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11. Spillover effects of the recent US monetary policy shocks on the South African economy: The role of monetary and fiscal policy coordination

Author:
Guangling Liu and Marrium Mustapher
Publication Date:
11-2024
Content Type:
Working Paper
Institution:
United Nations University
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. The commitment to price stability under Regime M increases real interest rates, raising domestic debt service costs and the debt-to-GDP ratio. Regime F (active fiscal policy), in contrast, stabilizes debt more quickly but at the cost of higher inflation, as it does not use future surpluses to manage public debt. These spillover effects are more amplified under both Regime M and Regime F in the case of a complete exchange rate pass-through and a higher degree of trade openness, with Regime F exhibiting a stronger amplification effect.
Topic:
Foreign Policy, Economics, Monetary Policy, Inflation, and Fiscal Policy
Political Geography:
Africa, South Africa, North America, and United States of America

12. The European Central Bank’s operational framework and what it is missing

Author:
Giulia Gotti and Francesco Papadia
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In March 2024, the European Central Bank published the results of a review of its operational framework. After discussing how the ECB operational framework has changed since the Great Financial Crisis, we provide an assessment of the review, which we deem as premature and highlight some gaps it has not resolved. First, the choice of a hybrid system is attractive, but needs a precise specification. Second, the review did not specify the timing of the introduction of structural long-term refinancing operations and a structural portfolio of securities. We find that these measures should be implemented when the level of excess liquidity reaches between €1.3 trillion and €2 trillion, projected between mid-2026 and late 2027. Finally, as the introduction of a digital euro could impact bank liquidity, it is crucial to design a framework that can flexibly increase the supply of central bank liquidity.
Topic:
Monetary Policy, Governance, European Union, Macroeconomics, Fiscal Policy, European Central Bank, and Banking
Political Geography:
Europe

13. What can central banks do to take the Paris Agreement seriously?

Author:
Dirk Schoenmaker and Hesse McKechnie
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Since the Paris Agreement on climate change was signed in 2015, its 195 signatories have seen financial instability resulting from the climate transition increase by approximately one third, in the context of still-increasing global emissions. In the European Union, emissions have fallen but banks have not fully internalised the costs of transitioning to net-zero. Banks continue to finance the expansion of the fossil-fuel industry. At the systemic level, this is trading a pretence of financial stability now for a more disorderly transition scenario with greater financial instability later. Central banks are increasingly using microprudential supervisory tools to address climate-related financial risks. These tools include reviewing banks’ risk-management processes and giving warnings over shortcomings in banks’ risk models. This approach is helpful, but has so far failed to address the build-up of climate-transition-related imbalances in the financial system. This situation echoes the run-up to the 2007-2008 global financial crisis, when supervisors were busy reviewing the implementation of the latest Basel risk models by individual banks, while failing to see increased imbalances in the financial system caused by rising housing prices. This Policy Brief proposes that central banks should take a macro approach to managing system-wide risks stemming from the climate transition. It is necessary to treat climate as an endogenous, and in many jurisdictions legally-mandated, transition, rather than an exogenous risk. The policy aim for central banks, in their macroprudential supervision capacity, should be to minimise financial instability during that transition. This Policy Brief argues that, all other things being equal, the steadiest path towards net-zero offers the greatest amount of financial stability. Current proposals to impose systemic risk buffers for climaterelated concentration risk may fail to provide such a steady reduction. A guided transition is recommended for banks that have been reluctant to hive off profitable loans to high-emitting companies. A requirement for the financial sector to reduce financed emissions by four percentage points annually from 2025 to 2050 would deliver net-zero with the least amount of financial instability.
Topic:
Climate Change, Monetary Policy, European Central Bank, Paris Agreement, Banking, and Green Transition
Political Geography:
Europe

14. The value added of central bank digital currencies: a view from the euro area

Author:
Maria Demertzis and Catarina Martins
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Different jurisdictions have set out different reasons for creating central bank digital currencies (CBDCs). Some countries, particularly those with already-operational CBDCs for retail purposes, aim to to promote financial inclusion. But in countries where most citizens have access to financial services, central banks are interested in CBDCs as an aspect of the increasing digitalisation of finance. Central banks could also choose to use CBDCs to guarantee in full citizen’s holdings (currently, deposits in commercial bank are only partially guaranteed), but this would trigger major changes in the financial system in terms of the role of commercial banks in intermediation and the role of fiat money. So far, central banks have not opted to go this way. In the euro area, consumers have multiple payment options and a very efficient retail payments system. The currency enjoys high levels of trust and is not challenged by the emergence of private currencies, such as Bitcoin, or by the risk that cash, a monetary system’s anchor, will disappear. Therefore, creating a CBDC for retail purposes in the euro area offers little obvious value added, at least for the foreseeable future. However, there is a strong case for building a CBDC that banks could use for cross-border wholesale purposes (ie with other currencies). Wholesale CBDCs could revolutionise the way that cross-border, cross-currency payments are made for two reasons. Cross-border payments are currently slow and inefficient. Pilot projects have shown that wholesale payments with CBDCs can generate substantial time and cost savings. Any two central banks that have operational wholesale CBDCs could settle transactions between themselves. This would be very different from the current system, as most settlements today are done via the dollar (and then the euro) infrastructure and use correspondent banks. The euro area and the United States would have to consider carefully from a geopolitical perspective how wholesale CBDCs might affect their global economic standing. By developing a CBDC for wholesale purposes, the European Union would be able to contribute to developing the global standard.
Topic:
Monetary Policy, Governance, Regulation, Central Bank, Digital Currency, and Euro
Political Geography:
Europe

15. Federal Reserve Anti-Inflation Policy: Wealth Protection for the 1%?

Author:
Aaron Medlin and Gerald Epstein
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The Federal Reserve has a dual mandate from Congress that directs it to conduct monetary policy as such to achieve “maximum employment” and “stable prices.” Yet the U.S. central bank typically chooses to address inflation as a top priority and focuses on employment only secondarily, if at all. Why? In this paper we argue that an important reason is that the Federal Reserve conducts policy so as protect the real wealth of the top 1% of the wealth distribution. We focus on the Fed’s fight against inflation in 2021-2022, when it rapidly raised its policy interest rates by almost 4 percentage points in the face of more than 6 percent inflation. Using a novel econometric analysis, we provide evidence that shows that this policy serves as a real net wealth protection policy for the 1% by restoring some of the lost wealth that they would otherwise lose due to unexpected inflation. The results of this policy for the top 10% of the wealth distribution are econometrically ambiguous. But to the extent that the Fed’s high interest rates generate higher unemployment or even a recession, this wealth protection for the 1% could have serious income costs for workers who find themselves or another member of their household out of a job.
Topic:
Political Economy, Monetary Policy, Inflation, Elites, and Wealth
Political Geography:
North America and United States of America

16. Exchange Rate Pass-Around

Author:
Matthieu Crozet, Julian Hinz, and Federico Trionfetti
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
In January 2015, The Swiss Franc (CHF) appreciated unexpectedly against the Euro by approximately 15%. We document a new fact: French firms that exported to both the Swiss market and the Eurozone also exhibited a sudden change in their export prices to the Eurozone. We coin this the “exchange rate pass-around” effect. We rationalise this fact with a simple model based on the endogenous decision of some firms to give up pricing-to-market and opt for single-pricing to all markets. An important implication of this finding is that single-pricing may be one of the causes of the incomplete pass-through. This mechanism has so far remained unexplored in the literature, which may have led to overestimating the importance of other factors. Based on monthly French export data, our empirical analysis confirms the existence of the pass-around. Firms directly affected by the CHF exchange rate shock increased their prices in neighboring markets by 0.8% compared to other exporters. The effect was stronger for firms with lower ex-ante price heterogeneity across markets and for firms with smaller trade costs to Switzerland. However, the effect was short-lived. As time passed, exporters tended to decouple the prices they set on the Swiss market from those for the Eurozone, and the pass-around effect faded.
Topic:
International Trade and Finance, Markets, Monetary Policy, European Union, and Exchange Rate Policy
Political Geography:
Europe

17. The Great Supply Chain Shift from China to South Asia?

Author:
Ganeshan Wignaraja
Publication Date:
07-2023
Content Type:
Research Paper
Institution:
Gateway House: Indian Council on Global Relations
Abstract:
Global supply chains connect world industry and international trade in manufactures. East Asia’s dominance with China as the preferred assembly hub in global supply chains has brought unprecedented regional prosperity, but South Asia remains a latecomer. However, pandemic-related and post-pandemic continuing disruptions to supply chains and slowing growth are being keenly felt, dampening China’s attractiveness. In an uncertain global economy, increasingly footloose foreign investors are looking for alternative production locations. Is it South Asia’s turn to prosper through supply chains in this uncertain world? This is the topical public policy question facing India and the others in South Asia. This paper discusses the concept of global supply chains, the industrial rise of East Asia, drivers of supply chain relocation from China, South Asia’s prospects, India as a complementary hub and policy lessons from East Asia’s industrial success. For the purposes of this paper, South Asia is broadly defined as the India and its contiguous countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Topic:
Industrial Policy, Monetary Policy, Foreign Direct Investment, Industrialization, COVID-19, Supply Chains, and Geoeconomics
Political Geography:
China, South Asia, Asia, Southeast Asia, and United States of America

18. Radical Steps Are Essential to Jump-Starting the Replacement of the Flawed US Money Regime

Author:
Brendan Brown
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Hudson Institute
Abstract:
A previous policy memo argued that flaws in the actual US money regime are responsible for the Great Pandemic Inflation.1 Now that reported inflation has been falling, some of us might imagine that addressing these flaws has become a non-urgent matter. After all, great supply shocks tend to come rarely. But such complacence does not fit the facts. The case for getting rid of the present rotten monetary regime is not simply based on the argument that it has malfunctioned so severely during the pandemic and war supply shock. That malfunctioning continues into the present, where there is now positive supply side news (the pandemic dislocation is fading, and a natural gas glut has emerged despite the continuing Russia-Ukraine War). The Federal Reserve and other central banks, still trying to navigate policy in an anchorless monetary system by choosing a path for short-term interest rates, are stumbling from one huge blunder to another, even if they have a rare lucky stretch in between. Beyond the woes of how the 2 percent inflation standard performed during the supply shock and subsequent supply restoration, this regime should be held responsible for a range of economic and social consequences that predate the pandemic and war. These include malinvestment (poor allocation of capital due to corrupted signaling in markets), advancement of monopoly capitalism, bloated government outlays, and punitive monetary taxation (in the form of inflation tax or monetary repression tax), all of which take their toll. Instead of enjoying a top-quality money with all its benefits, individuals have had to put up with a poor money and all its related costs, particularly the ongoing danger of serious loss of purchasing power.
Topic:
Economics, Monetary Policy, Inflation, and COVID-19
Political Geography:
North America and United States of America

19. The Global Economic Outlook and the State of Indonesia

Author:
Ivana Markus and Pyan Amin Muchtar
Publication Date:
01-2023
Content Type:
Policy Brief
Institution:
Economic Research Institute for ASEAN and East Asia (ERIA)
Abstract:
The global economy is facing a perfect storm as a result of the coronavirus disease (COVID-19) pandemic, prolonged geopolitical tensions, soaring inflation, and tightening monetary policy. A darkening future has been projected and the worst is yet to come. Amid global uncertainty, governments have become less aggressive in their budget spending, while high inflation has led many central banks to tighten their monetary policy. Furthermore, the pandemic has left widespread scarring effects, such as unemployment, poverty, and inequality, particularly on vulnerable groups. Global challenges and lower economic growth of the major economies will also affect Indonesia’s economic conditions, as the country may experience slower growth as a spillover from its major trading partners. It is important for the world and Indonesia to address these challenges, particularly the scarring effects, through multilateral solidarity and better maintenance of prudent fiscal policy.
Topic:
Monetary Policy, Geopolitics, Economy, Investment, Trade, and COVID-19
Political Geography:
Indonesia and Southeast Asia

20. Excess liquidity in the euro area: developments and implications

Author:
Marek Dabrowski
Publication Date:
09-2023
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The excess liquidity in the euro area is a product of a long period of quantitative easing. It changed the operational framework of the European Central Bank (ECB)’s monetary policy from the scarce reserves system (SRS) to the abundant reserves system (ARS). To eliminate excess liquidity and return to the SRS, the ECB must intensify quantitative tightening, which is also essential for successful disinflation. Fiscal adjustment can help in this process and mitigate the risk of financial instability. 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 25 September 2023.
Topic:
Monetary Policy, Finance, European Central Bank, and Liquidity
Political Geography:
Europe