nep-cba New Economics Papers
on Central Banking
Issue of 2017‒04‒30
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Asymmetric exchange rate policy in inflation targeting developing countries By Benlialper, Ahmet; Cömert, Hasan; Öcal, Nadir
  2. Exchange Rate Policies at the Zero Lower Bound By Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
  3. Achieving price stability by manipulating the central bank's payment on reserves By Robert E. Hall; Ricardo Reis
  4. The transmission of monetary policy shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  5. Understanding Survey Based Inflation Expectations By Travis J. Berge
  6. Forward guidance through interest rate projections: does it work? By Leif Brubakk; Saskia ter Ellen; Hong Xu
  7. Can the central bank alleviate fiscal burdens? By Ricardo Reis
  8. Regulatory Competition In Capital Standards with Selection Effects among Banks By Maier, Ulf
  9. The interest rate pass-through in the low interest rate environment: Evidence from Germany By Hennecke, Peter
  10. The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates By Brian Bonis; Jane E. Ihrig; Min Wei
  11. What has publishing inflation forecasts accomplished? Central banks and their competitors By Pierre L. Siklos
  12. Regional and global financial safety nets: the recent European experience and its implications for regional cooperation in Asia By Zsolt Darvas
  13. Inflation and Economic Growth By BLINOV, Sergey
  15. International Transmission of Japanese Monetary Shocks Under Low and Negative Interest Rates: A Global Favar Approach By Spiegel, Mark M.; Tai, Andrew

  1. By: Benlialper, Ahmet; Cömert, Hasan; Öcal, Nadir
    Abstract: In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks curb inflationary pressures, we ask whether central banks in developing countries have different policy stances with respect to depreciation and appreciation in order to hit their inflation targets. To that end, we analyze central banks' interest rate decisions by estimating a nonlinear monetary policy reaction function for a set of IT developing countries using a panel threshold model. Our findings suggest that during the period under investigation (2002-2008), central banks in developing countries implementing IT tolerated appreciation by remaining inactive in the case of appreciation, but fought against depreciation pressures beyond some threshold. We are unable to detect a similar asymmetric response for IT advanced countries suggesting that an asymmetric policy stance is particular to IT developing countries. Although there is a vast literature on asymmetric responses of various central banks to changes in inflation and output, an asymmetric stance with regards to the exchange rate has not been analyzed yet in a rigorous way especially within the context of IT developing countries. In this sense, our study is the first in the literature and thus is expected to fill an important gap.
    Keywords: Inflation Targeting,Central Banking,Developing Countries,Exchange Rates
    JEL: E52 E58 E31 F31
    Date: 2017
  2. By: Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
    Abstract: We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to arbitrage in international capital markets. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its exchange rate objective by choosing that interest rate, a well-known result in international finance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital inflows, and welfare costs associated with the accumulation of foreign reserves by the central bank. In this latter case, all changes in external conditions that increase inflows of capital toward the country are detrimental, while policies such as negative nominal interest rates or capital controls can reduce the costs associated with an exchange rate policy. We provide a simple way of measuring these costs, and present empirical support for the key implications of our framework: when interest rates are close to zero, violations in covered interest parity are more likely, and those violations are associated with reserve accumulation by central banks.
    JEL: F31 F32
    Date: 2017–03
  3. By: Robert E. Hall; Ricardo Reis
    Abstract: Today, all major central banks pay or collect interest on reserves, and stand ready to use the interest rate as an instrument of monetary policy. We show that by paying an appropriate rate on reserves, the central bank can pin the price level uniquely to a target. The essential idea is to index reserves to the market interest rate, the price level, and the target price level in a way that creates a contractionary financial force if the price level is above the target and an expansionary force if below. Our payment-on-reserves policy process does not require terminal conditions like Taylor rules, exogenous fiscal surpluses like the fiscal theory of the price level, liquidity preference as in quantity theories, or local approximations as in new Keynesian models. The process accommodates liquidity services from reserves, segmented financial markets where only some institutions can hold reserves, and nominal rigidities. We believe it would be easy to implement.
    JEL: F3 G3
    Date: 2016–10–16
  4. By: Miranda-Agrippino, Silvia (Bank of England); Ricco, Giovanni (University of Warwick)
    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 identification 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: C11 C14 E52 G14
    Date: 2017–04–21
  5. By: Travis J. Berge
    Abstract: Survey based measures of inflation expectations are not informationally efficient yet carry important information about future inflation. This paper explores the economic significance of informational inefficiencies of survey expectations. A model selection algorithm is applied to the inflation expectations of households and professionals using a large panel of macroeconomic data. The expectations of professionals are best described by different indicators than the expectations of households. A forecast experiment finds that it is difficult to exploit informational inefficiencies to improve inflation forecasts, suggesting that the economic cost of the surveys' deviation from rationality is not large.
    Keywords: Informational efficiency ; Phillips curve ; Survey based inflation expectations ; Boosting ; Inflation forecasting ; Machine learning
    JEL: C53 E31 E37
    Date: 2017–04
  6. By: Leif Brubakk (Norges Bank (Central Bank of Norway)); Saskia ter Ellen (Norges Bank (Central Bank of Norway)); Hong Xu (Norges Bank (Central Bank of Norway))
    Abstract: Based on high-frequency data for Norway and Sweden, we investigate to what extent explicit forward guidance from monetary policy makers, by means of publishing the path of expected future policy rates, affects the market yield curve. We summarise movements in the yield curve by two latent factors (the 'target factor' and 'market path factor'), which capture market participants' assessment of all relevant monetary policy communication made available on announcement days. We then show that information contained in the published interest rate path has a signi cant effect on the market path, and can explain up to 47% of the market path factor. Hence, we conclude that 'explicit' forward guidance in the form of publishing the interest rate path succeeds in moving markets in the desired direction. Furthermore, our results show that central bank and market revisions of interest rate expectations are strongly correlated. This suggests that market participants to a large extent understand the monetary policy reaction pattern.
    Keywords: monetary policy, forward guidance, interest rates
    JEL: E43 E44 E52 E58 G12
    Date: 2017–04–19
  7. By: Ricardo Reis
    Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by in uencing different terms in the government resource constraint. It discusses five channels: (i) how in ation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
    Keywords: Monetary Policy; Reserves; Interest Rates; Quantitative Easing
    JEL: E52 E58 E63
    Date: 2016–12
  8. By: Maier, Ulf (LMU Munich)
    Abstract: Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, which is inconsistent with the \'race to the bottom\' in capital standards found in the literature. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones and a \'race to the top\' occurs when governments care equally about bank profits, taxpayers, and consumers.
    Keywords: Regulatory competition; capital requirements; bank heterogeneity;
    JEL: G28 F36 H73
    Date: 2017–03–25
  9. By: Hennecke, Peter
    Abstract: In this paper it is shown that the ECB's main refinance rate, measured by various Taylor-rules, is far too low for Germany for over half a decade. That entails risks for the stability of Germany's financial system. How strong these risks materialize depends on the extent to which German banks pass on the low policy rates to their customers. In this paper, the interest rate pass-through in Germany in the low interest era is investigated using error-correction models for various bank interest rates. The results indicate a stronger short-term pass-through as well as diminished interest rate margins that weigh on banks' profits. However, there is no evidence for structural changes in the long-term relationship between policy rates and banks' interest rates. While the latter might be soothing for monetary policy makers, the former is rather a reason for concern.
    Keywords: low interest rates,interest rate pass-through,interest rate channel
    JEL: E43 E58
    Date: 2017
  10. By: Brian Bonis; Jane E. Ihrig; Min Wei
    Abstract: In an effort to promote more accommodative financial conditions following the financial crisis of 2008 and the ensuing recession, and at a time when the conventional monetary policy tool--the federal funds rate--was at its effective lower bound, the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). This note outlines a way to estimate by how much Federal Reserve securities holdings resulting from these purchase programs reduce longer-term interest rates. In this note, we focus on another channel through which LSAPs may affect the economy: the portfolio balance channel.
    Date: 2017–04–20
  11. By: Pierre L. Siklos
    Date: 2017–04
  12. By: Zsolt Darvas
    Abstract: This paper compares financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis—which were supported by the International Monetary Fund (IMF) and various European financing facilities. These programmes have distinct features compared with assistance programmes in other parts of the world, such as the size of imbalances, financing, unique cooperation of the IMF and various European facilities, and membership of a currency union in the case of euro-area countries. We evaluate the programmes by assessing their success in creating conditions to regain market access, the degree of compliance with loan conditionality, and actual economic performance relative to programme assumptions. We conclude that the rate of compliance with loan conditionality was not a good predictor of programme success and that deviations from gross domestic product programme assumption correlate strongly with fiscal performance and unemployment, highlighting the key role of macroeconomic projections in programme design. While the Troika institutions succeeded in cooperating, there were major disputes among them in some cases, especially related to the assessment of fiscal sustainability and cross-country spillovers. Asian countries can draw several lessons from European experiences, including the coexistence of the IMF and regional safety nets, cooperation issues, systemic spillovers, and social implications of programme design.
    Date: 2017–04
  13. By: BLINOV, Sergey
    Abstract: Attempts to establish a link between inflation and economic growth are made quite regularly. The aim of such attempts is not only to determine the impact of inflation on economic growth but also to assess efficiency of the inflation rein-in policy, for example, the policy of inflation targeting. This work reveals the nature of the inter-connection between inflation and economic growth and explains why this inter-connection cannot be sustainable without considering the third parameter, i.e. money supply.
    Keywords: Monetary Policy; Price Level; Inflation; Deflation; Economic Growth; Business Cycles;
    JEL: E30 E31 E32 E51 E52 E58 N10 O11 O40 O42
    Date: 2017–04–08
  14. By: Baker, Colleen (Independent Consultant); Cumming, Christine M. (Federal Reserve bank of New York (retired)); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia)
    Abstract: This paper discusses the new financial regulations in the post–financial crisis period, focusing on capital and liquidity regulations. Basel III and the capital stress tests introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of requirements increased, making it difficult to determine which constraints are binding. We find that the new common equity tier 1 (CET1) and Level 1 high-quality liquid assets (HQLAs) are the binding constraints at large U.S. banks, especially for banks that are active in capital markets activities. Banks have been holding more CET1 and a larger share of Level 1 HQLAs since the financial crisis of 2007 to 2009. We also find that the market pricing of bank debt appears to have responded to changes in liquidity measures, especially at large capital markets banks. The Basel III regulatory capital ratios appear to have little direct influence on spreads.
    Keywords: bank capital regulations; bank liquidity; CET1; high-quality liquid assets (HQLAs); Basel III; Dodd–Frank Act; financial stability
    JEL: G12 G18 G21 G28
    Date: 2017–04–24
  15. By: Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Tai, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: We examine the implications of Japanese monetary shocks under recent very low and sometimes negative interest rates to the Japanese economy as well as three of its major trading partners: Korea, China and the United States. We follow the literature in using movements in 2-year Japanese government bond rates as proxies for changes in monetary conditions in the neighborhood of the zero lower bound. We examine the implications of shocks to the 2-year rate in a series of factor-augmented vector autoregressive—or FAVAR—models, in which both local and global conditions are proxied by latent factors generated from domestic economic indicators and weighted indicators of major trading partners, respectively. Our results suggest that shocks to 2-year Japanese rates do have substantive impacts on Japanese economic activity and inflation in conditions of low or even negative short-term rates. However, we find only modest global spillovers from Japanese monetary policy shocks, as their impact on the economic conditions of major Japanese trading partners is muted, particularly relative to the impact of innovations in 2-year U.S. Treasury yields over the same period.
    Date: 2017–02–28

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.