nep-cba New Economics Papers
on Central Banking
Issue of 2016‒07‒23
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Macroeconomic effectiveness of non-standard monetary policy and early exit. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  2. Monetary policy, the financial cycle and ultra-low interest rates By Mikael Juselius; Claudio Borio; Piti Disyatat; Mathias Drehmann
  3. Unconventional monetary policies: a re-appraisal By Claudio Borio; Anna Zabai
  4. On the optimality of bank competition policy By Ioannis G. Samantas
  5. QE in the future: the central bank's balance sheet in a financial crisis By Ricardo Reis
  6. Central Bank Collateral Frameworks By Kjell G. NYBORG
  7. Bank Regulation, CEO Compensation, and Boards By Kolm, Julian; Laux, Christian; Lóránth, Gyöngyi
  8. Monetary Policy, Financial Conditions, and Financial Stability By Adrian, Tobias; Liang, Nellie
  9. Extracting the Information Shocks from the Bank of England Inflation Density Forecasts By Carlos Diaz Vela
  10. Exchange Rates and Monetary Policy Uncertainty By Andrea Vedolin; Alireza Tahbaz-Salehi; Philippe Mueller
  11. Monetary Policy Through Production Networks: Evidence from the Stock Market By Michael Weber; Ali Ozdagli
  12. Basel 3: Does One Size Really Fit All Banks' Business Models? By Giuliana Birindelli; Paola Ferretti; Marco Savioli
  13. On the Incidence of Bank Levies: Theory and Evidence By Kogler, Michael
  14. Central Bank Transparency and Cross-border Banking By Eichler, Stefan; Littke, Helge; Tonzer, Lena
  15. Monetary-Fiscal Policy Interaction and Fiscal Inflation: A Tale of Three Countries By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  16. Public Bank Guarantees and Allocative Efficiency By Gropp, Reint E.; Guettler, Andre; Saadi, Vahid

  1. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative strategies as regards (i) the unwinding of asset positions accumulated under the APP and (ii) communication of current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area. Our results are as follows. First, as the monetary authority brings forward the selling of long-term sovereign bonds, the stimulus from the APP on inflation and economic activity is correspondingly reduced. In particular, if the bonds are sold immediately after purchases end, the impact on inflation is negligible. Second, if the monetary authority communicates that it will hold the policy rate constant for one year instead of two, the APP is less effective, and the inflation increase is halved. Third, the subdued impact of the APP associated with an early exit from the programme delays the return to a standard monetary policy regime.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E52 E58
    Date: 2016–07
  2. By: Mikael Juselius; Claudio Borio; Piti Disyatat; Mathias Drehmann
    Abstract: Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run.
    Keywords: natural interest rate, financial cycle, monetary policy, credit, business cycle
    Date: 2016–07
  3. By: Claudio Borio; Anna Zabai
    Abstract: We explore the effectiveness and balance of benefits and costs of so-called "unconventional" monetary policy measures extensively implemented in the wake of the financial crisis: balance sheet policies (commonly termed "quantitative easing"), forward guidance and negative policy rates. Our objective is to provide the reader with a helpful entry point to the burgeoning empirical literature and with a specific perspective on the complex issues involved. We reach three main conclusions: there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down; the balance of the benefits and costs is likely to deteriorate over time; and the measures are generally best regarded as exceptional, for use in very specific circumstances. Whether this will turn out to be the case, however, is doubtful at best and depends on more fundamental features of monetary policy frameworks. In the paper, we also provide a critique of prevailing analyses of "helicopter money" and explore in more depth the role of negative nominal interest rates in our fundamentally monetary economies, highlighting some risks.
    Keywords: unconventional monetary policies, balance sheet policies, forward guidance, negative interest rates
    Date: 2016–07
  4. By: Ioannis G. Samantas (University of Athens)
    Abstract: This study examines whether the effect of market structure on financial stability is persistent, subject to current regulation and supervision policies. Extreme Bounds Analysis (EBA) is employed over a sample of 2450 banks operating within the EU-27 during the period 2003-2010. The results show an inverse U-shaped association between market power and soundness and a stabilizing tendency in markets of less concentration, where policies lean towards limited restrictions on non-interest income, official intervention in bank management and book transparency. Regulation significantly contributes as a stability channel through which bank competition policy is optimally designed.
    Keywords: Market power; financial stability; regulation; extreme bound analysis
    JEL: D21 D4 L11 L51
    Date: 2016–07
  5. By: Ricardo Reis (Tel Aviv University; London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Analysis of quantitative easing (QE) typically focus on the recent past studying the policy's effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable in ation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank's balance sheet can interfere with each of these channels, stabilizing in ation and economic activity. The power of QE comes from interest-paying reserves being a special public asset, neither substitutable by currency nor by government debt.
    Keywords: New-style central banks, Unconventional monetary policy
    JEL: E44 E58 E63
    Date: 2016–07
  6. By: Kjell G. NYBORG (University of Zurich, Swiss Finance Institute, and CEPR)
    Abstract: This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework.
    Keywords: central bank, banks, collateral, money, liquidity, monetary system, financial system, monetary policy, ratings, guarantees, haircuts, Eurosystem, ECB
    JEL: E58 E42 E52 E44 G10 G01 G21
  7. By: Kolm, Julian; Laux, Christian; Lóránth, Gyöngyi
    Abstract: We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is ineffective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulations. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders' incentives to implement an active board, which reduces the effectiveness of compensation regulation.
    Keywords: Bank Regulation; Executive Compensation; Corporate Governance
    JEL: G21 G28
    Date: 2016–07
  8. By: Adrian, Tobias; Liang, Nellie
    Abstract: We review a growing literature that incorporates endogenous risk premiums and risk taking in the conduct of monetary policy. Accommodative policy can create an inter-temporal tradeoff between improving current financial conditions at a cost of increasing future financial vulnerabilities. In the U.S., structural and cyclical macroprudential tools to reduce vulnerabilities at banks are being implemented, but may not be sufficient because activities can migrate and there are limited tools for nonbank intermediaries or for borrowers. While monetary policy itself can influence vulnerabilities, its efficacy as a tool will depend on the costs of tighter policy on activity and inflation. We highlight how adding a risk-taking channel to traditional transmission channels could significantly alter a cost-benefit calculation for using monetary policy, and that considering risks to financial stability—as downside risks to employment--is consistent with the dual mandate.
    Keywords: financial conditions; financial stability; leaning against the wind; macroprudential policy; monetary policy rules; monetary policy transmission; risk taking channel of monetary policy
    Date: 2016–07
  9. By: Carlos Diaz Vela
    Abstract: This paper shows how to extract the density of the shocks of information perceived by the Bank of England between two consecutive releases of its inflation density forecasts. These densities are used to construct a new measure of ex ante in ex ante inflation uncertainty, and a measure of news incorporation into subsequent forecasts. Also dynamic tests of point forecast optimality is constructed. It is shown that inflation uncertainty as perceived by the Bank was decreasing before the financial crisis, increasing sharply during the period 2008-2011. Since then, uncertainty seems to have stabilized, but it remains still above its pre-crisis levels. Finally, it is shown that forecast optimality is lost at some points during the financial crisis, and that there are more periods of optimal forecasts in long term than in short term forecasting. This could be also interpreted as that short term forecasts are subject to profound revisions.
    Keywords: Inflation, density forecast, uncertainty, revisions, optimal forecasts.
    JEL: C22 C53 C63 E31 E37 E58
  10. By: Andrea Vedolin (London School of Economics); Alireza Tahbaz-Salehi (Columbia Business School); Philippe Mueller (London School of Economics)
    Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-a`-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.
    Date: 2016
  11. By: Michael Weber (University of Chicago); Ali Ozdagli (Federal Reserve Bank of Boston)
    Abstract: Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. A one percentage point higher than expected Federal Funds rate leads to a drop in the stock market by 4 percentage points within a 30 minutes event window. We decompose the overall event into a direct (demand) effect and an indirect (network) effect using spatial autoregressions. We use the empirical input-output structure from the Bureau of Economic Analysis to construct a spatial-weighting matrix. We attribute 50% to 85% of the overall effect to indirect effects. The effect is robust to different sample periods, event windows, type of announcements, and is symmetric in the shock sign. We rationalize our findings in a simple model with intermediate inputs. Our findings indicate that production networks might not only be important for the propagation of idiosyncratic shocks but might also be a propagation mechanism of monetary policy to the real economy.
    Date: 2016
  12. By: Giuliana Birindelli (Department of Management and Business Administration, University of Chieti-Pescara, Italy); Paola Ferretti (Department of Economics and Management, University of Pisa, Italy); Marco Savioli (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: Based on a sample of eurozone banks classified into six business models over the period 2001–2014, this paper aims to investigate whether and how strongly the Basel 3 requirements affect differently the stability of banks working under different business models. Our findings show that, irrespective of the business model, the most positive driver of banks' stability is the leverage ratio, followed by the net stable funding ratio. The interactions with banks' business models allow us to highlight significant differences in the coefficients of the Basel 3 variables. In particular, savings banks are predicted to gain the greatest advantage from our set of identified reform measures in banking prudential regulation; on the contrary, commercial and investment banks are the least advantaged. Thus, our findings stress the need to revise the current “one-size-fits-all” prudential framework.
    Keywords: Basel 3, banks' business model, financial stability
    JEL: G21 G28
    Date: 2016–07
  13. By: Kogler, Michael
    Abstract: Several European countries have recently introduced levies on bank liabilities to internalise the fiscal costs of banking crises. This paper studies the tax incidence: Building on the Monti-Klein model, we predict that banks shift the burden to borrowers by raising lending rates and that deposit rates may increase as deposits are partly exempt. Bank-level evidence for 23 EU countries in the period 2007-2013 implies a moderate increase in lending and deposit rates and net interest margins. Market characteristics and capital structure influence the magnitude: The lending rate strongly increases in concentrated markets, whereas the pass-through is weak for well-capitalised banks.
    Keywords: Taxation of banks, Tax Incidence, Pigovian taxes
    JEL: G21 G28 H22
    Date: 2016–04
  14. By: Eichler, Stefan; Littke, Helge; Tonzer, Lena
    Abstract: We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered complements by banks investing abroad.
    Keywords: central bank transparency,cross-border banking,gravity model
    JEL: E58 F30 G15
    Date: 2016
  15. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: time-varying VAR,inflation,public deficits
    JEL: E42 E58 E61
    Date: 2015
  16. By: Gropp, Reint E.; Guettler, Andre; Saadi, Vahid
    Abstract: In the wake of the recent financial crisis, many governments extended public guarantees to banks. We take advantage of a natural experiment, in which long-standing public guarantees were removed for a set of German banks following a lawsuit, to identify the real effects of these guarantees on the allocation of credit ('allocative efficiency'). Using matched bank/firm data, we find that public guarantees reduce allocative efficiency. With guarantees in place, poorly performing firms invest more and maintain higher rates of sales growth. Moreover, firms produce less efficiently in the presence of public guarantees. Consistently, we show that guarantees reduce the likelihood that firms exit the market. These findings suggest that public guarantees hinder restructuring activities and prevent resources to flow to the most productive uses.
    Abstract: [Staatliche Bankgarantien und Allokationseffizienz] Im Zuge der jüngsten Finanzkrise haben viele Regierungen ihre staatlichen Garantien für Banken erweitert. Wir nutzen ein natürliches Experiment, bei dem langjährige staatliche Garantien für eine Reihe deutscher Banken nach einem Rechtsstreit aufgehoben wurden, um die realwirtschaftlichen Auswirkungen dieser Bürgschaften auf die Kreditvergabe identifizieren zu können („Allokationseffizienz“). Unter Verwendung zusammengeführter Bank- und Unternehmensdaten zeigt sich, dass staatliche Garantien diese Allokationseffizienz mindern. Werden Garantien gewährleistet, investieren leistungsschwache Unternehmen mehr und behalten höhere Zuwachsraten beim Umsatz bei. Darüber hinaus produzieren Unternehmen im Allgemeinen weniger effizient, wenn staatliche Garantien existieren. Folgerichtig zeigen wir außerdem, dass Garantien die Wahrscheinlichkeit verringern, dass Unternehmen aus dem Markt ausscheiden. Die Ergebnisse belegen, dass staatliche Garantien Restrukturierungsaktivitäten behindern und verhindern, dass finanzielle Mittel den produktivsten Verwendungszwecken zugeführt werden.
    Keywords: banking,public guarantees,allocative efficiency,Bankwesen,staatliche Garantien,Allokationseffizienz
    JEL: D22 D61 G21 G28 G31 G32
    Date: 2015

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