|
on Monetary Economics |
| By: | Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta |
| Abstract: | We test for state-dependent bias in the European Central Bank's inflation projections. We show that the ECB tends to underpredict when the observed inflation rate at the time of forecasting is higher than an estimated threshold of 1.8%. The bias is most pronounced at intermediate forecasting horizons. This suggests that inflation is projected to revert towards the target too quickly. These results cannot be fully explained by the persistence embedded in the forecasting models nor by errors in the exogenous assumptions on interest rates, exchange rates or oil prices. The state-dependent bias may be consistent with the aim of managing inflation expectations, as published forecasts play a central role in the ECB's monetary policy communication strategy. |
| Keywords: | Inflation Forecasts, Forecast Evaluation, ECB, Central Bank Communication |
| JEL: | C12 C22 C53 E31 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:295738&r= |
| By: | Simona Bozhinovska (CEPN) |
| Abstract: | The present article proposes to draw on the recent experiences of many central banks of advanced economies and the evolution of their operational frameworks in the new context of increased domestic liquidity, when analysing the operations of central banks that engage in exchange rate management and increase their official foreign reserves as a result. It argues that the theoretical literature on endogenous money set within the context of an open economy with an exchange rate objective needs to be amended to account for such developments, as it would be entirely possible for a central bank that accumulates substantial foreign reserves to adopt a floor system and thus maintain a near-perfect control over its policy interest rate without the need for any compensating measure. On the grounds of the reverse causation argument, establishing a direct link between the foreign reserves and the monetary base should not entail any quantitative effect on other economic variables. |
| Keywords: | central bank balance sheets, endogenous money theory, foreign exchange accumulation, monetary policy implementation |
| JEL: | E58 E42 E50 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:87-2023&r= |
| By: | Ben S. Bernanke (Brookings Institution); Olivier J Blanchard (Peterson Institute for International Economics) |
| Abstract: | In a collaborative project with ten central banks, Bernanke and Blanchard investigate the causes of the pandemic-era global inflation, building on their work for the United States. Globally, as in the United States, pandemic-era inflation was due primarily to supply disruptions and sharp increases in the prices of food and energy; however, the inflationary effects of these supply shocks have not been persistent, in part due to the credibility of central bank inflation targets. As the effects of supply shocks have subsided, tight labor markets, and the resulting rises in nominal wages, have become relatively more important sources of inflation in many countries. In a number of countries, including the United States, curbing wage inflation and returning price inflation to target may require a period of modestly higher unemployment. |
| Keywords: | Inflation, monetary policy, aggregate demand, Beveridge curve, commodity prices, energy prices, food prices, shortages, inflation expectations |
| JEL: | E30 E31 E52 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp24-11&r= |
| By: | Ricciutelli, Francesco |
| Abstract: | Recent research unveiled the heterogeneous effects of rising energy prices for low-income and high-income European households, as they tend to purchase distinct consumption baskets. We explore the effects of energy inflation on consumption inequality in a Two-Agent New Keynesian (TANK) model with an exogenous energy sector, and look for the optimal monetary policy response to an energy price shock. We find that rising energy prices widen consumption inequality through the expansions of inflation and income gaps. The effects of a maximizing welfare monetary policy are partially approximated by a core inflation targeting Taylor rule. |
| Keywords: | TANK Models; Energy; Consumption Inequality; Monetary Policy |
| JEL: | E52 I14 Q43 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120899&r= |
| By: | Emre Yoldas |
| Abstract: | Most central banks tightened monetary policy considerably over the past few years as inflation surged globally. Though effects of the COVID pandemic on global supply chains and labor markets was a common factor driving inflation higher across economies, domestic factors led to notable variation in the timing and extent of monetary policy responses. |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2024-05-10-2&r= |
| By: | Tänzer, Alina |
| Abstract: | Central bank intervention in the form of quantitative easing (QE) during times of low interest rates is a controversial topic. This paper introduces a novel approach to study the effectiveness of such unconventional measures. Using U.S. data on six key financial and macroeconomic variables between 1990 and 2015, the economy is estimated by artificial neural networks. Historical counterfactual analyses show that real effects are less pronounced than yield effects. Disentangling the effects of the individual asset purchase programs, impulse response functions provide evidence for QE being less effective the more the crisis is overcome. The peak effects of all QE interventions during the Financial Crisis only amounts to 1.3 pp for GDP growth and 0.6 pp for inflation respectively. Hence, the time as well as the volume of the interventions should be deliberated. |
| Keywords: | Artificial Intelligence, Machine Learning, Neural Networks, Forecasting and Simulation: Models and Applications, Financial Markets and the Macroeconomy, Monetary Policy, Central Banks and Their Policies |
| JEL: | C45 E47 E44 E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:295732&r= |
| By: | Thomas I. Palley |
| Abstract: | This paper introduces the notion of monetary disorder. The underlying theory rests on a twin circuits view of the macro economy. The idea of monetary disorder has relevance for understanding the experience and consequences of the recent decade-long period of monetized large budget deficits and ultra-easy monetary policy. Current policy rests on Keynesian logic whereby a large fall in aggregate demand warrants robust offsetting monetary and fiscal policy actions. That logic neglects potential monetary disorder being bred within the financial circuit in the form of inflated asset prices and leveraged balance sheets. That disorder is likely to develop long before inflation accelerates so that inflation targeting fails to protect against it. Political factors increase the policy danger as the benefits of disorder are front-loaded and the costs backloaded. The paper concludes with a policy discussion regarding how to prevent Keynesian goods market counter-cyclical stabilization policy from causing monetary disorder. |
| Keywords: | Monetary disorder, twin circuits, inflation, asset price bubbles, budget deficits, modern money theory (MMT) |
| JEL: | E00 E12 E30 E40 E63 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:93-2023&r= |
| By: | Olena Kostyshyna; Tolga Özden; Yang Zhang |
| Abstract: | Elevated inflation can threaten the credibility of central banks and increase the risk that inflation expectations do not remain anchored. Wage-price spirals might develop in such an environment, and high inflation could become entrenched. We quantitively assess the risks of a wage-price spiral occurring in Canada over history by using a medium-scale dynamic stochastic general equilibrium model enhanced with heterogenous expectation and learning. This mechanism generates time-varying propagation of inflationary shocks that improves forecasting performance of inflation and wage growth. Central bank credibility is endogenous in our model and depends on several notions of the learning mechanism. Weaker credibility and a higher risk of inflation expectations not remaining anchored increase the risk of a wage-price spiral. |
| Keywords: | Business fluctuations and cycles; Credibility; Inflation and prices; Monetary policy |
| JEL: | E00 E7 E47 C22 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-14&r= |
| By: | Raphael Auer; Mathieu Pedemonte; Raphael Schoenle |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | globalisation, inflation, Phillips curve, monetary policy, global value chain, international inflation synchronisation |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1189&r= |
| By: | Alice Albonico; Guido Ascari; Qazi Haque |
| Abstract: | We estimate a medium-scale DSGE model for the Euro Area allowing and testing for indeterminacy since the introduction of the euro until mid-2023. Our estimates suggest that monetary policy in the euro area was passive, leading to indeterminacy and self-fulfilling dynamics. Indeterminacy dramatically alters the transmission of fundamental shocks, particularly for inflation whose responses are inconsistent with standard economic theory. Inflation increases following a positive supply or a negative demand shock. Consequently, demand shocks look like supply shocks and vice versa, making the dynamics of the model under indeterminacy challenging to interpret. However, this finding is not robust across different assumptions on the way the sunspot shock is specified in the estimation. Both under determinacy and indeterminacy, the model estimates a natural rate of interest that turned positive after the recent inflation episode. |
| Keywords: | monetary policy, indeterminacy, euro area, business cycle fluctuations, inflation |
| JEL: | E32 E52 C11 C13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-34&r= |
| By: | Li, Boyao |
| Abstract: | Monetary policy operations affect bank balance sheets (BBSs). This study develops a balance sheet model to examine the impacts of monetary policy operations on banks’ ability to supply funds. That ability is assessed using the balance sheet capacities provided by regulatory risk management instruments. The balance sheet approach views a monetary policy operation as a transaction between the central bank and a commercial bank, modeling the transaction as multiple changes to the BBS. This study identifies and distinguishes the effects of multiple changes in the BBS on balance sheet capacity. A balance sheet change resulting from a monetary policy operation may positively or negatively affect balance sheet capacity. Thus, a monetary policy may have a positive and a negative effect simultaneously. Positive (negative) effects result from balance sheet changes that reduce (increase) bank risks, as measured by regulations. As regulatory stringency decreases, the positive effects increase, whereas the negative effects remain unchanged. A BBS capacity channel of monetary policy is also shown. |
| Keywords: | Balance sheet; Banking; Monetary policy; Monetary transmission; Regulation |
| JEL: | E51 E52 E58 G21 G28 |
| Date: | 2024–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120882&r= |
| By: | Korhonen, Iikka; Newby, Elisa; Elonen-Kulmala, Jonna |
| Abstract: | This article looks into global central bank messaging on the Twitter social media platform. At the end of 2021, a total of 122 central banks and monetary authorities had registered accounts on Twitter At that time, approximately two-thirds of world's central banks and monetary author- ities were using Twitter. Drawing on a database of central bank tweets up to the end of 2021, we document Twitter interactions of central banks by such measures as influence, connections and hashtag use. In addition to similarities among central bank strategies, we also find striking differences in influence and willingness to connect with the public. Tweeting activity during the Covid-19 pandemic provides insight in central bank crisis responses. |
| Keywords: | central banks, communications, Twitter, Covid-19 |
| JEL: | E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:294868&r= |
| By: | Olesya V. Grishchenko; Laura Wilcox |
| Abstract: | We study probabilities of extreme inflation events in the Unites States and the euro area. Using a state-space model that incorporates information from a large set of professional forecasters, we generate the term structure of inflation forecasts as well as probabilities of future inflation for any range of inflation outcomes in closed form at any horizon. Since the onset of the COVID-19 pandemic, inflation expectations increased materially amid heightened uncertainty about future inflation. Likelihood of significant departures of inflation targets in the longer term reached about 15 percent in the middle of 2022, increasing from near zero levels in 2020. Such an increase in the right tail of the probability distribution over future inflation outcomes drives an increase in inflation expectations and inflation risk premiums. Several popular external uncertainty measures are associated with variation in tail probabilities. |
| Keywords: | Inflation forecasts; Inflation state-space model; Probability of rare inflation events; Inflation anchoring |
| JEL: | G12 G13 G14 |
| Date: | 2024–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2024-28&r= |
| By: | igescu, iulia |
| Abstract: | Some selected examples from trade history and even more the rise of superstar firms in the early twenty first century make visible the eminence of monetary delocalization in the process of market creation. Market creation is highly concentrated in space. As a result, inside and outside money have evolved as complements. Extensive market creation today has become a main source of excess reserves in the banking sector. Monetary delocalization forces the process of market completeness to demand more safe assets of good quality, driving up their price. A monetary authority facing network collateral channel effects of superstar firms would have to rely on increased volumes of safe assets, to be deployed in case a lack of complete markets interrupts inside-outside money flows. Higher interest rates would make market completion more costly, slowing it down. |
| Keywords: | usura monetary policy excess reserves money delocalization market incompleteness inside-outside money superstar firms Ming Dynasty trade Medici banks Canton trade Reichsbank during war Romania |
| JEL: | B00 E40 E52 E58 N13 N14 N15 O43 |
| Date: | 2023–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120865&r= |
| By: | Wauters, Joris (National Bank of Belgium); Zekaite, Zivile (Central Bank of Ireland); Garabedian, Garo (Central Bank of Ireland) |
| Abstract: | The ECB concluded its strategy review in 2021 with a plan to include owner-occupied housing (OOH) costs in its inflation measure in the future. This paper uses the Bundesbank’s online household panel to study how household expectations would react to this change. We conducted a survey experiment with different information treatments and compared long-run expectations for euro area overall inflation, interest rates, and OOH inflation. Long-run expectations are typically higher for OOH inflation than overall inflation, and both are unanchored from the ECB’s target at the time of the survey. We find significantly higher inflation expectations under the treatment where OOH costs are assumed to be fully included in the inflation measure. This information effect is heterogeneous as, among others, homeowners and respondents with low trust in the ECB react more strongly. However, inflation expectations remain stable when information about past OOH inflation is also given. Careful communication design could thus prevent expectations from becoming more de-anchored. |
| Keywords: | Owner-occupied housing costs, survey experiment, inflation measurement, inflation expectations, ECB. |
| JEL: | D83 D84 E31 E50 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:3/rt/24&r= |
| By: | Ariadne Checo; Mr. Francesco Grigoli; Mr. Damiano Sandri |
| Abstract: | Doubts persist about the effectiveness of monetary transmission in emerging markets, but the empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using novel analysts’ forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting, allowing them to incorporate any relevant data release. Using these shocks, we show that monetary transmission in emerging markets operates similarly to advanced economies. Monetary tightening leads to a persistent increase in bond yields, a contraction in real activity, and a delayed reduction in inflation. Furthermore, monetary policy impacts leveraged firms more strongly. |
| Keywords: | Monetary policy shocks; financial markets; emerging markets. |
| Date: | 2024–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/093&r= |
| By: | Beckers, Benjamin; Bernoth, Kerstin |
| Abstract: | We investigate the role of monetary policy in stock price misalignments and explore whether central banks can attenuate excessive mispricing as suggested by the proponents of a “leaning against the wind” monetary policy. Decomposing stock prices into expected excess dividends, an equity risk premium, and a mispricing component, we find that prices fall more strongly in response to an increase in the policy rate than what is implied by their underlying fundamentals. This systematic overreaction suggests that tighter monetary policy may contain emerging asset price misalignments. Our findings are at odds with the predictions of a rational bubble framework, but can be explained by mispricing arising from false subjective expectations of irrational investors. |
| Keywords: | Asset pricing, bubbles, leaning against the wind, mispricing, monetary policy, stock prices |
| JEL: | E44 E52 G12 G14 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120502&r= |
| By: | Stephen G. Cecchetti; Jens Hilscher |
| Abstract: | In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP. |
| JEL: | E42 E52 E58 E63 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32478&r= |
| By: | S. Borağan Aruoba; Thomas Drechsel |
| Abstract: | We develop a novel method for the identification of monetary policy shocks. By applying natural language processing techniques to documents that Federal Reserve staff prepare in advance of policy decisions, we capture the Fed's information set. Using machine learning techniques, we then predict changes in the target interest rate conditional on this information set and obtain a measure of monetary policy shocks as the residual. We show that the documents' text contains essential information about the economy which is not captured by numerical forecasts that the staff include in the same documents. The dynamic responses of macro variables to our monetary policy shocks are consistent with the theoretical consensus. Shocks constructed by only controlling for the staff forecasts imply responses of macro variables at odds with theory. We directly link these differences to the information that our procedure extracts from the text over and above information captured by the forecasts. |
| JEL: | C10 E31 E32 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32417&r= |
| By: | Meri Papavangjeli (Institute of Economic Studies, Charles University, Prague, Czech Republic & Bank of Albania, Tirana, Albania); Adam Gersl (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | Given the prevailing global circumstances, characterized by tightening global financial conditions and substantial macro-financial vulnerabilities, the significance of monitoring financial conditions becomes even more pronounced and calls for heightened attention to the assessment and surveillance of financial indicators. This paper introduces a Financial Conditions Index (FCI) tailored for Albania, spanning from 2000 to 2022, using a factor augmented vector autoregressive models with time-varying coefficients (TVP-FAVAR) and incorporating a wide range of indicators, grounded in the empirical literature. By aligning with the main financial dynamics during this timeframe, the constructed index emerges as a robust gauge for monitoring and assessing the financial landscape of the country. Additionally, through a threshold Bayesian VAR model, the paper examines the transmission of monetary policy and financial conditions shocks to the real economy, by capturing non-linear dynamics through differentiating between periods characterized by different stands of financial fragilities. The findings suggest that the credit-to-GDP gap could potentially function as an early warning indicator of financial vulnerabilities, with a positive gap possibly reflecting excessive risk-taking by financial institutions. Furthermore, the transmission of monetary policy and financial conditions shocks to the real economy depends non-linearly on the private nonfinancial sector credit and is not symmetric throughout the considered period, with monetary policy transmission being attenuated during periods of heightened vulnerabilities. |
| Keywords: | financial conditions, monetary policy, credit gap stance, macro-financial vulnerabilities |
| JEL: | E52 E51 E61 E63 E65 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_20&r= |
| By: | Daniel Greenwald; John Krainer; Pascal Paul |
| Abstract: | We study the transmission of monetary policy through bank securities portfolios using granular supervisory data on U.S. bank securities, hedging positions, and corporate credit. Banks that experienced larger losses on their securities during the 2022-2023 monetary tightening cycle extended less credit to firms. This spillover effect was stronger for available-for-sale securities, unhedged securities, and banks that must include unrealized gains and losses in their regulatory capital. A structural model, disciplined by our cross-sectional regression estimates, shows that interest rate transmission is stronger the more banks are required to adjust their regulatory capital for unrealized value changes of securities. |
| JEL: | E32 E43 E44 E51 E52 E60 G21 G32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32449&r= |
| By: | Alvaro Silva; Julian di Giovanni; Muhammed A. Yildirim (Center for International Development at Harvard University); Sebnem Kalemli-Ozcan |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | Russia, Ukraine, China, COVID-19, Inflation |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:cid:wpfacu:440&r= |
| By: | R, Pazhanisamy; Sri, Thomas Mathew |
| Abstract: | The global economy has witnessed significant transformations in recent decades, marked by the emergence of new economic powers and the evolution of financial systems. Within this context, the globalization of currencies has become a crucial aspect of international economic dynamics. This paper explores the globalization of the Indian Rupee within the framework of the new world economic order. It examines the factors driving the globalization of the rupee, including economic liberalization, financial market reforms, and India's growing integration into the global economy. Furthermore, the paper analyzes the implications of the Rupee's globalization for India's economy, financial markets, and monetary policy. By examining the possibilities of appreciation of Indian rupee and opportunities associated with the globalization of the Rupee, this paper aims to contribute to a better understanding of India's role in the evolving global economic landscape and its implications for domestic and international trade. |
| Keywords: | Money demand, currency in circulation, payment systems, monetary policy Foreign Exchange, International Policy, Globalization, Indian Rupee, New World Economic Order, Internationalization, Monetary Policy, Economic Integration. |
| JEL: | E4 E42 E47 E51 E52 F3 F31 F33 F4 G18 |
| Date: | 2024–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120650&r= |
| By: | Marco Lorusso (University of Perugia, Newcastle University Business School); Francesco Ravazzolo (BI Norwegian Business School, Free University of Bozen-Bolzano, Italy); Claudia Udroiu (Free University of Bozen-Bolzano, Italy) |
| Abstract: | In this paper, we investigate the use of money supply issued by the central bank to support expansionary fiscal interventions. We develop and estimate a New Keynesian model using US data for the sample 1960Q1 - 2019Q4. We conduct a quantitative counterfactual analysis to assess the effects of a fiscal stimulus that does not result in an increase in public debt, as it is financed by money supply. Our impulse response analysis indicates that both increases in government spending and transfers that are monetary financed have positive effects on private consumption, investment and output. However, the expansionary impact of monetary-financed fiscal shocks comes at a cost: an increase in inflation. Our sub-sample analysis indicates that monetary-financed fiscal stimuli would have had a greater positive impact on the economy during the Great Moderation. Lastly, we find that as the debt burden increases, the positive effects of a monetary-financed fiscal stimulus diminish |
| Keywords: | Fiscal Policy, Monetary Policy, Bayesian Estimation. |
| JEL: | C11 E32 E52 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps105&r= |
| By: | Jung, Alexander |
| Abstract: | This study re-assesses the validity of the quantity theory of money (QTM) for the very long sample, 1870 to 2020, for 18 industrial countries using the dataset from Jordà et al. (2017). It considers structural changes in the economic and financial sectors and changes in monetary policy rameworks. Three findings are presented. First, the results from panel cointegration tests show that the long-run relationship between excess money growth and inflation holds if longer runs of data are used. Second, panel regressions confirm the presence of long and variable lags in the monetary policy transmission, as predicted by Milton Friedman. For the full sample, the average speed of adjustment from excess money growth to inflation in industrial countries was about two years amid heterogeneity across time and countries. Third, the results show that over recent decades, structural change - coinciding with the Great Moderation and, in part, reflecting changes in payment technologies - has led to a collapse of QTM. JEL Classification: B16, B23, E40, E50, N1 |
| Keywords: | excess money growth, great moderation, panel cointegration tests, payment technologies, structural change |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242940&r= |
| By: | Marco Di Maggio; Pulak Ghosh; Soumya Kanti Ghosh; Andrew Wu |
| Abstract: | Interest in central bank digital currencies (CBDCs) has been burgeoning with 134 countries now exploring its implementation. In December 2022, India started its CBDC pilot program to continue its transition towards a digitized payments economy. This paper presents the first empirical analysis utilizing detailed transaction data to explore the dynamics between CBDCs and existing digital payment methods, as well as the implications of increased CBDC usage on traditional bank deposits. Our findings reveal that policies which increase transaction costs for current digital payment methods catalyze a substitution effect, bolstering CBDC adoption. Furthermore, an uptick in CBDC usage is associated with a notable decline in bank, cash, and savings deposits, suggesting potential paths to bank disintermediation. This study contributes critical insights into the evolving competition between digital currencies and established financial infrastructures, highlighting the transformative potential of CBDCs on the broader economy. |
| JEL: | E42 G21 G38 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32457&r= |
| By: | Miguel Ampudia; Marco Jacopo Lombardi; Théodore Renault |
| Abstract: | This paper studies the pass-through from wages to producer prices using sectoral disaggregated data for the euro area. We find a positive and statistically significant wage-price pass-through that reaches 50% after three years, which differs across sectors. The wage-price pass-through in private services is significantly higher than in industry and takes longer before reaching its peak. While a higher labour intensity is a key component of the pass-through, our estimates indicate that differences in sectoral labour shares alone cannot explain the larger wage-price pass-through in private services compared to industry. Instead, the estimates hint at an important role for international competition in the domestic market for the tradeable sector. They also suggest that the sales destination matters: wage growth contributes to domestic inflation for goods but not to export inflation. Finally, we also provide evidence of an increase in the wage-price pass-through after 2020, particularly in private services. |
| Keywords: | inflation dynamics, wage-price pass-through, sectors, international competition |
| JEL: | E24 E31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1192&r= |
| By: | Akira Kohsaka (Osaka School of International Public Policy, Osaka University) |
| Abstract: | A breakup of Euro Zone appeared likely in the aftermath of the Global Financial Crisis (GFC), while EU has long been model regional integration to East Asia. Recognizing different political-economic contexts between East Asia and EU, what can we learn from the experiences of Euro Zone so far? This paper tries to answer the question by examining regional financial integration in two regions in view of international macroeconomics. Financial globalization since the 1990s plays the key role there. We can summarize our observations as follows:East Asia’s fundamental strength shown throughout GFC implies weak motivation to promote further regional financial integration toward a monetary/fiscal union as EU. The global sudden stop of capital inflow by GFC seriously damaged vulnerable links in Euro Zone, although crisis-driven policy innovations seem to strengthen its macro-financial policy framework. As to the future role of Euro Zone, at issue is the volatility intrinsic to the global financial market, which would aggravate the asymmetry across currencies, potentially harming resource allocation and growth. Post-Bretton Woods flexible exchange rates could not wipe away, but magnify this asymmetry (i.e. US dollar dominance). The Euro and Euro Zone could challenge this fundamental flaw of the present international monetary system. |
| Keywords: | regional integration, East Asia, Euro Zone, financial globalization |
| JEL: | E5 F3 F41 G15 O11 O16 P51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:24e001&r= |
| By: | Philemon Kwame Opoku |
| Abstract: | This paper uses a structural vector autoregressive model (SVAR) to study the effect of monetary policy and bank lending standards on business loans. The results are consistent with a dynamic model of bank behaviour that explicitly considers a bank’s soundness position. According to the results of the empirical estimation and prediction of the theoretical model, increases in loans, particularly non-performing loans or delinquency rates due to a monetary policy shock, deteriorate a bank’s health, causing it to apply more stringent lending standards. Thus, the results show that banks raise their lending standards in response to the tightness of money, defined as increases in the demand for the bank’s loans while its resources (reserves or deposits) remain constant. Furthermore, lending standards dominate loan rates in explaining loans and output dynamics. |
| Keywords: | Monetary Policy, Credit Standards, Bank Behaviour, SVAR model; Monetary Policy, Credit Standards, Bank Behaviour, SVAR model. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03232024&r= |
| By: | ITO Hiroyuki; KAWAI Masahiro |
| Abstract: | The US dollar has long been the most dominant international currency used for international trade, investment, financial settlements, foreign exchange market trading, foreign reserve holding, and exchange rate anchoring. This paper develops a new method to estimate the size of major currency zones, i.e., those for the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound sterling (GBP), and Chinese yuan (RMB), and identify their determinants. The paper employs the simple Frankel-Wei (1994) and Kawai-Pontines (2016) estimation models to identify major anchor currencies and the degree of exchange rate stability (ERS) for each economy. The paper uses the estimated currency weights to construct the size of major currency zones globally and regionally over time and econometrically identify the determinants of these currency weights. In this analysis, the paper considers the degree of ERS, defined by the Root Mean Squared Error (RMSE) of the estimation model, which allows for the possibility that a part of each economy or region or part of the world is under a floating exchange rate regime. This method avoids overestimating the size of a particular major currency zone such as the RMB zone, when economies do not rigidly stabilize their currencies to such a major currency, and thus presents a better picture that is more consistent with the current state of the international monetary system. The paper yields several interesting results. First, the global economic share of the USD zone, still the largest in the world, has declined over time due to the emergence of the EUR zone and the recent rapid rise of the RMB zone. The size of the EUR zone is larger than that of the RMB zone if the degree of ERS is taken into account. Additionally, the share of the world economy under floating exchange rates has expanded in size over time. Second, the USD zone is the largest in the Middle East & Central Asia, followed by emerging & developing Asian and Sub-Saharan African economies, while the EUR zone is dominant in emerging & developing economies in Europe. The USD zone share has been declining rapidly in Latin America & the Caribbean. The size of the RMB zone has been increasing in most regions. Third, the USD weight is positively affected by the share of trade with the United States and the US dollar shares in export invoicing and cross-border bank liabilities. Similarly, the EUR weight is positively affected by economies’ shares of trade with the Euro Area as well as the euro shares in export invoicing, inward FDI stock, and cross-border bank liabilities. The RMB weight is not significantly affected by economies’ shares of trade with, or inward FDI stock or borrowing from China. The paper provides some policy implications. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:24059&r= |
| By: | Philip Schnorpfeil; Michael Weber; Andreas Hackethal |
| Abstract: | We study how investors respond to inflation combining a customized survey experiment with trading data at a time of historically high inflation. Investors' beliefs about the stock return-inflation relation are very heterogeneous in the cross section and on average too optimistic. Moreover, many investors appear unaware of inflation-hedging strategies despite being otherwise well-informed about inflation and asset returns. Consequently, whereas exogenous shifts in inflation expectations do not impact return expectations, information on past returns during periods of high inflation leads to negative updating about the perceived stock-return impact of inflation, which feeds into return expectations and subsequent actual trading behavior. |
| JEL: | C93 D14 D83 D84 E22 E31 E44 G11 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32470&r= |
| By: | António Afonso; Jorge Braga Ferreira |
| Abstract: | Using a panel data approach with bank-fixed effects, we study the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on banks’ risk, given by their distance to default (DtD). The study aims to determine if the liquidity from TLTROs influences banks' risk-taking behaviour. For the period from 2012:Q1 to 2018:Q4, covering 90 listed banks from 16 Eurozone countries, our findings show that TLTRO is associated with an increase in banks' default risk. However, banks that participated in TLTRO experienced a positive effect on their default risk, indicating that they may have used liquidity to strengthen their financial position. Furthermore, we found no evidence that TLTRO liquidity encouraged banks to significantly increase lending or invest in riskier assets. Finally, our results also suggest that TLTRO’s impact is consistent across banks of different sizes and that the competition within the banking sector does not influence how banks utilize TLTRO liquidity. |
| Keywords: | ECB, TLTRO, Unconventional Monetary Policy, Bank Risk, Moral Hazard, Risk-Taking Channel |
| JEL: | C23 E52 E58 G21 G32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03202024&r= |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | We examine public trust in the European Central Bank (ECB) and its determinants using data from the Bundesbank Household Panel survey for Germany. Employing an interdisciplinary approach that integrates insights from political science and psychology, we offer a fresh perspective on the factors influencing central bank trust that is more holistic than the conventional one. Our primary findings can be summarized as follows. Households who state that competence, which we define as the ECB’s performance in maintaining stable prices and making decisions grounded in rules, science, and data, matters for their trust in the ECB, tend to express higher trust in the ECB. Conversely, those who place greater importance on values, particularly the integrity of top central bankers, honest communication and broader concern, tend to trust the ECB less. Trust in the ECB also hinges on trust in political institutions more generally and, to a lesser extent, on generalized trust (i.e. trust in others). |
| Keywords: | central banks, trust, survey, trust, central bank communication, values, experiences, credibility |
| JEL: | E7 E58 E59 C93 D84 Z13 Z18 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-31&r= |
| By: | Ayrton Amaral; Marique Kruger; Monique Reid |
| Abstract: | This note gives an overview of the Bureau for Economic Researchs business sector inflation expectations data in South Africa, including additional firm-level dimensions and characteristics, and provides motivation for prioritising the analysis of this data. We show how the disaggregated data can provide valuable insights for policymakers about how well anchored inflation expectations are and the extent to which inflationary pressures filter through the economy and become more generalised. Our illustrative analysis of the disaggregated firm-level data in recent post-COVID years (2021-2023) suggests that second-round effects may have arisen, with evidence that inflation expectations may have become moderately unanchored along with underlying inflationary pressures that have broadened. |
| Date: | 2024–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:oboens:11057&r= |
| By: | Lorenz Emter; Peter McQuade; Swapan-Kumar Pradhan; Martin Schmitz |
| Abstract: | This paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the "tyranny of distance", in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. |
| Keywords: | dominant currency paradigm, currency denomination, cross-border banking, gravity |
| JEL: | F31 F33 F34 F36 G21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1184&r= |
| By: | Zattler, Jürgen |
| Abstract: | Many developing countries are still grappling with the consequences of the pandemic and the associated high debt burdens while facing huge financing needs, inter alia related to climate change. In response, the International Monetary Fund (IMF) issued $650 billion in Special Drawing Rights (SDRs). The G7 and G20 have committed to re-channelling SDR 100 billion of their allocation to developing countries (on-lending, recycling and re-channelling are used interchangeably in this policy brief). The question now is how to implement these commitments in a way that promotes the global transformation and at the same time supports debt sustainability. It is important to note that there are certain restrictions on the re-channelling of SDRs. Most importantly, the re-channelling must be consistent with the SDR's status as an international reserve asset. There are different interpretations of these requirements. The IMF has encouraged the use of the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST) for re-channelling. It has also signalled general support for re-channelling SDRs to the multilateral development banks (MDBs). The European Central Bank (ECB) has taken a more restrictive stance. Does the re-channelling of SDRs through the above-mentioned IMF trusts ('the current on-lending option') effectively support the global transformation? Measured against this objective, the current on-lending regime has two shortcomings. First, it does not sufficiently link foreign exchange support to deep structural transformation. Second, it does not allow funds to be leveraged in the private capital market. In this policy brief, we discuss a promising alternative: recycling SDRs for MDB hybrid capital ('the hybrid capital option'). This option can overcome the two drawbacks of the current system. At the same time, it has its own challenges. Moreover, both the current on-lending option and the hybrid capital option raise concerns about debt sustainability. If implemented in their current forms, they would risk exacerbating vulnerable countries' debt problems. It would therefore be desirable to modify these options to better integrate debt implications. This could be done by using the on-lent SDRs primarily for programmes that are not 'expenditure-based', but rather help to improve the composition of expenditure and revenue in a socially equitable manner, for example the introduction of regulatory standards, feebates and carbon pricing, or the phasing out of fossil fuel subsidies. Such an approach could have the added benefit of making previously sceptical member states more receptive to the hybrid capital proposal. The mid-term review of the RST, scheduled for May 2024, as well as the full review in 2025 provide good opportunities to further explore some of the issues raised in this policy brief. In addition, the brief identifies three ways in which interested shareholders of the IMF and MDBs could advance the debate on the hybrid capital option. |
| Keywords: | development finance, IMF, international financial system, special drawing rights |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:idospb:294856&r= |
| By: | Johnny Thornton (University of East Anglia-US department of the Treasury); Chrysovalantis Vasilakis (Bangor University) |
| Abstract: | We revisit the historical record of the economic performance of strictly dollarizedeconomies relative to that economies of non-dollarized economies as previously examined byEdwards (2001) and Edwards and Magendzo (2003, 2006). We extend their work to takeadvantage of the experience of more recently dollarized economies, employ a larger countrysample and a longer sample period, use panel as opposed to cross-section data, and employ avariety of econometric techniques, including to deal with potential endogeneity problems. Ourresults suggest that overall countries that adopted dollarization experienced higher average GDPgrowth rates and lower inflation rates and inflation volatility than countries that did not adoptdollarization. Moreover, even GDP growth appears to have been less volatile in dollarizedcountries in recent years. |
| Keywords: | Strict dollarization, GDP growth, inflation, volatility |
| JEL: | E30 E31 F43 O11 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:322&r= |
| By: | Ajit Desai; Anneke Kosse; Jacob Sharples |
| Abstract: | We propose a flexible machine learning (ML) framework for real-time transaction monitoring in high-value payment systems (HVPS), which are a central piece of a country’s financial infrastructure. This framework can be used by system operators and overseers to detect anomalous transactions, which—if caused by a cyber attack or an operational outage and left undetected—could have serious implications for the HVPS, its participants and the financial system more broadly. Given the substantial volume of payments settled each day and the scarcity of actual anomalous transactions in HVPS, detecting anomalies resembles an attempt to find a needle in a haystack. Therefore, our framework uses a layered approach. In the first layer, a supervised ML algorithm is used to identify and separate “typical” payments from “unusual” payments. In the second layer, only the unusual payments are run through an unsupervised ML algorithm for anomaly detection. We test this framework using artificially manipulated transactions and payments data from the Canadian HVPS. The ML algorithm employed in the first layer achieves a detection rate of 93%, marking a significant improvement over commonly used econometric models. Moreover, the ML algorithm used in the second layer marks the artificially manipulated transactions as nearly twice as suspicious as the original transactions, proving its effectiveness. |
| Keywords: | Digital currencies and fintech; Financial institutions; Financial services; Financial system regulation and policies; Payment clearing and settlement systems |
| JEL: | C45 C55 D83 E42 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-15&r= |
| By: | David Altig; Alan J. Auerbach; Erin F. Eidschun; Laurence J. Kotlikoff; Victor Yifan Ye |
| Abstract: | The post-COVID price surge has reignited interest in inflation’s impact on American households. Even if anticipated and with full market adjustments, inflation affects households through its interaction with the fiscal system, which is the focus of this paper. Inflation affects households through its interaction with the fiscal. We run the 2019 Survey of Consumer Finances (SCF), assuming different inflation rates, through the Fiscal Analyzer (TFA) – a life cycle, consumption-smoothing tool incorporating all major federal and state fiscal programs. Before doing so, we adjust the SCF data to neutralize inflation’s non-fiscal effects. A permanent increase in the inflation rate from zero to 10 percent reduces median lifetime spending by 6.82 percent. This impact is smaller – 4.74 percent – when fiscal COLAs aren’t lagged. But the big stories are the progressivity of inflation’s increase in net taxation, its age pattern, and its heterogeneity. The 15.9 percent median lifetime spending loss of the top 1 percent from 10 percent inflation is roughly 2.5 times that of the bottom quintile. Middle aged households are hit far harder because they have more asset income, which, with inflation, is taxed at a higher effective rate. The 25th percentile of spending changes is a reduction of 9.84 percent. The 75th percentile change is still a reduction of 4.83 percent. The maximum spending decline (increase) across all households is 64.9 (46.7) percent. Thus, the distribution of welfare is highly sensitive to significant, ongoing inflation. |
| JEL: | D63 E60 E62 H20 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32482&r= |
| By: | Knut Are Aastveit; Jamie L. Cross; Francesco Furlanetto; Herman K. Van Dijk |
| Abstract: | The Fed’s policy rule switches during the different phases of the business cycle. This finding is established using a dynamic mixture model to estimate regime-dependent Taylor-type rules on US quarterly data from 1960 to 2021. Instead of exogenously partitioning the data based on tenures of the Fed chairs, a Bayesian framework is introduced in order to endogenously select timing and number of regimes in a data-driven way. This agnostic approach favors a partitioning of the data based on two regimes related to business cycle phases. Estimated policy rule coefficients differ in two important ways over the two regimes: the degree of gradualism is substantially higher during normal times than in recessionary periods while the output gap coefficient is higher in the recessionary regime than in the normal one. The estimate of the inflation coefficient largely satisfies the Taylor principle in both regimes. The results are substantially reinforced when using real-time data. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0130&r= |
| By: | Sofia Priazhkina; Samuel Palmer; Pablo Martín-Ramiro; Román Orús; Samuel Mugel; Vladimir Skavysh |
| Abstract: | We build a network formation game of firms with trade flows to study the adoption and usage of a new digital currency as an alternative to correspondent banking. We document endogenous heterogeneity and inefficiency in adoption outcomes and explain why higher usage may correspond to lower adoption. Next, we frame the model as a quadratic unconstrained binary optimization (QUBO) problem and apply it to data. Method-wise, QUBO presents an extension to the potential function approach and makes broadly defined network games applicable and empirically feasible, as we demonstrate with a quantum computer. |
| Keywords: | Central bank research; Digital currencies and fintech; Digitalization; Economic models; Financial institutions; Payment clearing and settlement systems; Sectoral balance sheet |
| JEL: | E21 E44 E62 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-17&r= |