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on Monetary Economics |
| By: | Giang Nghiem; Lena Drager; Ami Dalloul |
| Abstract: | This paper explores communication strategies for anchoring households’ medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB’s inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank. |
| Keywords: | anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E52 E31 D84 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-70 |
| By: | De Polis, Andrea (University of Strathclyde & ESCOE); Melosi, Leonardo (University of Warwick, European University Institute, DNB & CEPR); Petrella, Ivan (Collegio Carlo Alberto, University of Turin & CEPR) |
| Abstract: | We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the first-order macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions. |
| Keywords: | Asymmetric risks ; optimal monetary policy ; balance of inflation risks ; risk-adjusted inflation targeting ; flexible average inflation targeting JEL Codes: E52 ; E31 ; C53 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1530 |
| By: | Eduardo G. C. Amaral |
| Abstract: | Rupert and Šustek (2019) showed that introducing endogenous capital into the canonical New-Keynesian model allows real interest rates to move in any direction after a positive monetary shock. According to them, this would prove that the real interest rate channel of monetary policy transmission is only observational — not structural — in that class of models, and therefore subject to the Lucas (1976) critique. In this paper, I show that such an identification problem for dynamic stochastic general equilibrium (DSGE) and vector autoregression (VAR) models can be circumvented by incorporating interest-rate smoothing — a feature as prevalent in medium-scale New-Keynesian models as capital itself — into the Taylor rule. I find that the negative association between changes in inflation and changes in the real interest rate is actually more robust than that between the former and changes in the nominal interest rate. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:606 |
| By: | Jens Hilscher (University of California, Davis); Alon Raviv (Bar-Ilan University); Ricardo Reis (London School of Economics) |
| Abstract: | Long-dated inflation swap contracts provide widely-used estimates of expected inflation. We develop methods to estimate complementary tail probabilities for persistently very high or low inflation using inflation options prices. We show that three new adjustments to conventional methods are crucial: inflation, horizon, and risk. An application of these methods finds: (i) US deflation risk in 2011-14 has been overstated, (ii) ECB unconventional policies lowered the deflation disaster probability, (iii) inflation expectations deanchored in 2021-22, (iv) and reanchored as policy tightened, (v) but the 2021-24 disaster left scars, (vi) US expectations are less sensitive to inflation realizations than in the EZ. |
| Keywords: | option prices, inflation derivatives, Arrow-Debreu securities |
| JEL: | E31 E44 G13 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2437 |
| By: | Yudai Hatayama (Bank of Japan); Yuto Iwasaki (Previously Bank of Japan) |
| Abstract: | This paper introduces a novel approach for simultaneously estimating nominal and real natural yield curves in Japan. Specifically, we employ macroeconomic variables (output gap and inflation rate) as observed variables, in addition to the nominal and real yield curves, and conduct an estimation combining the representative yield curve model, the Nelson-Siegel model (Nelson and Siegel, 1987), with a VAR with common trends (Del Negro et al., 2017). The results presented in this paper indicate that since the 1990s, both nominal and real natural yield curves have exhibited downward shifts, as a consequence of a decline in the natural rate of interest. Furthermore, both curves have flattened due to a trending decline in the term premium. The results also indicate that the extent of these changes differs between the nominal and real natural yield curves. However, it should be noted that the estimation of natural yield curves is still in the process of development. Consequently, the results should be interpreted with caution. |
| Keywords: | Natural rate of interest; Natural yield curve; Term structure |
| JEL: | C32 E43 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e17 |
| By: | Jonathon Hazell (London School of Economics); Stephan Hobler (London School of Economics) |
| Abstract: | This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach”. We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation. We estimate an “inflation multiplier” of 0.18% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around 30% of the 2021-22 inflation—meaning deficits were important but not the only cause. A standard heterogeneous agent New Keynesian model quantitatively matches the size and dynamics inflation multiplier. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2439 |
| By: | Rakesh Arora; Han Du; Raza Ali Kazmi; Duc-Phong Le |
| Abstract: | With the rapid digitization of financial transactions, central banks have given considerable focus in recent years to the research and development of central bank digital currencies (CBDCs). While CBDCs could offer several advantages, there are concerns about end-user privacy. Traditional methods of protecting confidentiality in banking and financial systems have primarily relied on data encryption and access control techniques. However, these techniques alone are inadequate, especially in cases where data are shared across different entities because privacy in such situations is typically governed by legal frameworks. Privacy-enhancing technologies (PETs) can offer robust protection for data throughout their lifecycle, whether stored, in transit or during processing, and ensure privacy is maintained even when data are extensively shared or analyzed. This study explores the use of PETs in the design of CBDC systems, potentially paving the way for solutions that better safeguard end-user privacy and meet rigorous data protection standards. While PETs promise significant advancements in privacy protection, they present some challenges in implementation. They can introduce performance overheads and add complexity to systems, and their effectiveness and applicability are currently limited due to their early stage of development. As these technologies evolve, it is crucial for organizations to carefully consider these factors to fully leverage PET benefits while managing associated challenges. This paper provides a comprehensive overview of how PETs can transform privacy design in financial systems and the implications of their broader adoption. |
| Keywords: | Central bank research; Digital currencies and fintech; Financial system regulations and policies; Payment clearing and settlement systems |
| JEL: | E4 E42 O3 O31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocadp:25-01 |
| By: | Bhattacharjee, A.; Holly, S.; Wasseja, M. |
| Abstract: | Transcripts from the US Federal Open Markets Committee provide, albeit with a lag, valuable information on the monetary policymaking process at the Federal Reserve Bank. We use the data compiled by Chappell et al. (2005b) on preferred interest rates (not votes) of individual FOMC members. Together with information on which monetary policy decisions are based, we use these preferred rates to understand decision making in the FOMC, focussing both on cross-member heterogeneity and interaction among the members of the committee. Our contribution is to provide a method of unearthing otherwise unobservable interactions between the members of the FOMC. We find substantial heterogeneity in the policy reaction function across members. Further, we identify significant interactions between individuals on the committee. The nature of these interdependencies tell us something about information sharing and strategic interactions within the FOMC and provide interesting comparisons with the Bank of England’s Monetary Policy Committee. |
| Keywords: | Monetary Policy, Interest Rates, FOMC Decision Making, Spatial Weights Matrix, Spatial Lag Model |
| JEL: | E42 E43 E50 E58 C31 C34 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2469 |
| By: | Atsuki Hirata (Bank of Japan); Sohei Kaihatsu (Bank of Japan); Yoshiyasu Kasai (Bank of Japan); Hiroki Yamamoto (Bank of Japan); Jouchi Nakajima (Hitotsubashi University) |
| Abstract: | Over the past 25 years, the Bank of Japan has conducted a variety of unconventional monetary policies. This paper empirically analyzes the impact of these unconventional monetary policies on Japan's economic activity, prices, and financial sector. First, we investigate the impact of the Bank of Japan's purchase of long-term JGBs on long-term interest rates and find that it lowered the rates by lowering the term premium. Its impact was particularly pronounced following the introduction of Quantitative and Qualitative Monetary Easing (QQE) in 2013. Second, we employ a factor-augmented vector autoregression (FAVAR) and the shadow rates as a proxy of a monetary policy stance reflecting information on the entire government bond yield, and investigate the counterfactual analyses. Our estimation result indicates that the series of unconventional monetary policies had a positive effect on output and prices, and the large-scale monetary easing after the introduction of QQE contributed to fostering a non-deflationary environment in Japan. The empirical analysis also indicates that the unconventional monetary policies may have had the side effect of reducing the profitability of banks by lowering lending rates. |
| Keywords: | Monetary policy; Term structure model; Shadow rate; FAVAR; Counterfactual analysis |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e21 |
| By: | Noam Ben-Ze’ev (Bank of Israel); Sigal Ribon (Bank of Israel); Roy Stein (Bank of Israel) |
| Abstract: | We examine the mutual fund market, focusing on its role in the transmission of monetary policy and its impact on asset market liquidity. Utilizing daily data on mutual fund flows in Israel, we observe that in response to contractionary monetary policy of one percentage point, mutual fund holders—which are predominantly households—reduce their investments in corporate and government bonds and equity funds by approximately 6-10% of the funds' assets, over about a month after the change. This reaction is accompanied by an expansion of money market funds, indicating a shift by retail investors from higher-risk to lower-risk assets. This finding is supported by indications of a parallel increase of Institutional investors’ holdings of higher-risk assets. Concurrently, we note a decrease in market liquidity of the underlying assets in response to the monetary tightening. Our findings suggest that the adjustments in asset portfolios through changes in mutual fund flows only partially explain the decline in liquidity. Unlike the strong and immediate reactions observed during real shocks such as the COVID crisis, responses to changes in monetary policy are moderate and gradual, posing less significant risks to market liquidity |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.11 |
| By: | Wildmer Daniel Gregori; Ângelo Ramos |
| Abstract: | This paper studies empirically the effects of monetary and macroprudential policy shocks on key policy-relevant macroeconomic variables, namely credit, consumer price, and economic growth. The analysis relies on a Bayesian TVP-SVAR model with monthly frequency data in the period 2010-2022 for Portugal. Macroprudential policy shocks are based on two microfounded intensity indicators, for capital and borrower-based measures. Results show that a monetary policy tightening reduces credit growth, especially in periods of high inflation, suggesting a cross-policy effect. In addition, a macroprudential policy tightening does not lower macroeconomic aggregates, highlighting that the implemented measures did not disrupt credit or economic growth. |
| JEL: | E58 E61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202401 |
| By: | Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel); Yaakov Chen-Zion (Bank of Israel) |
| Abstract: | We develop and calibrate a micro-founded DSGE model, tailored to the Israeli economy, based on key stylized facts about the Israeli economy. The model includes the housing market, both ownership and rental, and heterogeneous households. Macroprudential policy is represented by policy regarding the Loan-to-Value (LTV) ratio, a common measure in both literature and practice. Our primary objective is to examine the effects of monetary and macroprudential policies on the housing market, especially on housing prices. Our findings suggest that contractionary monetary policy pushes home prices downward while real rent prices rise. Macroprudential policy does not undermine monetary policy’s ability to achieve its primary goals, although it introduces a slight distributional effect. Tighter macroprudential policy (lower LTV) significantly reduces debt and the ownership-to-rent ratio in the economy, but slightly increases home prices and real rent prices. This challenges the existing DSGE model literature, and we attribute this discrepancy to the absence of a rental market (and real estate investors) in those models. These insights indicate that while macroprudential tools can help manage financial stability, their effect on home prices must be carefully assessed alongside other monetary measures. |
| Keywords: | housing market, monetary policy, macroprudential policy, ownership-to-rent ratio, heterogeneous households |
| JEL: | R21 E12 E32 E52 E61 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.14 |
| By: | ITO Arata; SATO Masahiro; OTA Rui |
| Abstract: | Policy uncertainty has the potential to reduce policy effectiveness. Existing studies have measured policy uncertainty by tracking the frequency of specific keywords in newspaper articles. However, this keyword-based approach fails to account for the context of the articles and differentiate the types of uncertainty that such contexts indicate. This study introduces a new method of measuring different types of policy uncertainty in news content which utilizes large language models (LLMs). Specifically, we differentiate policy uncertainty into forward-looking and backward-looking uncertainty, or in other words, uncertainty regarding future policy direction and uncertainty about the effectiveness of the current policy. We fine-tune the LLMs to identify each type of uncertainty expressed in newspaper articles based on their context, even in the absence of specific keywords indicating uncertainty. By applying this method, we measure Japan’s monetary policy uncertainty (MPU) from 2015 to 2016. To reflect the unprecedented monetary policy conditions during this period when the unconventional policies were taken, we further classify MPU by layers of policy changes: changes in specific market operations and changes in the broader policy framework. The experimental results show that our approach successfully captures the dynamics of MPU, particularly for forward-looking uncertainty, which is not fully captured by the existing approach. Forward- and backward-looking uncertainty indices exhibit distinct movements depending on the conditions under which changes in the policy framework occur. This suggests that perceived uncertainty regarding monetary policy would be state-dependent, varying with the prevailing social environment. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24080 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve. |
| Keywords: | menu costs; inflation; Phillips curve |
| JEL: | E12 E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99169 |
| By: | Ichiro Fukunaga (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Yoichi Ueno (Bank of Japan) |
| Abstract: | This paper provides an overview of economic activity and prices in Japan since the 1990s, based on discussions mainly in academia as well as the survey of corporate behavior, and then discusses some issues related to the signs of change in recent years. In the 1990s, monetary policy faced a lower bound on nominal interest rates as the economy fell into stagnation and mild deflation due to various factors both on the demand and supply sides. In the 2010s, the economy recovered thanks to the effects of quantitative and qualitative monetary easing and other measures, which brought about a situation of no longer being in deflation. However, the "price stability target" of 2 percent could not be achieved while people's mindset and practices based on the assumption that wages and prices were unlikely to rise remained. After the pandemic in the 2020s, as the economic recovery and the tightening of labor markets as well as the surge in import prices have strengthened the virtuous cycle between wages and prices, it came in sight that the "price stability target" would be achieved in a sustainable and stable manner. Against this background, signs of change have been seen in the global economic landscape, labor markets, and firms' price-setting behavior. The mindset and practices based on the assumption that wages and prices were unlikely to rise, which took root during the deflation period, appear to be dissolving. |
| Keywords: | Japan's economy; Prices; Labor market; Globalization; Monetary policy |
| JEL: | E31 E32 E52 F62 J20 O53 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e14 |
| By: | de Brauw, Alan; Gilligan, Daniel O.; Herskowitz, Sylvan; Roy, Shalini |
| Abstract: | Mobile money can be a vehicle for improving financial access, particularly among disadvantaged populations. For mobile money systems to play this role, though, members of disadvantaged groups must both enroll in and begin to use mobile money systems. In this paper, we describe a randomized trial conducted in collaboration with a bank in Somali region, Ethiopia, that attempted to stimulate use among recent mobile money enrollees in areas near refugee camps. We provide one group with a small transfer to their mobile money account and another group is told they will receive a small transfer if they first make three transactions of any type within a promotional period. The unconditional transfer induces a 9.3 percentage point increase in customers making at least one transaction, while the conditional transfer has no significant effect. The effect is larger among men, but there is evidence that it also induces use among women. |
| Keywords: | access to finance; refugees; gender; digital technology; currencies; finance; mobile phones; Eastern Africa; Africa; Ethiopia |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ifprid:2295 |
| By: | James Antwis (Reserve Bank of New Zealand) |
| Abstract: | • We find that services inflation appears more elevated and broad-based in New Zealand than in a number of other advanced economies. • In the March 2024 quarter, annual services CPI inflation was 3 percentage points higher than a level that has historically been consistent with headline CPI inflation at target in New Zealand (“benchmark†). This difference is broadly similar to the United States, but higher than in the euro area and Australia. • The component drivers of services inflation are broad-based in New Zealand, suggesting we are experiencing relatively generalised inflationary pressure in parts of the services sector. While some other advanced economies have a similar dynamic, others appear to be experiencing a relatively larger impulse from relative price shifts. • Recent inflation dynamics appear to correlate with broad macroeconomic trends abroad. While a weaker macroeconomic backdrop in New Zealand is yet to materially soften inflation in services, disinflation elsewhere should give us confidence that a dampening in overall demand conditions will bring inflation back to target over the medium term. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nzb:nzbans:2024/04 |
| By: | Lydia Dudson (Reserve Bank of New Zealand) |
| Abstract: | • This Note decomposes retail trade inflation into supply- and demand-driven components using the methodology of Shapiro (2024). I find that, on average, the proportion of supply-driven contributions to inflation is higher than demand-driven contributions over the history of the series. • At the onset of COVID-19 in 2020, contributions of demand-side factors were initially much larger than those of supply-side factors. However, since late 2022, supply-side factors have contributed a far greater proportion of year-on-year headline retail trade inflation. • Though the results are based on retail trade inflation, similar insights emerge from decomposing household consumption expenditure inflation. The results are also in line with findings in the international literature based on other inflation measures. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nzb:nzbans:2024/05 |
| 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, Price Rounding Regulation, Regulation, Rounding Tax, Inattention, Inattention Penalty, Round Prices, 9-Ending Prices, Psychological Prices, Just Below Prices, Price Setting, Price Adjustment, Pricing, Inflation |
| JEL: | E31 K00 K20 L11 L40 L51 M30 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:306479 |
| By: | Patrice T. Robitaille; Brent Weisberg; Tony Zhang |
| Abstract: | In the late 1990s and early 2000s, Brazil, Chile, Colombia, Mexico, and Peru (hereafter referred to as the Latin 5) adopted inflation targeting frameworks as their monetary policy strategy, allowing greater exchange rate variability than in the past. By taking this step, policy makers aimed to put an end to a historical record of high and variable inflation. |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-20-2 |
| By: | Melissa van Rensburg (The Treasury) |
| Abstract: | Over the past few decades, there has been a persistent decline in the level of real interest rates, both in New Zealand and in many other advanced countries. This decline is thought to reflect a decline in the neutral level of the real interest rate. The neutral level of the real interest rate can be defined as the real interest rate level that would be consistent with an economy that is in equilibrium over the medium term. That is, all resources are fully utilised, inflation is stable at its target, and the output gap is closed. Whilst the neutral interest rate is not observable, and cannot be measured with much precision or certainty, it is a useful theoretical concept that can be helpful for analysing the appropriate setting of monetary and fiscal policies. Following a long period of decline, interest rates have increased in the post-COVID-19 environment, which has raised important questions about the outlook for the structural factors affecting the level of real neutral interest rates over the long term. The objective of this note is to better understand these structural drivers. This will help us to design robust macroeconomic frameworks to ensure the effectiveness of monetary and fiscal policies in stabilising economic fluctuations. This paper gives an overview of the literature on the drivers that have contributed to the decline in real neutral interest rates over recent decades. It considers whether the direction or magnitude of these factors are likely to change in the next few decades and possible scenarios are presented. |
| JEL: | E43 E52 E61 E62 |
| Date: | 2023–08–23 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an23/05 |
| By: | Kota Ikkatai (Bank of Japan); Takuji Kawamoto (Bank of Japan); Kenichi Sakura (Bank of Japan) |
| Abstract: | This paper empirically examines the response of the nominal exchange rate (U.S. dollar-yen exchange rate) to the monetary policy changes, focusing on the effects of various unconventional monetary policy measures implemented by the Bank of Japan over the past 25 years. Specifically, applying the estimation method proposed by Inoue and Rossi (2019), we identify Japan's "monetary policy shocks" from changes in the entire yield curve and the exchange rate around policy announcements, and estimate the dynamic response of the exchange rate to them. The results show that the yen depreciated against the U.S. dollar in many cases in response to Japan's expansionary monetary policy shocks, and that non-interest rate differential channel - e.g., the shifts in future exchange rate expectations - accounts for the larger parts of such responses than conventional interest rate differential channel. Moreover, our findings suggest that the responses of the exchange rate to unconventional monetary policies have been state-dependent in the sense that they could vary significantly depending on global financial market conditions and investors' herding behavior at each point in time. |
| Keywords: | Unconventional monetary policy; Exchange rate; Functional local projection |
| JEL: | C32 E52 F31 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e23 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones |
| Abstract: | We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary nonneutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary nonneutrality predict a nearly constant fraction of price changes. |
| Keywords: | menu costs; inflation; fraction of price changes |
| JEL: | E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99188 |
| By: | Itamar Caspi (Bank of Israel); Nadav Eshel (Bank of Israel); Nimrod Segev (Bank of Israel) |
| Abstract: | This study investigates the impact of increased debt servicing costs on household consumption resulting from monetary policy tightening. It utilizes observational panel microdata on all mortgage holders in Israel and leverages quasi-exogenous variation in exposure to adjustable-rate mortgages (ARMs) due to a regulatory shift. Our analysis indicates that when monetary policy became more restrictive, consumers with a higher ratio of ARMs experienced a more marked reduction in their consumption patterns. This effect is predominantly observed in mid- to lower-income households and those with a higher ratio of mortgage payments to total spending. These findings highlight the substantial role of the mortgage cashflow channel in monetary policy transmission, emphasizing its implications for economic stability and inequality. Keywords: Adjustable-rate Mortgages, monetary policy, cash-flow channel, household consumption, heterogeneity, Israel. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.13 |
| By: | Zhesheng Qiu (The Hong Kong University of Science and Technology); Yicheng Wang (Peking University, HSBC Business School); Le Xu (Shanghai Jiao Tong University); Francesco Zanetti (University of Oxford; Centre for Economic Policy Research) |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages. |
| Keywords: | Production networks, small open economy, monetary policy |
| JEL: | C67 E52 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2501 |
| By: | Pedro Teles; Oreste Tristani |
| Abstract: | Motivated by the surge in debt levels through the pandemic crisis, we revisit the issue of the optimal financing of public debt. In contrast with the existing literature, we find that the optimal response of inflation to a large increase in debt levels is a gradual but significant and long-lasting rise in inflation. The difference in our results is due to a different assumption on the source of nominal rigidities. While the literature has focused on sticky prices, of either the Calvo or Rotemberg type, we consider sticky plans as in the sticky information set up of Mankiw and Reis (2002). A crucial feature of our results is that a significant inflation response is desirable only if the maturity of debt is (realistically) long. In a calibrated example, we show that QE policies, by reducing the maturity of the debt held by the private sector, may lead to an optimally higher response of inflation. |
| JEL: | E31 E32 E52 E58 H21 H63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202403 |
| By: | Milutin Jesic (University of Belgrade, Serbia); Hans Manner (University of Graz, Austria) |
| Abstract: | The European Central Bank (ECB) adopted a new monetary policy strategy in July 2021 to replace the previous one that had been in place since 2003. This study implicitly analyzes the performance of the previous strategy in achieving price stability by identifying the key macroeconomic determinants that influence inflation dynamics. Methodologically, we apply the nonstationary ordered probit model, which allows the estimation of marginal effects of covariates on the probability of the inflation rate being below, in, or above the assumed targeted range. The results indicate that the crucial determinants of deviation in the inflation rate from the targeted range are fundamental macroeconomic variables, of which some are indirectly under control of the ECB. While the inflation rate has occasionally deviated from the targeted range, the overall conclusion is that the performance of the ECB in fulfilling the primary goal defined in the monetary policy strategy is still manageable to the extent that it can influence some of the factors that are identified as drivers of inflation dynamics. |
| Keywords: | ECB, monetary policy, monetary policy strategy, nonstationary ordered probit model, inflation. |
| JEL: | C25 C54 E31 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-17 |
| By: | Ding Dong; Zheng Liu; Pengfei Wang; Min Wei |
| Abstract: | We present empirical evidence that household inflation disagreement weakens the power of forward guidance and conventional monetary policy shocks. The attenuation effect is stronger when inflation forecasts are positively skewed and it is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. These empirical observations can be rationalized by a model featuring heterogeneous beliefs about the central banks' inflation target. An agent who perceives higher future inflation also perceives a lower real interest rate and thus borrows more to finance consumption, subject to borrowing constraints. Higher inflation disagreement would lead to a larger share of borrowing-constrained agents, resulting in more sluggish responses of aggregate consumption to changes in current and expected future interest rates. This mechanism also provides a microeconomic foundation for Euler equation discounting that helps resolve the forward guidance puzzle. |
| Keywords: | Inflation disagreement; Inflation expectations; Heterogeneous beliefs; Borrowing constraints; Monetary policy transmission; Forward guidance puzzle |
| JEL: | E21 E31 E52 E71 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-94 |
| By: | Lukasz Grzybowski (University of Warsaw, Faculty of Economic Sciences); Valentin Lindlacher (TU Dresden); Onkokame Mothobi (University of Witwatersrand) |
| Abstract: | In this paper, we investigate the effects of non-exclusive agreements between networks of mobile money agents on mobile network operator choices, using survey data from Tanzania conducted in 2017. By combining survey responses with geo-location data and information on agent proximity, we employ discrete choice models to analyze consumers’ decisions in subscribing to mobile network operators and their corresponding mobile money providers. Our findings highlight the significant influence of the distance to mobile money agents on consumers’ subscription choices. To explore the impact of interoperability (non-exclusivity) at the mobile money agent level, where consumers can use the nearest agent from any mobile money provider, we assess its effects on market shares of mobile network operators. Our results indicate that interoperability at the agent level has only a minor impact on market shares. Smaller operators experience marginal gains as their consumers can now utilize agents of larger providers, which are often closer in proximity. In conclusion, we find that interoperability at the agent level does not considerably alter the market structure in the context Tanzania during the period under consideration. |
| Keywords: | Mobile money, interoperability |
| JEL: | O16 O18 O33 L86 L96 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2024-22 |
| By: | Ambrocio, Gene; Haavio, Markus; McClung, Nigel |
| Abstract: | We show that sacrifice ratios associated with announcements of the most likely course of monetary policy are lower when the implementation date is further out into the future in the basic New Keynesian framework. This is not due to forward guidance puzzle effects and holds even when agents' expectations feature cognitive discounting. Nevertheless, the rate at which sacrifice ratios fall with the implementation horizon is attenuated by the intensity of cognitive discounting. We also show that our results also hold in a model with additional real and nominal rigidities. These results indicate that telegraphing the most likely course of action for monetary policy attenuates the effects on output relative to inflation. |
| Keywords: | monetary policy announcements, sacrifice ratio, cognitive discounting |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306368 |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | Researchers typically compare inflation in the new Keynesian (NK) model to published inflation measures constructed from indices like the CPI. Inflation in the standard NK model without price indexation is bounded above. The model analogue of fixed-weight inflation measures, like the CPI, is not. When inflation is in the range of values observed after 2021, there is a substantial difference between model-based and fixed-weight measures of inflation. This finding poses a challenge to using linear approximations to the NK model in environments with moderately high inflation and implies that analysts should construct data-consistent model analogues when assessing the NK model. |
| Keywords: | New keynesian model; Inflation |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-95 |
| By: | Morshed, Monzur |
| Abstract: | Bangladesh is a developing country with a population of over 160 million people and a GDP of $437.42 billion USD (2023). The country is reeling from inflation that is forecast to be about 9-10% this year. The increase stems mainly from global disruptions, dependence on imports and a weakening currency. Although the government has endeavored to contain inflation with more restrictive monetary policies and subsidies, these are not inclusive due to budget constraints and slow growth of the economy. Structural reforms are also required to promote local production as opposed to relying on imports. If global circumstances improve, inflation may fall back to something similar to 5-6%. A well-coordinated strategy is key to managing inflation, fostering growth, and ensuring long-term stability. |
| Date: | 2024–12–28 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:pe9tm |
| By: | Fatih Altunok (Central Bank of the Republic of Turkey); Yavuz Arslan (University of Liverpool Management School); Steven Ongena (University of Zurich) |
| Abstract: | While higher interest rates increase the payments for borrowers with adjustable-rate mortgages (ARMs), cutting their disposable income, higher rates also increase lenders' interest income strengthening their balance sheets. We find, correspondingly, that-when monetary conditions tighten-banks with higher ARM shares see their stock prices increase, supply more credit, and obtain higher interest income compared to banks with lower ARM shares. Therefore, more ARM credit outstanding may weaken monetary policy transmission. And during a financial crisis, when interest income becomes critical for banks, reductions in interest rates may be challenging for those banks with very high ARM shares. |
| Keywords: | Monetary policy, Adjustable rate mortgages, Fixed-rate mortgages |
| JEL: | E50 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2465 |
| By: | Gerelmaa Bayarmagnai; Punnoose Jacob (Reserve Bank of New Zealand) |
| Abstract: | • This Note assesses inflation in New Zealand through the lens of the Bernanke-Blanchard (2023) model. The framework decomposes price and wage inflation to the individual contributions of supply shortages, labour market pressures, food and energy prices and productivity. • The historical decomposition of headline inflation over the past four years suggests that supply shortages and labour market tightness have contributed significantly to inflation. The contributions of more direct factors such as the prices of food and energy have been lower and less persistent. • In the absence of pandemic-related shocks, and supply disruptions due to war and weather events, annual headline inflation in New Zealand would have remained just below 2%, the mid-point of the RBNZ’s target band, by early 2024. • The sizable contributions of labour market tightness to inflation distinguishes the New Zealand economy from its peers in the advanced world. In most other countries, supply shortages and food and energy prices have contributed more materially to inflation. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nzb:nzbans:2024/03 |
| By: | Boris Hofmann; Cristina Manea; Benoit Mojon |
| Abstract: | Monetary theory and central bank doctrine generally prescribe a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. The Taylor–type rules used so far to describe central banks' reaction functions assume instead a uniform response of policy rates to inflation irrespective of its drivers. In this paper, we refine the specification of these policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. Estimates of the new targeted rule for the United States show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New Keynesian model to discuss the properties of the new type of monetary policy rule in terms of business cycle fluctuations and welfare. |
| Keywords: | monetary policy trade–offs, targeted Taylor rules, inflation targeting |
| JEL: | E12 E3 E52 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1234 |
| By: | Geoffrey R. Dunbar |
| Abstract: | Household inflation can be decomposed into three terms that reflect nominal expenditure, real quantities and household preferences, using the money pump proposed by Echenique, Lee and Shum (2011). I quantify the importance of changes in household preferences on household inflation rates using 11 years of scanner data for 11, 000 US households. I then analyze the effect of monetary policy on household inflation using the monetary policy shocks from Nakamura and Steinsson (2018). I find that monetary policy news shocks affect household inflation through the expenditure and preferences channels for 12 months from the date of the shocks, and that federal funds rate shocks affect inflation through the same channels at a horizon of 13–24 months. The results suggest that changes in household preferences are an important driver of inflation dynamics at the household level. |
| Keywords: | Inflation and prices; Monetary policy transmission |
| JEL: | D12 E52 E58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-45 |
| By: | Mr. JaeBin Ahn; Euihyun Bae; Jing Zhou |
| Abstract: | The U.S. economy has been exceeding expectations amid one of the most aggressive monetary policy tightening cycles. This paper provides firm-level evidence showing that abundant cash holdings enable firms to benefit from higher interest rates, thereby reducing net interest payments and mitigate the adverse impact from interest rate hikes to firms' investment and employment. |
| Keywords: | Corporate cash; Monetary policy transmission; Interest income; Interest expense; Net interest payment; cash holding; tightening JaeBin Ahn; Monetary tightening; Interest payments; Income; Employment; Capital spending; North America; Global |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/245 |
| By: | Diessner, Sebastian |
| Abstract: | Post-crisis accounts of economic governance in Europe have often analysed the monetary policy decisions of the supranational European Central Bank and the fiscal policy coordination of the intergovernmental Council and Eurogroup separately. This is unfortunate since both policy fields are closely linked and increasingly interdependent. We put forward a theory of monetary-fiscal interactions in the Economic and Monetary Union based on the notion of de-commitment and re-commitment. In juxtaposition to the grand theories of neo-functionalism and liberal intergovernmentalism, we argue that EU institutions serve not only to tie the member states to policy commitments but also to untie them from previous policy commitments that have become outdated and harmful. The European Central Bank’s main contribution to safeguarding the Eurozone in 2012 and 2020 has not been to enforce but to relax the monetary financing prohibition of the Treaty, and the Council’s main contribution in 2020 was not to double down on the no bail-out clause but to re-commit to risk-sharing and burden-sharing through the NextGenerationEU programme. We argue and show that economic governance in Europe has progressed through three stages of commitment. Whereas monetary-fiscal interactions followed a commitment logic during the first decade of the Economic and Monetary Union (the “old normal”), the defining feature of the second decade has been de-commitment (the “new normal”). In the Covid-19 crisis, economic governance finally entered a phase of re-commitment (taking the Economic and Monetary Union “back to the future”). The analysis has implications for our understanding of the purpose and power of supranational institutions in overcoming the problem of outdated commitments post-crisis. |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:vwrgs |
| By: | Federle, Jonathan-Julian; Mohr, Cathrin; Schularick, Moritz |
| Abstract: | We study the political consequences of inflation surprises, focusing on votes for extremist and populist parties in 365 elections in 18 advanced economies since 1948. Inflation surprises are regularly followed by a substantial increase in vote shares of extremist, anti-system, and populist parties. An inflation surprise of 10 percentage points leads to a 15% increase in their vote share, comparable to the increase typically seen after financial crises. We show that the change in voting behavior is particularly pronounced when real wages decline, and less evident when real wages are not affected. Our paper points to considerable political after-effects of unexpected inflation. |
| Keywords: | Inflation, Economic Voting, Extremism, Populism, Radicalization |
| JEL: | D72 E31 N40 N10 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:308099 |
| By: | Fiorella De Fiore; Alexis Maurin; Andrej Mijakovic; Damiano Sandri |
| Abstract: | We analyse the media's role in channelling information about the Fed's monetary policy stance to the public. Using LLMs, we find a tight correspondence between FOMC communication and media coverage, although with significant variation over time. The communication pass-through weakened during the ZLB period and improved with the introduction of press conferences, which now exert strong influence on the media. Media coverage effects households' inflation expectations, particularly when inflation is high and volatile, while we do not detect a direct impact of FOMC communication. This underscores the media's crucial function in channelling central banks' communication to the public. |
| Keywords: | central bank communication, media coverage, large language models, households' expectations |
| JEL: | E50 E52 E58 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1231 |
| By: | Cormun, Vito; Ristolainen, Kim |
| 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 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306349 |
| By: | Allayioti, Anastasia; Gόrnicka, Lucyna; Holton, Sarah; Martínez Hernández, Catalina |
| Abstract: | We document that about 33% of the core inflation basket in the euro area is sensitive to monetary policy shocks. We assess potential theoretical mechanisms driving the sensitivity. Our results suggest that items of a discretionary nature, as reflected in a higher share in the consumption baskets of richer households, and those with larger role of credit in financing their purchase, tend to be more sensitive.Non-sensitive items are more frequently subject to administered prices and include non-discretionary items such as rents and medical services. Energy intensity does not seem to drive our results and the sensitive items are not dominated by durable goods, but are relatively evenly split between goods and services. Estimations over different samples show that the impact of monetary policy shocks on sensitive core inflation has become larger recently. JEL Classification: E30, E50, C32 |
| Keywords: | BVAR, euro area, inflation, monetary policy |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243003 |
| By: | Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik; João Barata R. B. Barroso |
| Abstract: | This paper estimates the impact of countercyclical reserve requirements (RRs) on credit. We explore differential bank exposure to RRs in matched bank-firm loan-level data from Brazil, where RRs have been used extensively to pursue financial stability. We find that, after tightening RRs, more exposed banks reduce credit to firms; after loosening, they expand credit supply. During booms, private domestic banks with lower capital adequacy are more responsive to a tightening of RRs and to a simultaneous tightening of the short-term policy rate. We also find that higher levels of economic policy uncertainty weaken this channel, and real effects in employment are modest |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:607 |
| By: | Maybrit Wachter; Christian R. Proano; Juan Carlos Pena |
| Abstract: | This paper revisits the “one-size-fits-all†challenge posed by the European Central Bank’s (ECB) monetary policy within the heterogeneous economic landscape of the euro area. Using a dataset spanning from 1999Q1 to 2019Q4 for the ECB interest rate and from 2004Q4 onwards for the Wu-Xia shadow rate, we compute country-specific hypothetical Taylor rates across EU-11 countries and examine the dynamic effects of the difference between these rates and the actual ECB policy rate, the so-called Taylor Rate Gaps (TRGAPs), on GDP growth, inflation, unemployment, and government debt. Employing panel and country-specific local projections, our findings reveal that positive TRGAPs negatively impact economic growth, with this effect being more pronounced in periphery countries compared to core countries. The analysis highlights the limitations of a uniform monetary policy in addressing the diverse economic conditions within the euro area, suggesting the need for a more tailored approach to foster balanced and sustainable growth across the region. |
| Keywords: | monetary policy, Taylor Rule, euro area, economic growth, interest rate gap |
| JEL: | E52 E5 C23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-77 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve. |
| Keywords: | menu costs; inflation; Phillips curve |
| JEL: | E12 E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99183 |
| By: | Joao Guerreiro (University of California, Los Angeles); Jonathon Hazell (London School of Economics; Centre for Economic Policy Research); Chen Lian (University of California, Berkeley; National Bureau of Economic Research); Christina Patterson (University of Chicago; National Bureau of Economic Research) |
| Abstract: | How costly is inflation to workers? Answers to this question have focused on the path of real wages during inflationary periods. We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises. We study a menu-cost style model, where workers choose whether to engage in conflict with employers to secure a wage increase. We show that, following a rise in inflation, wage catch-up resulting from more frequent conflict does not raise welfare. Instead, the impact of inflation on worker welfare is determined by what we term “wage erosion”—how inflation would lower real wages if workers’ conflict decisions did not respond to inflation. As a result, measuring welfare using observed wage growth understates the costs of inflation. We conduct a survey showing that workers are willing to sacrifice 1.75% of their wages to avoid conflict. Calibrating the model to the survey data, the aggregate costs of inflation incorporating conflict more than double the costs of inflation via falling real wages alone. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2440 |
| By: | Angeloni, Ignazio |
| Abstract: | In this paper, the ECB monetary policy stance is assessed by comparing the recent tightening cycle (2022-today) with the two preceding ones, which took place in 2000-2001 and in 2006-2008. Interest rates, quantitative indicators and monetary conditions indices (MCIs) are used for this purpose. The main finding is that at the peak of the latest tightening cycle, the ECB monetary policy stance was no more restrictive than it was at the peak of the two preceding ones; actually, probably less. This contrasts with the fact that in the more recent case inflation was higher and more persistent than in the two earlier episodes. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 4 December 2024. |
| Keywords: | ECB Monetary Policy Stance, Tightening Cycle, Inflation |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewh:308084 |
| By: | Ehrmann, Michael |
| Abstract: | Trust in the central bank is an essential ingredient for a successful conduct of monetary policy. However, for many central banks trust has recently declined, for instance in the wake of the post-pandemic inflation surge, due to large errors in central banks’ inflation forecasts, or given problems when exiting from forward guidance. The rapid, substantial and persistent erosion of trust makes it clear that trust needs to be earned continuously. This paper reviews why trust is important, what determines it and how central banks can enhance it. It also argues that it is important for central banks to improve the measurement and monitoring of trust. It ends by highlighting some future challenges for maintaining trust. JEL Classification: E52, E58, G53 |
| Keywords: | central banks, credibility, inflation expectations, monetary policy, trust |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20243006 |
| By: | Knut Are Aastveit; Hilde C. Bjornland; Jamie L. Cross; Helene Olsen Kalstad |
| Abstract: | After decades of a stable environment with low inflation in most advanced economies, global inflation rates surged unexpectedly during the pandemic and have remained elevated since. This paper demonstrates that inflation expectations have significantly amplified the global demand and supply shocks triggered by the pandemic, playing a crucial role in sustaining elevated inflation in the post-pandemic regime. We establish this finding by applying a structural vector autoregression model that includes various shocks to global demand and supply, along with domestic inflation and inflation expectations, across six economies: the United States, Canada, New Zealand, the Euro area, the United Kingdom, and Norway. First, we document that global demand and supply shocks in the oil market, as well as disruptions in global supply chains, have been major drivers of the recent inflation surge in all these economies. Then, through various counterfactual exercises, we demonstrate that inflation expectations generally amplify the transmission of global shocks to inflation — particularly in Canada, New Zealand, and the US during the post-pandemic period. As a result, managing inflation expectations should remain a crucial policy objective to mitigate their amplifying effects on inflation. |
| Keywords: | post-pandemic regime, inflationary expectations, elevated inflation, oil prices, supply chain pressures |
| JEL: | E31 C11 C32 D84 Q41 Q43 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-68 |
| By: | Fengler, Matthias; Koeniger, Winfried; Minger, Stephan |
| Abstract: | We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund. |
| Keywords: | Liquidity, Monetary policy, Option order books, Option markets, COVID-19 pandemic |
| JEL: | G13 G14 D52 E52 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:usg:econwp:2025:01 |
| By: | Walter Engert; Oleksandr Shcherbakov; André Stenzel |
| Abstract: | We investigate the introduction of a central bank digital currency (CBDC) into the market for payments. Focusing on the point of sale, we develop and estimate a structural model of consumer adoption, merchant acceptance and usage decisions. We counterfactually simulate the introduction of a CBDC, considering a version with debit-like characteristics and one encompassing the best of cash and debit, and characterize outcomes for a range of potential adoption frictions. We show that, in the absence of adoption frictions, CBDC has the potential for material consumer adoption and merchant acceptance, along with moderate usage at the point of sale. However, modest adoption frictions substantially reduce outcomes along all three dimensions. Incumbent responses required to restore pre-CBDC market shares are moderate to small and further reduce the market penetration of CBDC. Overall, this implies that an introduction of CBDC into the market for payments is by no means guaranteed to be successful. |
| Keywords: | Bank notes; Digital currencies and fintech; Econometric and statistical methods; Financial services |
| JEL: | C51 D12 E42 L14 L52 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-52 |
| By: | Verona, Fabio |
| Abstract: | This paper addresses the challenge of inflation forecasting by adopting a thick modeling approach that integrates forecasts from time- and frequency-domain models. Frequency-domain models excel at capturing long-term trends while also accounting for short-term fluctuations. Combining these models with traditional approaches leverages their complementary strengths, resulting in forecasts that consistently outperform individual methods, especially during periods of heightened inflation volatility. By pooling insights from diverse modeling frameworks, this study provides a robust and effective strategy for improving inflation forecasts across different horizons. |
| Keywords: | inflation forecasting, forecast combination, wavelets, Haar filter, time-varying parameters, Phillips curve |
| JEL: | C32 C53 E31 E37 E43 E44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:308098 |
| By: | Mitchener, Kris James (Santa Clara University, CAGE, CESifo, CEPR & NBER); Wandschneider, Kirsten (University of Vienna) |
| Abstract: | The Great Depression is the canonical case of a widespread currency war, with more than 70 countries devaluing their currencies relative to gold between 1929 and 1936. What were the currency war’s effects on trade flows? We use newly-compiled, high- frequency bilateral trade data and gravity models that account for when and whether trade partners had devalued to identify the effects of the currency war on global trade. Our empirical estimates show that a country’s trade was reduced by more than 21% following devaluation. This negative and statistically significant decline in trade suggests that the currency war destroyed the trade-enhancing benefits of the global monetary standard, ending regime coordination and increasing trade costs. |
| Keywords: | currency war, monetary regimes, gold standard, competitive devaluations, “beggar thy neighbor, †gravity model JEL Classification: F14, F33, F42, N10, N70 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cge:wacage:740 |
| By: | Rachael Grant; Kate Poskitt (Reserve Bank of New Zealand) |
| Abstract: | A new Analytical Note measures monetary policy surprises and assesses their effects on financial market instruments. Understanding the effects of monetary policy surprises on financial markets is key given the importance of central bank communication and the role financial markets play in the transmission of monetary policy. The Analytical Note shows that material monetary policy surprises – defined as instances where market pricing for the OCR immediately prior to an announcement is more than 5 basis points different from the announced rate – are relatively rare. Since 2006, fewer than 1 in 5 OCR announcements resulted in a material monetary policy surprise. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nzb:nzbans:2024/08 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | We develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator—a feedback loop between inflation and the fraction of price changes—that significantly increases the slope of the Phillips curve during periods of high inflation. Applied to the U.S. time series, our model predicts that the slope of the Phillips curve ranges from 0.02 in the 1990s to 0.12 in the 1970s and 1980s. |
| Keywords: | Phillips curve; inflation; price rigidities |
| JEL: | E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99192 |
| By: | Ms. Nan Li; Sergii Meleshchuk |
| Abstract: | This paper estimates, for the first time, the exchange rate elasticity of bilateral trade in services, providing indirect evidence of both producer currency pricing and dominant currency pricing in services trade. We developed a novel dataset of bilateral trade flows in services, covering twelve broad service sectors across 245 countries from 1985 to 2022. We find that, similar to manufacturing trade, the value of services trade is more closely associated with US dollar exchange rates than with bilateral exchange rates, although this relationship varies by service category. Zeroing in on tourism, where proxies for trade volume (such as tourist arrivals and hotel stays) are available, we find that bilateral exchange rates play a larger role on tourism volume compared to the dollar exchange rates. In addition, in the context of global supply chain, we find that downstream dollar exchange rate movements, rather than downstream bilateral exchange rates, affect the demand for service imports via forward linkages. |
| Keywords: | trade in services; exchange rates; dominant currency pricing; producer currency pricing; global value chain; dollar exchange rate movement; pricing in service; exchange rate elasticity; currency pricing; Currencies; Trade balance; Exports; Global |
| Date: | 2024–11–22 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/242 |
| By: | Zhesheng Qiu; Yicheng Wang; Le Xu; Francesco Zanetti |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index that weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages |
| Date: | 2025–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1064 |
| By: | Honkapohja, Seppo; McClung, Nigel |
| Abstract: | Properties of average inflation targeting under imperfect knowledge and learning have been studied only for the Rotemberg NK model, where price stickiness arises from adjustment costs in price setting. This note fills the gap by studying average inflation targeting in the NK model with Calvo price stickiness. It is shown that in this setting the two models have the same basic properties, unless the central bank aggressively stabilizes output instead of average inflation. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306369 |
| By: | Sohei Kaihatsu (Bank of Japan); Shogo Nakano (Bank of Japan); Hiroki Yamamoto (Bank of Japan) |
| Abstract: | This paper examines the impact of shifts in long-term inflation expectations on economic activity and price dynamics in Japan using a time-varying parameter vector autoregressive (TVP-VAR) model. Our empirical findings demonstrate that exogenous positive shocks to long-term inflation expectations improve the output gap and generate upward pressure on inflation rates. These results suggest the existence of an "expectations channel" in Japan, whereby higher inflation expectations stimulate private sector spending through mechanisms such as reducing real funding costs. Looking at the analysis by period, it indicates that during the deflationary phase of the 2000s, declining long-term inflation expectations likely contributed to persistent downward pressure on prices, potentially serving as one factor that hindered Japan's exit from sustained deflation. However, following the introduction of the "price stability target" and Quantitative and Qualitative Monetary Easing (QQE) in 2013, this contribution reversed, appearing to exert upward pressure on inflation rates. In this respect, the findings suggest that the "management of expectations" intended by monetary policy during this period demonstrated some effectiveness. Nevertheless, as inflation rates subsequently declined, the upward contribution of inflation expectations to the inflation rate diminished, failing to anchor expectations to the price stability target. This outcome suggests the inherent difficulty in maintaining a sustained influence on long-term inflation expectations. |
| Keywords: | Inflation Expectation; Inflation; TVP-VAR; Monetary Policy |
| JEL: | C32 E31 E52 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e18 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve. |
| Keywords: | menu costs; inflation; Phillips curve |
| JEL: | E12 E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99190 |
| By: | Bauer, Michael D.; Offner, Eric A.; Rudebusch, Glenn D. |
| Abstract: | Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric methods, and sample periods, and it is not explained by other firm characteristics. This evidence suggests that higher interest rates may not skew investment away from a sustainable transition. |
| Keywords: | monetary transmission, carbon premium, ESG, climate finance |
| JEL: | E52 G14 Q54 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:308032 |
| By: | Shira Buzaglo-Baris (Bank of Israel) |
| Abstract: | This paper investigates the effect of wage inflation on price inflation and vice versa, using industry-level data from Israel for identification. Various methodologies are employed to evaluate the wage inflationary effect, which yield consistent estimates of the pass-through from wage to price inflation. The findings suggest that a 10% increase in monthly wages is associated with a 1%-3% cumulative rise in prices a year ahead, an effect that gradually decreases in the following months. The analysis is extended to include the reversed effect of headline inflation on wages, thereby completing the wageprice spiral perspective. I find that within a year wages slowly adjust to catch up with an inflation shock. Lastly, the paper presents some evidence of a stronger relationship during the aftermath of the COVID-19 pandemic, albeit with considerable uncertainty. To a certain degree, the results indicate that labor market inflationary pressures may be higher than previously thought. |
| Keywords: | Wage-price spiral, pass-through, inflation dynamics |
| JEL: | E24 E31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.09 |
| By: | Guangling Liu; Marrium Mustapher |
| Abstract: | This study examines how different policy mix regimes affect the impact of recent US contractionary monetary policy on South Africa's inflation and business cycles. The study uses a small open economy New Keynesian Dynamic Stochastic General Equilibrium model with an integrated fiscal block to analyse these effects. Regime M (active monetary policy) is more effective at containing the spillover effects but leads to higher public debt, requiring larger future fiscal surpluses. |
| Keywords: | Monetary and fiscal policy, Spillovers, New Keynesian models, Dynamic stochastic general equilibrium model, Policy coordination |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-68 |
| By: | Wilmer Martínez-Rivera; Edgar Caicedo-García; Juan Bonilla-Pérez |
| Abstract: | This article studies the relationship between instantaneous and year-on-year inflation and the benefit of the forecast performance using instantaneous as a predictor. Instantaneous inflation is a transformation of year-on-year inflation, assigning different weights to each month of the Consumer Price Index (CPI) used to calculate the year-on-year inflation. We study the relationship using the Coincident Profile, which allows us to determine whether instantaneous inflation is coincident or anticipates the dynamic of year-on-year inflation. This finding establishes the lag order of the VAR, VECM, and ARIMAX models. Once we fit these models, we forecast year-on-year inflation and evaluate the predictive capacity. We found that instantaneous inflation helps to improve the forecast performance, beating the performance of an ARIMA model and more complex models that use a large set of predictors in several evaluation periods in the near and medium term.We developed three empirical exercises using data from Colombia, the United States, and the United Kingdom to evaluate this approach; in the three cases, we found betterment using instantaneous inflation as a predictor. **** RESUMEN: En este documento estudiamos la relación entre la inflación instantánea y la inflación anual y las ventajas de incluir la inflación instantánea como predictor en el desempeño de pronóstico de la inflación anual. La inflación instantánea ofrece una perspectiva más dinámica sobre la inflación, asignando pesos variables al Índice de Precios al Consumidor (IPC) en los usados para el cálculo de la inflación anual. Nosotros estudiamos la relación por medio del Perfil Coincidente, el cual permite establecer si la inflación instantánea y anual son contemporáneos o si una antecede la dinámica de la otra. Este hallazgo es usado para establecer el orden autorregresivo de modelos VAR, VECM y ARIMAX. Una vez estos modelos son ajustados, pronosticamos la inflación anual y evaluamos su capacidad predictiva. Nosotros encontramos que la inflación instantánea ayuda a mejorar los pronósticos de la inflación anual mejorando el desempeño de modelos como el ARIMA y modelos más complejos que incluyen un conjunto amplio de predictores a horizontes de corto y mediano plazo. Nosotros desarrollamos tres ejercicios empíricos para evaluar la metodología propuesta incluyendo datos para Colombia, Estados Unidos y Reino Unido. Los resultados de la evaluación de pronósticos en los tres casos muestran que la inflación instantánea como predictor ayuda a mejorar los pronósticos de la inflación anual. |
| Keywords: | Instantaneous Inflation, Coincident Profile, Forecast Evaluation, Inflación instantánea, Perfil coincidente, Evaluación de pronósticos |
| JEL: | C52 E17 E31 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1296 |
| By: | Michael D. Bordo; Edward Simpson Prescott |
| Abstract: | We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on banking policy in the 1950s and 1960s. We document that demand for research and analysis was driven by banking industry developments and legal changes that required the Federal Reserve and other banking regulatory agencies to develop guidelines for bank mergers. In response to these developments, the Board and the Reserve Banks hired industrial organization economists and young economists out of graduate school who brought in the leading theory of industrial organization at the time, which was the structure, conduct, and performance (SCP) paradigm. This flow of ideas into the Federal Reserve from academia paralleled the flow that was going on in monetary policy and macroeconomics at the time and contributed to the increased professionalization of research at the Federal Reserve. We document how several Reserve Banks, particularly Boston and Chicago, innovated by creating dissertation support programs, collecting specialized data, and creating the Bank Structure Conference, which became the clearinghouse for academic work on bank structure and later for bank risk and financial stability. We interpret these examples as illustrating an advantage that a decentralized central bank has in the production of knowledge. |
| Keywords: | Federal Reserve System; banking; industrial organization; financial regulation; governance |
| JEL: | B2 E58 G2 H1 L1 |
| Date: | 2025–01–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99372 |
| By: | Simon C. Smith; Alexander L. Wolman |
| Abstract: | From 1995 through February 2020 – a period when inflation was relatively low and stable – the rate of monthly total Personal Consumption Expenditures (PCE) inflation was tightly related to a measure of asymmetry in the distribution of price changes of its subcomponents. We document that relationship and use it to construct an "inflation Filter" to distinguish inflation that is broad-based from that which is idiosyncratic (explained by price changes in a small share of subcomponents). Our "Inflation Filter" can be viewed as a standard diffusion index in which the threshold each month is set equal to that month's inflation rate, allowing it to vary through time. In contrast to standard diffusion indexes that use an ad hoc time-invariant threshold, our approach generates considerable explanatory power for the rate of inflation in the pre-COVID period. This makes it useful for evaluating in real time whether inflation is returning to pre-pandemic norms. |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-12-20-3 |
| By: | Claudio Borio |
| Abstract: | From its tentative beginnings, inflation targeting has spread to become the de facto global monetary standard. Historically, only the Gold Standard has had a longer lifespan. Inflation targeting has done its job: helping to hardwire a low-inflation regime, even in the face of the post-Covid inflation surge. But the journey has been far from easy. Inflation targeting had to contend with the rise of financial instability, most spectacularly in the form of the Great Financial Crisis. In the wake of that crisis, it struggled to push inflation back up to point targets, and it saw a historical erosion in the room for policy manoeuvre. This paper assesses these challenges and considers possible adjustments to the framework. These include more systematic consideration of the longer-term damage that financial factors can cause to the economy and of the importance of safety margins in the conduct of policy. And all this should be grounded on a clear recognition of what monetary policy can and cannot deliver. |
| Keywords: | monetary policy, business cycle, financial cycle, inflation targeting, deflation, natural interest rate |
| JEL: | E43 E51 E52 E58 E31 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1230 |
| By: | J. Scott Davis; Andrei Zlate |
| Abstract: | This paper looks at the effect of fluctuations in the global financial cycle on real exchange rates (RER). We show that, on average, a downturn in the global financial cycle leads to RER depreciation relative to the U.S. dollar. However, quantitatively there is considerable heterogeneity in the RER responses among advanced, emerging and developing economies; between net creditor and net debtor countries; and also over time. Prior to 2007, the global financial cycle had less effect on advanced than on emerging market economies' RER, whereas post-2007 the effect was about the same in the two groups of countries. Finally, we decompose the RER changes into changes in the nominal exchange rate and changes in aggregate price levels. We find that in advanced economies, nearly all RER adjustment occurred through nominal exchange rates throughout the sample period. In the emerging and developing economies, the RER adjustment was mixed prior to 2007, when changes in the RER were driven by both nominal exchange rate changes and inflation differentials, whereas nominal exchange rate adjustments dominated post-2007. |
| Keywords: | global financial cycle; real exchange rates |
| JEL: | F3 F4 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99214 |
| By: | Lukasz Grzybowski (University of Warsaw, Faculty of Economic Sciences); Valentin Lindlacher (TU Dresden); Onkokame Mothobi (University of Witwatersrand) |
| Abstract: | In this paper, we utilize survey data collected in 2017 from 12, 735 individuals across nine Sub-Saharan African countries. We merge the survey data with geographic information related to the proximity of mobile network towers and banking facilities, based on the geo-locations of the respondents. Our estimation approach comprises a two-stage model. In the first stage, consumers make choices between adopting a feature phone or a smartphone. In the second stage, they make decisions regarding the use of mobile money services. Our findings reveal that network coverage significantly influences the adoption of mobile phones. Moreover, we observe that mobile money services are more favored by younger and relatively wealthier individuals for sending money, while older individuals and those with lower incomes tend to use mobile wallets for receiving money. Consequently, mobile money services facilitate younger migrant workers residing in areas with better infrastructure in providing support to their older relatives in less developed regions. |
| Keywords: | Mobile money, Sub-Saharan Africa, Financial inclusion |
| JEL: | O12 O16 O18 O33 L86 L96 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2024-20 |