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on Monetary Economics |
| By: | Saki Bigio; Nicolas Caramp; Dejanir Silva; Dejanir H. Silva |
| Abstract: | We append the expectation of a monetary-fiscal reform into a standard New Keynesian model. If a reform occurs, monetary policy will temporarily aid debt sustainability through a temporary burst in inflation. The anticipation of a possible reform links debt levels with inflation expectations. As a result, interest rates have two effects: they influence demand and affect expected inflation in opposite directions. The expectations effect is linked to the impact of interest rates on public debt. While lowering inflation in the short term is possible through demand control, inflation tends to rise again due to its impact on inflation expectations (sticky inflation). Optimal monetary policy may allow low real interest rates after fiscal shocks, temporarily breaking away from the Taylor principle. We assess whether the Federal Reserve’s “staying behind the curve” was the right strategy during the recent post-pandemic inflation surge. |
| Keywords: | monetary policy, monetary-fiscal coordination, inflation expectations |
| JEL: | E31 E52 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11495 |
| By: | Gobbi, Lucio; D'Ippoliti, Carlo; Temperini, Jacopo |
| Abstract: | In this paper we analyze the impact of less conventional monetary policy tools on the personal and functional distribution of income. We focus on the issuance of central bank digital currency (CBDC) in a comparative perspective, using a stock-flow consistent model of the eurozone economy. We consider two kinds of policies: helicopter money policies such as Quantitative Easing and the issuance of a CBDC; and scenarios not based on balance sheet expansions, such as an interest rate policy following the Pasinetti Rule, or a sterilized issuance of CBDC. Monetary policies using CBDCs tend to increase the wage share at the expense of financial rents. The targeted issuance of CBDCs to firms might produce an increase in GDP, corporate profits, and the wage share. The Pasinetti Rule reduces personal income inequality the most, but if applied mechanically, its impact on growth is also the least desirable. |
| Keywords: | Inequality; Monetary policy; Central Bank Digital Currencies; Pasinetti Rule |
| JEL: | E12 E5 G0 I3 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122934 |
| By: | Gunther Schnabl; Taiki Murai |
| Abstract: | The paper examines the relationship between money and prices in Japan based on Fisher’s (1911) transactions version of the quantity theory of money. Money is defined as aggregate debt less net foreign assets. A general price index is constructed from consumer prices, real estate prices, stock prices, nominal wages and the nominal effective exchange rate. Evidence shows a high correlation between money growth and general price inflation for Japan from 1980 to 2022, supporting the view that inflation is a monetary phenomenon. The paper argues that Japan’s inflation has remained low since the 1990s because the policy mix of monetary and fiscal expansion led to the fall of private debt and the rise of government debt, resulting in a low money growth at the aggregate level. An exit from monetary and fiscal expansion would contribute to the recovery of private debt creation, which would restore the money, price and growth dynamics in Japan. |
| Keywords: | quantity theory of money, inflation, monetary policy |
| JEL: | E31 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11476 |
| By: | Raputsoane, Leroi |
| Abstract: | This paper analyses the reaction of the minerals industry to foreign exchange developments in South Africa. This is achieved by augmenting a Taylor rule type central bank monetary policy reaction function with the foreign exchange rate. The results provide evidence that, following an a percentage point increase in foreign exchange rate, output of the minerals industry decreases and bottoms out after 3 months. The results further show that the effect of an increase in foreign exchange rate on output of minerals industry is statistically significant up to 5 months. The results are consistent with the dominant currency pricing paradigm, with the U.S. dollar being the most dominant currency, hence appreciation of the dollar against other currencies predicts a decline in the volume of trade between these countries. Most currencies, including the rand, follow a freely floating exchange rate regime with little direct or indirect intervention for the purpose of influencing their exchange rates. As a result, the exporters and importers could use the available strategies and financial instruments to manage the exchange rate risk and to minimise the adverse |
| Keywords: | Foreign exchange rate, Minerals industry, Economic cycles |
| JEL: | C11 E52 F31 L72 |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123014 |
| By: | Leek, Lauren Caroline (European University Institute); Bischl, Simeon |
| Abstract: | Although central bank communication is a core monetary policy and accountability tool for central banks, little is known about what shapes it. This paper develops and tests a theory regarding a previously unconsidered variable: central bank independence (CBI). We argue that increases in CBI alter the pressures a central bank faces, compelling them to address these pressures to maintain their reputation. We fine-tune and validate a Large Language Model (Google's Gemini) to develop novel textual indices of policy pressures regarding monetary policy communication of central banks in speeches of 100 central banks from 1997 to 2023. Employing a staggered difference-in-differences and an instrumental variable approach, we find robust evidence that an increase in independence decreases monetary pressures and increases financial pressures discussed in monetary policy communication. These results are not, as generally is assumed, confounded by general changes in communication over time or singular events, in particular, the Global Financial Crisis. |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:yrhka |
| By: | Baioni Tomás |
| Abstract: | Standard macroeconomic theory shows that a contractionary monetary policy reduces inflation. However, Argentina's recent history of active contractionary monetary policy stance and increasing inflation suggests otherwise. I construct monthly monetary policy shocks, first as deviations from the Central Bank's policy rule, following Romer & Romer (2004), and secondly as daily forward premium to overcome a potential "prize puzzle", following Witheridge (2024), to estimate the dynamic responses of inflation, economic growth and bilateral exchange rate to higher interest rates. Results from a SVAR model suggest that, as opposed to standard macroeconomic theory, a 10% hike in the monetary policy rate unequivocally increases headline inflation using both approaches. Furthermore and as robustness checks, I estimate the impulse response functions with an instrumental-variables local-projections approach (IV-LP), first, and I then compare my prior estimations with a "one-step" approach, following Lloyd & Manuel (2024), and find that my original conclusions hold. I theorize that this seemingly unconventional result is consistent with standard macroeconomic theory, when one accounts for a Central Bank with increasing interest-bearing liabilities as an active policy stance. |
| JEL: | E31 E52 G15 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4709 |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | This paper examines the impact of current account balances on energy, headline, and core inflation across developed and developing economies from 1980 to 2023. Using Panel OLS fixed effects, Panel-IV 2SLS and Panel Vector Autoregressive models, we find that an improvement in the current account consistently leads to lower inflation, with heterogeneous effects across inflation components, even when controlling for monetary policy. Our analysis also explores regional differences and contrasts the periods before and after the 2008 subprime crisis, revealing that current account surpluses had a stronger deflationary effect in the more recent period. There is also a negative link between cyclical unemployment and inflation supporting the traditional Phillips curve perspective. These results suggest that policies aimed at improving current account balances, particularly in energy-importing countries, could help mitigate inflationary pressures. |
| Keywords: | current account, energy inflation, headline inflation, core inflation, panel data, VAR, subprime crisis, inflation dynamics, monetary policy |
| JEL: | E31 F32 Q43 C33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11512 |
| By: | Yakhin, Yossi |
| Abstract: | The paper introduces foreign exchange interventions (FXIs) into a standard New-Keynesian small open economy model. It solves for the optimal FXI policy, suggests an implementable policy rule, and studies the transmission mechanism of FXIs. Relying on the portfolio balance channel, deviations from the uncovered interest rate parity (UIP) reflect financial inefficiencies. Therefore, a policy rule that stabilizes the UIP premium moves the economy toward its optimal allocation, regardless of the type of shocks it faces. Augmenting the rule with foreign reserves smoothing further improves welfare. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. FXIs are transmitted by affecting the UIP premium. Purchasing foreign reserves increases the UIP premium, thereby raising the effective return home agents face and depreciating the domestic currency. Consequently, domestic demand contracts and export expands. The results are robust to a variety of modeling alternatives for the financial sector. |
| Keywords: | Foreign Exchange Interventions; Policy Rule; UIP Premium; Monetary Policy; Open Economy Macroeconomics |
| JEL: | E44 E58 F30 F31 F41 G15 |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122948 |
| By: | Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) |
| Abstract: | I show that in linear rational expectation models, the effect of a monetary tightening can be simulated using contemporaneous and anticipated monetary policy shocks that replicate the forward curves observed during the period of interest, normalized with the forward curve observed in the quarter before the tightening period of interest begins. In particular, the shocks in response to which the tightening occurs are irrelevant. All required information is incorporated in the normalized forward curves. I confirm this result via simulations and a formal proof. Then I use it to assess the effects of the recent monetary tightening in the Euro Area.. |
| Keywords: | : policy counterfactualsmonetary policyinterest rate expectations |
| JEL: | E52 E43 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202501-471 |
| By: | Sangyup Choi; Kimoon Jeong; Jiseob Kim |
| Abstract: | We study how the call option-like refinancing structure can affect the transmission channel of monetary policy on consumption. Utilizing European data, we find that contractionary shocks induce a larger decline in consumption in countries with a higher share of adjustable-rate mortgages (ARMs), confirming the well-known finding. In contrast, consumption responses to expansionary shocks do not depend on this share, resulting in the asymmetric mortgage channel that has not been documented. Household-level microdata and quantitative analysis indicate that refinancing in response to a decline in the interest rate—akin to exercising call options—is the key to rationalizing our findings. |
| Keywords: | adjustable-rate mortgages, refinancing, monetary policy, consumption, call option |
| JEL: | E21 E32 E44 E52 G21 G51 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-02 |
| By: | Martin Groiss; Nicolas Syrichas |
| Abstract: | How do different monetary policy tools influence residential housing markets, and how do these effects vary between owner-occupied and rental segments? To answer this question, we assemble a new monthly regional dataset from 35 million real estate listings over the period 2007-2023 and exploit high-frequency monetary policy surprises for identification. Focusing on Germany—where half of households rent—we find that expansionary monetary policy significantly boosts property prices, with forward guidance and quantitative easing having more pronounced and persistent effects than conventional rate cuts. Rents also rise, albeit more modestly and less persistently. Housing demand—measured by daily contacts per listing—rises sharply, while the number of for-sale properties falls, tightening the owner-occupied market more than the rental market. Linking these findings to survey microdata, we show that renters become homeowners at higher rates, homeowners reduce home-to-home moves, and renters make more rent-to-rent transitions. The results suggest that accommodative monetary policy can widen price-to-rent ratios, fueling housing affordability pressures and potentially exacerbating the wealth gap between owners and renters. |
| Keywords: | housing markets, monetary policy, rents, property prices, forward guidance, quantitative easing, household mobility |
| JEL: | E52 R21 R31 |
| Date: | 2025–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0058 |
| By: | Lee, Munseob (University of California, San Diego); Macaluso, Claudia (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Richmond Fed) |
| 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. |
| JEL: | E31 E52 J15 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17502 |
| By: | Michael D. Bordo; Klodiana Istrefi; Humberto Martínez |
| Abstract: | This study provides evidence on the usage and preferences of Federal Reserve’s Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the language of the FOMC, the use of the language of Rules surged notably in the mid-1990s, aligning with theoretical advancements in monetary policy. We identify that a rise in Discretion terminology occurs during economic downturns and periods of heightened uncertainty. In contrast, a rise in the language of Rules is supported by higher references to terms such as “credibility” and “commitment, ” and is more prevalent among hawkish FOMC members. Our findings link the increased use of the language of Rules (Discretion) language to tighter (easier) monetary policy, revealing a significant role of this debate in shaping policy outcomes, in particular periods. |
| JEL: | E03 E50 E61 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33262 |
| By: | Matthias Fengler; Winfried Koeniger; Stephan Minger |
| Abstract: | We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund. |
| Keywords: | liquidity, monetary policy, option order books, option markets, Covid-19 pandemic |
| JEL: | G13 G14 D52 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11556 |
| By: | Michael D. Bauer; Eric A. 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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11552 |
| By: | Jyotsana Kala; Lucie Lebeau; Lu Wang |
| Abstract: | We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run. |
| Keywords: | search; money; market power; monetary policy |
| JEL: | D82 D83 E40 E50 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99409 |
| By: | Waldman Joaquín |
| Abstract: | The study of chronic inflation has declined over the years, but the recent surge in global inflation has made it crucial to revisit this phenomenon to prevent it from becoming entrenched. In this paper, we identify more than 300 significant inflation outbreaks worldwide and explore why some become chronic while others do not. Our findings reveal that large inflation surges negatively impact GDP in the short term, regardless of whether they become chronic. This affects particularly middle-income economies, Latin American and Caribbean countries, and Middle Eastern and North African nations. Although these shocks are often exogenous, their consolidation into chronic inflation largely depends on policy responses. When governments effectively address upsurges with monetary, exchange rate, and fiscal policies, they can resolve the outbreaks; however, inaction leads to the entrenchment of chronic inflation. In such cases, the likelihood of reaching higher inflation levels increases, and the resulting output losses are significantly more severe, especially in middle-income economies and Latin American and Caribbean countries. |
| JEL: | E3 N1 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4771 |
| By: | Cathal O'Donoghue (University of Galway); Beenish Amjad (World Bank); Jules Linden (CEQ Institute, Tulane University); Nora Lustig (CEQ Institute, Tulane University); Denisa Sologon (Luxembourg Institute for Social and Economic Research); Yang Wang (CEQ Institute, Tulane University) |
| Abstract: | This paper developed a microsimulation model to simulate the distributional impact of price changes using Household Budget Survey data, Income Survey data and an Input Output Model. The primary purpose is to describe the models components. The secondary purpose is to demonstrate one component of the model by assessing the distributional and welfare impact of recent price changes in Pakistan. Over the period of November 2020 to November 2022, headline inflation 41.5\%, with food and transportation prices increasing most. The analysis shows that despite large increases in energy prices, the importance of energy prices for the welfare losses due to inflation is limited because energy budget shares are small and inflation is relatively low. The overall distributional impact of recent price changes is mildly progressive, but household welfare is impacted significantly irrespective of householdsâ position along the income distribution. The biggest driver of the welfare loss at the bottom was food price inflation, while inflation in other goods and services were the biggest driver at the top of the distribution. To compensate households for increased living costs, transfers would need to be on average 40\% of pre-inflation expenditure. Behavioural responses to price changes have a negligible impact on the overall welfare cost to households. |
| Keywords: | Inflation, Welfare impact, Carbon tax, Revenue Recycling |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:tul:wpaper:2501 |
| By: | Ordoñez Lucas Sebastián |
| Abstract: | This paper investigates how domestic and external supply shocks influence inflation in Argentina using the Local Projections methodology. We categorise supply shocks into two groups: domestic and external. Domestic supply shocks include the nominal exchange rate and regulated prices. In contrast, external supply shocks include international energy and food prices. The results reveal two main findings: First, both domestic and external supply shocks positively influence inflation. Second, there are significant variations in the magnitude and dynamic of how these supply shocks are transmitted to inflation. These insights offer a comprehensive understanding of how supply shocks influence inflationary processes in developing countries and small open economies, similar to Argentina. |
| JEL: | E3 C1 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4750 |
| By: | Cathal O'Donoghue (University of Galway); Beenish Amjad (World Bank); Jules Linden (CEQ Institute, Tulane University); Nora Lustig (CEQ Institute, Tulane University); Denisa Sologon (Luxembourg Institute for Social and Economic Research); Yang Wang (CEQ Institute, Tulane University) |
| Abstract: | This paper developed a microsimulation model to simulate the distributional impact of price changes using Household Budget Survey data, Income Survey data and an Input Output Model. The primary purpose is to describe the models components. The secondary purpose is to demonstrate one component of the model by assessing the distributional and welfare impact of recent price changes in Pakistan. Over the period of November 2020 to November 2022, headlineinflation 41.5%, with food and transportation prices increasing most. The analysis shows that despite large increases in energy prices, the importance of energy prices for the welfare losses due to inflation is limited because energybudget shares are small and inflation is relatively low. The overall distributional impact of recent price changes is mildly progressive, but household welfare is impacted significantly irrespective of households’ position along the incomedistribution. The biggest driver of the welfare loss at the bottom was food price inflation, while inflation in other goods and services were the biggest driver at the top of the distribution. To compensate households for increased living costs, transfers would need to be on average 40% of pre-inflation expenditure. Behavioural responses to price changes have a negligible impact on the overall welfare cost to households. |
| Keywords: | Inflation, Welfare impact, Carbon tax, Revenue Recycling |
| JEL: | E31 I38 H23 E62 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2025-679 |
| By: | Barthelemy, Jean (Banque de France); Mengus, Eric (HEC Paris); Plantin, Guillaume (Sciences Po) |
| Abstract: | Fiscal dominance refers to situations in which fiscal policy imposes restrictions on monetary policy. Large shifts in the dynamics of sovereign debts, surpluses, and central bank's balance sheets since the Great Financial Crisis have created the perception of a heightened risk of such fiscal dominance in major jurisdictions. This paper reviews the theoretical and empirical literature on fiscal dominance. We offer a simple theory in which fiscal dominance arises as the outcome of strategic interactions between the government, the central bank and the bond markets. |
| Keywords: | Fiscal dominance; game of chicken; Fiscal-Monetary Interactions |
| JEL: | E31 E52 E63 H63 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1532 |
| By: | Rustam Jamilov (University of Oxford); Tobias Konig (University of Bonn); Karsten Muller (National University of Singapore); Farzad Saidi (University of Bonn; Centre for Economic Policy Research) |
| Abstract: | We study bank runs using a novel historical cross-country dataset that covers 184 countries over the past 200 years and combines a new narrative chronology with statistical indicators of bank deposit withdrawals. We document the following facts: (i) the unconditional likelihood of a bank run is 1.2% and that of significant deposit withdrawals 12.7%; (ii) systemic bank runs, i.e. those that are accompanied by deposit withdrawals, are associated with substantially larger output losses than non-systemic runs or deposit contractions alone; (iii) bank runs are contractionary even when they are not triggered by fundamental causes, banks are well capitalized, and there is no evidence of a crisis or widespread failures in the banking sector; (iv) in historical and contemporary episodes, depositors tend to run on highly leveraged banks, causing a credit crunch, and a reallocation of deposits across banks; and (v) liability guarantees are associated with lower output losses after systemic runs, while having a lender of last resort or deposit insurance reduces the probability of a run becoming systemic. Taken together, our findings highlight a key role for sudden bank liability disruptions over and above other sources of financial fragility. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2435 |
| By: | Sarthak Behera; Hyeongwoo Kim; Soohyon Kim |
| Abstract: | This paper investigates the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models often suggest that the bilateral real exchange rate is primarily driven by the relative economic performance of the two countries, our research highlights the superior predictive power of latent factors obtained from U.S. economic variables, while Korean factors fail to enhance predictability and often act as noise. We attribute the strong predictability of U.S. factors to significant cross-correlations observed among a panel of bilateral real exchange rates vis-Ã -vis the U.S. dollar, indicating a limited role for idiosyncratic factors associated with smaller economies. Our major findings are based on data from the pre-COVID19 era. We further explore how economic crises disrupt this relationship, resulting in temporary yet persistent disconnects between the real exchange rate and macroeconomic fundamentals. |
| Keywords: | Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 F31 G17 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-01 |
| By: | Michael D. Bordo; Edward S. Prescott |
| Abstract: | We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge. |
| JEL: | B20 E58 G2 H1 L1 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33263 |
| By: | Dibiasi, Andreas (Aix Marseille University); Mikosch, Heiner (ETH Zürich); Sarferaz, Samad (ETH Zurich); Steinbach, Armin (HEC Paris) |
| Abstract: | In a novel survey, we study how German senior government officials systematically adjust fiscal policy in response to economic shocks, focusing on their fiscal responses to a contractionary monetary policy shock. Using randomized vignette treatments, we examine how officials update GDP and inflation expectations under fiscal and monetary policy shock scenarios and assess their preferred fiscal adjustments. Our findings show that officials predominantly respond by increasing debt and reducing spending, with tax increases playing a minor role, often combining multiple fiscal instruments. Counterfactual analysis reveals that officials’ reasoning aligns with key insights from the Heterogeneous Agent New Keynesian literature. |
| Keywords: | Fiscal policy; Monetary policy; Fiscal-monetary interaction; Expectation formation; Survey experiment |
| JEL: | D83 E52 E62 E63 |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1531 |
| By: | Greenwood, Robin; Hanson, Samuel; Vayanos, Dimitri |
| Abstract: | We survey the growing literature emphasizing the role that supply and demand forces play in shaping the term structure of interest rates. Our starting point is the Vayanos and Vila model of the term structure of default-free bond yields, which we present in both discrete and continuous time. The key friction in the model is that the bond market is partially segmented from other financial markets: The prices of short-rate and bond supply risks are set by specialized bond arbitrageurs who must absorb shocks to the supply and demand for bonds from other preferred-habitat agents. We discuss extensions of this model in the context of default-free bonds and other asset classes. |
| Keywords: | term structure of interest rates; monetary policy; bond demand; bond supply; market segmentation; preferred habitat; limited arbitrage |
| JEL: | E43 E52 F31 G12 |
| Date: | 2024–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126107 |
| By: | Brzezinski, Adam; Chen, Yao; Palma, Nuno; Ward, Felix |
| Abstract: | We estimate the effect of money supply changes on the real economy by exploiting a recurring natural experiment: maritime disasters in the Spanish Empire (1531–1810) that resulted in the loss of substantial amounts of silver money. We find that negative money supply shocks caused Spanish real output to decline. A transmission channel analysis highlights slow price adjustments and credit frictions as mechanisms through which money supply changes affected the real economy. Especially large output declines occurred in textile manufacturing against the backdrop of a credit crunch that impaired merchants’ ability to supply their manufacturers with inputs. |
| Keywords: | AAM requested |
| JEL: | N0 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125472 |
| By: | Aromí J. Daniel; Heymann Daniel |
| Abstract: | We propose a method to generate “synthetic surveys” that reveal policymakers’ perceptions and narratives. This exercise is implemented using 80 time-stamped Large Language Models (LLMs) fine-tuned with FOMC meetings’ transcripts. Given a text input, fine-tuned models identify highly likely responses for the corresponding FOMC meeting. We demonstrate the value of this tool in three different tasks: measurement of perceived economic conditions, evaluation of transparency in Central Bank communication and extraction of policymaking narratives. Our analysis covers the housing bubble and the subsequent Great Recession (2003-2012). For the first task, LLMs are prompted to generate phrases that describe economic conditions. The resulting outputs show policymakers informational advantage. Anticipatory ability increases as models are prompted to discuss future scenarios and financial conditions. To analyze transparency, we compare the content of each FOMC meeting minutes to content generated synthetically through the corresponding fine-tuned LLM. The evaluation suggests the tone of each meeting is transmitted adequately by the corresponding minutes. In the third task, LLMs produce narratives that show policymakers’ views on their responsibilities and their understanding of main forces shaping macroeconomic dynamics. |
| JEL: | E58 E47 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4707 |
| By: | International Monetary Fund |
| Abstract: | The South African Reserve Bank (SARB) sets a high benchmark for transparency and is considered by the external stakeholders one of the most reputable and effective public institutions in South Africa, and globally. The SARB’s transparency practices are broadly aligned with expanded and comprehensive practices as defined by the IMF Central Bank Transparency Code (see Table 1). The SARB’s commitment to open and transparent communications, as embedded in its 2025 Strategic Plan, is highly valued by its external stakeholders. |
| Keywords: | contingency reserve account; central bank Transparency Code; IMF mission; review mission; production assistance; Financial sector stability; Anti-money laundering and combating the financing of terrorism (AML/CFT); Monetary policy frameworks; International reserves; Inflation targeting; Africa; Global |
| Date: | 2024–12–02 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfscr:2024/320 |
| By: | Pérez Caldentey, Esteban |
| Abstract: | The United States dollar has increased its importance as an international medium of exchange, maintained its strength as a store of value and reinforced its role as the world’s unit of account. At the same time the capital market has become a major source of funding throughout the world including for developing countries. This context has major financial implications for the United States and for those countries, mainly developing countries, that are anchored to the dollar. These implications are brought to the fore by focusing on some of the main transmission mechanisms of international financial conditions to developing countries and by analyzing the components of the external balance sheets for the United States and for developing countries. The analysis is placed within the context of some of the changes that have occurred in the international financial system and in the composition of international financial flows in the aftermath of the Global Financial Crisis. |
| Date: | 2024–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ecr:col035:81187 |
| By: | Ghassan, Hassan Belkacem; Krichene, Noureddine |
| Abstract: | This paper theoretically investigates financial stability and assesses the impacts of central bank policies on the banking system. The Islamic finance system has empirically shown relative stability to the waves of the 2007-2008 international financial crisis and reduced volatility of global financial markets. By using the sharing rule and stochastic dominance, we prove that the investor’s expected payoff in the stochastic return model is superior and falls between the expected payoffs of the investor and financier in the fixed return model, respectively. Financial instability can stem from banking and financial markets deviations, asset bubbles, and money market fluctuations. Current economic and financial theories, rooted in the risk-shifting and interest rate smoothing models, have proven inadequate. New principles are needed to address financial instability and mitigate the devastating impacts of financial crises. Western attempts to address financial instability will prove unattainable as long as they depend on banking interest and credit multiplier systems. From the Islamic economics paradigm, financial stability hinges on two key conditions: the prohibition of interest rates and the institutionalization of contractual finance in accordance with Islamic Shariah. We propose that synchronized (or desynchronized) interactions between financial and business cycles positively (or negatively) affect both the banking system and the real economic domain, leading to stable (or unstable) states. Given the financial system’s prohibition of interest rates and the real economy’s adherence to Shariah jurisprudence, we theoretically envisage that the series of procyclical and countercyclical behaviors of financial variables would contribute to improve the financial stability since the financial cycle is too close to real cycle. |
| Keywords: | Financial stability, Synchronization, Financial cycle, Profit-Loss-Sharing finance, Shadow banking, Monetary policies, Policy reforms, Policy analysis. |
| JEL: | G2 |
| Date: | 2023–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122963 |
| By: | Kelly Shue; Richard Townsend; Chen Wang |
| Abstract: | We identify a common misconception that expected future changes in short-term interest rates predict corresponding future changes in long-term interest rates. People forecast similar shapes for the paths of short and long rates over the next four quarters. This is a mistake because long rates should already incorporate public information about future short rates and do not positively comove with expected changes in short rates. We hypothesize that people group short- and long-term interest rates into the coarse category of “interest rates, ” leading to overestimation of their comovement. We show that this categorical thinking persists even among professional forecasters and distorts the real behavior of borrowers and investors. Expectations of rising short rates drive households and firms to rush to lock in long-term debt before further increases in long rates, reducing the effectiveness of forward guidance in monetary policy. Investors sell long-term bonds because they anticipate future increases in long rates. The resulting increase in supply and decrease in demand for long-term debt cause long rates to overreact to expected changes in short rates, and can help explain the excess volatility puzzle in long rates. |
| Keywords: | categorical thinking, interest rates, expectations, subjective beliefs |
| JEL: | E43 G12 G41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11558 |