Monetary policy

As interest rates surge: flighty deposits and lending

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Friday, April 5, 2024

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Key Points:

US monetary policy is more powerful in low economic growth regimes

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Tuesday, April 2, 2024

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Key Points:

The macroeconomic effects of global supply chain reorientation

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Saturday, February 10, 2024

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We analyse the macroeconomic

Key Points:

We analyse the macroeconomic
effects of supply chain reorientation through localisation policies, using a global dynamic
general equilibrium model.
While arguments about comparative advantage, the potential forgone benefits of international specialisation and industry- and product-specific disruptions are familiar, there is less
analysis on the macroeconomic effects of supply chain changes resulting from localisation policies.
The large sensitivity of the global economy to the recent supply chain shocks suggests that
the international trade reconfiguration implied by localisation policies could also have sizable
impacts on key macroeconomic variables such as output, employment and inflation.
Thus, localisation focuses on the
goods in our model most closely related to global supply chains.
Retaliation also attenuates any positive effects from
reshoring on output and implies a reduction in the volume of overall international trade.
This finding calls for limiting the scope of reshoring, such as by focusing on vital goods that are
most susceptible to supply chain disruptions.
Either that, or the economic costs are considered a worthwhile trade-off for an increase
in security of supply, for example.
While arguments about comparative advantage, the potential forgone benefits of international specialisation and industry- and product-specific disruptions are familiar, there is less
analysis on the macroeconomic effects of supply chain changes resulting from localisation policies.
Recent supply chain shocks have had large effects, with disruptions in 2021 estimated
to have reduced euro area GDP by around two percent and doubled the rate of manufacturing producer inflation (Celasun et al., 2022).
To analyse this issue, we simulate a (partial) reshoring of production back to Europe in
a global dynamic general equilibrium framework.
Thus,
localisation focuses on the goods in our model most closely related to global supply chains.3 We
model reshoring through a direct change to the export goods? production-function parameters.
Since reshoring
effectively shortens the supply chain, the sum of markups along the chain falls.
This means that imports that are at the end of the supply chain (i.e.
In particular, our work relates to papers examining the potential for countries to reduce
their exposure to global supply chains.
(2021) demonstrate that reduced reliance on foreign inputs does not mitigate pandemicinduced contractions in labour supply.
(2021) find no evidence of a relationship
between global value chain integration and macroeconomic volatility.
This dynamic, along with factors such as natural disasters, climate-change
induced volatility and terrorism mean that supply chain disruptions could be a new normal
(Grossman et al., 2021).
Our work contributes to the literature providing dynamic general equilibrium analyses of
protectionist policies, in particular those using global macroeconomic models to quantify trade
policy changes.
(2008) analyse the effect of a rise in protectionism in response
to rising global trade imbalances.
Linde? and Pescatori (2019) find that although the macroeconomic costs of a
trade war are substantial, a fully symmetric retaliation is the best response.
(2020) consider a rich input-output structure and demonstrate that closer integration amplifies
the adverse effects of protectionist trade policies.
Several recent studies have also examined the economic effects of a global trade fragmentation.
First, we modify a dynamic general
equilibrium model of the global economy in order to analyse the transmission of localisation
policies.
This allows for a comprehensive treatment of cross-border macroeconomic interdependences and spillovers between the different regions.
4
There is, however, substantial cross-country heterogeneity in terms of impact, with small open economies
(SOEs) reliant on global supply chains more affected.
ECB Working Paper Series No 2903
7

Second, we are able to assess both long-run effects and the transition dynamics of localisation
policies.
Our model contains a detailed monetary block and captures inflation dynamics, which is a key
concern for supply chain reorientation.
Overall, our paper contains a careful analysis of the key aspects of the localisation debate,
including effects of localisation on domestic competition and efficiency.
Section 2 provides a brief overview of the model, the modifications to examine
global supply chain reorientation, some key details on the calibration and a brief discussion of
the nature of our exercise.
(2020) for discussions of the relative strengths and weaknesses of
trade and macroeconomic models in assessing large economic shocks.
2.1
Supply chain reorientation

Our analysis focuses on imported inputs used to produce goods for export, as the introduction
of localisation policies is in response to recent disruptions to global supply chains.
Since reshoring
effectively shortens the supply chain, the sum of markups along the chain falls.
Further to
these effects, engagement with global firms provides an opportunity for knowledge spillovers to
local firms (Criscuolo et al., 2017).
This finding calls for limiting the scope of reshoring, such as by focusing on vital goods that are
most susceptible to supply chain disruptions.
(B12)
Adjusting the share of local inputs in export goods, of course, affects prices and quantities all
along the supply chain.

The effect of new housing supply in structural models: a forecasting performance evaluation

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Sunday, February 4, 2024

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Key Points:

Deposit market concentration and monetary transmission: evidence from the euro area

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Sunday, February 4, 2024

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Abstract

Key Points:

Abstract
I study the transmission of monetary policy to deposit rates in the euro area with a
focus on asymmetries and the role of banking sector concentration.
Moreover, the
gap between deposit rates across euro area member states - despite being exposed to the same
key ECB interest rates - has widened.
This begs the question whether deposit rates are more
sluggish in response to both policy rate increases and cuts, and what factors might influence the
transmission of monetary policy to deposit rates.
Whether banks are indeed able to adjust deposit rates asymmetrically to positive and
negative changes in policy rates could thus well depend on how much market power they hold
in the deposit market.
Arguing that market power increases in the degree of market concentration,
I further consider whether more concentrated banking sectors set rates (more) asymmetrically.
The response of deposit rates in banking sectors with an average degree of concentration does
not appear asymmetric.
The degree of market concentration is often pointed at, but recent evidence
for the euro area is scarce.
In this paper, I provide empirical evidence on the asymmetric response of deposit rates to
monetary policy, and relate this to the degree of concentration within a country?s banking sector.
Both papers
provide empirical evidence based on US deposit markets showing that deposit rates respond
more rigidly to upward changes in market rates than downward changes, especially so in more
concentrated markets.
Recent research on euro area deposit markets,
instead, has focused more on the transmission of negative policy rates (see e.g.
Whether banks are able to set deposit rates that materially differ from policy rates is affected
ECB Working Paper Series No 2896

4

by market concentration: market power is assumed to increase in the degree of concentration in
the banking sector.
Concentration thus appears to matter for how quickly ECB monetary policy has
been transmitted to deposit rates across the euro area.
Banks thus have a motive to be
rigid in adjusting deposit rates to a ?positive? monetary policy shock.
While customers are generally (and potentially rationally) inattentive, swift and substantial
nominal deposit rate declines may trigger deposit outflows.
relative deposit rate = deposit rate - short term rate
The inverse of the wedge, the relative deposit rate will allow us to see more clearly how
the deposit rate evolves in comparison to the short-term rate.
This then translates to (more
pronounced) effects on the transmission of policy to the deposit wedge, reinforcing the asymmetry discussed before.
More concentration would mean more rigid deposit rates (and thus an
increase in the deposit wedge) in case of positive surprises, and more flexible deposit rates (and
thus a decrease in the deposit wedge) in case of negative surprises (see also e.g.
I add an identical
altered-linex adjustment cost for deposit rates, to capture the upward rigidity and downward
flexibility of deposit rates as well.
As discussed
previously, the deposit rate is particularly rigid in case of a positive shock, illustrating the dividend smoothing motive and bank market power.
Without the asymmetric adjustment cost,
the response of the deposit rates to positive and negative changes in policy would have been
symmetric.
This appears a reasonable assumption
in general, as market concentration or market shares are slow-moving concepts.
3
Methods and data

I study the dynamic response to an unexpected change in monetary policy on deposit rates
in different countries in the euro area.
deposit rate - short-term rate), which for the sake of
brevity I will refer to as the ?relative deposit rate?.
Positive IRFs for the relative deposit rate imply that
the deposit rate has increased by more than the short-term rate, narrowing the wedge between
the short-term rate and the deposit rate.
0
?2
?2
?4
?6

?4
4

8

12

4

Months

8

12

Months

Figure 9: NFC rate response - linear combination of ?0 and ?1

Relative deposit rate at 1 month

Relative deposit rate at 4 months

0.0

0
?1

p.p.
0
0
?2
?1
?4
4

8

12

4

8

Months

12

Months

Figure 12: NFC rate response - linear combination of ?0 and ?1

Relative deposit rate at 1 month

Relative deposit rate at 4 months
2.0

1.5

p.p.
And, (2) how quickly
households and NFCs learn about changes in monetary policy, via the deposit rate, may vary
across the monetary union.
?0 , ?1 )
Figure A16: NFC overnight deposits, small member states
Relative deposit rate (average)

Relative deposit rate (interaction)

2

10
5

p.p.
?0 , ?1 )
Figure A19: NFC overnight deposits, four lags
Relative deposit rate (average)

Relative deposit rate (interaction)
5

0

p.p.
?0 , ?1 )
Figure A28: NFC overnight deposits, small member states
Relative deposit rate (average)

Relative deposit rate (interaction)

3

5.0

2

2.5

p.p.
?0 , ?1 )
Figure A31: NFC overnight deposits, four lags
Relative deposit rate (average)

Relative deposit rate (interaction)

3
2

p.p.

The Albanese government blew its shot at setting a historic new unemployment target

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Tuesday, September 26, 2023

Review, Unemployment, Employment, Monetary policy, Chalmers, Conduct, Reserve, Government, Lowe, Population, Reserve Bank, Knowledge, Saugus Iron Works National Historic Site, RBA, Blow molding, Employment agency, Telescopic sight, Renewable energy, Cryptocurrency

A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch.

Key Points:

A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch.
Released at a time when unemployment was almost 10%, it specified a target unemployment rate of 5% – an ambition that served as a beacon for decades.
Yet the Albanese government has passed up a historic opportunity to say how much less, which it could have done by setting its own target.

Setting our sights below 5%

That means our unemployment target ought to be somewhere between zero and 5%.
There will always be people out of work while they are moving between jobs, what the white paper calls “frictional” unemployment.
I get that we need, in the words of the white paper, “a higher level of ambition than is implied by statistical measures”.

What gets measured gets done

If a target isn’t specific, it isn’t a target at all (or at best it’s a fuzzy target).
That means it’s less likely to be aimed at and less likely to be hit.
But neither could make any boast about hitting the employment target – because there wasn’t one.

How failing to set a target costs jobs

Read more:
The RBA's failure to cut rates faster may have cost 270,000 jobs
Lowe wasn’t held to account for the extra unemployed in the same way as he is being held to account for his performance on inflation.
Because he was never actually given an unemployment target.
I am quite prepared to acknowledge that other measures of employment matter, underemployment among them.
As employers find it hard to hire new workers, they get existing workers to put in more hours.

Our unemployment rate is a proxy for what matters

This makes the unemployment rate just about the perfect proxy for everything else about the labour market that matters, and just about the perfect number to target.
Even that would have been less “ambitious” than Keating choosing 5%, when the rate was twice as high.
Treasurer Chalmers says the government didn’t set a target because apparently the unemployment rate doesn’t capture “the full extent of spare capacity in our economy or the full potential of our workforce”.
Chalmers is about to update the Reserve Bank’s statement of expectations, the one that until now hasn’t included a target for unemployment.

Alliance of Comprehensive Planners (ACP) Announces Details of 2023 Annual Conference

Retrieved on:

Tuesday, September 19, 2023

WILMINGTON, N.C., Sept. 19, 2023 /PRNewswire/ -- The Alliance of Comprehensive Planners (ACP), a community of tax-focused, fiduciary financial advisors who provide comprehensive wealth building strategies for their clients on a commission-free retainer basis, recently announced the details of their upcoming 2023 ACP Annual Conference, which will take place November 7-10, 2023 at The Davenport Grand in Spokane, Washington.

Key Points:

WILMINGTON, N.C., Sept. 19, 2023 /PRNewswire/ -- The Alliance of Comprehensive Planners (ACP) , a community of tax-focused, fiduciary financial advisors who provide comprehensive wealth building strategies for their clients on a commission-free retainer basis, recently announced the details of their upcoming 2023 ACP Annual Conference , which will take place November 7-10, 2023 at The Davenport Grand in Spokane, Washington.
Early bird pricing is available through October 8th, 2023: $875 for ACP members and $1000 for non-members.
Companies that are interested in sponsoring this year's conference can click here for more information on sponsorship opportunities .
The 2022 ACP Annual Conference took place in Minneapolis, Minnesota in late September 2022 and featured over 100 ACP members and other attendees.

Christine Lagarde: Twenty-five years of the ECB

Retrieved on:

Saturday, May 27, 2023

Key Points:

Reserve Bank to have two boards after overhaul by inquiry

Retrieved on:

Wednesday, April 19, 2023

The long-awaited independent review of the Reserve Bank commissioned by Treasurer Jim Chalmers will be released on Thursday, with the treasurer already flagging in-principle agreement with all its recommendations.

Key Points:

The long-awaited independent review of the Reserve Bank commissioned by Treasurer Jim Chalmers will be released on Thursday, with the treasurer already flagging in-principle agreement with all its recommendations.
Titled “An RBA fit for the future”, the report makes 51 recommendations under 14 broader headings.
Chalmers will announce on Thursday two new RBA board members, to replace retiring members Wendy Craik and Mark Barnaba.
Lowe has been under fire for indicating the cash rate would likely not increase before 2024, which influenced the decisions of some house buyers.

Backcasting real interest rates and inflation expectations – combining market-based measures with historical data for related variables

Retrieved on:

Thursday, March 30, 2023

= Backcasting real rates and inflation expectations – combining market-based measures with historical data for related variables =

Key Points:

= Backcasting real rates and inflation expectations – combining market-based measures with historical data for related variables =
Published as part of the ECB Economic Bulletin, Issue 2/2023.
Markets for financial products linked to inflation in the euro area offer valuable insights into market participants’ expectations for inflation and real interest rates, but these financial instruments have only been available since the early 2000s.
The yields on inflation-linked bonds (ILBs) and the interest rates on inflation-linked swaps (ILSs) incorporate market participants’ expectations for inflation and real interest rates over periods from one to 30 years.
These longer time series are constructed by estimating the relationship between ILS rates or market-implied real rates and longer time series of statistical data for variables such as inflation or indicators of economic activity.
The starting point for the backcasting exercise is a set of 108 variables, dating back to at least 1992, that may provide information about inflation compensation and real rates.
The backcasted series indicate the broad contours of inflation compensation and real rates for various maturities over a period where real-time market-based measures were not yet available.
The shaded areas mark the period for which euro area ILS rates and real rates have been backcasted (January 1992 to March 2005).
Here too, shorter maturities are broadly in line with measures of inflation expectations obtained from survey data in combination with nominal yield data.
Notes: The shaded areas mark the sample for which euro area ILS rates and real rates have been backcasted (January 1992 to March 2005).
Notes: The shaded area marks the sample for which euro area ILS rates and real rates have been backcasted (January 1992 to March 2005).