nep-cba New Economics Papers
on Central Banking
Issue of 2015‒07‒18
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation targeting and financial stability: providing policymakers with relevant information By Anders Vredin
  2. The Monetary Policy of the European Central Bank (2002-2015) By Stefano Micossi
  3. Alternative Monetary Policy and Central Banking By Giorgios Argitis
  4. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Morais, Bernardo; Peydro, Jose Luis; Ruiz, Claudia
  5. The Interactive Evolution of Economic Ideas and Experience - The Case of Canadian Inflation Targeting By David Laidler
  6. Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation By Ihrig, Jane E.; Meade, Ellen E.; Weinbach, Gretchen C.
  7. Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing By Saroj Bhattarai; Gauti B. Eggertsson; Bulat Gafarov
  8. Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter? By De Pooter, Michiel; Rebecca, DeSimone; Martin, Robert F.; Pruitt, Seth
  9. Central Bank Credibility and Black Market Exchange Rate Premia: A Panel Time Series Analysis By Mammadov, Fuad
  10. Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay By Williamson, Stephen D.
  11. Monetary Policy, Hot Housing Markets and Leverage By Ungerer, Christoph T.
  12. Survey on economic policies during the crisis By Felipe Serrano; Amaia Altuzarra
  13. Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta's Dissenting Policy By Eugene N. White
  14. Enhancing the financing of the real economy and financial stability in the United Kingdom By Olena Havrylchyk; Rafal Kierzenkowski
  15. The Federal Reserve System and World War I: Designing Policies without Precedent By Tallman, Ellis W.; Jacobson, Margaret M.
  16. Mandatory Disclosure and Financial Contagion By Fernando Alvarez; Gadi Barlevy
  17. Structural interdependence in monetary economics: theoretical assessment and policy implications By Cavalieri, Duccio

  1. By: Anders Vredin
    Abstract: Experience from financial crises and central bank policies in the past decade has led to an intensified debate about the relationship between monetary policy and financial stability. Since there is no established theoretical framework for analysing the links between financial stability and monetary policy, it is very difficult to deliver precise recommendations for policy.
    Keywords: monetary policy, financial stability, inflation targeting, central banks, financial crisis, financial frictions
    Date: 2015–07
  2. By: Stefano Micossi (Director General ASSONIME, Visiting Professor at the College of Europe)
    Abstract: This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.
    Keywords: Monetary Policy; European Central Bank; Quantitative easing; Financial and economic crisis
    JEL: E4 E5 F3 O52
    Date: 2015–07
  3. By: Giorgios Argitis (National and Kapodistrian University of Athens)
    Abstract: This paper points out policy suggestions for modern central banks to improve their effectiveness in terms of successfully targeting financial stability and employment. The theoretical foundations of the proposed policy suggestions rely on Minsky’s conceptualization of financial fragility and instability. It is argued that Minsky’s Financial Instability Hypothesis contextualizes how the financial structure of the effective demand and financial markets predispose to endogenous non-sustainable leverage and liability structures that result from position-making operations. We stress that Minsky advances an approach to central banking that is based on a cash-flow examination procedure to capture changes in the quality of leverage, solvency and liquidity of firms and banks that destabilize the macroeconomic system. We underline that Minsky patterns central banking and monetary policy within Ponzi financial practices and interconnections among financial institutions and financial markets. Following Minsky, we suggest discount window central banking, lender of last resort operations and targeting Ponzi finance as the most appropriate policies of modern central banks to deal with financial and macroeconomic instability.
    Keywords: Financial Fragility and Instability, Central Banking, Monetary Policy
    JEL: E12 E52 E58 G18
    Date: 2015–01–01
  4. By: Morais, Bernardo (Board of Governors of the Federal Reserve System (U.S.)); Peydro, Jose Luis (Universitat Pompeu Fabra); Ruiz, Claudia (World Bank)
    Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico, matched with firm and bank balance-sheet data, and by exploiting foreign monetary policy shocks, given the large presence of European and U.S. banks in Mexico. We find that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, U.K. monetary policy affects credit supply in Mexico via U.K. banks), in turn implying strong real effects, with substantially larger elasticities from monetary rates than QE. Moreover, low foreign monetary policy rates and expansive QE increase disproportionally more the supply of credit to borrowers with higher ex ante loan rates--reach-for-yield--and with substantially higher ex post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest that foreign QE increases risk-taking in emerging markets more than it improves the real outcomes of firms.
    Keywords: Credit channel of monetary policy; financial globalization; quantitative easing (QE); credit supply; risk-taking; foreign banks.
    JEL: E44 E52 E58 G01 G21 G28
    Date: 2015–07–02
  5. By: David Laidler (University of Western Ontario)
    Abstract: In Canada, targeting the inflation rate was intended as a temporary measure on a journey to price-level stability, but became a well-established monetary policy regime in its own right. This paper analyses the role of the interaction of economic ideas with the experience generated by their application to policy in bringing about this outcome. In the following account, changing beliefs about the stability or otherwise of ongoing inflation, the capacity of a flexible exchange rate to create a vicious circle of depreciation and rising domestic prices, and about the roles played by the natural unemployment rate and money growth in influencing economic outcomes are emphasised. Today’s standard DSGE approach to modelling inflation targeting arrived on the scene only after the Canadian regime was well established.
    Keywords: Money; Monetary Policy; Inflation; Inflation-targeting; Interest Rates; Unemployment; Exchange Rate
    JEL: B2 E5
    Date: 2015
  6. By: Ihrig, Jane E. (Board of Governors of the Federal Reserve System (U.S.)); Meade, Ellen E. (Board of Governors of the Federal Reserve System (U.S.)); Weinbach, Gretchen C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC's target will not work in current circumst ances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.
    Keywords: FOMC; Federal Reserve; liftoff; monetary policy implementation; monetary policy normalization; monetary policy tools
    JEL: E43 E52 E58
    Date: 2015–06–30
  7. By: Saroj Bhattarai; Gauti B. Eggertsson; Bulat Gafarov
    Abstract: We present a signalling theory of Quantitative Easing (QE) at the zero lower bound on the short term nominal interest rate. QE is effective because it generates a credible signal of low future real interest rates in a time consistent equilibrium. We show these results in two models. One has coordinated monetary and fiscal policy. The other an independent central bank with balance sheet concerns. Numerical experiments show that the signalling effect can be substantial in both models.
    JEL: E31 E4 E42 E43 E5 E52 E62 E63
    Date: 2015–07
  8. By: De Pooter, Michiel (Board of Governors of the Federal Reserve System (U.S.)); Rebecca, DeSimone (Columbia Business School); Martin, Robert F. (Barclays Capital); Pruitt, Seth (Arizona State University)
    Abstract: In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB's purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB's SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.
    Keywords: Monetary policy; interest rates; recession; European Central Bank; asset purchases; euro area
    JEL: E20 E43 E52 F44
    Date: 2015–07–06
  9. By: Mammadov, Fuad
    Abstract: The major goal of this study was analyze the effect of “credibility” shocks to the dynamics of inflation persistence in 20 countries using quarterly data for the period 1980-1998. To address this topic, we used recently developed heterogeneous panel time series methods and found that central bank credibility, as inferred from the black market premium, impacted the degree of inflation persistence associated with central bank interventions and that the magnitude of this effect was correlated with the degree of central bank autonomy.
    Keywords: Central bank credibility, black market exchange rate, heterogeneous dynamic panel, panel VAR
    JEL: C13 C23 E58
    Date: 2014–12–11
  10. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: This review essay is intended as a critical review of Humpage (2015), and it expands on the issues raised in that volume. Federal Reserve Policy during the financial crisis, and in its aftermath are addressed, along with the relationship to historical experience in the U.S. and elsewhere in the world.
    Keywords: Monetary policy; economic history
    JEL: E4 E5 N1
    Date: 2015–07–09
  11. By: Ungerer, Christoph T. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Expansionary monetary policy can increase household leverage by stimulating housing liquidity. Low mortgage rates encourage buyers to enter the housing market, raising the speed at which properties can be sold. Because lenders can resell seized foreclosure inventory at lower cost in such a hot housing market, ex-ante they are comfortable financing a larger fraction of the house purchase. Consistent with this mechanism, this study documents empirically that both the housing sales rate and loan-to-value ratios increase after expansionary monetary policy. Calibrating a New Keynesian macroeconomic model to fit the response of housing liquidity to monetary policy, the interaction between credit frictions and housing market search frictions generates endogenous movements in the loan-to-value ratio which amplify the economy's response to monetary policy.
    Keywords: Credit frictions; housing market; monetary policy; search frictions
    JEL: E32 E44 E52 R21
    Date: 2015–05–22
  12. By: Felipe Serrano (Department of Applied Economics V, University of the Basque Country UPV/EHU); Amaia Altuzarra (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: The Global Financial Crisis has meant for developed countries to return to an economic situation similar to that experienced during the Great Recession. At the root of the crisis, again, is the financial system. Financial innovation, combined with stringent regulatory failures and with an overly loose monetary policy, allowed to expand private credit disproportionately, fuelling a speculative bubble that, when it burst, generated a demand shock that eventually turn a financial crisis into an economic crisis with lasting consequences. This work attempts to examine the economic policies implemented during the crisis. We focus exclusively on demand policies, with special attention to those implemented in the first phase of the crisis. The economic policy implemented to overcome the crisis has passed through different stages. In the first stage, the strategy was a combination of expansionary monetary and fiscal policies. In the second stage, the fiscal stimuli begin to be withdrawn, while an aggressive monetary policy to stimulate private credit through expanding the money supply is maintained. The third stage is scheduled to start in late 2014. This third phase would be characterized by the end of demand policies and the recovery of supply policies or structural adjustment policies, especially for the case of emerging economies as well as economies of southern Eurozone.
    Keywords: fiscal policy, monetary policy, Eurozone, emerging countries, developed countries, financial crisis
    JEL: E02 E52 E58 E62
    Date: 2015–04–01
  13. By: Eugene N. White
    Abstract: During the 1920-1921 recession, the Federal Reserve Bank of Atlanta resisted the deflationary policy sanctioned by the Federal Reserve Board and pursued by other Reserve banks. By borrowing gold reserves from other Reserve banks, it facilitated a reallocation of liquidity to its district during the contraction. Viewing the collapse of the price of cotton, the dominant crop in the region, as a systemic shock to the Sixth District, the Atlanta Fed increased discounting and enabled capital infusions to aid its member banks. The Atlanta Fed believed that it had to limit bank failures to prevent a fire sale of cotton collateral that would precipitate a general panic. In this previously unknown episode, the Federal Reserve Board applied considerable pressure on the Atlanta Fed to adhere to its policy and follow a simple Bagehot-style rule. The Atlanta Fed was vindicated when the shock to cotton prices proved to be temporary, and the Board conceded that the Reserve Bank had intervened appropriately.
    JEL: E58 G01 N12 N22
    Date: 2015–07
  14. By: Olena Havrylchyk; Rafal Kierzenkowski
    Abstract: The banking sector in the United Kingdom (UK) was deeply affected by the crisis. Bank credit has collapsed reflecting both weak demand and tighter supply. New prudential requirements have improved the resilience of the banking sector and a number of measures were taken to support credit supply. These included conventional and unconventional monetary policies, policies to address credit constraints with Help to Buy and Funding for Lending programmes, and a number of public programmes to improve access to finance united under the roof of the British Business Bank. Further structural reforms are needed to improve competition in the SME credit market and to boost credit provision to SMEs in the medium term. Sustainable financing of the economy and greater financial stability should be achieved by sound regulation, ensuring high capital requirements for systemically important banks, improving banks’ resolvability and fine-tuning the use of countercyclical measures. Data should be collected on a wider set of financial institutions than currently done and macroprudential regulation should be gradually extended beyond the banking sector to prevent the migration of systemic risks. This Working Paper relates to the 2015 OECD Economic Survey of the United Kingdom (<P>Renforcer le financement de l'économie réelle et la stabilité financière au Royaume-Uni<BR>Le secteur bancaire du Royaume-Uni a été profondément touché par la crise. Les concours bancaires ont chuté, sous l’effet de la faiblesse de la demande aussi bien que des restrictions de l’offre. Les nouvelles obligations prudentielles ont cependant amélioré la résilience du secteur bancaire, et les pouvoirs publics ont pris un certain nombre de mesures pour soutenir l’offre de crédit, parmi lesquelles des mesures de politique monétaire conventionnelles et non conventionnelles, des mesures visant à alléger les contraintes pesant sur l’accès au crédit grâce aux programmes Help to Buy et Funding for Lending, ainsi que plusieurs programmes publics destinés à assouplir le crédit aux entreprises, regroupés sous l’égide de la British Business Bank. D’autres réformes structurelles sont nécessaires pour améliorer la concurrence sur le marché du crédit aux PME et stimuler les concours aux petites et moyennes entreprises à moyen terme. Il faudrait parvenir à assurer un financement durable de l’économie et une plus grande stabilité financière par l’adoption d’une réglementation solide, l’imposition de normes d’adéquation des fonds propres aux banques d’importance systémique, l’amélioration des possibilités résolution en cas de difficultés et d’affiner le recours aux mesures contra-cycliques. Il conviendrait aussi de recueillir des données portant sur un nombre d’institutions financières plus grand que ce qui est actuellement fait, et la réglementation macroprudentielle devrait être progressivement élargie au-delà du secteur bancaire afin de prévenir la diffusion des risques systémiques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Royaume-Uni, 2015 ( JEL classification: G21, G28, D14, D24
    Keywords: house prices, banks, capital, household, mortgages, deleveraging, financial stability, SMEs
    JEL: D14 D24 G21 G28
    Date: 2015–07–09
  15. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Jacobson, Margaret M. (Indiana University)
    Abstract: The Federal Reserve System failed to prevent the collapse of intermediation during the Great Depression (1929-1933) and took action as if it was unaware of policies that should have been taken in the event of widespread bank runs. The National Banking Era panics and techniques to alleviate them should have been useful references for how to alleviate a financial crisis. We suggest that the overwhelming effort to finance World War I combined with a perspective held by contemporary Federal Reserve officials that the central bank legislation was sufficient to overcome financial crises are key reasons why the historical experiences were overlooked.
    Keywords: Crisis prevention; liquidity provision; Federal Reserve Act
    JEL: E58 E61 N22
    Date: 2015–07–07
  16. By: Fernando Alvarez; Gadi Barlevy
    Abstract: This paper explores whether mandatory disclosure of bank balance sheet information can improve welfare. In our benchmark model, mandatory disclosure can raise welfare only when markets are frozen, i.e. when investors refuse to fund banks in the absence of balance sheet information. Even then, intervention is only warranted if there is sufficient contagion across banks, in a sense we make precise within our model. In the same benchmark model, if in the absence of balance sheet information investors would fund banks, mandatory disclosure cannot raise welfare and it will be desirable to forbid banks to disclose their financial positions. When we modify the model to allow banks to engage in moral hazard, mandatory disclosure can increase welfare in normal times. But the case for intervention still hinges on there being sufficient contagion. Finally, we argue disclosure represents a substitute to other financial reforms rather than complement them as some have argued.
    JEL: G01 G18 G33
    Date: 2015–07
  17. By: Cavalieri, Duccio
    Abstract: This is a theoretical analysis of structural interdependence in monetary economics and of its connections with the theories of value and capital. Some recent attempts to integrate money and finance in the theory of income and expenditure – those of the ‘Stock-Flow Consistent Approach’ to macroeconomics, of ‘Modern Monetary Theory’ and of Circuit Theories – are examined. The surplus approach to the theory of value and capital is then formally considered in a model devoid of Sraffian misleading dichotomic connotations, where money plays a fundamental role and flows and stocks are coherently reconciled. In such framework, a method for measuring the unit cost of real capital is indicated and some reasons for reconsidering the traditional approaches to monetary theory and policy in a ‘late Marxian’ updated analytical perspective are highlighted.
    Keywords: monetary theory; monetary policy; fiscal policy; structural interdependence; Sraffian dichotomy; post-Keynesian economics; MEV.
    JEL: B22 E12 E44 E52 M41
    Date: 2015–07–10

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