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on Central Banking |
| By: | Matteo Bonetti; Dirk Broeders; Damiaan Chen; Daniel Dimitrov |
| Abstract: | In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively. |
| Keywords: | Capital; Central Bank; Contingent Claim Analysis, Risk Management; Shareholder; Stackelberg Games |
| JEL: | G13 G32 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:809&r=cba |
| By: | Egemen Eren; Timothy Jackson; Giovanni Lombardo |
| Abstract: | Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets. |
| Keywords: | optimal monetary policy, central bank balance sheet, government debt, reserves, financial frictions, macroprudential |
| JEL: | E42 E44 E51 E52 G2 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1173&r=cba |
| By: | Ida, Daisuke; Kaminoyama, Kenichi |
| Abstract: | This paper explores the impact of the cost channel on the monetary transmission mechanism in a behavioral New Keynesian model. In contrast to previous studies, we demonstrate that the degree of cognitive discounting significantly affects the determinacy condition in the model with a cost channel. Second, we show that the price puzzle arises only when a large value of the cost channel parameter, which is not empirically supported, is introduced with a high degree of cognitive discounting. Third, we find that the degree of cognitive discounting significantly impacts the effect of the cost channel on optimal monetary policy. |
| Keywords: | Cognitive discounting; New Keynesian model; Cost channel; Monetary policy rules; Price puzzle; |
| JEL: | E52 E58 |
| Date: | 2024–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120424&r=cba |
| By: | Cappelletti, Giuseppe; Marqués-Ibáñez, David; Reghezza, Alessio; Salleo, Carmelo |
| Abstract: | How a historic drop in bank deposits shapes banks’ loan supply? We exploit the effects of a large, and unexpected, increase in monetary policy rates to estimate the deposit channel of monetary policy using an extensive credit register that includes all bank-firm lending relationships in all euro area countries. We find that banks experiencing large deposit outflows reduce credit, but not the interest rate they charge, to the same borrower relative to other lenders. This credit restriction is stronger for fixed rate and longer maturity loans, but not for riskier borrowers. The effect is mostly driven by banks coming into the hiking period with a larger unhedged duration gap that renders borrowers of those banks more vulnerable to credit restrictions due to the deposit outflows as interest rates surge. We resort to the deposit beta as an instrument variable and a matched estimator that bear out the thrust of our results. JEL Classification: E51, E58, G21 |
| Keywords: | bank deposits, banks, monetary policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242923&r=cba |
| By: | Pablo A. Aguilar (Banco de España); Mario Alloza (Banco de España); James Costain (Banco de España); Samuel Hurtado (Banco de España); Jaime Martínez-Martín (Banco de España) |
| Abstract: | This paper empirically quantifies the effect on Spain’s public finances of the asset purchase programmes implemented in the euro area between 2015 and 2022. Specifically, it evaluates the impact of the ECB’s Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) on Spanish public revenue, expenditure, deficit and debt. The results suggest that these programmes have had a significant cumulative downward effect on the level of public debt. |
| Keywords: | quantitative easing, asset purchase programmes, unconventional monetary policy, term structure models, signaling and portfolio balance effects, expectations channel, fiscal effects, Spain |
| JEL: | E43 E44 E52 E63 E65 G18 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2409e&r=cba |
| By: | Ojo, Marianne |
| Abstract: | Important lessons which were drawn from the most recent GFC - notably, the growing need for accommodative policies (unconventional and conventional) to facilitate appropriate responses - given limited monetary policy spaces, the emergence, rise and evolution of private actors and their implications for monetary policies and financial stability. Amongst other goals and objectives, this paper considers innovative possibilities - particularly those of distributed ledger technologies which constitute benefits which can be harnessed to enhance digital possibilities of the Fourth Industrial Revolution. |
| Keywords: | monetary policies; financial stability; innovative techniques; forecasting techniques ; accommodative policies |
| JEL: | E43 E47 E58 G2 M21 O1 O19 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120515&r=cba |
| By: | Salomón García-Villegas (Banco de España); Enric Martorell (Banco de España) |
| Abstract: | How should bank capital requirements be set to deal with climate-related transition risks? We build a general equilibrium macro banking model where production requires fossil and low-carbon energy intermediate inputs, and the banking sector is subject to volatility risk linked to changes in energy prices. Introducing carbon taxes to reduce carbon emissions from fossil energy induces risk spillovers into the banking sector. Sectoral capital requirements can effectively address risks from energy-related exposures, benefiting household welfare and indirectly facilitating capital reallocation. Absent carbon taxes, implementing fossil penalizing capital requirements does not reduce emissions significantly and may threaten financial stability. During the transition, capital requirements can complement carbon tax policies, safeguarding financial stability and trading off long-run welfare gains against lower investment and credit supply in the short run. |
| Keywords: | climate risk, financial intermediation, macroprudential policy, bank capital requirements |
| JEL: | Q43 D58 G21 E44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2410&r=cba |
| By: | Paula Bejarano Carbo |
| Abstract: | This paper leverages insights from data and economic theory in order to construct a narrative account of how the nature of inflation has evolved over time in the euro area, United Kingdom and United States since the onset of the Covid-19 pandemic. To this end, I decompose the recent 'inflationary surge episode' into four periods: The Covid shock period (2020 Q1 – 2020 Q2), characterised by joint a negative demand and supply shock; the economic reopening period (2020 Q3 – 2021 Q4), characterised by conflicting positive demand and negative supply shocks; the post-reopening period (2022 Q1 – 2023 Q1), also characterised by conflicting positive demand and negative supply shocks, where the latter is driven by an exogenous increase in energy prices; and the post-energy shock period (2023 Q2 – present), characterised by falling consumer price index (CPI) inflation alongside still-elevated and broad-based underlying inflationary pressures. Having established this 'inflation story', I conclude with some brief comments on the European Central Bank, Bank of England and Federal Reserve monetary policy responses during this time. |
| Keywords: | Inflation, Monetary Policy, Central Bank Policy, Comparative Analysis |
| JEL: | E31 E50 E58 E63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:554&r=cba |
| By: | Heider, Florian; Schlegel, Jonas |
| Abstract: | This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem stillholds plenty of reserveseven with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines ofthe euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages. This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:287744&r=cba |
| By: | Sushant Acharya; Paolo A. Pesenti |
| Abstract: | We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher fractions of high MPC households and more countercyclical income risk. Quantitatively, both channels amplify spillovers by 30-60% relative to RANK. |
| JEL: | E50 F41 F42 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32245&r=cba |
| By: | Steffen Murau (Global Climate Forum, Berlin; Freie Universität Berlin; Global Development Policy Center, Boston University); Alexandru-Stefan Goghie (Freie Universität Berlin); Matteo Giordano (Department of Economics, SOAS University of London) |
| Abstract: | Despite the paramount centrality of repurchase agreements (repos) in today’s market-based finance regime, both conceptual and empirical questions about European repo markets are insufficiently explored as contradictory legal and accounting treatments make their on-balance-sheet representation intricate. Drawing on the literature on monetary hierarchy, we make three connected conceptual arguments: First, we argue that the balance sheet mechanics of repos vary if the counterparties involved are on hierarchically different levels (“vertical repos†) or on the same hierarchical level (“horizontal repos†). While the vertical repo mechanism implies money creation, the horizontal repo mechanism only lends on pre-existing money. Second, we coherently represent the whereabouts of the security posted as repo collateral, which is held as an off-balance-sheet position of the repo lender, combined with a liability to repay it. Basel III regulations interpret this ambiguous status of the collateral as being “encumbered†and not leaving the repo borrower’s balance sheet. Third, we introduce an on-balance-sheet notation of the collateral framework as a means of the repo lender to alter the elasticity of the funding provided. Applying our methodology on two cases—vertical repos created by the Eurosystem for monetary policy implementation and horizontal repos used in the European interbank market—offers an innovative and consistent way to represent changes in the collateral frameworks that affect the elasticity space in the Euro area’s monetary architecture. Our analysis yields two main contributions: We offer a novel understanding of different mechanisms for repo creation based on monetary hierarchy, and we put forth a data-driven empirical analysis of repos in Europe aimed at supporting our conceptual elaborations. |
| Keywords: | repurchase agreements; collateral; market-based finance; Eurosystem; European Central Bank; Eurex clearing. |
| JEL: | G21 G23 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:262&r=cba |
| By: | Jonathan G. James (Department of Economics, Swansea University); Philip Lawler (Department of Economics, Swansea University) |
| Abstract: | The issue of optimal central bank disclosure of its information regarding aggregate demand shocks is revisited in the context of a widely studied model featuring monopolistically competitive firms whose observations of central bank announcements are subject to private errors. Given the existence of such ‘receiver noise’, the principal conclusion drawn by previous contributions using this framework is found to be overturned when a plausible additional modification is made to the information structure: namely, the existence of public information which is exogenous in the sense that its informativeness regarding shock realizations is beyond the central bank’s influence. For plausible parameterizations, full disclosure of its own information by the central bank is found to be welfare-dominated by a policy of partial obfuscation. The key insight is found to have wider relevance beyond the specific macroeconomic framework deployed, notably to models of supply-schedule competition in homogeneous-good markets. |
| Keywords: | strategic complementarity; public disclosure; receiver noise |
| JEL: | D62 D82 E58 |
| Date: | 2024–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:swn:wpaper:2024-03&r=cba |
| By: | Davide Debortoli; Jordi Galí |
| Abstract: | We analyze the merits and limitations of simple tractable New Keynesian models (RANK and TANK) in accounting for the aggregate predictions of Heterogenous Agent New Keynesian models (HANK). By means of comparison of a number of nested HANK models, we isolate the role played by (i) idiosyncratic income risk, (ii) a binding borrowing constraint, and (iii) a portfolio choice between liquid and illiquid assets. We argue that the effects of household heterogeneity can be largely understood looking at the differential behavior of two types of households, hand-to-mouth and unconstrained, We find that a suitably specified and calibrated TANK model (which abstracts from idiosyncratic income risk) captures reasonably well the aggregate implications of household heterogeneity and the main channels through which it operates. That ability increases in the presence of a policy rule that emphasizes inflation stability. In the limiting case of a strict inflation targeting policy, heterogeneity becomes irrelevant for the determination of aggregate output. |
| Keywords: | monetary policy, idiosyncratic income risk, incomplete markets, representative household, New Keynesian model, HANK models |
| JEL: | E32 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1436&r=cba |
| By: | Claudia M. Buch; Linda S. Goldberg |
| Abstract: | Global liquidity flows are largely channeled through banks and nonbank financial institutions. The common drivers of global liquidity flows include monetary policy in advanced economies and risk conditions. At the same time, the sensitivities of liquidity flows to changes in these drivers differ across institutions and have been evolving over time. Microprudential regulation of banks plays a role, influencing leverage and capitalization, changing sensitivities to shocks, and also driving risk migration from banks to nonbank financial institutions. Risk sensitivities and flightiness of global liquidity are now strongest in more leveraged nonbank financial institutions, raising challenges in stress episodes. Current policy initiatives target linkages across different types of financial institutions and associated risks. Meanwhile, significant gaps remain. This paper concludes by discussing policy options for addressing systemic risk in banks and nonbanks. |
| Keywords: | international banks; nonbank financial institutions; global liquidity; regulation; prudential policy |
| JEL: | F3 G21 G23 G28 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97968&r=cba |
| By: | Yumeng Gu; Sanjay R. Singh |
| Abstract: | We incorporate incumbent innovation in a Keynesian growth framework to generate an endogenous distribution of market power across firms. Existing firms increase markups over time through successful innovation. Entrant innovation disrupts the accumulation of market power by incumbents. Using this environment, we highlight a novel misallocation channel for monetary policy. A contractionary monetary policy shock causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. We characterize the circumstances when contractionary monetary policy may increase misallocation. |
| Keywords: | monetary policy; markup dispersion; allocative efficiency; market power |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97992&r=cba |
| By: | Alex Hsu; Indrajit Mitra; Yu Xu; Linghang Zeng |
| Abstract: | We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to explain these patterns. Our model rationalizes the slow decline in inflation in 2022–23 despite aggressive policy rate hikes. |
| Keywords: | monetary policy; Fed information effect; heterogeneous investment response |
| JEL: | E22 E52 G31 |
| Date: | 2023–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:97979&r=cba |
| By: | Corentin Roussel |
| Abstract: | Differentiated treatment of green credit risk in banks’ capital requirements to favor green transition generates lot of debates among European prudential regulators. The aim of this paper is to examine whether the key Basel 3 finalization instrument - the Output Floor - should be applied to green credit risk in order to ensure stability of banking system and promote green finance. To do so, we assess macrofinancial and environmental benefits of such green policy for the Euro Area through the lens of a general equilibrium model. We get three main results. First, when banks get transitory ’environmental awareness’, an Output Floor (OF) applied to brown credits only (i.e. a brown OF) faces a trade-off between limiting environmental aftermaths and reaching OF objectives (i.e reducing volatility of banks’ capital adequacy ratio). Second, to mitigate the prudential cost of this trade-off, brown OF should be joined with additional green financial policies such as green Quantitative Easing. Third, pollutant emissions tax erodes brown OF efficiency along financial and economic cycles but limits the welfare cost implied by pollution in the long run. |
| Keywords: | Output Floor, Credit Risk, Green Finance, Climate Change, DSGE. |
| JEL: | Q54 G21 E44 E51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-07&r=cba |
| By: | Dominik Boddin; Daniel Marcel te Kaat; Chang Ma; Alessandro Rebucci |
| Abstract: | We document a housing portfolio channel of quantitative easing (QE) transmission exploiting variation in German household data in a difference-in-differences setting around QE adoption in 2015. We find that QE encourages households with larger initial bond positions to rebalance more toward second homes. Rebalancing is especially pronounced among higher-income and church-affiliated households with stronger tax incentives to purchase and rent out properties. We also show that, in regions more exposed to this channel, house prices increase more than rents, and sale listings decrease more than rental ones, suggesting that the rental supply may increase in response to QE. |
| JEL: | E0 G11 R0 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32211&r=cba |
| By: | Mengting Zhang; Andreas Steiner; Jakob de Haan; Haizhen Yang |
| Abstract: | We analyse how reversals of several types of capital flows impact currency crises in emerging market and developing economies. Estimates of logit models show that reversals of (equity and debt) portfolio flows significantly increase the likelihood of currency crises in emerging market economies. In developing economies, reversals of portfolio debt flows and banking flows have a significant positive impact on currency crises. Finally, our results suggest that countries with mature financial systems and fixed exchange rate regimes are less likely to experience a currency crisis after a capital flow shock. The mediating role of capital account liberalization varies by country type. |
| Keywords: | capital flow reversals, currency crises, event study approach, logit models, domestic financial factors |
| JEL: | E44 E51 F34 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11008&r=cba |
| By: | Charles W. Calomiris; Matthew S. Jaremski |
| Abstract: | The high social costs of financial crises imply that economists, policymakers, businesses, and households have a tremendous incentive to understand, and try to prevent them. And yet, so far we have failed to learn how to avoid them. In this article, we take a novel approach to studying financial crises. We first build ten case studies of financial crises that stretch over two millennia, and then consider their salient points of differences and commonalities. We see this as the beginning of developing a useful taxonomy of crises – an understanding of the most important factors that reappear across the many examples, which also allows (as in any taxonomy) some examples to be more similar to each other than others. From the perspective of our review of the ten crises, we consider the question of why it has proven so difficult to learn from past crises to avoid future ones. |
| JEL: | E30 G01 N20 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32213&r=cba |