nep-mon New Economics Papers
on Monetary Economics
Issue of 2024‒06‒10
29 papers chosen by
Bernd Hayo, Philipps-Universität Marburg

  1. Thinking Fast and Slow about Central Bank Digital Currencies By Ozili, Peterson K
  2. Central Bank Exit Strategies: Domestic Transmission and International Spillovers By Christopher Erceg; Marcin Kolasa; Jesper Lindé; Haroon Mumtaz; Pawel Zabczyk
  3. Inflation-targeting monetary policy framework in Nigeria: The Success Factors By Ozili, Peterson K
  4. Monetary Policy in the Euro Area: Active or Passive? By Alice Albonico; Guido Ascari; Qazi Haque
  5. Sixty Years of Global Inflation: A Post-GFC Update By Raphael Auer; Mathieu Pedemonte; Raphael Schoenle
  6. Global Spillovers from FED Hikes and a Strong Dollar: The Risk Channel By José Cristi; Ṣebnem Kalemli-Özcan; Mariana Sans; Filiz D. Unsal
  7. De-dollarization: the global payment infrastructure and wholesale central bank digital currencies By Joerg Mayer
  8. Can Discount Window Stigma Be Cured? An Experimental Investigation By Olivier Armantier; Charles Holt
  9. Survey Expectations, Adaptive Learning and Inflation Dynamics By Yuliya Rychalovska; Sergey Slobodyan; Raf Wouters
  10. SDR Rechanneling and ECB Rules By Paduano, Stephen
  11. Foreign Reserves & Global Objectives: How The UK’s Idle FX Reserves Can Support Its Global Economic Objectives By Paduano, Stephen
  12. Accounting for the Multiple Sources of Inflation: an Agent-Based Model Investigation By Leonardo Ciambezi; Mattia Guerini; Mauro Napoletano; Andrea Roventini
  13. Resurgence of inflation: Assessing the role of macroeconomic policies By Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián
  14. Monetary policy rules and the inequality-augmented Phillips curve By Lilian Rolim; Laura Carvalho; Dany Lang
  15. Inflation and the role of macroeconomic policies: A model for the case of Denmark By Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián
  16. The Impact of the PEPP on the Corporate Commercial Paper Market By Valère Fourel; Alice Schwenninger
  17. Monetary Policies on Green Financial Markets: Evidence from a Multi-Moment Connectedness Network By Tingguo Zheng; Hongyin Zhang; Shiqi Ye
  18. Reallocation, Productivity, and Monetary Policy in an Energy Crisis By Boris Chafwehé; Andrea Colciago; Romanos Priftis
  19. Cost-push and conflict inflation in theory and practice - with a discussion of the Italian case By Davide Romaniello; Antonella Stirati
  20. Investor heterogeneity and large-scale asset purchases By Breckenfelder, Johannes; De Falco, Veronica
  21. The macroeconomics of liquidity in financial intermediation By Porcellacchia, Davide; Sheedy, Kevin D.
  22. Estimating the importance of monetary policy shocks for variation in the U.S. homeownership rate By Daniel A. Dias; Joao B. Duarte
  23. Determinants of bank performance: evidence from replicating portfolios By Altavilla, Carlo; Burlon, Lorenzo; Hünnekes, Franziska; Begenau, Juliane
  24. Recent Developments in the Linkage between Wages and Prices By Tatsuya Ozaki; Masahiro Jimbo; Tomoyuki Yagi; Akihito Yoshii
  25. International Reserve Management under Rollover Crises By Mauricio Barbosa-Alves; Javier Bianchi; César Sosa-Padilla
  26. Options Paper For Channeling China’s SDRs To Africa By Ryder, Hannah; Kebret, Etsehiwot; Chen, Huiyi
  27. Anti-poor and anti-rich: Product-downgrading and the distributional effects of UK inflation in the wake of the Brexit vote By Guenter W. Beck; Philipp Harms; Muzammil Hussain; Mark Ruszel
  28. Advancements in stress-testing methodologies for financial stability applications By Budnik, Katarzyna; Ponte Marques, Aurea; Giglio, Carla; Grassi, Alberto; Durrani, Agha; Figueres, Juan Manuel; Konietschke, Paul; Le Grand, Catherine; Metzler, Julian; Población García, Francisco Javier; Shaw, Frances; Groß, Johannes; Sydow, Matthias; Franch, Fabio; Georgescu, Oana-Maria; Ortl, Aljosa; Trachana, Zoe; Chalf, Yasmine
  29. Endogenous vs Exogenous Instability: An Out-of-Sample Comparison By Domenico Delli Gatti; Filippo Gusella; Giorgio Ricchiuti

  1. By: Ozili, Peterson K
    Abstract: Central banks are considering the issuance of a central bank digital currency to serve as a payment tool to support economic activities. A central bank digital currency can also serve secondary purposes that are related or unrelated to the statutory objectives of a central bank which is monetary and price stability. Many central banks are thinking too fast about central bank digital currencies – they are very optimistic about the potential benefits of central bank digital currencies. While such optimism is good, central banks also need to think slowly about central bank digital currency by paying serious attention to known risks and whether there is a unique use case for CBDC. This calls for cautious optimism and a need for central banks to think fast and slow about central bank digital currencies.
    Keywords: CBDC, central bank digital currency, cryptocurrency, digital payment, thinking fast and slow
    JEL: E40 E42 E49 E50 E52 E58 E59
    Date: 2024
  2. By: Christopher Erceg (Monetary and Capital Markets Department, IMF); Marcin Kolasa (Monetary and Capital Markets Department, IMF); Jesper Lindé (Monetary and Capital Markets Department, IMF); Haroon Mumtaz (School of Economics & Finance, Queen Mary University London); Pawel Zabczyk (Monetary and Capital Markets Department, IMF)
    Abstract: We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the onlyeffective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
    Keywords: Monetary Policy, Quantitative Easing, International Spillovers
    JEL: C54 E52 E58 F41
    Date: 2024–04–01
  3. By: Ozili, Peterson K
    Abstract: Many developing countries are facing high inflation and the central bank in these countries have adopted several solutions to tame rising inflation. Nigeria transitioned to an inflation targeting monetary policy framework in late 2023 from a monetary targeting monetary policy framework. This study identifies the important success factors for an effective inflation targeting monetary policy regime in Nigeria. The identified success factors include the size or number of economic agents monitoring the inflation target, the credibility of the central bank, the degree of central bank independence, reduction in budget deficit, limited dollarization of the Nigerian economy, effective central bank communication, avoidance of fiscal dominance, financial development, greater financial inclusion, financial stability, and insecurity caused by farmer-herder clashes and terrorism.
    Keywords: inflation targeting, inflation, Nigeria, monetary policy, interest rate
    JEL: E40 E42 E44 E47 E49
    Date: 2024
  4. By: Alice Albonico; Guido Ascari; Qazi Haque
    Abstract: We estimate a medium-scale DSGE model for the Euro Area allowing and testing for indeterminacy since the introduction of the euro until mid-2023. Our estimates suggest that monetary policy in the euro area was passive, leading to indeterminacy and self-fulfilling dynamics. Indeterminacy dramatically alters the transmission of fundamental shocks, particularly for inflation whose responses are inconsistent with standard economic theory. Inflation increases following a positive supply or a negative demand shock. Consequently, demand shocks look like supply shocks and vice versa, making the dynamics of the model under indeterminacy challenging to interpret. However, this finding is not robust across different assumptions on the way the sunspot shock is specified in the estimation. Both under determinacy and indeterminacy, the model estimates a natural rate of interest that turned positive after the recent inflation episode.
    Keywords: monetary policy, indeterminacy, euro area, business cycle fluctuations, inflation
    JEL: E32 E52 C11 C13
    Date: 2024–05
  5. By: Raphael Auer; Mathieu Pedemonte; Raphael Schoenle
    Abstract: Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors.
    Keywords: globalization; inflation; Phillips curve; monetary policy; global value chain; international inflation synchronization
    JEL: E31 E52 E58 F02 F41 F42 F14 F62
    Date: 2024–05–20
  6. By: José Cristi; Ṣebnem Kalemli-Özcan; Mariana Sans; Filiz D. Unsal
    Abstract: We study the international transmission of U.S. monetary policy (FED hikes) and a strong U.S. dollar. Both of these variables are endogenous and thus we follow the recent developments in the literature to measure the exogenous components of each from the perspective of the rest of the world (ROW). We show that while U.S. monetary policy shocks act as financial shocks increasing risk premia in emerging markets, a shock to U.S. dollar does not generate the same effect.
    JEL: F30
    Date: 2024–04
  7. By: Joerg Mayer
    Abstract: Traditional trust-related de-dollarization motives have gained additional impetus from the declining share of the United States in global output, recent upheaval in dollar bond markets, geopolitical tensions, and a “weaponization†of the dollar. Several institutional innovations by China and the BRICS demonstrate the demand for de-dollarization but do not offer credible alternatives to the dollar’s value characteristics. By contrast, new financial technology, including distributed ledger technology (DLT), and related changes in cross-border payment infrastructure could reduce the network effects that have sustained dollar dominance. By allowing for leaner cross-border payment infrastructures and an easier, cheaper, and more transparent use of non-dollar currencies in cross-border payment and settlement, DLT-based wholesale central bank digital currency (wCBDC) platforms with a foreign-exchange conversion layer may indicate a direction of travel. Pilots of multicurrency wCBDC-platforms indicate how to enable interoperability and reduce exposure to foreign-exchange risk. Regarding institutional (legal, regulatory, and supervisory) frameworks required to fully benefit from infrastructural changes, interlinking common multicurrency wCBDC-platforms among limited numbers of like-minded central banks to form an interoperable hub-and-spoke global wCBDC-system could minimize fragmentation risks while accommodating diverging governance preferences, e.g., concerning data protection and developmental aspirations. By augmenting macroeconomic autonomy and reducing the need for costly dollar reserves, de-dollarization promises greater benefits for countries with non-dominant currencies. These countries should sit at the table when outstanding questions on interoperability and related economic, technical, legal and governance questions regarding multicurrency wCBDCs platforms are answered.
    Date: 2024
  8. By: Olivier Armantier; Charles Holt
    Abstract: A core responsibility of a central bank is to ensure financial stability by acting as the “lender of last resort” through its Discount Window. The Discount Window, however, has not been effective because its usage is stigmatized. In this paper, we study experimentally how such stigma can be cured. We find that, once a Discount Window facility is stigmatized, removing stigma is difficult. This result is consistent with the Federal Reserve’s experiences which have been unsuccessful at removing the stigma associated with its Discount Window.
    Keywords: lender-of-last-resort (LOLR); Lender of last resort; discount window; stigma; laboratory experiments
    JEL: E58 G01 C92
    Date: 2024–05–01
  9. By: Yuliya Rychalovska; Sergey Slobodyan; Raf Wouters
    Abstract: The use of survey information on inflation expectations as an observable in a DSGE model can substantially refine identification of the shocks that drive inflation. Optimal integration of the survey information improves the model forecast for inflation and for other macroeconomic variables. Models with expectations based on an Adaptive Learning setup can exploit survey information more efficiently than their Rational Expectations counterparts. The resulting time-variation in the perceived inflation target, in inflation persistence and in the sensitivity of inflation to various shocks provide a rich and consistent description of the joint dynamics of realized and expected inflation. Our framework produces a reasonable interpretation of the post-Covid inflation dynamics. Our learning model successfully identifies the more persistent nature of the recent inflation surge.
    Keywords: Inflation, Expectations, Survey data, Adaptive Learning, DSGE models
    JEL: C5 D84 E3
    Date: 2024–05
  10. By: Paduano, Stephen
    Abstract: Eurozone countries are financially and politically pivotal to the Special Drawing Rights (SDRs) rechannelling agenda.1 Collectively, they hold $200bn in SDRs (just over 20% of all SDRs), and the Eurozone countries which are G-20 members hold $120bn in SDRs (just under 20% of the G-20’s SDRs). These countries are also the most ambitious and proactive members of the SDR system, with France being the first advocate of SDR rechanneling and Spain being the first to rechannel (to the IMF Resilience and Sustainability Trust - RST). However, the Eurozone’s capacity to lead on and participate in SDR rechanneling has been complicated by the European Central Bank (ECB). President Lagarde has expressed that SDR rechanneling to Multilateral Development Banks (MDBs) may not preserve the reserve asset characteristic of the SDR and may violate the prohibition on monetary financing. Building on Paduano and Maret (2023), this paper demonstrates that certain forms of SDR rechanneling can clearly satisfy the ECB’s concerns — and, more importantly, that the rechanneling of reserve assets to multilateral development banks already occurs.
    Keywords: European Central Bank, eurosystem, national central banks, Special Drawing Rights, International Monetary Fund, World Bank, global development, international financial architecture
    Date: 2023–05
  11. By: Paduano, Stephen
    Abstract: This paper discusses how the United Kingdom can make use of its idle exchange equalisation account to support its global economic objectives in an era of fiscal consolidation — when limited political appetite for further taxing and borrowing, combined with interest rates, have reduced the UK’s ability to finance its international interests. It does so with particular attention to the UK’s $40 billion in idle and illiquid Special Drawing Rights (SDRs). The illiquidity of these SDRs is a hindrance to the “policy-readiness†of the UK’s foreign exchange reserves. This paper discusses how rechanneling those SDRs—e.g., through the purchase of an SDR bond issued by a multilateral development bank—would serve the dual function of boosting the liquidity of the UK’s foreign-exchange reserves (a key objective of the UK’s reserve managers) whilst supporting the UK’s global economic interests (providing additional financing to the MDBs). This paper also draws lessons from how other countries have made use of their idle foreign-exchange reserves to support global economic objectives, such as the United States with its Exchange Stabilization Fund in the 1980s and 1990s.
    Keywords: Public debt, sustainability, Private sector, Social outcomes, International Monetary Fund, World Bank, Special Drawing Rights, foreign aid, global development, international financial architecture, United Kingdom, Bank of England
    Date: 2023–09
  12. By: Leonardo Ciambezi; Mattia Guerini; Mauro Napoletano; Andrea Roventini
    Abstract: In this work, we develop a macroeconomic agent-based model to study the role of demand and supply factors in the determination of inflation dynamics. The model is characterized by local interactions of heterogeneous firms and households in the labor and goods markets. Imperfect information implies that market selection is imperfect, as it does not depend only on relative prices but also on firm size. We show that our model is able to generate realistic inflation dynamics, as well as a non-linear Phillips curve in line with the empirical evidence. We then find that the traditional demand-led explanation of inflation stemming from a tight labor market only holds when markets are competitive and efficient. Finally, we study the response of inflation to shocks impacting on consumption, labor productivity or energy costs. The results show that only demand shocks lead to wage-led inflation surges. Productivity shocks are entirely passed-through to prices without affecting the income distribution. Energy shocks, instead, induce sellers' inflation after changes in both firms' cost structure and profit margins. This is in line with the recent empirical evidence for the Euro Area.
    Keywords: Inflation, agent-based models, market structure, mark-up rates, sellers' inflation
    Date: 2024–05–10
  13. By: Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián
    Abstract: After decades of relative consumer price stability, inflation is now making a come-back as a central topic in economic and political discussions, against a backdrop of various policy challenges. The aim of this paper is to provide a nuanced assessment of the different channels through which monetary, fiscal and income policies can affect prices and output in a small open economy, as well as discuss which policy measures are desirable and practically feasible when such an economy experiences inflationary shocks. To do so, we adopt a comprehensive modelling approach and build an empirical stock-flow-consistent model using sectoral national account data for Denmark over the period 2005Q1-2020Q1. We then replicate the inflationary environment in which Denmark and several other countries are currently operating and introduce a monetary policy reaction which leads to a modest reduction in inflation at the cost of further contracting the economy. Taking monetary tightening as a forced policy response in the case of a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the adverse effects of inflation. Specifically, we introduce fiscal interventions - in the form of tax cuts on income and production - along with wage- and price-based income policies. Our main conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Finally, we address a question of political relevance by exploring the effects of different policies on public budget and debt. Overall, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.
    Keywords: Macroeconomía; Política Económica; Inflación; Dinamarca;
    Date: 2023–01
  14. By: Lilian Rolim (Universidade Estadual de Campinas); Laura Carvalho; Dany Lang
    Abstract: We explore the relationship between inequality, unemployment, and inflation by considering the evidence that low-wage workers are more exposed to business cycle fluctuations. The analysis is undertaken in an extended version of the stock-and-flow consistent agent-based model by Rolim et al. (2023), in which inflation and inequality result from the social conflict over income distribution. The inflation-unemployment-inequality nexus leads to the inequality-augmented Phillips curve relating higher levels of unemployment to lower inflation rates and more inequality. We then perform two sets of experiments to investigate the implications of this nexus further. The first experiment shows that the decrease in low-wage workers' bargaining power could explain the flattening of the Phillips curve and the increase in income and wage inequalities. The second experiment contrasts different monetary policy rules and compares the implications for inequality dynamics. In line with the inequality-augmented Phillips curve, the rules have important implications for wage and income inequalities: a monetary policy rule that prioritizes low inflation rates is associated with higher unemployment and higher inequality levels.
    Keywords: Phillips curve, inflation, unemployment, inequality, monetary policy, bargaining power
    JEL: C63 D3 E2 E3 E4
    Date: 2023
  15. By: Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián
    Abstract: This paper provides an assessment of the different channels through which monetary, fiscal and income policies affect prices and output in a small open economy and discuss which policy measures are effective and feasible in the face of inflationary shocks. We build a stock-flow-consistent model using sectoral data for Denmark. We then replicate the inflationary environment faced by Denmark and several other countries after the Covid-19 crisis. While taking monetary tightening as a forced policy response for a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the effects of inflation. Our conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.
    Keywords: Macroeconomía; Política Económica; Inflación; Dinamarca;
    Date: 2023–07–05
  16. By: Valère Fourel; Alice Schwenninger
    Abstract: The Covid-19 crisis triggered a “dash for cash” phenomenon that revealed vulnerabilities on short-term debt markets. To foster monetary policy transmission and indirectly to ensure firms’ short-term financing needs, the Eurosystem effectively bought for the first time corporate commercial paper (CP) market in March 2020, as part of the Pandemic Emergency Purchase Programme (PEPP).Using a difference-in-differences approach that exploits the PEPP eligibility criteria, our findings suggest that the program triggered a shift in the debt composition of eligible firms. Maturity at issuance increased on average by 42 days for eligible issuers, which contributed to a reduction in rollover risk. This asset purchase program was effective in easing financing conditions, which translated into a compression of yields between 8 and 11 basis points for eligible firms. Eligible issuances increased but we do not find that the PEPP fostered issuance at the aggregate level. For issuers whose debt was mainly held by money market funds prior to the crisis, we found that the effect on maturity is more contained, indicating that firms’ investor sector matters.
    Keywords: Commercial Paper, Pandemic Emergency Purchase Programme, Eurosystem, Debt Structure, Money Market Funds
    JEL: E52 E58 G01 G12 G20 G23
    Date: 2024
  17. By: Tingguo Zheng; Hongyin Zhang; Shiqi Ye
    Abstract: This paper introduces a novel multi-moment connectedness network approach for analyzing the interconnectedness of green financial market. Focusing on the impact of monetary policy shocks, our study reveals that connectedness within the green bond and equity markets varies with different moments (returns, volatility, skewness, and kurtosis) and changes significantly around Federal Open Market Committee (FOMC) events. Static analysis shows a decrease in connectedness with higher moments, while dynamic analysis highlights increased sensitivity to event-driven shocks. We find that both tight and loose monetary policy shocks initially elevate connectedness within the first six months. However, the effects of tight shocks gradually fade, whereas loose shocks may reduce connectedness after one year. These results offer insight to policymakers in regulating sustainable economies and investment managers in strategizing asset allocation and risk management, especially in environmentally focused markets. Our study contributes to understanding the complex dynamics of the green financial market in response to monetary policies, helping in decision-making for sustainable economic development and financial stability.
    Date: 2024–05
  18. By: Boris Chafwehé; Andrea Colciago; Romanos Priftis
    Abstract: This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term.
    Keywords: Energy, productivity, firm entry and exit, monetary policy.
    JEL: E62 L16 O33
    Date: 2024–05
  19. By: Davide Romaniello; Antonella Stirati
    Abstract: This study contributes to the ongoing discussion surrounding the recent upswing in inflation by presenting an analytical framework and empirically examining inflation trends in Italy. Its primary aim is to unveil the underlying causes, distributive repercussions, and mechanisms through which inflation spreads. We adopt a cost-push and distributive conflict perspective on current inflation. Within this perspective, some contributions argued for a profit-driven inflation, while others dispute this interpretation. They emphasize that increases in profit share or operating surplus, especially amid rising import costs, do not necessarily translate to heightened overall profitability. To disentangle these intricacies, the paper puts forth an analytical framework that clarifies how escalating import costs can elevate profit shares and set in motion inflationary processes, even in the absence of explicit conflicts over income distribution. Turning attention to the Italian context, the study utilizes descriptive statistics, sectoral data, and simple simulations to gain insights into the drivers of inflation and its distributive consequences. Additionally, a Structural Vector Autoregressive (SVAR) model is deployed to uncover the nature and timing of the propagation process. The paper concludes with some policy implications based on the findings.
    Keywords: inflation, cost-push, mark-up, distribution; Italian economy
    JEL: E31 E12 E2
    Date: 2024
  20. By: Breckenfelder, Johannes; De Falco, Veronica
    Abstract: Large-Scale Asset Purchases can impact the price of securities directly, when securities are targeted by the central bank, or indirectly through portfolio re-balancing of private investors. We quantify both the direct and the portfolio re-balancing impact, emphasizing the role of investor heterogeneity. We use proprietary security-level data on asset holdings of different investors. We measure the direct impact on security level, finding that it is smaller for securities predominantly held by more price-elastic investors, funds and banks. Comparing a security at the 90th percentile of the investor elasticity distribution to a security at the 10th percentile, the price impact is only two-thirds as large. To assess the portfolio re-balancing effects, we construct a novel shift-share instrument to measure investors’ quasi-exogenous exposure to central bank purchases, based on investors’ holdings of eligible securities before the QE program was announced. We show that funds and banks sell eligible securities to the central bank and re-balance their portfolios towards ineligible securities, with investors ex-ante more exposed to central bank purchases re-balancing more. Using detailed holdings data of mutual funds, we estimate that for each euro sold to the central bank, the average fund allocates 88 cents to ineligible assets and 12 cents to other eligible assets that the central bank does not buy in that time period. The price of ineligible securities held by more exposed funds increases compared to those held by less exposed funds, underscoring the portfolio re-balancing channel at work. JEL Classification: E52, E58, G11, G12, G23
    Keywords: asset pricing, central bank, financial intermediaries, mutual funds
    Date: 2024–05
  21. By: Porcellacchia, Davide; Sheedy, Kevin D.
    Abstract: In financial crises, the premium on liquid assets such as US Treasuries increases alongside credit spreads. This paper explains the link between the liquidity premium and spreads. We present a theory of endogenous bank fragility arising from a coordination friction among bank creditors. The theory’s implications reduce to a single constraint on banks, which is embedded in a quantitative macroeconomic model to investigate the transmission of shocks to spreads and economic activity. Shocks that reduce bank net worth exacerbate the coordination friction. In response, banks lend less and demand more liquid assets. This drives up both credit spreads and the liquidity premium. By mitigating the coordination friction, expansions of public liquidity reduce spreads and boost the economy. Empirically, we identify high-frequency exogenous variation in liquidity by exploiting the time lag between auction and issuance of US Treasuries. We find a causal effect on spreads in line with the calibrated model. JEL Classification: E41, E44, E51, G01, G21
    Keywords: bank-lending channel, bank runs, liquid assets
    Date: 2024–05
  22. By: Daniel A. Dias; Joao B. Duarte
    Abstract: Being a homeowner is one of the tenets of the American dream. In general, relative to renting, people see homeownership as a path to wealth through the usual appreciation of the house prices and the forced savings through mortgage payments but also a path to financial stability through more stable and predictable housing costs (Young et al., 2023).
    Date: 2024–05–03
  23. By: Altavilla, Carlo; Burlon, Lorenzo; Hünnekes, Franziska; Begenau, Juliane
    Abstract: We construct a novel measure of bank performance, investigate its determinants, and show that it affects bank resilience, lending behaviour and real outcomes. Using confidential and granular data, we measure performance against a market-based benchmark portfolio that mimics individual banks’ interest rate and credit risk exposure. From 2015 to mid-2022, euro area banks underperformed market benchmarks by around e160 billion per year, amid substantial heterogeneity. Structural factors, such as cost inefficiencies, rather than monetary or regulatory measures, were the main driver of bank underperformance. We also show that higher edge banks are less reliant on government support measures and less likely to experience the materialisation of interest rate or credit risk when hit by shocks. Using the euro area credit register and the pandemic shock for identification, we find that higher edge banks originate more credit, direct it towards more productive firms, and support more firm investment. JEL Classification: E52, G12, G21, G28
    Keywords: banking, credit supply, maturity transformation, replicating portfolio
    Date: 2024–05
  24. By: Tatsuya Ozaki (Bank of Japan); Masahiro Jimbo (Bank of Japan); Tomoyuki Yagi (Bank of Japan); Akihito Yoshii (Bank of Japan)
    Abstract: The prices of many items making up the CPI are affected by past significant fluctuations in import prices. As a result, it is not easy to identify upward pressure on prices stemming from the linkage between wages and prices. In this article, a number of different approaches are used to quantitatively measure the linkage between wages and prices. Results of analyses based on cost structures of items making up the CPI and analyses using time-series models suggest that moves to reflect wage increases in output prices are gradually spreading. It is important to determine developments in the linkage between wages and prices by continuously carrying out quantitative analyses from various standpoints including those approaches taken in this article, as well as by conducting qualitative analyses, such as interviews with firms, carefully.
    Keywords: Consumer prices; Wage; Pass-Through; Time-varying parameter VAR
    JEL: C32 E30 E31
    Date: 2024–05–10
  25. By: Mauricio Barbosa-Alves (University of Minnesota); Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa-Padilla (University of Notre-Dame/NBER)
    Abstract: This paper investigates how a government should manage international reserves whenit faces the risk of a rollover crisis. We ask, should the government accumulate reservesor reduce debt to make itself less vulnerable? We show that the optimal policy entailsinitially reducing debt, followed by a subsequent increase in both debt and reserves asthe government approaches a safe zone. Furthermore, we uncover that issuing additionaldebt to accumulate reserves can lead to a reduction in sovereign spreads.
    Keywords: International reserves, sovereign debt, rollover crises.
    JEL: E4 E5 F32 F34 F41
    Date: 2024–05
  26. By: Ryder, Hannah; Kebret, Etsehiwot; Chen, Huiyi
    Abstract: As the international community grapples with the polycrisis witnessed in our world today, the need for greater financing and a reform of the international financial system has never been more dire. SDRs, as a financial instrument, have been a point of much debate and contention over the last few years, mainly due to the need to maintain its reserve asset status and in relation to that, the challenges and limitations of reallocating SDRs outside of the IMF, in particular through Multilateral Development Banks (MDBs). Developed in partnership with the Finance for Development Lab, this Report by Development Reimagined explores five options for China to reallocate its SDRs to the continent.
    Keywords: SDRs, Africa, China, International Monetary Fund, African Development Bank, debt, reserve asset, economic growth, World Bank, Liquidity and Sustainability Facility
    Date: 2023–04
  27. By: Guenter W. Beck (University of Siegen, Germany); Philipp Harms (Johannes Gutenberg-University Mainz, Germany); Muzammil Hussain (University of Siegen, Germany); Mark Ruszel (Johannes Gutenberg-University Mainz, Germany)
    Abstract: In the second half of 2016, the United Kingdom experienced a strong increase of retail prices which was caused, among other factors, by a massive depreciation of the British pound in the wake of the Brexit vote. In this paper, we analyze the distributional effects of this inflationary episode, examining in particular the role that households’ decisions to adjust their consumption behavior at the extensive margin within narrowly defined products have played in this context. Using a very granular scanner data set on purchases of fast-moving consumer goods, we demonstrate that households at an intermediate income level engaged in product-downgrading, i.e. they switched from higher-priced varieties of a given product to lower-priced varieties, and thus limited the effect of the overall price increase. By contrast, poor households had no scope for product-downgrading since they already consumed the lowest-priced varieties. Rich households, finally, also did not change the mix of varieties they consumed and thus experienced relatively elevated inflation rates as well – probably because their higher income allowed them to tolerate the price increase.
    Date: 2024–05–03
  28. By: Budnik, Katarzyna; Ponte Marques, Aurea; Giglio, Carla; Grassi, Alberto; Durrani, Agha; Figueres, Juan Manuel; Konietschke, Paul; Le Grand, Catherine; Metzler, Julian; Población García, Francisco Javier; Shaw, Frances; Groß, Johannes; Sydow, Matthias; Franch, Fabio; Georgescu, Oana-Maria; Ortl, Aljosa; Trachana, Zoe; Chalf, Yasmine
    Abstract: This paper provides an overview of stress-testing methodologies in Europe, with a focus on the advancements made by the European Central Bank’s Financial Stability Committee Working Group on Stress Testing (WGST). Over a four-year period, the WGST played a pivotal role in refining stress-testing practices, promoting collaboration among central banks and supervisory authorities and addressing challenges in the evolving financial landscape. The paper discusses the development and application of various stress-testing models, including top-down models, macro-micro models and system-wide models. It highlights the integration of new datasets and model validation efforts as well as the expanded use of stress-testing methodologies in risk and policy evaluation and in communication. The collaborative efforts of the WGST have demystified stress-testing methodologies and fostered trust among stakeholders. The paper concludes by outlining the future agenda for continued improvements in stress-testing practices. JEL Classification: G21, G28, C58, G01, G18
    Keywords: Basel III, communication, COVID-19 mitigation, economic activity, financial system model, impact assessment, lending, macro-financial scenarios, prudential policies, stress testing, uncertainty, Working Group on Stress Testing
    Date: 2024–05
  29. By: Domenico Delli Gatti; Filippo Gusella; Giorgio Ricchiuti
    Abstract: Given the unobserved nature of expectations, this paper employs latent variable analysis to examine three financial instability models and assess their out-of-sample forecasting accuracy. We compare a benchmark linear random walk model, which implies exogenous instability phenomena, with a linear state-space model and a nonlinear Markov regime-switching model, both of which postulate endogenous fluctuations phenomena due to heterogeneous behavioral heuristics. Using the S&P 500 dataset from 1990 to 2019, results confirm complex endogenous dynamics and suggest that the inclusion of behavioral nonlinearities improves the model’s predictability both in the short, medium, and long run.
    Keywords: endogenous instability, exogenous instability, behavioral model, forecasting analysis
    JEL: C13 C51 E37 G10
    Date: 2024

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