|
on Monetary Economics |
| By: | Dräger, Lena; Dalloul, Ami; Nghiem, Giang |
| JEL: | E52 E31 D84 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302397 |
| By: | Rafael S. M. Ribeiro; Gilberto Tadeu Lima; Gustavo Pereira Serra; Marina Sanches |
| Abstract: | This article examines the impact of restrictive monetary policy, specifically an increase in the benchmark interest rate (Selic), on inflation rates across different consumption groups in Brazil, as measured by the Extended National Consumer Price Index (IPCA). The Central Bank of Brazil uses the Selic rate to align inflation with its target. The study uses the Local Projections model on data from January 2007 to December 2023 to analyze how inflation in various groups and subgroups responds to changes in the Selic rate. Findings indicate that an increase in the Selic rate reduces inflation in groups like “Food and beverages†, “Household items†, and “Clothing†, but has little effect on “Housing†and “Communication†. This research highlights the need for tailored economic policies for different consumption segments, illustrated by a case during the COVID-19 pandemic. |
| Keywords: | Monetary policy; Selic rate; disaggregated inflation; Local Projections model |
| JEL: | E52 E31 C32 E58 |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:spa:wpaper:2024wpecon24 |
| By: | Tatar, Balint; Wieland, Volker |
| Abstract: | This paper investigates the implications of monetary policy rules during the surge and subsequent decline of inflation in the euro area and compares them to the interest rate decisions of the European Central Bank (ECB). It focuses on versions of the Taylor (1993) and Orphanides and Wieland (OW) (2013) rules. Rules that respond to recent outcomes of HICP Core or domestic inflation data called for raising interest rates in 2021 and well ahead of the rate increases implemented by the ECB. Thus, such simple outcome-based policy rules deserve more attention in the ECB's monetary policy strategy. Interestingly, the rules support the recent shift of the ECB to policy easing. Yet, they add a note of caution by suggesting that policy rates should not decline as fast as apparently anticipated by traded derivative-based interest rate forecasts. |
| Keywords: | Monetary policy, interest rates, European Central Bank, Taylor rule, OrphanidesWieland rule, New Keynesian macro-epidemic models |
| JEL: | E42 E43 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:303512 |
| By: | C, Prasanth; Chakraborty, Lekha; K Shihab, Nehla |
| Abstract: | Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management. Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies. |
| Keywords: | Interest Rate Determination, Post Pandemic Monetary Policy, Fiscal Deficit, Monetary Policy Commitee |
| JEL: | C32 E43 E63 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122345 |
| By: | Eiblmeier, Sebastian |
| JEL: | C23 E51 E52 G11 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302432 |
| By: | Hie Joo Ahn; Leland E. Farmer |
| Abstract: | We develop a model of the individual term structure of inflation expectations across forecasting horizons. Using the Survey of Professional Forecasters, we decompose disagreement about inflation expectations into individuals' long-term beliefs, private information, and public information. We find that in normal times, long-horizon disagreement is predominantly driven by individuals' long-term beliefs, while short-horizon disagreement stems from private information. During economic downturns, heterogeneous reactions to public information become a key driver of disagreement at all horizons. When forecasters disagree about public information, monetary policy exhibits a delayed response and a price puzzle emerges, underscoring the importance of anchoring inflation expectations. |
| Keywords: | Inflation Expectations; Term Structure; Disagreement; Monetary Policy |
| JEL: | E17 E31 E37 E52 E58 E65 |
| Date: | 2024–09–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-84 |
| By: | Paludkiewicz, Karol; Fricke, Daniel; Greppmair, Stefan |
| JEL: | E43 E44 E52 G21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302364 |
| By: | Emter, Lorenz; Setzer, Ralph; Zorell, Nico; Moura, Afonso S. |
| Abstract: | This paper analyses how country-specific institutional quality shapes the impact of monetary policy on downside risks to GDP growth in the euro area. Using identified high-frequency shocks in a growth-at-risk framework, we show that monetary policy has a higher impact on downside risks in the short term than in the medium term. However, this result for the euro area average hides significant heterogeneity across countries. In economies with weak institutional quality, medium-term growth risks increase substantially following contractionary monetary policy shocks. In contrast, these risks remain relatively stable in countries with high institutional quality. This suggests that improvements in institutional quality could significantly enhance euro area countries’ economic resilience and support the smooth transmission of monetary policy. JEL Classification: C23, E52, F45, G28, O43 |
| Keywords: | Euro area, growth-at-risk, institutional quality, monetary policy transmission |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242989 |
| By: | Alan S. Blinder (Princeton University) |
| Abstract: | There is little doubt that the Federal Reserve was late to start raising interest rates as inflation rose in 2021-22. The Federal Open Market Committee (FOMC) made a substantial, though perhaps understandable, error in failing to raise interest rates until March 2022. Much of that policy error can be attributed to faulty forecasts of inflation, which the Federal Reserve shared with many other forecasters. It was not an outlier. But the error was not quite as consequential as the Fed's sharpest critics allege. Even if the FOMC had started to hike rates earlier, the econometric evidence suggests that the effects on peak inflation would likely have been small. Supply constraints, not excess demand, ruled the roost. They came, driving inflation higher; and then they went, pulling inflation down. Blinder says that the FOMC's August 2020 framework shoulders more of the blame for the inflationary surge than it should--probably because the new wording revised both of the Fed's goals, low inflation and high employment, in dovish directions. For that reason alone, the framework will almost certainly be changed in 2025, given the high inflation since. But how? Blinder suggests that the August 2020 change in the employment goal, from symmetry to "shortfalls, " is sensible and probably not too important anyway. But the change in the inflation goal, from a 2 percent point target to flexible average inflation targeting (FAIT), was probably consequential. It may have made the FOMC slow on the draw as inflation gathered steam, and it may have kept monetary policy too tight for too long in 2024. In both directions, Blinder argues, a 1.5 to 2.5 percent target range would be a better choice. To answer the question in the title of this Policy Brief, that may be the structural flaw the Fed should fix. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb24-11 |
| By: | Thiago Revil T. Ferreira; Nils M. Gornemann; Julio L. Ortiz |
| Abstract: | Household savings rose above trend in many developed countries after the onset of COVID-19. Given its link to aggregate consumption, the presence of these "excess savings" has raised questions about their implications for the transmission of monetary policy. Using a panel of euro-area economies and high-frequency monetary policy shocks, we document that household excess savings dampen the effects of monetary policy on economic activity and inflation, especially during the pandemic period. To rationalize our empirical findings, we build a New Keynesian model in which households use savings to self-insure against counter-cyclical unemployment and consumption risk. |
| Keywords: | Monetary Policy; Excess Savings; Precautionary Savings; Consumption Risk; Unemployment |
| JEL: | E12 E21 E24 E31 E52 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1397 |
| By: | Anthony Brassil (Reserve Bank of Australia); Yahdullah Haidari (Reserve Bank of Australia); Jonathan Hambur (Reserve Bank of Australia); Gulnara Nolan (Reserve Bank of Australia); Callum Ryan (Reserve Bank of Australia) |
| Abstract: | This paper explores the formation of households' wage and inflation expectations using a common dataset and framework, documenting a number of stylised facts. We find that households tend to form wage and inflation expectations somewhat differently. Households associate higher wages growth with good economic outcomes, but higher inflation with worse economic outcomes. Wages expectations also tend to be somewhat more forward looking, while inflation expectations are more backward looking, especially for lower income households, and place a disproportionate weight on past fuel prices. These findings paint a picture of households having a somewhat 'supply-side' view of inflation, where shocks that push up inflation also weaken the economy, but a more 'demand-side' view of wages, where shocks that push up wages also strengthen the economy, which may make communication of monetary policy and the outlook more challenging. |
| Keywords: | inflation expectations; wage growth |
| JEL: | D84 E31 J31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-07 |
| By: | Gara Afonso; Domenico Giannone; Gabriele La Spada; John C. Williams |
| Abstract: | As central banks shrink their balance sheets to restore price stability and phase out expansionary programs, gauging the ampleness of reserves has become a central topic to policymakers and academics alike. The reason is that the ampleness of reserves informs when to slow and then stop quantitative tightening (QT). The Federal Reserve, for example, implements monetary policy in a regime of ample reserves, whereby the quantity of reserves in the banking system needs to be large enough such that everyday changes in reserves do not cause large variations in short-term rates. The goal is therefore to implement QT while ensuring that reserves remain sufficiently ample. In this post, we review how to gauge the ampleness of reserves using the new Reserve Demand Elasticity (RDE) measure, which will be published monthly on the public website of the Federal Reserve Bank of New York as a standalone product. |
| Keywords: | ample reserves; monetary policy; implementation |
| JEL: | E41 E52 |
| Date: | 2024–10–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98984 |
| By: | Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Alari Paulus (Eesti Pank) |
| Abstract: | The Baltic states experienced the most substantial consumer price inflation of any of the EU countries shortly after the COVID-19 pandemic. The year-on-year all-items inflation rate averaged 11% from January 2021 to September 2023, peaking at around 22% in late 2022. This study examines how consumer price rigidity in the region during this period of high inflation differed from the preceding period of low inflation in 2019-2020. We use the detailed price records that underlie the official consumer price indexes to assess the frequency and the size margins of price changes. The average frequency of price changes increased by about four percentage points when inflation was high, as an increase of five percentage points in the frequency of price increases combined with a fall of one percentage point in the frequency of price cuts. The average size of price changes increased by 2.8 percentage points, mainly because the share of price increases changed. We further show that structural shocks in energy prices and aggregate demand contributed significantly to fluctuations in the inflation rate through the frequency of price changes during the period of high inflation. All this points to pricing being state-dependent in the Baltic states. |
| Keywords: | consumer price rigidity, price-setting, high inflation, frequency of price changes |
| JEL: | D40 E31 |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202403 |
| By: | Groiss, Martin |
| JEL: | C43 E24 E32 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302346 |
| By: | Ferreira, Alex (University of São Paulo); Mullen, Rory (Warwick Business School); Ricco, Giovanni (École Polytechnique, University of Warwick, OFCE & CEPR); Viswanath-Natraj, Ganesh (Warwick Business School); Wang, Zijie (Warwick Business School) |
| Abstract: | We study the impact of foreign exchange interventions during periods of tight credit constraints. Expanding on the Gabaix and Maggiori (2015) model, we predict that long-lived spot interventions have larger effects on exchange rates than shortlived swaps, unanticipated interventions are more impactful, and tighter credit constraints amplify effects. Using high-frequency data on Brazilian Central Bank interventions from 1999 to 2023, we find that unanticipated spot sales of USD reserves lead to significant domestic currency appreciation and reduced covered interest parity deviations. Spot interventions outperform swaps, especially when global intermediaries are constrained, and enhance market efficiency by lowering USD borrowing costs. |
| Keywords: | Exchange Rate ; Central Bank ; Interventions ; Yield Curve ; Asset Pricing JEL Codes: E44 ; E58 ; F31 ; G14 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1522 |
| By: | Gersbach, Hans; Zelzner, Sebastian |
| JEL: | E42 E44 E51 G21 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302356 |
| By: | Vicente da Gama Machado |
| Abstract: | Since the adoption of inflation targeting in Brazil, the literature on core inflation has significantly expanded; however, a comprehensive survey has been lacking. This paper aims at filling this gap by providing a thorough overview of the academic developments and a historical guide to the core inflation measures employed by the Central Bank of Brazil (BCB). Additionally, the paper introduces a unified approach to evaluate the performance of core measures, which is then used to assess the set of official measures currently monitored by the BCB. This approach emphasizes the complementary nature of individual measures and demonstrates the overall favorable relative performance of the core average. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:602 |
| By: | Fernando Martins; João Quelhas |
| Abstract: | This paper studies the price-setting behaviour in food products, using the microdata underlying the Portuguese Consumer Price Index (CPI). We document that, on average, more than onequarter of food prices changed every month and half displayed price spells shorter than 5.3 months. Positive price changes were more frequent and had a higher magnitude than price decreases. There is a strong heterogeneity across type of industry and outlet. We find that, from 2009 to 2019, food inflation was primarily driven by the frequency of price changes rather than the magnitude, and price changes were more frequent at the producer than at the consumer level, but in a lower magnitude. Finally, we report that frequency and magnitude estimates are higher when using daily online price data, meaning that intra-month patterns in price dynamics, not captured by the official inflation statistics, are relevant. |
| Keywords: | price stickiness, price-setting behaviour, consumer prices, microdata, inflation. |
| JEL: | E30 E31 D40 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03452024 |
| By: | Andrej Cupak (National Bank of Slovakia); Pavel Gertler (National Bank of Slovakia); Daniel Hajdiak (National Bank of Slovakia); Jan Klacso (National Bank of Slovakia); Stefan Rychtarik (National Bank of Slovakia) |
| Abstract: | This paper presents the findings from a novel survey examining awareness and interest in the future usage of the digital euro in Slovakia. Approximately 34% of the respondents have already heard or read about the digital euro. Around 26% express an intention to use this new digital currency. The likelihood of its usage depends on political preferences, trust in institutions such as the central bank, and preferences for cash payments, in addition to standard socio-economic factors. The survey also reveals that privacy and transaction security are among the top concerns for potential users. The majority of respondents plan to allocate nearly 20% of their net monthly income to digital euro holdings. These insights may provide valuable guidance for shaping the operational framework of the digital euro and informing future communication strategy. |
| JEL: | D14 E42 E51 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1111 |
| By: | Adam Copeland; Sarah Wang |
| Abstract: | A central use of reserves held at Federal Reserve Banks (FRBs) is for the settlement of interbank obligations. These obligations are substantial—the average daily total reserves used on two main settlement systems, Fedwire Funds and Fedwire Securities, exceeds $6.5 trillion. The total amount of reserves needed to efficiently settle these obligations is an active area of debate, especially as the Federal Reserve’s current quantitative tightening (QT) policy seeks to drain reserves from the financial system. To better understand the use of reserves, in this post we examine the intraday flows of reserves over Fedwire Funds and Fedwire Securities and show that the mechanics of each settlement system result in starkly different intraday demands on reserves and differing sensitivities of those intraday demands to the total amount of reserves in the financial system. |
| Keywords: | reserve balances; intraday; quantitative tightening (QT) |
| JEL: | G14 E42 |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98993 |
| By: | Dimitris Georgarakos; Yuriy Gorodnichenko; Olivier Coibion; Geoff Kenny |
| Abstract: | We implement a survey-based randomized information treatment that generates independent variation in the inflation expectations and the uncertainty about future inflation of European households. This variation allows us to assess how both first and second moments of inflation expectations separately affect subsequent household decisions. We document several key findings. First, higher inflation uncertainty leads households to reduce their subsequent durable goods purchases for several months, while a higher expected level of inflation increases them. Second, an increase in uncertainty about inflation induces households to tilt their portfolios towards safe and away from riskier asset holdings. Third, higher inflation uncertainty encourages household job search, leading to higher subsequent employment among the unemployed and less under-employment among the employed. Finally, we document that the level of inflation expectations has a different effect from uncertainty in inflation expectations and thus it is crucial to take into account both to measure their separate effects on decisions. |
| JEL: | C83 D84 E31 G51 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33014 |
| By: | Ko Munakata (Bank of Japan); Takeshi Shinohara (Bank of Japan); Shigenori Shiratsuka (Keio University); Nao Sudo (Bank of Japan); Tsutomu Watanabe (University of Tokyo) |
| Abstract: | Seasonality is among the most salient features of price changes, but it is notably less analyzed than seasonality of quantities and the business cycle component of price changes. To fill this gap, we use the scanner data of 199 categories of goods in Japan to empirically study the seasonality of price changes from 1990 to 2021. We find that the following four features generally hold for most categories: (1) The frequency of price increases and decreases rises in March and September; (2) Seasonal components of the frequency of price changes are negatively correlated with those of the size of price changes; (3) Seasonal components of the inflation rate track seasonal components of net frequency of price changes; (4) The seasonal pattern of the frequency of price changes is responsive to changes in the category-level annual inflation rate for the year. We use simple state-dependent price models and show seasonal cycles in menu costs play an essential role in generating seasonality of price changes. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf591 |
| By: | Ko Munakata (Bank of Japan); Takeshi Shinohara (Bank of Japan); Shigenori Shiratsuka (Keio University); Nao Sudo (Bank of Japan); Tsutomu Watanabe (University of Tokyo) |
| Abstract: | Seasonality is among the most salient features of price changes, but it is notably less analyzed than seasonality of quantities and the business cycle component of price changes. To fill this gap, we use the scanner data of 199 categories of goods in Japan to empirically study the seasonality of price changes from 1990 to 2021. We find that the following four features generally hold for most categories: (1) The frequency of price increases and decreases rises in March and September; (2) Seasonal components of the frequency of price changes are negatively correlated with those of the size of price changes; (3) Seasonal components of the inflation rate track seasonal components of net frequency of price changes; (4) The seasonal pattern of the frequency of price changes is responsive to changes in the category-level annual inflation rate for the year. We use simple state-dependent price models and show seasonal cycles in menu costs play an essential role in generating seasonality of price changes. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:upd:utmpwp:052 |
| By: | Delgado, Martha Elena; Herreño, Juan David; Hofstetter, Marc; Pedemonte, Mathieu |
| Abstract: | We estimate the causal effects of a shift in the future expected exchange rate of a local currency against the US dollar on a representative sample of firms in a small open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. This information treatment is effective in shifting exchange rate expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we estimate a positive elasticity of current import expenditures to a future expected depreciation. Our estimates highlight the intertemporal margin of trade to anticipated changes in trade costs. |
| Keywords: | Expectations;exchange rate;Firms;Trade |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13761 |
| By: | Dave Na; Ellie Newman; Bernd Schlusche |
| Abstract: | The Federal Reserve (Fed) utilized its balance sheet as a monetary policy tool in response to the Global Financial Crisis (GFC) and the COVID-19 pandemic, acquiring large quantities of Treasury and agency securities. In 2022, the Fed began to reduce the size of its securities portfolio held in the System Open Market Account (SOMA) by allowing securities to roll off its balance sheet in amounts up to specific monthly redemption caps for Treasury securities and agency securities. |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-09-20-2 |
| By: | Klodiana Istrefi (BANQUE DE FRANCE); Florens Odendahl (BANCO DE ESPAÑA); Giulia Sestieri (BANQUE DE FRANCE) |
| Abstract: | This paper presents the Euro Area Communication Event-Study Database (EA-CED), a new dataset that tracks financial market movements around ECB Governing Council meetings (GC) and inter-meeting communication (IMC). Covering the period from 1999 to 2024, the EA-CED contains intraday changes in euro area financial variables around the time of 304 ECB GC policy announcements and 4, 400 IMC events, consisting mainly of speeches and interviews. We document several new empirical findings on the impact of IMC on financial markets. First, we show that many IMC events are associated with significant market movements, often of similar or larger magnitude than those associated with ECB policy announcements, particularly for yields at longer maturities. Significant effects are not limited to communication from the ECB’s President but extend to other members of the Governing Council. Second, the importance of IMC varies over time, peaking around tightening cycles, particularly in 2022-2023. Third, like ECB GC announcements, IMC events convey multi-dimensional information and lead to surprises regarding the path of monetary policy and the state of the economy. |
| Keywords: | monetary policy, ECB, communication, financial markets, euro area |
| JEL: | E03 E50 E61 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2431 |
| By: | Boran Plong; Neil Maru |
| Abstract: | The Canadian Overnight Repo Rate (CORRA) measures the cost of overnight general collateral Canadian-dollar repurchase agreements (repos). Since late May 2024, the volume of trades that make up CORRA has increased and remained elevated. At the same time, CORRA started being consistently above the Bank of Canada’s policy interest rate. This upward pressure results entirely from industry-wide changes to the settlement period for cash bond trades on the secondary market, from two days to one. The change in the settlement period prompted a rise in volumes in the overnight repo market (which is CORRA-eligible) from the tomorrow-next repo market (which is not CORRA-eligible). In addition, this move has overwhelmingly been one way: demand from hedge funds to fund their long bond positions. This demand existed before but was always traded in the tomorrow-next market, and thus activity in the tomorrow-next repo market has been decreasing by an amount comparable to the increase in the overnight market. We find this mechanical effect has accounted for up to 3 basis points of upward pressure on CORRA. We find no indications that any other factors are contributing to this pressure. Given the new dynamics since May, the Bank has amended the terms of its overnight repo operations. It has also subsequently conducted a series of operations to help reinforce the target for the overnight rate, which had deviated away from the Bank’s policy rate due to this mechanical adjustment. Overnight repos are routine operations that are part of the Bank’s operational framework for implementing monetary policy and reinforcing the policy interest rate. |
| Keywords: | Financial markets; Interest rates; Monetary policy implementation |
| JEL: | D4 D5 D53 E4 E43 E44 E5 E52 G1 G12 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-21 |
| By: | Vito Cormun (Santa Clara University, USA); Kim Ristolainen (Turku School of Economics, University of Turku, Finland) |
| Abstract: | Leveraging Wall Street Journal news, recent developments in textual analysis, and generative AI, we estimate a narrative decomposition of the dollar exchange rate. Our findings shed light on the connection between economic fundamentals and the exchange rate, as well as on its absence. From the late 1970s onwards, we identify six distinct narratives that explain changes in the exchange rate, each largely non-overlapping. U.S. fiscal and monetary policies play a significant role in the early part of the sample, while financial market news becomes more dominant in the second half. Notably, news on technological change predicts the exchange rate throughout the entire sample period. Finally, using text-augmented regressions, we find evidence that media coverage explains the unstable relationship between exchange rates and macroeconomic indicators. |
| Keywords: | Exchange rates, big data, textual analysis, macroeconomic news, Wall Street Journal, narrative retrieval, scapegoat |
| JEL: | C3 C5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp167 |
| By: | Kaufmann, Daniel; Stuart, Rebecca |
| Abstract: | Using newly collected discount rate data for six Swiss cities, we find no evidence of increasing integration during a 30-year period of lightly regulated free banking. We attribute this to two structural issues: banks had incentives to protect their local monopolies, and the inherent instability of free banking meant that there was always a risk (which varied across banks) of a bank run. We use a novel counterfactual to show that these risks increased discount rate dispersion, and argue that as a result, public regulation of payments infrastructure was necessary for money market integration. |
| Keywords: | Switzerland, discount rates, money market, financial integration, monetary union, 19th century |
| JEL: | E43 E44 F33 F45 N13 N23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qucehw:303522 |
| By: | Antonio Diez de los Rios |
| Abstract: | The Bank of Canada’s Government of Canada Bond Purchase Program, launched in response to the COVID-19 pandemic, lowered the weighted average maturity of the Government of Canada’s debt by approximately 1.4 years. This in turn reduced Canadian 10-year and 5-year zero-coupon yields by 84 and 52 basis points, respectively. |
| Keywords: | Asset pricing; Central bank research; Coronavirus disease (COVID-19); Interest rates; Monetary policy |
| JEL: | E4 E43 E5 E52 G1 G12 H6 H63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:24-22 |
| By: | Luis Fernando Colunga Ramos |
| Abstract: | In some advanced and emerging economies, contrary to expectations, it has been observed that increases in short-term interest rates are accompanied by increases in bank credit; a phenomenon referred to as "the loan puzzle." This study investigates, through the estimation of a structural vector autoregressive model using national and sectoral-level data, whether this phenomenon occurred in the Mexican economy between 2001 and 2019. The results suggest that, in response to a positive shock to short-term interest rates, the volume of bank credit to firms exhibits a positive and short-lived response but subsequently decreases. This response is primarily observed in sectors that had the lowest average delinquency rates during the analysis period. This suggests that banks would grant more loans to relatively safer companies, while, in response to such monetary tightening, they would reduce their investments in riskier and longer-term assets, such as consumer loans and loans to the real estate sector. |
| Keywords: | Monetary Policy;Bank Credit;Vector Autoregressive Model |
| JEL: | E51 E52 E58 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-15 |
| By: | Marçal, Emerson; Simões, Oscar Rodrigues |
| Abstract: | Current account imbalances significantly impact economic policy, with sharp exchange rate movements often causing disruptions. Hamilton’s [1989] Markov Switching Model introduced a framework for analyzing such dynamics. Few papers have used non-linear multivariate models to study current accounts and real effective exchange rates. This paper documents the existence of non-linearity by estimating a Markov Switching VECM and showing its superiority against a linear benchmark for the Brazilian economy in the period of inflation target and dirty floating regime. The monthly frequency and the sample cover the period from 1999-2 to 2024-3. Two regimes were identified. One regime is related to crisis events and the other to tranquil periods. Both real exchange rate and current account dynamics differ across regimes highlighting the necessity of modelling nonlinearity. |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fgv:eesptd:571 |
| By: | Boge, Kevin Patrick; Rieth, Malte; Kholodilin, Konstantin |
| JEL: | E52 R12 R31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302370 |
| By: | Tess C. Scharlemann; Eileen van Straelen |
| Abstract: | We study how the mortgage interest deduction (MID) constrains mortgage refinancing. Households who deduct mortgage interest from their taxes face a lower post-tax interest rate, reducing the interest savings from refinancing net of taxes. We estimate the effect of the MID on refinancing using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA doubled the standard deduction, dramatically reducing MID uptake and value. This policy affected borrowers differently based on their pre-existing mortgage interest, federal and state tax rates, and property taxes. We use heterogeneity in borrowers' pre-TCJA exposure to the policy to show that, following the TCJA, the refinancing rate amongst households who lose the MID increased by 25%. In response to a 19 basis point increase in the after-tax mortgage rate, we estimate that refinancing increases 25%. These results suggest that reductions in the MID may improve the pass-through of monetary policy. |
| Keywords: | Consumption; Household Finance; Monetary policy; Mortgages |
| JEL: | E52 G21 E21 D14 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-82 |
| By: | Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra; Iuri Lazier; Rodrigo Cesar de Castro Miranda |
| Abstract: | This paper uses a network-based framework to examine the propagation of exchange rate shocks through the economy. We use a comprehensive set of supervisory, granular, and unique datasets from Brazil to construct an economy-wide network of exposures from 2015 to 2022, which includes a representative set of financial institutions, both banking and nonbanking, the corporate sector, and bilateral exposure linkages encompassing credit and funding risks. Our findings reveal significant disparities in how exchange rate shocks impact different sectors. Financial institutions generally benefit from positive exchange rate shocks due to their net foreign-denominated assets, whereas nonfinancial firms incur losses, particularly those with substantial foreign debt. However, contagion effects indicate that even sectors that are initially better off can experience substantial indirect losses, highlighting the complexity of risks in the financial network. Despite vulnerabilities in segments such as development banks and non-bank financial institutions, adequate regulatory capital maintains and supports overall financial stability. These insights underscore the importance of incorporating network structures in regulatory frameworks and stress-testing methodologies, offering crucial implications for policymakers seeking to improve financial stability and mitigate systemic risks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:605 |
| By: | Yaya, OlaOluwa S.; Olayinka, Hammed Abiola; Adebiyi, Aliu A; Atoi, Ngozi Victor; Olugu, Mercy U.; Akinkunmi, Wasiu B. |
| Abstract: | We checked against the law of one price between urban and rural consumer price indices of goods and services in Nigeria, using data that span January 1995 to April 2024. By first testing for persistence in price indices, we found a similar pattern of persistence that is non-mean reverting in all the CPI components except in Communication and Education where mean reversions are possible in the urban and rural areas. Communication and Restaurants & Hotels are major net inflation transmitters in both urban price region and rural price regions, while Clothing & footwear, and Furnishings & Household equipment maintenance also have minor roles to play in this regard at both price regions. Food & Non-alcoholic beverages; and Alcoholic beverages, tobacco & kola; transportation; Recreation and culture; and Miscellaneous goods and services are major net inflation shock receivers. We found Housing, water, electricity, gas and other fuel; Health; and Education to have different inflation shock transmitting roles for both urban and rural areas. Pricing at urban and rural areas are in tandem, thus policies that could further close the price gaps such as urbanisation and good road systems should be enacted. |
| Keywords: | CPI inflation, Nigeria, Urban-rural price differentials |
| JEL: | C2 C22 R11 |
| Date: | 2024–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121106 |