nep-cba New Economics Papers
on Central Banking
Issue of 2017‒05‒07
eleven papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy at Work: Security and Credit Application Registers Evidence By Peydró, José Luis; Polo, Andrea; Sette, Enrico
  2. The effects of US monetary policy shocks: Applying external instrument identification to a dynamic factor model By Kerssenfischer, Mark
  3. Do Negative Interest Rates Make Banks Less Safe? By Federico Nucera; Andre Lucas; Julia Schaumburg; Bernd Schwaab
  4. The aggregate and country-speci c e ectiveness of ECB policy: evidence from an external instruments (VAR) approach By Lucas Hafemann; Peter Tillmann
  5. Federal Reserve Credibility and the Term Structure of Interest Rates By Lakdawala, Aeimit; Wu, Shu
  6. Decomposing the Effects of Monetary Policy Using an External Instruments SVAR By Lakdawala, Aeimit
  7. Fiscal foundations of inflation: Imperfect knowledge By Stefano Eusepi; Bruce Preston
  8. Is monetary policy less effective when interest rates are persistently low? By Claudio Borio; Boris Hofmann
  9. A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity By Rocheteau, Guillaume; Weill, Pierre-Olivier; Wong, Russell
  10. If the Fed sneezes, who catches a cold? By Dedola, Luca; Rivolta, Giulia; Stracca, Livio
  11. L’impact de la crise fiancière sur la performance de la politique monétaire conventionnelle de la zone euro By Ewen Gallic; Jean-Christophe Poutineau; Gauthier Vermandel

  1. By: Peydró, José Luis; Polo, Andrea; Sette, Enrico
    Abstract: The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks' securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more - not less - capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply.
    Keywords: bank capital; loan applications; monetary policy; reach-for-yield; regulatory arbitrage; securities; Sovereign debt
    JEL: E51 E52 E58 G01 G21
    Date: 2017–04
  2. By: Kerssenfischer, Mark
    Abstract: Dynamic factor models and external instrument identification are two recent advances in the empirical macroeconomic literature. This paper combines the two approaches in order to study the effects of monetary policy shocks. I use this novel framework to re-examine the effects found by Forni and Gambetti (2010, JME) in a recursively-identified DFM. Considering the fundamental differences between the identifying assumptions, the results are overall strikingly similar. Importantly, this finding stands in stark contrast to traditional VAR models, which yield decisively different results in the two identification schemes. This highlights the importance of using extended information sets to properly identify monetary policy shocks.
    Keywords: Monetary Policy,Dynamic Factor Models,External Instrument,High-Frequency Identification
    JEL: C32 E32 E44 E52 F31
    Date: 2017
  3. By: Federico Nucera (LUISS Guido Carli University, Rome); Andre Lucas (Vrije Universiteit Amsterdam and Tinbergen Institute); Julia Schaumburg (Vrije Universiteit Amsterdam and Tinbergen Institute); Bernd Schwaab (European Central Bank, Financial Research)
    Abstract: We study the impact of increasingly negative central bank policy rates on banks' propensity to become undercapitalized in a financial crisis (`SRisk'). We find that the risk impact of negative rates depends on banks' business models: Large banks with diversified income streams are perceived as less risky, while smaller and more traditional banks are perceived as more risky. Policy rate cuts below zero trigger different SRisk responses than an equally-sized cut to zero.
    Keywords: negative interest rates; bank business model; systemic risk; unconventional monetary policy measures
    JEL: G20 G21
    Date: 2017–04–25
  4. By: Lucas Hafemann (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that refl ects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems.
    Keywords: Euro area, VAR, external instrument, local projections, monetary transmission
    JEL: E52 E32 E44
    Date: 2017
  5. By: Lakdawala, Aeimit; Wu, Shu
    Abstract: In this paper we show how the degree of central bank credibility influences the level, slope and curvature of the term structure of interest rates. In an estimated structural model, we find that historical yield curve data are best matched by the Federal Reserve conducting policy in a loose commitment framework, rather than the commonly used discretion and full commitment assumptions. The structural impulse responses indicate that the past history of realized shocks play a crucial role in determining the dynamic effects of monetary policy on the yield curve. Finally, the regime-switching framework allows us to estimate likely re-optimization episodes which are found to impact the middle of the yield curve more than the short and long end.
    Keywords: Term Structure, Commitment, Regime-Switching Bayesian Estimation, Optimal Monetary Policy, DSGE models
    JEL: E52 G12
    Date: 2017–01
  6. By: Lakdawala, Aeimit
    Abstract: We study the effects of monetary policy on economic activity separately identifying the effects of a conventional change in the fed funds rate from the policy of forward guidance. We use a structural VAR identified using external instruments from futures market data. The response of output to a fed funds rate shock is found to be consistent with typical monetary VAR analyses. However, the effect of a forward guidance shock that increases long-term interest rates has an expansionary effect on output. This counterintuitive response is shown to be tied to the asymmetric information between the Federal Reserve and the public.
    Keywords: Monetary policy, Forward Guidance, Identification with External Instruments
    JEL: E31 E32 E43 E52 E58
    Date: 2016–11
  7. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence the scale and composition of the public debt matter for inflation. High moderate-duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments, in an estimated medium-scale DSGE model, reveal the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods, had average debt been consistent with levels currently observed in Italy or Japan.
    Keywords: Monetary and Fiscal Interactions, Learning Dynamics, Expectations Stabilization, Great Moderation, Great Inflation
    JEL: E32 D83 D84
    Date: 2017–05
  8. By: Claudio Borio; Boris Hofmann
    Abstract: Is monetary policy less effective in boosting aggregate demand and output during periods of persistently low interest rates? This paper reviews the reasons why this might be the case and the corresponding empirical evidence. Transmission could be weaker for two main reasons: (i) headwinds, which would typically arise in the wake of balance sheet recessions, when interest rates are low; and (ii) inherent non-linearities, which would kick in when interest rates are persistently low and would dampen their impact on spending. Our review of the evidence suggests that headwinds during the recovery from balance-sheet recessions tend to reduce monetary policy effectiveness. At the same time, there is also evidence of inherent non-linearities. That said, disentangling the two types of effect is very hard, not least given the limited extant work on this issue. In addition, there appears to be an independent role for nominal rates in the transmission process, regardless of the level of real (inflation-adjusted) rates.
    Keywords: monetary policy, low interest rates, balance-sheet recession, monetary transmission
    Date: 2017–04
  9. By: Rocheteau, Guillaume (University of California, Irvine); Weill, Pierre-Olivier (University of California, Los Angeles); Wong, Russell (Federal Reserve Bank of Richmond)
    Abstract: We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of liquidity-trap equilibria and policy mix in terms of "helicopter drops" and open-market operations.
    Keywords: money; inflation; risk sharing; liquidity traps
    JEL: E40 E50
    Date: 2017–04–20
  10. By: Dedola, Luca; Rivolta, Giulia; Stracca, Livio
    Abstract: This paper studies the international spillovers of US monetary policy shocks on a number of macroeconomic and financial variables in 36 advanced and emerging economies. In most countries, a surprise US monetary tightening leads to depreciation against the dollar; industrial production and real GDP fall, unemployment rises. Inflation declines especially in advanced economies. At the same time, there is significant heterogeneity across countries in the response of asset prices, and portfolio and banking cross-border flows. However, no clear-cut systematic relation emerges between country responses and likely relevant country characteristics, such as their income level, dollar exchange rate flexibility, financial openness, trade openness vs. the US, dollar exposure in foreign assets and liabilities, and incidence of commodity exports. JEL Classification: F3, F4
    Keywords: capital mobility, exchange rate regime, identification of monetary shocks, international transmission, trilemma
    Date: 2017–05
  11. By: Ewen Gallic (Université de Rennes 1, CREM UMR CNRS 6211, France); Jean-Christophe Poutineau (Université de Rennes 1, CREM UMR CNRS 6211, France); Gauthier Vermandel (Université Paris-Dauphine et PSL Research University, France)
    Abstract: This paper analyses the consequences of the financial crisis on the implementation of ECB conventional policy decisions. We use the three equation new Keynesian model that was widely adopted before the 2007 financial crisis as the benchmark of the analysis. Our main results underline a decrease in conventional monetary policy efficiency, following two main factors. On the one side, we observe a worsening of the arbitrage between the variance of activity and that of inflation (namely the Taylor curve). On the other side, our analysis underlines a clear departure from the efficiency frontier (as measured by the Taylor curve) coming from a high increase in the output gap. We find that to overcome part of this inefficiency the ECB should have set lower interest rates than observed, even negative by the end of the period of our analysis. This result provides a simple rationale for the adoption of new unconventional policy practices to overcome the consequences of the financial crisis.
    JEL: F32 F34 F36 F44
    Date: 2017–03

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