nep-cba New Economics Papers
on Central Banking
Issue of 2016‒12‒04
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations By Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
  2. The evolution of inflation expectations in euro area markets By Ricardo Gimeno; Eva Ortega
  3. Mending the broken link: heterogeneous bank lending and monetary policy pass-through By Altavilla, Carlo; Canova, Fabio; Ciccarelli, Matteo
  4. Interaction between monetary policy and bank regulation: theory and European practice By Eddie Gerba; Corrado Macchiarelli
  5. Gradualism and liquidity traps By Nakata, Taisuke; Schmidt, Sebastian
  6. Time-varying volatility, financial intermediation and monetary policy By Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
  7. Cross-Country Evidence on Monetary Policy Autonomy: A Markov Regime Switching Approach By Hang Zhou
  8. Measuring Cross Country Monetary Policy Uncertainty By Lucas F. Husted; John H. Rogers; Bo Sun
  9. Words Matter: Assessing the Role of Money versus Interest Rate in Pakistan By Zafar Hayat; Muhammad Nadim Hanif
  10. Unconventional Monetary Policy and the Safety of the Banking System By Martine Quinzii
  11. Is The Monetarist Arithmetic Unpleasant? By Martín Uribe
  12. Joining the dots: The FOMC and the future path of policy rates By Gerlach, Stefan; Stuart, Rebecca
  13. Turnover Liquidity and the Transmission of Monetary Policy By Shengxing Zhang; Ricardo Lagos
  14. The Effect of Monetary Policy Shocks in the United Kingdom: an External Instruments Approach By Francesco Zanetti; Wei Li
  15. Collateral, Central Bank Repos, and Systemic Arbitrage By Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
  16. Correlation changes between the risk-free rate and sovereign yields of euro area countries By De Santis, Roberto; Stein, Michael
  17. US-euro area term structure spillovers, implications for central banks By Nyholm, Ken
  18. REGULATING A MODEL By Leitner, Yaron; Yilmaz, Bilge
  19. Assessing Monetary Policy Effectiveness in Rich Data Environment By Muhammad Nadim Hanif; Javed Iqbal
  20. The Effect of Bank Recapitalization Policy on Corporate Investment: Evidence from a Banking Crisis in Japan By Hiroyuki Kasahara; Yasuyuki Sawada; Michio Suzuki
  21. Appointements to central bank boards : does gender matter ? By Patricia Charléty; Davide Romelli; Estefania Santacreu-Vasut
  22. A Shadow Rate New Keynesian Model By Jing Cynthia Wu; Ji Zhang
  23. Macroprudential Policy: Promise and Challenges By Enrique G. Mendoza

  1. By: Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
    Abstract: We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.
    Keywords: Liquidity Coverage Ratio ; Term Deposit Facility ; Monetary Policy ; Excess Reserves ; Basel III
    JEL: E52 E58 G21 G28
    Date: 2016–10–24
  2. By: Ricardo Gimeno (Banco de España); Eva Ortega (Banco de España)
    Abstract: This paper explores the behaviour of inflation expectations across countries that share their monetary policy, in particular those of the European Monetary Union. We investigate the possible common features at the various horizons, as well as differentials across euro area countries. A multi-country dynamic factor model based on Diebold et al. (2008), where we also add a liquidity risk component, is proposed and estimated using daily data from inflation swaps for Spain, Italy, France, Germany and the euro area as a whole, and for a wide range of horizons. It allows us to calculate the proportion of common vs country-specific components in the term structure of inflation expectations. We find sizable differences in inflation expectations across the main euro area countries only at short maturities, while in general a common component predominates throughout the years, especially at long horizons. The common long-run level of infl ation expectations is estimated to have fallen since late 2014, while an increased persistence of lower expected inflation and for longer horizons is estimated from 2012. There has been no reversal in either of these characteristics following the announcement and implementation of the ECB’s unconventional monetary policy measures.
    Keywords: inflation expectations; monetary union; inflation-linked swaps; multicountry dynamic factor model; liquidity risk premium.
    JEL: E31 C32 G13
    Date: 2016–11
  3. By: Altavilla, Carlo; Canova, Fabio; Ciccarelli, Matteo
    Abstract: We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset. Bank balance sheet characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes. The location of a bank is instead irrelevant. Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates. Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures. Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output would have been significantly lower. JEL Classification: C3, E4, E5, G2
    Keywords: bank balance sheet characteristics, monetary policy pass-through
    Date: 2016–11
  4. By: Eddie Gerba; Corrado Macchiarelli
    Abstract: The European Union has pursued a number of initiatives to create a safer and sounder financial sector for the single market. In parallel, bold unconventional monetary policies have been implemented in order to combat low inflation, foster risk taking and, ultimately, reinvigorate growth. But monetary and macro-prudential policies interact with each other and thus may enhance or diminish the effectiveness of the other. Monetary policy affects financial stability by shaping, for instance, leverage and borrowing. Equally, macro-prudential policies constrain borrowing, which in turn have side-effects on output and prices, and therefore on monetary policy. When both monetary and macroprudential functions are housed within the central bank, coordination is improved, but safeguards are needed to counter the risks from dual objectives. Against this background, this paper outlines the theoretical and empirical underpinnings of macro-prudential policy, and discusses the way it interacts with monetary policy. We identify advantages as well as risks from cooperating in the two policy areas, and provide suggestions in terms of institutional design on how to contain those risks. Against this backdrop, we evaluate the recent European practice.
    JEL: J1
    Date: 2016–10
  5. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Modifying the objective function of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the central bank with the standard objective function does. Through expectations, the temporary overheating of the economy associated with such low-for-long interest rate policy mitigates the declines in inflation and output when the lower bound constraint is binding. In a calibrated model, we find that the introduction of an interest-rate smoothing objective can reduce the welfare costs associated with the lower bound constraint by more than half. JEL Classification: E52, E61
    Keywords: gradualism, inflation targeting, interest-rate smoothing, liquidity traps, zero lower bound
    Date: 2016–11
  6. By: Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
    Abstract: We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which banks endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, banks lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy.
    Keywords: monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator
    JEL: C32 E44 E52
    Date: 2016
  7. By: Hang Zhou
    Abstract: This paper revisits the definition of monetary policy autonomy and develops a new method to identify autonomy regimes of a set of countries. Compared to the traditional identification approach, which only focuses on the base country interest rate, monetary policy autonomy discussed in this paper is jointly determined by how the interest rate responds to foreign monetary policy as well as its domestic inflation and real GDP. Using a Bayesian Markov Switching model for the monetary policy function, I estimate policy responses in two regimes, and obtain measures of monetary policy autonomy in the estimation process. Testing the method with case studies and simulated data demonstrates the robustness of the approach under different scenarios. Applying the method to the data of a set of advanced countries, I find monetary policy autonomy decreases when exchange rate is fixed or capital control is loosened, which is consistent with the open economy trilemma.
    JEL: C22 E52 F33 F41
    Date: 2016–11–24
  8. By: Lucas F. Husted; John H. Rogers; Bo Sun
    Abstract: In previous work, we constructed a news-based index of U.S. monetary policy uncertainty (MPU) that captures the degree of uncertainty the public perceives about Federal Reserve policy actions and their consequences. In this note, we extend that work to Canada, the Euro Area, Japan, and United Kingdom.
    Date: 2016–11–23
  9. By: Zafar Hayat (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: We empirically examine the role of monetary aggregate(s) vis-à-vis short term interest rate as monetary policy instruments, and the impact of State Bank of Pakistan’s transformation towards the latter on their relative effectiveness in terms of inflation in Pakistan. Using indicators of ‘persistent changes’ in the underlying behaviors of variables of interest, we found that broad money consistently explains inflation in (i) monetary, (ii) transitory and (iii) interest rate regimes. Though its role has receded whilst moving from the transition to the interest rate regime, the interest rate instrument seems to be positively related to inflation, a phenomenon commonly known as price puzzle. There is need to explore it further. In light of these findings, we recommend that the role of money should not be completely de-emphasized while moving towards flexible inflation targeting regime as planned.
    Keywords: Monetary policy instruments, price puzzle, ARDL, Pakistan
    JEL: E31 E52
    Date: 2016–11
  10. By: Martine Quinzii (University of California, Davis)
    Abstract: This paper presents a simple model of banking equilibrium in which unconventional monetary policy serves as a tool to enhance the safety of the banking system. Every economy has two intrinsic characteristics: a ``natural'' debt-equity ratio which depends on the endowments of the infinitely risk averse safe-debt providers and the risk neutral equity providers, and a ``critical'' debt-equity ratio which depends only on the risks inherent in the banks' productive loans. When the natural debt-equity ratio exceeds the critical ratio, there is a positive probability of bankruptcy in equilibrium. In such ``high debt'' economies, standard banking equilibria are inefficient regardless of the capital requirement imposed by regulators. However unconventional monetary policy using the balance sheet of the Central Bank in conjunction with a standard equity requirement can restore the Pareto optimality of the banking equilibrium.
    Date: 2016
  11. By: Martín Uribe
    Abstract: The unpleasant monetarist arithmetic of Sargent and Wallace (1981) states that in a fiscally dominant regime tighter money now can cause higher inflation in the future. In spite of the qualifier ‘unpleasant,’ this result is positive in nature, and, therefore, void of normative content. I analyze conditions under which it is optimal in a welfare sense for the central bank to delay inflation by issuing debt to finance part of the fiscal deficit. The analysis is conducted in the context of a model in which the aforementioned monetarist arithmetic holds, in the sense that if the government finds it optimal to delay inflation, it does so knowing that it would result in higher inflation in the future. The central result of the paper is that delaying inflation is optimal when the fiscal deficit is expected to decline over time.
    JEL: E51 E52 E58 E63
    Date: 2016–11
  12. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: The Federal Reserve publishes since 2012 Federal Open Market Committee (FOMC) members' views regarding what federal funds rate will be necessary for the FOMC to achieve its statutory targets. The views or 'projections' pertain to the end of the current and the next two or three years, and the 'longer run'. We use a simple model to interpolate the projections between these discrete points in time, estimate the interest rates one, two and three years ahead, and study how they evolve with macroeconomic conditions. News regarding the labour market, but not inflation, affects the projections in the sample period.
    Keywords: Federal Reserve; interest rate expectations; interpolation; monetary policy
    JEL: E52 E58
    Date: 2016–11
  13. By: Shengxing Zhang (London School of Economics); Ricardo Lagos
    Abstract: In this paper we document a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, we develop a model of this mechanism, and use a quantitative version to assess the ability of the theory to match the evidence.
    Date: 2016
  14. By: Francesco Zanetti; Wei Li
    Abstract: This paper uses VAR analysis to identify monetary policy shocks on U.K. data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.
    Keywords: Monetary Policy Transmission, Structural VAR, Small Open Economy, External Instruments Identification
    JEL: E44 E52 F41
    Date: 2016–11–23
  15. By: Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks' liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: banks; central bank; Collateral; collateral policy; financial fragmentation; financial stability; interbank market; liquidity; repo; systemic arbitrage
    JEL: E42 E51 E52 E58 G12 G21
    Date: 2016–11
  16. By: De Santis, Roberto; Stein, Michael
    Abstract: We study correlations between the risk-free rate and sovereign yields of ten euro area countries using smooth transition conditional correlation GARCH (STCC-GARCH) specifications, controlling for credit risk in mean and variance equations and conditioning non-linearly to liquidity risk. Correlations are state-dependent and heterogeneous across jurisdictions. Using panel vector autoregression models, we identify the macro factors influencing the correlations: interbank credit risk, the Greek crisis, and break-up risk. We show that the European Central Bank’s asset purchase programmes helped restore the pass-through relationship. We also make a methodological contribution by estimating all STCC-GARCH parameters at once and introducing an STCC-GARCHX. JEL Classification: G12, G15
    Keywords: euro area, government bonds, monetary policy, smooth transition models
    Date: 2016–11
  17. By: Nyholm, Ken
    Abstract: Spillovers between the US and euro area term structures of interest rates are examined. Implications for monetary policy are investigated using term-structure metrics that proxy conventional and unconventional instruments, i.e. the short rate, the 10 year term premium, and the 10 year risk-free rate. A new discrete-time arbitrage-free term structure model is used to extract these variables, at a daily frequency during the period covering 2005 to 2016. Relying on forecast error variance decompositions, following Diebold and Yilmaz (2009), it is found that transatlantic spillovers have increased by approximately 11%-points during the examined period, making it more dicult for central banks to directly assess the impact of their policies. JEL Classification: C32, E43, E58
    Keywords: international spillovers, monetary policy, yield curve modelling
    Date: 2016–11
  18. By: Leitner, Yaron (Federal Reserve Bank of Philadelphia); Yilmaz, Bilge (Universdity of Pennsylvania)
    Abstract: We study a situation in which a regulator relies on models produced by banks in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but, in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank's private gain from producing more information is either sufficiently high or sufficiently low (e.g., when the bank has a very little or very large amount of debt). When public models are more precise, banks produce more information, but the regulator may end up monitoring more
    Keywords: bank regulation; Bayesian persuasion; internal-risk models; model-based regulation
    JEL: D82 D83 G21 G28
    Date: 2016–10–26
  19. By: Muhammad Nadim Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan)
    Abstract: We assess impact of monetary policy actions upon inflation in a country while considering changes in global commodity prices in rich data environment. We apply Factor Augmented Bayesian Structural Vector Autoregression (FABSVAR) methodology of Bernanke et al (2005) upon Pakistan’s monthly data for July 1992-June 2015. Unlike Bernanke et al (2005), we combine variables of similar nature in groups to extract factors. We think putting all sorts of variables in one group impairs the factor extraction. Moreover, rather than working only with the response of variable of interest (inflation in this study) to shocks in factors under consideration (which, consist of different interest rates, monetary aggregates, exchange rates in this study) we propose use of eigenvector to obtain Impulse Response Functions (IRFs) of shock to individual variables in a factor. We find significant and desired impact of monetary policy decisions upon inflation in Pakistan. Administered prices, however, are found to have no response to interest rate changes in the country, which is understandable. By analyzing IRFs of inflation in Pakistan to shocks in interest rate we do not observe any price puzzle. It is simply because we consider the relevant variables omitted in previous studies reporting price puzzle in Pakistan.
    Keywords: Monetary policy, inflation, econometric modeling, interest rates
    JEL: E52 E31 C50 E43
    Date: 2016–11
  20. By: Hiroyuki Kasahara (University of British Columbia); Yasuyuki Sawada (University of Tokyo); Michio Suzuki (University of Tokyo)
    Abstract: This article examines the effect of government capital injections into financially troubled banks on corporate investment during the Japanese banking crisis of the late 1990s. By helping banks meet the capital requirements imposed by Japanese banking regulation, recapitalization enables banks to respond to loan demands, which could help firms increase their investment. To test this mechanism empirically, we combine the balance sheet data of Japanese manufacturing firms with bank balance sheet data and estimate a linear investment model where the investment rate is a function of not only firm productivity and size but also bank regulatory capital ratios. We find that the coefficient of the interaction between a firm's total factor productivity measure and a bank's capital ratio is positive and significant, implying that the bank's capital ratio affects more productive firms. Counterfactual policy experiments suggest that capital injections made in March 1998 and 1999 had a negligible impact on the average investment rate, although there was a reallocation effect, shifting investments from low- to high-productivity firms.
    Date: 2016–11
  21. By: Patricia Charléty (Essec Business School, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique); Davide Romelli (Trinity College Dublin [Dublin]); Estefania Santacreu-Vasut (Essec Business School)
    Abstract: This paper provides the fi rst systematic analysis of the evolution of female and male appointments to central bank boards. We build a novel and unique dataset that tracks appointments and replacements in a balanced panel of 26 OECD central bank boards from 2003 to 2015. We find that the likelihood of appointing a female is higher when a female rather than a male is being replaced and lower when the percentage of women on the board is already high.
    Keywords: Boards,Central Banks,Financial Crisis,Gender,Governance
    Date: 2016–09–15
  22. By: Jing Cynthia Wu; Ji Zhang
    Abstract: We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.
    JEL: E12 E52 E58 E63
    Date: 2016–11
  23. By: Enrique G. Mendoza
    Abstract: Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities.
    JEL: E44 E5 F34 F4 G01 G28
    Date: 2016–11

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