del IPC. Adicionalmente, utilizamos estos modelos de tendencia, con posibles quiebres, para pronosticar la inflación total y la inflación por grupos. Nuestros resultados indican que incorporar los quiebres en las tendencias mejora la precisión de los pronósticos de acuerdo con las medidas de evaluación tradicionales. |
| Keywords: | Consumer Price Indexes, Linear Trend Models, Structural Breaks, Forecasting, Forecasting Evaluation, Índices de Precios al Consumidor, Modelos de Tendencia Lineal, Quiebres Estructurales, Pronósticos, Evaluación de pronósticos |
| JEL: | C22 C43 E31 E37 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1289 |
| By: | Cortney Cowley; Jacob Dice; Amaze Lusompa; David Rodziewicz; Francisco Scott |
| Abstract: | Food inflation has been excluded from core measures of inflation under the reasoning that it is a phenomenon of the supply side of the economy, driven by stochastic supply shocks to agricultural production that can affect the availability of farm products and increase food price volatility. However, the share of food costs related to agricultural production has fallen over the years as food value chains have become more complex and food prices tied more closely to value added downstream in the supply chain. We calculate the magnitude and extension of agricultural price passthroughs to food prices in the United States after 2008. We leverage the results of simple models of food pricing under imperfect competition along the supply chain to identify possible sources of bias in the passthrough calculations. We argue that we can identify U.S. agricultural price passthrough to U.S. food prices in a structural vector autoregressive setting using weather instruments that shift supply of farm production but are excluded from demand. Our results suggest that the passthrough of agricultural commodity prices to food prices is generally small and imprecisely estimated. Our results suggest that understanding food inflation can benefit from focusing on factors affecting downstream segments of the supply chain. |
| Keywords: | food inflation; passthrough rates; Agricultural prices |
| JEL: | Q10 E31 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99297 |
| By: | Kartik B. Athreya |
| Abstract: | Presentation for the Anderton Economic Policy Symposium, Hobart and William Smith Colleges, Geneva, New York delivered by Kartik Athreya, Director of Research and Head of the Research and Statistics Group, Federal Reserve Bank of New York. |
| Keywords: | disinflation; Inflation; monetary policy; unemployment |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsp:99218 |
| By: | Hugo Oriola; Jamel Saadaoui |
| Abstract: | This research provides novel empirical evidence about the exchange rate reaction to international organization loans and geopolitical preferences using an unbalanced panel of 153 countries observed from February 1993 to December 2019. For elected temporary members of the UN Security Council, the IMF loans cause a sizeable appreciation in the exchange rate vis-à-vis the USD of around 2 percent at the 12-month horizon, after controlling for institutional quality. ADB loans cause an appreciation of around 0.25 percent at the 4-month horizons. These effects are stronger when the geopolitical distance with China is higher, indicating a higher credibility for these loans. |
| Keywords: | Exchange rates, Geopolitical preferences, International organization loans, Institutional quality, Local projections |
| JEL: | D78 F30 F42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-2 |
| By: | Pamela Cardozo; Andrés Fernández; Jerzy Jiang; Felipe D Rojas |
| Abstract: | Cross-border crypto flows (CBCFs) are not systematically measured and are poorly understood. After defining CBCFs and the channels through which they materialize, we review the various approaches to measure them through two case studies. We also quantify the dynamics and drivers of CBCFs through a push/pull factor SVAR model. We find an increasingly large volume of CBCFs, although considerable heterogeneity remains across estimates. Furthermore, CBCFs are more sensitive to push factors than regular capital flows. Our findings call for accurate and comprehensive measurement and monitoring of CBCFs and the need to rethink capital account restrictions in a more digitalized world. |
| Keywords: | Crypto assets; cross-border flows; capital flows; measurement; push-pull factors; capital account restrictions |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/261 |
| By: | Leonie Bräuer (University of Geneva; Swiss Finance Institute, Students); Harald Hau (University of Geneva) |
| Abstract: | Using comprehensive new contract level data (EMIR) for the period 2019-2023, we explore how the FX derivative trading by European funds compares to a feasible theoretical benchmark of optimal hedging. We find that hedging behavior by all fund types is often partial, unitary (i.e., with a single currency focus), and sub-optimal. Overall, the observed FX derivative trading does not significantly reduce the return risk of the average European investment funds, even though optimal hedging strategies could do so without incurring substantial trading costs. |
| Keywords: | Global Currency Hedging, Institutional Investors, Mean-Variance Optimization |
| JEL: | E44 F31 F32 G11 G15 G23 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp24103 |