nep-cba New Economics Papers
on Central Banking
Issue of 2016‒11‒06
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy Tradeoffs Between Financial Stability and Price Stability By Malik Shukayev; Alexander Ueberfeldt
  2. Macroprudential tools, transmission and modelling By Oriol Carreras; E Philip Davis; Rebecca Piggott
  3. Monetary Policy, Credit Markets and Banking Regulation By Daniel Sanches; Todd Keister
  4. Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations By Cociuba, Simona; Shukayev, Malik; Ueberfeldt, Alexander
  5. Fighting Crises By Gary Gorton; Guillermo Ordoñez
  6. Market Liquidity and Systemic Risk in Government Bond Markets: A Network Analysis and Agent-Based Model Approach By Toshiyuki Sakiyama; Tetsuya Yamada
  7. Systemic risk, macroprudential policy, bank capital requirements, real estate. By Stijn Ferrari; Mara Pirovano; Pablo Rovira Kaltwasser
  8. Liquidity and Credit Risks in the UK’s Financial Crisis: How ‘Quantitative Easing’ changed the relationship By Woon K. Wong; Iris Biefang-Frisancho Mariscal; Wanru Yao; Peter Howells
  9. Forecasting Chilean Inflation with the Hybrid New Keynesian Phillips Curve: Globalisation, Combination, and Accuracy By Carlos Medel
  10. Structural factors, unemployment and monetary policy: the useful role of the natural rate of interest By Francesco Furlanetto; Paolo Gelain
  11. Quantitative Easing and Liquidity in the Japanese Government Bond Market By Kentaro Iwatsubo; Tomoki Taishi

  1. By: Malik Shukayev; Alexander Ueberfeldt
    Abstract: We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices. Price adjustment frictions and a state-dependent risk of financial crisis create the possibility of a policy tradeoff between price stability and financial stability. Focusing on Taylor rules with monetary policy possibly reacting to banks’ short-term liabilities, we find that the optimized policy uses the extra tool to support investment at the expense of higher inflation and output volatility.
    Keywords: Financial stability, Monetary policy framework, Transmission of monetary policy
    JEL: E44 D62 G01 E32
    Date: 2016
  2. By: Oriol Carreras; E Philip Davis; Rebecca Piggott
    Abstract: The purpose of this paper is twofold. First, we review the theoretical and empirical literature on macroprudential policies and tools. Second, we test empirically the effectiveness of several macroprudential policies and tools using three datasets from the IMF and BIS that cover up to 19 OECD countries during 2000-2014, thus giving wide coverage of instruments. In addition, our focus on OECD countries gives us access to a wider range of control variables whose omission may lead to excessively favourable results on the impact of macroprudential policies. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.
    Date: 2016–10
  3. By: Daniel Sanches (Federal Reserve Bank of Philadelphia); Todd Keister (Rutgers University)
    Abstract: We study a model in which both money and private credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs in our model have access to productive projects, but face credit constraints due to limited pledgeability of their returns. If credit claims cannot circulate, the optimal monetary policy is the Friedman rule, which leads to efficient patterns of exchange, but the equilibrium level of investment is inefficiently low. When credit claims do circulate, monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment. The Friedman rule is no longer optimal; we show that the optimal policy instead strikes a balance between easing borrowing constraints for entrepreneurs and promoting efficient exchange. We relate our result to the traditional bank lending channel of monetary policy and derive implications for optimal banking regulation.
    Date: 2016
  4. By: Cociuba, Simona (University of Western Ontario); Shukayev, Malik (University of Alberta, Department of Economics); Ueberfeldt, Alexander (Bank of Canada)
    Abstract: We develop a model in which a financial intermediarys investment in risky assets risk taking is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations either capital or leverage regulation, and a tax on pro ts achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
    Keywords: Financial intermediation; risk taking; interest rate policy; macroprudential regulations; capital requirements; leverage ratio
    JEL: E44 E52 G11 G18
    Date: 2016–11–01
  5. By: Gary Gorton; Guillermo Ordoñez
    Abstract: In fighting a financial crisis, opacity (keeping the names of banks borrowing at emergency lending facilities secret) and stigma (the cost of having a bank’s name revealed) are desirable to restore confidence. Lending facilities raise the perceived average quality of all banks’ assets. Opacity reduces the costs of these facilities, creating an information externality that prevents runs even on banks not participating in lending facilities. Stigma is costly but keeps banks from revealing their participation, making opacity sustainable. The key tool for implementing optimal opacity while fine tuning stigma is the haircut for bonds offered as collateral in lending facilities.
    JEL: E32 E58 G01
    Date: 2016–10
  6. By: Toshiyuki Sakiyama (Deputy Director, Economic and Financial Studies Division, Institute for Monetary and Economic Studies (currently Financial Markets Department), Bank of Japan (E-mail:; Tetsuya Yamada (Director, Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Recently, market liquidity in government bond markets has been attracting attention by market participants and central bankers since interest rate spikes have become frequent under unconventional monetary easing. We analyze network structures in the JGB (Japanese government bond) market using daily data from the BOJ-NET (the Bank of Japan Financial Network System). To our knowledge, this is the first network analysis on the government bond market. We studies how QQE (quantitative and qualitative monetary easing) has affected JGB market structure. We also conduct event studies for the spikes in interest rates (the shock after the introduction of QQE and the so-called VaR [Value at Risk] shock in 2003). In addition, we propose an agent-based model that accounts for the findings of the above event studies, and show that not only the capital adequacy of market participants but also the network structure are important for financial market stability.
    Keywords: Market Liquidity, Government bond markets, Quantitative and Qualitative Easing, Network analysis, Systemic risk, Agent-based model
    JEL: C58 G12 G18
    Date: 2016–10
  7. By: Stijn Ferrari (National Bank of Belgium); Mara Pirovano (National Bank of Belgium); Pablo Rovira Kaltwasser (National Bank of Belgium)
    Abstract: In December 2013 the National Bank of Belgium introduced a sectoral capital requirement aimed at strengthening the resilience of Belgian banks against adverse developments in the real estate market. This paper assesses the impact of this macroprudential measure on mortgage lending spreads. Our results indicate that affected banks reacted heterogeneously to the introduction of the measure. Specifically, mortgage-specialised and capital-constrained banks increase mortgage lending spreads by a greater amount. As expected, the impact of the measure on mortgage loan pricing has been rather modest in economic terms.
    Keywords: Regions, productivity, labour costs, linked panel data
    JEL: E44 E58 G21 G28
    Date: 2016–10
  8. By: Woon K. Wong (Cardiff Business School); Iris Biefang-Frisancho Mariscal; Wanru Yao; Peter Howells
    Abstract: This paper investigates the relationship between credit and liquidity risk components in the UK interbank spread during the recent financial crisis and sheds light on the transmission mechanism of the quantitative easing (QE) carried out by the Bank of England on short term interest rates. Specifically, we find that prior to the Bank’s intervention counterparty risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed during the period when QE was implemented. Using the accumulated value of asset purchases as a proxy for the central bank’s liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, and indirectly, credit risk. We also find evidence that suggests liquidity schemes provided by other central banks and international market sentiment contributed to the reduction of interbank spread.
    Keywords: Migration; Fiscal Decentralisation; Tax Revenue
    JEL: R23 J61 H11 H22 H71 H72 H77
    Date: 2016–09
  9. By: Carlos Medel
    Abstract: This article analyses the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) covering the period from 2000.1 to 2014.12, for the Chilean economy. A distinctive feature of this article is the use of a Global Vector Autoregression (GVAR) specification of the HNKPC to enforce an open economy version. Another feature is the use of direct measures of inflation expectations—Consensus Forecasts—differing from a fully-founded rational expectations model. The HNKPC point forecasts are evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks, including combined forecasts. The results indicate that there is evidence supporting the existence of the HNKPC for the Chilean economy, and robust to alternative specifications. In predictive terms, the results show that in a sample previous to the global financial crisis, the evidence is mixed between atheoretical benchmarks and the HNKPC by itself or participating in a combined prediction. However, when the evaluation sample is extended to include a more volatile inflation period, the results suggest that the HNKPC (and combined with the random walk) delivers the most accurate forecasts at horizons comprised within a year. In the long-run the HNKPC deliver accurate results, but not enough to outperform the candidate statistical models.
    Date: 2016–10
  10. By: Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Paolo Gelain (Norges Bank (Central Bank of Norway))
    Abstract: We study the role of monetary policy in response to variations in unemployment due to structural factors, modeled as exogenous changes in matching efficiency and in the size of the labor force. We fi?nd that monetary policy should play a role in such a scenario. Both negative shocks to the matching efficiency and negative shocks to the labor force increase infl?ation, thus calling for an increase in the interest rate when policy is conducted following Taylor-type rules. However, the natural rate of interest declines in response to both shocks. The optimal Ramsey policy prescribes small deviations from price stability and lowers the interest rate, thus tracking the natural rate of interest in response to both shocks. Structural factors in the labor market may have contributed to the recent decline in the natural rate of interest in the US.
    Keywords: Optimal Monetary Policy, Taylor Rules, Natural Rate of Interest, Natural Rate of Unemployment, Labor Force Shocks
    JEL: E32
    Date: 2016–10–27
  11. By: Kentaro Iwatsubo (Professor, Graduate School of Economics, Kobe University (E-mail:; Tomoki Taishi (Manager, Market Operations, Osaka Exchange, Inc. (E-mail:
    Abstract: The gQuantitative and Qualitative Monetary Easing h enacted immediately after the inauguration of Bank of Japan Governor Kuroda brought violent fluctuations in the prices of government bonds and deteriorated market liquidity. Does a central bank fs government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent this decrease? This study analyzes how the Bank of Japan fs purchasing policy changes influenced market liquidity. The results reveal that three specific policy changes contributed significantly to improving market liquidity: 1) increased purchasing frequency; 2) a decrease in the purchase amount per transaction; and 3) reduced variability in the purchase amounts. These policy changes facilitated investors f purchase schedule expectations and helped reduce market uncertainty. The evidence supports the theory that the effect of government bond purchasing policy on market liquidity depends on the market fs informational environment.
    Keywords: Monetary Policy, Quantitative Easing, Liquidity, Government Bond
    JEL: G14
    Date: 2016–10

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