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on Monetary Economics |
| By: | Adam, Klaus; Weber, Henning |
| Abstract: | Many central banks worldwide announce numerical inflation targets, typically ranging from zero to two percent in advanced economies and higher in developing countries. Historically, a significant gap existed between the inflation targets pursued by central banks and those recommended by academic studies. This paper reviews traditional economic forces advocating for zero or negative inflation targets and surveys new forces justifying positive targets. Key factors include (i) trends in relative prices, (ii) the lower bound constraint on nominal interest rates, (iii) (downward) wage rigidity, and (iv) effects of product entry and aggregation. By examining these forces, we assess whether current inflation targets are optimal or require adjustment, and identify areas for future research on optimal inflation targets. |
| Keywords: | Optimal inflation rate, relative price trends, effective lower bound, nominal rigidities, product aggregation |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311841 |
| By: | Ha, Jongrim; Liu, Haiqin; Rogers, John |
| Abstract: | Emerging markets and developing economies (EMDEs) exhibit significantly greater volatility in asset returns than advanced economies. The commonalities in these returns (and flows) across countries are particularly strong for EMDEs. If these occur independently of the exchange rate regime and if these global financial cycle effects are furthermore independent of countries’ financial openness, the result is Obstfeld (2022)’s “Lemma”: countries can do nothing to decouple from the global financial cycle. Under the prevalent view that U.S. monetary policy is the key driver of the global financial cycle, countries then inherit U.S. monetary policy no matter what they do on exchange rates or capital control policies. Using structural vector autoregression models for 78 countries over 1995–2019, as well as different methods of identifying U.S. monetary policy shocks from the literature, this paper tests the proposition that countries with less open capital accounts exhibit systematically smaller responses to U.S. monetary policy shocks than low capital control countries. This paper also considers the role of other institutional features such as exchange rate regimes and foreign exchange interventions in explaining cross-country differences in the responses to the shocks. The empirical results suggest that more stringent capital controls exhibit smaller responses of interest rates and exchange rates to U.S. monetary policy shocks and that this result holds more firmly for EMDEs than advanced economies. In contrast, the analysis finds only weak evidence that the degree of exchange rate flexibility affects U.S. spillovers to foreign interest rates and exchange rates. |
| Date: | 2023–10–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10582 |
| By: | Eickmeier, Sandra; Petersen, Luba |
| Abstract: | As central banks, including the European Central Bank (ECB), adopt climaterelated responsibilities, gauging public support becomes essential. Drawing on a June 2023 Bundesbank household survey, we find that 69% of households report increased trust in the ECB due to its climate actions, valuing the institution's broader scope and concern. While 17% and 20% of households express concerns over risks to price stability or independence, 23% believe climate engagement reinforces the ECB's core objectives. An information intervention indicates minimal impact on household inflation expectations, suggesting a disconnect between institutional trust and inflation outlooks. An internal survey reveals that central bankers accurately gauge trust impacts but tend to overestimate effects on inflation expectations. Overall, our findings indicate broad public support for the ECB's climate initiatives. |
| Keywords: | Central bank trust, central bank credibility, inflation expectations, climate change, green policies, survey, central bank communication, uncertainty |
| JEL: | E7 E59 C93 D84 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311842 |
| By: | Westermeier, Carola |
| Abstract: | The European Central Bank (ECB) has entered the preparation phase for the potential issuance of a digital euro. The digital euro under consideration represents a retail Central Bank Digital Currency (CBDC), a digital representation of central bank money that is intended for use by the general public. This article foregrounds the digital euro as an infrastructure that furthers European security ambitions. It argues that the development of the digital euro is a materialization of European (in)security rationales that aim to secure pan-European financial transactions amid growing geopolitical tensions. It focuses on the development of the technology and analyses how central bankers’ scenarios of the future manifest in the anticipated design and prototypes. While the provision of a financial infrastructure is the most decisive security-related implication of the digital euro, the introduction of a new form of public money is the decisive financial feature with potentially wide-ranging implications for banks. Although the ECB seeks to balance the interests of banks and other financial actors in the development of the digital euro, its plans are still met with criticism. Finally, the paper argues that the European Central Bank exerts itself more explicitly than before as geopolitical actors in its own regard. |
| Date: | 2024–03–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:x45eg_v1 |
| By: | Christoph Kaufmann; Jaime Leyva; Manuela Storz |
| Abstract: | The insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio re-balancing consistent with the risktaking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries. |
| JEL: | E52 G11 G22 G20 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202502 |
| By: | Petrella, Ivan; De Polis, Andrea; Melosi, Leonardo |
| Abstract: | We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions. JEL Classification: E52, E31, C53 |
| Keywords: | asymmetric risks, balance of inflation risks, flexible average inflation targetin, optimal monetary policy, risk-adjusted inflation targeting |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253028 |
| By: | Nuno Vilarinho Goncalves |
| Abstract: | This paper applies the Bernanke and Blanchard (2023) model to analyse the drivers of postpandemic inflation in Portugal, comparing the results with those for the euro area. The analysisreveals that transitory supply-side shocks, particularly related to energy and food prices, alongside global supply chain disruptions, were the primary drivers of inflation in Portugal until 2023. Labour market tightness emerged as a significant inflationary factor from 2023, contributing to persistent inflationary pressures through a stronger wage-to-price pass-through than in the euro area. Conditional projections suggest a slow decline in inflation, though remaining above 2% in the short-term, as labour market conditions continue to exert upward pressure on prices. These findings imply that the inflation dynamics in Portugal, while aligned with broader euro area trends, exhibit distinct labour market-driven inflation persistence. |
| JEL: | C5 E24 E31 E37 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202418 |
| By: | Alviarez, Vanessa; Pedroni, Peter; Powell, Andrew; Quevedo Rocha, Ingri Katherine |
| Abstract: | This study investigates the disconnect between falling agricultural commodity prices and persistent food inflation by applying a Heterogeneous Vector Autoregression (VAR) model to a panel of 203 countries using data from 1961 to 2022. It analyzes the impact of global crops, fertilizer, and oil prices on domestic inflation and explores the asymmetries in the pass-through of global shocks. Results show that fertilizer price shocks significantly influence crop prices, especially maize and soybeans, while production shocks have a weaker effect. Demand-driven price changes exhibit higher pass-through to food inflation compared to supply-driven shocks, with country-specific characteristics shaping these responses. A historical decomposition reveals that global factors played a larger role in inflation during 2021, particularly for emerging economies, while advanced economies were more affected by domestic shocks. These findings highlight the importance of tailored policies to mitigate inflation in the face of global commodity price volatility. |
| JEL: | E30 E31 Q02 Q11 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13986 |
| By: | Damast, Dominik; Kubitza, Christian; Sørensen, Jakob Ahm |
| Abstract: | We document a novel transmission channel of monetary policy through the homeowners insurance market. On average, contractionary monetary policy shocks result in higher homeowners insurance prices. Using granular data on insurers' balance sheets, we show that this effect is driven by the interaction of financial frictions and the interest rate sensitivity of investment portfolios. Specifically, rate hikes reduce the market value of insurers' assets, tightening insurers' balance sheet constraints and increasing their shadow cost of capital. These frictions in insurance supply amplify the effects of monetary policy on real estate and mortgage markets by making housing less affordable. We find that monetary policy shocks have a stronger impact on home prices and mortgage applications when local insurers are more sensitive to interest rates. This channel is particularly pronounced in areas where households face high climate risk exposure. Our findings highlight the role of insurance markets in amplifying macroeconomic shocks and the interconnections between homeowners insurance, residential real estate, and mortgage lending |
| Keywords: | Insurance Markets, Monetary Policy, Financial Frictions, Housing Markets |
| JEL: | E5 E44 G21 G22 G5 R3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:icirwp:312410 |
| By: | Andreea Maura Bobiceanu (Babes-Bolyai University); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We leverage differences in central bank independence and financial stability sentiment across countries to investigate the variability in banks' stock market reactions to prudential policy announcements during the COVID-19 crisis. Our findings reveal that the relaxation of both macro and micro-prudential policies leads to negative cumulative abnormal returns (CARs), the reaction being attenuated in countries where the central bank is more independent or communicates deteriorations in financial stability. The CARs around the announcement dates are 0.75 percentage points (pp) and 6.89 pp higher in countries with greater versus lesser central bank independence, for macro- and micro-prudential policy announcements. The difference is close to 3.73 pp and 5.65 pp between banks based in countries where the central bank communicates a negative versus a positive sentiment about financial stability. The positive effect of higher degrees of central bank independence and deteriorations in financial stability sentiment on bank market valuation is enhanced for smaller banks, and in countries characterized by greater fiscal flexibility, and a higher prevalence of privately owned banks. |
| Keywords: | stock market reaction, macro-prudential regulation, micro-prudential regulation, central bank independence, financial stability sentiment |
| JEL: | E61 G14 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2511 |
| By: | Masashige Hamano (Waseda University); Philip Schnattinger (Bank of England); Kongphop Wongkaew (Waseda University) |
| Abstract: | We develop a New Keynesian DSGE model to examine how preference shifts between online and brick-and-mortar retail affect pricing dynamics and inflation. Central to our model are goods market search frictions, which govern the interaction between retailers and producers. We introduce distinct search efficiencies for online and brick-and-mortar retailers, capturing the evolving retail landscape. Our analysis reveals two key channels through which these frictions impact inflation: the composition channel, arising from differing search efficiencies, and the arbitrage channel, reflecting changes in market tightness. Both channels operate through the search friction mechanism, altering the wedge between consumer and producer prices. Bayesian estimation identifies that both channels reinforce each other, lowering CPI inflation. This research highlights the critical role of goods market search frictions in understanding modern inflation dynamics. |
| Keywords: | Search and matching friction; CPI inflation; Firm dynamics |
| JEL: | E31 E52 J64 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2420 |
| By: | Afonso S. Moura; Lorenz Emter; Nico Zorell; Ralph Setzer |
| JEL: | C23 E52 F45 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202414 |
| By: | Gregory Phelan; William Chen |
| Abstract: | Banking-sector stability may suffer, yet household welfare may improve should a digital currency be fully integrated into the financial system. Keywords: Central bank digital currency, CBDC, volatility, digital assets, stable coins |
| Date: | 2023–03–22 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-06 |
| By: | Afonso S. Moura; Gergely Buda; Vasco M. Carvalho; Giancarlo Corsetti; João B. Duarte; Stephen Hansen; Álvaro Ortiz; Tomasa Rodrigo; José V. Rodríguez Mora; Guilherme Alves da Silva |
| Abstract: | We examine the transmission of monetary policy shocks to the macroeconomy at high frequency. To do this, we build daily consumption and investment aggregates using bank transaction records and leverage administrative data for measures of daily gross output and employment for Spain. We show that variables typically regarded as "slow moving", such as consumption and output, respond significantly within weeks. In contrast, the responses of aggregate employment and consumer prices are slow and peak at long lags. Disaggregating by sector, consumption category and supply-chain distance to final demand, we find that fast adjustment is led by downstream sectors tied to final consumption—in particular luxuries and durables—and that the response of upstream sectors is slower but more persistent. Finally, we find that time aggregation to the quarterly frequency alters the identification of monetary policy transmission, shifting significant responses to longer lags, whereas weekly or monthly aggregation preserves daily-frequency results. |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202501 |
| By: | Sara Riscado; Antonio F. Amores; Henrique Basso; Johannes Simeon Bischl; Paola De Agostini; Silvia De Poli; Emanuele Dicarlo; Maria Flevotomou; Maximilian Freier; Sofia Maier; Esteban Garcia-Miralles; Myroslav Pidkuyko; Mattia Ricci |
| Abstract: | Following the inflation surge in the aftermath of the pandemic crisis, governments adopted a large array of fiscal measures to cushion its impact on households and firms. In the euro area, discretionary fiscal measures are estimated to amount to around 2% of GDP, in both 2022 and 2023. In the analysis of the impact of inflation and related fiscal measures the distributional dimension is particularly relevant, since the sudden and strong increase in prices affected families differently depending on their position in the income distribution. Furthermore, the evaluation of the cost of fiscal measures and their targeting is fundamental to improve the efficiency and effectiveness of policy interventions. Using a microsimulation approach, this paper uncovers the aggregate and distributional impact of high consumer inflation, as well as the impact of the government measures aimed at supporting households and containing prices. This analysis is carried out for 2022 and includes Germany, France, Italy, Spain, Portugal and Greece, which together proxy for the euro area. Our work confirms that the purchasing power and welfare of lower-income households was more severely affected by the 2022 inflation surge than that of high-income households. Fiscal measures contributed significantly to closing the inflation gap, though with country differences. However, most fiscal measures were not particularly targeted to low-income households, implying a low cost-effectiveness in protecting the poorest in some countries. |
| JEL: | E31 D31 H12 H50 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202424 |
| By: | Gregory Phelan; Jean-Paul L’Huillier |
| Abstract: | New OFR working paper model shows supply shocks cause inflation, demand shocks don’t. Keywords: Inflation, supply and demand, Phillips curve |
| Date: | 2023–04–20 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-09 |
| By: | Paul Beaudry, Chenyu Hou and Franck Portier (Simon Fraser University) |
| Abstract: | The paper examines whether the US evidence in favour of a nonlinearity in the Phillips curve is robust or fragile. To this end, we use both cross city and aggregate time series data. We are particularly concerned with the possibility that the evidence in favour a nonlinear Phillips curve may is fact be driven by improperly controlling for inflation expectations. Our finding suggest that the evidence in support of a nonlinear Phillips curve is very fragile. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:sfu:sfudps:dp25-01 |
| By: | Fernando Martins; João Nuno Quelhas |
| Abstract: | This paper studies the price-setting behaviour in food products, using the microdata underlying the Portuguese Consumer Price Index (CPI). We document that, on average, more than onequarter of food prices changed every month and half displayed price spells shorter than 5.3 months. Positive price changes were more frequent and had a higher magnitude than price decreases. There is a strong heterogeneity across type of industry and outlet. We find that, from 2009 to 2019, food inflation was primarily driven by the frequency of price changes rather than the magnitude, and price changes were more frequent at the producer than at the consumer level, but in a lower magnitude. Finally, we report that frequency and magnitude estimates are higher when using daily online price data, meaning that intra-month patterns in price dynamics, not captured by the official inflation statistics, are relevant. |
| JEL: | E30 E31 D40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202415 |
| By: | Priftis, Romanos; Schoenle, Raphael |
| Abstract: | We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition, ” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA. JEL Classification: E52, E62, H23, Q43, Q58 |
| Keywords: | DSGE model, energy sector, energy subsidies, financial frictions, macroprudential policy |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253032 |
| By: | Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska Lieselotte |
| Abstract: | This paper examines the drivers of fluctuations in global inflation, defined as a common factor across monthly headline consumer price index (CPI) inflation in G7 countries, over the past half-century. It estimates a Factor-Augmented Vector Autoregression model where a wide range of shocks, including global demand, supply, oil price, and interest rate shocks, are identified through narrative sign restrictions motivated by the predictions of a simple dynamic general equilibrium model. The authors report three main results. First, oil price shocks followed by global demand shocks explained the lion’s share of variation in global inflation. Second, the contribution of global demand and oil price shocks increased over time, from 56 percent during 1970–1985 to 65 percent during 2001–2022, whereas the importance of global supply shocks declined. Since the pandemic, global demand and oil price shocks have accounted for most of the variation in global inflation. Finally, oil price shocks played a much smaller role in global core CPI inflation variation, for which global supply shocks were the main source of variation. These results are robust to various sensitivity exercises, including alternative definitions of global variables, different samples of countries, and additional narrative restrictions. |
| Date: | 2023–12–18 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10648 |
| By: | Thomas H. Li; Juan M. Londono; Sai Ma |
| Abstract: | The COVID-19 pandemic brought unprecedented disruptions to global supply chains, labor markets, and economic activity, leading to significant volatility in inflation rates worldwide. Not only the level of inflation but the uncertainty about the future path of inflation increased considerably since the onset of the pandemic and have remained elevated until very recently, posing challenges for policymakers and businesses alike. |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-01-16 |
| By: | Dagmar Chiella; Hashim Hamandi; Ruth Leung |
| Abstract: | In its 2022 Annual Report to Congress, the Office of Financial Research discussed how inflation, monetary tightening, and market volatility elevated financial system risk in 2022. As we begin 2023, OFR’s senior financial analysts Dagmar Chiella, Hashim Hamandi, and Ruth Leung explain five areas of risk they’re currently monitoring. |
| Date: | 2023–03–07 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-04 |
| By: | Lucy Cordes; Sebastian Infante |
| Abstract: | Over the past six months, Treasury repo rates have risen, on average, relative to the rate on the overnight reverse repurchase agreement (ON RRP) facility and have become more volatile. Recent literature has argued that these trends have been driven, in part, by the cumulative effects of quantitative tightening (QT). |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2025-02-12-1 |
| By: | Philip N. Jefferson |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgsq:99608 |
| By: | Schmidt, Kirsten; Tonzer, Lena |
| Abstract: | We study whether the low interest rate environment paired with booming housing markets affected banks' foreign activities in terms of commercial and residential real estate backed lending. Using a unique dataset covering systemically relevant banks in the euro area over the period 2015-2022, we find that banks expand their foreign real estate backed lending in the presence of higher lending spreads. The result is especially present given a lack of or misalignment in macroprudential policies across home and destination country. Furthermore, we assess whether banks disclose potential losses conditional on higher lending spreads and borrowing country exposure. We find only better capitalized banks to show higher forbearance ratios. In line with search-for-yield motives, we find that during the COVID-19 crisis low capitalized banks experienced larger loan losses on real-estate backed loans in countries having offered higher rates. |
| Keywords: | International banking, real estate backed loans, macroprudential regulation, financial stability |
| JEL: | F21 F34 G10 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311839 |
| By: | Peter Bednarek (Deutsche Bundesbank); Olga Briukhova (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Natalja von Westernhagen (Deutsche Bundesbank) |
| Abstract: | What is the impact of a sudden and sizeable increase in bank capital requirements on the lending activity by directly affected banks and by non-affected non-bank financial institutions (NBFIs)? To answer this question, we apply a difference-in-differences methodology around the capital exercise by the European Banking Authority (EBA) in 2011 with German credit register data. We find that insurance companies, financial enterprises, and factoring companies — but not leasing companies or very large NBFIs — and Non-EBA banks expand their corporate lending relative to EBA banks. In particular, NBFIs use the opportunity to expand their credit activities, in riskier and more competitive borrower segments. |
| Keywords: | non-bank financial intermediation, bank capital requirements, EBA capital exercise |
| JEL: | E50 G21 G23 G28 C33 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2512 |