nep-cba New Economics Papers
on Central Banking
Issue of 2016‒11‒13
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy By Bhattarai, Saroj; Neely, Christopher J.
  2. The Power of Unconventional Monetary Policy in a Liquidity Trap By Masayuki Inui; Sohei Kaihatsu
  3. Price Dispersion and Inflation Persistence By Kurozumi, Takushi; Van Zandweghe, Willem
  4. An Unconventional Approach to Evaluate the Bank of England's Asset Purchase Program By Matthias Neuenkirch
  5. Non-standard monetary policy, asset prices and macroprudential policy in a monetary union By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  6. Adding it all up: the macroeconomic impact of Basel II and outstanding reform issues By Ingo Fender; Ulf Lewrick
  7. Should Central Banks Care About Fiscal Rules? By Eric M. Leeper
  8. Deflation probability and the scope for monetary loosening in the United Kingdom By Haberis, Alex; Masolo, Riccardo; Reinold, Kate
  9. Unsurprising shocks: information, premia, and the monetary transmission By Miranda-Agrippino, Silvia
  10. The Impact of regulatory capital regulation on balance sheet structure, intermediation cost and growth By Pierre-Charles Pradier; Hamza El Khalloufi
  11. The Effect of ECB Forward Guidance on Policy Expectations By Paul Hubert; Fabien Labondance
  12. International Reserves and Rollover Risk By Bianchi, Javier; Hatchondo, Juan Carlos; Martinez, Leonardo
  13. Putting Money to Work: Monetary Policy in a Low Interest Rate Environment By Steve Ambler
  14. Optimal Inflation to Reduce Inequality By Lorenzo, Menna; Patrizio, Tirelli;
  15. The Pass-Through to Consumer Prices in CIS Economies: the Role of Exchange Rates, Commodities and Other Common Factors By Mariarosaria Comunale; Heli Simola

  1. By: Bhattarai, Saroj (University of Texas at Austin); Neely, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies. We show that event studies provide very strong evidence that U.S. unconventional policy announcements have strongly influenced international bond yields, exchange rates, and equity prices in the desired manner. In addition, such studies indicate that such policies curtailed market perceptions of extreme events. Calibrated modeling and vector autoregressive (VAR) exercises strongly suggest that these policies significantly improved macroeconomic outcomes, raising U.S. GDP and CPI, through these changes in asset prices. Both event studies and VARs imply positive international spillovers of such policies.
    Keywords: Quantitative easing; event study; unconventional monetary policy; zero lower bound
    JEL: E51 E58 E61 F31 G12
    Date: 2016–11–28
  2. By: Masayuki Inui (Bank of Japan); Sohei Kaihatsu (Bank of Japan)
    Abstract: In this study, we examine what unconventional monetary policy measures are effective in escaping from a liquidity trap. We develop a heterogeneous agent New Keynesian model with uninsurable income uncertainty and a borrowing constraint. We show that adverse effects of income uncertainty deteriorate in the liquidity trap, which crucially undermines the transmission mechanism of unconventional monetary policy through an increase in precautionary savings. We then draw the following implications: (1) decreasing risk premiums by quantitative easing (QE) is more effective than forward guidance (FG) in the liquidity trap; (2) when the liquidity trap becomes deeper, central banks should conduct QE with sufficiently rapid pace of asset purchases; and (3) the combination of QE and FG yields synergy effects that strengthen the power to escape from the liquidity trap through mitigating precautionary saving motives.
    Keywords: unconventional monetary policy; liquidity trap; uninsurable income uncertainty; incomplete market; quantitative easing; forward guidance
    JEL: E21 E31 E52 E58
    Date: 2016–11–11
  3. By: Kurozumi, Takushi; Van Zandweghe, Willem (Federal Reserve Bank of Kansas City)
    Abstract: Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. This paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. {{p}} In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of inflation persistence under the positive trend inflation rate. {{p}} JEL Classification: E31, E52
    Keywords: Disinflation; Inflation; Monetary policy; Prices; Fixed production cost
    JEL: E31 E52
    Date: 2016–10–01
  4. By: Matthias Neuenkirch
    Abstract: Empirical papers analysing the transmission of (unconventional) monetary policy typically rely on a vector autoregressive framework. In this paper, I complement these studies and employ a matching approach to examine the impact of the Bank of England's asset purchase program on macroeconomic quantities in the UK. My sample covers the period March 2001-December 2015 and five small open inflation targeting economies. Using entropy balancing, I create a synthetic control group comprised of credible counterfactuals for the sample of observations subject to the asset purchase program. My key results are that a 100 bn GBP increase in asset purchases has a significant and positive effect on GDP growth with a peak effect of 0.66-0.69 percentage points (pp) after 30 months. The same increase leads to a reduction in the inflation gap with a peak effect between -0.77 and -0.94 pp after 30 months. An in-depth analysis reveals that the latter finding is not driven by the choice of the empirical methodology. In contrast, I find that the returns on asset purchases are decreasing (i) over time and (ii) with the level of asset purchases. This causes the impact of asset purchases on the inflation gap to eventually become negative.
    Keywords: Asset Purchases, Bank of England, Entropy Balancing, Matching, Quantitative Easing, Treatment Effects, Unconventional Monetary Policy
    JEL: E52 E58
    Date: 2016
  5. 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 and financial effects of the Eurosystem’s Asset Purchase Programme (APP) and its interaction with a member country’s macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households’ borrowing. Second, while the APP is being implemented, an increase in households’ borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound, macroprudential policy
    JEL: E43 E52 E58
    Date: 2016–10
  6. By: Ingo Fender; Ulf Lewrick
    Abstract: As the Basel III package nears completion, the emphasis is shifting to monitoring its implementation and assessing the impact of the reforms. This paper presents a simple conceptual framework to assess the macroeconomic impact of the core Basel III reforms, including the leverage ratio surcharge that is being considered for global systemically important banks (G-SIBs). We use historical data for a large sample of major banks to generate a conservative approximation of the additional amount of capital that banks would need to raise to meet the new regulatory requirements, taking the potential impact of current efforts to enhance G-SIBs' total loss-absorbing capacity into account. To provide a high-level proxy for the effect of changes in capital allocation and bank business models on the estimated net benefits of regulatory reform, we simulate the effect of banks converging towards the "critical" average risk weights (or "density ratios") implied by the combined risk-weighted and leverage ratio-based capital requirements. While keeping in mind that quantifying the regulatory impact remains subject to caveats, the results suggest that Basel III can be expected to generate sizeable macroeconomic net benefits even after the implied changes to bank business models have been taken into account.
    Keywords: Basel III, density ratio, global systemically important banks, leverage ratio, macroeconomic impact, risk-shifting
    Date: 2016–11
  7. By: Eric M. Leeper
    Abstract: This essay aims to explain the nature of monetary and fiscal policy interactions and how those interactions could inform the fiscal rules that countries choose to follow. It makes two points: (1) monetary policy control of inflation requires appropriate fiscal backing; (2) European fiscal frameworks appear unlikely to provide the necessary fiscal backing.
    JEL: E31 E5 E62 E63
    Date: 2016–11
  8. By: Haberis, Alex (Bank of England); Masolo, Riccardo (Bank of England); Reinold, Kate (Bank of England)
    Abstract: In this paper, we use an estimated DSGE model of the UK economy to investigate perceptions of the effectiveness of monetary policy since the onset of the 2007–08 financial crisis in a number of measures of deflation probability — the Survey of Economic Forecasts, financial-market option prices, and the Bank of England's Monetary Policy Committee’s (MPC) forecasts. To do so, we use stochastic simulations of the model to generate measures of deflation probability in which the effectiveness of monetary policy to offset deflationary shocks is affected by different assumptions about the existence and level of a lower bound on policy rates. We find that measures of deflation probability are consistent with the perception that the MPC was not particularly constrained in its ability to offset deflation shocks in the post-crisis period.
    Keywords: Deflation; forecasting and simulation; models and applications; interest rates; monetary policy
    JEL: E31 E37 E43 E47 E52
    Date: 2016–11–04
  9. By: Miranda-Agrippino, Silvia (Bank of England)
    Abstract: Central banks’ decisions are a function of forecasts of macroeconomic fundamentals. Because private sector forecasts are not bound to be equal to central banks’ forecasts, what markets label as unexpected may or may not be unanticipated by the central bank. Monetary surprises can thus incorporate anticipatory effects if market participants fail to correctly account for the systematic component of policy when they are surprised by an interest rate decision. Depending on how market participants perceive the policy decision, their economic projections and the associated risk compensations move in opposite directions, and do so at the time of the announcement. Hence, and regardless of the width of the measurement window, monetary surprises capture more than just the monetary policy shock, and their use as external instruments for identification is potentially compromised. Monetary ‘surprises’ are dependent on, and shown to be predictable by both central banks’ forecasts and past information available to market participants prior to the announcement. A New-Keynesian framework sketches the intuition. The resulting distortions in the estimated impulse response functions can be dramatic, both qualitatively and quantitatively. A new set of monetary surprises, free of anticipatory effects and unpredictable by past information, are shown to retrieve transmission coefficients to a monetary policy shock consistent with macroeconomic theory even in informationally deficient VARs.
    Keywords: Monetary surprises; identification with external instruments; monetary policy; expectations; information asymmetries; event study; proxy SVAR
    JEL: C36 E44 E52 G14
    Date: 2016–11–04
  10. By: Pierre-Charles Pradier (Centre d'Economie de la Sorbonne & LabEx RéFi); Hamza El Khalloufi (PRISM & LabEx RéFi)
    Abstract: As Europe is subject to a protracted recession, it should be asked whether the reform of the financial sector is not costly in terms of potential growth. Our analysis shows that the negative effect of the Basel III package excepted by the pre-QE studies are almost annihilated today. The recession must then have other causes: falling corporate lending volumes resulted from falling demand in the aftermath of the financial crisis, but this is longer the case. The EU is trying to incentivize corporate lending, via forward guidance as well as ‘supporting factor’ cutting down the Basel capital requirements. The macroeconomic theorists are trying to account for future success of monetary policy around zero nominal interest rate via the risk-taking channel. All these clever initiatives failed to deliver. As a consequence, we might infer that banks are simply not taking any risks: rather than appealing to risk aversion, we would like to argue that the banks seem especially embarrassed by future regulatory developments, which appear remote and uncertain. The binding constraint for corporate lending and growth in the EU is then plausibly a combination of banks' expectations of future regulation and strong uncertainty aversion. While we offer some mitigation prospects, we hope that the theoretical developments of the recent years will quickly yield both theoretical advances and practical results
    Keywords: banking, financial regulation
    JEL: G22 G28 G01
    Date: 2016–09
  11. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of private short-term interest rate expectations. We estimate the static and dynamic impact of forward guidance on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements decrease most of the term structure of private short-term interest rate expectations, this being robust to several specifications. The effect is stronger on longer maturities and persistent.
    Keywords: Central bank communication, Short-term interest rate expectations, OIS
    JEL: E43 E52 E58
    Date: 2016–10
  12. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis); Hatchondo, Juan Carlos (Indiana University); Martinez, Leonardo (International Monetary Fund)
    Abstract: We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, larger contingent liabilities, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.
    Keywords: Sovereign default; international reserves; rollover risk; safe assets
    JEL: F32 F34 F41
    Date: 2016–11–03
  13. By: Steve Ambler
    Keywords: Monetary Policy
    JEL: E43 E52 E58
    Date: 2016–11
  14. By: Lorenzo, Menna; Patrizio, Tirelli;
    Abstract: A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher in ation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations.
    Keywords: in ation, monetary and fiscal policy, Ramsey plan, inequality
    JEL: E52 E58 J51 E24
    Date: 2016–11–01
  15. By: Mariarosaria Comunale (Bank of Lithuania); Heli Simola (Bank of Finland)
    Abstract: This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.
    Keywords: Commonwealth of Independent States, Exchange Rate Pass-Through, Commodity prices, Dynamic Panel Data, Inflation, Exchange Rates, Cross-sectional dependence, Financial cycle.
    JEL: C38 E31 F31
    Date: 2016–11–02

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