nep-cba New Economics Papers
on Central Banking
Issue of 2016‒01‒03
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Lessons from the crisis.Did central banks do their homework? By Aleksandra Hałka
  2. Transparency and Trust: The Case of the European Central Bank By Roman Horvath; Dominika Katuscakova
  3. International Spillovers of ECB’s Unconventional Monetary Policy: The Effect on Central and Eastern Europe By Klara Halova; Roman Horvath
  4. Central bank accountability under adaptive learning. By Marine Charlotte André; Meixing Dai
  5. Shocking language: Understanding the macroeconomic effects of central bank communication By Hansen, Stephen; McMahon, Michael
  6. The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macrofinancial stability? By Krug, Sebastian
  7. Unconventional Monetary Policy Shocks in OECD Countries: How Important is the Extent of Policy Uncertainty? By Rangan Gupta; Charl Jooste
  8. Seasonality in the Frequency of Price Change and Optimal Monetary Policy By Söderberg, Johan
  9. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Konstantinos Theodoridis; Haroon Mumtaz
  10. Conservatism and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt
  11. Can Central Banks Successfully Lean against Global Headwinds? By Malte Rieth
  12. Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance By Chia-Lin Chang; Juan-Ángel Jiménez-Martín; Esfandiar Maasoumi; Michel McAleer; Teodosio Pérez-Amaral
  13. The decentralised central bank: regional bank rate autonomy in Norway, 1850-1892 By Jan Tore Klovland; Lars Fredrik Øksendal
  14. Transmission Channels and Welfare Implications of Unconventional Monetary Easing Policy in Japan By Hiroshi Ugai
  15. Credit Frictions and Optimal Monetary Policy By Cúrdia, Vasco; Woodford, Michael
  16. Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer By Leonardo Nogueira Ferreira; Márcio Issao Nakane
  17. An Approach About Monetary Policy Risk Balance In Colombia: A Multivariate Analysis Based On Time Series By Fernando Uscátegui; Mike Woodcock; Carlos Méndez
  18. How can it work? On the impact of quantitative easing in the Eurozone By Francesco Saraceno; Roberto Tamborini
  19. Measuring the Instability of China’s Financial System: Indices Construction and an Early Warning System By Sun, Lixin; Huang, Yuqin
  20. Macroprudential policy and forecasting using Hybrid DSGE models with financial frictions and State space Markov-Switching TVP-VARs By Stelios D. Bekiros; Alessia Paccagnini

  1. By: Aleksandra Hałka
    Abstract: The outbreak of the global financial crisis triggered changes in thinking about the way monetary policy is conducted, in particular about the desired central banks’ reaction function. However, a change in thinking does not necessarily mean that central banks really implemented these modifications. Therefore, I investigate whether four selected European central banks in small open economies – ˇCesk´a N´arodn´ı Banka, Magyar Nemzeti Bank, Narodowy Bank Polski and Sveriges Riksbank, have adjusted their reaction function to the new paradigm of how monetary policy should be conducted. To address this problem I use a logit model to see first, how the relative importance of inflation and GDP forecasts in the process of setting interest rates evolved over time, second, how the forecast horizon which central banks take into consideration when setting the interest rate has changed, and finally whether they conduct more accommodative monetary policy. The outcomes indicate that all banks after the Lehman Brother’s collapse became more flexible in the way they conduct monetary policy. In order to maintain the stability of the whole economy they are ready to accept an extended period or greater deviations of inflation from the target, although each one in its own way – through extension of the forecasting horizon, the increase of the GDP’s importance, permanent shift of the monetary policy stance to more accommodative one or a mixture of these factors.
    Keywords: product-level inflation, CEE economies, multi-level factor model.
    JEL: C25 E52 E58
    Date: 2015
  2. By: Roman Horvath (Charles University, Prague); Dominika Katuscakova
    Abstract: We examine how the transparency of the European Central Bank’s monetary policy affects the amount of trust that the citizens of the European Union have in this institution. We use nearly half a million individual responses from the European Commission’s Eurobarometer survey from 2000-2011 and estimate probit regressions with sample selection. We find that transparency exerts a non-linear effect on trust. Transparency increases trust, but only up to a certain point; too much transparency harms trust. This result is robust to controlling for a number of macroeconomic conditions, financial stability transparency measures, and economic and socio-demographic characteristics of respondents, including examining respondents in European Union countries that do not use the euro and addressing clustering issues.
    Keywords: European Central Bank, trust, transparency, survey
    JEL: E52 E58
    Date: 2015–10
  3. By: Klara Halova; Roman Horvath
    Abstract: We examine how unconventional monetary policy of the European Central Bank influences macroeconomic stability in Central and Eastern European economies. We estimate various panel vector autoregressions using monthly data from 2008-2014. Using the shadow policy rate and central bank assets as measures of unconventional policies, we find that output and prices in Central and Eastern Europe temporarily increase following an expansionary unconventional monetary policy shock by the European Central Bank. Using both impulse responses and variance decompositions, we find that the effect of unconventional policies on output is much stronger than the effect on inflation. In addition, our results provide evidence that unconventional policy tends to reduce market uncertainty and domestic interest rates but that the effect on the real exchange rate is not significant.
    Keywords: Unconventional Monetary Policy, ECB, Central and Eastern Europe, Panel Vector Autoregression
    JEL: E52 E58
    Date: 2015–10
  4. By: Marine Charlotte André; Meixing Dai
    Abstract: Using a New Keynesian model, we examine the accountability issue in a delegation framework where private agents form expectations through adaptive learning while the central bank is rational and optimally sets monetary policy under discretion. Learning gives rise to an incentive for the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation and induces thus a deviation of endogenous variables from rational expectations equilibrium. To help the central bank to better manage the intratemporal tradeoff, the government should nominate a liberal central banker, i.e., set a negative optimal inflation penalty according to the value of learning coefficient. By reducing the deviation of the feedback effects of inflation expectations and cost-push shocks on inflation and the output gap from the corresponding ones under rational expectations, the optimal inflation penalty allows the economy to be more efficient and improves the social welfare. The main conclusions are valid under both constant- and decreasing-gain learning.
    Keywords: Adaptive learning, optimal monetary policy, accountability, inflation penalty, rational expectations.
    JEL: E42 E52 E58
    Date: 2015
  5. By: Hansen, Stephen; McMahon, Michael
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC has effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: communication; monetary policy; Vector Autoregression
    JEL: E52 E58
    Date: 2015–12
  6. By: Krug, Sebastian
    Abstract: The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should "lean against the wind" or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. We aim to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macro-model with endogenous money. We find that policies make use of their comparative advantage leading to superior outcomes concerning their respective intended objectives. In particular, we show that "leaning against the wind" should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy. In contrast, leaning against the wind seems to have no positive impact on financial stability which strengthens proponents of Tinbergen's principle arguing that both policies are designed for their specific purpose and that they should be used accordingly.
    Keywords: Financial Stability,Monetary Economics,Macroprudential Policy,Financial Regulation,Central Banking,Agent-Based Macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2015
  7. By: Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the effects of unconventional monetary policy shocks on output, inflation and uncertainty using a sign restricted panel VAR over the monthly period of 2008:1-2015:1. Our sample includes primarily OECD countries (Canada, Germany, France, Italy, Japan, Spain, UK and US) that reached the interest rate zero lower bound in response to the recent financial crisis. Central bank balance sheets are used to gauge the size of unconventional monetary policy reactions to the crisis. We control for the degree of uncertainty by estimating the economic response to balance sheet shocks in two economic states: high versus low uncertainty. We use sign restrictions to identify our shocks, but remain agnostic regarding price and output responses to balance sheet shocks. We show that the mean group response of prices and output increases in response to monetary policy. The results, however, vary by country and are sensitive to the degree of uncertainty. Prices and output do not necessarily increase uniformly across countries.
    Keywords: Unconventional monetary policy, Economic policy uncertainty, Macroeconomic effects, OECD countries
    JEL: C33 E58
    Date: 2015–11
  8. By: Söderberg, Johan (Dept. of Economics, Stockholm University)
    Abstract: The implications for optimal monetary policy of introducing seasonality in the frequency of price change in the baseline New Keynesian model are studied. In the resulting model, both the parameters of the Phillips curve and the weight on inflation stabilization in the welfare criterion vary seasonally. I show that for a plausible calibration, even a modest degree of seasonality in the frequency of price change gives rise to large seasonal differences in the equilibrium responses of the output gap and inflation to cost-push shocks. The effects on welfare, however, are small under both discretionary and commitment policy.
    Keywords: Price Setting; Staggering; Seasonality; Optimal Monetary Policy
    JEL: E31 E32
    Date: 2015–12–18
  9. By: Konstantinos Theodoridis; Haroon Mumtaz
    Abstract: We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increase in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in) ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
    Keywords: DSGE, Non-Linear SVAR, New Keynesian, Non-Zero Steady State Inflation, Epstein-Zin preferences, Stochastic Volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2015
  10. By: Taisuke Nakata (Federal Reserve Board); Sebastian Schmidt (European Central Bank)
    Abstract: In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.
    Keywords: Deflationary Bias, Inflation Conservatism, Inflation Targeting, Liquidity Traps, Zero Lower Bound
    JEL: E52 E61
    Date: 2014–10
  11. By: Malte Rieth
    Abstract: Despite expansionary central bank action, inflation remains low in the euro area. How much can we expect from the additional stimulus in face of anaemic global growth and declining oil prices? More generally, have central banks lost the ability to steer inflation in a globalised world where external factors have powerful effects on domestic inflation? This roundup summarises the evidence in the literature and concludes that central banks retain influence on domestic inflation.
    Date: 2015
  12. By: Chia-Lin Chang (National Chung Hsing University, Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Complutense University of Madrid, Spain); Esfandiar Maasoumi (Emory University, USA); Michel McAleer (National TsingHua University, Taiwan; Erasmus School of Economics, Erasmus University Rotterdam, and Tinbergen Institute, the Netherlands; Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain)
    Abstract: Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The Basel Committee on Banking Supervision (2013, p. 3) noted that: “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk”. The proposed reform costs and impact on bank balances may be substantial, such that the size and distribution of daily capital charges under the new rules could be affected significantly. Regulators and bank risk managers agree that all else being equal, a “better” distribution of daily capital charges is to be preferred. The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts. The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges. That is to say, while ES is known to be a preferable “risk function” based on its fundamental properties and greater accounting for the tails of alternative distributions, that same sensitivity to tails can lead to greater daily capital charges, which is the relevant (that is, controlling) practical reference for risk management decisions and observations. In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes, an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations. For this reason, robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.
    Keywords: Stochastic dominance; Value-at-Risk; Expected Shortfall; Optimizing strategy; Basel III Accord
    JEL: G32 G11 G17 C53 C22
    Date: 2015–12–15
  13. By: Jan Tore Klovland (Norwegian School of Economics and Norges Bank); Lars Fredrik Øksendal (Norges Bank and Norwegian School of Economics)
    Abstract: Before 1893 the regional branches of Norges Bank set their own bank rates. We discuss how bank rate autonomy could be reconciled with the fixed exchange rate commitments of the silver and gold standard. Although the headquarters of the bank was in Trondhjem, we find that the Christiania branch played the key role in providing leadership in bank rate policy. Foreign interest rate impulses were important for bank rate decisions, but there was also some leeway for responding to idiosyncratic shocks facing the Norwegian economy.
    Keywords: bank rate, gold standard, monetary policy
    JEL: E58 N23
    Date: 2015–12–23
  14. By: Hiroshi Ugai (School of International and Public Policy, Hitotsubashi University)
    Abstract: This paper examines the effects of the Quantitative and Qualitative Monetary Easing Policy (QQE <2013-current>) of the Bank of Japan (BOJ) by transmission channels in comparison with those of the Comprehensive Monetary Easing Policy (CE) and the subsequent monetary easing policies (2010-2012), based on the event study using financial market data. As for the QQE under normal market conditions, depreciation of foreign exchange rate in the context of portfolio balance channel functions quite strongly, while as for the CE, signaling channel through the commitment and credit easing channel at the dysfunctional markets work. The direct inflation expectation channel is weak for both QQE and CE, although the QQE has adopted various ways to exert a direct and strong influence on inflation expectation. It can be conjectured that the gradual rise in inflation expectation comes mainly from other channels like the depreciation of the yen. The most crucial characteristic of the QQE is to maximize the potential effects of easing policy by explicitly doubling and later tripling the purchased amount of JGBs and then the monetary base proportionally. The amount of JGB purchases by the BOJ surpasses the issuance amount of JGBs, thereby reducing the outstanding amount of JGBs in the markets. Shortage of safety assets would increase the convenience yield, which itself would reduce the economic welfare and not permeate the yields of other risky assets theoretically. This paper then examines the impact of reduction in JGBs on yield spreads between corporate bonds and JGBs based on money-in-utility type model applied to JGBs, and finds that at least severe scarcity situations of JGBs as safe assets are avoided, since the size of Japan’s public debt outstanding is the largest in the world. Even so, the event study shows no clear evidence that the decline in the yield of long-maturity JGBs induced by the QQE permeates the yields of corporate bonds. Recently demands for JGBs have been increasing from both domestic and foreign investors as collaterals after the Global Financial Crisis and from financial institutions that have to correspond to strengthened global liquidity regulation, while the Government of Japan is planning to consolidate the public debts. These recent changes as well as market expectation for future path of JGB amounts should also be taken account of to examine the scarcity of safe assets in case of further massive purchases of JGBs.
    Keywords: Quantitative easing, Credit easing, Inflation expectation, Safety asset
    JEL: E43 E44 E52
    Date: 2015–07
  15. By: Cúrdia, Vasco; Woodford, Michael
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads
    Keywords: credit spreads; flexible inflation targeting; policy rules; quadratic loss function; target criterion
    JEL: E44 E52
    Date: 2015–12
  16. By: Leonardo Nogueira Ferreira; Márcio Issao Nakane
    Abstract: The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best.
    Keywords: Macroprudential Policy; Basel III; Capital Buffer; Anchor Variable
    JEL: E3 E5
    Date: 2015–12–02
  17. By: Fernando Uscátegui; Mike Woodcock; Carlos Méndez
    Abstract: Monetary policy has been important as a tool at maintaining dynamic stability on inflation rate, an increasing growth rate and several changes in financial variables. The trend in those macroeconomic variables could be accounted for a straightforward or roundabout change in monetary policy tools. Hence, in this paper, we will present a historical trend about macroeconomic variables which change with monetary policy effects and we will use multivariate time series analysis which could give us empiric evidence to explain the impact of monetary policy in these variables. First, there will be a brief introduction about the importance of the subject will be made. Second, it will take place the description of the variables and a brief state of art for each variable analyzing the current literature in the subject. Third, it will be carried out all the subjects regarding the construction of two econometric models, VAR model and M-GARCH model, anyone not interested in this part is encourage to skip that section and continue reading the next section. Finally, it will be shown the final remarks and the conclusion of this paper.
    Keywords: Monetary policy, Risk balance, macroeconomic variables, VAR modeling, MGARCH modeling
    JEL: E43 E44 E47 E5 C39 C58
    Date: 2015–12–29
  18. By: Francesco Saraceno; Roberto Tamborini
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads − the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance
    Keywords: Monetary Policy, ECB, Deflation, Zero-Lower-Bound, Fiscal Policy
    JEL: E3 E4 E5
    Date: 2015
  19. By: Sun, Lixin; Huang, Yuqin
    Abstract: In this paper, employing several econometric techniques, we construct a financial stress index (CNFSI) and a financial conditions index (CNFCI) to measure the instability of China’s financial system. The indices are based on the monthly data collected from China’s inter-bank markets, stock markets, foreign exchange markets and debt markets. Using two indices, we identify the episodes of systemic financial stress, and then evaluate the indices. The empirical results suggest that the CNFSI performs better than the CNFCI. Furthermore, we propose four leading indicators for monitoring China’s financial instability, and provide a primary early warning system for China’s macroprudential regulations.
    Keywords: financial stress index, financial conditions index, China’s financial system, leading indicators, early warning system
    JEL: C43 E44 G18
    Date: 2013
  20. By: Stelios D. Bekiros; Alessia Paccagnini
    Abstract: We focus on the interaction of frictions both at the firm level and in the banking sector in order to examine the transmission mechanism of the shocks and to reflect on the response of the monetary policy to increases in interest rate spreads, using DSGE models with financial frictions. However, VAR models are linear and the solutions of DSGEs are often linear approximations; hence they do not consider time variation in parameters that could account for inherent nonlinearities and capture the adaptive underlying structure of the economy, especially in crisis periods. A novel method for time-varying VAR models is introduced. As an extension to the standard homoskedastic TVP-VAR, we employ a Markov-switching heteroskedastic error structure. Overall, we conduct a comparative empirical analysis of the out-of-sample performance of simple and hybrid DSGE models against standard VARs, BVARs, FAVARs, and TVP-VARs, using data sets from the U.S. economy. We apply advanced Bayesian and quasi-optimal filtering techniques in estimating and forecasting the models.
    Keywords: Financial frictions; Time-varying coefficients; Quasi-optimal filtering
    Date: 2015–10

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