We examine the performance stability of firms in inflation-targeting countries before and after the 2008 global financial crisis. We use the propensity score method to analyze and compare firms in inflation-targeting and non-inflation-targeting countries, including both developed and developing countries. The estimation results show that firms in inflation-targeting countries underperform in response to shocks. Our results suggest that inflation targeting does not necessarily mitigate an economy’s response to business cycle fluctuations. This implies that IT is not as effective as a monetary policy as expected from the theory.
{"title":"Does Inflation Targeting Really Matter?","authors":"Hiroshi Gunji","doi":"10.2139/ssrn.3902579","DOIUrl":"https://doi.org/10.2139/ssrn.3902579","url":null,"abstract":"We examine the performance stability of firms in inflation-targeting countries before and after the 2008 global financial crisis. We use the propensity score method to analyze and compare firms in inflation-targeting and non-inflation-targeting countries, including both developed and developing countries. The estimation results show that firms in inflation-targeting countries underperform in response to shocks. Our results suggest that inflation targeting does not necessarily mitigate an economy’s response to business cycle fluctuations. This implies that IT is not as effective as a monetary policy as expected from the theory.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"46 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125528971","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
H. Bennani, Jan Pablo Burgard, Matthias Neuenkirch
We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.
{"title":"The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model","authors":"H. Bennani, Jan Pablo Burgard, Matthias Neuenkirch","doi":"10.2139/ssrn.3738667","DOIUrl":"https://doi.org/10.2139/ssrn.3738667","url":null,"abstract":"\u0000 We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126852996","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker’s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve.
{"title":"Rationally Inattentive Monetary Policy","authors":"Joshua D. Bernstein, Rupal Kamdar","doi":"10.2139/ssrn.3923680","DOIUrl":"https://doi.org/10.2139/ssrn.3923680","url":null,"abstract":"This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker’s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125085492","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model. Going beyond previous work, we de- compose aggregate credit components into credit supply and demand flows directed at businesses, households and governments. We show that this decomposition enhances the understanding of global liquidity considerably. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial ag- gregates. Moreover, we extensively document that the prevalence of sectoral credit shocks varies across the financial cycle, characterized by financial sector risk and risk aversion. For instance, whereas household credit supply is high during financial cycle upswings, government credit supply increases in response to adverse shocks to the financial cycle. Moreover, the government sector demands credit in times of bust-episodes, whereas pri- vate entities demand credit in times of booms. To rationalize our findings, we suggest for instance that, whereas global government sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply businesses and households with credit to maximize profits along the financial cycle.
{"title":"The Credit Composition of Global Liquidity","authors":"H. Herwartz, Christian Ochsner, H. Rohloff","doi":"10.2139/ssrn.3738617","DOIUrl":"https://doi.org/10.2139/ssrn.3738617","url":null,"abstract":"We conceptualize global liquidity as global monetary policy and credit components by means of a large-scale dynamic factor model. Going beyond previous work, we de- compose aggregate credit components into credit supply and demand flows directed at businesses, households and governments. We show that this decomposition enhances the understanding of global liquidity considerably. In particular, we find that our global credit estimates explain substantial variance shares of a large panel of international financial ag- gregates. Moreover, we extensively document that the prevalence of sectoral credit shocks varies across the financial cycle, characterized by financial sector risk and risk aversion. For instance, whereas household credit supply is high during financial cycle upswings, government credit supply increases in response to adverse shocks to the financial cycle. Moreover, the government sector demands credit in times of bust-episodes, whereas pri- vate entities demand credit in times of booms. To rationalize our findings, we suggest for instance that, whereas global government sector credit supply is best understood as a safe-haven lending factor from an investors perspective, lenders supply businesses and households with credit to maximize profits along the financial cycle.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120952366","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks' unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called "monetarist" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a "desired velocity". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies.
{"title":"Monetarist Arithmetic at COVID-19 Time: A Take on How not to Misapply the Quantity Theory of Money","authors":"Julien Pinter","doi":"10.2139/ssrn.3906699","DOIUrl":"https://doi.org/10.2139/ssrn.3906699","url":null,"abstract":"The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks' unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called \"monetarist\" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a \"desired velocity\". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131822800","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In HANK, we show that fiscal policy is an appropriate macroeconomic stabilization tool at the ZLB. Fiscal policy achieves the same macroeconomic aggregates and the same welfare as hypothetically unconstrained monetary policy by replicating its transmission mechanism. Consumption taxes and labor taxes replicate the effects of monetary policy through the intertemporal substitution channel. Debt-financed lumpsum transfers and a permanent increase in the government debt level replicate the effects of monetary policy through the redistribution channel.
{"title":"Unconventional Fiscal Policy in HANK","authors":"Hannah Seidl, Fabian Seyrich","doi":"10.2139/ssrn.3873177","DOIUrl":"https://doi.org/10.2139/ssrn.3873177","url":null,"abstract":"In HANK, we show that fiscal policy is an appropriate macroeconomic stabilization tool at the ZLB. Fiscal policy achieves the same macroeconomic aggregates and the same welfare as hypothetically unconstrained monetary policy by replicating its transmission mechanism. Consumption taxes and labor taxes replicate the effects of monetary policy through the intertemporal substitution channel. Debt-financed lumpsum transfers and a permanent increase in the government debt level replicate the effects of monetary policy through the redistribution channel.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125715881","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper considers the estimation of heterogeneous impulse responses in large panels. I introduce an efficient data-driven clustering methodology for grouping heterogeneous responses within the local projection-IV framework. The proposed group local projection (GLP) estimator consistently recovers the latent group structure and the group-specific impulse responses when the panel dimensions increase. Simulation evidence illustrates the reliable finite sample performance of the estimator even under misspecification of the group structure. With the GLP estimator I revisit the debate on the effects of monetary policy shocks on house prices and document significant price appreciation after a contractionary shock in an economically large cluster of MSAs in the US. Importantly, this cluster is ignored by conventional grouping criteria.
{"title":"Group Local Projections","authors":"Jiaming Huang","doi":"10.2139/ssrn.3857086","DOIUrl":"https://doi.org/10.2139/ssrn.3857086","url":null,"abstract":"This paper considers the estimation of heterogeneous impulse responses in large panels. I introduce an efficient data-driven clustering methodology for grouping heterogeneous responses within the local projection-IV framework. The proposed group local projection (GLP) estimator consistently recovers the latent group structure and the group-specific impulse responses when the panel dimensions increase. Simulation evidence illustrates the reliable finite sample performance of the estimator even under misspecification of the group structure. With the GLP estimator I revisit the debate on the effects of monetary policy shocks on house prices and document significant price appreciation after a contractionary shock in an economically large cluster of MSAs in the US. Importantly, this cluster is ignored by conventional grouping criteria.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"135 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127374140","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over the past two decades, emerging market economies have improved their external liability structures by increasing the share of debt denominated in local currencies, while foreign currency debt is considered a major source of financial instability. This paper embeds the debt denomination choice in a sudden stop model and explore its implications for the optimal capital control policy. As its payoff depends on the real exchange rate, the local currency debt provides better risk-sharing for emerging market economies but introduces additional distortions. Compared to the competitive equilibrium, a discretionary planner has incentives to deflate the debt burden denominated in local currencies, which increases its issuance cost ex ante. In contrast, a social planner with commitment would promise a higher future payment to obtain a more favorable local currency bond price. Quantitatively, the optimal policy under commitment encourages more borrowing in local currencies, mitigates the severity of crises, and improves welfare relative to the laissez-faire.
{"title":"Sudden Stop with Local Currency Debt","authors":"Siming Liu, Chang Ma, Hewei Shen","doi":"10.2139/ssrn.3785755","DOIUrl":"https://doi.org/10.2139/ssrn.3785755","url":null,"abstract":"Over the past two decades, emerging market economies have improved their external liability structures by increasing the share of debt denominated in local currencies, while foreign currency debt is considered a major source of financial instability. This paper embeds the debt denomination choice in a sudden stop model and explore its implications for the optimal capital control policy. As its payoff depends on the real exchange rate, the local currency debt provides better risk-sharing for emerging market economies but introduces additional distortions. Compared to the competitive equilibrium, a discretionary planner has incentives to deflate the debt burden denominated in local currencies, which increases its issuance cost ex ante. In contrast, a social planner with commitment would promise a higher future payment to obtain a more favorable local currency bond price. Quantitatively, the optimal policy under commitment encourages more borrowing in local currencies, mitigates the severity of crises, and improves welfare relative to the laissez-faire.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"16 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132192239","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alexander Rodnyansky, Alejandro Van der Ghote, Daniel Wales
This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy's response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence.
{"title":"Product Quality, Measured Inflation and Monetary Policy","authors":"Alexander Rodnyansky, Alejandro Van der Ghote, Daniel Wales","doi":"10.2139/ssrn.3772176","DOIUrl":"https://doi.org/10.2139/ssrn.3772176","url":null,"abstract":"This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy's response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115577292","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper estimates the effect of monetary policy on the term structure of stock market risk premia. The implied stock market risk premia are obtained using analysts’ dividend forecasts and dividend future prices. The effect of monetary policy on risk premia is analysed using local projections and VAR models. According to the results, monetary policy easing raises the average risk premium. The effect is driven by a rise in long-horizon risk premia.
{"title":"Monetary Policy and Stock Market Valuation","authors":"Olli-Matti Laine","doi":"10.2139/ssrn.3694926","DOIUrl":"https://doi.org/10.2139/ssrn.3694926","url":null,"abstract":"This paper estimates the effect of monetary policy on the term structure of stock market risk premia. The implied stock market risk premia are obtained using analysts’ dividend forecasts and dividend future prices. The effect of monetary policy on risk premia is analysed using local projections and VAR models. According to the results, monetary policy easing raises the average risk premium. The effect is driven by a rise in long-horizon risk premia.","PeriodicalId":111923,"journal":{"name":"ERN: Monetary Policy (Topic)","volume":"277 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134404685","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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