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on Monetary Economics |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | The neo-Fisher effect and the central bank information (CBI) effect produce similar outcomes: under both, a monetary tightening triggers an increase in inflation and an expansion in real activity. Separate estimates of these effects run the risk of confounding one with the other. To disentangle these two channels, we introduce into a new-Keynesian model a permanent monetary shock that generates neo-Fisher effects and an aggregate demand shock to which the central bank responds that creates CBI effects. We estimate the model on U.S. data. We find that the neo-Fisherian shock is an important driver of inflation, while the CBI shock explains a significant fraction of movements in the nominal interest rate. The CBI shock explains little of inflation and output, but, through counterfactual exercises, we establish that this reflects the central bank's success in isolating the economy from aggregate demand disturbances. These results are shown to hold under full and imperfect information. |
| JEL: | E3 E5 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33136 |
| By: | Xuning Ding; Zhengyang Jiang |
| Abstract: | Monetary and fiscal policies require coordination to achieve desired macroeconomic outcomes. The literature since Leeper (1991) has focused on two regimes: monetary dominance and fiscal dominance. In both cases, one policy is active while the other is passive and accommodates the former. We study this coordination problem in an international economy, and find a third regime—hegemon dominance. In this case, one country (the hegemon)'s monetary and fiscal authorities can pursue separate policy goals, while the other country's monetary and fiscal policies are both accommodative. For example, the hegemon can pursue a monetary policy unbacked by its fiscal policy. When this happens, the foreign monetary authority has to take the same stance as the hegemon, the foreign fiscal authority has to provide fiscal backing for the monetary stance undertaken by both countries, and the exchange rate adjusts to equilibrate the economy. Our result suggests that the U.S. fiscal policy's independence from its own monetary policy can be made possible by accommodative foreign policies, and that the Fed's effort to fight inflation can succeed despite the high level of public debt which would have required enormous fiscal backing in a closed economy. |
| JEL: | E52 E63 F33 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33123 |
| By: | Kekaye, Tsholofelo; Bonga-Bonga, Lumengo |
| Abstract: | This study expands on the existing literature by investigating the impact of Inflation Targeting (IT) policies on the duration of High Inflation Episodes (HIEs) in both developed and emerging economies. Utilizing Survival Analysis, the study evaluated HIEs' lengths before and after IT policy implementation across 26 countries from 2003 to 2023. The findings reveal that IT policies significantly reduce the duration of HIEs. Kaplan-Meier estimates indicate a clear decline in ongoing HIE probability over time, with a more pronounced reduction in emerging economies. Statistical tests like the Log-Rank and Wilcoxon tests provide robust evidence supporting the effectiveness of IT policies, showing significant differences in HIE durations pre- and post-IT implementation. This study also addresses the literature gap by distinguishing the differential effects of IT policies based on the developmental status of countries, demonstrating their efficacy in enhancing price stability across diverse economic contexts. |
| Keywords: | monetary policy; inflation targeting; survival analysis |
| JEL: | C5 E52 E58 |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122745 |
| By: | Jongrim Ha; Dohan Kim; M. Ayhan Kose; Eswar S. Prasad |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle. |
| JEL: | E31 E32 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33133 |
| By: | Toncheva, Rossitsa |
| Abstract: | Money, as the quantitative representative of almost everything, decently occupies the central position in the distribution mechanism and as an instrument for imposing order. At the stage where global solutions are sought to adapt the orthodox monetary system to the current productive forces, many opportunities are being opened for testing new forms of social models, as one could also call that of "private non-bank money". The term "private non-bank money" is a conceptual successor to the term of "barter money" . Both are formal, synthetic words created as a tool to get better sense of the pretty wide variety of monetary experiments with complementary currency systems (ССS), not only as practical cases but also as theoretical interpretations. The use of new term partly solves not only the above limitation, but also the confusion resulting from the fact that "money" and "currency" are often perceived as synonymous. "Money" is defined and perceived with too wide a scope, which can even give rise to a cognitive fallacy. Regardless of the predominantly social characteristics of ССS, all of them, except for the time banks, have a powerful financial feature, and it is the monetary instrument that places them also in the field of monetary theory. The search for a common distinguishing property of the CCS has led to the need to include a new concept, by which the difficulty is largely removed. The concept of "private non-bank money" is instrumental, and as such it represents a relatively more limited notion of money - as a specific form of it, suitable for understanding the meaning, content and significance of the relations that have been created in the various models of CCS. |
| Keywords: | Private Non-bank Money, Distribution, Money, complementary currency |
| JEL: | E40 E50 G2 P40 |
| Date: | 2024–11–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122689 |
| By: | Christopher M. Meissner; Kensuke Molnar-Tanaka |
| Abstract: | Over the last 200 years, economies have accumulated significant experience in managing capital flows in the face of globalization. This study examines management of capital flows since the 1800s with an eye towards providing historical lessons for Southeast Asia today. We start with the global sterling/gold standard regime of the late 19th century globalization and then discuss the tumultuous inter-war period. We then examine policies in Southeast Asian countries since the 1950s. In the 1980s and 1990s, many economies faced increasing financial instability related to the resumption of global capital flows, most noticeably in Southeast Asia during the Asian Financial Crisis. The paper examines the historical importance of exchange rate policies for capital flow stability. Capital flow management in the 21st century faces various challenges such as enhanced state-intervention and digital currencies. |
| JEL: | F21 F33 F36 N20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33145 |
| By: | Ritam Chaurey; Ryan Kim; Pravin Krishna |
| Abstract: | This paper examines how liquidity shocks caused by currency shortages impact exports. We explore this in the context of India’s 2016 currency demonetization, a sudden and unexpected policy announcement by the government that large-denomination currency notes—comprising 86% of the country’s currency in circulation—would cease to be legal tender within hours. Our analysis uses novel data, including high-frequency customs transaction records matched with exporting firms and their balance sheets, as well as with inter-district domestic trade. We develop direct measures of exporting firms’ exposure to cash shortages and indirect measures that act through domestic supply chain networks. While the cash shortages do not directly affect exporting firms, we find a significant and immediate decline in real exports for firms whose domestic customers experience liquidity shocks. These findings underscore the critical role of domestic supply chains in transmitting liquidity shocks to exports. |
| JEL: | E50 F1 F14 O16 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33142 |
| By: | Sayag, Doron; Snir, Avichai; Levy, Daniel |
| Abstract: | We study Israel’s “price rounding regulation” of January 1, 2014, which outlawed non-0-ending prices, forcing retailers to round 9-ending prices, which in many stores comprised 60%+ of all prices. The regulation’s goals were to eliminate (1) the rounding tax—the extra amount consumers paid because of price rounding (which was necessitated by the abolition of low denomination coins), and (2) the inattention tax—the extra amount consumers paid the retailers because of their inattention to the prices’ rightmost digits. Using 4 different datasets, we assess the government’s success in achieving these goals, focusing on fast-moving consumer goods, a category of products strongly affected by the price rounding regulation. We focus on the response of the retailers to the price rounding regulation and find that although the government succeeded in eliminating the rounding tax, the bottom line is that shoppers end up paying more, not less, because of the regulation, underscoring, once again, Friedman’s (1975) warning that policies should be judged by their results, not by their intentions. |
| Keywords: | Price Rounding Regulation; Rounding Tax; Inattention Penalty; Round Prices; 9-Ending Prices; Just-Below Prices; Inflation |
| JEL: | E31 K00 K20 L11 L40 L51 M30 |
| Date: | 2024–11–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122733 |
| By: | Kenichiro Shiraya; Kanji Suzuki; Tomohisa Yamakami |
| Abstract: | Two formulations are proposed to filter out correlations in the residuals of the multivariate GARCH model. The first approach is to estimate the correlation matrix as a parameter and transform any joint distribution to have an arbitrary correlation matrix. The second approach transforms time series data into an uncorrelated residual based on the eigenvalue decomposition of a correlation matrix. The empirical performance of these methods is examined through a prediction task for foreign exchange rates and compared with other methodologies in terms of the out-of-sample likelihood. By using these approaches, the DCC-GARCH residual can be almost independent. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.08246 |
| By: | Orhan Erdem; Kristi Hassett; Feyzullah Egriboyun |
| Abstract: | We evaluate the reliability of two chatbots, ChatGPT (4o and o1-preview versions), and Gemini Advanced, in providing references on financial literature and employing novel methodologies. Alongside the conventional binary approach commonly used in the literature, we developed a nonbinary approach and a recency measure to assess how hallucination rates vary with how recent a topic is. After analyzing 150 citations, ChatGPT-4o had a hallucination rate of 20.0% (95% CI, 13.6%-26.4%), while the o1-preview had a hallucination rate of 21.3% (95% CI, 14.8%-27.9%). In contrast, Gemini Advanced exhibited higher hallucination rates: 76.7% (95% CI, 69.9%-83.4%). While hallucination rates increased for more recent topics, this trend was not statistically significant for Gemini Advanced. These findings emphasize the importance of verifying chatbot-provided references, particularly in rapidly evolving fields. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.07031 |