Working Paper
Jonathan Benchimol, Sophia Kazinnik, and Yossi Saadon. Working Paper. “Communication and Transparency Through Central Bank Texts”.
Jonathan Benchimol and Caroline Bozou. Working Paper. “Risk Aversion, Credit and Banking”.
Jonathan Benchimol and Caroline Bozou. Submitted. “Desirable Banking Competition and Stability”.Abstract
Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.
Jonathan Benchimol, Sophia Kazinnik, and Yossi Saadon. Submitted. “Federal Reserve Communication and the COVID-19 Pandemic”.Abstract

Our study examines how the Federal Reserve (Fed) communicated during the COVID-19 pandemic and compares it with other periods of stress. This comparison uses a set of dictionaries related to COVID-19, unconventional monetary policy (UMP), and financial stability, as well as sentiment analysis and topic modeling. We show that Fed communication during the COVID-19 pandemic focused on financial stability, market volatility, social welfare, and UMP, and was mostly characterized by contextual uncertainty. We also compare Fed communication during the COVID-19 pandemic with the dot-com and global financial crises regarding content, sentiment, and timing. We find that Fed communication and actions were more reactive to the COVID-19 crisis than to other crises. We also find that declining financial stability sentiment in interest rate announcements and minutes precedes accommodative monetary policy decisions.

Jonathan Benchimol and Samuel Dahan. Submitted. “The Legal Case for a Central Bank Labour Mandate”.Abstract
A consensus has emerged among economists that central banks cannot ignore employment and how monetary policies affect workers and employers. However, there is no agreement on the extent to which labour issues should be incorporated into operational frameworks or whether central banks should support structural reforms. In fact, more than 80% of the world’s central banks have no explicit employment objective. That said, given that labour issues can directly cause macroeconomic imbalances, many central banks, even those without explicit dual objectives, have incorporated labour indicators into their core policy frameworks. We assess the implicit mandate of the Bank of Canada and the European Central Bank, which, unlike the Federal Reserve, do not have an express labour mandate. To scrutinize modern central banking practices, we investigate the historical, legal, and extra-statutory data with regard to the primary objectives of central banks and how they interact with secondary objectives in practice. Our analysis shows that both the Global Financial Crisis and the recession triggered by COVID-19 have had tremendous impacts on the workforce, requiring immediate action and eventually changing the policy environment in which central banks operate. However, while neither the Bank of Canada nor the European Central Bank have an explicit dual mandate, the latter has been much more aggressive in pursuing labour objectives. We discuss the legality of this mandate transformation in light of the Bank of Canada Act and the European Union Treaty. Finally, we make a legal case for a more human-developmental approach to central banking, one that involves greater social and labour dimensions.
Jonathan Benchimol and Lahcen Bounader. Submitted. “Optimal Monetary Policy Under Bounded Rationality”.Abstract

We develop a behavioral New Keynesian model to analyze optimal monetary policy with heterogeneously myopic households and firms. Five key results are derived. First, our model reflects coherent microeconomic and aggregate myopia due to the consistent transition from subjective to objective expectations. Second, the optimal monetary policy entails implementing inflation targeting in a framework where myopia distorts agents' inflation expectations. Third, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality under bounded rationality. Fourth, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy when agents are myopic. Finally, bounded rationality is not necessarily welfare decreasing, and is even associated with welfare gains for extreme cognitive discounting.

Oren Barkan, Jonathan Benchimol, Itamar Caspi, Eliya Cohen, Allon Hammer, and Noam Koenigstein. Forthcoming. “Forecasting CPI Inflation Components with Hierarchical Recurrent Neural Networks.” International Journal of Forecasting.Abstract
We present a hierarchical architecture based on Recurrent Neural Networks (RNNs) for predicting disaggregated inflation components of the Consumer Price Index (CPI). While the majority of existing research is focused on predicting headline inflation, many economic and financial institutions are interested in its partial disaggregated components. To this end, we developed the novel Hierarchical Recurrent Neural Network (HRNN) model, which utilizes information from higher levels in the CPI hierarchy to improve predictions at the more volatile lower levels. Based on a large dataset from the US CPI-U index, our evaluations indicate that the HRNN model significantly outperforms a vast array of well-known inflation prediction baselines. Our methodology and results provide additional forecasting measures and possibilities to policy and market makers on sectoral and component-specific prices.
Jonathan Benchimol, Itamar Caspi, and Sophia Kazinnik. Forthcoming. “Measuring Communication Quality of Interest Rate Announcements.” Economists' Voice.Abstract

We use text-mining techniques to measure the accessibility and quality of information within the texts of interest rate announcements published by the Bank of Israel over the past decade. We find that comprehension of interest rate announcements published by the Bank of Israel requires fewer years of education than interest rate announcements published by the Federal Reserve and the European Central Bank. In addition, we show that the sentiment within these announcements is aligned with economic fluctuations. We also find that textual uncertainty is correlated with the volatility of the domestic financial market.

Jonathan Benchimol, Itamar Caspi, and Yuval Levin. 2022. “The COVID-19 Inflation Weighting in Israel.” The Economists' Voice. [doi]Abstract

Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.

Jonathan Benchimol, Makram El-Shagi, and Yossi Saadon. 2022. “Do Expert Experience and Characteristics Affect Inflation Forecasts?” Journal of Economic Behavior and Organization. [doi]Abstract
Each person’s characteristics may influence that person’s behaviors and outcomes. This study builds and uses a new database to estimate experts’ performance and boldness based on their experience and characteristics. Our study classifies experts providing inflation forecasts based on their education, experience, gender, and environment. We provide alternative interpretations of factors affecting experts’ inflation forecasting performance, boldness, and pessimism by linking behavioral economics, the economics of education, and forecasting literature. The study finds that an expert with previous experience at a central bank appears to have a lower propensity for predicting deflation.
Jonathan Benchimol, Inon Gamrasni, Michael Kahn, Sigal Ribon, Yossi Saadon, Noam Ben-Ze’ev, Asaf Segal, and Yitzchak Shizgal. 2022. “The Interaction Between Domestic Monetary Policy and Macroprudential Policy in Israel.” Economic Modelling. [doi]Abstract

The global financial crisis (GFC) triggered the use of macroprudential policies imposed on the banking sector. Using bank-level panel data for Israel for the period 2004–2019, we find that domestic macroprudential measures changed the composition of bank credit growth but did not affect the total credit growth rate. Specifically, we show that macroprudential measures targeted at the housing sector moderated housing credit growth but tended to increase business credit growth. We also find that accommodative monetary policy surprises tended to increase bank credit growth before the GFC. We show that accommodative monetary policy surprises increased consumer credit when interacting with macroprudential policies targeting the housing market. Accommodative monetary policy interacted with nonhousing macroprudential measures to increase total credit.

Non-Technical Summary
Jonathan Benchimol, Sophia Kazinnik, and Yossi Saadon. 2022. “Text Mining Methodologies with R: An Application to Central Bank Texts.” Machine Learning with Applications. [doi]Abstract

We review several existing text analysis methodologies and explain their formal application processes using the open-source software R and relevant packages. Several text mining applications to analyze central bank texts are presented.

    Jonathan Benchimol and Sergey Ivashchenko. 2021. “Switching Volatility in a Nonlinear Open Economy.” Journal of International Money and Finance. [doi]Abstract
    Uncertainty about an economy's regime can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how US shocks from both the real economy and financial markets affected the euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy, should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers.
    Paper Appendix
    Jonathan Benchimol and Makram El-Shagi. 2020. “Forecast Performance in Times of Terrorism.” Economic Modelling. [doi]Abstract
    Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, a factor that should be considered by decision-makers. We focus on terrorism as a mostly endogenously driven form of political uncertainty and assess the forecasting performance of market-based and professional inflation and exchange rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, the performance of both market-based and expert forecasts is significantly worse during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange rate forecasts.
    Jonathan Benchimol and Irfan Qureshi. 2020. “Time-Varying Money Demand and Real Balance Effects.” Economic Modelling. [doi]Abstract
    This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that household's money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the household's preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest elasticity of money demand of approximately one-third during the 1970s due to high trend inflation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to financial innovation. These developments led to a reduction in the welfare cost of inflation that subsequently explains the rise in monetary neutrality observed in the data.
    Jonathan Benchimol and André Fourçans. 2019. “Central Bank Losses and Monetary Policy Rules: A DSGE Investigation.” International Review of Economics & Finance. [doi]Abstract
    Central banks' monetary policy rules being consistent with policy objectives are a fundamental of applied monetary economics. We seek to determine, first, which of the central bank's rules are most in line with the historical data for the US economy and, second, what policy rule would work best to assist the central bank in reaching its objectives via several loss function measures. We use Bayesian estimations to evaluate twelve monetary policy rules from 1955 to 2017 and over three different sub-periods. We find that when considering the central bank's loss functions, the estimates often indicate the superiority of NGDP level targeting rules, though Taylor-type rules lead to nearly identical implications. However, the results suggest that various central bank empirical rules, be they NGDP or Taylor type, are more appropriate to achieve the central bank's objectives for each type of period (stable, crisis, recovery).
    Paper Online Appendix
    Jonathan Benchimol and André Fourçans. 2017. “Money and Monetary Policy in the Eurozone: An Empirical Analysis During Crises.” Macroeconomic Dynamics. [doi]Abstract
    This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.
    Paper Online Appendix
    Jonathan Benchimol. 2016. “Money and Monetary Policy in Israel During the Last Decade.” Journal of Policy Modeling. [doi]Abstract
    This study examines how money and monetary policy have influenced output and inflation during the past decade in Israel by comparing two New Keynesian DSGE models. One is a baseline separable model (Gali, 2008) and the other assumes non-separable household preferences between consumption and money (Benchimol & Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001–2013). The results of the presented dynamic analysis show that the sensitivity of output with respect to money shocks increased during the Dot-com, Intifada, and Subprime crises. The role of monetary policy increased during these crises, especially with regard to inflation, even though the effectiveness of conventional monetary policy decreased during the Subprime crisis. In addition, the non-separable model including money provides lower forecast errors than the baseline separable model without money, while the influence of money on output fluctuations can be seen as a good predictive indicator of bank and debt risks. By impacting and monitoring households’ money holdings, policy makers could improve their forecasts and crisis management through models considering monetary aggregates.
    Paper Online Appendix
    Jonathan Benchimol. 2015. “Money in the Production Function: A New Keynesian DSGE Perspective.” Southern Economic Journal. [doi]Abstract
    This article checks whether money is an omitted variable in the production process by proposing a microfounded New Keynesian Dynamic Stochastic General Equilibrium model. In this framework, real money balances enter the production function, and money demanded by households is differentiated from that demanded by firms. Using a Bayesian analysis, our model weakens the hypothesis that money is a factor of production. However, the demand of money by firms appears to have a significant impact on the economy, even if this demand has a low weight in the production process.
    Jonathan Benchimol. 2014. “Risk Aversion in the Eurozone.” Research in Economics. [doi]Abstract
    We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods from 1971 through 2011, each lasting for 20 years, to follow over time the dynamics of several parameters such as the risk aversion parameter; the Taylor rule coefficients; and the role of the risk aversion shock in output, inflation, interest rate, and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it was between 1971 and 2006, at least in the short run.