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on Monetary Economics |
| By: | Dario Bonciani; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Sara Sarpietro |
| Abstract: | We show that food price changes have a persistent impact on UK consumers’ inflation expectations. Over 60% of households report that their inflation perceptions are heavily influenced by food prices and display a stronger association between their inflation expectations and perceptions. In other words, households emphasising the importance of food prices tend to have more backward-looking inflation expectations. We complement this finding with a Structural Vector Autoregression (SVAR) analysis, illustrating that food price shocks have a larger and more persistent effect on expectations compared to a “representative” inflation shock. Finally, we augment the canonical New-Keynesian model with behavioural expectations that capture our empirical findings and show that monetary policy should respond more aggressively to food price shocks. |
| Keywords: | Inflation Expectations, Inflation Perceptions, Monetary Policy. |
| JEL: | D10 D84 E31 E52 E58 E61 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def135 |
| By: | José Ramón Martínez Resano (BANCO DE ESPAÑA) |
| Abstract: | This paper explores the financial stability nexus within a monetary ecosystem that has been expanded to include a central bank digital currency (CBDC). The paper examines the new risks associated with the introduction of a CBDC, their mitigants and their potential amplification factors. Economists and academics still seem to be split on the validity of the traditional principle of separating money into two tiers of public and private money, as a structural mitigant of the risks of deposit substitution and banking disintermediation towards CBDCs. The potential amplification of the risks associated with CBDCs through credit-related second-round effects is an additional concern. The systematic study of the risks and mitigants carried out in the paper highlights the importance of partially adapting the two-tier system of money by implementing certain limits, as envisaged in CBDC plans. The endogenous mitigation of the risks through improved bank competition often attributed to CBDCs is uncertain and may be insufficient from a systemic risk perspective. The introduction of exogenous mitigants, like CBDC holding limits calibrated on the basis of a robust methodology, seems instrumental to ensure the consistency of a monetary ecosystem that includes a CBDC. Hence, the paper addresses some fundamental methodological issues related to these limits, such as the rationale for alternative targets for the limits, the influence of disintermediation speed, the time horizons involved in the limitation and adaptation process, and the role of regulatory and market frictions. An illustrative empirical analysis for the Spanish case indicates that financial stability might not be a concern for reasonable levels of CBDC take-up, although the complexity and novelty of this instrument call for a more in-depth analysis in the future. |
| Keywords: | central bank digital currency, digital money, payments, financial stability |
| JEL: | E41 E42 E51 E52 E58 G21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:opaper:2436 |
| By: | Ton?i SVILOKOS (University of Dubrovnik, Department of Economics and Business) |
| Abstract: | The COVID-19 pandemic led to unconventional monetary policies, such as large-scale asset purchases and near-zero interest rates, which contributed to rising inflation. As inflation increased, central banks responded by tightening policies, including raising interest rates to reduce money supply. This study evaluates the effectiveness of these measures in controlling inflation during the post-pandemic recovery, focusing on the European Union and the United States. It examines the relationship between M2 monetary aggregates and inflation, using the Harmonized Index of Consumer Prices (HICP). Granger causality tests on data from January 2018 to July 2024 show a significant causal link between M2 and inflation, highlighting the importance of interest rate adjustments in managing inflation. |
| Keywords: | Inflation Control, Money Supply, Granger Causality Analysis, Central Bank Actions |
| JEL: | E52 E58 |
| URL: | https://d.repec.org/n?u=RePEc:sek:iefpro:14716501 |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | This paper examines the impact of current account balances on energy, headline, and core inflation across developed and developing economies from 1980 to 2023. Using Panel OLS fixed effects, Panel-IV 2SLS and Panel Vector Autoregressive models, we find that an improvement in the current account consistently leads to lower inflation, with heterogeneous effects across inflation components, even when controlling for monetary policy. Our analysis also explores regional differences and contrasts the periods before and after the 2008 subprime crisis, revealing that current account surpluses had a stronger deflationary effect in the more recent period. There is also a negative link between cyclical unemployment and inflation supporting the traditional Phillips curve perspective. These results suggest that policies aimed at improving current account balances, particularly in energy-importing countries, could help mitigate inflationary pressures. |
| Keywords: | Current Account, Energy Inflation, Headline Inflation, Core Inflation, Panel Data, VAR, Subprime Crisis, Inflation Dynamics, Monetary Policy. |
| JEL: | E31 F32 Q43 C33 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03592024 |
| By: | Mamdouh Abdelkader; Lilia Karnizova (Department of Economics, University of Ottawa, Canada) |
| Abstract: | As climate change risks escalate, central banks are increasingly called upon to address this global challenge. Yet, estimates of the environmental impact of monetary policy are limited, leaving a significant gap in understanding how monetary policy interacts with climate change. In this paper, we aim to fill this gap by providing new evidence based on U.S. data. We identify monetary policy shocks using the recursiveness assumption and estimate their effects on domestic carbon dioxide emissions. Three key findings emerge from our analysis. First, an unexpected monetary policy tightening produces a persistent yet transitory negative effect on total CO2 emissions. This finding holds consistently across different model specifications, periods, and monetary policy indicators, underscoring its robustness. Second, the effects of monetary policy vary significantly across major polluter types. Emissions in the industrial sector, closely tied to production activities, show the strongest response. In contrast, emissions in the residential and commercial sectors are weakly affected, likely due to the essential nature of energy services. Finally, the contribution of U.S. monetary policy shocks to explaining domestic CO2 emissions fluctuations has been modest. Since central banks have limited capacity to directly influence environmental outcomes, monetary policy should be viewed as complementary to fiscal policy and environmental regulation in addressing climate change. |
| Keywords: | CO2 emissions, Carbon emissions, Monetary policy shocks, Climate change, Environmental policy, Recursive VAR. |
| JEL: | E52 E58 Q50 Q51 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ott:wpaper:2406e |
| By: | Federico Di Pace; Giacomo Mangiante; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | We study the market-perceived monetary policy rule of the Bank of England (BoE) using financial market data and macroeconomic surprises. Leveraging exogenous variations in inflation and industrial production (IP) surprises around Office for National Statistics releases, we estimate gilt yield responsiveness to inflation and real activity, revealing how markets expect the BoE to react to macroeconomic changes. Markets generally understand the UK flexible inflation-targeting regime, revising both inflation expectations and short-term rates upward after inflation surprises. We identify two key nonlinearities. First, perceived responsiveness changes over time, with short-term rates responding when away from their lower bound, and medium-term rates responding during periods of unconventional monetary policy. Second, financial markets expect a weaker response to inflation when it originates from supply shocks. This, however, does not translate into a risk of de-anchored expectations. |
| Keywords: | Market Perceptions, Financial Markets’ expectations, Inflation, Yields, Monetary Policy Rule. |
| JEL: | C10 E50 E58 G10 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie1:def137 |
| By: | Laurence Bristow (Reserve Bank of Australia) |
| Abstract: | The RBA controls short-term interest rates by offering to lend as many reserves as banks demand at a rate close to its target for monetary policy. At this rate, banks' demand drives the amount of reserves the RBA supplies and subsequently the size of its balance sheet. I estimate a substantial increase in Australian banks' reserve demand since the COVID-19 pandemic. I find an increase in banking system deposits explains a large part of the increase in reserve demand through an associated shift to the right in Australian banks' reserve demand curve. The link between deposits and reserve demand suggests banks are willing to pay for the convenience of holding additional reserves to manage payments between depositors, or that banks hold reserves against deposits as a precaution in case of liquidity stress. The value of collateral also shifts banks' reserve demand curve as it changes the price at which banks can fund reserves through the repo market. The role of collateral in explaining the increase in banks' reserve demand is likely small as its value is little changed since the pandemic. |
| Keywords: | monetary policy; money and interest rates; banks |
| JEL: | E49 E52 G21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-08 |
| By: | Etienne Briand (University of Quebec in Montreal); Massimiliano Marcellino (Bocconi University); Dalibor Stevanovic (University of Quebec in Montreal) |
| Abstract: | We investigate the role of attention in shaping inflation dynamics. To measure the general public attention, we utilize Google Trends (GT) data for keywords such as "inflation". For professional attention, we construct an indicator based on the standardized count of Wall Street Journal (WSJ) articles with "inflation" in their titles. Through empirical analysis, we show that attention significantly impacts inflation dynamics, even when accounting for traditional inflation-related factors. Macroeconomic theory suggests that expectations formation is a natural mechanism to explain these findings. We find support for this hypothesis by measuring a decrease in professional forecasters' information rigidity during periods of high attention. In contrast to prior research, our findings highlight the critical roles of media communication and public attention in shaping aggregate inflation expectations. We then develop a theoretical model that captures our stylized facts, showing that both inflation dynamics and forecaster expectations are regime-dependent. Finally, we examine the implications of this framework for the effectiveness of monetary policy. |
| Keywords: | Inflation, Expectations, Monetary policy, Google trends, Text analysis |
| JEL: | C53 C83 D83 D84 E31 E37 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:24-05 |
| By: | Clodomiro Ferreira (BANCO DE ESPAÑA); Stefano Pica (BANK OF ITALY) |
| Abstract: | Using granular data on household subjective expectations for several countries, we uncover a robust positive reaction of inflation expectations to a contractionary monetary policy shock, a result at odds with standard equilibrium theories with nominal rigidities. We then investigate what lies behind such result. Although households disagree, their expectations are correlated in the cross-section. Two principal components account for a significant portion of the variance of all expectations. These components capture households’ perceptions of the sources of macroeconomic dynamics, with the first capturing either a supply-side view or an overall dislike for inflation, and the second component reflecting a perception about demand pressures. This structure of disagreement is stable across countries and over time and does not vary with demographic or socioeconomic characteristics. We then use these insights to identify two common factors driving expectations over time. These factors are consistent with a narrative based on perceived supply-side inflationary pressures after the invasion of Ukraine in February 2022, as well as with the overall downward inflation dynamics intensified by the reaction of the ECB. |
| Keywords: | survey, expectations, disagreement, monetary policy |
| JEL: | D1 D8 E2 E3 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2445 |
| By: | Lakdawala, Aeimit (Wake Forest University, Economics Department); Moreland, Timothy (University of North Carolina Greensboro); Fang, Min (University of Florida) |
| Abstract: | We show that the role of leverage in explaining firm-level responses to monetary policy changed around the financial crisis of 2007-09. Stock prices of firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. Using expected volatility measures from firm-level options, we further document that financial markets have been aware of this change. To explain this, we consider a model where firms borrow using both short-term and long-term debt. The reversal relies on the relative strength of two competing channels of monetary transmission through the existing level of debt: debt dilution and debt overhang. Before the crisis, the debt overhang channel dominated, so firms with high leverage were less responsive. Since the crisis, unconventional monetary policy has had an outsized effect on long-term interest rates, strengthening the debt dilution channel that benefits firms with high leverage more. Additional firm-level evidence supports this mechanism. |
| Keywords: | Monetary policy transmission; leverage; debt maturity; firm heterogeneity |
| JEL: | E22 E43 E44 E52 |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0120 |
| By: | Chuanglian Chen (Jinan University); Xiaobin Liu (Sun Yat-sen University); Jun Yu (University of Macau); Tao Zeng (Zhejiang University) |
| Abstract: | This paper investigates the time-varying asymmetric and zone-like preferences of the People’s Bank of China (PBoC) and its corresponding monetary policy reaction function. We assume that the priority given to different policy objectives in the loss function of the PBoC can evolve over time. Based on this assumption and the economic system, the central bank minimizes losses and derives an optimal forward-looking monetary policy rule with time-varying parameters. The paper explores four distinct types of loss related to inflation, output, and leverage, resulting in a total of 64 distinct models. Leveraging a modified maximum likelihood estimation approach, we estimate these models and utilize the Akaike information criterion (AIC) to identify the most suitable model. Based on the data from 1996 to 2022, we find that: (1) the PBoC’s reaction to inflation differentials exhibits slight asymmetry, featuring a no-intervention zone between -1% and 1%. The monetary authority intervenes when inflation diverges by more than 1% from the target, otherwise relying on market self-regulation; (2) regarding output gaps, the PBoC asymmetrically intervenes, displaying a stronger inclination towards averting overheating compared to downturns; (3) in response to credit leverage differentials, policy reactions follow a linear pattern. The empirical results underscore the central bank’s adaptability and responsiveness to economic fluctuations and strongly demonstrate the flexibility and advantages of our framework. |
| Keywords: | Time-varying parameter model, forward-looking monetary policy rule, leverage, asymmetric and zone-like preference |
| JEL: | E5 C32 C51 C52 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boa:wpaper:202421 |
| By: | Viktors Ajevskis (Latvijas Banka) |
| Abstract: | This paper investigates how different parametrisation of the monetary policy reaction function and different mechanisms of expectations formation shape the macroeconomic outcomes in the Smets-Wouters type DSGE model. The initial macroeconomic conditions of the simulations correspond to the high inflation environment of early 2022. The simulation results show that under the hybrid expectations the terminal monetary policy rate is significantly higher than under the rational expectations for all Taylor rule parametrisations. Under the hybrid expectations, the inflation rate is much more persistent than under the rational expectations; three years is not enough to reach the inflation target of two per cent even for quite hawkish calibration of the Taylor rule. In the modelled economy, a relatively fast inflation stabilization for the hawkish Taylor rule has its own price in form of the cumulative output loss when compared with the dovish Taylor rule. Simulations are also performed for the case where the central bank misspecifies expectations formation mechanism in the DSGE model and follows an interest rate path implied by a false model. The results show that the hawkish reaction is preferable for both rightly and wrongly specified models. |
| Keywords: | DSGE, Monetary policy, Expectations, High inflation, Loss function |
| JEL: | C62 C63 D9 D58 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202407 |
| By: | Donato Masciandaro (Department of Economics, Bocconi University); Davide Romelli (Department of Economics, Trinity College Dublin); Stefano Ugolini (Department of Economics, Universit' Toulouse Capitole) |
| Abstract: | This paper focuses on an early unique experiment of freely floating State-issued money, implemented in Venice between 1619 and 1666. Building on a new hand-collected database from a previously unexplored archival source, we show that, despite the Venetian ducat's status as an international currency and the government's reputation for fiscal prudence, its external value was significantly, and increasingly, affected by episodes of automatic government deficit monetization through the Banco del Giro during the crises of 1630 (outbreak of the bubonic plague) and 1648-50 (escalation of the Cretan War). This suggests that the institutional context plays an important role in the transmission mechanism between government deficit monetization and exchange rates. |
| Keywords: | Fiscal Dominance, Monetary Policy, Early Modern Venice, Banco del Giro, Fiat Money, Deficit Monetization, Historical Exchange Rates |
| JEL: | F31 E63 N33 N43 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep1124 |
| By: | Anttonen, Jetro; Laine, Olli-Matti |
| Abstract: | According to the efficient-market hypothesis, forecasts derived from efficient market prices should be unbeatable. However, numerous institutions, including the European Central Bank, regularly publish forecasts for future inflation that deviate from market expectations. We investigate the relative predictive accuracy of the ECB's short-term inflation projections against predictions derived from the market prices of short-term inflation-linked swaps (fixings) in 2018-2023. We show that the predictive accuracy of fixings and the ECB projections have been very comparable during times of low and stable inflation, but during recent times of economic volatility the market prices of fixings have provided significantly more accurate predictions. We find that the efficiency of financial markets to process new information may result in more accurate short-term inflation forecasts than produced by Eurosystem insiders, and that risk premia and market inefficiencies do not seem to play a significant role in the context of short-term inflation-linked swaps. Overall, our findings suggest that making use of the information in the market prices for fixings could potentially improve the accuracy of the ECB's short-term inflation projections. |
| Keywords: | Inflation, fixings, swaps, financial market, forecasting |
| JEL: | E31 G14 G17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofecr:306300 |
| By: | Orphanides, Athanasios |
| Abstract: | Throughout its history, the Fed has operated with a muddled mandate that has not explicitly recognized price stability as the primary goal of monetary policy. The Fed's success in maintaining price stability and fostering the good economic performance associated with it has depended on how it interpreted its mandate and implemented its policy strategy. In the 1970s and in the recent past, the Fed interpreted its mandate in an overambitious fashion, placing undue emphasis on the elusive goal of maximum employment. On both occasions, the Fed's strategy proved insufficiently resilient, and high inflation followed. To improve its policy strategy the Fed ought to revert to earlier interpretations of its mandate that acknowledge the primacy of price stability as a policy guide. |
| Keywords: | Federal Reserve, mandate, maximum employment, monetary policy strategy |
| JEL: | E32 E52 E58 E61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:306827 |
| By: | Daeha Cho (Hanyang University); Eunseong Ma (Yonsei University) |
| Abstract: | This study quantitatively assesses both the aggregate and disaggregate effects of inflation-indexed loan contracts using a heterogeneous agentNewKeynesian (HANK) model with an occasionally binding zero lower bound (ZLB). Substituting real for nominal government bonds reduces the volatility of output and inflation and decreases the frequency of ZLB events. Real loans sever the link between real interest rates and inflation, preventing a rise in real interest rates at the ZLB. Accordingly, ZLB events become less costly, weakening precautionary savings against aggregate risk. This leads to higher average nominal rates and a reduced frequency of ZLB occurrences, further reducing aggregate volatility. Although inflation indexation improves aggregate welfare, at the disaggregate level, the wealthy lose while the poor gain. Inflation indexation outperforms suggested policies aimed at providing more room for monetary policy, such as increasing the inflation target and implementing an asymmetric Taylor rule. |
| Keywords: | Zero lower bound, HANK model, Inflation indexation, Welfare |
| JEL: | D31 E31 E32 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-233 |
| By: | Gabriel Rodriguez-Rondon |
| Abstract: | This paper introduces a new approach for estimating core inflation indicators based on common factors across a broad range of price indices. Specifically, by utilizing procedures for detecting multiple regimes in high-dimensional factor models, we propose two types of core inflation indicators: one incorporating multiple structural breaks and another based on Markov switching. The structural breaks approach can eliminate revisions for past regimes, though it functions as an offline indicator, as real-time detection of breaks is not feasible with this method. On the other hand, the Markov switching approach can reduce revisions while being useful in real time, making it a simple and robust core inflation indicator suitable for real-time monitoring and as a short-term guide for monetary policy. Additionally, this approach allows us to estimate the probability of being in different inflationary regimes. To demonstrate the effectiveness of these indicators, we apply them to Canadian price data. To compare the real-time performance of the Markov switching approach to the benchmark model without regime-switching, we assess their abilities to forecast headline inflation and minimize revisions. We find that the Markov switching model delivers superior predictive accuracy and significantly reduces revisions during periods of substantial inflation changes. Hence, our findings suggest that accounting for time-varying factors and parameters enhances inflation signal accuracy and reduces data requirements, especially following sudden economic shifts. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.12845 |
| By: | Lucia Quaglietti |
| Abstract: | Financing conditions have tightened sharply since 2022 across OECD countries, reflecting the rapid increase of central banks’ policy rates. Credit conditions have worsened alongside, especially in the euro area, where credit provided by banks has been expanding at the slowest pace since the euro area sovereign debt crisis. Empirical estimates obtained for Germany, France, Italy, the United Kingdom and the United States suggest that the credit deceleration reflects a combination of tighter credit supply and falling credit demand, with the latter playing a predominant role in shaping credit conditions in the euro area. Credit supply has progressively dried up in all countries, and although there have been few signs of a severe and widespread credit shortage of the type seen in the global financial crisis, the negative effect on economic activity is being felt in several countries. Bank lending rates have started to edge down, pointing to a completed pass-through of past monetary policy tightening. However, tight credit conditions could weigh on activity through 2024, due to the long lags in the transmission of credit shocks. Credit demand could also weaken further, including in the event of a sharp tightening of labour markets or a swift repricing in asset prices. |
| Keywords: | credit drivers, credit effects, labour markets, monetary policy |
| JEL: | E3 E4 E5 |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:oec:ecoaaa:1826-en |
| By: | William M. Doerner (Federal Housing Finance Agency); Michael J. Seiler (Federal Housing Finance Agency); Vivian Wong (Federal Housing Finance Agency) |
| Abstract: | This paper examines how banks adapt to tightening regulations, evolving macroeconomic conditions, and changes in household demand. Unlike most analyses of banking regulation, we develop a general equilibrium model in which banks both borrow from and lend to households, allowing us to assess the impact of regulations in conjunction with other macroeconomic factors. The model features an often overlooked interplay between household portfolio choices and bank financial decisions, emphasizing the contribution of household preferences to the precipitous climb in cash ratios that accompanied reductions in bank leverage following the 2008 global financial crisis. Through counterfactual analysis, we find that in the absence of heightened household demand for deposits, decline in bank leverage would have been twice as steep, and the proportion of mortgage loans within total assets would have contracted by more than twice the actual post-crisis change. Our empirical analysis confirms the increase in household demand for deposits and explores how this expansion interacts with banks' capital buffers. The empirical results support our comparative static implications that banks with larger capital buffers accumulate less cash and more mortgages as a share of total assets than banks with smaller capital buffers in response to growing deposits. The mechanisms discussed in this study are pertinent for policymakers, particularly as central banks worldwide consider further interest rate reductions and U.S. regulators finalize the implementation of Basel III requirements. |
| Keywords: | banks, deposits, monetary policy, mortgages |
| JEL: | C58 D14 D53 E44 E58 G21 G28 G51 R21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hfa:wpaper:24-08 |
| By: | De Oliveira Amado, Cristina Alexandra; Garrón Vedia, Ignacio; Lopes Moreira da Veiga, María Helena |
| Abstract: | This paper addresses the efect of country geopolitical risk on energy inflation by employing a methodology that combines fixed efects panel quantile regressions and local projections. The panel covers country-level indicators for 16 OECD countries from January 1990 to December 2022. Results show that adverse country-specific geopolitical events are associated with upside risks on energy inflation whereas the analysis reveals insignificant efects for both the median and left tail of energy inflation distribution. |
| Keywords: | Geopolitical risk; Energy inflation; Fixed efects; Panel data; Quantile regression |
| JEL: | C22 C23 E31 Q40 |
| Date: | 2024–11–29 |
| URL: | https://d.repec.org/n?u=RePEc:cte:wsrepe:45113 |
| By: | Knetsch, Thomas A.; Popova, Dilyana; Schwind, Patrick |
| Abstract: | The Harmonised Index of Consumer Prices (HICP) co-exists with the national Consumer Price Index (CPI) as a key measure of inflation in Germany. Both indices are based on the same granular price data and uniform compilation methods at the lower levels of aggregation. However, differences arise at the upper level, concerning e.g. coverage, index formula, weighting schemes and revision practices. Weighting is a major source of differences but its impact is expected to diminish because, in the last base year changeover, national accounts replaced household budget surveys as the dominant source for deriving five-year fixed CPI weights. This change increases conformity with the annual updating procedure for HICP weights. By contrast, the integration of the cost of owner-occupied housing (OOH) into the HICP might increase the differences between these key measures if, following the ECB's request in its 2020/2021 Monetary Policy Strategy Review, the acquisition approach were implemented. Choosing different options can be rationalized with a number of criteria (e.g. alignment with user interest, main purposes, public acceptance, practicality). As differences matter empirically, communication is important. |
| Keywords: | Inflation measurement, weighting, owner-occupied housing |
| JEL: | E31 C43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:307601 |
| By: | Palma Filep-Mosberger (Magyar Nemzeti Bank (Central Bank of Hungary)); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Zhou Ren (Vienna Graduate School of Finance) |
| Abstract: | Local currency borrowers are statistically significantly affected by exchange rate fluctuations due to the bank lending channel. Using microdata on borrowers from Hungary, this study examines the spillover effects of foreign currency loans on local currency borrowers following an unexpected appreciation of the Swiss franc (CHF) in January 2015. CHF corporate loans are considered unhedged since the majority of the borrowers did not have income in CHF. Our analysis indicates that banks holding a larger portion of unhedged CHF corporate loans reduced their lending in local currency corporate loans after the shock. This relationship is robust across both extensive (loans terminated by a given bank and no new loans at a bank or banks different from the account holder bank or banks) and intensive (no new loans at its current bank or banks) margins. Further investigation into the mechanisms reveals that banks with more unhedged CHF corporate loans experience an increase in non†performing CHF loans post†shock, reducing their capital adequacy. Furthermore, the evidence in our paper suggests that reductions in banks’ local currency lending due to exchange rate shocks adversely affect the investment activity of small firms and increase their likelihood of default. |
| Keywords: | bank lending, exchange rate shock, currency mismatch, FX loans, credit. |
| JEL: | G15 G21 G28 G32 G33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:mnb:wpaper:2024/2 |
| By: | Fritz, Benedikt; Krüger, Ulrich; Wong, Lui Hsian |
| Abstract: | We examine the impact of introducing a digital euro, as currently conceptualized in the proposal by the European Commission, on the liquidity situation of banks in Germany. The analyses are the basis for assessing the effects of a digital euro on banks' liquidity, as presented in the 11th Annual Report of the German Financial Stability Committee. This paper extensively addresses the technical details of the analyses and substantiates the robustness of the discussed findings. Our analysis focuses on short-term effects. In this environment, deposits are swiftly withdrawn and converted into digital euros, leaving banks with limited opportunities to adapt. We consider a scenario where users fully utilize the holding limit of the digital euro, along with additional scenarios that account for risk-mitigating factors. We employ a unique dataset that combines banking supervisory data with payment transaction information. Our analysis demonstrates that particular savings banks and cooperative banks are vulnerable to retail deposit outflows from exchanges into digital euro. However, only few banks would experience a liquidity shortfall if liquidity in the form of high-quality liquid assets could be redistributed within the banking associations (liquidity balancing). Furthermore, our analysis indicates that based on a holding limit of €3, 000 the liquidity shortfall based on the Liquidity Coverage Ratio remains relatively small in aggregate compared to the level of high-quality liquid assets of the entire banking system in all scenarios (up to 2%). |
| Keywords: | Central bank digital currency, holding limits, bank liquidity, systemic risk |
| JEL: | G21 G32 G38 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubtps:307139 |
| By: | Aliaksandr Zaretski (University of Surrey) |
| Abstract: | I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy. |
| JEL: | E32 E44 E52 E63 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0624 |
| By: | A T M Omor Faruq; Md Toufiqul Huq |
| Abstract: | This paper examines the pivotal role central banks play in advancing sustainable finance, a crucial component in addressing global environmental and social challenges. As supervisors of financial stability and economic growth, central banks have dominance over the financial system to influence how a country moves towards sustainable economy. The chapter explores how central banks integrate sustainability into their monetary policies, regulatory frameworks, and financial market operations. It highlights the ways in which central banks can promote green finance through sustainable investment principles, climate risk assessments, and green bond markets. Additionally, the chapter examines the collaborative efforts between central banks, governments, and international institutions to align financial systems with sustainability goals. By investigating case studies and best practices, the chapter provides a comprehensive understanding of the strategies central banks employ to foster a resilient and sustainable financial landscape. The findings underscore the imperative for central banks to balance traditional mandates with the emerging necessity to support sustainable development, ultimately contributing to the broader agenda of achieving global sustainability targets. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.13576 |
| By: | Vincenzo Quadrini (Univ. of Southern California, CEPRand NBER); Enrique G. Mendoza (University of Pennsylvania and NBER) |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We show these results with a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| Date: | 2024–11–23 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-038 |
| By: | Calmfors, Lars (Institute for International Economic Studies); Hassler, John (Institute for International Economic Studies); Seim, Anna (Department of Economics) |
| Abstract: | The economic situation of the past years, with multiple macroeconomic shocks and a low interest rate environment, has changed the conventional view of how stabilisation policy ought to be conducted. When the interest rate cannot be further reduced, monetary policy becomes less effective. This places increased demands on fiscal policy for business cycle stabilisation. In 2022, the economic situation rapidly changed. Increases in inflation and in interest rates raise several questions about how – and by whom – stabilisation policy should be conducted. Since aggregate demand is affected by both fiscal and monetary policy, the interaction between them is crucial for stabilisation policy to be effective. This is the case regardless of the economic situation. In this report to the Expert Group on Public Economics (ESO), which was previously published in Swedish (2022:3 Samspel för stabilitet), the balance between fiscal and monetary policy in Sweden is analysed. The report summarises the state of knowledge and gives both a theoretical and an empirical review of the effects of fiscal and monetary policy. The authors also discuss the appropriate division of responsibilities between fiscal and monetary policy under new economic conditions and call for clear guidelines regarding the role of fiscal policy in business cycle stabilisation. Since the original publication of this report in Swedish, facts and diagrams have been updated to include more recent data. |
| Keywords: | Budget; Finansiella kriser; Stabiliseringspolitik; Financial crises; Stabilization policy; |
| Date: | 2023–01–26 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:esorep:2023_001 |
| By: | Daniel Ripperger-Suhler |
| Abstract: | There is a general consensus that the bias associated with the entry of new merchants has nontrivial implications for measuring inflation. However, quantifying the bias empirically has proven difficult in part because little is known about how much of the price differences in goods sold by new versus old merchants represents a pure price difference (inflation) or differences in the quality of the attendant services (quality differences). In the public transportation industry, measurement of quality is complicated by the accompanying technological change rideshare services represented. As with any completely new technology, consumers faced considerable uncertainty around the quality of rideshare services. Consequently, consumers' perceived quality of rideshare services changes over time, which makes the calculation of constant-quality price indexes even more challenging. This paper explores a new method for accounting for this bias by separately identifying changes in product price and quality over time. I estimate multiple hedonic models to recover quality adjustment factors for quality-adjusted unit value price indexes. One of these models utilizes measures of time-varying product quality that are derived from a structural demand model of endogenous consumer learning that explicitly models the diffusion of knowledge about the quality of rideshare services. I compare the measurement of quality and pure price differences across modes of transportation, and the implications they have for constant-quality price indexes and, consequently, the measurement of inflation. |
| JEL: | C43 D12 D83 E31 L15 L91 O33 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bea:papers:0131 |
| By: | Doron Sayag; Avichai Snir; Daniel Levy |
| Abstract: | We study the price rounding regulation in Israel, which outlawed non-0-ending prices, forcing retailers to round 9 ending prices, which in many stores, comprised more than 60 percent of all prices. The goal of the regulation was to eliminate the rounding tax, the extra amount consumers paid because of price rounding, which was necessitated by the abolition of low denomination coins, and 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 success of the government 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, the warning of Milton Friedman that policies should be judged by their results, not by their intentions. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.13427 |