nep-cba New Economics Papers
on Central Banking
Issue of 2017‒04‒09
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Role of the Inflation Target Adjustment in Stabilization Policy By Eo, Yunjong; Lie,Denny
  2. Has the Fed responded to house and stock prices? A time-varying analysis. By Knut Are Aastveit; Francesco Furlanetto; Francesca Loria
  3. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  4. Exchange Rate Pass-Through in the Euro Area By Davor Kunovac; Mariarosaria Comunale
  5. Capital controls and foreign currency denomination By Fernando Garcia-Barragan; Guangling Liu
  6. Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area By S. Demiralp; J. Eisenschmidt; T. Vlassopoulos
  7. The Role of Structural Funding for Stability in the German Banking Sector By Fabian Schupp; Leonid Silbermann
  8. Same, but different: Testing monetary policy shock measures By Ettmeier, Stephanie; Kriwoluzky, Alexander
  9. External Monetary Shocks to Central and Eastern European Countries By Pierre Lesuisse
  10. The Making of Hawks and Doves: Inflation Experiences on the FOMC By Ulrike Malmendier; Stefan Nagel; Zhen Yan
  11. Central clearing and risk transformation By Rama Cont
  12. Aftershocks of Monetary Unification; Hysteresis with a Financial Twist By Tamim Bayoumi; Barry J. Eichengreen
  13. Effects and Risks of Unconventional Monetary Policy By Homburg, Stefan
  14. The Risk-Taking Channel in the US: A GVAR Approach By Raslan Alzubi; Mustafa Caglayan; Kostas Mouratidis
  15. Systemic banks, capital composition and CoCo bonds issuance:The effects on bank risk By Simón Sosvilla-Rivero; Victor Echevarria Icaza
  16. Inside money, investment, and unconventional monetary policy By Lukas Altermatt
  17. Monetary easing and financial instability By Viral Acharya; Guillaume Plantin
  18. From Inflation Targeting to achieving Economic Growth By César Carrera

  1. By: Eo, Yunjong; Lie,Denny
    Abstract: We study optimal monetary policy in a New Keynesian model in which the monetary authority faces a trade-off between inflation and output-gap stabilization due to cost-push shocks. In particular, we highlight the role of the inflation target adjustment in stabilization policy by showing that it can mitigate this policy trade-off and considerably improve welfare. The main fi ndings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy cofficients. Second, we propose an additional policy tool of a medium-run inflation target (MRIT) rule. When combined with the standard Taylor rule, the optimal MRIT signi ficantly reduces fluctuations in inflation originating from the cost-push shocks and results in a similar level of welfare to that associated with the Ramsey optimal policy. Third, the optimal MRIT needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. Fourth, the welfare implication of the MRIT is more pronounced under a flatter Phillips curve. Finally, the main findings are relevant to the current economic environment of low inflation rates under a flat Phillips curve, implying that the monetary authority should increase the inflation target in such an environment..
    Keywords: Cost-push shocks; Monetary policy; Medium-run inflation targeting; Flat Phillips curve; Welfare analysis
    Date: 2017–05
  2. By: Knut Are Aastveit (NORGES BANK); Francesco Furlanetto (NORGES BANK); Francesca Loria (EUROPEAN UNIVERSITY INSTITUTE)
    Abstract: In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US, i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again, and ii) only episodically took real stock price growth into account.
    Keywords: Bayesian VAR, time-varying parameters, monetary policy, house prices, stock market.
    JEL: C32 E44 E52 E58
    Date: 2017–04
  3. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the main refinancing rate, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react quickly and aggressively to an expansionary monetary policy shock by decreasing their lending standards. The banks' efforts to keep their lending margins stable are successful, as we find only an insignificant decrease in the margins over the medium-run.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Vector Autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2017
  4. By: Davor Kunovac (The Croatian National Bank, Croatia); Mariarosaria Comunale (Bank of Lithuania, Lithuania)
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.
    Keywords: Exchange rate pass-through, import prices, consumer prices, inflation, bayesian vector autoregression
    JEL: E31 F3 F41
    Date: 2017–01
  5. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination and its welfare implications. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a critical impact on the dynamics of assets and liabilities that are denominated in foreign currency. This critical impact works through the capital control constraint on quantitative nancial variables directly, not through the spreads. The non-pecuniary capital controls help to stabilize the nancial sector and, hence, reduces the negative spillovers to the real economy. A more restrictive capital-control policy signicantly attenuates the welfare effect of the foreign monetary policy and exchange rate shocks.
    Keywords: Capital control, Foreign currency denomination, Open economy macroeconomics, Financial friction, Welfare analysis, DSGE
    JEL: E32 E44 E58 F38 F41
    Date: 2017–02
  6. By: S. Demiralp (Koc University); J. Eisenschmidt (ECB); T. Vlassopoulos (ECB)
    Abstract: In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks’ business models.
    Keywords: negative rates, bank balance sheets, monetary transmission mechanism.
    JEL: E43 E52 G11 G21
    Date: 2017–03
  7. By: Fabian Schupp (Deutsche Bundesbank); Leonid Silbermann (Deutsche Bundesbank)
    Abstract: We analyze whether, and if so by how much, stable funding would have contributed to the financial soundness of German banks in the time period between 1995 and 2013, before the Basel III liquidity regulation to address excessive maturity mismatches in the wake of the financial crisis via the Net Stable Funding Ratio can be expected to have been fully implemented. Using a dataset that contains information on critical events of German banks, we find that financing loans using fewer customer deposits would have been associated with a higher probability of financial distress for savings banks and credit cooperatives. A one percent rise in the loanto- deposit ratio from 1995 to 2013 corresponds to an increase in the probability of experiencing a critical event, implying approximately two additional savings banks and two additional credit cooperatives in financial distress. No such effect can be detected for commercial banks (excluding big banks), which are found to be far more heterogeneous with respect to their business models.
    Keywords: Banks, financial distress, stable funding, Basel III liquidity regulation, NSFR, financial stability, panel data, random effects logit
    JEL: G21 G28 C23 C25
    Date: 2017
  8. By: Ettmeier, Stephanie; Kriwoluzky, Alexander
    Abstract: In this study, we test whether three popular measures for monetary policy, that is, Romer and Romer (2004), Barakchian and Crowe (2013), and Gertler and Karadi (2015), constitute suitable proxy variables for monetary policy shocks. To this end, we employ different test statistics used in the literature to detect weak proxy variables. We find that the measure derived by Gertler and Karadi (2015) is the most suitable in this regard.
    Keywords: monetary policy shock measures,Proxy-SVAR,weak proxies,F-test
    JEL: C12 C32 E32 E52
    Date: 2017
  9. By: Pierre Lesuisse (CERDI - Centre d'Etudes et de Recherches sur le Développement International - CNRS - Université d'Auvergne)
    Abstract: Few countries are part of the European Union but on the verge of the Euro-zone. This study aims at identifying the amplitude of the direct ECB monetary policy impact, i.e. the so-called international monetary spillovers, in Central and Eastern European countries (CEECs). The use of a panel-VAR method allows to deal with the small time span and endogeneity. We found that CEECs tend to significantly converge in monetary terms to the ECB standards. The direct impact on real variables remains relatively weak but contrary to the literature, is significant and in line with expectations. A persistent negative adjustment of GDP gives a quick glimpse of a robust reaction against monetary shock when the focus is made on the post-economic crisis period. The exchange rate regime plays a small but significant role in terms of magnitude. This increased interdependence is the result of macroeconomic reforms implemented during the last 25 years.
    Keywords: Monetary integration,External shocks,Panel VAR.
    Date: 2017–02–14
  10. By: Ulrike Malmendier; Stefan Nagel; Zhen Yan
    Abstract: We show that personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members' FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.
    JEL: D84 E03 E50
    Date: 2017–03
  11. By: Rama Cont (Imperial College London)
    Abstract: The clearing of over-the-counter transactions through central counterparties (CCPs), one of the pillars of financial reform following the crisis of 2007-2008, has promoted CCPs as key elements of the new global financial architecture. It is important to examine how these reforms have affected risks in the financial system and whether central clearing has attained the initial objective of the reform, which is to enhance financial stability and reduce systemic risk. We show that, rather than eliminating counterparty risk, central clearing transforms it into liquidity risk: margin calls transform accounting losses into realised losses which affect the liquidity buffers of clearing members. Accordingly, initial margin and default fund calculations should account for this liquidity risk in a realistic manner, especially for large positions. While recent discussions have centred on the solvency of CCPs, their capital and 'skin-in-the-game' and capital requirements for CCP exposures of banks, we argue that these issues are secondary and that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Clearing members should assess their exposure to CCPs in terms of liquidity, rather than counterparty risk. Stress tests involving CCPs should focus on liquidity stress testing and adequacy of liquidity resources.
    Keywords: CCP, central clearing, central counterparty, systemic risk, liquidity risk, counterparty risk, default fund, OTC derivatives, collateral requirement, regulation, stress testing
    Date: 2017–03–31
  12. By: Tamim Bayoumi; Barry J. Eichengreen
    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: European Monetary Union;United States;Western Hemisphere;Optimum currency area, hysterisis, Financial Markets and the Macroeconomy, Financial Aspects of Economic Integration
    Date: 2017–03–13
  13. By: Homburg, Stefan
    Abstract: During and after the Great Recession, the European Central Bank adopted unconventional monetary policies that are more or less uncontroversial in the literature. By contrast, its quanti-tative easing (QE) program that started in 2015 is highly dis-puted. The article evaluates the pros and cons of such a policy.
    Keywords: Quantitative easing; European Central Bank; excess reserves; money multiplier
    JEL: E51 E52 E58
    Date: 2017–03
  14. By: Raslan Alzubi (Department of Economics, University of Sheffield); Mustafa Caglayan (School of Social Sciences, Heriot-Watt University); Kostas Mouratidis (Department of Economics, University of Sheffield)
    Abstract: Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score.
    Keywords: Risk-taking channel; GVAR; monetary policy shocks; spilloverover effects
    JEL: E44 E52 G01 G19 G29
    Date: 2017–03
  15. By: Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); Victor Echevarria Icaza (Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa))
    Abstract: This paper shows that systemic banks are prone to increase their regulatory capital ratio through a decline in risk-weighted assets density and an intense use of lower level capital. The market access of systemic banks, and the fact that they were singled out for higher capital requirements seem to have biased them towards lower level capital, consistent with the theory that asymmetric information drives capital decisions. These effects are particularly strong for institutions that had a rather low level of capitalization at the start of the period and for those that exhibited a strong use of Additional Tier I capital before the regulatory changes. Strict capital composition requirements for firms with lower buffers would be an improvement.
    Keywords: Contingent capital, banking regulation, risk-taking incentives, asset substitution, systemic risk
    JEL: G12 G21 G28
    Date: 2017–03
  16. By: Lukas Altermatt
    Abstract: In this paper I build a new monetarist model that includes inside money and investment to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures like helicopter money and negative interest rates are under these circumstances. I find that the liquidity trap can be caused by a scarcity of savings instruments, by insufficient investment opportunities, by too much supply of bank deposits or by a combination of any of these reasons. I also find that unconventional monetary policies can get an economy out of a liquidity trap, but at a welfare cost, while issuing more government debt can do the same and also improve welfare.
    Keywords: New monetarism, liquidity trap, helicopter money, negative interest rates, government debt, Ricardian equivalence, banking
    JEL: E4 E5 G2
    Date: 2017–03
  17. By: Viral Acharya; Guillaume Plantin
    Abstract: We study optimal monetary policy in the presence of financial stability concerns. We build a model in which monetary easing can lower the cost of capital for firms and restore the natural level of investment, but does also subsidize inefficient maturity transformation by financial intermediaries in the form of “carry trades" that borrow cheap at the short-term against illiquid long-term assets. Carry trades not only lead to financial instability in the form of rollover risk, but also crowd out real investment since intermediaries equate the marginal return on lending to firms to that on carry trades. Optimal monetary policy trades off any stimulative gains against these costs of carry trades. The model provides a framework to understand the puzzling phenomenon that the unprecedented post-2008 monetary easing has been associated with below-trend real investment, even while returns to real and financial capital have been historically high.
    Keywords: Monetary policy; quantitative easing; financial stability; financial fragility; shadow banking; maturity transformation; carry trades
    JEL: E52 E58 G00 G21 G23 G28
    Date: 2017–01
  18. By: César Carrera (Banco Central de Reserva del Perú y Universidad del Pacífico)
    Abstract: Most economists agree that the relationship between long-run economic growth and inflation is negative. It is well documented that countries with inflation target achieve lower levels of inflation. But there is no study that relates inflation target and growth. I focus this study in identifying this relationship. I follow Sala-i-Martin (1997) and sample 45 countries that have an inflation target. This variable is then evaluated by controlling for three variables that are strongly correlated with economic growth and different subsets that belong to a set of variables that the literature agrees in being correlated with long-run economic growth. This strategy allows me to have a distribution of the parameter that captures a link between inflation target and growth. My results suggest that such effect, if any, is slightly negative.
    Keywords: Inflation target, inflation, growth
    JEL: E31 E58 N16
    Date: 2017–04

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