nep-cba New Economics Papers
on Central Banking
Issue of 2016‒09‒25
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. Foreign exchange intervention and monetary policy design: a market microstructure analysis By Montoro, Carlos; Ortiz, Marco
  2. The global Crisis and Unconventional Monetary Policy: ECB versus Fed By Carolina Tuckwell; António Mendonça
  3. Country Portfolios, Collateral Constraints and Optimal Monetary Policy By Senay, Ozge; Sutherland, Alan
  4. Bailouts, Moral Hazard, and Banks’ Home Bias for Sovereign Debt By Ariel Zetlin-Jones; Gaetano Gaballo
  5. Inflation Persistence and Structural Breaks: The Experience of Inflation Targeting Countries and the US By Giorgio Canarella; Stephen M. Miller
  6. Funding Quantitative Easing to Target Inflation By Reis, Ricardo
  7. International Banking and Cross-Border Effects of Regulation: Lessons from the Netherlands By Jon Frost; Jakob de Haan and Neeltje van Horen; Neeltje van Horen
  8. Modeling changes in U.S. monetary policy By Anh Nguyen; Efthymios Pavlidis; David Alan Peel
  9. Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality By Beck, Günter W.; Lein-Rupprecht, Sarah M.
  10. Stress Testing in Wartime and in Peacetime By Schuermann, Til
  11. The Effectiveness of Monetary Policy in Small Open Economies; An Empirical Investigation By Keyra Primus
  12. Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data By Claudiu Tiberiu Albulescu; Aviral Kumar Tiwari; Stephen M. Miller; Rangan Gupta
  13. Time-Varying Persistence of Inflation: Evidence from a Wavelet-based Approach By Heni Boubaker; Giorgio Canarella; Rangan Gupta; Stephen M. Miller
  14. How Regulatory Capital Requirement Affect Banks' Productivity: An Application to Emerging Economies' Banks By Duygun, Meryem; Shaban, Mohamed; Sickles, Robin C.; Weyman-Jones, Thomas
  15. The Risk of Returning to the Effective Lower Bound : An Implication for Inflation Dynamics After Lift-Off By Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
  16. Supervisory Incentives in a Banking Union By Elena Carletti; Giovanni Dell'Ariccia; Robert Marquez
  17. International Spillovers of Monetary Policy By John Ammer; Michiel De Pooter; Christopher J. Erceg; Steven B. Kamin
  18. The Federal Reserve's New Approach to Raising Interest Rates By Jane E. Ihrig; Ellen E. Meade; Gretchen C. Weinbach
  19. Measuring Monetary Policy Uncertainty : The Federal Reserve, January 1985-January 2016 By John H. Rogers; Bo Sun; Lucas F. Husted
  20. Monetary Policy for a Bubbly World By Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
  21. How Quantitative Easing Works: Evidence on the Refinancing Channel By Marco Di Maggio; Amir Kermani; Christopher Palmer
  22. "Whatever it takes" is all you need: monetary policy and debt fragility By Russell Cooper; Antoine Camous
  23. Inflation Targeting: New Evidence from Fractional Integration and Cointegration By Giorgio Canarella; Stephen M. Miller

  1. By: Montoro, Carlos (Banco Central de Reserva del Perú; Concejo Fiscal (CF)); Ortiz, Marco (Banco Central de Reserva del Perú)
    Abstract: In this paper we extend a new Keynesian open economy model to include risk-averse FX dealers and FX intervention by the monetary authority. These ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the dealers add endogenously a time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We analyse the effectiveness of different strategies of FX intervention (e.g.,unanticipated operations or via a preannounced rule) to affect the volatility of the exchange rate and the transmission mechanism of the interest rate. Our findings are as follows: (i) FX intervention has a strong interaction with monetary policy in general equilibrium; (ii) FX intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel; and (iii) there are some trade-offs in the use of FX intervention, since it can help to isolate the economy from external financial shocks, but it prevents some necessary adjustments on the exchange rate as a response to nominal and real external shocks.
    Keywords: Foreign exchange Microestructure, Exchange rate dynamics, Exchange Rate Intervention, Monetary policy, Information Heterogeneity
    JEL: E4 E5 F3 G15
    Date: 2016–09
  2. By: Carolina Tuckwell; António Mendonça
    Abstract: In the aftermath of the global economic and financial crisis, which broke-out in 2007, the major central banks started implementing so-called unconventional monetary policy measures. Following a fundamentally qualitative methodology, the aim of this paper is to compare the unconventional measures adopted by the ECB and the Fed, assessing their characteristics and also their impacts on the economy.
    JEL: E52 E58
    Date: 2016–04
  3. By: Senay, Ozge; Sutherland, Alan
    Abstract: Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks.
    Keywords: Collateral constraints; Country portfolios; Financial market structure; Optimal monetary policy
    JEL: E52 E58 F41
    Date: 2016–09
  4. By: Ariel Zetlin-Jones (Carnegie Mellon University); Gaetano Gaballo (Banque de France)
    Abstract: We show that an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic Sovereigns to successfully enact bailouts. When Sovereigns finance bailouts with newly issued debt and the price of sovereign debt is sensitive to unanticipated debt issues, then bailouts dilute the value of banks’ sovereign debt holdings rendering bailouts less effective. We explore this feedback mechanism in a model of financial intermediation in which banks are subject to managerial moral hazard and ex ante optimality requires lenders to commit to ex post inefficient bank liquidations. A benevolent Sovereign may desire to enact bailouts to prevent such liquidations thereby neutralizing lenders’ commitment. In this context, home bias for sovereign debt may arise as a mechanism to deter bailouts and restore lenders’ commitment.
    Date: 2016
  5. By: Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper reports on a sequential three-stage analysis of inflation persistence using monthly data from 11 inflation targeting (IT) countries and, for comparison, the US, a non IT country with a history of credible monetary policy. First, we estimate inflation persistence in a rolling-window fractional integration setting using the semiparametric estimator suggested by Phillips (2007). Second, we use tests for unknown structural breaks as a means to identify effects of the regime switch and the global financial crisis on inflation persistence. We use the sequences of estimated persistence measures from the first stage as dependent variables in the Bai and Perron (2003) structural break tests. These results suggest that four countries (Canada, Iceland, Mexico, and South Korea) experience a structural break in inflation persistence that coincide with the implementation of the IT regime, and three IT countries (Sweden, Switzerland, and the UK), as well as the US experience a structural break in inflation persistence that coincides with the global financial crisis. Finally, we reapply the Phillips (2007) estimator to the subsamples defined by the breaks. We find that in most cases the estimates of inflation persistence switch from mean-reversion nonstationarity to mean-reversion stationarity.
    Keywords: inflation persistence; inflation targeting; fractional integration; rolling window estimation; structural breaks
    JEL: C14 E31 C22
    Date: 2016–09
  6. By: Reis, Ricardo
    Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an effect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank's interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.
    Keywords: Event studies; Large scale asset purchases; Monetarism; Monetary policy
    JEL: E44 E52 E58
    Date: 2016–09
  7. By: Jon Frost; Jakob de Haan and Neeltje van Horen; Neeltje van Horen
    Abstract: The large and concentrated international activities of Dutch banks make the Netherlands particularly relevant for assessing the outward transmission of prudential policies. Analysis of the quarterly international claims of 25 Dutch banks in 63 countries over 2000-2013 indicates that Dutch banks increase lending in countries that tighten prudential regulation. This result is driven particularly by larger banks; banks with higher deposit ratios; by lending to advanced economies; and by lending in the post-crisis period. The result is not significant in most other sub-samples. These findings suggest that banks react to changes in local prudential regulation via foreign lending - which could come either from regulatory arbitrage, or from signaling effects of prudential policy on country risk. This contributes to the case for the reciprocation of macroprudential policy.
    Keywords: macroprudential policies; international banking; bank credit; spillovers
    JEL: F42 F44 G15 G21
    Date: 2016–09
  8. By: Anh Nguyen; Efthymios Pavlidis; David Alan Peel
    Abstract: The monetary economics literature has highlighted four issues that are important in evaluating U.S. monetary policy since the late 1960s: (i) time variation in policy parameters, (ii) asymmetric preferences, (iii) revisions to economic data, and (iv) heteroskedasticity. This paper, for the first time, estimates a Taylor rule model that addresses these four issues simultaneously. Our findings suggest that U.S. monetary policy has experienced substantial changes in terms of both the response to inflation and to real economic activity, as well as changes in preferences. These changes cannot be captured adequately by a single structural break at the late 1970s, as has been commonly assumed in the literature, and play a non-trivial role in economic performance.
    Keywords: Real-time data, Asymmetric objective, Stochastic volatility, Time-varying parameter model, Taylor rule, Monetary policy rules, Particle filter
    JEL: C32 E52 E58
    Date: 2016
  9. By: Beck, Günter W.; Lein-Rupprecht, Sarah M.
    Abstract: To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticites of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables.
    Keywords: demand curve,price elasticity,super-elasticity,price-setting,monetary non-neutrality
    JEL: E30 E31 E50 D12 C3
    Date: 2016
  10. By: Schuermann, Til (Oliver Wyman and University of Pennsylvania)
    Abstract: Stress testing served us well as a crisis management tool, and we see it applied increasingly to peacetime oversight of banks and banking systems. Stress testing is rapidly become the dominant supervisory tool on both sides of the Atlantic. Yet the objectives and certainly the conditions are quite different, and to date we see a range of practices across jurisdictions. Stress testing has proved to be enormously useful, not just for the supervisors but also for the banks. Using a simple taxonomy of stress testing--scenario design, models and projections, and disclosure--I analyze some of those different approaches with a view to examining how wartime stress testing can be adapted to peacetime concerns.
    JEL: G21 G28 G32
    Date: 2016–03
  11. By: Keyra Primus
    Abstract: This paper examines the relative effectiveness of the use of indirect and direct monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago, by estimating a restricted Vector Autoregressive model with Exogenous Variables (VARX). The study assumes that the central bank conducts monetary policy using a Taylor-type rule and it evaluates the effects of a reserve requirement policy. The results show that although a positive shock to the policy interest rate has a direct effect on commercial banks' interest rates, there is a weak transmission to the real variables. Furthermore, an increase in the required reserve ratio is successful in reducing private sector credit and excess reserves, while at the same time alleviating pressures on the exchange rate. The findings therefore indicate that central banks in small open economies should consider using reserve requirements as a complement to interest rate policy, to achieve their macroeconomic objectives.
    Date: 2016–09–16
  12. By: Claudiu Tiberiu Albulescu (Politehnica University of Timisoara); Aviral Kumar Tiwari (IBS Hyderabad, IFHE University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Rangan Gupta (University of Pretoria)
    Abstract: We provide new evidence on the relationship between inflation and its uncertainty in the U.S. on an historical basis, covering the period 1775-2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and we compare the results with the Stock and Watson (2007) method. Second, we employ the wavelet methodology to analyze the co-movements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium- and long-runs, the Freidman–Ball hypothesis holds when the measure of uncertainty is unbounded, while if the opposite applies, the Cukierman–Meltzer reasoning prevails. Second, we discover mixed evidence about the inflation–uncertainty nexus in the short-run, findings which explain the mixed results reported to date in the empirical literature.
    Keywords: historical inflation rate, uncertainty, continuous wavelet transform, bounded series, U.S.
    JEL: C22 E31 N11 N12
    Date: 2016–09
  13. By: Heni Boubaker (IPAG Lab); Giorgio Canarella (University of Nevada, Las Vegas); Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: We propose a new long-memory model with a time-varying fractional integration parameter, evolving non-linearly according to a Logistic Smooth Transition Autoregressive (LSTAR) specification. To estimate the time-varying fractional integration parameter, we implement a method based on the wavelet approach, using the instantaneous least squares estimator (ILSE). The empirical results show the relevance of the modeling approach and provide evidence of regime change in inflation persistence that contributes to a better understanding of the inflationary process in the US. Most importantly, these empirical findings remind us that a "one-size-fits-all" monetary policy is unlikely to work in all circumstances.
    Keywords: Time-varying long-memory, LSTAR model, MODWT algorithm, ILSE estimator
    JEL: C13 C22 C32 C54 E31
    Date: 2016–09
  14. By: Duygun, Meryem (University of Hull); Shaban, Mohamed (University of Leicester); Sickles, Robin C. (Rice University); Weyman-Jones, Thomas (Loughborough University)
    Abstract: This paper presents a novel approach to measure efficiency and productivity decomposition in the banking systems of emerging economies with a special focus on the role of equity capital. We model the requirement to hold levels of a fixed input, i.e. equity, above the long run equilibrium level or, alternatively, to achieve a target equity-asset ratio. To capture the effect of this under-leveraging, we allow the banking system to operate in an uneconomic region of the technology. Productivity decomposition is developed to include exogenous factors such as policy constraints. We use a panel data set of banks in emerging economies during the financial upheaval period of 2005-2008 to analyse these ideas. Results indicate the importance of the capital constraint in the decomposition of productivity.
    JEL: C23 D24 G21
    Date: 2015–06
  15. By: Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
    Abstract: In this note, we analyze an implication of the effective lower bound (ELB) risk--the possibility that adverse shocks will force policymakers in the future to lower the policy rate to the ELB--on inflation dynamics after liftoff.
    Date: 2016–02–12
  16. By: Elena Carletti; Giovanni Dell'Ariccia; Robert Marquez
    Abstract: We explore the behavior of supervisors when a centralized agency has full power over all decisions regarding banks, but relies on local supervisors to collect the information necessary to act. This institutional design entails a principal-agent problem between the central and local supervisors if their objective functions differ. Information collection may be inferior to that under fully independent local supervisors or under centralized information collection. And this may increase risk-taking by regulated banks. Yet, a “tougher†central supervisor may increase regulatory standards. Thus, the net effect of centralization on bank risk taking depends on the balance of these two effects.
    Keywords: Banking sector;Euro Area;Bank supervision;European Central Bank;Centralized bank supervision, bank risk taking, limited liability
    Date: 2016–09–15
  17. By: John Ammer; Michiel De Pooter; Christopher J. Erceg; Steven B. Kamin
    Abstract: This note presents a broad-brush overview of some of the salient issues on this topic and provides our sense of the answers to some key questions. We start by sketching out a simple framework for understanding how monetary policy actions spill over to other economies. The note then describes some back-of-the-envelope estimates of how U.S. monetary policy actions are transmitted overseas that we corroborate using a large-scale policy model (SIGMA). Finally, we discuss the implications of monetary policy spillovers for global economic stability, including the challenges posed by those spillovers for some countries with multiple policy objectives.
    Date: 2016–02–08
  18. By: Jane E. Ihrig; Ellen E. Meade; Gretchen C. Weinbach
    Abstract: At its December 2015 meeting, the Federal Open Market Committee (FOMC)--the Federal Reserve's monetary policy committee--raised its target range for the federal funds rate by 25 basis points, marking the end of an extraordinary seven-year period during which the federal funds target range was held near zero to support the recovery of the U.S. economy from the worst financial crisis and recession since the Great Depression.
    Date: 2016–02–12
  19. By: John H. Rogers; Bo Sun; Lucas F. Husted
    Abstract: In this note we focus on the U.S. over the period January 1985 to January 2016, but have also constructed measures over a longer time period and for other central banks/economies.
    Date: 2016–04–11
  20. By: Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
    Abstract: We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents’ expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy’s ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of “conventional” and “unconventional” monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.
    JEL: E32 E44 O40
    Date: 2016–09
  21. By: Marco Di Maggio; Amir Kermani; Christopher Palmer
    Abstract: Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2's focus on purchasing Treasuries did not have such differential effects. We find that the Fed's purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reduced interest payments for refinancing households, led to a boom in equity extraction, and increased refinancing mortgagors’ consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.
    JEL: E21 E58 E65 G01 G18 G21 R28
    Date: 2016–09
  22. By: Russell Cooper (Pennsylvania State University); Antoine Camous (University of Mannheim)
    Abstract: The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default and thus confirming the pessimism of lenders. Can monetary interventions mitigate debt fragility? With one-period commitment to a state contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains unless reputation effects are sufficiently strong. Simpler forms of interventions, such as an inflation target, cannot eliminate debt fragility
    Date: 2016
  23. By: Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: We investigate inflation persistence in six inflation targeting (IT) countries from the globaleconomy perspective. This view maintains that inflation persistence in IT countries has declined mainly because of the decline of inflation persistence in the global economy. We provide empirical evidence on two yet unanswered questions. First, we investigate whether each IT country in the sample share a common persistence with Germany and the US, two non-IT countries with a relatively good inflation record, which we use as proxies for the global economy. This tests the weak-form global hypothesis. Second, for the countries that share common inflation persistence with Germany and the US, we examine whether the same long memory component drives their inflationary processes to converge in the long-run to a common stochastic equilibrium with Germany and the US. This tests the strong-form global hypothesis. Our findings cast doubt on the relevance of IT in the industrial, but not developing, countries in the sample, suggesting that the global economy probably played an important role in the decline of inflation persistence in industrial, but not developing, countries.
    Keywords: inflation targeting, inflation persistence, fractional integration, cointegration
    JEL: C14 E31 C22
    Date: 2016–09

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