nep-cba New Economics Papers
on Central Banking
Issue of 2016‒11‒27
24 papers chosen by
Maria Semenova
Higher School of Economics

  1. International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma By Xuehui Han; Shang-Jin Wei
  2. U.S. Monetary Policy Normalization and Global Interest Rates By Carlos Caceres; Yan Carriere-Swallow; Ishak Demir; Bertrand Gruss
  3. Signaling Effects of Monetary Policy By Melosi, Leonardo
  4. Constrained Discretion and Central Bank Transparency By Bianchi, Francesco; Melosi, Leonardo
  5. Monetary Policy Rule, Exchange Rate Regime, and Fiscal Policy Cyclicality in a Developing Oil Economy By Aliya Algozhina
  6. Media Coverage and ECB Policy-Making: Evidence from a New Index By Hamza Bennani
  7. Inflation Dynamics During the Financial Crisis By Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajšek
  8. Financial Depth and the Asymmetric Impact of Monetary Policy By Caglayan, Mustafa; Kandemir Kocaaslan, Ozge; Mouratidis, Kostas
  9. Regulation and Rational Banking Bubbles in Infinite Horizon By Claire Océane Chevallier; Sarah El Joueidi
  10. No Smoking Gun: Private Shareholders, Governance Rules and Central Bank Financial Behavior By Bartels, Bernhard; Eichengreen, Barry; Weder, Beatrice
  11. TIPS: The Trend Inflation Projection System and Estimation Results By Koji Takahashi
  12. Monetary policy shocks, set-identifying restrictions, and asset prices: A benchmarking approach for analyzing set-identified models By Uhrin, Gábor B.; Herwartz, Helmut
  13. Monetary policy and large crises in a financial accelerator agent-based model By Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  14. Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints? By Schmitt-Grohé, Stephanie; Uribe, Martin
  15. Financial Regulation in a Quantitative Model of the Modern Banking System By Tim Landvoigt; Juliane Begenau
  16. On the Effectiveness of Inflation Targeting: Evidence from a Semiparametric Approach By Ardakani, Omid; Kishor, Kundan; Song, Suyong
  17. The Impact of Capital-Based Regulation on Bank Risk-Taking: A Dynamic Model By Paul S. Calem; Rafael Rob
  18. Measuring Systemic Stress in European Banking Systems* By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  19. Monetary Policy and the Stock Market: Time-Series Evidence By Andreas Neuhierl; Michael Weber
  20. Supervising Financial Regulators By Josef Schroth
  21. Macroeconomic surprises, market environment and safe-haven currencies By Adrian Jäggi; Martin Schlegel; Attilio Zanetti
  22. The Theory of Credit and Macro-economic Stability By Joseph E. Stiglitz
  23. Monetary policy and the stock market: Insights from a model of endogenous business cycles By Yanovski, Boyan
  24. Stocks or flows? New thinking about monetary transmission through the lending channel By Javier Villar Burke

  1. By: Xuehui Han; Shang-Jin Wei
    Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.
    JEL: F3
    Date: 2016–11
  2. By: Carlos Caceres; Yan Carriere-Swallow; Ishak Demir; Bertrand Gruss
    Abstract: As the Federal Reserve continues to normalize its monetary policy, this paper studies the impact of U.S. interest rates on rates in other countries. We find a modest but nontrivial pass-through from U.S. to domestic short-term interest rates on average. We show that, to a large extent, this comovement reflects synchronized business cycles. However, there is important heterogeneity across countries, and we find evidence of limited monetary autonomy in some cases. The co-movement of longer term interest rates is larger and more pervasive. We distinguish between U.S. interest rate movements that surprise markets versus those that are anticipated, and find that most countries receive greater spillovers from the former. We also distinguish between movements in the U.S. term premium and the expected path of risk-free rates, concluding that countries respond differently to these shocks. Finally, we explore the determinants of monetary autonomy and find strong evidence for the role of exchange rate flexibility, capital account openness, but also for other factors, such as dollarization of financial system liabilities, and the credibility of fiscal and monetary policy.
    Keywords: Monetary policy;United States;Interest rates;Spillovers;Asset prices;Central bank autonomy;Monetary policy; monetary conditions; autonomy; global financial cycle.
    Date: 2016–09–29
  3. By: Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop a dynamic general equilibrium model in which the policy rate signals the central bank’s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal persistent inflationary shocks, explaining why inflation and inflation expectations were so persistently heightened. The signaling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s.
    Keywords: Disanchoring of inflation expectations; heterogeneous beliefs; endogenous signals; Bayesian VAR; Bayesian counterfactual analysis; Delphic effects of monetary policy
    JEL: C11 C52 D83 E52
    Date: 2016–09–16
  4. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents’ uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S., enhancing transparency is found to increase welfare. The same result is found when we relax the assumption of perfectly credible announcements.
    Keywords: Policy announcement; Bayesian learning; reputation; forward guidance; macroeco-nomic risk; uncertainty; inflation expectations; Markov-switching models; likelihood estimation
    JEL: C11 D83 E52
    Date: 2016–10–16
  5. By: Aliya Algozhina
    Abstract: According to Frankel and Catao (2011), a commodity exporting developing economy is advised to target the output price index rather than consumer price index, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and CPI inflation monetary targeting under a flexible exchange rate regime to stabilize equally the domestic price inflation, aggregate output, and real exchange rate in a small open economy. This result is conditional on weights for those three variables used in the loss measure.
    Keywords: oil economy; monetary policy; fiscal policy; exchange rate; oil price shock; interventions; SWF;
    JEL: E31 E52 E62 E63 F31 F41 H54 H63 Q33 Q38
    Date: 2016–10
  6. By: Hamza Bennani
    Abstract: Using a novel index measuring media's uncertainty regarding the effectiveness of European Central Bank's (ECB) policy actions, this paper estimates the interest rate policy of the ECB with respect to media coverage of its monetary policy decisions. Our results suggest that the monetary institution implements a restrictive (accommodative) monetary policy, through its repo rate, in response to an increase (decrease) of the uncertainty expressed by the media concerning the effectiveness of its past policy actions, in particular since the global financial crisis. These results are robust when considering an alternative proxy of central bank's perceived effectiveness and ECB's unconventional policy measures in the estimation procedure. Our findings thus shed some light on the decision-making procedure of the ECB when the latter has to deal with the uncertain impact of its policy decisions as expressed by media coverage, and thus, address a critical issue related to the political economy of central banking.
    Keywords: Monetary Policy, ECB, Public Media, Taylor Rule.
    JEL: E43 E52 E58
    Date: 2016
  7. By: Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajšek
    Abstract: Using a novel dataset, which merges good-level prices underlying the PPI with the respondents’ balance sheets, we show that liquidity constrained firms increased prices in 2008, while their unconstrained counterparts cut prices. We develop a model in which firms face financial frictions while setting prices in customer markets. Financial distortions create an incentive for firms to raise prices in response to adverse financial or demand shocks. This reaction reflects the firms’ decisions to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.
    JEL: E31 E32 E44
    Date: 2016–11
  8. By: Caglayan, Mustafa; Kandemir Kocaaslan, Ozge; Mouratidis, Kostas
    Abstract: This paper investigates the importance of financial depth in evaluating the asymmetric impact of monetary policy on real output over the course of the US business cycle. We show that monetary policy has a significant impact on output growth during recessions. We also show that financial deepening plays an important role by dampening the effects of monetary policy shocks in recessions. The results are robust to the use of alternative financial depth and monetary policy shock measures as well as to two different sample periods.
    Keywords: Financial depth; financial frictions; monetary policy; output growth; asymmetric effects; Markov switching; instrumental variable
    JEL: E32 E52
    Date: 2016–08–01
  9. By: Claire Océane Chevallier (CREA, Université du Luxembourg); Sarah El Joueidi (CREA, Université du Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model in infinite horizon with a regulated banking sector where stochastic banking bubbles may arise endogenously. We analyze the conditions under which stochastic bubbles exist and their impact on macroeconomic key variables. We show that when banks face capital requirements based on Value-at- Risk, two different equilibria emerge and can coexist: the bubbleless and the bubbly equilibria. Alternatively, under a regulatory framework where capital requirements are based on credit risk only, as in Basel I, bubbles are explosive and, as a consequence, cannot exist. The stochastic bubbly equilibrium is characterized by positive or negative bubbles depending on the tightness of capital requirements based on Value-at-Risk. We find a maximum value of capital requirements under which bubbles are positive. Below this threshold, the stochastic bubbly equilibrium provides larger wel- fare than the bubbleless equilibrium. In particular, our results suggest that a change in banking policies might lead to a crisis without external shocks.
    Keywords: Banking bubbles; banking regulation; DSGE; infinitely lived agents; multiple equilibria; Value-at-Risk
    JEL: E2 E44 G01 G20
    Date: 2016
  10. By: Bartels, Bernhard; Eichengreen, Barry; Weder, Beatrice
    Abstract: Do central banks with private shareholders differ in their financial behavior from purely public central banks? Private shareholders might bias central banks toward focusing excessively on profits, dividends and risks to their balance sheets, but their influence may also be mitigated by governance rules. We study 35 OECD central banks, including eight with private shareholders, using new data on governance rules. We find that central banks with private shareholders do not differ from their purely public counterparts in their profitability, nor are they more financially cautious in the sense of building more loss-absorbing capacity. Surprisingly, their transfers to governments out of current profits tend to be higher, not lower. We find that broader governance rules matter for financial payouts.
    Keywords: central bank governance; private sharehoders
    JEL: E58 F30 G38
    Date: 2016–11
  11. By: Koji Takahashi (Bank of Japan)
    Abstract: In practice, trend inflation is often defined as a common factor extracted from observed inflation rates by removing cyclical effects from business cycles as well as other transitory distortions. Trend inflation can also be interpreted as the infinitely long-term inflation rate expected by private economic agents. If we assume that the central bank's inflation target policy is fully credible, trend inflation will converge to the target inflation rate in the long run. In the short run, however, trend inflation and the target rate can differ due to adaptive, or backward-looking, expectations and changes in the extent to which the inflation target is credible. Based on these considerations, this paper proposes a simple new methodology for projecting trend inflation, labelled the Trend Inflation Projection System (TIPS), where trend inflation is expressed as the weighted average of two components: an adaptive component, where a common trend is extracted from several core inflation measures, and a forward-looking component, namely the target inflation rate. In addition, the weights are allowed to vary over time to capture changes in the degree to which economic agents believe in the inflation target. The estimation results show that trend inflation in Japan increased dramatically in the first quarter of 2013, when the BOJ raised the target inflation rate, and has continued to rise gradually since then. However, since the second half of 2014, medium- to long-term inflation expectations have shifted downward, meaning that inflation expectations may be formed in a more adaptive manner than in the model. Furthermore, decomposition of the consumer price index (CPI, all items less fresh food) based on the estimated model indicates that although CPI inflation rose from the beginning of 2013 due to the increase in trend inflation, it has decreased again since the second half of 2014 due to transitory factors such as the decline in oil prices.
    Keywords: Core Inflation; Trend Inflation; Inflation Target
    JEL: C53 E31 E37 E58
    Date: 2016–11–21
  12. By: Uhrin, Gábor B.; Herwartz, Helmut
    Abstract: A central question for monetary policy is how asset prices respond to a monetary policy shock. We provide evidence on this issue by augmenting a monetary SVAR for US data with an asset price index, using set-identifying structural restrictions. The impulse responses show a positive asset price response to a contractionary monetary policy shock. The resulting monetary policy shocks correlate weakly with the Romer and Romer (2004) (RR) shocks, which matters greatly when analyzing impulse responses. Considering only models with shocks highly correlated with the RR series uncovers a negative, but near-zero response of asset prices.
    Keywords: monetary policy shocks,asset prices,sign restrictions,zero restrictions,set identification,structural VAR models
    JEL: C32 E44 E52
    Date: 2016
  13. By: Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Two examples are the Great Depression of 1929 and the Great Recession of 2008. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large scale crisis events. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a \double dip" recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.
    Keywords: Monetary Policy,Large Crises,Agent Based Model,Financial Accelerator,Zero Lower Bound
    JEL: E32 E44 E58 C63
    Date: 2016
  14. By: Schmitt-Grohé, Stephanie; Uribe, Martin
    Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
    JEL: E44 F41 G01 H23
    Date: 2016–11
  15. By: Tim Landvoigt (University of Texas Austin); Juliane Begenau (Harvard Business School)
    Abstract: This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. In particular, we investigate how the shadow banking system responds to capital regulation changes for traditional banks. A key feature of our model are defaultable bank liabilities that provide liquidity services to households. In case of default, commercial bank debt is fully insured and thus provides full liquidity services. In contrast, shadow banks are only randomly bailed out. Thus, shadow banks' liquidity services also depend on their default rate. Commercial banks are subject to a capital requirement. Tightening the requirement from the status quo, leads households to substitute shadow bank liquidity for commercial bank liquidity and therefore to more shadow banking activity in the economy. But this relationship is non-monotonic due to an endogenous leverage constraint on shadow banks that limits their ability to deliver liquidity services. The basic trade-off of a higher requirement is between bank liquidity provision and stability. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20\%.
    Date: 2016
  16. By: Ardakani, Omid; Kishor, Kundan; Song, Suyong
    Abstract: This paper estimates the treatment effect of inflation targeting for all explicit inflation targeting countries by taking into account the problem of model misspecification and inconsistent estimation of parametric propensity scores by using a semiparametric single index method. In addition, our study uses a broader set of preconditions for inflation targeting and macroeconomic outcome variables than the existing literature. Overall our results suggest no significant difference in level of inflation and inflation volatility in targeters versus non-targeters after the adoption of inflation targeting. Unlike parametric and non-parametric method, we find that inflation targeting leads to a significant decline in the sacrifice ratio and interest rate volatility in developed economies. The results suggest that inflation targeting framework enhances fiscal discipline in both industrial and developing countries.
    Keywords: Inflation Targeting, Propensity Score, Treatment Effects, Sieve Estimator, Single Index Model.
    JEL: C14 C21 E4 E5
    Date: 2015–01–08
  17. By: Paul S. Calem; Rafael Rob
    Abstract: In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model suggests that two aspects of the new regulatory environment may have unintended effects: higher capital requirements may lead to increased portfolio risk, and capital-based premia do not deter risk-taking by well-capitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough.Full paper (249 KB Postscript)
  18. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We construct a measure of systemic risk in selected EU banking systems using an indirect measure of the system covariance which is also time-varying. We proceed to examine to what extent the resulting measures of systemic stress provide a convincing narrative of events during the period January 2000 to March 2016. The results provide evidence of: (i) rising stress prior to the outbreak of the international financial crisis in 2007/08 in countries with banks exposed to toxic assets; (ii) stress associated with the euro area sovereign debt crisis from 2009/10; and (iii) continued concerns from 2013 out the need for euro area banks to clean up their balance sheets and raise new capital at a time of sluggish profitability.
    Keywords: euro area financial crisis, systemic stress, financial instability, European banks
  19. By: Andreas Neuhierl; Michael Weber
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2016–11
  20. By: Josef Schroth
    Abstract: How much discretion should local financial regulators in a banking union have in accommodating local credit demand? I analyze this question in an economy where local regulators privately observe expected output from high lending. They do not fully internalize default costs from high lending since deposit insurance cannot be priced fairly. Still, output net of default costs across the banking union is highest when local regulators are rewarded rather than punished. Regulators with lower current lending receive more discretion to allow higher lending in the future, but regulators with higher current lending may not experience any limit to their discretion.
    Keywords: Credit and credit aggregates, Financial stability, Financial system regulation and policies, Regional economic developments
    JEL: E44 G28 H7
    Date: 2016
  21. By: Adrian Jäggi; Martin Schlegel; Attilio Zanetti
    Abstract: In this paper, we study the reaction of the CHF and JPY to macroeconomic surprises and changes in the broader market environment before and during the crisis using high-frequency data. We show that both currencies are traditionally highly sensitive to macroeconomic surprises. This link, however, was significantly magnified during the crisis and effects persisted during times when monetary authorities implemented specific measures to limit the appreciation trend. We also find some evidence that, during the crisis, the CHF and JPY tended to respond more strongly to surprises generating an appreciation than to surprises leading to a depreciation. Both currencies also systematically respond to changes in the general market environment. This result is robust to the use of two measures of the market environment: VIX and on a novel index based on Bloomberg wires. Finally, our results suggest that negative macroeconomic surprises and deteriorations in the market environment are two distinct channels generating appreciation pressure on these two safe-haven currencies.
    Keywords: Safe-haven currencies, Swiss franc, yen, macroeconomic surprises, risk
    JEL: F31 G12 G14
    Date: 2016
  22. By: Joseph E. Stiglitz
    Abstract: In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct distortions.
    JEL: E42 E44 E51 G01 G20
    Date: 2016–11
  23. By: Yanovski, Boyan
    Abstract: [Key Takeaways] * Monetary policy might be ineffective in its attempt to influence the borrowing conditions over the business cycle because of the existence of adverse endogenous factors (like an endogenous risk premium, for example) counteracting monetary policy. * The evolution of the stock market over the business cycle can be considered an indicator of the extent to which monetary policy is able to affect the current borrowing conditions in the economy. * The pro-cyclical stock market observed in the US during the last 25 years in the presence of a counter-cyclical monetary policy can be considered evidence of monetary policy ineffectiveness and/or weak reactivity. * Monetary policy might be ineffective in reducing endogenous business cycle fluctuations because of the lags involved in its reactions and in the transmission process.
    Date: 2016
  24. By: Javier Villar Burke (European Commission)
    Abstract: The lending channel is conventionally understood to transmit monetary policy through the origination of new loans. In this paper, we postulate that the lending channel may also operate via the stock of existing loans. Monetary shocks generate two types of income effects: 1) monthly mortgage payments are impacted when rates are reset; 2) inflation erodes the real value of mortgage payments and increases the disposable income of borrowers. These income effects translate into variations in output due to the heterogeneous propensity to consume of individual economic agents. Three types of factors determine the importance of these income effects for individual households and at macro level: 1) borrowers’ features, such as income distribution, indebtedness and debt burden, 2) loan features, such as the period of rate fixation and 3) price developments. Significant differences in these factors across euro area Member States can distort a homogeneous transmission of the single monetary policy.
    Keywords: Euro area, monetary policy, monetary transmission, income effects, lending channel, mortgages.
    JEL: D33 D47 D90 E43 E51 E52 F36 F42 G21
    Date: 2016

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