nep-cba New Economics Papers
on Central Banking
Issue of 2016‒10‒02
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Classifying Exchange Rate Regimes: 15 Years Later By Levy-Yeyati, Eduardo; Sturzenegger, Federico
  2. Does Fed policy reveal a ternary mandate? By Peek, Joe; Rosengren, Eric S.; Tootell, Geoffrey M. B.
  3. Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework By Ayelen Banegas; Manjola Tase
  4. Have FOMC minutes helped markets to predict FED funds rate changes? By Jung, Alexander
  5. Did the Fed's Announcement of an Inflation Objective Influence Expectations? By Alan K. Detmeister; Daeus Jorento; Emily Massaro; Ekaterina V. Peneva
  6. Anchoring of inflation expectations in the euro area: recent evidence based on survey data By Łyziak, Tomasz; Paloviita, Maritta
  7. Net debt supply shocks in the euro area and the implications for QE By Blattner, Tobias; Joyce, Michael A. S.
  8. How to Improve Inflation Targeting in Canada By Maurice Obstfeld; Kevin Clinton; Ondra Kamenik; Douglas Laxton; Yulia Ustyugova; Hou Wang
  9. The ECB's asset purchase programme: an early assessment By Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
  10. Exchange rate floor and central bank balance sheets: Simple spillover tests of the Swiss franc By Adrien Alvero; Andreas M. Fischer
  11. Inflation and Activity - Two Explorations and Their Monetary Policy Implications By Blanchard, Oliver; Cerutti, Eugenio; SUmmers, Lawrence
  12. Exchange rate pass-through: What has changed since the crisis? By Martina Jašová; Richhild Moessner; Előd Takáts
  13. Non-Linear Phillips Curves with Inflation Regime-Switching By Jeremy J. Nalewaik
  14. Unconventional Monetary Policy in a Currency Union with Segmentation in the Market for Government Debt By Andreas Tischbirek
  15. Analyzing the impact of monetary policy on financial markets in Chile By Alicia García-Herrero; Eric Girardin; Hermann Esteban González
  16. Risk-Consistent Conditional Systemic Risk Measures By Hannes Hoffmann; Thilo Meyer-Brandis; Gregor Svindland

  1. By: Levy-Yeyati, Eduardo (Harvard University); Sturzenegger, Federico (Torcuato di Tella University)
    Abstract: Levy Yeyati and Sturzenegger (2001, 2003, 2005) proposed an exchange rate regime classification based on cluster analysis to group countries according to the relative volatility of exchange rates and reserves, thereby shifting the focus from a de jure to de facto approach in the empirical analysis of exchange rate policy. This note extends the classification through 2014 and broadens the country sample, increasing the number of classified country-year observations from 3335 to 5616. Based on this extension, the note documents the main stylized facts in the 2000s, including the behavior of exchange rate policy around the global financial crisis, and the prevalence of floating regimes.
    JEL: F30 F33
    Date: 2016–06
  2. By: Peek, Joe (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston); Tootell, Geoffrey M. B. (Federal Reserve Bank of Boston)
    Abstract: This paper examines the role of financial instability in setting monetary policy. The paper begins with a model that examines the interaction of monetary and regulatory policy. It then empirically tests whether financial instability has affected monetary policy. One important innovation is to construct a measure of financial instability directly related to the FOMC financial instability concerns expressed in FOMC meeting transcripts. We find that, even after controlling for forecasts of inflation and unemployment, the word counts of terms related to financial instability do correlate with monetary policy decisions. Thus, the FOMC not only “talks the talk” about financial stability, but it “walks the walk.”
    JEL: E44 E52 E58
    Date: 2016–09–01
  3. By: Ayelen Banegas; Manjola Tase
    Abstract: We study developments in reserve balances and the federal funds market in the context of two banking regulatory changes: the widening of the Federal Deposit Insurance Corporation (FDIC) assessment base and the introduction of the Basel III leverage ratio. Using a novel data set that includes FDIC fees and balance sheet data for depository institutions, we find that, as most foreign banks were not subject to the FDIC fee, they absorbed increasing amounts of reserve balances. Furthermore, foreign banks experienced positive and improving conditions for arbitraging between borrowing reserve balances in the federal funds market and earning interest on excess reserves by holding those reserves at the Federal Reserve Banks, contributing to an increase in federal funds borrowing by foreign banks relative to domestic banks. However, the implementation of the Basel III leverage ratio was associated with temporary declines in foreign bank federal funds borrowing at reporting dates.
    Keywords: Basel III ratios ; FDIC fees ; IOER arbitrage ; Reserve balances ; Federal funds market
    JEL: E49 E52 G28
    Date: 2016–09–01
  4. By: Jung, Alexander
    Abstract: This paper examines whether the release of minutes of the Federal Open Market Committee (FOMC) has provided markets with systematic clues about its future policy rates. We explain the future fed funds rate changes using Ordered Probit models (sample 1996 to 2008). We find that timely FOMC meeting minutes have provided assurance to markets about the most likely path of future interest rates. Though, their release did not cause markets to fundamentally revise their expectations on future policy decisions. The paper also discusses lessons from the Fed experience for the ECB and other central banks. JEL Classification: C34, E52, E58
    Keywords: communication, FOMC minutes, monetary policy, ordered Probit, predictability
    Date: 2016–09
  5. By: Alan K. Detmeister; Daeus Jorento; Emily Massaro; Ekaterina V. Peneva
    Abstract: Economic theory suggests that inflation expectations are a key determinant of actual inflation.
    Date: 2015–06–08
  6. By: Łyziak, Tomasz; Paloviita, Maritta
    Abstract: The paper analyses the anchoring of inflation expectations of professional forecasters and consumers in the euro area. We study anchoring, defined as the central bank’s ability to manage expectations, by paying special attention to the impact of the ECB inflation target and ECB inflation projections on inflation expectations. Our analysis indicates that longer-term inflation forecasts have become somewhat more sensitive to shorter-term forecasts and to actual HICP inflation in the post-crisis period. We also find that the ECB inflation projections have recently become more important for short- and medium-term professional forecasts and at the same time the role of the ECB inflation target for those expectations has diminished. Overall, our analysis suggests that in recent years inflation expectations in the euro area have shown some signs of de-anchoring. JEL Classification: D84, E52, E58
    Keywords: anchoring, euro area, financial crisis, inflation expectations, survey data
    Date: 2016–08
  7. By: Blattner, Tobias; Joyce, Michael A. S.
    Abstract: This paper examines how shocks to the net supply of government bonds affect the euro area term structure of interest rates and the wider macroeconomy. To measure net debt supply we construct a new free-float measure, which adjusts total government debt of the four largest euro area economies for foreign official holdings and the maturity of the outstanding stock of debt. Using a small macro-finance BVAR model, we estimate that the ECB’s government bond purchases, as announced on 22 January 2015, reduced euro area 10-year bond yields, on average, by around 30bps in 2015 through the so-called duration channel. The impact on the output gap and inflation in 2016 is of the order of 0.2ppt and 0.3ppt respectively. Our estimates are likely to underestimate the overall impact of the ECB’s purchases on interest rates and inflation, as they exclude effects on credit risk and monetary policy expectations that may have compressed interest rates even further. JEL Classification: C5, E4, E5, G1
    Keywords: ECB, government debt, macroeconomy, Quantitative Easing, term structure
    Date: 2016–09
  8. By: Maurice Obstfeld; Kevin Clinton; Ondra Kamenik; Douglas Laxton; Yulia Ustyugova; Hou Wang
    Abstract: Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance†) would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the decline in the world equilibrium real interest rate, this strategy is preferable to raising the inflation target.
    Date: 2016–09–26
  9. By: Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
    Abstract: This paper analyses the effects of the European Central Bank's expanded asset purchase programme (APP) on yields and on the macroeconomy, and sheds some light on its transmission channels. It shows, first, that the January 2015 announcement of the programme has significantly and persistently reduced sovereign yields on long-term bonds and raised the share prices of banks that held more sovereign bonds in their portfolios. This evidence is consistent with versions of the portfolio rebalancing channel acting through the removal of duration risk and the relaxation of leverage constraints for financial intermediaries. It then presents a stylised macroeconomic model that incorporates the aforementioned transmission channels. The model suggests that the macroeconomic impact of the programme can be expected to be sizable. JEL Classification: E44, E52, G12
    Keywords: reanchoring inflation expectations, transmission of large-scale asset purchases, unconventional monetary policy
    Date: 2016–09
  10. By: Adrien Alvero (Columbia Business School); Andreas M. Fischer (Swiss National Bank)
    Abstract: This paper examines spillover and spillback effects of unconventional monetary policies conducted by the European Central Bank (ECB) and Swiss National Bank (SNB) on the exchange rate's distribution. The empirical setup examines the price response of EURCHF risk reversal to a change in ECB and SNB balance sheets, with a distinction for the period of the minimum exchange rate (fl oor). The analysis finds only weak evidence of spillover effects from the ECB, while the spillback effect from the SNB balance sheet is robust during the floor period.
    Date: 2016–09
  11. By: Blanchard, Oliver (Peterson Institute for International Economics); Cerutti, Eugenio (IMF); SUmmers, Lawrence (Harvard University)
    Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    Date: 2015–11
  12. By: Martina Jašová; Richhild Moessner; Előd Takáts
    Abstract: We study how exchange rate pass-through to CPI inflation has changed since the global financial crisis. We have three main findings. First, exchange rate pass-through in emerging economies decreased after the financial crisis, while exchange rate pass-through in advanced economies has remained relatively low and stable over time. Second, we show that the declining pass-through in emerging markets is related to declining inflation. Third, we show that it is important to control for non-linearities when estimating exchange rate pass-through. These results hold for both short-run and long-run pass-through and remain robust to extensive changes in the specifications.
    Keywords: Exchange rate pass-through, inflation
    Date: 2016–09
  13. By: Jeremy J. Nalewaik
    Abstract: Building on the results in Nalewaik (FEDS 2015-93), this work models wage growth and core PCE price inflation as regime-switching processes, whose characteristics in the 1970s, 1980s and early 1990s differ fundamentally from their characteristics in the 1960s and from the mid-1990s to present. The key innovation here is the addition to the models of fundamental driving variables like labor-market slack, and the evidence strongly suggests a non-linear effect of slack on wage growth and core PCE price inflation that becomes much larger after labor markets tighten beyond a certain point. The results are informative for assessing the likelihood and risks of meeting certain inflation targets on a sustained basis.
    Keywords: Markov-switching ; NAIRU ; Threshold regression ; Wage Inflation ; Core PCE prices
    JEL: E31 E37 E51 E58 C22
    Date: 2016–08
  14. By: Andreas Tischbirek
    Abstract: The literature on large-scale purchases of government debt emphasises the importance of bond market segmentation along the maturity dimension for their transmission. This study investigates how another form of segmentation that we observe, the segmentation of government bond markets across countries, can be exploited by the central bank of a currency union in which fiscal coordination is not attainable. Under general conditions, government bond purchases which lower bond yields have first-order effects through a fiscal channel, even in the absence of the heterogeneity in investment opportunities found in Chen et al. (2012). The total effect on aggregate demand can be broken down into an "income-from-debt-issuance effect" and a "primary-surplus effect". If there is cross-country segmentation in bond markets and home bias in government spending, the central bank is able to use government bond purchases to control the terms of trade and achieve asymmetric degrees of stimulus across the members of the currency union without a transfer of resources. I characterise the welfare-optimising mix of conventional and unconventional monetary policy in this scenario and give an upper bound on the welfare benefi ts from using the unconventional tool.
    Keywords: Unconventional Monetary Policy, Quantitative Easing, Policy Coordination, Monetary Union, Market Segmentation
    JEL: E50 E52 E58 F45
    Date: 2016–09
  15. By: Alicia García-Herrero; Eric Girardin; Hermann Esteban González
    Abstract: During the past few years, monetary policy communication has become a hot topic in as far as it seems to have become a very relevant way for central banks to guide markets, beyond actual monetary policy decisions.
    Keywords: Banks , Chile , Financial regulation , Latin America , Working Paper
    JEL: E52 E58 E43
    Date: 2016–08
  16. By: Hannes Hoffmann; Thilo Meyer-Brandis; Gregor Svindland
    Abstract: We axiomatically introduce risk-consistent conditional systemic risk measures defined on multidimensional risks. This class consists of those conditional systemic risk measures which can be decomposed into a state-wise conditional aggregation and a univariate conditional risk measure. Our studies extend known results for unconditional risk measures on finite state spaces. We argue in favor of a conditional framework on general probability spaces for assessing systemic risk. Mathematically, the problem reduces to selecting a realization of a random field with suitable properties. Moreover, our approach covers many prominent examples of systemic risk measures from the literature and used in practice.
    Date: 2016–09

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