nep-cba New Economics Papers
on Central Banking
Issue of 2017‒04‒23
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy and Global Banking By Falk Bräuning; Victoria Ivashina
  2. Monetary Policy and the Predictability of Nominal Exchange Rates By Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo
  3. Monetary policy's rising FX impact in the era of ultra-low rates By Massimo Ferrari; Jonathan Kearns; Andreas Schrimpf
  4. Threshold effects of financial stress on monetary policy rules: a panel data analysis By Floro, Danvee; van Roye, Björn
  5. The Cost Channel Effect of Monetary Transmission: How Effective is the ECB's Low Interest Rate Policy for Increasing Inflation? By Schäfer, Dorothea; Stephan, Andreas; Trung Hoang, Khanh
  6. Forecasting Chilean Inflation with the Hybrid New Keynesian Phillips Curve: Globalisation, Combination, and Accuracy By Medel, Carlos A.
  7. Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis By Jean Barthélémy; Vincent Bignon; Benoît Nguyen
  8. Does monetary policy generate asset price bubbles ? By Christophe Blot; Paul Hubert; Fabien Labondance
  9. A systemic shock model for too big to fail financial institutions By Sabrina Mulinacci
  10. SenSR: A sentiment-based systemic risk indicator By Svetlana Borovkova; Evgeny Garmaev; Philip Lammers; Jordi Rustige
  11. A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt By Christensen, Jens H. E.; Rudebusch, Glenn D.
  12. The inflation risk premium in the post-Lehman period By Camba-Méndez, Gonzalo; Werner, Thomas
  13. Real dollarization and monetary policy in Peru By Alex Contreras M.; Zenón Quispe M.; Fernando Alonso Regalado S.; F. Martín Martinez P.
  14. Low Real Interest Rates and the Zero Lower Bound By Williamson, Stephen D.
  15. Unconventional monetary policy: interest rates and low inflation: A review of literature and methods By Mariarosaria Comunale; Jonas Striaukas
  16. Do Digital Currencies Pose a Threat to Sovereign Currencies and Central Banks? By Daniel Heller
  17. GENDER AND CENTRAL BANKING By Ibrahima Diouf; Dominique Pépin

  1. By: Falk Bräuning; Victoria Ivashina
    Abstract: Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often denominated in different currencies. This leads to a foreign exchange (FX) exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest interest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.
    JEL: E44 E52 F31 G21
    Date: 2017–04
  2. By: Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo
    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: Exchange rates and foreign exchange ; Monetary policy
    JEL: E52 F31
    Date: 2017–02
  3. By: Massimo Ferrari; Jonathan Kearns; Andreas Schrimpf
    Abstract: We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.
    Keywords: Rates, Unconventional Monetary Policy, Forward Guidance, Event Study, High Frequency Data
    Date: 2017–04
  4. By: Floro, Danvee; van Roye, Björn
    Abstract: This study tests for the state-dependent response of monetary policy to increases in overall financial stress and financial sector-specific stress across a panel of advanced and emerging economy central banks. We use a factor-augmented dynamic panel threshold regression model with (estimated) common components to deal with crosssectional dependence. We find strong evidence of state-dependence in the response of monetary policy to financial sector-specific stress for advanced economy central banks, as they pursue aggressive monetary policy loosening in response to stock market and banking stress only in times of high financial market volatility. By comparison, evidence of threshold effects of financial stress is generally weak for emerging market central banks. JEL Classification: E31, E44, E52, E58, C23, C24
    Keywords: cross-section dependence, Financial stress, monetary policy, threshold panel regression
    Date: 2017–04
  5. By: Schäfer, Dorothea (DIW Berlin, JIBS and CERBE); Stephan, Andreas (Linnæus University, Ratio Institute and JIBS); Trung Hoang, Khanh (DIW Berlinn)
    Abstract: We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential passthrough of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany.
    Keywords: Inflation; cost channel; monetary transmission
    JEL: E31 E43 E43 G01 G01
    Date: 2017–03–23
  6. By: Medel, Carlos A.
    Abstract: This article analyses the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) covering the period from 2000.1 to 2014.12, for the Chilean economy. A distinctive feature of this article is the use of a Global Vector Autoregression (GVAR) specification of the HNKPC to enforce an open economy version. Another feature is the use of direct measures of inflation expectations--Consensus Forecasts--differing from a fully-founded rational expectations model. The HNKPC point forecasts are evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks, including combined forecasts. The results indicate that there is evidence to do not reject the hypothesis of the HNKPC for the Chilean economy, and it is also robust to alternative specifications. In predictive terms, the results show that in a sample previous to the global financial crisis, the evidence is mixed between atheoretical benchmarks and the HNKPC by itself or participating in a combined prediction. However, when the evaluation sample is extended to include a more volatile inflation period, the results suggest that the HNKPC (and combined with the random walk) delivers the most accurate forecasts at horizons comprised within a year. In the long-run the HNKPC deliver accurate results, but not enough to outperform the candidate statistical models.
    Keywords: New Keynesian Phillips Curve; inflation forecasts; out-of-sample comparisons; survey data; Global VAR; structured time-series models; forecast combinations
    JEL: C22 C26 C53 E31 E37
    Date: 2017–04–16
  7. By: Jean Barthélémy; Vincent Bignon; Benoît Nguyen
    Abstract: This paper assesses the effect on banks’ lending activity of accepting illiquid collateral at the central bank refinancing facility in times of wholesale funding stress. We exploit original data on the loans granted by the 177 largest euro area banks between 2011m1 and 2014m12 and on the composition of their pool of collateral pledged with the Eurosystem. During this period, two-thirds of the banks in our sample experienced a sizable loss of wholesale funding. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem reduced their lending to non-financial firms and households less: a one standard deviation increase in the volume of illiquid collateral pledged corresponded to a 0.6% increase in loans to the economy. This result holds for banks that were and were not run. Our finding thus suggests that the broad range of collateral eligible in the euro area may have helped to mitigate the credit crunch during the euro debt crisis.
    Keywords: collateral, loans, central bank, euro crisis.
    JEL: E52 E58 G01 G21
    Date: 2017
  8. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    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 polikcy; Quantitative easing; Federal Reserve; ECB
    JEL: E44 G12 E52
    Date: 2017–02
  9. By: Sabrina Mulinacci
    Abstract: In this paper we study the distributional properties of a vector of lifetimes in which each lifetime is modeled as the first arrival time between an idiosyncratic shock and a common systemic shock. Despite unlike the classical multidimensional Marshall-Olkin model here only a unique common shock affecting all the lifetimes is assumed, some dependence is allowed between each idiosyncratic shock arrival time and the systemic shock arrival time. The dependence structure of the resulting distribution is studied through the analysis of its singularity and its associated copula function. Finally, the model is applied to the analysis of the systemic riskiness of those European banks classified as systemically important (SIFI).
    Date: 2017–04
  10. By: Svetlana Borovkova; Evgeny Garmaev; Philip Lammers; Jordi Rustige
    Abstract: The media influence our perception of reality and, since we act on those perceptions, reality is in turn affected by the media. News is a rich source of information, but, in addition, the sentiment (i.e., the tone of financial news) tells us how others perceive the financial system and how that perception changes. In this paper we propose a new indicator of the systemic risk in the global financial system. We call it SenSR : Sentiment-based Systemic Risk indicator. This measure is constructed by dynamically aggregating the sentiment in news about systemically important financial institutions (SIFIs). We test the SenSR for its ability to indicate or even forecast systemic stress in the financial system. We compare its performance to other well-known systemic risk indicators, as well as with macroeconomic fundamentals. We find that SenSR anticipates other systemic risk measures such as SRISK or VIX in signaling stressed times. In particular, it leads other systemic risk measures and macroeconomic indicators by as long as 12 weeks.
    Keywords: systemic risk; sentiment analysis; Granger causality
    JEL: G01 G18 C58 G17
    Date: 2017–04
  11. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: Some have argued that Treasury yields have been pushed down by lower longer-run expectations of the safe, short-term real interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. We examine this possibility using an arbitrage-free dynamic term structure model estimated directly on prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. We find that a lower expected short real rate has accounted for about 2 percentage points of the general downtrend in yields over the past two decades and that this situation seems unlikely to reverse quickly.
    Date: 2017–03–22
  12. By: Camba-Méndez, Gonzalo; Werner, Thomas
    Abstract: In this paper we construct model-free and model-based indicators for the inflation risk premium in the US and the euro area. We study the impact of market liquidity, surprises from inflation data releases, inflation volatility and deflation fears on the inflation risk premium. For our analysis, we construct a special dataset with a broad range of indicators. The dataset is carefully constructed to ensure that at every point in time the series are aligned with the information set available to traders. Furthermore, we adopt a Bayesian variable selection procedure to deal with the strong multicollinearity in the variables that potentially can explain the movements in the inflation risk premium. We find that the inflation risk premium turned negative, on both sides of the Atlantic, during the post-Lehman period. This confirms the recent finding by Campbell et al. (2016) that nominal bonds are no longer "inflation bet" but have turned into "deflation hedges". We also find, and contrary to common beliefs, that indicators of inflation uncertainty alone cannot explain the movements in the inflation risk premium in the post-Lehman period. The decline in the inflation risk premium seems mostly related to increased deflation fears and the belief that inflation will stay far away from the monetary policy target rather than declining inflation uncertainty. This in turn would suggest that central banks should not be complacent with low or even negative inflation risk premia. JEL Classification: E44, G17
    Keywords: inflation expectations, Inflation linked swaps, inflation risk premium
    Date: 2017–03
  13. By: Alex Contreras M. (BCRP, UDEP, UPC y UNI); Zenón Quispe M. (BCRP); Fernando Alonso Regalado S. (BCRP y Universidad del Pacífico); F. Martín Martinez P. (BCRP y Universidad Nacional Mayor de San Marcos)
    Abstract: Despite the average inflation levels of 2.8 percent between 2002 and 2015, within the range of the price stability goal, partial dollarization remains as the main vulnerability of the Peruvian economy. Although financial dollarization has already been importantly reduced, in the case of lending, from 82 percent at the end of 1990’s to 29 percent in June 2016; the dollarization of transactions persists at high levels such as 58 percent imposing important challenges to monetary policy, principally in events of higher volatility of the exchange rate which passes-through to domestic inflation. In this scenario, measuring the real dollarization at the sectorial level and at the level of the structure of costs of non-financial firms becomes crucial to understand it and to contribute to the design of the monetary policy in the presence of dollarization.
    Date: 2017–04
  14. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that can in- corporate sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. Forward guidance in a liquidity trap works through the promise of higher future inflation, generated by a higher future nominal interest rate. With very tight collateral constraints, the real interest rate can be very low, but the zero lower bound need not be optimal.
    JEL: E4 E5
    Date: 2017–04–01
  15. By: Mariarosaria Comunale; Jonas Striaukas
    Abstract: In this paper, we review a range of approaches used to capture monetary policy in a period of Zero Lower Bound (ZLB). We concentrate here on methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis, and different shadow rates. Next, we calculate these measures for the euro area, draw comparisons among different approaches, and look at the effects on main macroeconomic variables, with a special focus on inflation. By and large, the impact of unconventional monetary policy shocks on inflation is found to be significantly positive across studies and methods. Finally, we summarize the literature on the Natural Real Rate of Interest. This overview may help to assess how long low (real) interest rates in a ZLB stay in place, potentially leading to more accurate policy recommendations.
    Keywords: Unconventional monetary policy, zero lower bound, shadow rates, natural interest rate, inflation.
    JEL: E43 E52 E58 F42
    Date: 2017–04
  16. By: Daniel Heller (Peterson Institute for International Economics)
    Abstract: Bitcoin is the first digital currency to have received widespread recognition and interest from users, developers, investors, central banks, and regulators, largely because of its “distributed ledger” technology, which allows it to provide relatively low-cost peer-to-peer transfers of money. Users own the bitcoin system and can make changes to the rules and protocol only by consensus or a supermajority of 95 percent. This communitarian ownership model and the fact that payments in bitcoin can be easily made from one end of the globe to another have led many to believe and hope that bitcoin will one day replace sovereign currencies—and the central banks that issue them. In addition, some observers see bitcoin as the origin of a fundamental transformation of the financial system toward a more decentralized structure. As a medium of exchange, bitcoin is still small compared with traditional channels, and it is held largely for speculation rather than transactions. Its lack of a mechanism for dampening the price effect of an increase in demand or reducing supply in case of a demand slump means that adopting bitcoin as a currency would be like reverting to a currency based on gold coins. As long as central banks continue to pursue stability-oriented monetary policies, they will have little reason to fear that the bitcoin system will replace them.
    Date: 2017–04
  17. By: Ibrahima Diouf (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: Female Central Bank chairs represent but a tiny minority. To understand why, this article analyzes socioeconomic and socio-political characteristics of the countries where females have chaired Central Banks. Then, it suggests that gender differences in preferences as regards monetary policy goals may have some influence. This hypothesis is based on an empirical analysis showing that female Central Bank chairs focus more than their male colleagues on achieving the price stability goal. This means, then, that females are more resistant than males to political pressures. Finally, it concludes that gender differences in degree of conservatism, may be an explanatory factor in female underrepresentation in the Central Bank chairs.
    Keywords: monetary policy,Central Bank,gender gap,preference parameters,female,conservatism
    Date: 2017–02

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