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on Monetary Economics |
| By: | Winnie Coleman; Dieter Nautz |
| Abstract: | This paper investigates the determinants of inflation target credibility (ITC) using a unique survey we designed to measure the credibility of the ECB’s inflation target. Containing over 200, 000 responses from German consumers collected between January 2019 and November 2024, our dataset enables us to estimate the effect of both positive and negative deviations of inflation from the 2% target on ITC. In contrast to the symmetry of the ECB’s inflation target, we find that ITC is asymmetric, i.e. consumers respond significantly and plausibly signed to target deviations only when inflation is above target. When inflation is below target, however, the credibility of the inflation target cannot be improved by raising the inflation rate to close the gap. |
| Keywords: | Credibility of Inflation Targets, Consumer Inflation Expectations, Expectation Formation |
| JEL: | D84 E31 E52 E58 |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0060 |
| By: | Christian de Boissieu |
| Abstract: | Faced with the rise of cryptocurrencies, central banks are responding by launching their digital currencies. The purpose of this Policy Brief is to provide an update on the preparation of central bank digital currencies (CBDs) by monetary authorities, a process that concerns all emerging, developing, and more advanced countries. It is also about analyzing the conditions and some of the consequences (for banks, for financial inclusion, for the conduct of monetary policy...) of such a financial innovation, systematically distinguishing between wholesale and retail CBDCs. |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb_19_23_0 |
| By: | Brühl, Volker |
| Abstract: | The introduction of central bank digital currencies (CBDCs) in general, and of a digital euro in particular, has attracted growing interest from academic research, central banks and political decision-makers. Most of the existing literature is focused on the impact of a digital euro on monetary policy issues, financial stability - especially the potentially enhanced risk of bank runs - and related questions concerning the design options of a digital euro. However, a digital euro could negatively affect the profitability of the European banking sector. Fees from payment transaction services could decline and refinancing costs could increase, as comparatively cheap financing from retail deposits would have to be replaced in part by more expensive financing instruments such as bonds or open market operations with the ECB. This paper deals with these aspects by estimating the potential impact of a digital euro in a simulation model based on current market data. The analysis demonstrates that the annual fee losses could be in the range of €2.1 billion to €4.2 billion. The associated refinancing need due to replacements of deposits by digital euro holdings could be in the range of €324 billion to €650 billion, translating into additional refinancing costs of around €6.5 billion to €19.5 billion p.a.. Therefore, a fair compensation model for banks and payment service providers is needed to avoid adverse consequences for the profitability and resilience of the European financial sector. The paper also discusses the general need for a retail digital euro in light of the expected benefits and risks as well as implications for design options to mitigate inherent risks. |
| JEL: | E42 E51 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:308806 |
| By: | Larrahondo, Cristhian; Chávez, Augusto; Giles Álvarez, Laura; Andrian, Leandro Gaston |
| Abstract: | This paper calculates the exchange rate pass through (ERPT) with time constant and time varying coefficients for Colombia between 2006 and 2023. It then estimates the ERPT during four specific depreciation events during the period of analysis: the 2008 financial crisis, the 2014-2016 fall in international fuel prices, the COVID-19 pandemic and the post-COVID recovery. A Bayesian Vector Autoregressive model with exogenous variables (BVARX) model with time constant and time varying coefficients is used for the exercise. The results for time constant coefficients show that a 1 percentage point (p.p.) increase in the depreciation of the exchange rate leads to an increase in imported, producer and consumer inflation of 0.42 p.p., 0.15p.p., and 0.01 p.p. respectively in the first month of the shock. Time varying coefficient results suggest that the nature and the size of the shock result in a heterogeneous ERPT and monetary policy response. Moreover, higher ERPT in imported inflation and producer inflation does not seem translate into higher ERPT in consumer inflation. Further studies could look at: First, the nature of the ERPT on different types of inflation and why this is heterogeneous in a time varying analysis. Second, how the combined effect of different factors in the Colombian economy led to different monetary policy responses in each of the four episodes under analysis. |
| Keywords: | Passthrough;exchange rate;depreciation;Prices;Inflation |
| JEL: | C32 C51 C52 E31 E44 E50 E52 F31 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13959 |
| By: | Alessia De Stefani; Rui Mano |
| Abstract: | We study the two-way relationship between fixed-rate mortgages (FRMs) and monetary policy in a panel of up to 35 countries over the last two decades. The dataset includes quarterly information on the composition of mortgage flows and stock by type of rate-fixation and monetary policy shocks cleaned of information effects. Using instrumental-variablel local projections, we find both path- and state-dependency in monetary transmission. Monetary policy shapes mortgage choice, increasing (decreasing) the share of FRMs during easing (tightening) cycles. Over time, this mechanism alters the composition of the outstanding mortgage stock which, in turn, affects the central bank's ability to stabilize the economy ex-post. A greater (lower) prevalence of FRMs weakens (strengthens) monetary policy transmission to key macro-variables. |
| Keywords: | Monetary Policy; Mortgage Markets |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/024 |
| By: | Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas |
| Abstract: | We study households' response to the redistributive effects of inflation combining bank data with an information experiment during historic inflation. Households are generally well-informed about inflation and concerned about its wealth impact; yet, while knowledge about inflation eroding nominal assets is widespread, most households are unaware of nominal-debt erosion. When informed about the latter, households view nominal debt more positively and increase estimates of their real net wealth. These changes causally affect actual consumption and hypothetical debt decisions. Our findings suggest real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation. |
| Keywords: | Inflation Beliefs, Information Treatment, Consumption, Monetary Policy |
| JEL: | D12 D14 D83 D84 E21 E31 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:308805 |
| By: | Willem THORBECKE |
| Abstract: | Inflation remained quiescent for several decades and then surged in 2021 and 2022. Inflation subsequently fell in 2023 and 2024. This paper investigates how the rise and fall of inflation after 2019 affected the U.S. stock market. To do this, it estimates a fully specified multi-factor model that measures the exposure of 54 assets to inflation, monetary policy, and other macroeconomic variables over the 1994 to 2019 period. The paper then uses the inflation betas to investigate how investors’ perceptions of inflation changed between 2020 and 2024. The results indicate that concerns about inflation roiled the stock market over this period. The Fed’s anti-inflationary policies whipsawed markets even more. These findings highlight the dangers that arise when monetary policy allows inflation to accelerate. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24087 |
| By: | Eichacker, Nina |
| Abstract: | In recent years, cryptocurrencies have become more salient as speculative assets, and as sources of instability for wider swathes of the public. This has occurred at a global level, with both domestic and international spillover effects for core and peripheral economies. At the same time, analysts of cryptocurrency and blockchains have identified some institutional benefits of these innovations, including the ability to process payments outside of traditional business hours and the potential to provide banking services for households and institutions in regions that lack access to a formal banking sector. This paper considers how central banks’ efforts to create formal digital currencies may stabilize financial and monetary conditions. By offering a formal digital currency, central banks have the potential to diminish payment related demand for cryptocurrencies, and decrease the exposure households have to the volatility of cryptocurrency asset markets as well as to fraud endemic to the cryptocurrency markets. Offering a formal digital currency may be seen as a monetary form of public finance; in this case, the public alternative is a country’s own currency that may be usable in the blockchain, rather than forcing households to search for the most reputable or stable cryptocurrency alternatives. As households and businesses adopt CBDCs, they may leave cryptocurrency markets; while this might induce a brief period of instability in those markets, it would likely leave more volatile crypto asset markets to those best suited to managing the risk and potential reward of betting on existing assets, and insulate the risk averse from that volatility. |
| Date: | 2025–01–15 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:8muc4 |
| By: | Schnorpfeil, Philip; Weber, Michael; Hackethal, Andreas |
| Abstract: | We study how investors respond to inflation combining a customized survey experiment with trading data at a time of historically high inflation. Investors' beliefs about the stock return-inflation relation are very heterogeneous in the cross section and on average too optimistic. Moreover, many investors appear unaware of inflation-hedging strategies despite being otherwise well-informed about inflation rates and asset returns. Consequently, whereas exogenous shifts in inflation expectations do not impact return expectations, information on past returns during periods of high inflation leads to negative updating about the perceived stock-return impact of inflation, which feeds into return expectations and subsequent actual trading behavior. |
| Keywords: | Belief Formation, Field Experiment, Inflation, Trading |
| JEL: | C93 D14 D83 D84 E22 E31 E44 G11 G51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:308804 |
| By: | Fengler, Matthias; Koeniger, Winfried; Minger, Stephan |
| 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:zbw:cfswop:308803 |
| By: | Kim, Cholwoo (Department of Economics, University of Warwick) |
| Abstract: | This paper examines Ramsey-type optimal monetary policy in an open economy with a two-country dynamic general equilibrium model where search and matching frictions exist in labor markets along with the limited participation in the financial markets. Monetary policy affects the decision of firms in labor markets because firms finance their wage bills with loans from domestic financial intermediaries in advance. There are two main results associated with optimal monetary policy. The long-term optimal nominal interest rate could be zero suggesting negative optimal inflation rate in the long run because the terms of trade effect on consumption could be weaken by search frictions. As a result of Ramsey optimal monetary policy, dynamics of business cycles in both countries show similar patterns in response to a productivity shock and, in turn, higher cross-country correlations of real variables. |
| Keywords: | labor market frictions ; search and matching ; working capital ; optimal monetary policy JEL Codes: E24 ; E52 ; F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1539 |
| By: | Hajdini, Ina; Knotek, Edward S; Leer, John; Pedemonte, Mathieu; Rich, Robert; Schoenle, Raphael |
| Abstract: | Using a large, nationally representative survey of US consumers, we estimate a causal 20 percent pass-through from inflation expectations to income growth expectations for the average consumer, with considerable heterogeneity in pass-through associated with sociodemographic factors. The results also indicate that higher inflation expectations cause an increase in consumers' likelihood to search for higher-paying jobs but do not change the likelihood of asking for a raise, suggesting that consumers recognize significant wage rigidity with their current employer. In a calibrated search-and-matching model, we find that demand and supply shocks combined with incomplete pass-through produce a strong negative relationship between expected inflation and expected utility. Taken together, the survey results and model analysis provide a labor market account of why people dislike inflation. |
| Keywords: | Inflation;Wage-price spiral;Expectations;randomized controlled trial |
| JEL: | E31 E24 E71 C83 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13937 |
| By: | Martijn Boermans; Tomás Carrera de Souza; Robert Vermeulen |
| Abstract: | In this study, we analyze the impact of the European Central Bank’s (ECB) sovereign bond purchases on bond demand among euro area investors from 2015 to 2022. By employing a novel demand setup, using ownership shares of individual bonds, we separately estimate investor reactions to (i) ECB bond purchases and (ii) new bond issuances. Utilizing bond level data on securities holdings of euro area investors and the ECB, we show that insurance companies and pension funds act as preferred habitat investors and are reluctant to sell the bonds the ECB is buying. Conversely, non-euro area investors from the private sector primarily serve as counterparties for ECB purchases. Our findings indicate significant differences across bond maturities and credit ratings, but minimal differences across the different stages of the quantitative easing (QE) implementation periods and between domestic and non-domestic euro area bonds. |
| Keywords: | quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics; bond demand |
| JEL: | E58 F42 G11 G15 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:826 |
| By: | Kiarash Firouzi; Mohammad Jelodari Mamaghani |
| Abstract: | We suggest employing log-ergodic processes to simulate the velocity of money in an ergodic manner. Our approach sheds light on economic behavior, policy implications, and financial dynamics by maintaining long-term stability. By bridging theory and practice, the partially ergodic model helps analysts and policymakers comprehend and forecast velocity of money. The empirical analysis, using historical U.S. GDP and money supply data, demonstrates the model's effectiveness in capturing the long-term stability of the velocity of money. Key findings indicate that the log-ergodic model offers superior predictive power compared to traditional models, making it a valuable tool for policymakers to control economic factors in vital situations. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.08657 |
| By: | Abolfazl Rezghi |
| Abstract: | How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data suggesting that this interaction likely plays a critical role in understanding macroeconomic dynamics. In a simple model, I demonstrate that financially constrained firms tend to be more attentive to economic conditions, consistent with my empirical findings. Embedding this mechanism into a DSGE model, I show that the aggregate investment response to a monetary policy shock depends on this interaction. The model further predicts that credit-constrained firms reduce their investment after an expansionary shock due to tighter borrowing constraints and higher production costs, a prediction I empirically confirm. |
| Keywords: | Monetary policy; Rational inattention; Financial frictions; Investment |
| Date: | 2025–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/025 |
| By: | Sebastian Dragoe; Camelia Oprean-Stan |
| Abstract: | The monetary transmission channel is disrupted by many factors, especially securitization and liquidity traps. In our study we try to estimate the effect of securitization on the interest elasticity and to identify if a liquidity trap occurred during 1954Q3-2019Q3. The yield curve inversion mechanism shows us that economic cycles are very sensitive to decreasing profitability of banks. However there is no evidence that restoring their profits will ensure a strong recovery. In this regard, we research the low effect of Quantitative Easing (QE) upon economic growth and analyze whether securitization and liquidity traps posed challenges to QE or is it the mainstream theory flawed. In this regard we will examine the main weaknesses of QE, respectively the speculative behavior induced by artificial low rates and its unequal distribution. We propose a new form of QE that will relief households and not reward banks for their risky behavior before recession. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.06575 |
| By: | Pradhan, Manoj; Goodhart, C. A. E. |
| Abstract: | Ageing societies are likely to face rapidly changing structural macroeconomic trends, with fiscal balances likely to worsen over time. It is widely acknowledged by forecasters and financial markets that debt-to-GDP ratios are tending to rise over t ime, but there are signs that the size and persistence of future deficits and debts may be underestimated. This underestimation comes from three sources: i) incorrect consideration of the medical complications of older cohorts; ii) a demography-driven rise in inflation, real interest rates and interest expenses; and iii) misalignment of f iscal and monetary policy incentives in an inflationary environment. We argue that a new era is starting, when we will have to face complicated relations between demography, and fiscal and monetary policy. |
| JEL: | E20 E30 E40 E50 I11 J11 J14 N10 N30 P10 |
| Date: | 2024–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126585 |
| By: | Olaniran, Abeeb; Akanni, Lateef; Salisu, Afees |
| Abstract: | We explore the role of fear associated with migration in predicting exchange rate volatility of Germany, France, and the United Kingdom within the context of the generalized autoregressive conditional heteroscedastic (GARCH) mixed-data-sampling (MIDAS) framework using United States dollar (USD) as the reference currency. While we adopt the quarterly Migration Fear Index and daily exchange rate of Euro (for France and Germany) and GBP (for the UK) to USD for the nexus between migration anxiety and exchange rate volatility, we equally augment our model with Migration Policy Uncertainty (MPU) to examine the joint predictability of the two migration fears proxies on exchange rate volatility. We conduct an empirical analysis that covers the full sample period which is further partitioned into pre- and post-GFC periods to see if the nexus is sensitive to crises periods. We find evidence of migration fears predicting exchange rate volatility of the G-3 country considered, given the statistical significance of our model’s slope coefficient. Although the influence of migration fears on the strengths of the euro and pounds relative to the USD differ, as migration fear causes the former to depreciate and the latter to appreciate, both currencies exhibit high volatility persistence during the period under scrutiny. Our findings have implications for policy-makers on whose shoulders the responsibility of exchange rate management falls. |
| Keywords: | Exchange rate, Migration, Fear, GARCH-MIDAS |
| JEL: | J6 |
| Date: | 2024–11–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123196 |
| By: | John Echeverri-Gent (University of Virginia); Renuka Sane (TrustBridge Rule of Law Foundation) |
| Abstract: | This essay shows how the sectoral political network in India's banking sector has structured its development from the era of dirigisme beginning under the Nehru government in 1947 to the more liberalized contemporary period starting in 1991. We show that political bargains, or institutionalized agreements among actors in a sectoral political network, are mechanisms through which the legacies of earlier eras shape developments in subsequent periods. Our study of India's banking sector examines two varieties of political bargains. Politicians created an entrenched political bargain during the dirigiste era by nationalizing India's banks to assert control over bank governance. Entrenched bargains limit subsequent reforms to policies that address their negative consequences but not the underlying causes emanating from the interests of powerful actors. Principal-agent relations are the second type of political bargain. Politicians struck this evolving bargain by establishing an asymmetric relationship between the government and India's central bank, the Reserve Bank of India (RBI). We analyze how these entrenched and principal-agent bargains have shaped the development of Indian banking by examining their impact on the banking sector's recurring non-performing asset problem and its dynamic payment system. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bjd:wpaper:8 |
| By: | Heng-fu Zou |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:735 |
| By: | Maxted, Peter; Laibson, David; Moll, Ben |
| Abstract: | We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of monetary policy, but at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity injections to high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates. |
| JEL: | E21 E60 |
| Date: | 2025–02–28 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123935 |
| By: | Alexander Rom |
| Abstract: | This paper investigates the impact of banking competition on interest rates for household consumption loans in the Euro Area from 2014 to 2020. Utilizing a panel data regression approach, we analyze how various factors, including local banking competition, influence the interest rates set by banks across 13 Euro-area countries. Our key independent variable, local banking competition, is measured by the number of commercial bank branches per 100, 000 adults. Control variables include the ECB interest rate, euro exchange rate, real GDP growth rate, inflation rate, unemployment rate, bank business volumes, and country risk. We address potential endogeneity and heterogeneity biases and employ both Fixed Effects and Hausman-Taylor models to ensure robust results. Our findings indicate that higher local banking competition is associated with a slight increase in interest rates for household loans. Additionally, factors such as ECB interest rate, country risk, and euro appreciation significantly affect interest rates. The results offer insights into how competitive dynamics in the banking sector influence borrowing costs for households, providing valuable implications for policymakers and financial institutions in the Euro Area. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.17723 |
| By: | Mr. Bas B. Bakker |
| Abstract: | The economic literature has long attributed non-zero expected excess returns in currency markets to time-varying risk premiums demanded by risk-averse investors. This paper, building on Bacchetta and van Wincoop's (2021) portfolio balance framework, shows that such returns can also arise when investors are risk-neutral but face portfolio adjustment costs. Models with adjustment costs but no risk aversion predict a negative correlation between exchange rate levels and expected excess returns, while models with risk aversion but no adjustment costs predict a positive one. Using data from nine inflation targeting economies with floating exchange rates (2000–2024), we find strong empirical support for the adjustment costs framework. The negative correlation persists even during periods of low market stress, further evidence that portfolio adjustment costs, not risk premium shocks, drive the link between exchange rates and excess returns. Our model predicts that one-year expected excess returns should have predictive power for multi-year returns, with longer-term expected returns as increasing multiples of short-term expectations, and the predictive power strengthening with the horizon. We confirm these findings empirically. We also examine scenarios combining risk aversion and adjustment costs, showing that sufficiently high adjustment costs are essential to generate the observed negative relationship.These findings provide a simpler, testable alternative to literature relying on assumptions about unobservable factors like time-varying risk premiums, intermediary constraints, or noise trader activity. |
| Keywords: | Exchange Rates; Portfolio Balance; Uncovered Interest Parity; Portfolio Adjustment Costs; Risk Premium; Currency Markets; Expected Returns |
| Date: | 2025–01–17 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/011 |
| By: | Peter Albrecht; Evžen Kočenda; Evžen Kocenda |
| Abstract: | Using novel methods, we comprehensively analyze volatility connectedness among most traded currencies using high-frequency data from 2009 to 2023. Our study presents the first empirical evidence of a statistically significant association between increases in connectedness and endogenously selected impactful events for most traded currencies. Moreover, we uncover the previously unexplored relationship between twenty-three events affecting global forex connectedness up to one business month ahead and further analyze pre-event connectedness changes. We also distinguish between the transitory and permanent impacts of events on connectedness and confirm the association of four events with a permanent shift in connectedness; two events are associated with the EU and US debt crises. We compute the portfolio weights and hedge ratios for portfolio optimization and uncover the Swiss franc and Japanese yen as the most suitable tools for managing currency risk. The effects of intra-day currency depreciation versus appreciation against the U.S. dollar differ significantly, but the extent of asymmetries declines over time. |
| Keywords: | volatility connectedness, global currencies, bootstrap-after-bootstrap procedure, transitory and permanent effects, debt crisis, portfolio composition and hedging, uncertainty |
| JEL: | C58 F31 F65 G01 G15 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11606 |
| By: | Garrod, Luke; Li, Ruochen; Russo, Antonio; Wilson, Chris M |
| Abstract: | There is limited theoretical understanding of cost pass-through within markets where prices are dispersed. Under a general demand function, we analyse the effects of cost changes in a seminal model of price dispersion, where some consumers are captive to particular sellers while others are not (Varian, 1980). To study pass-through in this mixed-strategy context, we employ a novel approach that links well to the pass-through literature in pure-strategy settings. Following an industry-wide cost increase, we show how the magnitudes of price rises faced by different consumer types, as well as the wider effects on price dispersion, depend upon whether demand is log-concave or log-convex. Furthermore, we examine whether the burden of the cost increase is expected to fall more heavily on captive or non-captive consumers. Finally, we show how our results vary with the level of competition and analyse the relationship between pass-through and demand shocks under price dispersion. |
| Keywords: | Cost pass-through, price dispersion, demand curvature, competition, demand shocks |
| JEL: | D43 D83 L13 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123285 |
| By: | Michal Kobielarz |
| Abstract: | The Eurozone bailouts consisted of credit lines with favorable lending conditions, equivalent to countries receiving implicit fiscal transfers. They are often interpreted as meant to prevent a default in the Eurozone or resolve the crisis. Contrary to this nar rative, Greece defaulted on its debt and went through a deep and prolonged recession, despite receiving fiscal assistance. This paper analyzes country bailouts in a monetary union within a framework where sovereign default and exit from the union are two separate decisions. The studied bailouts prevent an exit and, thus, do not exclude subsequent defaults. The model replicates the experience of Greece and captures the coexistence of bailouts, defaults, and recession. It also sheds new light on the moral hazard discussion of bailouts by showing no significant effects from exit-driven bailouts. |
| Date: | 2023–03 |
| URL: | https://d.repec.org/n?u=RePEc:ete:ceswps:746842 |