nep-cba New Economics Papers
on Central Banking
Issue of 2017‒02‒19
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. On the Global Financial Market Integration “Swoosh” and the Trilemma By Geert Bekaert; Arnaud Mehl
  2. Capital Controls and Monetary Policy Autonomy in a Small Open Economy By J. Scott Davis; Ignacio Presno
  3. Coordinating expectations through central bank projections By Fatemeh Mokhtarzadeh; Luba Petersen
  4. Quantitative easing and the price-liquidity trade-off By Ferdinandusse, Marien; Freier, Maximilian; Ristiniemi, Annukka
  5. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Matteo Crosignani; Miguel Faria-e-Castro; Luis Fonseca
  6. Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries By Soyoung Kim; Kuntae Lim
  7. Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  8. A New Approach to the Estimation of Equilibrium Real Exchange Rates among East-Asian Economies By Kelvin Ho; Eric Wong; Edward Tan
  9. The Role of Nonbank Financial Institutions in the Monetary Transmission Mechanism: Theory and Evidence By Sung-Eun Yu
  10. Cross-border prudential policy spillovers: How much? How important? Evidence from the international banking research network By Buch, Claudia M.; Goldberg, Linda
  11. Unconventional Monetary Policy Effects on Bank Lending in the Euro Area By Stefan Behrendt
  12. Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy By Alice, Albonico; Lorenza, Rossi;
  13. Full disclosure and financial stability: how does the market digest the transparency shock? By Fausto Pacicco; Luigi Vena; Andrea Venegoni
  14. Temptation and Forward Guidance By Airaudo, Marco
  15. Can we Identify the Fed's Preferences? By Chatelain, Jean-Bernard; Ralf, Kirsten
  16. Does monetary policy generate asset price bubbles ? By Christophe Blot; Paul Hubert; Fabien Labondance

  1. By: Geert Bekaert; Arnaud Mehl
    Abstract: We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.
    JEL: F15 F21 F30 F36 F38 F41 F6 G15 N2
    Date: 2017–02
  2. By: J. Scott Davis; Ignacio Presno
    Abstract: Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to "manage" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.
    Keywords: Capital controls ; Credit constraints ; Small open economy
    JEL: F32 F41 E52 E32
    Date: 2017–02
  3. By: Fatemeh Mokhtarzadeh (University of Victoria); Luba Petersen (Simon Fraser University)
    Abstract: This paper explores how expectations are influenced by central bank projections within a learning-to-forecast laboratory macroeconomy. Subjects are incentivized to forecast output and inflation in a laboratory macroeconomy where their aggregated expectations directly influence macroeconomic dynamics. Using a between-subject design, we systematically vary whether the central bank communicates no information, ex-ante rational nominal interest rate projections, or rational or adaptive dual projections of output and inflation. Our experimental findings suggest that interest rate projections and adaptive dual projections can encourage backward-looking forecasting behavior. Expectations are best coordinated and stabilized by communicating rational output and inflation forecasts.
    Keywords: expectations, monetary policy, projections, communication, credibility, laboratory experiment, experimental macroeconomics
    JEL: C9 D84 E52 E58
    Date: 2017–02
  4. By: Ferdinandusse, Marien (European Central Bank); Freier, Maximilian (European Central Bank); Ristiniemi, Annukka (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We present a search theoretic model of over-the-counter debt with quantitative easing (QE). The impact of central bank asset purchases on yields depend on market tightness, which is determined by shares of preferred habitat investors. The model predicts that the impact of government bond purchases is higher in countries with a higher share of preferred habitat investors. Furthermore, there is a trade-off with liquidity, which is not present in other models of QE. We present a new index for the share of preferred habitat investors holding government bonds in Eurozone countries, based on the ECB's securities and holdings statistics, which we use to match the impact of QE on the observed yield changes in data and to test our model.
    Keywords: Quantitative easing; liquidity; search and matching
    JEL: E52 E58 G12
    Date: 2017–02–01
  5. By: Matteo Crosignani; Miguel Faria-e-Castro; Luis Fonseca
    Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.
    Keywords: Lender of Last Resort ; Sovereign Debt ; Unconventional Monetary Policy
    JEL: E58 G21 G28 H63
    Date: 2017–01
  6. By: Soyoung Kim (Seoul National University); Kuntae Lim (Bank of Korea)
    Abstract: This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the ¡°exchange rate puzzle,¡± ¡°delayed overshooting puzzle,¡± and ¡°forward discount bias puzzle¡± are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.
    Keywords: VAR, Monetary Policy Shocks, Exchange Rate, UIP Condition, Delayed Overshooting
    JEL: F3 E5
    Date: 2016–12
  7. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often-cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Our central finding is that the US dollar scores (by a wide margin) as the world’s dominant anchor currency and, by some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled in recent years. While the incidence of capital account restrictions has been trending lower for decades, an important wave toward capital market integration dates as recently as the mid-1990s. We suggest that record accumulation of reserves post 2002 has much to do with many countries’ desire to stabilize exchange rates in an environment of markedly greater capital mobility. Indeed, the continuing desire to manage exchange rates despite increased capital mobility post-2003 may be a key factor underpinning the modern-day Triffin dilemma that some have recently pointed to.
    JEL: E50 F3 F4 N2
    Date: 2017–02
  8. By: Kelvin Ho (Hong Kong Monetary Authority); Eric Wong (Hong Kong Monetary Authority); Edward Tan (Hong Kong Monetary Authority)
    Abstract: In view of the debate on exchange rate stabilization in Asia, this paper introduces a new and original approach to the determination of equilibrium real exchange rates (ERER) across ASEAN+3. Existing literature usually computes a country¡¯s ERER as the real exchange rate that brings the balance of payments of that country in to equilibrium with respect to the rest of the world, following a partial equilibrium approach. For a set of countries belonging to a highly integrated area, separately computing ERERs for each country may lead to mutual inconsistencies. The methodology in this paper achieves a simultaneous determination of the ERERs of all countries in the region, so that the trade balance of each of them is consistently in equilibrium with respect to the rest of the region. Numerical simulations conducted for ASEAN+3 show that such a methodology produces consistent results and may therefore be a useful way of evaluating exchange rate deviations from equilibrium within the area. The method is applied to assess ERER deviations of single currencies of ASEAN+3 vis-¨¤-vis the Chinese yuan and the Japanese yen. The results provide a helpful insight into the relative suitability of these two currencies to play a benchmark role in an exchange rate system for the whole region.
    Keywords: F31, F33, F42, F45
    Date: 2016–07
  9. By: Sung-Eun Yu
    Abstract: Nonbank financial institutions (NBFIs) have substantially increased their market share since 1980s. In spite of the growing importance of NBFIs, they have received much less attention in the monetary transmission mechanism. This paper examines if monetary policy affects NBFIs in the similar way as banks. First, I theoretically explain how monetary policy influences the loan supply of all financial intermediaries (banks and NBFIs) through changes in their net worth. Then, I empirically test whether these two kinds of lending institutions decrease their net worth and the intermediated loans in response to a tight monetary shock. I find that, at the statistically significant level, NBFIs shrink their net worth and a type of loan, especially C&I loans?but not all types of loans decrease, as predicted?in the same way as banks. In particular, NBFIs’ C&I loans “decrease” substantially in the beginning periods; however, NBFIs’ mortgages and consumer credit “increase” in the middle periods, showing a statistically significant level. These evidences suggest that the theoretical explanation is, at least, consistent with the evidence of C&I loans?but not mortgages and consumer loans. One possible explanation is that, while banks reject mortgages and consumer loans, NBFIs may increase mortgages and consumer loans by picking up the demand for these two types of loans.
    Keywords: monetary policy, nonbank financial institutions, net worth, loan supply JEL Classification: E51, E52, E58
    Date: 2017
  10. By: Buch, Claudia M.; Goldberg, Linda
    Abstract: The development of macroprudential policy tools has been one of the most significant changes in banking regulation in recent years. In this multi-study initiative of the International Banking Research Network (IBRN), researchers from 15 central banks and 2 international organizations use micro-banking data in conjunction with a novel dataset of prudential instruments to study international spillovers of prudential policy changes for bank lending growth. The collective analysis has three main findings. First, prudential instrument effects sometimes spill over across borders through bank lending. Second, international spillovers vary across prudential instruments and are heterogeneous across banks. Bank-specific factors like balance sheet conditions and business models drive the amplitude and direction of spillovers to lending growth rates. Third, international spillovers of prudential policy on loan growth rates have not been large on average. However, our results tend to underestimate the full effect by focusing on adjustment along the intensive margin and by analyzing a period in which relatively few countries implemented country-specific macroprudential policies.
    Keywords: international banking,macroprudential,regulation,spillovers,lending
    JEL: G01 F34 G21
    Date: 2017
  11. By: Stefan Behrendt (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: This paper employs a structural VAR framework with sign restrictions to estimate the effects of unconventional monetary policies of the European Central Bank since the Global Financial Crisis, mainly in their effectiveness towards bank lending. Using a variable for newly issued credit instead of the outstanding stock of credit, the effects on bank lending are smaller than found in previous similar studies for the Euro area.
    Keywords: unconventional monetary policy, zero lower bound, bank lending, SVAR
    JEL: C32 E30 E44 E51 E52 E58
    Date: 2017–02–08
  12. By: Alice, Albonico; Lorenza, Rossi;
    Abstract: This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.
    Keywords: inflation bias, markup shocks, liquidity constrained consumers, optimal monetary and fiscal policy
    JEL: E3 E5
    Date: 2017–02–14
  13. By: Fausto Pacicco; Luigi Vena; Andrea Venegoni
    Abstract: Since macro-prudential stress tests have become the main instruments of the supervisory authorities’ toolkit, the debate on the effect of their results disclosure inflamed. Our work aims at providing a framework that, via a dynamic estimation of the betas, allows to observe the impact of the new information flow on the stability of the banking system. What we find is that, contrary to literature wisdom, almost all banks betas decrease, as the transparency shock contributes to an overall systemic risk drop.
    Date: 2017–02
  14. By: Airaudo, Marco (School of Economics)
    Abstract: In the aftermath of the recent financial crisis, several central banks have resorted to "forward guidance" in monetary policy - that is, announcing publicly the future path of the short-term interest rate - to stimulate inflation and economic activity, and therefore move the economy away from the liquidity trap. Standard monetary models predict sizable stimulative effects of forward guidance, which are much in excess of what observed in the data and grow exponentially with the forward guidance horizon. This apparent disconnect between theory and data has been labeled by the literature as the forward guidance puzzle. We introduce temptation and dynamic-self-control preferences, as formalized by Gul and Pesendorfer (Econometrica 2002, 2004), into an otherwise standard New Keynesian model. In our set-up, the representative agent faces a temptation to liquidate his entire financial wealth for the purpose of immediate consumption. Resisting temptation involves cognitive effort (or self-control) and hence some disutility. Optimal behavior therefore trades of the temptation for immediate satisfaction with long-run optimal consumption smoothing. We show that, for suitable parameterizations, dynamic self-control preferences deliver a discounted Euler equation,lower households. sensitivity to real interest rates, and make the Phillips curve less forward-looking. These features combined help solve the puzzle. Moreover, they have stark implications for what concerns the conditions for equilibrium determinacy, the adverse effects of large negative shocks to the real interest rate, and the paradox of volatility.
    Keywords: Monetary Policy; New Keynesian Model; Forward Guidance; Temptation; Self-Control
    JEL: E31 E32 E43 E52 E58
    Date: 2017–02–07
  15. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: A pre-test of Ramsey optimal policy versus time-consistent policy rejects time-consistent policy and (optimal) simple rule for the U.S. Fed during 1960 to 2006, assuming the reference new-Keynesian Phillips curve transmission mechanism with auto-correlated cost-push shock. The number of reduced form parameters is larger with Ramsey optimal policy than with time-consistent policy although the number of structural parameters, including central bank preferences, is the same. The new-Keynesian Phillips curve model is under-identified with Ramsey optimal policy (one identifying equation missing) and hence under-identified for time-consistent policy (three identifying equations missing). Estimating a structural VAR for Ramsey optimal policy during Volcker-Greenspan period, the new-Keynesian Phillips curve slope parameter and the Fed's preferences (weight of the volatility of the output gap) are not statistically different from zero at the 5% level.
    Keywords: Ramsey optimal policy,Time-consistent policy,Identification,Central bank preferences,New-Keynesian Phillips curve
    JEL: C61 C62 E52 E58
    Date: 2017
  16. By: Christophe Blot (OFCE-Sciences PO); Paul Hubert (OFCE-Sciences PO); Fabien Labondance (Université de Bourgogne Franche Comté, CRESE, OFCE-Sciences PO)
    Abstract: This paper empirically assesses the effect of monetary policy on asset price bubbles and aims to disentangle the competing predictions of theoretical bubble models. First, we take advantage of the model averaging feature of Principal Component Analysis to estimate bubble indicators, for the stock, bond and housing markets in the United States and Euro area, based on the structural, econometric and statistical approaches proposed in the literature to measure bubbles. Second, we assess the linear and non-linear effect of monetary shocks on these bubble components using local projections. The main result of this paper is that monetary policy does not affect asset price bubble components, except for the US stock market for which we find evidence in favor of the prediction of rational bubble models.
    Keywords: Asset price bubbles, Monetary policy, Quantitative Easing, Federal Reserve, ECB
    JEL: E44 G12 E52
    Date: 2017–02

This nep-cba issue is ©2017 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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