nep-cba New Economics Papers
on Central Banking
Issue of 2015‒08‒07
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. On the Limits of Macroprudential Policy By Marcin Kolasa
  2. International Capital Market Frictions and Spillovers from Quantitative Easing By Margaux MacDonald
  3. Monetary policy with asset-backed money By David Andolfatto; Aleksander Berentsen; Christopher Waller
  4. Patience and Inflation By Hübner, Malte; Vannoorenberghe, Gonzague
  5. Why Did Bank Lending Rates Diverge from Policy Rates After the Financial Crisis? By Anamaria Illes; Marco Lombardi; Paul Mizen
  6. Macroeconomic Policy after the Global Financial Crisis By Quiggin, John
  7. From Financial Repression to External Distress: The Case of Venezuela By Carmen M. Reinhart; Miguel Angel Santos
  8. Optimal Time-Consistent Macroprudential Policy By Enrique Mendoza; Javier Bianchi
  9. Limited commitment and the demand for money in the U.K. By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  10. Optimal Inflation Weights in the Euro Area By Daniela Bragoli; Massimiliano Rigon; Francesco Zanetti
  11. On the conditional distribution of euro area inflation forecast By Fabio Busetti; Michele Caivano; Lisa Rodano
  12. Understanding policy rates at the zero lower bound: insights from a Bayesian shadow rate model By Marcello Pericoli; Marco Taboga
  13. Economic resilience: The usefulness of early warning indicators in OECD countries By Mikkel Hermansen; Oliver Röhn
  14. Weekly versus Monthly Unit Value Price Indexes By de Haan, Jan; Diewert, W. Erwin; Fox, Kevin J.
  15. Can global economic conditions explain low New Zealand inflation? By Adam Richardson
  16. Real Assets and Inflation: Which Real Assets Hedge Inflation By Parajuli, Rajan; Chang, Sun Joseph

  1. By: Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: This paper considers a canonical New Keynesian macrofinancial model to analyze how macroprudential policy tools can help the monetary authority in reaching a selection of dual stabilization objectives. We show that using the loan-to-value ratio as an additional policy instrument does not allow to resolve the standard inflation-output volatility tradeoff. Simultaneous stabilization of inflation and either credit or house prices with monetary and macroprudential policy is possible only if the role of credit in the economy is very small. Overall, our results suggest that macroprudential policy has important limits as a complement to monetary policy.
    Date: 2015
  2. By: Margaux MacDonald (Queen's University)
    Abstract: This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) during 2008–2014. I show that there was substantial heterogeneity in the way EME currency, equity, and long-term sovereign bond markets were impacted by these purchases. Drawing on the gravity-in-international- finance literature, I show evidence that the degree of economic integration between EMEs and advanced countries is able to explain some of the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of the domestic monetary policy, exchange-rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the US Federal Reserve or other advanced country central banks engaging in the purchases.
    Keywords: Emerging markets, Unconventional monetary policy, Gravity
    JEL: E4 E5 F3
    Date: 2015–07
  3. By: David Andolfatto; Aleksander Berentsen; Christopher Waller
    Abstract: We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capi- tal and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of claims outstanding, (ii) the dividends paid to claim holders, and (iii) the structure of redemption fees. We find that for capital-rich economies, the first-best allocation can be implemented and price stability is optimal. However, for sufficiently capital-poor economies, achieving the first-best allocation requires a strictly positive rate of inflation. In general, the minimum infiation necessary to implement the first-best allocation is above the Friedman rule and varies with capital wealth.
    Keywords: Limited commitment, asset-backed money, optimal monetary policy
    JEL: D82 D83 E61 G32
    Date: 2015–06
  4. By: Hübner, Malte; Vannoorenberghe, Gonzague
    Abstract: Monetary policy makers constantly face an inter-temporal choice problem. By gener- ating surprise inflation they can temporarily increase employment and output. These short-run gains have however to be weighed against the long-run costs associated with higher inflation and a loss of reputation. More patient countries should therefore choose to implement lower inflation. Using cross-country data for up to 88 advanced and emerging economies, we provide empirical evidence that more patient countries had indeed lower average inflation rates over our sample period from 1961 to 2009. To address the possibility that patience may be endogenous to past inflation rates we use information on how the language spoken in a country encodes future time as an instrument for patience. Our results show that patience has a statistically and economically significant impact on inflation.
    Keywords: Inflation, Patience, Stability Culture
    JEL: D72 E31 E58 Z13
    Date: 2015–07–20
  5. By: Anamaria Illes; Marco Lombardi; Paul Mizen
    Abstract: After the global finance crisis short-term policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between policy rates and lending rates, how should central banks view the post-crisis transmission of policy to lending rates? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over policy rates. It suggests central banks should focus on the cost of bank liabilities more broadly to understand the dynamics of lending rates.
    Keywords: Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015
  6. By: Quiggin, John
    Abstract: This chapter describes the ideology of market liberalism, the macroeconomic policies and institutions it produced, and the failure of those policies and institutions that produced the GFC and the subsequent deep recession in most developed countries. Although it is impossible to prescribe a fully-developed alternative policy framework at this point, new directions in macroeconomic policy are sketched out, including countercyclical fiscal policy, the need for an increase in public sector revenue and expenditure, and new approaches to monetary policy and financial regulation.
    Keywords: Global financial crisis, market liberalism, Australia, monetary policy., Political Economy, Public Economics, G28, E6,
    Date: 2013–09
  7. By: Carmen M. Reinhart; Miguel Angel Santos
    Abstract: Recent work has supported that there is a connection between the level of domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. This experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies, we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of the much higher domestic debt-to-GDP ratios in the latter. However, the financial repression “tax rate” is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case.
    JEL: E4 E5 E58 E6 F31 F36 N26
    Date: 2015–07
  8. By: Enrique Mendoza (University of Pennsylvania); Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: Collateral constraints widely used in models of financial crises feature a pecuniary externality, because agents do not internalize how collateral prices respond to collective borrowing decisions, particularly when binding collateral constraints trigger a crisis. We study a production economy in which physical assets serve as collateral for debt and working capital loans, and show that agents in a competitive equilibrium borrow ``too much" during credit expansions compared with a financial regulator who internalizes this externality. Under commitment, however, this regulator faces a time inconsistency problem: It promises low future consumption to prop up current asset prices when collateral constraints bind, but this is not optimal ex post. Instead, we examine the optimal, time-consistent policy of a regulator who cannot commit to future policies. Quantitative analysis shows that this policy reduces the incidence and magnitude of crises, removes fat tails from the distribution of returns and reduces risk premia. A key element of this policy is a state-contingent macro-prudential debt tax (i.e. a tax imposed in normal times when a financial crisis has positive probability next period) of about 1 percent on average. Constant debt taxes also reduce the frequency of crises but are less effective at reducing their severity and reduce welfare when credit constraints bind.
    Date: 2015
  9. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: In the United Kingdom, money demand deviates from the convex relationship suggested by monetary theory. Limited commitment of borrowers via banks can explain this observation. Our finding is based on a microfounded monetary model, where a money market provides insurance against idiosyncratic liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.K. data and show that limited commitment significantly improves the fit between the theoretical money demand function and the data. Limited commitment can also explain the "liquidity trap"; i.e., why the ratio of credit to Ml is currently so low, despite the fact that nominal interest rates are at their lowest recorded levels.
    Keywords: Money demand, money markets, financial intermediation, limited commitment
    JEL: E4 E5 D9
    Date: 2015–07
  10. By: Daniela Bragoli (Università Cattolica); Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This study investigates the appropriate measure for stabilizing inflation in the Euro Area. We use a model that accounts for both the heterogeneity observed in the degree of price rigidities across regions and sectors, and asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or sector result from complex interactions between the degree of price stickiness, economic size and the distribution of shocks within regions.
    Keywords: Optimal monetary policy, Euro Area regions, asymmetric shocks, asymmetric price stickiness.
    JEL: E52 F41
    Date: 2015–07
  11. By: Fabio Busetti (Bank of Italy); Michele Caivano (Bank of Italy); Lisa Rodano (Bank of Italy)
    Abstract: The paper uses dynamic quantile regressions to estimate and forecast the conditional distribution of euro-area inflation. As in a Phillips curve relationship we assume that inflation quantiles depend on past inflation, the output gap, and other determinants, namely oil prices and the exchange rate. We find significant time variation in the shape of the distribution. Overall, the quantile regression approach describes the distribution of inflation better than a benchmark univariate trend-cycle model with stochastic volatility, which is known to perform very well in forecasting inflation. In an out-of-sample prediction exercise, the quantile regression approach provides forecasts of the conditional distribution of inflation that are superior, overall, to those produced by the benchmark model. Averaging the distribution forecasts of the different models improves robustness and in some cases results in the greatest accuracy of distributional forecasts.
    Keywords: quantile regression, Phillips curve, time-varying distribution
    JEL: C32 E31 E37
    Date: 2015–07
  12. By: Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy)
    Abstract: Term structure models are routinely used by central banks to assess the impact of their communication on market participants' views of future interest rate developments. However, recent studies have pointed out that traditional term structure models can provide misleading indications when policy rates are at the zero lower bound (ZLB). One of the main drawbacks is that they are unable to reproduce the stylized fact that policy rates tend to remain at the ZLB for prolonged periods of time once they reach it. A consensus has recently emerged that shadow rate models, first introduced by Black (1995), are apt to solve this problem. The main idea is that the shadow rate (i.e., the short-term interest rate that would prevail in the absence of the ZLB) can move in negative territory for long time spans even when the actual rate remains close to the ZLB. Due to their high nonlinearity, shadow rate models are particularly difficult to estimate and have been so far only estimated with approximate methods. We propose an exact Bayesian method for their estimation. We use it to study developments in euro and US dollar yield curves since the end of the '90s. Our estimates confirm - and provide a quantitative assessment of - the fact that there has been a significant divergence of monetary policies in the euro area and in the US over the past years: between 2009 and 2013, the shadow rate was much lower in the US than in the euro area, while the opposite has been true since 2014; furthermore, at the end of our sample (January 2015), the most likely date of the the first increase in policy rates was estimated to be around mid-2015 in the US and around 2020 in the euro area.
    Keywords: zero lower bound, shadow rate term structure model
    JEL: C32 E43 G12
    Date: 2015–07
  13. By: Mikkel Hermansen; Oliver Röhn
    Abstract: The global financial crisis and the high associated costs have revived the academic and policy interest in “early warning indicators” of crises. This paper provides empirical evidence on the usefulness of a new set of vulnerability indicators, proposed in a companion paper (Röhn et al., 2015), in predicting severe recessions and crises in OECD countries. To evaluate the usefulness of the indicators the signalling approach is employed, which takes into account policy makers’ preferences between missing crises and false alarms. Our empirical evidence shows that the majority of indicators would have helped to predict severe recessions in the 34 OECD economies and Latvia between 1970 and 2014. Indicators of global risks consistently outperform domestic indicators in terms of their usefulness, highlighting the importance of taking international developments into account when assessing a country’s vulnerabilities. In the domestic areas, indicators that measure asset market imbalances (real house and equity prices, house price-to-income and house price-to-rent ratios), also perform consistently well both in and out-of sample. Domestic credit related variables appear particularly useful in signalling upcoming banking crises and in predicting the global financial crisis out-of-sample. The results are broadly robust to different definitions of costly events, different forecasting horizons and different time and country samples.<P>Résilience économique : L'utilité des indicateurs d'alerte rapide dans des pays de l'OCDE<BR>La crise financière mondiale et les coûts associés élevés ont ravivé l'intérêt pour les « indicateurs d'alerte rapide » des crises. Cette étude fournit des données statistiques sur l'utilité d'un nouvel ensemble d'indicateurs de vulnérabilité, proposé dans une étude connexe (Röhn et al., 2015), pour prédire les récessions graves et les crises dans les pays de l'OCDE. Pour évaluer l'utilité des indicateurs la méthode de signalisation est employée. Celle-ci prend en compte les préférences des décideurs politiques entre les crises manquantes et les fausses alarmes. Les résultats de l’analyse statistique montrent que la majorité des indicateurs aurait aidé à prédire les récessions sévères dans les 34 économies de l'OCDE et la Lettonie entre 1970 et 2014. Les indicateurs de risque global surclassent systématiquement les indicateurs domestiques en termes d’information utile, soulignant l'importance de prendre les développements internationaux en compte lors de l'évaluation des vulnérabilités d'un pays. Dans les champs domestiques, des indicateurs qui mesurent les déséquilibres du marché des actifs (les prix réels des logements et le cours des actions, le ratio du prix des logements au revenu disponible et le ratio du prix des logements au coût des loyers), performe bien dans et hors de l'échantillon. Les variables reliées au crédit domestique semblent particulièrement utile dans la signalisation des crises bancaires et à prédire la crise financière mondiale hors-échantillon. Les résultats sont globalement robustes pour différentes définitions d'événements onéreux, différents horizons de prévision et différents échantillons de temps et de pays.
    Keywords: recession, crisis, resilience, vulnerability, résilience, crise, déséquilibres, vulnérabilité
    JEL: E32 E44 E51 F47
    Date: 2015–07–28
  14. By: de Haan, Jan; Diewert, W. Erwin; Fox, Kevin J.
    Abstract: A new source of potential bias in the Consumer Price Index (CPI) is described. We find that unit value (average) prices, commonly used for construction of the CPI should be constructed over the same period as the index to be constructed, rather than over an incomplete sub-period. The latter approach can lead to an upward bias in the CPI.
    Keywords: Elementary price indexes, aggregation, inflation.
    JEL: C43 C82 E31
    Date: 2015–07–20
  15. By: Adam Richardson (Reserve Bank of New Zealand)
    Abstract: This note highlights the contribution the international economy has made to current low inflation in New Zealand. In addition, it investigates if international economic factors can help explain the residual uncertainty around the overall drivers of current inflation.
    Date: 2015–07
  16. By: Parajuli, Rajan; Chang, Sun Joseph
    Abstract: Inflation is considered as a leading macroeconomic indicator, which might create substantial distortions in financial statements, future earnings, and overall performance of securities in the financial market. An inflation-hedging ability of an asset offers protection against inflation, which eliminates or at least reduces the uncertainty about the future real returns. Real assets like real estate, timberland, and farmland have been regarded as good inflation hedges, whereas financial assets like common stocks and bonds are considered as perverse hedges against inflation. Using the generalized Capital Asset Pricing Model (CAPM) to account for inflation, this study evaluates the inflation-hedging ability of several real assets. Consistent with the findings of previous studies, this study concludes that private-equity assets offer hedges against inflation to some extent, but stocks are found to be inferior hedges against inflation.
    Keywords: Real Assets, Inflation, CAPM, Private-equity assets, Public-equity assets, Agricultural Finance, Financial Economics, G11,
    Date: 2015

This nep-cba issue is ©2015 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.