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on Monetary Economics |
| By: | Fischer, Lion; Rapp, Marc Steffen; Zahner, Johannes |
| Abstract: | In December 2017, during the One Planet Summit in Paris, a group of eight central banks and supervisory authorities launched the "Network for Greening the Financial Sector" (NGFS) to address challenges and risks posed by climate change to the global financial system. Until 06/2023 an additional 69 central banks from all around the world have joined the network. We find that the propensity to join the network can be described as a function in the country's economic development (e.g., GDP per capita), national institutions (e.g., central bank independence), and performance of the central bank on its mandates (e.g., price stability and output gap). Using an event study design to examine consequences of network expansions in capital markets, we document that a difference portfolio that is long in clean energy stocks and short in fossil fuel stocks benefits from an enlargement of the NGFS. Overall, our results suggest that an increasing number of central banks and supervisory authorities are concerned about climate change and willing to go beyond their traditional objectives, and that the capital market believes they will do so. |
| Keywords: | Climate finance, green central bank policy, stock market reaction, sustainable finance |
| JEL: | E58 E61 G1 Q54 Q58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:281998&r=mon |
| By: | Alexandre Carrier; Kostas Mavromatis |
| Abstract: | We examine optimal normalization strategies for a central bank confronted with persistent inflationary shocks and a potential de-anchoring of expectations. Our analysis characterizes optimal monetary policy, when the central bank uses both the short-term interest rate and the balance sheet, in a framework in which agents’ expectations can deviate from the rational expectations benchmark. Optimal policy is developed using a sufficient statistics approach, highlighting the dynamic causal effects of changes in each policy instrument on the central bank’s targets. Three key insights emerge: first, the interest rate is identified as the key instrument for managing inflationary pressures, outperforming balance sheet adjustments. Second, having anchored expectations about the path of quantitative tightening (QT) is crucial to mitigate economic downturns and controlling inflation, within the framework of an optimal balance sheet strategy set under a predefined interest rate rule. Lastly, when both the interest rate and QT are set optimally, expectations are found to significantly influence the optimal interest rate trajectory, whereas their impact on the optimal QT path is comparatively minimal. |
| Keywords: | Optimal monetary policy; de-anchored expectations; normalization strategy |
| JEL: | E52 E71 D84 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:800&r=mon |
| By: | Enisse Kharroubi; Enisse Kharroubi and Frank Smets |
| Abstract: | Following evidence on the role of firm profits in the current inflation surge, we develop a New Keynesian model where profit-driven inflation stems from the presence of reservation profits on the supply side. We use this framework to investigate the positive and normative implications of cost push shocks, focusing on energy price shocks. We first show that these shocks lead to inefficiently large supply contractions and thereby inefficiently large (profit-driven) inflation, as firms which retrench do not internalise the social costs of doing so. Second, we show that optimal monetary policy follows a pecking order. It first aims at shielding the supply side from the fallout of the shock, thereby undoing the negative retrenchment externality. It then splits the burden of the shock between supply and demand, when insulating the supply side is too costly. Finally, when the energy price shock is very large, monetary policy loses traction. Budget-neutral fiscal interventions, e.g. redistribution from high- to low-income households and/or from high- to low-profit firms, can then restore monetary policy effectiveness. |
| Keywords: | energy price shocks, price stickiness, reservation profits, optimal monetary policy, corporate tax |
| JEL: | D21 E23 E31 E32 E52 E62 H24 H25 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1167&r=mon |
| By: | Loretta J. Mester |
| Abstract: | Monetary policy is in a good place from which to assess and respond to these risks to the outlook. The current strength in labor market conditions and the strong spending data give us the opportunity to keep the nominal funds rate at its current level while we gather more evidence that inflation truly is on a sustainable and timely path back to 2 percent. This is better than finding ourselves in a situation where we begin easing too soon, undo some of the progress we have made on inflation, potentially destabilize inflation expectations, and then have to reverse course. If the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down. My base case is that we will do so at a gradual pace so that we can continue to manage the risks to both sides of our mandate. Of course, if downside risks materialize, we would have the opportunity to move rates down more quickly, just as we raised rates more aggressively than usual to combat rising inflation. Or if inflation appears to be stalling at a level above our goal, we would have the opportunity to maintain a restrictive stance for longer. Our policy actions will depend on how the economy and the risks evolve. When our goals of price stability and maximum employment are achieved, the economy will be in an even better place than where it is today. |
| Keywords: | Monetary policy; inflation; economic conditions; labor market; consumer spending |
| Date: | 2024–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcsp:97730&r=mon |
| By: | James Costain; Galo Nuño Barrau; Carlos Thomas |
| Abstract: | We build an arbitrage-based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a "default risk extraction" channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective. |
| Keywords: | sovereign default, quantitative easing, yield curve, affine model, Covid-19 crisis, ECB, pandemic emergency purchase programme |
| JEL: | E5 G12 F45 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1165&r=mon |
| By: | Krenz, Johanna; Verma, Akhilesh K |
| Abstract: | How does macroprudential regulation affect financial stability in the presence of non-bank financial intermediaries? We estimate the contributions of traditional banks vis-'a-vis non-bank financial intermediaries to changes in systemic risk - measured as ∆CoVaR - after macroprudential policy shocks in European countries. We find that while tighter macro-prudential regulation, generally, decreases systemic risk among traditional banks, it has the opposite effect on systemic risk in the non-bank financial intermediation sector. For some types of regulations, the latter effect is even stronger than the former, indicating that macro-prudential tightening increases systemic risk in the entire financial system, through leakages between the traditional and the non-bank financial intermediation sectors. |
| Keywords: | macroprudential policy, systemic risk, ∆, CoVaR, non-bank financial intermediation, regulatory arbitrage, Europe |
| JEL: | G18 G23 G28 G21 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281783&r=mon |
| By: | Pavel Vikharev (Bank of Russia, Russian Federation); Anna Novak (Bank of Russia, Russian Federation); Andrei Shulgin (Bank of Russia, Russian Federation) |
| Abstract: | The paper explores the mutual influence of inequality and monetary policy. The model introduces household heterogeneity in terms of access to the financial market and intertemporal preferences. The parameters are calibrated and estimated based on both Russia's microdata (including RLMS-HSE and HBS) and macro statistics. We have shown that the introduction of households with no access to the financial market has only a slight impact on the transmission of a monetary policy shock, while its secondary effects help amplify the action of most structural shocks. The behavior of wealthy hand-to-mouth households amplifies the response of macroeconomic variables to the monetary policy shock but has a slight impact on these variables' responses to most of the other structural shocks. We have identified non-structural inequality shocks at the bottom and the top of the Lorenz curve. As a result, we have found that the mutual influence of inequality and monetary policy is limited. The interest rate immediate response to changes in the Gini consumption index equals 0.1 for inequality shocks and 10 for a monetary policy shock. We have demonstrated that the shocks at the top of the Lorenz curve cause a more persistent response from the economy, whereas the shock at the bottom of the Lorenz curve. On first approximation, only one integral inequality indicator can be used to study the role of inequality in a business cycle. The relative consumption dynamics for specified household groups is not a conclusive indicator of either pro- or disinflationary policy, but it provides additional data to help identify structural shocks. |
| Keywords: | monetary policy, inequality, THRANK, inequality shock, hand-to-mouth, Russia, Lorenz curve, household heterogeneity, Wealthy HtM |
| JEL: | E21 E44 E52 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps113&r=mon |
| By: | Andrea Monaco; Matteo Ghio; Adamaria Perrotta |
| Abstract: | We examine the statistical properties of a closed monetary economy with multi-aggregates interactions. Building upon Yakovenko's single-agent monetary model (Dragulescu and Yakovenko, 2000), we investigate the joint equilibrium distribution of aggregate size and wealth. By comparing theoretical and simulated data, we validate our findings and investigate the influence of both micro dynamics and macro characteristics of the system on the distribution. Additionally, we analyze the system's convergence towards equilibrium under various conditions. Our laboratory model may offer valuable insights into macroeconomic phenomena allowing to reproduce typical wealth distribution features observed in real economy. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.09871&r=mon |
| By: | Wenting Liao (School of Finance, Renmin University of China, Beijing, People's Republic of China); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, UK); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Sayar Karmakar (Department of Statistics, University of Florida, 230 Newell Drive, Gainesville, FL, 32601, USA) |
| Abstract: | This study investigates the impact of a metric of extreme weather shocks on 32 state-level inflation rates of the United States (US) over the quarterly period of 1989:01 to 2017:04. In this regard, we first utilize a dynamic factor model with stochastic volatility (DFM-SV) to filter out the national factor from the local components of overall, non-tradable and tradable inflation rates, to ensure that the effect of regional climate risks is not underestimated, given the derived sizeable common component. Second, using impulse responses derived from linear and nonlinear local projections models, we find statistically significant increases in the state (and national) factor of overall inflation rates, with the aggregate effect being driven by the tradable sector relative to the non-tradable one, particularly across the agricultural states in comparison to the non (less)-agricultural ones. Our findings have important policy implications. |
| Keywords: | Extreme weather shocks, Inflation, US states, Dynamic factor model with stochastic volatility, Linear and nonlinear local projections, Impulse response functions |
| JEL: | C22 C23 C32 E31 Q54 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202402&r=mon |
| By: | Jiaqi Li; Andrew Usher; Yu Zhu |
| Abstract: | To what extent does a central bank digital currency (CBDC) compete with bank deposits? To answer this question, we develop and estimate a structural model where each household chooses which financial institution to deposit their digital money with. Households value the interest paid on digital money, the possibility of obtaining complementary financial products, and the access to in-branch services. A non-interest-bearing CBDC that does not provide complementary financial products can substantially crowd out bank deposits only if it provides an extensive service network. Imposing a large limit on CBDC holding would effectively mitigate this crowding out. |
| Keywords: | Central bank research; Digital currencies and fintech |
| JEL: | E50 E58 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-4&r=mon |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | This article summarizes empirical research on the interaction between monetary policy and asset markets, and reviews our previous theoretical work that captures these interactions. We present a concise model in which monetary policy impacts the aggregate asset price, which in turn influences economic activity with lags. In this context: (i) the central bank (the Fed, for short) stabilizes the aggregate asset price in response to financial shocks, using large-scale asset purchases if needed ("the Fed put"); (ii) when the Fed is constrained, negative financial shocks cause demand recessions, (iii) the Fed's response to aggregate demand shocks increases asset price volatility, but this volatility plays a useful macroeconomic stabilization role; (iv) the Fed's beliefs about the future aggregate demand and supply drive the aggregate asset price; (v) macroeconomic news influences the Fed's beliefs and asset prices; (vi) more precise news reduces output volatility but heightens asset market volatility; (vii) disagreements between the market and the Fed microfound monetary policy shocks, and generate a policy risk premium. |
| JEL: | E32 E43 E44 E52 G12 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32053&r=mon |
| By: | Guidorzzi Girotto, Vitor; Strachman, Eduardo |
| Abstract: | The relationship between money and credit is analyzed differently between schools of economic thought. Orthodoxy, in general, analyzes it using the commodity money approach; heterodoxy, in large part, adopts the Chartist approach. The crucial difference between them lies in the fact, as put by Schumpeter, that orthodoxy postulates a monetary theory of credit; the heterodox, a credit theory of money. For the latter, money is, by nature, credit, and it can take different forms, tangible or not. The State uses it sovereignty to delimit the monetary system by defining what will (or will not) be accepted as money in the payments of transactions due to itself. Thus, Knapp’s contribution in structuring a theory of state money meets Innes’s credit theory of money and, together, these contributions offer a solid theoretical and historical framework for the formulation of an alternative theory of money, the Chartist theory. |
| Keywords: | Money; Chartalism; Credit; Knapp; Innes. |
| JEL: | E12 E42 E51 |
| Date: | 2024–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119866&r=mon |
| By: | Grant Rosenberger; Peter Zimmerman |
| Abstract: | Rising interest rates have prompted concerns about losses on bank assets, especially following the failure of Silicon Valley Bank (SVB) in March 2023. In this working paper, we examine whether US credit unions could be subject to similar losses as banks and analyze how their regulatory capital would be affected. We estimate that after realizing losses from assets that have decreased in value and not yet been sold the overall net worth of the credit union industry would have fallen by 40 percent in 2023:Q1. Unrealized losses were most severe at the largest credit unions. Nonetheless, the bulk of deposits at credit unions were insured, suggesting limited risk of an SVB-style run. In addition, credit union deposit rates are relatively insensitive to market interest rates, providing credit unions with a hedge against a rising rate environment. Overall, credit unions’ balance sheet positions seemed to be more resilient to unrealized interest rate risk than banks’. |
| Keywords: | credit unions; deposit franchise; interest rate risk |
| JEL: | G21 G28 |
| Date: | 2024–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97721&r=mon |
| By: | Inessa BENCHORA; Aurélien LEROY; Louis RAFFESTIN |
| Abstract: | This article examines the impact of monetary policy (MP) on firms’ stock prices across CO2 emissions. We provide a theoretical model in which green firms are less sensitive to MP shocks than brown firms, because they are less exposed to transition risk and provide non-pecuniary utility to investors. We test this prediction by using a panel event-study regression approach on 857 US firms between 2010 and 2019. We find robust evidence that firms with high carbon intensity are significantly more affected by policy rate surprises. The sensitivity premium of brown firms remains significant when controlling for classic sources of MP heterogeneity, is persistent, and increases with climate awareness. Our results suggest that the market neutrality principle guiding the implementation of monetary policy could induce a bias toward brown firms. |
| Keywords: | Climate change, Transition risk, Carbon emissions, Monetary policy shocks, Risk premia. |
| JEL: | E44 O13 Q49 Q54 G12 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:grt:bdxewp:2023-08&r=mon |
| By: | Davide Romelli |
| Abstract: | This paper presents an extensive update to the Central Bank Independence – Extended (CBIE) index, originally developed in Romelli (2022), extending its coverage for 155 countries from 1923 to 2023. The update reveals a continued global trend towards enhancing central bank independence, which holds across countries’ income levels and indices of central bank independence. Despite the challenges which followed the 2008 Global financial crisis and the recent re-emergence of political scrutiny on central banks following the COVID-19 pandemic, this paper finds no halt in the momentum of central bank reforms. I document a total of 370 reforms in central bank design from 1923 to 2023 and provide evidence of a resurgence in the commitment to central bank independence since 2016. These findings suggest that the slowdown in reforms witnessed post-2008 was a temporary phase, and that, despite increasing political pressures on central banks, central bank independence is still considered a cornerstone for effective economic policy-making |
| Keywords: | Central banking, central bank independence, central bank governance, legislative reforms. |
| JEL: | E58 G28 N20 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp24217&r=mon |
| By: | Bonam, Dennis; Ciccarelli, Matteo; Gomes, Sandra; Aldama, Pierre; Bańkowski, Krzysztof; Buss, Ginters; da Costa, José Cardoso; Christoffel, Kai; Elfsbacka Schmöller, Michaela; Jacquinot, Pascal; Kataryniuk, Ivan; Marx, Magali; Mavromatis, Kostas; Moyen, Stéphane; Mužić, Ivan; Notarpietro, Alessandro; Papageorgiou, Dimitris; Rannenberg, Ansgar; Skotida, Ifigeneia; Bouabdallah, Othman; Dobrew, Michael; Hauptmeier, Sebastian; Holm-Hadulla, Fédéric; Brzoza-Brzezina, Michał; Hurtado, Samuel; Kolasa, Marcin; Patella, Valeria; Renault, Théodore; Domínguez-Díaz, Rubén; Lechthaler, Wolfgang; McClung, Nigel; Šestořád, Tomáš; Silgado-Gómez, Edgar; Železník, Martin; von Thadden, Leo; Menéndez-Álvarez, Carolina |
| Abstract: | In the low inflation and low interest rate environment that prevailed over the period 2013-2020, many argued that besides expansionary monetary policy, expansionary fiscal policy could also support central banks’ efforts to bring inflation closer to target. During the pandemic, proper alignment of fiscal and monetary policy was again crucial in promoting a rapid macroeconomic recovery. Since the end of 2021 an environment of higher inflation, lower growth, higher uncertainty, and higher interest rates has changed the nature of the required policy mix and poses different challenges to the interaction between monetary and fiscal policy. Following up on the work done under the ECB’s 2020 strategy review (see Debrun et al., 2021), this report explores some of the renewed challenges to monetary and fiscal policy interactions in an environment of high inflation. The main general conclusion is that, with an independent monetary policy that aims to bring inflation back to target in a timely manner, it is still possible to design fiscal policy in a way that protects vulnerable parts of society against the costs of high inflation without pulling against the central bank’s effort to tame inflation. This is more likely to be the case if fiscal measures are temporary and targeted, and if priority is given to structural reforms and public investment in support of potential growth. The latter is particularly effective in reshaping the supply side of the economy in a manner that is likely to have a lasting positive structural impact. JEL Classification: E22, E52, E58, E62 |
| Keywords: | fiscal policy, monetary policy, public investment |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024337&r=mon |
| By: | Anton Bobrov (Federal Reserve Bank of San Francisco); Rupal Kamdar (Indiana University); Mauricio Ulate (Federal Reserve Bank of San Francisco) |
| Abstract: | U.S. monetary-policy decisions are made by the 12 voting members of the Federal Open Market Committee (FOMC). Seven of these members, coming from the Federal Reserve Board of Governors, inherently represent national-level interests. The remaining five members, a rotating group of presidents from the 12 Federal Reserve districts, come instead from sub-national jurisdictions. Does this structure have relevant implications for the monetary policy-making process? In this paper, we first build a panel dataset on economic activity across Fed districts. We then provide evidence that regional economic conditions influence the voting behavior of district presidents. Specifically, a regional unemployment rate that is one percentage point higher than the U.S. level is associated with an approximately nine percentage points higher probability of dissenting in favor of looser policy at the FOMC. This result is statistically significant, robust to different specifications, and indicates that the regional component in the structure of the FOMC could matter for monetary policy. |
| Keywords: | Monetary Policy, FOMC, Regional Economic Conditions, Taylor Rule |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2024002&r=mon |
| By: | Jaqueline Terra Moura Marins |
| Abstract: | FX rate predictability is non-trivial, but is of great importance for economic agents and policy makers, as it is one of the main prices in an economy. Aware of the failure of standard economic theory to explain foreign exchange rate behavior using key economic variables since Meese and Rogoff (1983 a, b), in this paper, besides economic models, we also use financial data to forecast point and density estimates, as well as some value-at-risk measures. Making use of promising results found for Brazilian currency in Gaglianone and Marins (2017) with the Option-Implied model for the short-run forecasting, we verify if |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:588&r=mon |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen); Yuan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | We develop a continuous time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risksharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices and exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from Uncovered and Covered Interest Parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly. |
| Keywords: | Financial Intermediation, Exchange Rates, Uncovered Interest Parity, Covered Interest Parity Deviations |
| JEL: | E44 E52 F31 F33 G13 G15 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2401&r=mon |
| By: | Ethan Struby (Carleton College); Christina Farhart (Carleton College) |
| Abstract: | Using a unique, nationally representative survey from the 2022 midterm elections, we investigate the partisan divide in beliefs about inflation and monetary policy. We find that party identity is predictive of inflation forecasts even after conditioning on beliefs about both past inflation and the Federal Reserve’s long-run inflation target. Partisan forecast differences are driven by respondents who express low generalized trust in others and have a high degree of political knowledge; high-trust and lowknowledge partisans make similar forecasts all else equal. This finding is consistent with the literature in political psychology that examines the endorsement of conspiracy theories and political misinformation. We argue that the partisan divide in consumer inflation surveys is consistent with strategic responses by partisans. |
| JEL: | E70 E71 E30 E31 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:avv:wpaper:2024-01&r=mon |
| By: | Blampied, Nicolas; Cafferata, Alessia; Tibiletti, Luisa; Uberti, Mariacristina |
| Abstract: | The Taylor rule constitutes the main tool policy makers rely on to guide monetary policy. In simple words, the rule is a reaction function that determines the short-term interest rate, which responds in the baseline specifications to changes in the inflation gap and the output gap. Since the original paper of Taylor (1993), a large debate has taken place in the literature regarding what the best performing rules are. This paper attempts to analyze the recent literature on the Taylor rule and in particular two important extensions proposed in the last decades: first, we consider whether financial variables should be included in the Taylor rule; second, we analyze the inclusion of the long-term interest rate. From this analysis, we contribute to the understanding of the main monetary policy tool used by any Central Bank and debate whether we find potential variables to extend it. |
| Keywords: | Inflation; Interest rates; Output;Taylor rule; Taylor principle |
| JEL: | E50 E52 E58 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119923&r=mon |
| By: | Krenz, Johanna |
| Abstract: | What are the effects of financial integration on global comovement? Using a standard two-country DSGE model, I show that in response to country-specific supply shocks higher exposure to foreign assets leads to lower cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important, yet overlooked, transmission channel originates in the interplay between financial integration and terms of trade movements in response to the shocks hitting the economy. The transmission channel is independent of whether the agents who hold the foreign assets are financially constrained or not. |
| Keywords: | Business cycle comovement, Financial cycle comovement, Financial integration, Demand versus supply shocks, Terms of trade, Transfer Problem, Balance sheet effect |
| JEL: | E30 E44 F41 F44 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281784&r=mon |
| By: | Nadezhda Ivanova (Bank of Russia, Russian Federation); Ekaterina Petreneva (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation) |
| Abstract: | This paper studies the cross-border transmission of US monetary policy to Russia in 2000-2019 via its effect on activities of Russian banks in the low interest rate environment in comparison with normal times. Specifically, we investigate dynamic responses of lending, funding, and risk taking. The main finding is that, in normal times, the dynamic responses of dependent variables of interest are consistent with the prevalence of the international lending channel whereas in the low rate environment the patterns are different for different indicators: in some instances the dynamic effect of interest is attenuated compared with normal times, in others, it is reinforced. |
| Keywords: | monetary policy, international spillovers, cross-border transmission, low interest rates |
| JEL: | E52 F34 G21 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps114&r=mon |
| By: | Martin Iseringhausen |
| Abstract: | We study the role of regional housing markets in the transmission of US monetary policy. Using a FAVAR model over 1999q1–2019q4, we find sizeable heterogeneity in the responses of US states to a contractionary monetary policy shock. Part of this regional variation is due to differences in housing supply elasticities, household debt overhang, and housing wealth (volatility). Our analysis indicates that house prices and consumption respond more in supply-inelastic states and in states with large household debt imbalances, where negative housing wealth effects bite more strongly and borrowing constraints become more binding. Moreover, financial stability risks increase sharply in these areas as mortgage delinquencies and foreclosures surge, worsening banks’ balance sheets. Finally, monetary policy may have a stronger effect on housing tenure decisions in supply-inelastic states, where the homeownership rate and price-to-rent ratios decline by more. Our findings stress the importance of regional housing supply conditions in assessing the macrofinancial effects of rising interest rates. |
| Keywords: | Credit conditions, FAVAR, house prices, monetary policy, regional data, supply elasticities |
| JEL: | C23 E32 E52 R31 |
| Date: | 2024–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:59&r=mon |
| By: | Vadim Grishchenko (Bank of Russia, Russian Federation); Diana Gasanova (Higher School of Economics, Russian Federation); Egor Fomin (Higher School of Economics, Russian Federation); Grigory Korenyak (Moscow State University, Russian Federation) |
| Abstract: | A multitude of recent research shows that the inflation expectations of households are far from rational. In making inflation forecasts, people tend to focus on the prices of particular goods and services, which they can observe every day – ‘visible prices’. In this paper, we propose a new method for the identification of such items. Our novel ‘brute force’ algorithm automatically sorts through the full array of prices of goods and services given by Rosstat and constructs consumer baskets. It then selects the best baskets based on their ability to forecast the inflation expectations of Russian households from the FOM Survey. In the end, we get a decomposition of various met-rics of inflation expectations for visible prices which also demonstrates good forecasting perfor-mance (as compared to the AR(1) process as a benchmark). To ensure robustness, we use an alter-native method (optimisation with regularisation) and a variety of metrics of inflation expectations. As a result, we get lists of ‘robust visible items’ which include not only foodstuffs but mainly durable goods and services. Surprisingly enough, oil and petrol, which are typically labelled ‘vis-ible goods’ in research, do not fall into this category for Russia. |
| Keywords: | inflation expectations, households, visible prices, visible items, Rosstat, FOM Survey |
| JEL: | C43 C82 E31 E37 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps117&r=mon |
| By: | Cisil Sarisoy |
| Abstract: | Measures of uncertainty about U.S. short maturity interest rates derived from options have risen sharply since October 2021, reaching their highest levels in more than a decade. This note first uses survey-based measures of economic uncertainty to argue that this increase in option-implied measures likely reflect higher uncertainty about inflation, the associated monetary policy response, and the perceived resulting downside risks to economic activity. |
| Date: | 2023–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2023-12-22&r=mon |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| Keywords: | central bank research; international financial markets; monetary policy transmission |
| JEL: | E44 E52 F36 F42 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-3&r=mon |
| By: | Apeti, Ablam Estel; Edoh, Eyah Denise |
| Abstract: | Making tax administration more efficient and maximising voluntary compliance is a very difficult task for developing countries. In this paper, we analyse the effect of mobile money payments on the quality of tax policy and administration for a large sample of countries in developing economies. We use the World Bank indicator on efficiency of revenue mobilisation as a measure of the quality of tax policy and administration and employ an entropy balancing method to show that mobile money payments improve the quality of tax systems. This result is robust to several robustness tests, including sample alteration, alternative measures of mobile money, controlling for other aspects of tax policy, and alternative estimation methods such as GMM-system, event study approach and ordinary least square. In addition, our results show that the positive effect of mobile money on tax systems depends on the level of development, financial development, the state’s legitimacy, a country’s fiscal space, the number of available products/companies, the type of mobile money services, and the geographic position of countries. Finally, we highlight some potential mechanisms underlying these findings through lower tax compliance burden, smaller informal sector, and lower corruption. |
| Keywords: | Economic Development, |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:18214&r=mon |
| By: | Lorena Skufi (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania); Meri Papavangjeli (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania); Adam Gersl (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | Motivated by migration phenomena and wage-inflation spillovers, we investigate the relationship between the two and the inflationary remittances built-in pressures. We establish a feedback loop between migration and inflation, and specify a simple dynamic model to identify the pass-through. Our empirical approach focuses on the wage Phillips Curve, price setting under monopolistic competition, and state space model for the natural unemployment rate. Our estimates suggest that overshooting inflation and tight labor market conditions increase wage-inflation sensitivity. A continuous decline of population by 1% leads to 98 basis points (BP) of inflation pressures in the short-run and 23 BP in the long-run. Remittances induce excessive pressures by 18 BP on inflation. Supportive schemes such as an older retirement age and higher labor force participation rate can partially mitigate inflationary. |
| Keywords: | labor market, demographics, inflation, wage, remittances, feedback-loop |
| JEL: | J11 J21 J31 E24 E31 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_05&r=mon |
| By: | Yuriy Kitsul; Bill Lang; Mehrdad Samadi |
| Abstract: | Rapid monetary policy tightening in most advanced economies in 2022 and 2023 was accompanied by substantial increases in prevailing interest rates for new credit to businesses and households. In addition to increasing the cost of new borrowing, monetary policy tightening may also be associated with increases in costs of servicing existing debt, potentially leading to the tightening of firms' and households' financial constraints, leaving them with less cash for investment and consumption. |
| Date: | 2023–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2023-12-01&r=mon |
| By: | Viacheslav Kramkov (Bank of Russia, Russian Federation) |
| Abstract: | If the consumer price index (CPI), one of the main indicators of inflation, consists of several components, would it be more accurate to forecast them separately? International experience shows that the aggregate of individual forecasts is often more accurate than the forecast of the aggregated index. In this paper, we explore this issue for Russia and test whether the quality of inflation forecasts can be improved by the CPI individual components forecasting. Using the panel data of Russian regions for the period from 2010 to 2021 we partially confirm the usefulness of a disaggregated approach. Individual modelling of the short-term price dynamics of individual commodity groups is ahead in terms of accuracy of the overall inflation model, including standard benchmark models, but only under certain conditions. First, it is necessary to include the factors of trend inflation in the models, which helps to separate the trend inflation acceleration/deceleration from short-term idiosyncratic fluctuations. Secondly, the models should have the property of inflation convergence to its long-term level, determined by the Bank of Russia's goal. Under these conditions, the disaggregated approach gives a more accurate forecast on short horizons than the aggregated one and a forecast of comparable to non-structural models’ accuracy on longer ones. Additionally, good predictive properties of the “anchored” forecast model were established (the “anchored” forecast is equal to the target inflation rate). The accuracy of this forecast turns out to be higher than the accuracy of standard models and does not deteriorate with an increase in the forecast horizon. This allows us to recommend this model as a simple non-structural benchmark for measuring the quality of inflation forecast models in Russia. |
| Keywords: | price dynamics of CPI components, forecasting, relative prices, trend inflation, idiosyncratic shocks, comparison of forecasting models in panel data |
| JEL: | E31 E37 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps112&r=mon |
| By: | Rodrigue Dossou-Cadja (Sapienza University of Rome, EHESS, PSE) |
| Abstract: | The CFA franc devaluation on 11 January 1994 stands out as the most significant reform within the Franc Zone system since political independences of former African French colonies in 1960, yet a topic shrouded into profound taboo. So far, the economic literature has failed to draw any connection between this pivotal event in African macroeconomic history and its historical context: the 1992-3 European Monetary System (EMS) crisis. Using the narrative approach coupled with quantitative analysis (DCC-MGARH-X and SVARs) and powered by an unprecedented set of archival data from the Banque de France, the Bank of England, and the Bundesbank (the latter two from Eichengreen and Naef, 2022), as well as the International Monetary Fund (IMF), we document a brand-new route on understanding a certain integrated African-European common history. Evidence unveils the CFA franc devaluation as a fundamental role player in backing up credibility of the French franc amidst the 1992-3 EMS crisis. A ‘new democratic Franc Zone's Transition Committee' at the Banque de France, appears as a key feature for the future of the Zone’s management. |
| Keywords: | CFA franc devaluation, Franc Zone, European Monetary System, Currency crisis, Political Independences, Narrative approach |
| JEL: | E42 E58 F31 F33 F42 F53 F54 F55 N14 N17 N24 N27 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:hes:wpaper:0246&r=mon |
| By: | Ethan Struby (Carleton College); Michael F. Connolly (Colgate University and Boston College) |
| Abstract: | The U.S. Department of Treasury has announced plans to revive its buyback program after more than two decades. We estimate the effects of the 2000-2002 Treasury Buyback program on Treasury returns and the Federal Reserve's System Open Market Account (SOMA) portfolio. The reduction in supply from the buybacks had significant effects on both the bonds purchased by the buybacks and bonds with similar remaining maturity. Changes in supply contributed about 90 basis points to price returns over the course of the program -- nearly 1/5 of the overall change in prices. At a higher frequency, prices of purchased bonds and their near substitutes tended to change on settlement dates, not auction dates. We find that the Fed's holdings of individual securities were largely unaffected over the course of the buyback program. This is consistent with the Fed attempting to avoid exacerbating supply shortages in Treasury markets. |
| JEL: | E5 E63 G1 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:avv:wpaper:2023-02&r=mon |
| By: | Andriantomanga, Zo |
| Abstract: | This paper performs a real-time forecasting exercise for US inflation from 1992Q1 to 2022Q2. We reinvestigate the literature on autoregressive (AR) inflation gap models - the deviation of inflation from long-run inflation expectations. The findings corroborate that, while simple models remain hard to beat, the multivariate extensions to the AR gap models can improve forecasting performance at short horizons. The results show that (i) forecast combination improves forecast accuracy over simpler models, (ii) aggregating survey measures, using dynamic principal components, improves forecast accuracy, (iii) and the additional information obtained from the error correction process between inflation and long run inflation expectations can improve forecasting performance. In spite of our models providing more accurate one-step ahead forecasts on average, fluctuation tests reveal that over unstable time periods - mainly during the GFC and the Covid-19 pandemic - the AR(1) benchmark performed better. |
| Keywords: | Inflation, survey forecasts, forecast combination, inflation expectations, error correction, real-time data |
| JEL: | C53 E31 E37 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119904&r=mon |
| By: | Pascal Michaillat; Emmanuel Saez |
| Abstract: | This paper proposes a model of the divine coincidence, explaining its recent appearance in US data. The divine coincidence matters because it helps explain the behavior of inflation after the pandemic, and it guarantees that the full-employment and price-stability mandates of the Federal Reserve coincide. In the model, a Phillips curve relating unemployment to inflation arises from Moen's (1997) directed search. The Phillips curve is nonvertical thanks to Rotemberg's (1982) price-adjustment costs. The model's Phillips curve guarantees that the rate of inflation is on target whenever the rate of unemployment is efficient, generating the divine coincidence. If we assume that wage decreases -- which reduce workers' morale -- are more costly to producers than price increases -- which upset customers -- the Phillips curve also displays a kink at the point of divine coincidence. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.12475&r=mon |
| By: | Gabriel Bizama; Alexander Wu; Bernardo Paniagua; Max Mitre |
| Abstract: | This research aims to provide a framework to assess the contribution of digital currencies to promote financial inclusion, based on a diagnosis of the landscape of financial inclusion and domestic and cross-border payments in Latin America and the Caribbean. It also provides insights from central banks in the region on key aspects regarding a possible implementation of central bank digital currencies. Findings show that although digital currencies development is at an early stage, a well-designed system could reduce the cost of domestic and cross-border payments, improve the settlement of transactions to achieve real-time payments, expand the accessibility of central bank money, incorporate programmable payments and achieve system performance demands. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.09811&r=mon |
| By: | Anayi, Lena; Bloom, Nicholas; Bunn, Philip; Mizen, Paul; Thwaites, Gregory Douglas; Yotzov, Ivan |
| Abstract: | We use data from a large panel survey of UK firms to analyze the economic drivers of price setting since the start of the Covid pandemic. Inflation responded asymmetrically to movements in demand. This helps to explain why inflation did not fall much during the negative initial pandemic demand shock. Energy prices and shortages of labor and materials account for most of the rise during the rebound. Inflation rates across firms have become more dispersed and skewed since the start of the pandemic. We find that average price inflation is positively correlated with the dispersion and skewness of the distribution. Finally, we also introduce a novel measure of subjective inflation uncertainty within firms and show how this has increased during the pandemic, continuing to rise in 2022 even as sales uncertainty dropped back. |
| Keywords: | price setting; energy prices; labour shortages; Covid-19; coronavirus |
| JEL: | N0 |
| Date: | 2023–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121323&r=mon |
| By: | Lo Duca, Marco; Moccero, Diego; Parlapiano, Fabio |
| Abstract: | We analyse the impact of macroeconomic and monetary policy shocks on corporate credit risk as measured by firms’ probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections (LP). For the period 2014-19, we find that aggregate shocks significantly affect the dynamics of credit risk. An adverse supply shock leads to a deterioration of firms’ riskiness 10 per cent above the average PD. Contractionary monetary policy shocks exert similar, but delayed effects. Firms’ responses to shocks vary depending on their characteristics and degree of financial constraints. Smaller firms are affected to a larger degree. Firms’ outstanding indebtedness and debt repayment capacity are an important transmission channel for aggregate shocks, but the accumulation of cash reserves helps building resilience. JEL Classification: C23, C55, E43, E52, G33 |
| Keywords: | corporate credit risk, local projections, monetary policy shocks, probabilities of default, structural demand and supply shocks |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242897&r=mon |
| By: | Monique Reid; Pierre Siklos |
| Abstract: | Abundant evidence that the inflation expectations of financial analysts differ in economically important ways from those of non-financial specialists, has been followed by increasing demand for firm level data, in an attempt to more accurately capture the views of price setters. The unusually rich firm level survey data from South Africa allows us to explore some of the ways in which the expectations of firms differ from that those of other groups surveyed. We focus specifically on forecast disagreement, which can offer insights about the level of uncertainty reflected in the data, as well as the degree to which expectations are anchored. We find that divergence of inflation forecasts amongst respondents is partly explained by differences in how respondents believe the broader macroeconomy is evolving. We also consider the impact of different types of aggregation of the data. It is when we construct a new measure of macroeconomic disagreement that combines all the variables being forecast that we are able to see that forecasters responded sharply in early 2020 as the pandemic emerged. |
| Keywords: | forecast disagreement, firm level, labor, professional forecasts, Bureau of Economic Research, South African Reserve Bank |
| JEL: | E37 E31 E47 E32 E58 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-05&r=mon |
| By: | Faccia, Donata; Hünnekes, Franziska; Köhler-Ulbrich, Petra |
| Abstract: | In this paper we build a unique dataset to study how banks decide which firms to lend to and how this decision depends on their own situation and the characteristics of their borrowers. We find that weaker capitalised banks adjust their credit standards more than healthier banks, especially for firms with a higher default risk. We also show how credit standards change in reaction to two specific macroeconomic developments, namely an increase in bank funding costs and a sudden deterioration in banks’ corporate loan portfolios. Here we find that weaker banks respond more forcefully by tightening their credit standards more than better capitalised banks. This development is particularly pronounced when banks are linked to riskier firms. Insofar, we provide evidence of heterogeneity in the bank lending channel, depending on the situation of the lenders and the borrowers. JEL Classification: E44, E51, E52, G21 |
| Keywords: | bank lending channel, credit risk, credit supply, monetary policy transmission |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242902&r=mon |