nep-cba New Economics Papers
on Central Banking
Issue of 2016‒05‒14
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroprudential regulation, credit spreads and the role of monetary policy By Tayler, William; Zilberman , Roy
  2. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  3. How can it work ? On the impact of quantitative easing in the eurozone By Roberto Tamborini; Francesco Saraceno
  4. Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
  5. Liquidity Trap and Stability of Taylor Rules By Antoine Le Riche; Francesco Magris; Antoine Parent
  6. Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model By Julio Garín; Robert Lester; Eric Sims
  7. "Maximizing Price Stability in a Monetary Economy" By Warren Mosler; Damiano B. Silipo
  8. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  9. Monetary policy transmission: the case of Lithuania By Julius Stakenas; Rasa Stasiukynaite
  10. Should Monetary Policy Lean Against Housing Market Booms? By Sami Alpanda; Alexander Ueberfeldt
  11. Are experts’ probabilistic forecasts similar to the NBP projections? By Halina Kowalczyk; Ewa Stanisławska
  12. Capital Adequacy Regulations in Hungary: Did It Really Matter? By Dóra Siklós
  13. Global inflation: the role of food, housing and energy prices By Miles Parker
  14. A Model of the International Monetary System By Matteo Maggiori; Emmanuel Farhi
  15. Inflation Expectations and the Stabilization of Inflation : Alternative Hypotheses By Nalewaik, Jeremy J.
  16. Easier said than done? Reforming the prudential treatment of banks� sovereign exposures By Michele Lanotte; Giacomo Manzelli; Anna Maria Rinaldi; Marco Taboga; Pietro Tommasino
  17. Indicators for Setting the Countercyclical Capital Buffer By Creedon, Conn; O'Brien, Eoin
  18. Differences of Opinion, Liquidity, and Monetary Policy By Johnson, Christopher

  1. By: Tayler, William (Lancaster University); Zilberman , Roy (Lancaster University)
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress.
    Keywords: Basel III — macroprudential policy; bank capital; monetary policy; borrowing cost channel; welfare
    JEL: E32 E44 E52 E58 G28
    Date: 2016–04–29
  2. By: Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand)
    Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
    JEL: E31 E32 E44 F41
    Date: 2016–04
  3. By: Roberto Tamborini (University of Trento); Francesco Saraceno (OFCE Sciences Po & LUISS-SEP, Rome)
    Abstract: How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as the aggregate of two countries characterised by New Keynesian output and inflation equations with a Tobinian money market equation that determines each country's interest rate as a spread above the common policy rate. High spreads determine negative output gaps and deflationary pressure. With the ECB policy rate at the zero lower bound, QE expands money supply throughout the EZ. We show that QE, if large enough, can indeed be effective by reducing country spreads and the ensuing output gaps. However, zero output and deflation gaps can be obtained for the EZ on average, but not for all single countries unless fully symmetric conditions are met. Therefore fiscal accommodation at the country level should also intervene, and we 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: 2016–05
  4. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone.
    JEL: E52 F38 F41
    Date: 2016–05
  5. By: Antoine Le Riche (University of Maine, Aix-Marseille University (Aix-Marseille School of Economics), GAINS, CNRS, GREQAM, EHESS & CAC); Francesco Magris (LEO, University "François Rabelais" of Tours and CAC); Antoine Parent (Sciences Po Lyon, LAET CNRS 5593)
    Abstract: We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.
    Keywords: Cash-in-Advance; Liquidity Trap; Monetary Policy; Multiple Equilibria.
    JEL: E31 E41 E43 E58
    Date: 2016–05–06
  6. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: Increasing the inflation target in a textbook New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short run co-movement between the nominal interest rate and inflation conditional on a nominal shock as Neo-Fisherianism. We show that the NK model is more likely to be Neo-Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo-Fisherianism is driven by the forward-looking nature of the model. Modifications which make the framework less forward-looking make it less likely for the model to exhibit Neo-Fisherianism. As an example, we show that a modest and empirically realistic fraction of "rule of thumb" price-setters may altogether eliminate Neo-Fisherianism in the textbook model.
    JEL: E31 E43 E52
    Date: 2016–04
  7. By: Warren Mosler; Damiano B. Silipo
    Abstract: In this paper we analyze options for the European Central Bank (ECB) to achieve its single mandate of price stability. Viable options for price stability are described, analyzed, and tabulated with regard to both short- and long-term stability and volatility. We introduce an additional tool for promoting price stability and conclude that public purpose is best served by the selection of an alternative buffer stock policy that is directly managed by the ECB.
    Keywords: European Central Bank; Monetary Policy Tools and Price Stability; Buffer Stock Policy
    JEL: E52 E58
    Date: 2016–04
  8. By: Matheus Grasselli (Department of Mathematics and Statistics, McMaster University, Hamilton, Canada, Fields Institute for Research In Mathematical Sciences - Fields Institute for Research In Mathematical Sciences); Adrien Nguyen Huu (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - UPE - Université Paris-Est)
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Keywords: limit cycles,local stability,Minsky's financial instability hypothesis,Keen model,stock-flow consistency,financial crisis,dynamical systems in macroeconomics
    Date: 2015–07–06
  9. By: Julius Stakenas (Bank of Lithuania); Rasa Stasiukynaite (Bank of Lithuania)
    Abstract: In this paper we study the effect of a (standard) monetary policy shock in the euro area on the Lithuanian economy. For this purpose we employ a structural vector autoregressive (SVAR) model incorporating variables from both, the euro area and Lithuania. We identify the system using short-term zero restrictions. The model exhibits a block exogenous structure to account for the fact that Lithuania is a small economy and Lithuanian macro variables do not have a significant effect on the euro area variables. In general, we find that a monetary policy shock in the euro area has a stronger effect on the Lithuanian economy than it does on the euro area economy, though the effects are not significant, preventing firm conclusions. We further broaden our analysis employing a panel VAR model for the three Baltic states. This allows us to not only explore the time variation of the euro area monetary policy transmission in the Baltics, but also helps to verify our initial results. The effects are stronger when estimated using the panel VAR model.
    Keywords: monetary policy, SVAR, panel VAR
    JEL: C32 C33 E52
    Date: 2016–04–04
  10. By: Sami Alpanda; Alexander Ueberfeldt
    Abstract: Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the level of household debt. This crisis regime is characterized by an elevated risk premium on mortgage lending rates, and, occasionally, a binding zero lower bound on the policy rate, imposing large costs on the economy. Using our set-up, we examine the optimal level of monetary leaning, introduced as a Taylor rule response coefficient on the household debt gap. We find that the costs of leaning in regular times outweigh the benefits of a lower crisis probability. Although the decline in the crisis probability reduces volatility in the economy, this is achieved by lowering the average level of debt, which severely hurts borrowers and leads to a decline in overall welfare.
    Keywords: Economic models, Financial stability, Housing, Monetary policy framework
    JEL: E44 E52 G01
    Date: 2016
  11. By: Halina Kowalczyk; Ewa Stanisławska
    Abstract: We assess similarity of the Polish central bank’s forecasts published in Inflation Reports and economic experts’ forecasts (from NBP Survey of Professional Forecasters), an important issue in monetary policy. Contrary to other studies which use point forecasts, we are interested is comparing whole forecasts’ distributions. We are especially interested whether the SPF experts mirror the NBP projections. For this purpose, we propose employing methods based on distance between distributions. Unfortunately, substantial heterogeneity of forecasts, as well as short and atypical period analyzed, limit drawing firm conclusions with this respect.
    Keywords: survey data, fan charts, probabilistic forecasts, inflation forecasts, GDP growth forecasts, distribution similarity
    JEL: D83 D84 E37
    Date: 2016
  12. By: Dóra Siklós (European Stability Mechanism)
    Abstract: The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending
    Keywords: FX lending, capital adequacy, bank regulation, counterfactual analysis
    JEL: E58 G01 G21 G28
    Date: 2016–04
  13. By: Miles Parker (Reserve Bank of New Zealand)
    Abstract: This paper studies the role of global factors in causing common movements in consumer price inflation, with particular focus on the food, housing and energy sub-indices. It uses a comprehensive dataset of 223 countries and territories collected from national and international sources. Global factors explain a large share of the variance of national inflation rates for advanced countries - and more generally those with greater GDP per capita, financial development and central bank transparency - but not for middle and low income countries. Common factors explain a large share of the variance in food and energy prices.
    Date: 2016–05
  14. By: Matteo Maggiori; Emmanuel Farhi
    Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: under a Hegemon vs. a multi-polar world; when reserve assets are abundant vs. scarce; under a gold exchange standard vs. a floating rate system; away from or at the zero lower bound (ZLB). We rationalize the Triffin dilemma which posits the fundamental instability of the system, the common prediction regarding the natural and beneficial emergence of a multi-polar world, the Nurkse warning that a multi-polar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold exchange standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. Our analysis is both positive and normative.
    Date: 2016–05
  15. By: Nalewaik, Jeremy J.
    Abstract: This paper examines two candidate hypotheses explaining the stabilization of U.S. inflation since the 1970s and 1980s. The first explanation credits the stabilization of inflation expectations, and assumes those expectations have a strong positive causal effect on actual subsequent inflation, while the second explanation credits the disappearance of such a strong positive causal effect. The paper reports statistical tests favorable to both a stabilization of inflation expectations and a marked decline in the effect of the general public’s inflation expectations on subsequent inflation.
    Keywords: Inflation ; Phillips Curve
    JEL: E31 E52
    Date: 2016–04–21
  16. By: Michele Lanotte (Bank of Italy); Giacomo Manzelli (Bank of Italy); Anna Maria Rinaldi (Bank of Italy); Marco Taboga (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: In the aftermath of the euro-area sovereign debt crisis, several commentators have questioned the favourable treatment of banks� sovereign exposures allowed by the current prudential rules. In this paper, we assess the overall desirability of reforming these rules. We conclude that the microeconomic and macroeconomic costs of a reform could be sizeable, while the benefits are uncertain. Furthermore, we highlight considerable implementation issues. Specifically, it is widely agreed that credit ratings of sovereigns issued by rating agencies present important drawbacks, but sound alternatives still need to be found; we argue that consideration could be given to the use of quantitative indicators of fiscal sustainability, similar to those provided by international bodies such as the IMF or the European Commission.
    Keywords: sovereign risk, prudential regulation, sustainability of public finances
    JEL: E58 G21 G28 H63
    Date: 2016–04
  17. By: Creedon, Conn (Central Bank of Ireland); O'Brien, Eoin (Central Bank of Ireland)
    Abstract: Since January 1 2016, the Countercyclical Capital Buffer (CCB), a new macro-prudential policy instrument, has been operational in Ireland. The CCB, which is a time-varying countercyclical capital requirement, aims to limit the potential systemic risks associated with excessive credit growth. This Letter provides an overview of the CCB and summarises European Systemic Risk Board (ESRB) recommendations on appropriate economic and financial indicator variables to guide the setting of the CCB. A number of indicators are applied to historical Irish data for illustrative purposes. The analysis also highlights challenges that arise in the estimation and interpretation of indicators and, therefore, the importance that policymaker judgement will play in setting the CCB rate.
    Date: 2016–04
  18. By: Johnson, Christopher
    Abstract: Liquidity considerations are important in understanding the relationship between asset prices and monetary policy. Differences of opinion regarding the future value of an asset can affect liquidity of not only the underlying asset, but also of competing media of exchange, such as money. I consider a monetary search framework in which money and risky assets can facilitate trade, but where the asset is an opinion-sensitive medium of exchange in that traders may disagree on its future price. A pecking-order theory of payments is established between money and risky assets, which can go in either direction depending on the respective beliefs of both agents in a bilateral trade. In short, optimists prefer to use money over assets, whereas pessimists prefer to use assets over money. In contrast to a majority of the differences of opinion literature, not only do pessimists actively participate in the purchasing of assets, but in some cases their demand coincides with that of optimists. Additionally, in support of Bernanke and Gertler (2000), I find that monetary policy aimed at reducing asset price volatility need not be welfare-maximizing. Instead, the Friedman rule is welfare-maximizing.
    Keywords: liquidity, monetary policy, asset pricing, differences of opinion
    JEL: E4 E5
    Date: 2016–04–13

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