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on Monetary Economics |
| By: | Ezequiel Cabezon; Moayad Al Rasasi |
| Abstract: | Uzbekistan has significantly improved its monetary policy framework during 2017-21. Nevertheless, the transition to inflation targeting is challenging as the country is going through a period of deep structural reforms. Therefore, the Central Bank of Uzbekistan (CBU) will have to monitor structural reforms and calibrate monetary policy accordingly. This paper identifies institutional and structural gaps, and assesses the effectiveness of monetary policy transmission. Institutional gaps are assessed using institutional indexes while transmission is assessed using VARs. It concludes that in the coming years, reforms will need to continue, to further improve the CBU’s governance and independence, develop financial markets, but most of all to reduce the still large footprint of the state in the financial sector as well as in the overall economy. |
| Keywords: | Uzbekistan; Inflation targeting; Monetary policy; post inflation targeting implementation; monetary policy outcome; monetary policy transmission; inflation targeting condition; transition to inflation targeting; transmission mechanism; Central bank policy rate; Inflation; Dollarization; Currency markets; Global; Central Asia and the Caucasus |
| Date: | 2022–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/229&r=mon |
| By: | Thore Kockerols; Erling Motzfeldt Kravik; Yasin Mimir |
| Abstract: | Should central banks use leaning against the wind (LAW)-type monetary or macroprudential policy to address risks to financial stability? We first assess LAW as a one-off (nonsystematic) policy using an estimated large-scale dynamic stochastic general equilibrium (DSGE) model with empirically plausible persistent financial cycles and a stylised regime-switching (RS) framework of occasional crises. We then evaluate policy-rule based (systematic) LAW using an endogenous RS version of our DSGE model with financial crises, effective lower bound (ELB) on interest rates, and an asymmetric LAW policy. Our findings do not support LAW by monetary policy because the costs of depressing the economy in normal times far outweigh the benefits of a less likely and less severe crisis. LAW increases inflation volatility significantly as it amplifies the effects of supply shocks on inflation. It also leads to higher long-run output costs in the case of nonsystematic policy and to a lower mean inflation rate in the case of systematic policy. The latter also results in more frequent ELB episodes due to the lower mean inflation rate it induces. We find that LAW is only advisable if the policymaker cares more about output stability relative to inflation stability or if financial cycles are less persistent, exclusively under systematic LAW. Higher long-run capital requirements in normal times address risks to financial stability better as they reduce the fluctuations in inflation and output considerably. |
| Keywords: | leaning against the wind, monetary policy, financial cycle, macroprudential policy |
| JEL: | E52 E58 G01 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2021_11&r=mon |
| By: | Linas Jurkšas; Francisco Gomes Pereira |
| Abstract: | We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly find if fiscal stance matters for the monetary policy conduct. We use GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 with the thick-modelling approach. The results revealed that ECB actions have exhibited desirable stabilising monetary policy properties and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit usually is not statistically significant in explaining ECB monetary policy stance. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These findings speak against the “fiscal dominance” regime in the euro area where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the precise specification of the GMM and SVAR models and if the sample period is shortened from 2012. |
| Keywords: | ECB; monetary policy; reaction function; Taylor rule; fiscal deficits; fiscal stance |
| JEL: | E43 E52 E58 E61 E62 H62 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02582023&r=mon |
| By: | Michael D. Bordo; William Roberds |
| Abstract: | We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs. |
| Keywords: | banknotes; central banks; digital currencies; monetary systems |
| JEL: | E42 E58 N10 |
| Date: | 2022–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:95574&r=mon |
| By: | Bernardino Adão; André Silva; João Gama |
| Abstract: | We show that the effectiveness of monetary policy changes with the labor income share. We do this in the context of a continuous time cash-in-advance model with heterogeneous agents and market segmentation. It turns out that the current price level depends on future interest rates through an integral equation. The solution of this integral equation reveals that, after an increase in interest rates, a larger income share implies larger reductions in money, prices and inflation. Monetary policy is more powerful in countries with a higher labor income share. |
| JEL: | C6 E3 E4 E5 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202218&r=mon |
| By: | Frédéric Boissay (BIS - Bank for International Settlements); Fabrice Collard (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Jordi Gali (CREI - Centre de Recerca en Economia Internacional - UPF - Universitat Pompeu Fabra [Barcelona]); Cristina Manea (BIS - Bank for International Settlements) |
| Abstract: | We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course. |
| Keywords: | Financial crisis, monetary policy |
| Date: | 2023–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03917780&r=mon |
| By: | Gonzalo Huertas |
| Abstract: | I conduct interviews with 32 Central Bankers from Emerging Markets and present five unifying themes that explain their behavior when reacting to a U.S. monetary tightening. I then estimate the impulse response functions of their two main monetary tools, the policy rate and foreign exchange interventions, to an increase in the U.S. rate, using the answers from the interviews as a guide for the best econometric specification. I find that most Central Banks react to a U.S. tightening by raising domestic rates, regardless of the exchange rate regime, but their reasons for doing so vary – from controlling inflation to preventing capital outflows. |
| Keywords: | Monetary policy; emerging markets. international spillovers; global interest rates; trilemma. |
| Date: | 2022–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/243&r=mon |
| By: | Sebastián Katz (Central Bank of Argentina) |
| Abstract: | Digital transformation is provoking a real revolution in the payment´s landscape of many economies in the last few years. New technologies and the change in public´s habits are transforming not only the way payments are processed but the very modes of registering, storing and transferring value among economic agents. In that sense, a potential change in the forms of money as social convention or institution is also taking place. Many of these trends were accelerated by the pandemic. As a consequence of these developments, Central Banks started to actively explore the possibility of issuing their own digital monetary liabilities directed towards the general public, or retail CBDC (Central Bank Digital Currency). Many of them have progressed from conceptual research towards practical experimentation and a few jurisdictions have decided to implement it in the last period. This working paper presents a general overview of these efforts, the potential benefits that could derive from this initiative and the alternative designs and architectures under study oriented to minimize some of its risks. |
| Keywords: | Central Bank digital currencies, crytoassets, money, payment systems, stablecoins |
| JEL: | E42 E58 F42 G21 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2022100&r=mon |
| By: | Roberto Tamborini |
| Abstract: | The resurgence of inflation since the late 2021 is now accompanied by a reversal of prospects of growth, reviving fears of stagflation across the world (IMF 2022, World Bank 2022). In almost all accounts of the mounting stagflation threats a prominent role is played by the fall of households' purchasing power, and hence consumption, owing to the inflation shock visà-vis nominal wages lagging behind. The theoretical issue that motivates this paper is that this endogenous real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The paper shows how this channel can be introduced reformulating the consumption function, with the consequence that it exerts a stabilisation effect on inflation endogenously. By means of simulations the paper discusses the main monetary policy implication: what is the role left to monetary policy which purports to curb inflation in the same way? |
| Keywords: | cost-push inflation, real income effect, stagflation, New Keynesian models for monetary policy |
| JEL: | E17 E30 E50 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10194&r=mon |
| By: | Oleksiy Kryvtsov; James (Jim) C. MacGee; Luis Uzeda |
| Abstract: | The rise in inflation in 2021–22 sparked a growing literature and debate over the causes of the surge as well as the near- and medium-term path for inflation. This review offers three key messages. First, the exceptional nature of shocks resulting from the COVID-19 pandemic and geopolitical events drove the surge in inflation and the initial underestimation by many central banks of the extent of inflationary pressures. Second, the pandemic may have accelerated structural changes in goods and labour markets, which are likely to put pressure on goods prices and wages in the medium and long term. Third, the resulting shifts in relative prices for goods, services and labour are unlikely to be large enough to threaten a return of inflation to target but may require somewhat higher interest rates than those in the decade before the pandemic. |
| Keywords: | Inflation and prices; Inflation targets; Monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-3&r=mon |
| By: | Matthias Kaldorf (University of Cologne); Florian Wicknig (University of Cologne) |
| Abstract: | Central banks implement monetary policy by extending credit to banks, for example via standing facilities or long-term refinancing operations. In addition to setting policy rates, central banks also specify in their collateral framework which financial assets banks can pledge to obtain central bank funding. Here we discuss the design of collateral frameworks for the case of corporate sector assets. This is particularly relevant in countries where the supply of safe government bonds is insufficient to satiate collateral demand. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkpbs:026&r=mon |
| By: | Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello |
| Abstract: | The ECB is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this tradeoff would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. The ECB should have followed this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring a euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB needs to be more effective and subject to excessive discretion. The ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies. |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:00155&r=mon |
| By: | Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | With the profusion of measures of expected inflation (from market prices and from surveys of households, firms, and professionals) it is a mistake to focus on a single one while ignoring the others. This paper discusses four common arguments for a single focus, and finds each of them to be lacking. In the process, it isolates characteristics of different measures that models that combine them should take into account. |
| Keywords: | Phillips curve, anchoring, monetary policy, central banking |
| JEL: | E31 E52 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2301&r=mon |
| By: | El Mehdi El Herradi (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Aurelien Leroy (UB - Université de Bordeaux, BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper assesses whether monetary policy announcements have an impact on households' (subjective) well-being by analysing life satisfaction on the days before and after monetary surprises in Germany. To do so, we use individual-level information on life satisfaction from the German Socio-Economic Panel (SOEP) survey and identify the day on which each answer is submitted to the survey. We also exploit the Euro Area Monetary Policy event study Database (EA-MPD) to obtain daily-level information on European Central Bank (ECB) monetary surprises. Our results show that life satisfaction is significantly affected by monetary policy surprises: tightening surprises decrease life satisfaction, while easing surprises increase it. |
| Keywords: | Monetary policy, Subjective Well-Being, Survey data, European Central Bank |
| Date: | 2022–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03897994&r=mon |
| By: | Antoine Camous |
| Abstract: | This paper studies how progressive fiscal policy influences the conduct of monetary policy in a tractable heterogeneous agent economies. A priori, progressive labor taxation is undesirable because it generates costly distortions. Nonetheless, it is an effective instrument to mitigate the inflation bias of monetary policy because it achieves a redistributive purpose. I analyze this commitment channel of progressive labor taxes through the lens of political conflicts. When agents vote on monetary and fiscal instruments, progressivity is decisive in curbing the inflation bias because it generates distributional conflicts, lower-productivity agents support higher labor taxes to preserve the consumption value of money holding and shift the burden of policy distortions to higher-productivity agents. Anticipating the reduction in inflation, agents unanimously desire to adopt a progressive fiscal system. |
| Keywords: | Monetary-Fiscal Policy, Progressive Labor Income Taxes, Inflation Bias, Time Consistency, Political Economy, Heterogeneous Agents |
| JEL: | E02 E42 E52 E61 E62 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_387&r=mon |
| By: | Riccardo Degasperi (DG Economics, Statistics and Research, Rome, Italy); Seokki Simon Hong (Paris School of Economics, Paris, France); Giovanni Ricco (CREST – Ecole Polytechnique, Palaiseau, France) |
| Abstract: | US monetary policy shapes economic conditions globally due to the dominant role of the dollar in the world economy. We study the propagation of US monetary policy shocks abroad using a state-of-the-art high-frequency identification and a harmonised dataset covering 30 economies and over 150, 000 datapoints. A policy tightening has large contractionary effects on both advanced and emerging economies. The propagation via financial variables limits foreign central banks’ control over domestic economic conditions by increasing risk premia and by destabilising the medium-long segment of the yield curve. The responses of headline prices abroad are instead shaped by spillovers via commodity markets. |
| Keywords: | Monetary policy, Trilemma, Exchange Rates, Monetary Policy Spillovers. |
| JEL: | E5 F3 F4 C3 |
| Date: | 2022–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2023-02&r=mon |
| By: | Roger Vicquéry |
| Abstract: | This paper quantifies the relative dominance of global currencies and the competitive structure of the international monetary system since 1825. I find the post-1945 experience of dollar hegemony to have no historical precedent. No currency has ever maintained such a large, long-lasting lead over global currency rivals. Close competitors frequently challenged the previous hegemon, the pound sterling. I confirm the dollar temporarily overtook the sterling for the first time in the mid-1920s. Among previously overlooked episodes of monetary competition, I highlight the rise of the French franc in the 1850s and 1930s as well as of the German mark in the 1870s. In light of the recent debate on the costs and benefits of a multipolar international monetary system, I document a positive correlation between higher global currency competition and the prevalence of financial crises, which is however highly dependent on specific sub-periods. |
| Keywords: | International Monetary System, Long Run, Dollar Hegemony, Multipolarity |
| JEL: | F3 F4 N2 E5 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:882&r=mon |
| By: | Gadi Barlevy |
| Abstract: | This paper examines whether tasking central banks with leaning against asset booms can conflict with their existing mandates to stabilize goods prices and output. The paper embeds the Harrison and Kreps (1978) model of speculative booms in a monetary model based on Rocheteau, Weill, and Wong (2018). In the model, a speculation shock that generates an asset boom is associated with higher output but a lower price level, unlike aggregate demand shocks that raise both output and prices. This creates a trilemma for central banks in that contemporaneous monetary policy cannot simultaneously stabilize output, the price level, and real asset prices. Stabilizing all three requires alternative policies. |
| Date: | 2022–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:95174&r=mon |
| By: | Yasin Mimir; Enes Sunel |
| Abstract: | We provide a theory on how a wider foreign lending base of local-currency sovereign debt may lead to destabilising effects (the original sin redux). Bond sell-offs by foreigners induce domestic banks to fund the government, reducing the credit for investment and tightening financial conditions. Currency mismatches exacerbate the ensuing deterioration in financial sector balance sheets, which amplifies the repercussions of the initial shock by prompting private sector capital outflows and larger currency depreciations. We then explore the role of central bank government bond and firm security purchases in countervailing the ramifications of bond sell-offs. Our estimated model reflects the regularities of the representative emerging-market economy that deployed quantitative easing policies during the pandemic. It further offers an explanation to the puzzle of stable exchange-rate dynamics accompanied by a reduction in excess sovereign bond yields and larger room for conventional monetary policy easing. We conclude asset purchases should be large in size to have a persistent effect on financial conditions and are less effective when they de-anchor inflation expectations or pose risks to a consolidated government balance sheet. |
| Keywords: | asset purchases, original sin redux, bayesian estimation |
| JEL: | E62 E63 G21 |
| Date: | 2021–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2021_8&r=mon |
| By: | Mr. Frederik G Toscani; Thomas McGregor |
| Abstract: | We develop a bottom-up model of inflation in the euro area based on a set of augmented Phillips curves for seven subcomponents of core inflation and auxiliary regressions for non-core items. We use the model’s disaggregated structure to explore which factors drove the deterioration in forecasting performance during the pandemic period and use these insights to improve on the ability to forecast inflation. In the baseline, the projection for core inflation is centered above 3 percent at end-2023, while headline inflation is expected to drop quite sharply over 2023, with energy base effects pulling inflation down from the currently very elevated levels to below 3 percent by 2023q4. The confidence intervals around these projections are wide given elevated uncertainty. We argue that the bottom-up approach offers a useful complement to the forecasters toolbox – even in the current uncertain environment - by improving forecast accuracy, shedding additional light on the drivers of inflation and providing a framework in which to apply ex post judgement in a structured way. |
| Keywords: | Euro area; Inflation; Phillips curve; inflation expectation; inflation pressure; augmented Phillips curves; forecast accuracy; drivers of inflation; Natural gas sector; Fuel prices; Oil prices; Food prices; Global |
| Date: | 2022–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/260&r=mon |
| By: | Mahvash S Qureshi; Mr. Tobias Adrian; Mr. Fabio M Natalucci |
| Abstract: | The global financial system has shown remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This paper takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. In response to the pandemic-induced crisis, major central banks acted swiftly and decisively, cutting policy rates, introducing new asset purchase programs, providing liquidity support for the banking system, and creating several emergency facilities to sustain the flow of credit to the real economy. Several emerging market central banks also deployed asset purchase programs for the first time. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future. |
| Keywords: | COVID-19 pandemic crisis; monetary policy; financial stability; emerging markets; central bank asset; purchase program; monetary policy support; market liquidity; asset purchase; COVID-19; Inflation; Global financial crisis of 2008-2009; Capital flows; Financial sector stability; Global |
| Date: | 2022–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/251&r=mon |
| By: | Alina K. Bartscher; Moritz Kuhn; Moritz Schularick; Paul Wachtel |
| Abstract: | Racial income and wealth gaps in the United States are large and persistent. Recently, central bankers and politicians have put forward the suggestion that monetary policy can be used to reduce these inequalities. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Over multi-year horizons, we find that while accommodative monetary policy tends to reduce racial unemployment and thus earnings differentials, it exacerbates racial wealth differentials, which implies an important tradeoff for policymakers. |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkpbs:014&r=mon |
| By: | Luca Eduardo Fierro (Institute of Economics, Scuola Superiore Sant'Anna Pisa (SSSA),); Federico Giri (Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)); Alberto Russo (Department of Economics, Universitat Jaume I (UJI) and Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)) |
| Abstract: | We study how income inequality affects monetary policy through the inequality household debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy, i.e. lowering the policy rate, can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted. |
| Keywords: | Inequality, Financial Fragility, Monetary Policy, Agent-Based Model |
| JEL: | D31 E21 E25 E31 E52 G51 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:474&r=mon |
| By: | Sandra Gomes; Pascal Jacquinot; Matija Lozej |
| Abstract: | Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of crosscountry heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households. |
| JEL: | E24 E32 E43 E52 F45 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202301&r=mon |
| By: | Alfred V Guender; Hamish McHugh-Smith |
| Abstract: | In a model comprising a bank and goods-producing firm, this paper advances the hypothesis that financial openness should be inversely related to the rate of inflation. Our empirical analysis reveals a strong and robust inverse link between financial openness and CPI inflation in over 100 countries over the 1997-2016 period, adding weight to the argument that inflation in financially open economies is indeed lower. This result obtains for OECD countries as well as non-OECD countries. Trade openness in contrast bears no systematic relationship to inflation. |
| Keywords: | Financial Openness, Trade Openness, Inflation, Bank Loans, Deposits, Nominal Price Rigidity |
| JEL: | E3 E5 F3 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-02&r=mon |
| By: | Mr. Damiano Sandri; Mr. Francesco Grigoli |
| Abstract: | We analyze the impact of monetary policy on consumer spending using credit card data. Because of their high frequency, these data improve identification and allow for a precise characterization of the transmission lags. We find that shocks to short-term interest rates affect spending much more rapidly than shocks to longer-term interest rates. We also detect significant asymmetries. While interest rate rises are contractionary, interest rate cuts are unable to lift spending. Finally, by exploiting the disaggregation of credit card data, we uncover considerable heterogeneity in the effects of monetary policy across spending categories and a stronger impact on higher-income users. |
| Keywords: | Credit card spending; heterogeneity; monetary policy; transmission; credit card data; IMF working paper research Department; interest rate cut; impact of monetary policy; interest rate rise; Consumer credit; Asset prices; Monetary tightening; Consumption; Negative interest rates |
| Date: | 2022–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/255&r=mon |
| By: | Emilia Garcia-Appendini (University of Zurich - Department of Banking and Finance); Frédéric Boissay (Bank for International Settlements (BIS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Is monetary policy transmitted through markets for intermediate goods? Analyzing US data on corporate linkages, we document that the financial health of downstream and upstream firms plays a key role in monetary policy transmission. Our estimates suggest that contractionary changes in monetary conditions lead to reductions in demand and supply of financially constrained firms downstream and upstream. These reductions create bottlenecks inducing the "middle" linked firms to curtail their own activities. Overall these "bottleneck effects" coming from changes in demand and supply by constrained partners have a larger impact on a firm's operations than the firm's own financial conditions. |
| Keywords: | Monetary policy transmission, supply chain, aggregate demand, cost channel. |
| JEL: | E52 G32 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2297&r=mon |
| By: | Pedro Elosegui (Central Bank of Argentina); Máximo Sangiácomo (Central Bank of Argentina) |
| Abstract: | The Central Bank of Argentina (BCRA) implements a monthly Survey of Business Economic Perspectives to capture the business climate and economic perspectives. The survey includes both qualitative and quantitative questions on past and expected change in different economic variables of the main companies in Argentina. This unique proprietary data is used to approximate the price setting behavior of the firms in the domestic markets. We postulate an econometric model where the firms’ dynamic on their expected domestic prices are based on (i) firm’s past and expected information (prices, input costs and inventories) and (ii) macroeconomic variables (economic activity, foreign exchange rate, interest rate and inflation rate). The results indicate the importance of input costs (domestic and imported) and the macroeconomic variables (especially the exchange rate and the inflation rate) in the expected price dynamics of the analyzed companies and are in line with the literature analyzing price setting behavior under macroeconomic uncertainty. Foreign exchange rate pass-through, markups on input prices and forward-looking behavior in price setting generate important challenges for the anti-inflationary monetary policy. |
| Keywords: | survey data, price setting, firms expectations |
| JEL: | E30 E50 D40 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2022103&r=mon |
| By: | Jing Cynthia Wu; Yinxi Xie |
| Abstract: | We build a tractable New Keynesian model to study four types of monetary and fiscal policy. We find that quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks down: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments—the policy rate together with QE or fiscal transfers—can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion. |
| Keywords: | Fiscal policy; Monetary policy |
| JEL: | E E4 E61 E62 E63 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-6&r=mon |
| By: | Prati, Alberto |
| Abstract: | In terms of well-being, how costly is inflation? To answer this question, empirical evaluations have typically studied average inflation rates at the national level, thus disregarding the role of inflation inequalities within a country. In this article, we relax the assumptions that heterogeneous consumers face homogeneous inflation rates, and study the correlation between price changes and self-reported satisfaction with living standards. We use newly available data from France and adopt two approaches. First, we focus on individually perceived inflation and use the internationally harmonized Opinion Price Index as a proxy for experienced inflation. Variations in perceived inflation help predict well-being differences among consumers, even when controlling for relevant sociodemographic factors, personality traits, and common method variance. We estimate their marginal impact to be higher than equivalent variations in nominal income. Second, we compare groups of consumers over time and find that changes in the price of a good disproportionately affect the relative well-being of those who consume it. The study shows that the well-being cost of the inflation crisis would be underestimated if looking at aggregate figures only. |
| Keywords: | heterogeneous inflation; inflation inequality; Opinion Price Index; perceived inflation; standard of living; subjective well-being |
| JEL: | J1 |
| Date: | 2023–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:117919&r=mon |
| By: | Francisco Gomes Pereira |
| Abstract: | Employing a Bayesian structural vector autoregressive (VAR) model, we estimate the impact of the European Central Bank’s (ECB) balance sheet expansionary policies (BSEP) on a range of economic and financial variables including real GDP, inflation, long-term sovereign bond yields, systemic stress, unemployment, bank loans, and equity markets in the period from 2009:Q1 to 2021:Q4. The main conclusion from this study is that more vulnerable euro area countries had larger magnitudes in desirable impulse responses to BSEPs shocks. To reach this conclusion, we estimated the same model for 16 euro area countries and used maximum, minimum, and cumulative impulse responses to assess the heterogenous responses to BSEPs across member states. We then attempt to find correlations of impulse responses with measures of financial and economic vulnerability such as debt-to-GDP ratios, unemployment, GDP per capita (PPP), and tier 1 bank capital ratios. Our results suggest that the magnitude of the responses are more pronounced in countries with higher levels of vulnerability. These findings are akin to theoretical assumptions that suggest that unconventional monetary policies are most effective in periods of severe systemic stress. |
| Keywords: | ECB; monetary policy; unconventional monetary policy; BVAR; euro area |
| JEL: | C11 E02 E52 E58 G02 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02592023&r=mon |
| By: | Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello |
| Abstract: | This paper uses an event-based analysis to describe how the European Central Bank’s (ECB’s) policy responses to the pandemic crisis have affected the European financial and economic system. The result of our exercise, which is based on the examination of the main measures taken by the ECB during 2020, is that these responses have positively affected the European economic system by improving banks’ lending activity and by indirectly creating room for expansionary fiscal policies in the euro area’s high-debt countries that do not have fiscal capacity. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:00151&r=mon |
| By: | Wenxin Du |
| Abstract: | Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs’ activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs’ business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles. |
| Keywords: | foreign banking organizations (FBOs); dollar; reserves |
| JEL: | E5 |
| Date: | 2023–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:95471&r=mon |
| By: | Mahir Binici; Mr. Serhan Cevik; Samuele Centorrino; Gyowon Gwon |
| Abstract: | Global inflation has surged to 7.5 percent in August 2022, from an average of 2.1 percent in the decade preceding the COVID-19 pandemic, threatening to become an entrenched phenomenon. This paper disentangles the confluence of contributing factors to the post-pandemic rise in consumer price inflation, using monthly data and a battery of econometric methodologies covering a panel of 30 European countries over the period 2002-2022. We find that while global factors continue to shape inflation dynamics throughout Europe, country-specific factors, including monetary and fiscal policy responses to the crisis, have also gained greater prominence in determining consumer price inflation during the pandemic period. Coupled with increasing persistence in inflation, these structural shifts call for significant and an extended period of monetary tightening and fiscal realignment. |
| Keywords: | Inflation; output gap; globalization; Phillips curve; dynamic factor model; fixed effect estimator; local projection method; inflation dynamics; consumer price inflation; fiscal policy response; inflation expectation; inflation process; commodity price; core CPI; Commodity prices; COVID-19; Energy prices; Global; Europe |
| Date: | 2022–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/241&r=mon |
| By: | Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello |
| Abstract: | This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:00152&r=mon |
| By: | Chan, Jenny; Diz, Sebastian; Kanngiesser, Derrick |
| Abstract: | How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small, open-economy TANK model that features labor and an energy import good as complementary production inputs (Gas-TANK). Given such complementarities, higher energy prices reduce the labor share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from adverse energy price shocks, further depressing labor income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labor in production and the degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalized to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy. |
| Keywords: | Heterogenous agent models, business cycle fluctuations, energy, monetary policy |
| JEL: | E5 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115975&r=mon |
| By: | Ms. Alina Carare; Mr. Yorbol Yakhshilikov; Metodij Hadzi-Vaskov; Dmitry Vasilyev; Lavinia Franco; Justin Lesniak |
| Abstract: | This paper investigates factors that predict variation in digital and non-digital remittance fees over time and across countries, exploring differences between CAPDR and other regions. The paper fills a void in the literature on how country- and corridor-specific factors relate to remittance fees at different levels of digitalization of the transaction mode. It also complements stylized facts and regression analysis with a survey analysis of the CAPDR authorities’ views on the latest developments, possibilities, and risks related to digital remittances with a view to gauging the authorities’ potential role in further reducing the cost of cross-border payments more generally and remittances fees in particular. The paper finds a clear trend of declining remittance fees across countries and at any level of digitalization, albeit they remain higher for CAPDR countries relative to non-CAPDR countries. More competition, financial and digital development in receiving countries—such as debit/credit card ownership or bank branch penetration—are associated with lower remittance fees, especially in CAPDR. The surveyed authorities actively explore the use of digital money to advance domestic payment systems, expedite financial inclusion, and lower remittances fees, yet see considerable risks, especially for preserving monetary sovereignty in CAPDR. |
| Keywords: | Digital money; cryptocurrency; stablecoin; remittances |
| Date: | 2022–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/238&r=mon |
| By: | Markus Leippold (University of Zurich; Swiss Finance Institute); Vincent Wolff (University of Zurich - Department of Banking and Finance) |
| Abstract: | Næs, Skjeltorp, and Ødegaard (2011) provide empirical evidence that stock market liquidity contains leading information about future economic activity. Their result suggests a rebalancing of small, increasingly illiquid to large stocks in recession times, an expression of “flight-to-quality”. We show that the relationship no longer holds due to the Fed’s accommodative monetary policy to buoy stock markets in crisis starting in the 1990s. Moreover, we document that liquidity dry-ups in small stocks no longer coincide with recessions. The Fed’s interventions mute the systematic link between monetary conditions and aggregate stock market liquidity’s well-established business cycle component. |
| Keywords: | Financial Markets and the Macroeconomy, Liquidity, Monetary Policy |
| JEL: | G10 E52 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2293&r=mon |
| By: | Javier GarciÌ a-Cicco (UCEMA); Lorena Garegnani (Central Bank of Argentina); Maximiliano GoÌ mez Aguirre (Central Bank of Argentina); Ariel Krysa (Central Bank of Argentina); Luis Libonatti (Central Bank of Argentina) |
| Abstract: | This paper makes a comparative study of the inflation dynamics of Argentina, Brazil, Chile, Colombia, Mexico and Uruguay during the 2004-2019 period. The goal is to document a number of empirical regularities that are useful for some discussions about the determinants and mechanisms of the inflationary processes of those countries. Firstly, we apply a cointegration analysis, and two long-run relationships are found in all the analyzed countries. One relationship is related to the influence of different costs on domestic prices. The other relationship is associated with the money demand. Then, we propose a methodology for decomposing the short-run evolution of the year-on-year inflation between the effects of lagged variables and the contemporary effects of the determinants. As a result, we show that the influence of the inflation persistence explains a big part of the inflation dynamics in Argentina, Uruguay and, to a lesser extent, in Brazil. In Colombia and Mexico, the relative contribution of the autonomous persistence and the lags of the other determinants is more balanced. Finally, in Chile the autonomous persistence has a marginal influence. When focusing on the dynamics influenced by the lagged values of the other determinants, we found heterogeneous explanations in the countries of the sample. |
| Keywords: | inflation, Latin America, econometric models |
| JEL: | C32 E31 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2022101&r=mon |
| By: | Ozili, Peterson K |
| Abstract: | The eNaira is the central bank digital currency of Nigeria. People who are interested in the eNaira and financial inclusion will seek information about eNaira and financial inclusion. Their interest in information about eNaira and financial inclusion will make it easier for them to adopt the eNaira and embrace other financial inclusion innovations such as financial technology (Fintech) and cryptocurrency. This paper investigates the determinants of interest in eNaira and financial inclusion information. Interest over time data were analyzed using descriptive statistics, correlation analysis and ordinary least squares (OLS) regression. The study also used the GMM and 2SLS regression methods for robustness. The findings of this study reveal that interest in Fintech and eNaira information are significant positive determinants of interest in financial inclusion information. Also, interest in financial inclusion is a significant positive determinant of interest in eNaira information. Furthermore, interest in Fintech information has a positive and significant correlation with interest in financial inclusion information. There is also a significant positive correlation between interest in central bank digital currency information and interest in Fintech information. The implication of the findings is that interest in information about new financial innovations, such as Fintech and eNaira, can stimulate interest in information about financial inclusion. |
| Keywords: | eNaira, Fintech, financial inclusion, central bank digital currency, cryptocurrency, information, innovation, innovation diffusion theory. |
| JEL: | G21 G23 G24 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115990&r=mon |
| By: | Eduardo Corso (Central Bank of Argentina); Maximo Sangiacomo (Central Bank of Argentina) |
| Abstract: | dollarization hinders financial intermediation in domestic currency which is detrimental for economic growth and development. A broad branch of the financial dollarization literature is based on portfolio theory. Dollarization of savings portfolios is the result of optimal mean-variance portfolio selection. In this document, we use an optimal portfolio selection approach to analyse financial dollarization's hysteresis in Argentina. Based on the historical experience of our country, we model agents' expectations using second-order probability distributions, that allow us to incorporate positive bias in subjective distribution of dollar returns. This bias arises from the subjective perceptions of unsustainability of the current regime. Under the proposed analytical scheme, in contexts in which households and firms face difficulties in identifying informative signals about the sustainability of the current exchange-rate regime, policy measures aimed at promoting financial de-dollarization may produce unwanted behavior. For example, the usually stated mean-variance approach argument of rising real exchange rate volatility relative to domestic currency volatility (inflation) could be perceived as an increase in the subjective probability of regime change, leading to portfolio rebalancing towards the foreign currency, with opposite results to those expected. |
| Keywords: | dollarization, asset substitution, financial intermediation |
| JEL: | E52 F36 F41 G11 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2023106&r=mon |
| By: | Julien Reynaud; Juan-Pablo Erraez |
| Abstract: | A textbook argument in favor of adopting another country’s legal tender is that it imposes strong constraints on money creation and therefore fiscal dominance. In Ecuador, an officially dollarized economy since January 2000, a series of accounting practices and subsequent changes in legislations approved over the period 2009-2014 allowed an expansion of the Central Bank of Ecuador’s (CBE) balance sheet to finance the central government. At its peak, central bank financing of the government represented 10 percent of GDP. This resulted in large liabilities to the CBE that translated into low reserve coverage, putting the public and private financial systems and ultimately the dollarization regime at risk. In this paper, we first present the legal and accounting processes behind the expansion of the CBE's balance sheet and some stylized facts. In the second section, we establish a stress test-like methodology to show how the expansion of the CBE’s balance sheet induced strong pressures on CBE’s liquidity. Ultimately, such liquidity stress at the CBE translated into high cash inflows needs, i.e. external debt, for the central government. |
| Keywords: | Central bank; balance sheet expansion; fiscal dominance; central bank financing; financing of the government; accounting practice; liquidity ration; CBE balance sheet; CBE liability; International reserves; State-owned banks; Financial statements; Bank deposits; Public sector |
| Date: | 2022–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/234&r=mon |
| By: | Natkamon Tovanich (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique); Rémy Cazabet (DM2L - Data Mining and Machine Learning - LIRIS - Laboratoire d'InfoRmatique en Image et Systèmes d'information - UL2 - Université Lumière - Lyon 2 - ECL - École Centrale de Lyon - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique, LIRIS - Laboratoire d'InfoRmatique en Image et Systèmes d'information - UL2 - Université Lumière - Lyon 2 - ECL - École Centrale de Lyon - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique, UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, IXXI - Institut Rhône-Alpin des systèmes complexes - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - INSA - Institut National des Sciences Appliquées - Inria - Institut National de Recherche en Informatique et en Automatique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes) |
| Abstract: | Bitcoin is the first and highest valued cryptocurrency that stores transactions in a publicly distributed ledger called the blockchain. Understanding the activity and behavior of Bitcoin actors is a crucial research topic as they are pseudonymous in the transaction network. In this article, we propose a method based on taint analysis to extract taint flows-dynamic networks representing the sequence of Bitcoins transferred from an initial source to other actors until dissolution. Then, we apply graph embedding methods to characterize taint flows. We evaluate our embedding method with taint flows from top mining pools and show that it can classify mining pools with high accuracy. We also found that taint flows from the same period show high similarity. Our work proves that tracing the money flows can be a promising approach to classifying source actors and characterizing different money flow patterns. |
| Keywords: | Bitcoin, Money flow, Taint analysis, Graph embeddings |
| Date: | 2022–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03896866&r=mon |
| By: | Mr. John C Bluedorn; Mr. Niels-Jakob H Hansen; Jorge Alvarez; Evgenia Pugacheva; Alexandre Sollaci; Youyou Huang |
| Abstract: | How often have wage-price spirals occurred, and what has happened in their aftermath? We investigate this by creating a database of past wage-price spirals among a wide set of advanced economies going back to the 1960s. We define a wage-price spiral as an episode where at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages. Perhaps surprisingly, only a small minority of such episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged. A decomposition of wage dynamics using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels that are consistent with observed inflation and labor market tightness. When focusing on episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow – thus allowing real wages to catch up. We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold. |
| Keywords: | Inflation; Wages; Wage-price spirals; Labor markets.; wage-price spiral; nominal wage growth; Phillips curve; Phillips Curve estimation; Wage-Price spiral; Real wages; Labor markets; Wage adjustments |
| Date: | 2022–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/221&r=mon |