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on Monetary Economics |
| By: | Bindseil, Ulrich; Marrazzo, Marco; Sauer, Stephan |
| Abstract: | As digital payments become increasingly popular, many central banks are looking into the issuance of retail central bank digital currency (CBDC) as a new central bank monetary liability in addition to banknotes and commercial bank reserves. CBDC will have broadly the same balance sheet and profit implications as the issuance of banknotes. While the decision to issue CBDC is often thought to likely increase the size of central banks’ balance sheets, the net impact of digitalisation on balance sheet size could also be negative, as the number of banknotes in circulation may decline and CBDC’s design features could limit its take-up as a store of value. We use scenario analyses to illustrate the key drivers of the impact of CBDC on central bank profitability, with the part of CBDC that does not derive from an exchange of banknotes being an important factor. The financial risk implications of CBDC for central banks can be managed via well-established frameworks and relate primarily to the impact on balance sheet size and asset composition. The paper concludes with a discussion on how the profit and risk channels affect central bank capital. JEL Classification: E58 |
| Keywords: | central bank capital, central bank digital currency, digital money, financial risk management, seigniorage |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024360 |
| By: | Moritz Pfeifer; Gunther Schnabl |
| Abstract: | This paper investigates the relationship between economic divergence and expansionary monetary policies within the eurozone based on a new divergence indicator. We study the dynamics between the economic divergence of member states and unconventional monetary policy in a Bayesian SVAR and find a strong positive response of the expansion of the ECB’s balance sheet to rising divergence. We find weaker evidence for unconventional monetary policies lowering divergence. We interpret these findings as evidence that expansionary monetary policy aims to absorb shocks leading to divergence. However, it may exacerbate divergence and inflationary pressures in the long-run. This research contributes to the literature on Optimum Currency Areas (OCAs) by highlighting the dynamics between economic disparities and unconventional monetary policy. |
| Keywords: | optimum currency areas, unconventional monetary policy shocks, statistical identification |
| JEL: | E52 E58 F15 F45 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11442 |
| By: | Maximilian Grimm (University of Bonn) |
| Abstract: | Does monetary policy affect funding vulnerabilities of the banking system? I show that contractionary monetary policy shocks cause an aggregate outflow of retail deposits and an inflow of non-core market-based funding. Using a newly constructed worldwide dataset covering the liability structure of banking systems at monthly frequency, I demonstrate that a growing reliance on wholesale funding is associated with increasing risks of financial instability and subsequent contractions in lending and real activity. I rationalize this effect of monetary policy on banks' funding structure and ultimately on financial stability risk in a model where profit-maximizing banks do not internalize the heightened systemic risk stemming from the rise of runnable debt in the system. This paper shows that monetary policy has direct consequences for financial stability by changing the liability structure of the banking sector. |
| Keywords: | Monetary policy, bank funding, banking fragility |
| JEL: | E44 E52 E58 G01 G21 N10 N20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:341 |
| By: | Galo Nuño; Philipp Renner; Simon Scheidegger |
| Abstract: | This paper studies monetary policy in a New Keynesian model with persistent supply shocks, that is, sustained increases in production costs due to factors such as wars or geopolitical fragmentation. First, we demonstrate that Taylor rules fail to stabilize long-term inflation due to endogenous shifts in the natural interest rate. Second, we analyze optimal policy responses under discretion and commitment. Under discretion, a systematic inflationary bias emerges when the shock impacts the economy. Under commitment, the optimal policy adopts a lean-against-the-wind approach without compensating for past inflation, implying that “bygones are bygones”. We further extend the model to incorporate the zero lower bound (ZLB) and show that the optimal policy supports preemptive easing. |
| Keywords: | deep learning, Markov switching model, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11463 |
| By: | Ruslana Datsenko; Johannes Fleck |
| Abstract: | Economic growth in some euro area countries has been lackluster since the COVID-19 pandemic. Concurrently, the ECB hiked its policy rate to fight inflation. In this note, we show that high interest rates have depressed economic activity more in those euro-area countries with large manufacturing sectors. |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-11-12-2 |
| By: | Wonseong Kim; Choong Lyol Lee |
| Abstract: | This study explores the influence of FOMC sentiment on market expectations, focusing on cognitive differences between experts and non-experts. Using sentiment analysis of FOMC minutes, we integrate these insights into a bounded rationality model to examine the impact on inflation expectations. Results show that experts form more conservative expectations, anticipating FOMC stabilization actions, while non-experts react more directly to inflation concerns. A lead-lag analysis indicates that institutions adjust faster, though the gap with individual investors narrows in the short term. These findings highlight the need for tailored communication strategies to better align public expectations with policy goals. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.04286 |
| By: | Rohit Kumar; Sourabh Bikas Paul; Nikita Singh |
| Abstract: | We analyze the impact of the Reserve Bank of India's (RBI) monetary policy communications on Indian financial market from April 2014 to June 2024 using advanced natural language processing techniques. Employing BERTopic for topic modeling and a fine-tuned RoBERTa model for sentiment analysis, we assess how variations in sentiment across different economic topics affect the stock market. Our findings indicate that dovish sentiment generally leads to declines in equity markets, particularly in topics related to the interest rate policy framework and economic growth, suggesting that market participants interpret dovish language as signaling economic weakness rather than policy easing. Conversely, dovish sentiment regarding foreign exchange reserves management has a positive impact on equity market. These results highlight the importance of topic-specific communication strategies for central banks in emerging markets. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.04808 |
| By: | Mirko Ðukic, Iva Krsmanovic, Miodrag Petkovic; Mirko Ðukic (National Bank of Serbia); Iva Krsmanovic (National Bank of Serbia); Miodrag Petkovic (National Bank of Serbia) |
| Abstract: | The paper presents the methodology which the National Bank of Serbia uses to nowcast inflation in real time, based on prices from the web, downloaded automatically using web scraping. A specific feature of the method used by the National Bank of Serbia is that it is based not only on prices for online shopping, but on every relevant data on the prices, including those displayed on the web merely informatively. The intention of the NBS was to cover as many items in the CPI as possible (around 90% at the time of writing this paper), in an endeavour to acquire a more reliable nowcast of the inflation central tendency. In the first year of applying this method, nowcasting performance has been encouraging – on average, inflation nowcasts were at the level of the official figures (nowcasts are not biased), the mean forecasting absolute error was 0.20 pp, and the median was 0.13 pp, which is not significant given that the observed period was characterized by relatively high and volatile inflation. |
| Keywords: | inflation forecasting, web prices, web scraping, big data |
| JEL: | C53 E17 E58 |
| Date: | 2023–03 |
| URL: | https://d.repec.org/n?u=RePEc:nsb:bilten:16 |
| By: | Heather Ford; Mary-Frances Styczynski |
| Abstract: | In 1994, a symposium was held on the measurement of the U.S. monetary aggregates. As a result of this symposium, the main components and data sources used at the time to construct the U.S. monetary aggregates were documented for posterity in A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting by Richard Anderson and Kenneth Kavajecz. |
| Date: | 2024–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-11-12-1 |
| By: | Jesper Lindé; Mr. Patrick Schneider; Mrs. Nujin Suphaphiphat; Hou Wang |
| Abstract: | This paper analyzes the effectiveness of foreign exchange intervention (FXI) in mitigating economic and financial shocks in India by applying the Integrated Policy Framework (IPF). It highlights how FXI can be a complementary tool in mitigating the tradeoff between output and inflation, specifically under large economic shocks amid temporarily shallow FX markets. The paper indicates that while FXI can soften adverse impacts on domestic demand and output during severe risk-off shocks, its benefits under normal conditions with liquid FX markets are limited. |
| Keywords: | Integrated policy framework; foreign exchange intervention; risk-off shocks |
| Date: | 2024–11–15 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/236 |
| By: | Fascione, Luisa; Oosterhek, Koen; Scheubel, Beatrice; Stracca, Livio; Wildmann, Nadya |
| Abstract: | Since the March 2023 banking turmoil, a policy debate has emerged concerning the unprecedented scale and speed of the observed deposit outflows. Have recent stress episodes and developments in technology structurally changed depositors’ behaviour? Are the Basel III liquidity coverage ratio (LCR) run-off assumptions for cash outflows still fit for purpose? Leveraging on monthly liquidity reporting for a sample of 110 significant institutions (SIs) between 2016 and 2024, we shed light on some stylised facts pertaining to the composition of deposit flows in the banking union. Overall, we find limited evidence of a structural change in the statistical behaviour of deposit flows to date. For all but one of the deposit classes included in the analysis, more than 90% of observable net outflows remained below the LCR run-off assumptions during the whole sample period. Some extreme deposit outflows recorded during the COVID-19 pandemic and for a few SIs assessed as failing or likely to fail (FOLTF) remain rare tail events for which the LCR standard was not designed. JEL Classification: G20, G21, G28 |
| Keywords: | bank regulation, bank runs, deposit outflows, LCR run-off assumptions, liquidity risk |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2024361 |
| By: | Philippe Bergault; Louis Bertucci; David Bouba; Olivier Gu\'eant; Julien Guilbert |
| Abstract: | In this paper, we introduce a novel framework to model the exchange rate dynamics between two intrinsically linked cryptoassets, such as stablecoins pegged to the same fiat currency or a liquid staking token and its associated native token. Our approach employs multi-level nested Ornstein-Uhlenbeck (OU) processes, for which we derive key properties and develop calibration and filtering techniques. Then, we design an automated market maker (AMM) model specifically tailored for the swapping of closely related cryptoassets. Distinct from existing models, our AMM leverages the unique exchange rate dynamics provided by the multi-level nested OU processes, enabling more precise risk management and enhanced liquidity provision. We validate the model through numerical simulations using real-world data for the USDC/USDT and wstETH/WETH pairs, demonstrating that it consistently yields efficient quotes. This approach offers significant potential to improve liquidity in markets for pegged assets. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.08145 |
| By: | Sergio A. Correia; Stephan Luck; Emil Verner |
| Abstract: | Why do banks fail? In a new working paper, we study more than 5, 000 bank failures in the U.S. from 1865 to the present to understand whether failures are primarily caused by bank runs or by deteriorating solvency. In this first of three posts, we document that failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive noncore funding. Further, we find that problems in failing banks are often the consequence of rapid asset growth in the preceding decade. |
| Keywords: | financial crises; deposit insurance; bank runs; bank failures |
| JEL: | G21 |
| Date: | 2024–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99160 |
| By: | Martin Haran; Michael McCord; Olawumi Fadeyi |
| Abstract: | The London office market is a primary destination for international real estate capital and a key global city and financial centre for international real estate investment. However, the increase in global uncertainties in recent years due to political events and economic and inflationary challenges highlights the need for more insights into the behaviour of international real estate capital flows. The purpose of this study is to evaluate the influence of the global and domestic environment on international real estate investment activities within the London office market over the period 20016–2023, concentrating on the separation of the UK from Europe due to the Brexit referendum, which seemingly have influenced investment flow patterns in and out of London. We employ an auto-regressive distributed lag approach using quarterly MSCI cross-border investment transactions within the central London office market for the period 2016-2023. We measure both long-run and short-run co-integrating effects and causality relative to Long-term interest rates, real effective exchange rates, total returns and yields from the London office market, GDP, Stock Market Capitalisation, the VIX index and Global Liquidity. |
| Keywords: | Brexit; Capital Flows into Real Estate; International Property Investment Trends; London Offices |
| JEL: | R3 |
| Date: | 2024–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:arz:wpaper:eres2024-257 |
| By: | Leslie Sheng Shen; Hillary Stein |
| Abstract: | Global shipping costs have soared to record highs in recent years. Costs spiked during the COVID-19 pandemic, driven by supply chain disruptions, labor shortages, and port congestion. Costs had eased by mid-2023, but they began rising again later that year and into 2024 due to Houthi violence off the coast of Yemen that restricted access to the Suez Canal and a drought at the Panama Canal that limited vessel traffic and forced rerouting around the Cape of Good Hope. As global shipping costs have soared, US import prices also have increased. |
| Keywords: | shipping costs; import prices; cost-price pass-through; inflation |
| JEL: | E31 F14 |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:99072 |
| By: | Kristina Trajkovic (National Bank of Serbia) |
| Abstract: | Prevention of money laundering and other abuses in the digital assets sector is a major step in the preservation of financial system stability. Non-alignment of regulatory regimes in an environment of rapid market development creates a potential for abuse and illicit activities. Monitoring the market requires systematic analysis in order to define clear guidelines for mitigating identified risks. Regular implementation of risk assessment and the regulator’s supervisory function facilitate the identification of the riskiness of the entire digital assets sector. In addition to an overview of regulations and standards governing the prevention of money laundering, the paper looks into the risks to which the digital assets sector is exposed, including the conduct of supervision and, in this sense, implementation of the risk-based approach. |
| Keywords: | regulation, digital assets, virtual currency, supervision, money laundering, abuse |
| JEL: | E30 K20 K23 G18 |
| Date: | 2023–09 |
| URL: | https://d.repec.org/n?u=RePEc:nsb:bilten:17 |
| By: | Hunter Ng |
| Abstract: | Wash trading, the practice of simultaneously placing buy and sell orders for the same asset to inflate trading volume, has been prevalent in cryptocurrency markets. This paper investigates whether wash traders in Bitcoin act deliberately to exploit market conditions and identifies the characteristics of such manipulative behavior. Using a unique dataset of 18 million transactions from Mt. Gox, once the largest Bitcoin exchange, I find that wash trading intensifies when legitimate trading volume is low and diminishes when it is high, indicating strategic timing to maximize impact in less liquid markets. The activity also exhibits spillover effects across platforms and decreases when trading volumes in other asset classes like stocks or gold rise, suggesting sensitivity to broader market dynamics. Additionally, wash traders exploit periods of heightened media attention and online rumors to amplify their influence, causing rapid but short-lived spikes in legitimate trading volume. Using an exogenous demand shock associated with illicit online marketplaces, I find that wash trading responds to contemporaneous events affecting Bitcoin demand. These results advance the understanding of manipulative practices in digital currency markets and have significant implications for regulators aiming to detect and prevent wash trading. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.08720 |
| By: | Marcin W\k{a}torek; Marcin Kr\'olczyk; Jaros{\l}aw Kwapie\'n; Tomasz Stanisz; Stanis{\l}aw Dro\.zd\.z |
| Abstract: | Multifractality is a concept that helps compactly grasping the most essential features of the financial dynamics. In its fully developed form, this concept applies to essentially all mature financial markets and even to more liquid cryptocurrencies traded on the centralized exchanges. A new element that adds complexity to cryptocurrency markets is the possibility of decentralized trading. Based on the extracted tick-by-tick transaction data from the Universal Router contract of the Uniswap decentralized exchange, from June 6, 2023, to June 30, 2024, the present study using Multifractal Detrended Fluctuation Analysis (MFDFA) shows that even though liquidity on these new exchanges is still much lower compared to centralized exchanges convincing traces of multifractality are already emerging on this new trading as well. The resulting multifractal spectra are however strongly left-side asymmetric which indicates that this multifractality comes primarily from large fluctuations and small ones are more of the uncorrelated noise type. What is particularly interesting here is the fact that multifractality is more developed for time series representing transaction volumes than rates of return. On the level of these larger events a trace of multifractal cross-correlations between the two characteristics is also observed. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.05951 |