Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors

We explore the growth and welfare effects of monetary policy in a two-sector Schumpeterian economy with cash-in-advance (CIA) constrained R&D investment in both sectors. We show that a nominal interest rate increase generates two effects on equilibrium labor allocation: a manufacturing-R&D-reallocation effect and a cross-R&D-sector effect. The former reduces economic growth by shifting labor from R&D to production, whereas the latter can enhance it by shifting labor from the less productive R&D sector to the more productive one. Unless the high productivity R&D sector is severely more CIA-constrained than the low productivity one, aggregate R&D overinvestment is sufficient but not necessary ..

Monetary Economics

Liquidity, Capital Pledgeability and Inflation Redistribution

We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the..

Monetary Economics

Estimating the elasticity of consumer prices to the exchange rate: an accounting approach

We analyse the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate, using world input-output tables (WIOT) from 1995 to 2019. In line with the existing literature, we find a modest output-weighted elasticity of around 0.1. This elasticity is stable over time but heterogeneous across countries, ranging from 0.05 to 0.22. Such heterogeneity mainly reflects differences in foreign product content of consumption and intermediate products. Direct effects through imported consumption and intermediate products entering domestic production explain most of the transmission of an exchange rate appreciation to domestic prices. By contrast, indirect effects linked to p..

Monetary Economics

Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh

This paper set out to uncover the nexus between the propensity of mobile financial service (MFS) usage and inflation in Bangladesh, if any. This paper hypothesizes that the usage of MFS will lead to an increase in the velocity of money, i.e., the ease of using MFS in lieu of cash will lead to money transferring ownership quicker. All things constant, this will lead to inflation—as stipulated by the quantity theory of money. To this end, monthly data pertaining to the general price index, number of MFS agents, number of average daily MFS transactions, number of MFS clients and number of banks supporting MFS transactions have been used ranging from FY16 to FY20, subject to availability. The ..

Monetary Economics

Early monetary policies of the Tokugawa shogunate and merchants f coping strategies: 1695?1736

The Tokugawa monetary system was a new experience in Japanese history, and the Genroku debasement, which was necessitated by the exhaustion of gold and silver resources, was a new experiment for both the shogunate and merchants, the representatives of the townspeople. For the same reason, the shogunate had no choice but to implement a monetary policy gnominalistically, h but the merchants responded gmetallistically. h This was because the merchants valued money as bullion. The conflict between the shogunate and merchants played an important role in invigorating the Tokugawa economy. This study describes the historical economic situation.

Monetary Economics

Does money growth tell us anything about inflation?

Economists and central bankers no longer consider monetary aggregates relevant for inflation forecasts. We explain this neglect by advancing and testing the hypothesis that monetary aggregates are only relevant for inflation in unsettled monetary and inflationary conditions. When inflation is basically stable around the central bank target (1.9 percent), as it has been in most of the last two decades, there is no apparent relationship between monetary aggregates and inflation....

Monetary Economics

TLTROs and collateral availability in Italy

In response to the Covid-19 pandemic, the ECB has adopted a broad set of measures aimed at ensuring that banks maintain wide access to central bank liquidity. In an environment where refinancing operations are conducted under a full allotment regime, it is important to analyse whether collateral scarcity might have influenced participation in the TLTRO-III operations and the contribution made by collateral easing measures. The analysis shows that the collateral availability of the Italian banking system proved to be adequate and it allowed Italian banks to benefit from the favorable conditions introduced under the TLTRO-III programme. For almost all the banks, the absence of collateral easin..

Monetary Economics

Optimal Monetary Policy According to HANK

We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households’ unequal exposures to aggregate shocks. Simple target criteria summarize the planner’s trade-off between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and th..

Monetary Economics

Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases

This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a 30-minute window around Federal Reserve announcements, allowing me to identify the separate contributions of..

Monetary Economics

It's not always about the money, sometimes it's about sending a message: Evidence of Informational Content in Monetary Policy Announcements

This paper introduces a transparent framework to identify the informational content of FOMC announcements. We do so by modelling the expectations of the FOMC and private sector agents using state of the art computational linguistic tools on both FOMC statements and New York Times articles. We identify the informational content of FOMC announcements as the projection of high frequency movements in financial assets onto differences in expectations. Our recovered series is intuitively reasonable and shows that information disclosure has a significant impact on the yields of short-term government bonds.

Monetary Economics

O Tell Me The Truth About Central Bank Digital Currency

Monetary Economics

What goes around comes around: How large are spillbacks from US monetary policy?

We quantify spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model estimated on data for the time period from 1990 to 2019. We find that spillbacks account for a non-trivial share of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock. Our analysis suggests that spillbacks materialise as Tobin’s q/cash flow and stock market wealth effects impinge on US investment and consumption. Contractionary US monetary policy depresses foreign sales of US firms, which reduces their valuations/cash flows and thereby induces cutbacks..

Monetary Economics

Bank Money Creation and the Payments System

This article investigates how the role that banks play in the payment system space affects their money creation power and process. In particular, the article analyzes how the payments market share of each bank affects its money creation power and how payment settlement technologies and rules determine the banks’ demand for funding and, hence, their money creation power. Also, as the power to create money enables money creators to extract extra-profits or rents ("seigniorage") from the economy, the article evaluates analytically how banks extract seigniorage through money creation and how bank seigniorage differs from profits from pure financial intermediation. By showing the central role t..

Monetary Economics

Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective

Theory suggests the existence of a bi-directional relationship between stock market volatility and monetary policy rate uncertainty. In light of this, we forecast volatilities of equity markets and shadow short rates (SSR) - a common metric of both conventional and unconventional monetary policy decisions, by applying a bivariate Markov-switching multifractal (MSM) model. Using daily data of eight advanced economies (Australia, Canada, Euro area, Japan, New Zealand, Switzerland, the UK, and the US) over the period of January, 1995 to March, 2021, we find that the bivariate MSM model outperforms, in a statistically significant manner, not only the benchmark historical volatility and the univa..

Monetary Economics

"Welfare Costs of Exchange Rate Fluctuations: Evidence from the 1972 Okinawa Reversion"

The main tenet of the New Keynesian (NK) paradigm is that price dispersion caused by nominal price stickiness is the primary source of allocative inefficiency. This study empirically evaluates the welfare implications of NK models by observing how internal and external price dispersion responds to two types of large aggregate shocks: high inflation and sharp currency depreciation. For this purpose, we consider the history of US military deployment on a small southern island in Japan called Okinawa following the Pacific War. We investigate unique data variations in micro-level retail prices surveyed in Okinawa and mainland Japan before and after the Okinawan reversion to Japanese sovereignty ..

Monetary Economics

The Effects of Forward Guidance: Theory with Measured Expectations

We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in response to changes in the Fed’s projections about future interest rates. Respondents significantly downward-adjust their inflation expectations in response to learning about an increase in the Fed’s pro-jection about the federal funds rate three years in the future, and they expect inflation to respond most strongly immediately after the announcement. By contrast, respon-dents do not adjust their..

Monetary Economics

Forecasting with VAR-teXt and DFM-teXt Models:exploring the predictive power of central bank communication

This paper explores the complementarity between traditional econometrics and machine learning and applies the resulting model – the VAR-teXt – to central bank communication. The VAR-teXt is a vector autoregressive (VAR) model augmented with information retrieved from text, turned into quantitative data via a Latent Dirichlet Allocation (LDA) model, whereby the number of topics (or textual factors) is chosen based on their predictive performance. A Markov chain Monte Carlo (MCMC) sampling algorithm for the estimation of the VAR-teXt that takes into account the fact that the textual factors are estimates is also provided. The approach is then extended to dynamic factor models (DFM) generat..

Monetary Economics

Price Stability of Cryptocurrencies as a Medium of Exchange

We present positive evidence of price stability of cryptocurrencies as a medium of exchange. For the sample years from 2016 to 2020, the prices of major cryptocurrencies are found to be stable, relative to major financial assets. Specifically, after filtering out the less-than-one-month cycles, we investigate the daily returns in US dollars of the major cryptocurrencies (i.e., Bitcoin, Ethereum, and Ripple) as well as their comparators (i.e., major legal tenders, the Euro and Japanese yen, and the major stock indexes, S&P 500 and MSCI World Index). We examine the stability of the filtered daily returns using three different measures. First, the Pearson correlations increased in later years i..

Monetary Economics

The Impact of the ECB Banking Supervision Announcements on the EU Stock Market

We study the impact of ECB’s supervisory announcements on the Bank Stock index, from 2013 through 2017. Our evidence shows that the news, related to supervisory actions, do have highly significant effects on the market price of banks, contributing to the volatility of the Bank Stock Index for Europe and Italy. Most announcements signal the need to raise more regulatory capital and lead to negative returns in the stock market, thus increasing the cost of raising new capital. Our study is related to previous ones (by Bernanke and Kuttner) focusing on the impact of monetary policy announcements on the stock exchange.

Monetary Economics

Bank risk-taking and monetary policy transmission : Evidence from China

We study the impact of China’s 2013 implementation of Basel III on bank risk-taking and its responses to monetary policy shocks using confidential loan-level data from a large Chinese bank. Guided by theory, we use a difference-in-difference identification, exploiting cross-sectional differences in lending behaviors between high-risk and low-risk bank branches before and after the new regulations. We find that, through a risk-weighting channel, changes in regulations significantly reduced bank risk-taking, both on average and conditional on monetary policy easing. However, banks reduce risk-taking by increasing lending to ostensibly low-risk state-owned enterprises (SOEs) under government ..

Monetary Economics

Mark my words: the transmission of central bank communication to the general public via the print media

We ask how central banks can change their communication in order to receive greater newspaper coverage. We write down a model of news production and consumption in which news generation is endogenous because the central bank must draft its communication in such a way that newspapers choose to report it, while still retaining the message the central bank wishes to convey to the public. We use our model to show that standard econometric techniques that correlate central bank text with measures of news coverage in order to determine what causes central bank communication to be reported on will likely prove to be biased. We use techniques from computational linguistics combined with an event-stu..

Monetary Economics

Phase-Dependent Monetary and Fiscal Policy

This paper studies how the effects of monetary and fiscal policy vary depending on the business cycle phase. It shows that in a medium-scale DSGE model, estimated on US data, monetary policy has a stronger impact on the economy in downturns and booms. Labor and capital income taxes display similar patterns. Government expenditure shocks and consumption tax shocks, on the contrary, have a stronger impact on output in depressions and recoveries. The paper also shows that accounting for the source of business cycle fluctuations is potentially important when assessing state-dependence in policy transmission.

Monetary Economics

A Bibliography of Free Banking Scholarship (2021)

In this paper, the author provides a bibliography of major and minor scholarly writings on free banking up to mid-2021. It is helpful both for expanding knowledge of the history of free banking and for providing references that may be useful for thinking about some aspects of cryptocurrencies.

Monetary Economics

Optimal monetary policy mix at the zero lower bound

Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In response to negative demand shocks at the zero lower bound (ZLB), the optimal monetary policy consists of a mix of forward guidance and mild adjustments in the balance sheet. The presence of balance-sheet policies reduces the optimal ZLB duration and significantly improves social welfare. Mitigating the effectiveness of forward guidance calls for a more substantial balance-sheet expansion and a shorter ZLB..

Monetary Economics

The Impact of Remittances on Monetary Transmission Mechanisms during the Pre and Post-Conflict Eras in Sri Lanka

This study analyses the impact of remittances on the monetary transmission mechanism (MTM) of the Sri Lankan economy during its conflict and post-conflict eras, using monthly data from 1996 to 2009. In addition, the study focuses on how the impact of remittances varied over different intermediate transmission channels, especially credit, asset prices, and exchange rate, in transmitting monetary policy shocks to the economy. The SVAR model is used to analyse the impact of remittances in the transmission of monetary policy shock to real economic variables. The empirical findings reveal that remittances affect the MTM of Sri Lanka in the post-conflict period significantly and their impact on ba..

Monetary Economics

The Transmission Mechanism of Quantitative Easing: A Markov-Switching FAVAR Approach

This article assesses the impact of unconventional monetary policies and sheds light on their transmission mechanism in the United States. Using a three-variable Markov switching factor-augmented vector autoregression (MS-FAVAR) with time-varying transition probabilities and a shadow short-term interest rate, we allow our analysis to be free from arbitrary policy rate decisions and sample-splitting choices. By augmenting our informational set with variables able to grasp the functioning of Quantitative Easing, we can determine the differences between conventional and unconventional expansionary monetary policy shocks. Our results show a leading role for both the duration risk and the credit ..

Monetary Economics

The International Experience of Central Bank Asset Purchases and Inflation

Recent inflationary pressures in the global economy have rekindled the debate on the link between money growth and price stability. Specifically, does rapid central bank money creation resulting from large-scale purchases of government securities fuel inflationary spending by households and firms? We argue that there are many valid reasons to be skeptical about this textbook narrative. In this post, we look at the international experience with regard to asset purchases, money growth, and inflation dynamics in the pre-COVID era in an attempt to draw lessons from the recent past. Most notably, we find that the view that large-scale purchases of sovereign debt cause unmanageable inflationary pr..

Monetary Economics

Forecasting Inflation and Output Growth with Credit-Card-Augmented Divisia Monetary Aggregates

This paper investigates the performance of the Credit-Card-Augmented Divisia monetary aggregates in forecasting U.S. inflation and output growth at the 12-month horizon. We compute recursive and rolling out-of-sample forecasts using an Autoregressive Distributed Lag (ADL) model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card-augmented Divisia, and the credit-card-augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability (CFS). We find that the smallest Root Mean Square Forecast Errors (RMSFE) are attained with the credit-card-augm..

Monetary Economics

Optimal monetary policy in a two-country new Keynesian model with deep consumption habits

This study develops a two-country new Keynesian (NK) model that incorporates deep habits in consumption and investigates the macroeconomic dynamics under the optimal coordinated monetary policy. We show that in response to the structural shocks, the central bank changes the interest rate significantly in the two-country open economy model compared with the closed economy where the central bank is reluctant to move interest rates. When a deep consumption habit exists, the international central bank can exploit the terms of trade externalities. Habit formation might boost the expenditure switching effect, which differentiates the aggressiveness of the central bank between closed and open econo..

Monetary Economics

Extracting Firms' Short-Term Inflation Expectations from the Economy Watchers Survey Using Text Analysis

This paper discusses the Price Sentiment Index (PSI), a quantitative indicator of firms' outlook for general prices proposed by Otaka and Kan (2018). The PSI is developed from the textual data of the Economy Watchers Survey conducted by the Cabinet Office; it is computed by extracting firms' views from survey comments, using text analysis. In this paper, we revisit the PSI and quantitatively analyze the determinants of changes in the PSI and the relationship between the PSI and macroeconomic variables. We also address a shortcoming in the text analysis used for computing the PSI that we discover when examining the performance of the PSI since the COVID-19 outbreak. The results of our analyse..

Monetary Economics