nep-cba New Economics Papers
on Central Banking
Issue of 2016‒04‒23
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Bank Transparency and Inflation (Volatility) – New Evidence By Christoph S. Weber
  2. Changes in inflation persistence prior and subsequent to the subprime crisis: What are the implications for South Africa? By Phiri, Andrew
  3. Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom By Ambrogio Cesa-Bianchi; Gregory Thwaites; Alejandro Vicondoa
  4. Private News and Monetary Policy: Forward guidance or the expected virtue of ignorance By FUJIWARA Ippei; WAKI Yuichiro
  5. The effects of us unconventional monetary policies in Latin America By Fructuoso Borrallo; Ignacio Hernando; Javier Vallés
  6. Verification of Monetary Policy Effect through the Banking Sector: Empirical analysis using Japanese macro-level data (Japanese) By SHOJI Keishi
  7. “The Distributive effects of conventional and unconventional monetary policies” By Karen Davtyan
  8. Dismantling the boundaries of the ECB's monetary policy mandate: The CJEU's OMT judgement and its consequences By Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
  9. The Federal Reserve as lender of last resort during the subprime crisis: Successful stabilisation without structural changes By Herr, Hansjörg; Rüdiger, Sina; Pédussel Wu, Jennifer
  10. “Income Inequality and Monetary Policy: An analysis on the Long Run Relation” By Karen Davtyan
  11. The Federal Reserve and market confidence By Boyarchenko, Nina; Haddad, Valentin; Plosser, Matthew
  12. Real-Time Forecasting for Monetary Policy Analysis: The Case of Sveriges Riksbank By Iversen, Jens; Laseen, Stefan; Lundvall, Henrik; Söderström, Ulf
  13. Monetary Transmission: Are Emerging Market and Low-Income Countries Different? By Ales Bulir; Jan Vlcek
  14. Quantitative Easing and the Liquidity Channel of Monetary Policy By Herrenbrueck, Lucas
  15. Sovereign Default in the US By Ergungor, O. Emre
  16. Inflation is Always and Everywhere an Interest-Rate Phenomenon By Belanger, Gilles
  17. The Optimal Composition of Public Spending in a Deep Recession By Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
  18. The Theory of Unconventional Monetary Policy By Farmer, Roger E A; Zabczyk, Pawel
  19. Profit distribution and loss coverage rules for central banks By Bunea, Daniela; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
  20. Monetary policy when households have debt: new evidence on the transmission mechanism By Cloyne, James; Ferreira, Clodomiro; Surico, Paolo

  1. By: Christoph S. Weber
    Abstract: The last decades have shown a tendency towards higher central bank transparency. It became customary for central bankers to explain their monetary policy decisions in detail and for them to publish inflation forecasts. This leads to the question of how central bank transparency is entangled with price stability and inflation volatility. A plethora of studies analysed the relationship from a theoretical point of view and came to contradictory results. Whilst some studies argued that transparency leads to lower inflation, others concluded that openness of central banks results in higher prices. Conversely, there is only a small amount of studies looking at this issue empirically. Most studies found a diminishing effect of transparency on inflation. However, these studies hardly controlled for other causes of inflation. This paper tries to close this gap by employing a panel data set on central bank transparency. We find that transparency significantly reduces inflation rates even if we control for other determinants of inflation. This result still holds under various robustness checks. The same is true for inflation volatility: central bank transparency seems to diminish inflation uncertainty. This confirms the economic importance of central bank transparency.
    Keywords: Central Bank Transparency, Inflation, Inflation Volatility, Determinants of Inflation, Central Bank Independence
    JEL: E31 E42 E58
    Date: 2016–03
  2. By: Phiri, Andrew
    Abstract: The appropriateness of the inflation targeting regime as a policy framework for the South African Reserve Bank (SARB) continues to be a furiously debated topic for both academics and policymakers alike. In this study, we approach this debate by examining whether there have been any changes in the persistence of the inflation process for periods prior and subsequent to the global financial crisis. By effect, our study attempts to answer the question of whether inflation targets have been successful in controlling inflation rates in the face of unanticipated financial crisis. Indeed, our empirical results indicate that persistence in the inflation process has decreased in periods subsequent to the subprime crisis, and yet this has been accompanied by decreases in economic growth and unchanged high levels of unemployment. Our study ultimately suggests that given the current status of the economy, inflation may be required to be lowered to close-to-zero levels which will have to be accompanied with higher levels of economic growth, separate macroeconomic policies which specifically target unemployment and a change in domestic real interest rates.
    Keywords: Inflation persistence; inflation targeting; global financial crisis; monetary policy; South Africa; sub-Saharan Africa (SSA)
    JEL: C22 C23 C31 C51
    Date: 2016–04–11
  3. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Gregory Thwaites (Bank of England; Centre for Macroeconomics (CFM)); Alejandro Vicondoa (European University Institute)
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing high-frequency identification methods. Using direct projections, monetary policy is found to have persistent effects on real interest rates and expected inflation at long horizons. We use our series of surprises as an instrument in a SVAR and show that monetary policy affects economic activity, prices, the exchange rate, and the trade balance. Exploiting the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), we propose a test of overidentifying restrictions and find no evidence that either set of shocks contains any 'endogenous' response to macroeconomic variables.
    Keywords: Monetary Policy Transmission, External Instrument, High-Frequency Identification, Structural VAR, Local Projections
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–04
  4. By: FUJIWARA Ippei; WAKI Yuichiro
    Abstract: When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? Not always. In a canonical New Keynesian model, the central bank finds it optimal to commit to being secretive about news shocks. There exists an expected virtue of ignorance; and secrecy constitutes optimal policy. This result holds in the canonical model when the news is about cost-push shocks, or shocks to the monetary policy objective, or shocks to the natural rate of interest, and even when the zero lower bound of nominal interest rates is taken into account. We also demonstrate through numerical examples that the same result holds for richer models too. A lesson of our analysis for a central bank's communication strategy is that, while it is crucial that the central bank uses Odyssean forward guidance to communicate its history-dependent policy action plan to the private sector, Delphic forward guidance that helps the private sector form more accurate forecasts of future shocks can be undesirable.
    Date: 2016–03
  5. By: Fructuoso Borrallo (Banco de España); Ignacio Hernando (Banco de España); Javier Vallés (Banco de España)
    Abstract: This paper offers an empirical analysis of the way in which US unconventional monetary policy has affected Latin American countries. First, we estimate the effects of US monetary policy announcements on sovereign bond interest rates, exchange rates and stock market indices for a set of emerging countries, including five Latin American economies. We find that QE announcements in 2008/2009 and the “tapering talk” in 2013 generated sizable sovereign yield and exchange rate fluctuations. We further find some excess response of Latam asset prices that disappear once we take into account their country characteristics. In the second part of the paper we estimate a simple model that measures the influence of country-specific macroeconomic fundamentals on the transmission of US financial disturbances. An estimated model including the inflation rate, the CDS spread, the ratio of official reserves and market capitalisation explains some of the observed cross-country heterogeneity of spillovers from US monetary policy announcements. Under this model, a greater impact from the normalisation of US monetary policy can be expected in Latin America relative to other emerging economies
    Keywords: unconventional monetary policy, spillovers, emerging economies, event study
    JEL: E52 F32 G11
    Date: 2016–03
  6. By: SHOJI Keishi
    Abstract: Monetary policy has benefits such as seigniorage and an economic stimulus effect while government bonds held-appraisal loss, interest payments to current accounts, and increasing reserve deposit rates occur in the exit strategy. In particular, the expanded monetary base and prolonged average life resulting from quantitative and qualitative easing are risks for increasing the cost. In this paper, under such awareness of these problems, the effect of monetary policy on corporate investment is examined by making a structural estimation of the simple macro model which includes Tobin's q type capital investment function and banks' portfolio function. The following is a summary of the results: (i) Policy interest rates have an effect on corporate investment in theory as expected, (ii) On the other hand, this suggests that quantitative easing has a limited net negative effect on corporate investment by having both a positive effect through the real economy and a negative effect through changing the bank's portfolio, (iii) However, if quantitative easing lowers the real interest rate, there is an effect on the expected inflation rate, (iv) As in the secular stagnation hypothesis which was proposed by Summers (2014), it seem likely that a relatively lower policy interest rate under declining natural interest rate circumstances is required. Thus, judging its effects cautiously, quantitative easing should be restrained as much as possible from the perspective of its cost. Furthermore, it is important for the government to improve productivity through structural reforms such as deregulation.
    Date: 2016–03
  7. By: Karen Davtyan (AQR Research Group-IREA, University of Barcelona)
    Abstract: The distributional effect of monetary policy is estimated in the case of the USA. In order to identify a monetary policy shock, the paper employs contemporaneous restrictions with ex-ante identified monetary policy shocks as well as log run identification. In particular, a cointegration relation has been determined among the considered variables and the vector error correction methodology has been applied for the identification of the monetary policy shock. The obtained results indicate that contractionary monetary policy decreases income inequality in the country. These results could have important implications for the design of policies to reduce income inequality by giving more weight to monetary policy.
    Keywords: income inequality, monetary policy, cointegration, identification JEL classification: C32, D31, E52
    Date: 2016–04
  8. By: Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
    Abstract: The German Federal Constitutional Court (Bundesverfassungsgericht) submitted an order for referral to the European Court of Justice (CJEU) in 2014, asking it to clarify the compatibility of the "Outright Monetary Transactions" (OMT)-Programme with European Union law. The OMT-Programme prepares the ground for the selective purchasing of government bonds of crisis-struck Member States of the European Monetary Union (EMU). A year later, the CJEU decided that the OMT-Programme is covered by the mandate of the European Central Bank (ECB) and does not violate the prohibition of the monetary financing of Member States. Concerns raised by the Federal Constitutional Court were only partially adressed. Now the ball has been passed back to the Federal Constitutional Court. In this study, the Kronberger Kreis, Scientific Council of the Stiftung Marktwirtschaft, explains why the CJEU's reasoning would have irreversable consequences, if the German Federal Constitutional Court were to follow. The CJEU's judgment dismantles the boundaries of the ECB's monetary policy mandate and significantly weakens the prohibition of the monetary financing of Member States in the long run. Effective judicial review of the scope of the ECB's competence would no longer be guaranteed. An act of crisis intervention by the ECB threatens to irrevocably turn the future structure of the EMU into the wrong direction. Nonetheless, the Federal Constitutional Court remains obliged to execute its ultra vires control in an EU-friendly manner. A rupture in the cooperative relationship between the German Federal Constitutional Court and the CJEU could have far-reaching consequences, especially considering the current crisis-riddled state of the EU. The Federal Constitutional Court may therefore want to follow the operative part of the CJEU's judgment, but base it on a different legal reasoning, so as to reserve itself the possibility for future judicial review of the acts of the ECB based on more demanding legal standards than those laid out by the CJEU.
    Date: 2016
  9. By: Herr, Hansjörg; Rüdiger, Sina; Pédussel Wu, Jennifer
    Abstract: This paper studies the actions of the U.S. Federal Reserve Bank (FRB) during the financial crisis from 2007-2012 rating the performance of the Federal Reserve during the crisis. The chosen scoring model approach shows that the average performance of five specific measures taken by the FRB only ranks between fair and good. Comparing Stiglitz (2010) viewpoints with those of the FRB, this paper analyses several policies and events and argues that the resulting decisions were well intentioned but that the outcome was different from expectations because of missing regulations and restrictions. Furthermore, the structure of the FRB is examined and criticized.
    JEL: E42 E58 G18 E65
    Date: 2016
  10. By: Karen Davtyan (AQR Research Group-IREA. University of Barcelona)
    Abstract: The distributional effect of monetary policy is estimated in the case of the USA. In order to identify a monetary policy shock, the paper employs contemporaneous restrictions with ex-ante identified monetary policy shocks as well as log run identification. In particular, a cointegration relation has been determined among the considered variables and the vector error correction methodology has been applied for the identification of the monetary policy shock. The obtained results indicate that contractionary monetary policy decreases income inequality in the country. These results could have important implications for the design of policies to reduce income inequality by giving more weight to monetary policy.
    Keywords: income inequality; monetary policy; cointegration; identification. JEL classification: C32; D31; E52
    Date: 2016–04
  11. By: Boyarchenko, Nina (Federal Reserve Bank of New York); Haddad, Valentin (Princeton University); Plosser, Matthew (Federal Reserve Bank of New York)
    Abstract: We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our long-rate shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage demand, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.
    Keywords: policy announcement; risk premium; uncertainty; financial conditions
    JEL: E44 G12 G14
    Date: 2016–04–01
  12. By: Iversen, Jens; Laseen, Stefan; Lundvall, Henrik; Söderström, Ulf
    Abstract: We evaluate forecasts made in real time to support monetary policy decisions at Sveriges Riksbank (the central bank of Sweden) from 2007 to 2013. We compare forecasts made with a DSGE model and a BVAR model with judgemental forecasts published by the Riksbank, and we evaluate the usefulness of conditioning information for the model-based forecasts. We also study the perceived usefulness of model forecasts for central bank policymakers when producing the judgemental forecasts.
    Keywords: Forecast evaluation; Inflation targeting; Monetary policy; Real-time forecasting
    JEL: E37 E52
    Date: 2016–03
  13. By: Ales Bulir; Jan Vlcek
    Abstract: We use two representations of the yield curve, by Litterman and Scheinkman (1991) and by Diebold and Li (2006), to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from short-term policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of monetary regime: advanced countries with a credible IT regime seem to have "better behaved" yield curves than those with other monetary regimes.
    Keywords: Monetary transmission, yield curve
    JEL: E43 E52 G12
    Date: 2016–03
  14. By: Herrenbrueck, Lucas
    Abstract: How do central bank purchases of illiquid assets affect interest rates and the real economy? In order to answer this question, I construct a parsimonious and very flexible general equilibrium model of asset liquidity. In the model, households are heterogeneous in their asset portfolios and demand for liquidity, and asset trade is subject to frictions. I find that open market purchases of illiquid assets are fundamentally different from helicopter drops: asset purchases stimulate private demand for consumption goods at the expense of demand for assets and investment goods, while helicopter drops do the reverse. A temporary program of quantitative easing can therefore cause a 'hangover' of elevated yields and depressed investment after it has ended. When assets are already scarce, further purchases can crowd out the private flow of funds and cause high real yields and disinflation, resembling a liquidity trap. In the long term, lowering the stock of government debt reduces the supply of liquidity but increases the capital-output ratio. The consequences for output are ambiguous in theory but a calibration to US data suggests that the liquidity effect dominates; in other words, the supply of Treasuries is 'too small'.
    Keywords: Monetary theory, asset liquidity, search frictions, quantitative easing, liquidity trap
    JEL: E31 E40 E50 G1 G12
    Date: 2014–12–06
  15. By: Ergungor, O. Emre (Federal Reserve Bank of Cleveland)
    Abstract: In the absence of a judicial mechanism to reduce the debt burden of a sovereign member of our Union, the resolution process can be quick but perhaps too indifferent to the health, safety, and welfare of the affected residents. In this paper, I use evidence from the Arkansas state archives to provide a description of the events surrounding the default of the state in 1933. I examine the evolution of the negotiations, the outcomes, and the role of fiscal policy.
    Keywords: sovereign default; municipal bankruptcy; Great Depression; Arkansas highway bonds;
    JEL: G01 H74 K10 N22
    Date: 2016–04–06
  16. By: Belanger, Gilles
    Abstract: Following an earlier paper, I investigate an economy where nominal interest rates are rigid, but aggregate prices are not. Though the title exaggerates, interest rates rigidity does account for an uncanny number of stylized facts about inflation. This paper shows that previously shown results are robust to changes in the specification of interest rate rigidity. Results investigated include: (1) the procyclicality of inflation, (2) inflation control through interest rate manipulation,(3) the persistence of inflation since World War II, (4) the Great Moderation under inflation targeting, (5) real rate volatility under a gold standard, (6) the price puzzle.
    Keywords: Interest Rate Rigidity, Inflation, Monetary Policy, Fisher Effect.
    JEL: E31 E43 E52
    Date: 2016–04–19
  17. By: Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
    Abstract: We study optimal monetary and fiscal policy under commitment in an economy where monetary policy is constrained by the zero lower bound on the nominal interest rate, and where the government can allocate spending to public consumption and public investment. We show that the optimal response to an adverse shock that precipitates the economy into a liquidity trap entails a small and short-lived increase in public consumption but a large and persistent increase in public investment, which lasts well after the natural rate of interest has ceased to be negative. During this period, the optimal composition of public spending is therefore heavily skewed towards public investment. Contrary to the literature that abstracts from public investment, we find that the optimal increase in total public spending in a deep recession is sizable. However, we show that this fiscal expansion has little to do with a stabilization motive and is instead warranted by the intertemporal allocation of resources that efficiency dictates even in the absence of an output gap.
    Keywords: Public spending; Public investment; Time to build; Ramsey policies; Zero lower bound
    JEL: E4 E52 E62 H54
    Date: 2016–04
  18. By: Farmer, Roger E A; Zabczyk, Pawel
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Keywords: Qualitative Easing; Sunspots; Unconventional Monetary Policy
    JEL: E02 E6 G11 G21
    Date: 2016–03
  19. By: Bunea, Daniela; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
    Abstract: The issue of central bank profit distribution is both complex and often politically controversial. Based on the replies of 57 central banks worldwide to an ECB questionnaire, this paper analyses how profit distribution rules can affect the amounts distributed and the financial strength of central banks. The paper also investigates the link between profit distribution, accounting rules and financial strength. Research shows that central banks apply divergent rules as regards profit distribution and loss coverage. While they are not a measure of central bank performance, in the long run profits strengthen the credibility of central banks and contribute to their financial independence, whereas profit distribution rules that do not allow central banks to set up adequate reserves might have the opposite effect. The interaction of profit distribution rules and accounting rules also plays an important role in central banks achieving financial strength. Accounting frameworks can materially influence central banks’ net results via their treatment of unrealised results and the creation of general risk provisions. Distribution policies can offset the volatility of distributed profits by recording changes in value in a separate account before calculating the amount of distributable profit. This paper also shows that central banks with less volatile distributable profits display higher ratios of equity to total assets over time. Finally, the paper examines the role of stakeholders in influencing the profit distribution regimes of central banks, and develops a non-exhaustive set of general principles that could be considered in relation to profit distribution frameworks, with the aim of strengthening the financial, and therefore institutional, independence of central banks. JEL Classification: E37, E58, M48
    Keywords: accounting framework, financial independence, financial strength, loss coverage, profit distribution
    Date: 2016–04
  20. By: Cloyne, James (Bank of England); Ferreira, Clodomiro (London Business School); Surico, Paolo (London Business School and CEPR)
    Abstract: In response to an interest rate change, mortgagors in the United Kingdom and United States adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the United Kingdom than in the United States, these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash flows.
    Keywords: Monetary policy; mortgage debt; liquidity constraints
    JEL: E21 E32 E52
    Date: 2016–04–08

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