nep-cba New Economics Papers
on Central Banking
Issue of 2017‒03‒12
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Stabilising virtues of central banks: (re)matching bank liquidity By Legroux, Vincent; Rahmouni-Rousseau, Imène; Szczerbowicz, Urszula; Valla, Natacha
  2. Monetary Policy and the Predictability of Nominal Exchange Rates By Eichenbaum, Martin; Johannsen, Benjamin; Rebelo, Sérgio
  3. The Symmetry of ECB Monetary Policy Impact Under Scrutiny: An Assessment By Andrea Venegoni; Massimiliano Serati
  4. Starting from a blank page? Semantic similarity in central bank communication and market volatility By Ehrmann, Michael; Talmi, Jonathan
  5. Heterogeneity in euro area monetary policy transmission: results from a large multi-country BVAR model By Scharnagl, Michael; Mandler, Martin; Volz, Ute
  6. Fundamental uncertainty and unconventional monetary policy: an info-gap approach By Yakov Ben-Haim; Maria Demertzis; Jan Willem van den End
  7. Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters By Glas, Alexander; Hartmann, Matthias
  8. Effects of monetary and macro-prudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China By Kim, Soyoung; Mehrotra, Aaron
  9. Economic crises and the eligiblity for the lender of last resort: evidence from 19th century France By Bignon, Vincent; Jobst, Clemens
  10. What do we know about the global financial safety net? Data, rationale and possible evolution By Scheubel, Beatrice; Herrala, Risto; Stracca, Livio
  11. Central Bank Transparency and Cross-Border Banking By Littke, Helge C. N.; Eichler, Stefan; Tonzer, Lena
  12. The unbiased forward rate hypothesis before and after the inflation targeting regime in South Africa: A cointegration Analysis By Mavee, Nasha; Bonga-Bonga, Lumengo
  13. To guide or not to guide? Quantitative monetary policy tools and macroeconomic dynamics in China By Chen, Hongyi; Funke, Michael; Lozev, Ivan; Tsang, Andrew
  14. Optimal Bank Capital Requirements: An Asymmetric Information Perspective By Berardi, Simone; Marcelletti, Alessandra
  15. Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness? By Claudio Borio; Leonardo Gambacorta
  16. Government guarantees and financial stability By Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
  17. The Transmission of Monetary Policy Shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  18. Aftershocks of Monetary Unification: Hysteresis with a Financial Twist By Bayoumi, Tamim; Eichengreen, Barry
  19. The E-Monetary Theory By Ngotran, Duong
  20. Central Bank Policies and the Debt Trap By Orphanides, Athanasios
  21. The Effectiveness of the Negative Interest Rate Policy in Japan: An Early Assessment By Yuzo Honda; Hitoshi Inoue
  22. Are Basel's Capital Surcharges for Global Systemically Important Banks Too Small? By Wayne Passmore; Alexander H. von Hafften
  23. Central Bank Digital Currencies: assessing implementation possibilities and impacts By Olga Gouveia; Enestor Dos Santos; Santiago Fernández de Lis; Alejandro Neut; Javier Sebastián
  24. A suite of inflation forecasting models By Luis J. Álvarez; Isabel Sánchez
  25. It is time to separate money banks from credit banks in Italy By Michele Fratianni
  26. Macroprudential Policies in Peru: The effects of Dynamics Provisioning and Conditional Reserve Requirements By Cabello, Miguel; Lupú, José; Minaya, Elías

  1. By: Legroux, Vincent; Rahmouni-Rousseau, Imène; Szczerbowicz, Urszula; Valla, Natacha
    Abstract: Central banks have been blamed for the negative side effects of the non-conventional monetary policy measures they have implemented since 2008. In this paper, we argue that central banks played a positive role in the money market and interbank liquidity recovery. Using novel, micro data of the French banking system on the pool of collateral eligible to ECB open market operations, we construct a "liquidity mismatch indicator (LMI)" for the aggregate banking sector that highlights the central bank influence on the bank liquidity condition. Our results show that central bank liquidity and haircut policies have indeed helped banks to reduce the mismatch of liquidity between their assets and their liabilities that had widened after the 2011 stress episode. Moreover, our bank liquidity measure can be useful as an early warning indicator for the macro-prudential purposes. It gives the "cash equivalent value" of the French banking sector and indicates the amount of the liquidity support that the ECB might have to provide in case of financial crisis. The LMI can also help identify the systematically important French institution in terms of their liquidity exposures.
    Keywords: bank liquidity,liquidity crises,unconventional monetary policy,macroprudential regulation
    JEL: E58 G21 G28
    Date: 2017
  2. By: Eichenbaum, Martin; Johannsen, Benjamin; Rebelo, Sérgio
    Abstract: This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates.
    Keywords: currency forecasting; Taylor rule
    JEL: E52 F31 F41
    Date: 2017–02
  3. By: Andrea Venegoni; Massimiliano Serati
    Abstract: Since its inception, EMU adequacy to be an Optimal Currency Area was questioned, and, along with it, the homogeneous transmission of the monetary impulses across the Eurozone. Adopting a Bayesian Time-Varying parameter FAVAR model that fixes the flaws present in the existing literature and exploits a sufficiently extended dataset, we provide an updated assessment of the transmission mechanism’s functioning and of its symmetry along these first years of ECB operations. The empirical analysis shows that the occurrence of the two crises significantly altered the policy transmission, with the interest rate channel being the most affected. Policy-wise, our findings suggest that authorities must push towards a consistent innovation both on fiscal and monetary sides.
    Date: 2017–03
  4. By: Ehrmann, Michael; Talmi, Jonathan
    Abstract: Press releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Due to their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement, and update the earlier text at the margin. This makes it straightforward to compare statements and see how the central bank’s thinking has evolved; however, more substantial changes, which will eventually be required, might then be harder to understand. Using variation in the drafting process at the Bank of Canada, this paper studies the extent to which similarity in central bank statements matters for the reception of their content in financial markets. It shows that similar press releases generate less market volatility, but that more substantial textual changes after a sequence of very similar statements lead to much larger volatility. JEL Classification: E43, E52, E58
    Keywords: ARCH models, Bank of Canada, central bank communication, semantic similarity, volatility
    Date: 2017–02
  5. By: Scharnagl, Michael; Mandler, Martin; Volz, Ute
    Abstract: We study cross-country differences in monetary policy transmission across the large four euro area countries (France, Germany, Italy and Spain) using a large Bayesian vector autoregressive model with endogenous prior selection. Drawing both on the posterior distributions of the cross-country differences in impulse responses as well as on a battery of other tests we find real output to respond less negatively to a monetary policy tightening in Spain than in the other three countries while the price level decline is weaker in Germany. Bond yields rise stronger and more persistently in France and Germany than in Italy and Spain.
    JEL: C11 C54 E52
    Date: 2016
  6. By: Yakov Ben-Haim; Maria Demertzis; Jan Willem van den End
    Abstract: This paper applies the info-gap approach to the unconventional monetary policy of the Eurosystem and so takes into account the fundamental uncertainty on inflation shocks and the transmission mechanism. The outcomes show that a more demanding monetary strategy, in terms of lower tolerance for output and inflation gaps, entails less robustness against uncertainty, particularly if financial variables are taken into account. Augmenting the Taylor rule with a financial variable leads to a smaller loss of robustness than taking into account the effect of financial imbalances on the economy. However, in some situations, the augmented model is more robust than the baseline model. A conclusion from our framework is that including financial imbalances in the monetary policy objective does not necessarily increase policy robustness, and may even decrease it.
    Date: 2017–02
  7. By: Glas, Alexander; Hartmann, Matthias
    Abstract: We analyze the determinants of average individual inflation uncertainty and disagreement based on data from the European Central Bank’s Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods.
    JEL: E31 E52 E58
    Date: 2016
  8. By: Kim, Soyoung; Mehrotra, Aaron
    Abstract: We examine the effects of monetary and macroprudential policies in the Asia-Pacific region, where many inflation targeting economies have adopted macroprudential policies in order to safeguard financial stability. Using structural panel vector autoregressions that identify both monetary and macro-prudential policy actions, we show that tighter macroprudential policies used to contain credit growth have also had a significant negative impact on macroeconomic aggregates such as real GDP and the price level. The similar effects of monetary and macroprudential policies may suggest a complementary use of the two policies at normal times. However, they could also create challenges for policy-makers, especially during times when low inflation coincides with buoyant credit growth.
    JEL: E58 E61
    Date: 2017–03–02
  9. By: Bignon, Vincent; Jobst, Clemens
    Abstract: This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the central bank would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit. JEL Classification: E44, E51, G28, E58, N14, N54
    Keywords: Bagehot rule, Bank of France, collateral, default, discount window
    Date: 2017–02
  10. By: Scheubel, Beatrice; Herrala, Risto; Stracca, Livio
    Abstract: We critically review the theoretical basis for the provision of global financial safety nets (GFSN) and provide a comprehensive database covering four types (foreign exchange reserves, IMF financing, central bank swap lines, and Regional Financing Arrangements) for over 150 countries in the sample 1970-2015. We also show some key stylised facts associated with the provision of financing associated with GFSN and compare macroeconomic outcomes around sudden stop episodes depending on how much GFSN were available for countries, and used. We conclude with some speculations on the possible evolution of the GFSN.
    JEL: F34 F33 G01
    Date: 2016
  11. By: Littke, Helge C. N.; Eichler, Stefan; Tonzer, Lena
    Abstract: We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that central bank transparency in the destination country on average increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered as complements by banks investing abroad.
    JEL: E58 F30 G15
    Date: 2016
  12. By: Mavee, Nasha; Bonga-Bonga, Lumengo
    Abstract: This paper investigates the relationship between the future spot and forward rates in the South African foreign exchange market to infer whether the unbiased forward rate hypothesis (UFRH) holds in South Africa. More specifically we examine whether the hypothesis holds in the face of the different monetary policy regimes taken by the South African reserve bank. We distinguish between two periods; (1) the period before inflation targeting and (2) the period after inflation targeting from February 2000 to the present. The study applies the autoregressive dynamic lag (ARDL) cointegration technique to test the existence of the long-run relationship between the two variables. The results of this investigation indicate that existence of a long-run relationship between the two variables for all forward rates horizons, especially for the period after inflation targeting. This indicates that an improvement of market efficiency in South Africa during the inflation targeting period.
    Keywords: UFRH, cointegration, monetary policy
    JEL: C50 G15
    Date: 2017–01–08
  13. By: Chen, Hongyi; Funke, Michael; Lozev, Ivan; Tsang, Andrew
    Abstract: This paper discusses the macroeconomic effects of China’s informal banking regulatory tool “win-dow guidance,” introduced in 1998. Using an open-economy DSGE model that includes the com-mercial banking sector, we study the stabilizing effects of this non-standard quantitative monetary policy tool and the implications of quantity-based vs. price-based monetary policy instruments for welfare. The analyses are relevant to the current overhaul of Chinese monetary policy.
    JEL: C61 E32 E44 E52
    Date: 2017–02–27
  14. By: Berardi, Simone (LUISS School of European Political Economy); Marcelletti, Alessandra (LUISS School of European Political Economy)
    Abstract: The issue on the amount of capital banks should hold has pushed back the debate on top of policymakers' agenda. Literature on this field mainly focuses on how to prevent banks from gaming risk-weighted capital requirements. The analysis has provided different types of solutions, such as the introduction of penalties and complementary use of risk-sensitive capital requirements and leverage ratio. Although the majority of theoretical papers rely on an asymmetric information framework, only one source of asymmetry is taken into account. The paper fills this gap by studying how to implement a socially optimal regulation scheme that simultaneously faces moral hazard and adverse selection problems. Including both sources of asymmetry is crucial because of the supervisor's inability to distinguish between risk profiles and misconduct (risk-shifting behavior) of banks.
    Keywords: bank capital requirements; bank regulation; moral hazard; adverse selection
    JEL: D81 G21 G28
    Date: 2017–03–07
  15. By: Claudio Borio; Leonardo Gambacorta
    Abstract: This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that reductions in short-term interest rates are less effective in stimulating bank lending growth when rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks' traditional intermediation activity helps explain the subdued evolution of lending in the period 2010-14.
    Keywords: bank lending, monetary transmission mechanisms, low interest rate environment
    Date: 2017–02
  16. By: Allen, Franklin; Carletti, Elena; Goldstein, Itay; Leonello, Agnese
    Abstract: Banks are intrinsically fragile because of their role as liquidity providers. This results in under- provision of liquidity. We analyze the effect of government guarantees on the interconnection between banks? liquidity creation and likelihood of runs in a model of global games, where banks? and depositors? behavior are endogenous and affected by the amount and form of guarantee. The main insight of our analysis is that guarantees are welfare improving because they induce banks to improve liquidity provision although in a way that sometimes increases the likelihood of runs or creates distortions in banks? behavior. JEL Classification: G21, G28
    Keywords: bank moral hazard, fundamental runs, government guarantees, panic runs
    Date: 2017–02
  17. By: Miranda-Agrippino, Silvia (Bank of England and CFM); Ricco, Giovanni (University of Warwick and OFCE - Science Po)
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identi cation that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections.We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary Policy ; Local Projections ; VARs ; Expectations ; Information ; Rigidity ; Survey Forecasts ; External Instruments
    JEL: E52 G14 C32
    Date: 2017
  18. By: Bayoumi, Tamim; Eichengreen, Barry
    Abstract: Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor - ”that monetary union without banking union will not work.
    Keywords: euro; hysteresis; Monetary Unification
    Date: 2017–02
  19. By: Ngotran, Duong
    Abstract: Using the sparse grid, we solve a DSGE model where there are two types of electronic money: reserves (e-money that is issued by the central bank for banks) and zero maturity deposits (e-money that is issued by banks). Transactions between bankers are settled by reserves, while transactions in the non-bank private sector are settled by zero maturity deposits. We use our model to discuss about unconventional monetary policy tools during the Great Recession. Due to the maturity mismatch between deposits and loans, we find that keeping the federal funds rate at the lower bound for a long but finite time stimulates the economy in the short run but creates deflation and lower outputs in the long run. To get out of the zero lower bound, the central bank can conduct helicopter money and increase the interest rate paid on reserves simultaneously, which is impossible in the Keynesian theory, but possible with the current electronic money system.
    Keywords: e-money, reserves, quantitative easing, zero lower bound, interest on reserves, helicopter money
    JEL: E4 E40
    Date: 2016–10–29
  20. By: Orphanides, Athanasios
    Abstract: Monetary policy and fiscal dynamics are inexorably linked. When a government faces the risk of getting caught in a high debt trap, debt monetization may become an appealing option. However, independent central banks may be able to allay debt concerns without compromising price stability. One option is financial repression which, despite associated distortions, can create some fiscal space while preserving price stability. Financial repression is a feature of quantitative easing, which has proven to be an effective policy tool at the zero lower bound. This paper examines the policies of the Federal Reserve, the Bank of Japan and the ECB in relation to debt dynamics for the United States, Japan, Germany and Italy since the crisis. Important differences are identified across the four states, reflecting differences in the policy choices of the three central banks. While decisive QE policies by the Federal Reserve and, more recently, by the Bank of Japan have been effective, ECB policies have had decidedly uneven consequences on Germany and Italy. The normalization of the Federal Reserve’s balance sheet is also discussed in a historical context.
    Keywords: Bank of Japan; debt sustainability; ECB; Federal Reserve; financial repression; Germany; Italy; Japan; Quantitative easing; United States
    JEL: E52 E58 E61 G12 H63
    Date: 2017–02
  21. By: Yuzo Honda (Department of Informatics, Kansai University); Hitoshi Inoue (Faculty of Economics, Sapporo Gakuin University)
    Abstract: This paper examines the effects of the negative interest rate policy (NIRP) introduced by the Bank of Japan in January 2016. It has effectively stimulated private residential investment, and in lowering long-term interest rates, it has likely supported private nonresidential investment. There is also reason to believe that it likely stopped the appreciation of the yen and arrested the downward trend in Japanese stock prices around August 2016. Overall, we find that the NIRP has had expansionary effects, and therefore serves as a legitimate policy tool in alleviating Japan fs zero-interest rate lower bound, notwithstanding some potential negative side effects.
    Keywords: Negative Interest Rates, Residential/Nonresidential Investment, Foreign Exchange Rates
    JEL: E52
    Date: 2017–02
  22. By: Wayne Passmore; Alexander H. von Hafften
    Abstract: The Basel Committee on Banking Supervision (BCBS, the Basel Committee, or Basel) has developed a methodology for identifying global systemically important banks (G-SIBs) and standards for requiring G-SIBs to hold more common equity.
    Date: 2017–02–27
  23. By: Olga Gouveia; Enestor Dos Santos; Santiago Fernández de Lis; Alejandro Neut; Javier Sebastián
    Abstract: Distributed ledgers are a technology that can support a digitized version of cash while potentially withholding its four major features: universality, anonymity, peer-to-peer exchangeability (P2P) and a constant nominal value.
    Keywords: Banks , Digital economy , Global , Working Paper
    JEL: E42 E50 E61 G20 O33
    Date: 2017–03
  24. By: Luis J. Álvarez (Banco de España); Isabel Sánchez (Banco de España)
    Abstract: This paper describes the econometric models used by the Banco de España to monitor consumer price inflation and forecast its future trends. The strategy followed heavily relies on the results from a set of econometric models, supplemented by expert judgment. We consider three different types of approaches and highlight the relevance of heterogeneity in price-setting behaviour and the importance of using models that allow for a slowly evolving local mean when forecasting inflation.
    Keywords: inflation, forecasting, Phillips curves, transfer functions, judgemental forecasts
    JEL: C53 E31 E37
    Date: 2017–02
  25. By: Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Politecnica Marche and MoFiR)
    Abstract: This paper argues that the Italian banking system would benefit from a profound restructuring achieved by separating safe banks, or money banks, from credit banks. The former would accept demandable deposits to be fully collateralized by a combination of monetary base and interestrate- and-credit-risk-free assets. The latter would fund illiquid loans with equities and long-dated debt obligations. The money bank would fulfill the objective of fully protecting savings in the form of money without the necessity of heavy regulation. The risky bank, the credit bank, would not be exposed to liquidity crises because one cannot run against long-dated bonds and equity. The credit bank, which is subject to insolvency risk, would bear a more intense regulatory and supervision structure than the money bank.
    Keywords: Chicago Plan, money bank, credit bank, regulation, too big to fail
    JEL: E42 E51 E52
    Date: 2017–02
  26. By: Cabello, Miguel (Banco Central de Reserva del Perú); Lupú, José (Banco Central de Reserva del Perú); Minaya, Elías (Banco Central de Reserva del Perú)
    Abstract: In the last decade, the banking credit has grown significantly in Peru, a partial dollarized economy. That imposed some challenges to the financial regulators to mitigate the risks derived from both excessive economic growth and currency mismatches of banks debtors. This document assesses the effectiveness of two macroprudential measures implemented by the financial regulators: dynamic provisioning and conditional reserve requirements. By using a credit register data, there is evidence that dynamic provisioning has a dampening impact on commercial credit growth. Moreover, mortgage dollarization has declined more rapidly after the implementation of the Conditional Reserve Requirement scheme, but there is no clear evidence about its impact on banks assets quality. In the case of dynamic provisioning, its effect over non-performing loans is asymmetric.
    Date: 2017–02

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