|
on Monetary Economics |
| By: | Ursel Baumann; Annalisa Ferrando; Dmitris Georgarakos; Yuriy Gorodnichenko; Timo Reinelt |
| Abstract: | Does a successful disinflation contribute to the anchoring of inflation expectations? We provide novel survey evidence on the dynamics of euro area firms’ inflation expectations during the disinflation episode since 2022. We show that firms’ short-term inflation expectations declined steadily towards the inflation target as the disinflation progressed. However, we also document a thick tail in longer-term inflation expectations, substantial disagreement about the inflation outlook, and an increased sensitivity of longer-term inflation expectations to short-term inflation expectations. These findings suggest that it may take more time to bring inflation expectations fully in line with central bank objectives. |
| Keywords: | inflation expectations; firms; surveys; anchoring |
| JEL: | E31 E52 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99484 |
| By: | Dąbrowski, Marek A.; Janus, Jakub; Mucha, Krystian |
| Abstract: | In this paper, we propose a novel approach to classifying inflation-targeting (IT) economies based on fractionally integrated processes. Motivated by the rising prevalence and diversity of IT strategies, we leverage variation in the persistence of inflation rate series to identify four de facto IT strategies, or ‘shades’ of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average IT, strict IT, flexible IT, and uncommitted IT categories. This framework sheds light on the differences between declarative and actual monetary policy strategies across 36 advanced and emerging market economies. Notably, we demonstrate that while most economies fall into the flexible IT category, extreme cases, including the uncommitted IT category, occur with marked frequency. Furthermore, we link our IT classification to institutional features of national monetary frameworks using ordinal probit models. The results suggest that differences across IT categories are related to variations in the maturity and stability of IT frameworks, with less pronounced connections to central bank independence and transparency. |
| Keywords: | inflation targeting, monetary policy strategy, central banking, inflation persistence, fractional integration |
| JEL: | C22 E31 E52 E58 |
| Date: | 2025–01–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123455 |
| By: | Escribano Saez, Álvaro; Rodríguez, Juan Andrés; Arranz Cuesta, Miguel Angel |
| Abstract: | Since the influential works of Friedman and Schwartz (1963, 1982) and Hendry and Ericsson (1991), on the monetary history of the United States of America and the United Kingdom from 1876 to 1975, there has been a great concern in the literature about the instability of money demand functions. This concern together with the results of the New Keynesian´s models (Woodford, 2003), produced the abandon of money as an instrument of monetary policy. Recently, using M1 as the measure of money, Benati, Lucas, Nicolini and Weber (2021) have shown, for a shorter and recent period of time, that there is a stable long-run money demand for a long list of countries. However, to date there are no studies showing that stable long-run and short-run money demand equations exist since the XIX century and how it can be used to inform monetary policy based on the quantitative theory of money. By means of nonlinear cointegration and nonlinear error-correction models, this paper presents evidence of UK stable long-run and short-run money demands of real broad monetary balances from 1874 to 2023. These equations provide with key elements to identify periods of excess money demand generating periods of 6.5% excess inflation, over the historical 2.2% average. Stable Money demand estimates provide useful policy rules and additional cross-check instruments for monetary policy to reach inflation targets. Furthermore, they help identifying spurious transmission channels of monetary policy, when theoretical models impose invalid common factor restrictions. |
| Keywords: | Money demand stability; Nonlinear cointegration; Nonlinear equilibrium correction; Nonlinear error correction; Opportunity cost of holding money; Role of money in monetary policy |
| JEL: | E41 E43 E47 E51 |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:45845 |
| By: | Nikolaishvili, Giorgi (Wake Forest University, Economics Department) |
| Abstract: | This paper examines the dynamic macroeconomic effects of monetary transmission through community and noncommunity bank lending in the United States. I find that while both types of banks amplify the impact of monetary policy shocks on output, community banks exhibit a more delayed and persistent amplificatory influence than their noncommunity counterparts. These results suggest that continued decline in community banks' market share may dampen the efficacy of monetary policy over longer horizons. Moreover, the adverse real effects of monetary tightening are likely to be longer-lasting for small business borrowers who depend on community banks for funding. |
| Keywords: | Community banks; FAVAR; lending channel; monetary policy; relationship lending |
| JEL: | E51 E52 G21 |
| Date: | 2025–01–29 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0123 |
| By: | Nicolas Groshenny; Naveed Javed |
| Abstract: | We highlight the importance of jointly identifying domestic and foreign monetary shocks in SVAR-based evaluations of Dornbusch exchange rate overshooting and uncovered interest parity (UIP) in small open economies (SOEs). We estimate SVAR models for six developed SOEs to understand the effects of SOE and US monetary policy shocks on bilateral SOE/US exchange rates. Our novel identification strategy features block exogeneity combined with sign restrictions imposed on the coefficients of the SOE and US monetary policy rules. Crucially, the response of the exchange rate to monetary shocks is not restricted, and the SOE policy rate and the exchange rate are allowed to interact instantaneously. Exchange rate dynamics triggered by monetary shocks are found to be broadly in line with Dornbusch overshooting and UIP. We demonstrate that the few cases in which US monetary shocks trigger delayed overshooting in specific samples may not be inconsistent with UIP, but rather an artifact of SOE endogenous monetary policy responses to the US policy rate. |
| Keywords: | structural vector autoregressions, small open economies, monetary policy shocks, exchange rates, delayed overshooting, uncovered interest rate parity, spillovers of US monetary policy |
| JEL: | C32 E52 F31 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-06 |
| By: | Martin Brown (Swiss National Bank - Study Center Gerzensee; University of St. Gallen); Daniel Hoechle (FHNW School of Business - Institute for Finance; University of Basel - Department of Finance); Alejandra Perez; Markus Schmid (University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)) |
| Abstract: | We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock. |
| Keywords: | Household finance, Monetary policy, Financial stability, Exchange rates, Interest rates |
| JEL: | E41 E52 E58 F31 G11 G21 G51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp24108 |
| By: | Pongpitch Amatyakul; Fiorella De Fiore; Marco Jacopo Lombardi; Benoit Mojon; Daniel Rees |
| Abstract: | Much of the inflation increase in 2021 and 2022 was due to sectoral shocks on which monetary policy has close to no traction. What monetary policy can do, or fail to do, is to ensure that the effects of these shocks dissipate swiftly. We argue that, absent the somewhat delayed but vigorous increases in policy interest rates since 2022, inflation would have subsided more slowly in 2023. Central banks' most important contribution to inflation is to demonstrate commitment to achieving their targets and ensuring that low inflation remains the norm for price- and wage-setting decisions. |
| Date: | 2023–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:82 |
| By: | Islomjon Inkhomiddinov (The Central Bank of Uzbekistan) |
| Abstract: | The natural rate of interest, often interpreted as the equilibrium real interest rate, serves as a critical benchmark for evaluating the stance of monetary policy. This paper investigates the natural rate of interest in Uzbekistan using three econometric approaches: the HLW-type model (1), a modified HLW-type model, and the Central Bank of Uzbekistan's Quarterly Projection Model (QPM), semi-structural framework. The semi-structural HLW-type and modified HLW-type models estimate the real interest rate using core inflation, while the QPM relies on headline inflation. The results indicate that the natural rate was relatively stable across the models. The semi-structural HLW-type and modified HLW-type models produced average natural rate estimates of 4.5 percent and 4.1 percent, respectively, while the QPM estimated a slightly lower average rate of 3.4 percent. On average, the natural rate across all models was approximately 4.0 percent. In contrast, the real interest rate exhibited significant variability, reflecting periods of accommodative monetary policy before the adoption of the inflation targeting regime and restrictive policies during the IT regime’s active implementation. These findings emphasize the critical role of accurately estimating the natural rate to guide monetary policy and ensure macroeconomic stability effectively. (1) Holston-Laubach-Williams (2016) |
| Keywords: | Natural level of Real Interest Rate; Core Inflation; Kalman Filter; Bayesian Estimation |
| JEL: | E42 E43 E52 E59 |
| Date: | 2025–02–03 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp02-2025 |
| By: | Laura Coroneo |
| Abstract: | This paper discusses three key themes in forecasting for monetary policy highlighted in the Bernanke (2024) review: the challenges in economic forecasting, the conditional nature of central bank forecasts, and the importance of forecast evaluation. In addition, a formal evaluation of the Bank of England's inflation forecasts indicates that, despite the large forecast errors in recent years, they were still accurate relative to common benchmarks. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.07386 |
| By: | Yucheng Yang (University of Zurich; Swiss Finance Institute) |
| Abstract: | Inflation has heterogeneous impacts on households, which then affects optimal monetary policy design. I study optimal monetary policy rules in a quantitative heterogeneous agent New Keynesian (HANK) model where inflation has redistributive effects on households through their different (1) consumption baskets, (2) nominal wealth positions, and (3) earnings elasticities to business cycles. I parameterize the model based on the empirical analysis of these channels using the most recent data. Unlike in representative agent models, a utilitarian central bank should adopt an asymmetric monetary policy rule that is accommodative towards inflation and aggressive towards deflation. Specifically, by accommodating stronger demand and higher inflation, the central bank benefits low-income and low-wealth households through nominal debt devaluation and higher earnings growth. |
| Keywords: | Redistributive Inflation, Optimal Monetary Policy, Heterogeneous Agent, Expenditure Channel, Revaluation Channel, Earnings Channel |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2507 |
| By: | Hassnae HAMMOU OU ALI (Bank Al-Maghrib) |
| Abstract: | This study investigates the role of housing prices in the Moroccan economy and their response to monetary policy shocks. Using a Structural Vector Autoregression (SVAR) model, we explore the transmission mechanisms of monetary policy through various channels, including interest rates, credit availability, and consumer confidence. The analysis uses a comprehensive dataset spanning the period from 2006 to 2024, focusing on macroeconomic indicators, monetary policy instruments, and the Real Estate Asset Price Index (REPI). Empirical findings reveal that contractionary monetary policy leads to a delayed decline in housing prices, which may reflect structural rigidities in Morocco's real estate market. This study contributes to understanding the interplay between monetary policy and asset markets in emerging economies, providing insights for policymakers seeking to balance growth and stability objectives. |
| Keywords: | Real estate prices; Monetary policy; Interest rate; transmission channels |
| JEL: | E52 E40 R32 C32 |
| Date: | 2025–02–03 |
| URL: | https://d.repec.org/n?u=RePEc:gii:giihei:heidwp03-2025 |
| By: | Lucas Ordóñez (Universidad de Buenos Aires - IIEP) |
| Abstract: | This article investigate show domestic and external supply shocks influence inflation in Argentina using the Local Projections methodology. I 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 findings provide new evidence on how supply shocks influence inflationary dynamics in developing countries and small open economies. |
| Keywords: | Local Projections, Supply shocks, Inflation, Exchange rate pass-through. |
| JEL: | C22 E31 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:351 |
| By: | Pietro Patelli; Jimmy Shek; Ilhyock Shim |
| Abstract: | Currency appreciation in emerging market economies (EMEs) has gone hand in hand with greater risk-taking, higher capital flows and more accommodative financial conditions, against the backdrop of the increasing share of foreign investment in local currency assets in EMEs' external financing since 2007. The historically positive correlation between US dollar strength against EME currencies and EME sovereign bond spreads over US Treasuries up to 2021 continued in Latin America but reversed in emerging Asia in 2022–23. Such a divergence reflects a range of policy responses by EME central banks in the face of the unprecedented combination of shocks in 2022. In particular, central banks in emerging Asia intervened more actively in FX markets and relied less on monetary policy tightening than those in Latin America. |
| Date: | 2023–11–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:79 |
| By: | Jean-Sébastien Fontaine; Ingomar Krohn; James Kyeong; Rishi Vala; Konrad Zmitrowicz |
| Abstract: | Changes in domestic interest rates affect the value of the Canadian dollar less than changes in the risk premium do. These variations often occur when a broad shift in risk sentiment occurs in global markets. Ultimately, the value of the currency reflects long-term, slow-moving features of the economies. |
| Keywords: | Asset pricing; Econometric and statistical methods; Exchange rates; Interest rates; Monetary policy |
| JEL: | E4 E43 F3 F31 G1 G12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-2 |
| By: | Policy Infrastructure Division, Monetary Affairs Department (Bank of Japan) |
| Abstract: | The Bank of Japan deems it important to gain a broad understanding of its thinking on central bank finances and monetary policy conduct, and has thus been releasing various communications with regard to how monetary policy conduct affects central bank finances. This paper restates this mechanism and presents simulations for the Bank's future profits and capital by using certain assumptions based on interviews with market participants, taking into account recent changes in monetary policy conduct, including the change of its monetary policy framework and policy interest rate hikes. The results show that, in a scenario in which interest rates are priced in by the market rate, the negative impact on the Bank's finances is limited. Under more severe assumptions, on the other hand, a certain level of financial risk was indicated. The Bank of Japan will continue to ensure its financial soundness in light of the simulation results. |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojrev:rev25e01 |
| By: | Fernando Avalos; Ryan Niladri Banerjee; Matthias Burgert; Boris Hofmann; Cristina Manea; Matthias Rottner |
| Abstract: | Major price increases in energy and food were key drivers of the 2021–22 inflation surge. These large supply-driven commodity price increases, occurring when inflation was already elevated in many countries, increased the risk of moving to a high-inflation regime. Central banks have tended to look through commodity price fluctuations due to their often transitory nature and the implied trade-off between inflation and output stabilisation in the case of supply-driven price shocks. Growing geopolitical disruptions, climate change and a bumpy transition to green energy threaten to make commodity price shifts larger and more frequent going forward. This potentially raises greater risks for price stability, thereby limiting the scope for monetary policy to look through them. |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:96 |
| By: | Daniel E. Sichel (Wellesley College); Christopher Mackie (National Academies of Science, Engineering, and Medicine) |
| Abstract: | The consumer price index (CPI) plays a critical role in measuring inflation. Recent inflation trends, however, have raised questions about its accuracy. This paper evaluates several of these critiques, including that the CPI fails to keep up with rapid changes in consumer expenditure patterns; that its methodology is out of date; that the CPI does not correctly track the cost of housing; and that it does not keep up with rapidly changing products being purchased in the market. The paper also discusses the concern that, while year-over-year inflation has slowed dramatically since reaching its peak in June 2022, consumers still face considerably higher prices than before the pandemic. Drawing on insights from the 2022 report,  Modernizing the Consumer Price Index for the 21st Century,  of the National Academies of Sciences, Engineering, and Medicine, the authors argue that the basic CPI methodology is sound and that it provides a robust and defensible measure of inflation. However, as consumer markets and data environments evolve, updates to CPI methodologies are necessary. The paper underscores the need for continued investment in economic statistics to ensure the CPI remains a reliable gauge, benefiting policymakers, businesses, and consumers. |
| Keywords: | Consumer Price Index, CPI, inflation, prices, price measurement |
| JEL: | E30 E31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-3 |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics); Asher Rose (Peterson Institute for International Economics) |
| Abstract: | The speed of both the rise and fall of US inflation in 2021-23 took many economists by surprise. This paper shows that the rise of COVID era inflation reflects three independent shocks: a plethora of pandemic-related shifts in demand patterns and supply disruptions; the largest commodity price surge in 40 years caused by the Ukraine war; and strong monetary and fiscal responses to the pandemic, which kept labor markets tight. The authors document the transmission of these shocks through the main components of private consumption: durable goods, nondurable goods, and services. The rapid fall of inflation reflects the credibility of the Federal Reserve's commitment to low inflation, something that was not apparent during the inflationary shocks of the 1970s but that was important during the Korean War inflation of 1950-51. Another similarity with the Korean War episode is the temporary surge in demand for durable goods. |
| Keywords: | durable goods, nondurable goods, services, pandemic inflation |
| JEL: | E30 E31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-1 |
| By: | Mahya Karbalaii |
| Abstract: | With the growing popularity and rising value of cryptocurrencies, skepticism surrounding this groundbreaking innovation persists. Many financial and business experts argue that the value created in the cryptocurrency realm resembles the generation of currency from thin air. However, a historical analysis of the fundamental concepts that have shaped money reveals striking parallels with past transformations in human society. This study extends these historical insights to the present era, demonstrating how enduring monetary concepts are once again redefining our understanding of money and reshaping its form. Additionally, we offer novel interpretations of cryptocurrency by linking the intrinsic nature of money, the communities it fosters, and the cryptographic technologies that have provided the infrastructure for this transformative shift. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.10443 |
| By: | Robert-Paul Berben; Rajni Rasiawan; Jasper de Winter |
| Abstract: | This paper examines the performance of machine learning models in forecasting Dutch inflation over the period 2010 to 2023, leveraging a large dataset and a range of machine learning techniques. The findings indicate that certain machine learning models outperform simple benchmarks, particularly in forecasting core inflation and services inflation. However, these models face challenges in consistently outperforming the primary inflation forecast of De Nederlandsche Bank for headline inflation, though they show promise in improving the forecast for non-energy industrial goods inflation. Models employing path averages rather than direct forecasting achieve greater accuracy, while the inclusion of non-linearities, factors, or targeted predictors provides minimal or no improvement in forecasting performance. Overall, Ridge regression has the best forecasting performance in our study. |
| Keywords: | Inflation forecasting; Big data; Machine learning; Random Forest; Ridge regression |
| JEL: | C22 C53 C55 E17 E31 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:828 |
| By: | Rodney Garratt; Hyun Song Shin |
| Abstract: | Private tokenised monies that circulate as bearer instruments, like stablecoins, may entail departures in their relative exchange values away from par in violation of the "singleness of money". In contrast, tokenised deposits that do not circulate as bearer instruments but rather settle in central bank money are more conducive to singleness. Tokenised deposits may enable expanded functionality by building on the capacity of programmable ledgers to introduce contingent execution and composability of transactions. |
| Date: | 2023–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:73 |
| By: | Fernando Avalos; Deniz Igan; Cristina Manea; Richhild Moessner |
| Abstract: | During the current monetary policy tightening episode, financial conditions co-moved closely with policy rates, especially in the initial stages but with some differentiation across countries. For advanced economies, the tightening of financial conditions was stronger this time than in the past, while its full impact on real activity appears to be taking longer than usual. Financial conditions may continue tightening long after central banks stop raising policy rates, with possible implications for financial stability. |
| Date: | 2023–11–23 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:80 |
| By: | Douglas Kiarelly Godoy de Araujo; Sebastian Doerr; Leonardo Gambacorta; Bruno Tissot |
| Abstract: | Central banks have been early adopters of machine learning techniques for statistics, macro analysis, payment systems oversight and supervision, with considerable success. Artificial intelligence brings many opportunities in support of central bank mandates, but also challenges – some general and others specific to central banks. Central bank collaboration, for instance through knowledge-sharing and pooling of expertise, holds great promise in keeping central banks at the vanguard of developments in artificial intelligence. |
| Date: | 2024–01–23 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:84 |
| By: | Olamide Harrison; Vina Nguyen |
| Abstract: | This note provides a conceptual framework to organize discussions of the appropriateness of the monetary policy stance and presents tools that country teams can employ to measure, report, and evaluate the stance of monetary policy. The note focuses exclusively on aggregate demand considerations—on whether the stance is tight or loose—without considering whether such a stance is appropriate for achieving policy objectives. The latter requires considering aggregate supply and Phillips Curve trade-offs. The note does not cover other macroeconomic policies, such as macroprudential or fiscal measures, which could also have a considerable impact on the effectiveness of monetary policy. |
| Keywords: | Monetary policy stance; natural interest rate; neutral interest rate; yield curve |
| Date: | 2025–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfhtn:2025/003 |
| By: | Matthias R. Fengler (University of St. Gallen - SEPS: Economics and Political Sciences; Swiss Finance Institute); Winfried Koeniger (University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics; Swiss Finance Institute); Stephan Minger (University of St. Gallen) |
| 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: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2503 |
| By: | Ryan Niladri Banerjee; Denis Gorea; Deniz Igan; Gabor Pinter |
| Abstract: | Inflation receded from recent peaks, but housing cost growth remains elevated. This strength reflects pandemic-induced changes in housing supply and demand which further aggravated existing pressures from long-standing housing shortages and demographic trends. Strong growth of the housing component of inflation can be a concern for monetary policy because it tends to be more persistent than components related to other services and goods, reflecting lags in measurement and infrequent changes in rents. In the short term, rents and housing costs may rise after a monetary policy tightening if landlords pass higher financing costs to tenants, property developers reduce new supply or more households opt to rent rather than buy. |
| Date: | 2024–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:89 |
| By: | Miguel Ampudia; Fiorella De Fiore; Enisse Kharroubi; Cristina Manea |
| Abstract: | Monetary policy is tightening globally while private debt levels stand at historical highs. When private debt to GDP is high, aggregate demand may be more sensitive to interest rate hikes. Yet, after a decade of low rates, the maturity of private debt has generally lengthened, the prevalence of variable rates has fallen, and household net worth has increased. This should counteract the higher demand sensitivity stemming from elevated debt. Both the level and composition of private debt are important factors, although not the only ones, for the calibration of monetary policy in the current economic environment. |
| Date: | 2023–02–24 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:70 |
| By: | Ana Aguilar; Carlos Cantú; Rafael Guerra |
| Abstract: | Since 2021, monetary policy has tightened globally in response to the surge in inflation. Fiscal policies have generally remained expansionary, notably as governments put in place subsidies and transfers to insulate households, first from the pandemic and then from higher energy and food prices. Such fiscal support increases governments' funding needs at a time when tighter monetary policies raise the cost of servicing debts. Financial markets may reassess fiscal sustainability, request higher risk premia or reduce their holdings of sovereign bonds. Although such effects could affect both advanced and emerging market economies, the latter have historically been most vulnerable to a rise in the cost of international financing and a weaker exchange rate. |
| Date: | 2023–03–29 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:71 |
| By: | Sarah Bell; Michael Chui; Tamara Gomes; Paul Moser-Boehm; Albert Pierres Tejada |
| Abstract: | Rising interest rates are reducing profits or even leading to losses at some central banks, especially those that purchased domestic currency assets for macroeconomic and financial stability objectives. Losses and negative equity do not directly affect the ability of central banks to operate effectively. In normal times and in crises, central banks should be judged on whether they fulfil their mandates. Central banks can underscore their continued ability to achieve policy objectives by clearly explaining the reasons for losses and highlighting the overall benefits of their policy measures. |
| Date: | 2023–02–07 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:68 |
| By: | Kento Tango; Junichi Kikuchi; Yoshiyuki Nakazono |
| Abstract: | This study employs randomized control trial methods to explore how information selection and processing contribute to the heterogeneity in consumers’ inflation expectations. We find that, first, respondents vary in their preferences for inflation forecasts from established institutions. Second, providing credible information about future inflation helps stabilize expectations, with follow-up surveys indicating that this effect persists for at least one month. Third, respondents revise their expectations more extensively when provided with additional information. Fourth, respondents incorporate information more fully when they can choose the information they view. Individuals with exposure to interest rate risk are more likely to focus on relevant signals. |
| Date: | 2025–01–23 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:62 |
| By: | Santiago Alvarez-Blaser; Raphael Auer; Sarah M. Lein; Andrei A. Levchenko |
| Abstract: | This paper uses barcode-level price data for 16 advanced and emerging market countries over the period 2005–2022 to investigate the role of individual firms and product categories in aggregate inflation. We decompose inflation into the component due to macroeconomic shocks and the granular residuals capturing the impact of individual firms and product categories, respectively. In advanced economies, the firm granular residual accounts for 41% of the variance of overall inflation, while the product category granular residual accounts for another 15%. Most of the variation in the firm granular residual is due to idiosyncratic shocks rather than to higher sensitivity of larger firms to common shocks. In the cross-section of countries, granular residuals are less important in economies with less concentrated market shares and higher inflation, such as emerging markets. Lastly, granular residuals contributed to the post-COVID inflation surge, with the firm-level component accounting for roughly one-third of the 2021-2022 inflation in advanced economies. |
| JEL: | E31 E32 L11 L16 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33404 |
| By: | Benoit Mojon; Gabriela Nodari; Stefano Siviero |
| Abstract: | Insights into how the incomes of workers and firms absorb the disinflation burden in the euro area and the United States can be gained by decomposing changes in the GDP deflator into its underlying components. Nominal wage increases of 4–5% in the euro area and 3–4% in the United States this year and next year are compatible with bringing inflation within reach of 2% by end-2024, provided that import price growth slows and profit margins stabilise or slightly shrink. From a historical perspective, the 2023–24 disinflation path for prices and nominal wages is within the range of past disinflation episodes in both economies, although it remains uncertain how price and wage setters will react to the above-target inflation from 2021 onwards. |
| Date: | 2023–05–19 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:75 |
| By: | Omar Barbiero; Hillary Stein |
| Abstract: | This brief introduces a new methodology that quantifies how price increases at the border transmit to US consumers. The methodology allows the authors to determine the share of US consumption that would be subject to such increases and to break them down into different country and industry sources. Among other applications, the methodology enables the authors to compute the effects of various tariff plans on consumer price inflation, as tariffs effectively increase the border prices of imported goods. |
| Keywords: | tariffs; inflation; import prices; indirect imports |
| JEL: | F40 E65 E31 |
| Date: | 2025–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:99508 |
| By: | Christian Bittner (Deutsche Bundesbank & Goethe University Frankfurt); Rustam Jamilov (University of Oxford); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | We develop a quantitative macroeconomic framework with heterogeneous financial intermediaries and active liquidity management. In the model, banks manage uninsured, idiosyncratic deposit withdrawal risk through an iterative over-the-counter interbank market with endogenous intensive and extensive margins and equilibrium assortative matching based on balance sheet size. We validate our framework using administrative data from Germany encompassing the universe of bank-to-bank exposures. Our findings strongly support the presence of assortative matching in the data, thereby confirming the model's key mechanism. We show that assortative matching can inefficiently lead to reduced trading volumes and a broader region of inaction in the interbank market, a smaller and riskier banking sector, and a macroeconomy characterized by lower aggregate output. Using our empirically validated framework, we explore secular trends in interbank trading, the roles of liquidity and interest rate corridor policies, and the impact of deposit market power. |
| Keywords: | Heterogeneous banks, interbank markets, monetary policy, liquidity policy |
| JEL: | E44 E52 G20 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:353 |
| By: | Liza Fahmida |
| Abstract: | Bangladesh has experienced two distinct exchange rate regimes: a fixed exchange rate system from January 1972 to May 2003 and a floating one since June 2003. After adopting the floating exchange rate regime, Bangladesh positively impacted macroeconomic development. The key macroeconomic variables considered include foreign reserves, worker's remittances, and export proceeds. However, ongoing challenges for the country include the depreciating trend of the local currency within a highly inflationary economy. This paper aims to evaluate macroeconomic performance across the two regimes and analyze the current currency situation in Bangladesh. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.09593 |
| By: | Riccardo Zolea |
| Abstract: | : This paper tries to offer a new interpretation of the relationship between interest rate and profit rate, based on the profitability of bank capital and a rethinking of the traditional multi-sectoral depiction of the economy: that is, considering the banking sector as a particular ‘productive’ sector with a specific price equation. The tool of the Sraffian-type price equation is used to study and represent this relationship within the framework of the Sraffian “Marxian” approach of Garegnani. In order to describe the operation of the banking sector with such a tool, a careful analysis of the necessary and normal coefficients of a banking sector price equation is conducted and the compatibility of economic concepts such as input, output and capital with endogenous money theory is discussed. The results of this investigation show the possibility of conceiving a causal relationship between the rate of profit to the rate of interest, with the central bank wielding significant influence. These findings can also reconnect and develop the different cues in Marx's analysis of the financial system, which are apparently contradictory. |
| Keywords: | : Sraffian price equation; bank profitability; interest rate, endogenous money; Marx Jel Classification: E11; E43; G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:usi:wpaper:924 |
| By: | Antonio Coppola; Arvind Krishnamurthy; Chenzi Xu |
| Abstract: | Drawing on the experiences of the historical Eurodollar market and recent Chinese dollar bond issuances traded outside U.S. jurisdiction at negative spreads to Treasurys, we examine the conditions under which a parallel offshore dollar financial system that circumvents Western sanctions may emerge. We propose a model in which currency use is driven by liquidity provision and safe bond supply. We characterize three equilibrium regimes: high convenience yields emerge in both the initial sanctions-driven region and the final liquidity-driven region, separated by an intermediate region. Transitions between equilibria depend on safe-asset supply and liquidity technologies, in addition to endogenous dynamic complementarities. |
| JEL: | F33 F36 G20 N24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33390 |
| By: | Jung-Hyun Ahn (NEOMA Business School); Vincent Bignon (AMSE, Banque de France; Banque de France); Régis Breton (Banque de France) |
| Abstract: | This paper analyzes how collateral quality shocks affect banks’ liquidity management and the risk-free rate. We develop a model where banks manage liquidity through near-cash assets and marketable securities subject to idiosyncratic and/or aggregate shocks. Collateral quality deterioration leads to non-monotonic changes in liquidity holdings: moderate declines reduce cash holdings via lower market returns, while severe declines cause precautionary hoarding and market freezes. Reduced collateral quality depresses the risk-free rate. Policy interventions, including liquidity regulation and negative interest rate policies can mitigate these effects. Our findings highlight the risks of collateral quality shocks and the importance of policy complementarities in addressing liquidity issues. |
| Keywords: | interbank market, risk-free rate, collateral, liquidity regulation, negative interest rate, cash-hoarding. |
| JEL: | E58 G28 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2502 |