|
on Monetary Economics |
| By: | Thorarinn G. Petursson |
| Abstract: | This paper analysis the transmission mechanism of monetary policy in Iceland using three alternative identification schemes in a structural VAR setting. Consistent with the international literature, we find that an unexpected monetary policy tightening leads to a temporary but sizable contraction in output, a sustained appreciation of the nominal exchange rate, and a more sluggish and persistent decline in inflation. Three other structural shocks are also identified. All have plausible economic interpretation and can explain the bulk of the variation in output and inflation over our sample period. By comparison, the contribution from monetary policy shocks is relatively modest, especially to output fluctuations. Historical decomposition shows, however, that monetary policy played an important role during the disinflation of the second half of the 2010s and in offsetting a large negative demand shock following the global pandemic at the start of this decade. However, the historical decomposition also suggests that the withdrawal of the post-Covid monetary easing was too slow, thus contributing to rising inflation by the end of the sample period. |
| JEL: | C32 E52 F41 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp94&r=mon |
| By: | Mario Seccareccia (University of Ottawa); Guillermo Matamoros (University of Ottawa) |
| Abstract: | The Taylor rule has returned as a significant policy guide amid increasingly overt political pressures for its official (and not just its implicit) adoption at the US Fed as inflation fears have come to dominate monetary policy actions both in the US and internationally in recent times. Our paper analyzes the effect of monetary policy on the functional distribution of income by reconstructing how the post-1970s "inflation first" policy commitments of central banks came to be crystallized in the Taylor rule. While there are differences among the various specifications of this "rule", the Taylor relation is merely an offshoot of what can be described generically as the family of Wicksellian reaction functions whose implications support rentier income over time. Because of the internal logic of the Taylor rule, this has led to different interpretations such as, for example, the more Keynesian Yellen rule, which depart from the strict sense of the Taylor rule. The paper also interprets the Taylor Rule in light of Wicksell's formulation and analyzes the potential consequence of the differences. In contrast to the strict Wicksell rule of "proportional" adjustment, our econometric findings suggest evidence that central banks adjust "over-proportionally" the benchmark money interest rate in the presence of changes in the inflation rate for the complete "inflation first" era since the 1970s until the COVID-19 crisis. They thereby strongly favored rentier incomes in their reaction functions, with the possible exception of the post-financial crisis period. To limit the pro-rentier consequences of such inflation-targeting regimes, it is important that policymakers mandate multiple objectives for central banks, as exemplified in the current US Fed's dual mandate. |
| Keywords: | Central bank reaction functions, income distribution, monetary policy, Taylor rule, Wicksell rule |
| JEL: | E12 E52 E58 |
| Date: | 2023–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp209&r=mon |
| By: | Orphanides, Athanasios |
| Abstract: | This paper examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and its communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forwardlooking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook. |
| Keywords: | Monetary policy strategy, forward guidance, policy rules |
| JEL: | E52 E58 E61 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:190&r=mon |
| By: | Cole, Stephen J.; Huh, Sungjun; (Department of Economics Marquette University; Department of Economics Marquette University) |
| Abstract: | We compare the economic effects of forward guidance and quantitative easing utilizing the four-equation New Keynesian model of Sims, Wu, and Zhang (2023) with agents forming expectations via an adaptive learning rule. The results indicate forward guidance can have a greater influence on macroeconomic variables compared to quantitative easing, suggesting that forward guidance may have contributed to the high inflation rate after the COVID-19 related recession. Adaptive learning agents estimate a higher effect of forward guidance on the economy leading to a greater impact on expectations, and thus, contemporaneous inflation. However, the performance gap between forward guidance and quantitative easing can change. If quantitative easing includes anticipated shocks, more households finance consumption through long-term borrowing, and the central bank provides a greater percentage of liquidity in the long-term borrowing market, the performance of quantitative easing can increase, and at times, outperform forward guidance. |
| Keywords: | unconvetional monetary policy, QE, LSAP, forward guidance, adaptive learning |
| JEL: | E32 E52 E58 D83 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:2023-05&r=mon |
| By: | Cole, Stephen J.; Martinez-Garcia, Enrique; Sims, Eric (Department of Economics Marquette University; Department of Economics Marquette University) |
| Abstract: | This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth, and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the over-all effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany, and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19. |
| Keywords: | Forward guidance, central bank credibility, heterogeneous expectations |
| JEL: | D84 E30 E52 E58 E60 P52 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:2023-04&r=mon |
| By: | Nakov, Anton; Thomas, Carlos |
| Abstract: | We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transition to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads. JEL Classification: E31, E32, Q54, Q58 |
| Keywords: | climate change externalities, green QE, Pigouvian carbon taxes, Ramsey optimal monetary policy |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232845&r=mon |
| By: | Gara Afonso; Gonzalo Cisternas; Brian Gowen; Jason Miu; Josh Younger |
| Abstract: | The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation. |
| Keywords: | fed funds; reserves; Interbank market; monetary policy; Federal Open Market Committee (FOMC) |
| JEL: | E5 G1 G2 |
| Date: | 2023–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97093&r=mon |
| By: | Stephen J. Cole; Enrique Martinez-Garcia; Eric Sims |
| Abstract: | This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the overall effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19. |
| Keywords: | forward guidance; central bank credibility; heterogeneous expectations |
| JEL: | D84 E30 E52 E58 E60 P52 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:97039&r=mon |
| By: | Narayan Bulusu; Matthew McNeely; Kaetlynd McRae; Jonathan Witmer |
| Abstract: | In April 2022, the Bank of Canada announced that it would continue to use a floor system to implement monetary policy by providing a sufficiently large quantity of settlement balances to enable the overnight repo rate to trade at close to the deposit rate. In contrast, the Bank’s guiding principles of prudence, transparency and neutrality, which govern the management of its balance sheet, favour maintaining settlement balances as low as possible. In this context, this paper describes two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively maintain a floor system. The first is a regression-based analysis to estimate the quantity required to maintain the overnight repo rate close to the Bank’s policy interest rate (which is equal to the deposit rate in a floor system). The second is an analysis of operational considerations in implementing a floor system in Canada. Both approaches highlight that considerable uncertainty exists in determining the demand for settlement balances. Such uncertainty emphasizes the need for the Bank to monitor money market conditions as it continues to normalize its balance sheet after undertaking quantitative easing operations related to the COVID-19 pandemic. |
| Keywords: | Financial institutions; Financial markets; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systems |
| JEL: | E41 E42 E52 E58 G21 G28 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-26&r=mon |
| By: | Sergio Mayordomo (BANCO DE ESPAÑA); Irene Roibás (BANCO DE ESPAÑA) |
| Abstract: | The pass-through of market interest rates to the financial conditions of households and firms is an essential element in the monetary policy transmission mechanism. In this paper, we analyse how this transmission is playing out in the current hiking cycle in the euro area and in Spain, as compared to previous cycles. We find that the pass-through to the interest rates on retail time deposits is slower than in previous hiking cycles in both jurisdictions. Moreover, a slower pass-through is also observed for mortgages in Spain. We then show there is significant heterogeneity in this pass-through across euro area countries, especially for mortgages and retail time deposits. This heterogeneity is driven by both bank and country characteristics. More specifically, in the case of deposits, we find that almost half of the difference between the remuneration of retail time deposits in Spain and the euro area is driven by differences across banking sectors in the need to raise funds through deposits to supply credit. |
| Keywords: | monetary policy, interest rate pass-through, bank lending channel, loans, retail deposits, heterogeneity. |
| JEL: | E43 E47 E50 E51 E52 E58 E59 E65 G17 G21 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2312e&r=mon |
| By: | Ales Marsal (National Bank of Slovakia); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business); Lorant Kaszab (Magyar Nemzeti Bank) |
| Abstract: | Modern macroeconomics is increasingly leaning towards nonlinear solution methods. Our paper addresses the importance of nonlinearities in price setting. We demonstrate how nonlinearity in endogenous price adjustments, due to misalignments in relative prices, can trigger a price dispersion inflation spiral. This phenomenon yields globally unstable dynamics, even in instances where the model is locally stable around the non-stochastic steady state. We introduce the concept of the stability region as a nonlinear counterpart to the determinacy region. Our findings indicate that in a nonlinear world, the Taylor principle alone does not guarantee inflation stability and stable macroeconomic model moments. This new understanding not only challenges the conventional wisdom on inflation stabilization but also underscores the urgency for recalibrating monetary policy strategies in response to these dynamics. |
| Keywords: | Determinacy, stability, price dispersion, monetary policy, nonlinear solution methods, macro-finance |
| JEL: | E13 E31 E43 E44 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp350&r=mon |
| By: | Kern, Florian; Sigl-Glöckner, Philippa; Krahé, Max |
| Abstract: | Central banks define a monetary policy strategy in which they set out the instruments they use to achieve their monetary policy objectives as well as the incoming data they take into account when using these instruments. Independent central banks in particular are expected to provide a detailed and comprehensible explanation of their monetary policy strategy, since the absence of direct democratic legitimation comes along with particular accountability requirements. Since the end of the Bretton Woods system, both the Federal Reserve Bank (Fed) and the Deutsche Bundesbank, and later the European Central Bank (ECB), have made significant changes to their monetary policy strategy. In the 1970s, both the Bundesbank and the Fed pursued, at least officially, a monetary targeting strategy. We explain the analytical fallacies that underlay this strategy and the ideological assumptions that paved its way into practice. It is still unclear why a framework that is incoherent even at the theoretical level has been upheld for so long. It is conceivable that path dependency and a negative error culture played a role. Accordingly, we propose an evaluation of monetary policy strategy and its changes since 1973 with the aim of identifying and remedying relevant institutional weaknesses. The evaluation should also aim at clarifying whether monetary targeting resulted in institutional choices that continue to prevent monetary policy from achieving the Union's stated objectives in an optimal manner to this day. Considering that the quantity theory of money underlying monetary targeting is also propagated by supporters of cryptocurrencies, who use it specifically to attack the legitimacy of central banks, a reappraisal of the theory should also help to strengthen trust in central banks and reduce the damage caused by cryptocurrencies. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dzimps:277900&r=mon |
| By: | Ehrmann, Michael; Gnan, Phillipp; Rieder, Kilian |
| Abstract: | Leaks of confidential information emanating from public institutions have been the focus of a long-standing line of research. Yet, their determinants as well as their potential impact on public views and on policy effectiveness remain elusive. To address this gap, we study leaks from central banks because their effects are instantaneously reflected in financial markets. Based on a novel database of anonymous monetary policy leaks in the euro area as reported by newswires, we provide evidence that many of these leaks are likely placed by individual insiders with minority opinions. While we find that leaks have large effects on markets and weaken official policy announcements, our results also suggest that leaks do not lock in decision-makers, and that attributed communication can mitigate some of their effects. JEL Classification: D83, E52, E58, G14, H83 |
| Keywords: | central bank communication, European Central Bank, leaks, media, monetary policy |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232846&r=mon |
| By: | Perico Ortiz, Daniel |
| Abstract: | This paper investigates the effects of inflation news coverage on market-based inflation expectations and outcomes in the inflation-protected securities market. We employ a large corpus of news headlines from top U.S. newspapers and market data on the U.S. yield curve and inflation-protected securities. Our results indicate that news coverage, particularly regarding specific topics, exerts a significant influence on inflation compensation, expectations, and risk premiums. We observe that the impact of news diminishes as the maturity increases and varies across different news topics. This study contributes to the understanding of media influence on financial markets, specifically in shaping inflation expectations. |
| Keywords: | Inflation, expectations, risk premium, newspapers, term structure |
| JEL: | C22 D83 D84 E13 E31 E65 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwqwdp:052023&r=mon |
| By: | Rabitsch-Schilcher, Katrin; Marsal, Ales; Kaszab, Lorant |
| Abstract: | Modern macroeconomics is increasingly leaning towards nonlinear solution methods. Our paper addresses the importance of nonlinearities in price setting. We demonstrate how nonlinearity in endogenous price adjustments, due to misalignments in relative prices, can trigger a price dispersion inflation spiral. This phenomenon yields globally unstable dynamics, even in instances where the model is locally stable around the non-stochastic steady state. We introduce the concept of the stability region as a nonlinear counterpart to the determinacy region. Our findings indicate that in a nonlinear world, the Taylor principle alone does not guarantee inflation stability and stable macroeconomic model moments. This new understanding not only challenges the conventional wisdom on inflation stabilization but also underscores the urgency for recalibrating monetary policy strategies in response to these dynamics. |
| Keywords: | determinacy; stability; price dispersion; monetary policy; nonlinear solution methods; macro-finance |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:46498408&r=mon |
| By: | Döttling, Robin; Lam, Adrian (University of Pittsburgh) |
| Abstract: | This paper empirically examines the interaction between monetary policy and carbon transition risk. Using an event study design, we find that the stock prices of firms with higher carbon emissions are more responsive to monetary policy shocks identified from high-frequency movements in Fed Funds futures around Federal Open Market Committee (FOMC) announcements. Cross-sectional tests reveal that this effect is driven by firms that are more capital intensive, with lower ESG ratings, with greater climate risk exposures, or without climate abatement plans. Using instrumental-variable local projections, we find that high-emission firms reduce emissions relative to low-emission firms, but slow down these efforts when monetary policy is restrictive. Taken together, our results indicate that monetary policy shapes the path to carbon neutrality irrespective of whether central banks embrace a climate target. |
| Date: | 2023–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:kqdar&r=mon |
| By: | Benmir, Ghassane; Jaccard, Ivan; Vermandel, Gauthier |
| Abstract: | This paper studies the design of Ramsey optimal monetary policy in a Health New Keynesian (HeNK) model with Susceptible, Infected and Recovered (SIR) agents. The nonlinear model is estimated with maximum likelihood techniques on Euro Area data. Our objective is to deconstruct the mechanism by which contagion risk affects the conduct of monetary policy. If monetary policy is the only game in town, we find that the optimal policy features significant deviations from price stability to mitigate the effect of the pandemic. The best outcome is obtained when the optimal Ramsey policy is combined with a lockdown strategy of medium intensity. In this case, monetary policy can concentrate on its price stabilization objective. JEL Classification: E52, E32 |
| Keywords: | Covid-19, HeNK, macroeconomic trade-offs, nonlinear inference, Tin-bergen principle |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232847&r=mon |
| By: | Kenechukwu E. Anadu; Pablo D. Azar; Catherine Huang; Marco Cipriani; Thomas M. Eisenbach; Gabriele La Spada; Mattia Landoni; Marco Macchiavelli; Antoine Malfroy-Camine; J. Christina Wang |
| Abstract: | Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similar to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate. |
| Keywords: | stablecoins; money market mutual funds; financial stability; crypto assets; runs; liquidity transformation |
| JEL: | G10 G20 G23 |
| Date: | 2023–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:97050&r=mon |
| By: | Mario Carceller del Arco; Jan Willem van den End |
| Abstract: | We assess the robustness of monetary policy under shock uncertainty based on a novel empirical method. Shock uncertainty arises from the inability to observe the output gap in real time, by which the contribution of supply and demand shocks to inflation is unknown. We apply our method in a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model to the recent inflation surge in the US. We find that robust monetary policy aimed at limiting extreme welfare losses under shock uncertainty should neither be too strong nor too mild, given the probability that supply shocks are a dominant driver of economic fluctuations. An overly strong response to inflation in supply driven scenarios is associated with large tail losses due to adverse output dynamics. |
| Keywords: | Monetary policy; Inflation; Policy-making under risk and uncertainty |
| JEL: | E52 E58 D81 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:793&r=mon |
| By: | Maria Arakelyan; Adam Gersl; Mr. Martin Schindler |
| Abstract: | In this paper we assess the effectiveness of macroprudential policies and capital controls in supporting financial stability. We construct a large and granular dataset on prudential and capital flow management measures covering 53 countries during 1996-2016. Conditional on a credit boom, we study the impact of these policy measures on the probability of the credit boom ending in a bust. Our analysis suggests that macroprudential tools are effective from this perspective. If credit booms are accompanied by capital flow surges, in addition to macroprudential tools, capital controls on money market instruments including cross-border interbank lending tend to contribute to reducing the likelihood of a credit bust. |
| Keywords: | Macroprudential measures; capital controls; financial stability; credit cycles; capital control measure; credit bust; Net policy tightening; credit growth; boom episode; Credit booms; Macroprudential policy; Macroprudential policy instruments; Capital inflows; Global |
| Date: | 2023–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/171&r=mon |
| By: | Corsetti, Giancarlo; Maćkowiak, Bartosz |
| Abstract: | We study a model in which policy aims at aggregate price stability. A fiscal imbalance materializes that, if uncorrected, must cause inflation, but the imbalance may get corrected in the future with some probability. By maintaining price stability in the near term, monetary policy can buy time for a correction to take place. The policy gamble may succeed, preserving price and fiscal stability, or fail, leading to a delayed, possibly large jump in the price level. The resulting dynamics resemble the models of a currency crisis following Krugman (1979) and Obstfeld (1986). Like in Obstfeld’s work, multiple equilibria arise naturally: whether or not price stability is preserved may depend on private agents’ expectations. The model can be reinterpreted as a model of partial default on public debt, in which case it is reminiscent of Calvo (1988). JEL Classification: E31, F31, F41 |
| Keywords: | currency crisis, fiscal theory of the price level, inflation expectations, multiple equilibria, self-fulfilling beliefs, sovereign default |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232844&r=mon |
| By: | Mahmoud Fatouh (University of Essex; Bank of England); Simone Giansante (University of Palermo); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We assess the impact of quantitative easing (QE) on the provisioning of liquidity and the pricing in the UK gilt repo market. We compare the behaviour of banks that received reserves injections via QE operations to other similar banks in terms of the amounts lent and pricing. We also investigate whether leverage ratio capital requirements affected the amounts of liquidity supplied by broker-dealers and the spreads they charged. We find that QE interventions can improve liquidity provision, and that their size determines how this is attained. QE can also reduce the cost of borrowing in the repo market, unless it was associated with spikes in demand for liquidity. Our findings further indicate that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged. However, the larger capital charge repo transactions attract under the leverage ratio requirement is reflected in their spreads. |
| Keywords: | Monetary policy, quantitative easing, gilt repo market, leverage ratio |
| JEL: | G10 G21 G23 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2382&r=mon |
| By: | Le Bihan, Hervé; Leiva-Leon, Danilo; Pacce, Matías |
| Abstract: | We propose a new measure of underlying inflation that informs, in real time, about asymmetric risks on the outlook of inflationary pressures. The asymmetries are generated through nonlinearities induced by economic activity. The new indicator is based on a multivariate regime-switching framework jointly estimated on disaggregated sub-components of the euro area HICP and has several additional advantages. First, it is able to swiftly infer abrupt changes in underlying inflation. Second, it helps to timely track turning points in underlying inflation. Third, the proposed indicator also has a satisfactory performance with respect to various criteria relevant for inflation monitoring. JEL Classification: E17, E31, C11, C22, C24 |
| Keywords: | asymmetric risks, Bayesian methods, regime-switching, underlying inflation |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232848&r=mon |
| By: | Paul Beaudry; Thomas J. Carter; Amartya Lahiri |
| Abstract: | When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and explore optimal policy under a range of assumptions on how expectations are formed, including a form of bounded rationality involving level-k thinking (LKT). Despite modelling LKT in a way that nests both adaptive and rational expectations as special cases, we show that the optimal policy under LKT is qualitatively different and involves abrupt pivots in the policy stance. In particular, it is optimal for the central bank to initially look through supply shocks until a threshold is reached, then pivot discontinuously to a more hawkish anti-inflationary stance. We find that such pivots can, if optimally executed, be compatible with soft landings in the sense that most (or even all) of the reduction in inflation occurs through re-anchoring of expectations rather than economic slack. We also discuss risks and why policy errors in terms of tightening too late or too slowly can be especially costly in such an environment. |
| JEL: | E40 E50 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31741&r=mon |
| By: | Kumar Chandrakamal Pramod Kumar (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Digital payments are growing rapidly, and the use of cash seems to be declining, at least in advanced economies in Europe and the U.S. However, the literature on payment systems provides an interesting perspective- cash, or currency, when measured as a percentage of the gross domestic product, has not been falling as clearly as might be intuited. Contrarily, many economies face an increase in currency in circulation rates. This paper discusses this topic in literature and explores the determinants of currency in circulation in a panel of 17 countries between 2001-2022 and whether determinants from prior literature are also significant across a group of heterogeneous countries. Interest rates are found to affect the demand for cash significantly and negatively, while tax revenues have a significantly positive impact. Some measures of financial development are also considered but are found to not have any strong explanatory power. Country fixed effects regression analysis suggests that determining what type of economies may have higher or lower currency in circulation is a complex matter requiring more detailed investigation. |
| Keywords: | Currency in circulation, Monetary demand, Panel data, Fixed-effects regression, Interest rates, tax revenue |
| JEL: | E12 E41 E50 E51 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2023_32&r=mon |
| By: | Nira Harikrishnan; Benjamin Silk; Emre Yoldas |
| Abstract: | In 2013, a shift in expectations of market participants for the timing of the tapering of the Federal Reserve's asset purchases, and its ramifications for normalization of U.S. monetary policy, led to sharp increases in longer-term U.S. Treasury yields and volatility in broader financial markets. The episode came to be known as the "taper tantrum" because the strong market reaction came in response to Federal Reserve communications that were largely consistent with market analysts' expectations. |
| Date: | 2023–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2023-10-04&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:118543&r=mon |
| By: | Giraldo, Carlos (Latin American Reserve Fund); Giraldo, Iader (Latin American Reserve Fund); Gomez-Gonzalez, Jose E. (City University of New York – Lehman College); Uribe, Jorge M. (Universitat Oberta de Catalunya) |
| Abstract: | We examine the impact of U.S. monetary policy shocks on bank lending in five major Latin American countries where large U.S. banks have limited presence. Our analysis covers annual balance sheet data from 2000 to 2021 for all banks in these nations, utilizing a recently developed measure of U.S. monetary policy shocks by Bu et al. (2021). Our findings reveal the existence of an international bank lending channel, with a one-percentage-point increase in the Fed funds rate resulting in an average 80.6 basis-point reduction in domestic bank loan growth in these countries. Liquidity and solvency emerge as crucial factors driving variations in lending behavior among Latin American banks, with banks exhibiting stronger liquidity and solvency profiles experiencing higher loan supply growth rates. This international bank lending channel persists even in countries with minimal U.S. bank presence, leading to constrained cross-border lending activities. |
| Keywords: | International bank lending channel; U.S. monetary policy shocks; loan growth; Latin America; |
| JEL: | E51 E52 E59 G21 |
| Date: | 2023–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:col:000566:020925&r=mon |
| By: | Isabel Cairó; Avi Lipton |
| Abstract: | Black workers experience a higher unemployment rate, as well as more volatile employment dynamics, than white workers, and the racial unemployment rate gap is largely unexplained by observable characteristics. We develop a New Keynesian model with search and matching frictions in the labor market, endogenous separations, and employer discrimination against Black workers to explain these outcomes. The model is consistent with key features of the aggregate economy and is able to explain key labor market disparities across racial groups. We then use this model to assess the effects of the Federal Reserve’s new monetary policy framework---interest rates respond to shortfalls of employment from its maximum level rather than deviations---on racial inequality in the labor market. We find that shifting from a Deviations interest rate rule to a Shortfalls rule reduces the racial unemployment rate gap and the model-based measures of labor market discrimination but increases the average inflation rate. From a welfare perspective, we find that the Shortfalls approach does not do much to reduce racial inequality in our model economy. |
| Keywords: | Unemployment; Monetary policy; Racial inequality; Discrimination |
| JEL: | E24 E52 J15 J70 |
| Date: | 2023–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-65&r=mon |
| By: | Alexandra Sutton-Lalani; Sebastian Hernandez; John Miedema; Jiamin Dai; Badr Omrane |
| Abstract: | Digitalization—the use of data, digital platforms and advanced analytics—has quickly become widespread in today’s society. This has introduced new opportunities, but it has also created new barriers and exacerbated existing inequities. This is likewise true in the realm of payments, where issues around financial inclusion, digital inclusion and accessibility compound the challenges for users. Our work expands on that of Henry et al. (2023). We base our research on two key premises. First, we apply the social model of disability to the Canadian payments landscape to identify opportunities to remove barriers that marginalize or hinder people. Second, we investigate beyond the standard economic measures and aggregate statistics related to these topics to build a nuanced understanding of the challenges inherent in the current system. Our findings highlight important areas of research and design consideration for new digital payment products and services, specifically for central banks contemplating the introduction of a central bank digital currency. We identify barriers that rural populations, Indigenous communities, Canadians with low incomes and persons with disabilities face in using financial products. We also note a deficiency in the current research and payment offerings for those with cognitive accessibility challenges. With these findings, we aim to build awareness of the inequities and challenges present in the current payments system and motivate existing financial technology providers to move toward offering more-inclusive products and services. |
| Keywords: | Bank notes; Central bank research; Digital currencies and fintech; Digitalization; Financial services |
| JEL: | A14 E42 E50 I31 O33 O51 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-22&r=mon |
| By: | Alogoskoufis, George |
| Abstract: | This paper reviews, analyses and interprets the determinants and the implications of the twin, fiscal and current account, deficits in the history of modern Greece. The analysis focuses on the determinants and the dynamic interactions among the twin deficits, domestic monetary regimes, and access to international borrowing. Two are the main conclusions: First, when Greece did not have access to international borrowing, fiscal imbalances usually led to monetary destabilization and inflation. Second, when it did have access to international borrowing, fiscal imbalances were generally larger, led to external deficits and, eventually, sovereign debt crises and defaults. The monetary and exchange rate regime also mattered. The 1950s and 1960s were the only prolonged period in which the twin deficits were tackled effectively and, as a result, the only period in which Greece enjoyed high economic growth, monetary stability, and external balance simultaneously. |
| Keywords: | modern Greece; economic history; institutions; fiscal policy; monetary policy; debt crises |
| JEL: | N10 N20 N40 |
| Date: | 2023–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120344&r=mon |
| By: | Daniel Hyun; Jacky Lee |
| Abstract: | This paper examines factors that affect the transmission of fluctuations in global agricultural commodity prices to domestic food inflation. Using panel regressions on data from 53 advanced and emerging-market countries, we investigate how factors such as local crop production conditions, the extent of food industry development and the net agricultural trade status interact with global agricultural prices to affect pass-through to local food prices. Results show that pass-through varies significantly based on these factors. Pass-through decreases during better-than-normal crop conditions, highlighting the importance of local production. Countries with less-developed food industries experience higher pass-through, likely due to the greater importance of raw commodities in diets and less-complex supply chains. Interestingly, net exporters of agricultural commodities exhibit greater pass-through, potentially due to strategic trade adjustments that take advantage of global supply and demand dynamics. These variations in pass-through suggest potential avenues for managing food price inflation in response to shocks to global food prices under different scenarios. |
| Keywords: | Inflation and prices; International topics |
| JEL: | E31 Q02 Q11 Q17 Q18 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-24&r=mon |
| By: | Orphal, Philipp; Kern, Florian; Krahé, Max |
| Abstract: | In this paper, we show that the case law on the legality of bond purchases by Eurosystem central banks is partly based on the economic theory of monetarism and, in particular, on a 1981 paper by Thomas Sargent and Neil Wallace ("Some Unpleasant Monetarist Arithmetic"). However, monetarism, already controversial in the 1970s and 1980s, is now recognised as false. The assumptions on which Sargent and Wallace based their argument were already partially inaccurate at the time; today, it is generally accepted that these assumptions do not hold in reality.2 This intellectual progress should be taken into account in ongoing interpretation of the European treaties and the European legal framework. Building on this observation, in this paper we develop an updated, "non-monetarist" interpretation of Article 123 TFEU. This interpretation deviates from the standards developed in previous case law in three ways: First, the prohibition under which the European System of Central Banks may not purchase government bonds on the secondary markets under conditions which would, in practice, have an effect equivalent to that of a direct purchase of government bonds ("prohibition of transactions with equivalent effect") should be given up on. Second, the restriction that secondary market purchases must not weaken incentives (judicially speaking, the "impetus") towards "sound fiscal policy" ("prohibition on circumvention") should be replaced. Instead of this restriction, the proper limiting principle is that secondary market purchases must pursue the objective of price stability and, if possible without compromising the first objective, support the general economic policies in the European Union. Within the purposes of Article 123 TFEU, sound public finances are only a means for achieving price stability. The focus of the interpretation should therefore be the pursuit of price stability. The general economic policy goal of sound public finances is the subject of other rules. Third, and on a related point, the Federal Constitutional Court of Germany (BverfG) should no longer ground the protection of the Bundestag's budgetary right in Article 123 TFEU. The increasingly detailed measures and prohibitions built on an extensive reading of this article are detrimental to monetary policy and thus to price stability. This does not mean that the Federal Constitutional Court should give up on protecting the Bundestag's budgetary sovereignty. Instead, the protection of the Bundestag's budgetary right should be carried out under the legal benchmarks actually created for this purpose: Articles 121, 125 and 126 TFEU. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dzimps:277912&r=mon |
| By: | Nguyen, Luan-Thanh |
| Abstract: | The use of mobile technology services in Vietnam has surged, offering convenience and enhancing various aspects of users' lives. This shift towards wireless connectivity has also affected financial transactions and remittances, aligning with goals of a cashless society and financial inclusion. Mobile money, a widely used mobile service, is examined in this study. We focus on the determinants affecting the adoption of mobile money services, which are of interest to mobile money firms, telecom companies, banks, and developers. Factors like price, social influence, and perceived risk are explored as they influence consumer acceptance. To succeed, service providers must lower costs, emphasize benefits, and ensure seamless functionality. User-friendliness, trust, and data security are essential for sustained adoption and financial inclusion. This study provides insights into mobile money adoption in Vietnam, guiding stakeholders in the mobile technology sector to adapt and thrive in this evolving landscape. |
| Keywords: | Mobile money, PLS-SEM, Vietnam, UTAUT |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esconf:278113&r=mon |
| By: | Gorodnov, Artem (Городнов, Артем) (The Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | This paper is devoted to the estimation of the Phillips curve for small open economies with the inclusion of the expected change in the real exchange rate of the ruble. The nonlinear generalized method of moments (CUE GMM) is used as an estimation method. According to the estimates obtained, the dynamics of inflation in Russia depends on external factors, in particular on expectations about changes in the terms of trade. At the same time, the role of expectations in the formation of inflation has undergone several significant changes. The first change is associated with the transition to the inflation targeting regime, the second with the outbreak of the pandemic. In addition, the rigidity of prices was also subject to changes under the influence of these factors. |
| Keywords: | Phillips curve, open economy, GMM |
| Date: | 2023–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:w20220223&r=mon |
| By: | Roberto Perli |
| Abstract: | Remarks at the National Association for Business Economics (NABE) Annual Meeting. |
| Keywords: | monetary policy; money markets; reserves; ample reserves |
| Date: | 2023–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:97094&r=mon |
| By: | Donald Coletti |
| Abstract: | This paper outlines a strategic plan for the development of the fourth generation of Bank of Canada projection and policy analysis models. The plan features a new Canadian workhorse macroeconomic model as well as a suite of alternative models to better support a risk management approach to monetary policy. This new generation of models seeks to improve our understanding of inflation dynamics, the supply side of the economy and the underlying risks faced by policy-makers coming from uncertainty about how the economy functions. New approaches for dealing with idiosyncratic trends in the data and for leveraging the power of large data sets will be employed. |
| Keywords: | Economic models; Inflation and prices; Labour markets; Monetary policy and uncertainty |
| JEL: | C50 C51 C52 C53 C54 C55 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:23-23&r=mon |
| By: | Myslytska, Anna; Kruk, Anton; Khomych, Yaroslav |
| Abstract: | In the globalized world, the strength of a country's currency is paramount, especially for developing and transition economies. This research endeavors to identify the key predictors for currency strength in such countries, with a spotlight on Ukraine, particularly in the aftermath of Russia's invasion. Leveraging cross-country regression analysis, the study examines the factors influencing exchange rates. The findings highlight the role of economic prosperity, import dynamics, and government spending as vital determinants of currency strength, while interest rates, exports, and inflation were found to have less significance. For policymakers, this implies a need to bolster economic growth, manage imports, and ensure prudent fiscal policies. This study not only augments the academic discourse on international finance but also offers actionable insights for economies like Ukraine striving for currency stability. |
| Keywords: | Exchange Rates, Developing Countries, Transition Economies |
| JEL: | E00 E6 F4 |
| Date: | 2023–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118660&r=mon |
| By: | Niemeläinen, Julia |
| Abstract: | This paper provides a brief overview of China's capital controls, external asset holdings and the real interest rate, and analyzes the quantitative effects of China's macroeconomic policies between 2000 and 2015, including capital controls, interest rate policy, exchange rate policy and fiscal policy, on the dynamics of China's trade balance vis-a-vis the United States and the world real interest rate. In my analysis, I take into account the demographic differences between the countries, which affect the external imbalances directly and indirectly by affecting the transmission of the macroeconomic policies. Capital controls in China remain stringent even though they have somewhat eased in 2010s, and its gross external asset holdings differ from its peer countries both in terms of the largest functional categories and by type of investment. The average interest rate spread with the US has narrowed down. According to my analysis, the macroeconomic policies overall, and mainly the undervaluation of the real exchange rate, have had a positive impact on China's trade balance. The impact of the macroeconomic policies on the real interest rate has been positive, countering the negative trend induced by demographic factors. |
| Keywords: | capital controls, capital flows, China |
| JEL: | F21 F41 F42 G28 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:52023&r=mon |
| By: | Schuster, Florian |
| Abstract: | This paper studies the emergence of sovereign bond yield spreads in the Eurozone prior to the financial crisis. While spreads were close to zero in European government debt markets until the mid-2000s, they have persistently widened since then in many member states. We employ a difference-in-differences approach to analyze this phenomenon. We find that the Eurosystem's move from unconditional to conditional collateral eligibility of sovereign bonds, as part of the 2005 Single List reform, was the institutional change triggering the emergence of sovereign spreads in the Euro Area. Conditional eligibility becomes effective predominantly through a periphery premium: higher yields have been demanded from countries whose business cycles deviate most from the average Eurozone cycle. In contrast, spreads did not arise in response to adverse macroeconomic and fiscal fundamentals. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dzimps:277915&r=mon |
| By: | Wilmer Martínez-Rivera; Eliana R. González-Molano; Edgar Caicedo-García |
| Abstract: | Based on monthly disaggregated Consumer Price Index (CPI) item series and macroeconomic series, we explore the advantages of forecast inflation from a disaggregated to an aggregated level by aggregating the forecasts. We compare the performance of this approach with the forecast obtained modeling aggregated inflation directly. For the aggregate level, we implement some of the techniques and models, helpful to work with many predictors, such as dimension reduction, shrinkage methods, and machine learning models. Also, we implement traditional time-series models. For the disaggregated data, we use its lags and a set of macroeconomic variables as explanatory variables. Direct and recursive forecast techniques are also explored. The sample period of the analysis is from 2011 to 2022, with forecasting and evaluation out of the sample from 2017. In addition, we evaluate the forecast accuracy during the COVID-19 period. We found a reduction in the forecast error from the disaggregate analysis over the aggregate one. **** RESUMEN: En este artículo se analiza la información mensual tanto agregada como desagregada del índice de precios al consumidor (IPC) en Colombia. Se explora las ventajas de pronosticar a nivel desagregado para luego agregar pronósticos y comparar con los pronósticos obtenidos al analizar la información agregada. El cálculo de pronósticos esta basado en el ajuste de modelos y técnicas que incluyen modelos de reducción de dimensión, modelos de selección de variables, modelos de Machine Learning así como modelos tradicionales de series de tiempo ARIMA. El periodo muestral de análisis es 2011 a 2022 cuyo cálculo de pronósticos fuera de muestra se da a partir de 2017 hasta 2022. |
| Keywords: | Inflación, datos desagregados, pronósticos agregados, Inflación, datos desagregados, pronósticos agregados |
| JEL: | C52 E17 E31 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1251&r=mon |
| By: | Hugh Montag; Daniel Villar Vallenas |
| Abstract: | The Covid-19 pandemic has had enormous effects on every aspect of the economy, including inflation which has become one of the most pressing economic problems of the recovery period. Although inflation fell significantly at the onset of the pandemic, the increase seen since early 2021 has brought inflation to levels not seen since the 1980's. |
| Date: | 2023–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2023-08-29&r=mon |
| By: | Gersbach, Hans; Haller, Hans; Zelzner, Sebastian |
| Abstract: | We study the interplay of capital and liquidity regulation in a general equilibrium setting by focusing on future funding risks. The model consists of a banking sector with long-term illiquid investment opportunities that need to be financed by short-term debt and by issuing equity. Reliance on refinancing long-term investment in the middle of the life-time is risky, since the next generation of potential short-term debt holders may not be willing to provide funding when the return prospects on the long-term investment turn out to be bad. For moderate return risk, equilibria with and without bank default coexist, and bank default is a self-fulfilling prophecy. Capital and liquidity regulation can prevent bank default and may implement the first-best. Yet the former is more powerful in ruling out undesirable equilibria and thus dominates liquidity regulation. Adding liquidity regulation to optimal capital regulation is redundant. |
| Keywords: | financial intermediation, funding risk, bank default, banking regulation, liquidity requirements, capital requirements |
| JEL: | G21 G33 G38 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:714&r=mon |