nep-cba New Economics Papers
on Central Banking
Issue of 2014‒03‒22
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Effects of ECB balance sheet policy announcements on inflation expectations By Richhild Moessner
  2. Inflation Expectations Spillovers between the United States and Euro Area By Aleksei Netšunajev; Lars Winkelmann; ;
  3. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'Baye
  4. Federal Reserve Communications and Newswire Coverage By Matthias Neuenkirch
  5. Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation By Bucher, Monika; Hauck, Achim; Neyer, Ulrike
  6. Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter? By Aurélien Leroy; Yannick Lucotte
  7. Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model By Bernd Hayo; Britta Niehof
  8. The Dynamics of Currency Crises---Results from Intertemporal Optimization and Viscosity Solutions By Christian Bauer; Philip Ernstberger
  9. European Monetary Policy in the Heterogeneous Currency Area and the Open Question of Convergence By Afflatet, Nicolas
  10. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Jordi Gali; Luca Gambetti
  11. Macroprudential Policies in a Global Perspective By Olivier Jeanne
  12. How Central Banks Learn the True Model of the Economy By Federico Ravenna
  13. The Transmission of Federal Reserve Tapering News to Emerging Financial Markets By Joshua Aizenman; Mahir Binici; Michael M. Hutchison
  14. Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked? By Robert N McCauley; Catherine R Schenk

  1. By: Richhild Moessner
    Abstract: We investigate whether ECB balance sheet policy announcements in the wake of the global financial crisis have affected the ECB.s monetary policy credibility as measured by long-term inflation expectations, by looking at their effects on euro area inflation swap rates of maturities up to 10 years. We consider asset purchase programmes and long-term refinancing operations with maturities above 6 months. We find that these announcements only led to a slight increase in long-term inflation expectations. We therefore find no strong evidence to suggest that ECB balance sheet policy announcements have led to much higher long-term inflation expectations, suggesting that the monetary policy credibility of the ECB has not been harmed by these policies.
    Keywords: Monetary policy; central bank communication; balance sheet policies; inflation expectations
    JEL: E52 E58
    Date: 2014–03
  2. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: We quantify spillovers of inflation expectations between the United States (US) and Euro Area (EA) based on break-even inflation (BEI) rates. In contrast to previous studies, we model US and EA BEI rates jointly in a structural vector autoregressive (SVAR) model. The SVAR approach allows to identify US and EA specific inflation expectations shocks. By modeling the heteroscedasticity of the data, we are able to test the identifying restrictions of structural shocks and analyze time-varying spillovers. Adjusted for BEI risk premia, our main result suggests that spillovers of inflation expectations increase during times of macroeconomic stress. We document a significant impact of the European sovereign debt crisis on US expectations. The finding contributes to the discussion about a weakening of inflation control by national central banks and speaks in favor of internationally coordinated policy actions, especially during crisis times.
    Keywords: International transmissions, break-even inflation, credibility of monetary policy, structural vector autoregressive (SVAR) analysis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2014–03
  3. By: Ummad Mazhar (Shaheed Zul kar Ali Bhutto Institute of Science and Technology - Shaheed Zul kar Ali Bhutto Institute of Science and Technology); Cheick Kader M'Baye (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.
    Keywords: Forecasts transparency; monetary policy transparency; central banking; inflation volatility; output volatility
    Date: 2014–03–06
  4. By: Matthias Neuenkirch
    Abstract: In this paper, we explore the determinants of newswire coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward‐looking communications made in the period May 1999–May 2004. We find, first, that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by Chairman Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of newswire coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, newswire coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his chairmanship.
    Keywords: Central Bank Communication; Federal Open Market Committee; Federal Reserve; Monetary Policy; Newswire Coverage
    JEL: D83 E52 E58
    Date: 2014–01–29
  5. By: Bucher, Monika; Hauck, Achim; Neyer, Ulrike
    Abstract: This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. The frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at its disposal to impose an impact on bank loan supply. Lowering the rate on the deposit facility has, taken for itself, a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound. --
    Keywords: interbank market,monetary policy,monetary policy implementation,zero lower bound,loan supply
    JEL: E52 E58 G21
    Date: 2014
  6. By: Aurélien Leroy (Laboratoire d’Economie d’Orléans); Yannick Lucotte (ESG Management School; Department of Economics,)
    Abstract: This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.
    Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model
    JEL: C23 D4 E43 E52 G21 L10
    Date: 2014
  7. By: Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg)
    Abstract: We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent Financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting economic adjustment paths are similar to those of the theoretical model.
    Keywords: New Keynesian Model, Financial Crisis, Stochastic Differential Equation, Monetary Policy, Taylor Rule
    JEL: C02 C63 E44 E47 E52 F41
    Date: 2014
  8. By: Christian Bauer; Philip Ernstberger
    Abstract: We apply an infinite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend off speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.
    Keywords: intertemporal optimization; currency crises; policy design
    JEL: C61 E58 E61 F3
    Date: 2014
  9. By: Afflatet, Nicolas
    Abstract: Divergent macro-economic developments within a currency area can lead to undesired distortions. That is why in the Eurozone much attention was drawn to the homogeneity of the currency area. However, at the beginning the Eurozone seemed to be too heterogeneous for a common currency. So many hopes relied on a convergent development under the common currency so that the single monetary policy would meet the needs of all member countries. Based on the Taylor rule this article shows that these needs differ a lot within the currency union. Stationarity tests investigate whether the differences in inflation and growth rates have diminished. In this case, the single monetary policy would rather meet the monetary needs of the member countries. On the one hand, (partially small) hints for convergence can be found for several countries. On the other hand divergent developments can be assessed for others. These results lead to the conclusion that the single monetary policy will not meet the needs of all member countries in the foreseeable future. This should cause some concerns. As a result, the member countries should orientate their policies on measures which contribute to the efficiency of the currency area. --
    Keywords: Taylor rule,convergence,divergence,time series tests,stationarity,currency area,single monetary policy
    Date: 2014–03
  10. By: Jordi Gali; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which, after a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    JEL: E52 G12
    Date: 2014–03
  11. By: Olivier Jeanne
    Abstract: This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons.
    JEL: F36 F41 F42
    Date: 2014–03
  12. By: Federico Ravenna
    Abstract: Policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. We investigate how policy choices affect learning of the true model of the economy when the policymaker’s model is mis-specified. We ask under what conditions can the central bank learn the correct specification of the model describing the economy, and what is the impact of exogenous shocks and of adopting an optimal monetary policy on the speed of learning. Slow learning can occur simply because identifying the correct model at standard confidence levels requires a long data sample. We show that neither real-time learning by the policymaker or the private sector, nor the adoption of an optimal policy, affect the speed of detection of model misspecification. Detection speed depends instead on the relative volatility of supply and demand shocks.
    Keywords: Learning, Optimal policy, Model misspecification
    JEL: E58
    Date: 2014
  13. By: Joshua Aizenman; Mahir Binici; Michael M. Hutchison
    Abstract: This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the stronger group was more adversely exposed to tapering news than the weaker group. News of tapering coming from Chairman Bernanke is associated with much larger exchange rate depreciation, drops in the stock market, and increases in sovereign CDS spreads of the robust group compared with the fragile group. A possible interpretation is that tapering news had less impact on countries that received fewer inflows of funds in the first instance during the quantitative years and had less to lose in terms of repatriation of capital and reversal of carry-trade activities.
    JEL: F3 F36 G14
    Date: 2014–03
  14. By: Robert N McCauley; Catherine R Schenk
    Abstract: This paper analyses the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US Treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent, high prices for gold. However, had the US dollar return been based on US Treasury bond yields, the substitution account would have been solvent even without any gold backing.
    Keywords: Special Drawing Right, substitution account, reserve currency, foreign exchange reserves; International Monetary Fund
    Date: 2014–03

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