nep-cba New Economics Papers
on Central Banking
Issue of 2017‒06‒11
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. International Monetary Relations: Taking Finance Seriously By Maurice Obstfeld; Alan M. Taylor
  2. Inflation, Default, and the Currency Composition of Sovereign Debt in Emerging Economies: Working Paper 2017-01 By Daniel Fried
  3. Macroprudential policy and the revolving door of risk: lessons from leveraged lending guidance By Kim, Sooji; Plosser, Matthew; Santos, Joao A. C.
  4. Macroprudential Policy Frameworks in Developing Asian Economies By Lee, Minsoo; Gaspar, Raymond; Villaruel, Mai Lin
  5. Financial liberalization and long-run stability of money demand in Nigeria By Oludele E. Folarin; Simplice Asongu
  6. Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows By Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
  7. Did Negative Interest Rates Impact Bank Lending? By Phil Molyneux; Rue Xie; John Thornton; Alessio Reghezza
  8. Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach By Victor Echevarria-Icaza; Simón Sosvilla-Rivero
  9. Systemic banks, capital composition and CoCo bonds issuance: The effects on bank risk By Victor Echevarria-Icaza; Simón Sosvilla-Rivero
  10. Money-Financed Fiscal Programs : A Cautionary Tale By William B. English; Christopher J. Erceg; J. David Lopez-Salido
  11. Unconventional Taxation Policy, Financial Frictions and Liquidity Traps By William John Tayler; Roy Zilberman
  12. The dynamic impact of macroeconomic news on long-term inflation expectations By Hachula, Michael; Nautz, Dieter
  13. An agent based Keynesian model with credit cycles and countercyclical capital buffer By Zsuzsanna Hosszú; Bence Mérõ
  14. Bayesian Forecast Intervals for Inflation and Unemployment Rate in Romania By Mihaela Simionescu
  15. Fiscal Multipliers and Monetary Policy: Reconciling Theory and Evidence By Christian Bredemeier; Falko Juessen; Andreas Schabert
  16. The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis. By Haroon Mumtaz; Konstantinos Theodoridis
  17. U.S. monetary-fiscal regime changes in the presence of endogenous feedback in policy rules By Chang, Yoosoon; Kwak, Boreum
  18. Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases By Andreas Schabert

  1. By: Maurice Obstfeld; Alan M. Taylor
    Abstract: In our book, Global Capital Markets: Integration, Crisis, and Growth, we traced out the evolution of the international monetary system using the framework of the “international monetary trilemma”: countries can enjoy at most two from the set {exchange-rate stability, open capital markets, and domestic monetary autonomy}. The events of the past decade or more highlight the further complications for this framework posed by financial stability issues. Here we update and qualify our prior analysis, drawing on recent experience and research. Under the classical gold standard, scant attention was paid to macro management, either to stabilize output and employment or to ensure financial stability. The interwar years highlighted the changing demands for modern central bank interventions in the economy. Financial instability, followed by WWII, left a world with sharply constricted financial markets and little private cross-border capital mobility. Due to this historical accident, the Bretton Woods system agreed in 1944 focused not at all on financial stability, and focused on issues like adjustment, exchange rate misalignment, and international liquidity (defined in terms of official, not private, capital-account transactions). Post 1970s floating rates permitted, but did not require, liberalization of the capital account. But the political equilibrium had shifted in favor of financial interests, signaled by the push toward European integration and the later reform process in emerging markets starting in the 1990s. This development, however, opened the door once again to domestic financial crises and their international transmission. Countries now become more susceptible to a new species of “capital account crises,” fueled by bank and bond lending, and its sudden withdrawal. These developments, in fact, made evident a different, “financial trilemma”: countries can pick at most two from {financial stability, open capital markets, and autonomy over domestic financial policy}. We distill the main lessons as to the interactions between the monetary and financial trilemmas, and policies that could best address the resulting weaknesses.
    JEL: B1 E44 E50 E60 F30 F40 F62 F65 G01 N10 N20
    Date: 2017–05
  2. By: Daniel Fried
    Abstract: In emerging market economies, governments issue debt denominated both in their own currency and in foreign currencies. I develop a theory of the optimal composition of sovereign debt between local and foreign currencies. In a model with a micro-founded monetary framework a government controls monetary policy and has the ability to borrow from abroad using both local and foreign currency bonds. In this model, local currency bonds differ from foreign currency bonds in two important ways. Unlike foreign currency bonds, local currency bonds function as a contingent claim, allowing governments to
    JEL: F30 F33
    Date: 2017–02–02
  3. By: Kim, Sooji (Federal Reserve Bank of New York); Plosser, Matthew (Federal Reserve Bank of New York); Santos, Joao A. C. (Federal Reserve Bank of New York, Nova School of Business and Economics)
    Abstract: We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.
    Keywords: macroprudential regulation; leveraged loans; banks; enforcement; supervision; shadow banking
    JEL: G18 G21 G23
    Date: 2017–05–01
  4. By: Lee, Minsoo (Asian Development Bank); Gaspar, Raymond (Asian Development Bank); Villaruel, Mai Lin (Asian Development Bank)
    Abstract: Over the last decade, developing Asia’s deeper global financial linkages have been accompanied by greater financial integration. As the region becomes more interconnected, a key priority is to ensure that the dynamic environment is supported by better coordinated and potentially consistent macroprudential policies to adequately control systemic risks. Within the context of global financial developments, this paper presents a general macroprudential policy framework that highlights important aspects to conducting policy. It also provides an overview of how some Asian economies, New Zealand, and the euro area implement their macroprudential policies. It reviews existing macroprudential policy frameworks of five high-growth developing economies—Cambodia, Mongolia, Myanmar, Sri Lanka, and Viet Nam—identifying improvements and continuing challenges for their financial systems, which will likely grow more complex. Identifying and addressing key issues will help improve their existing macroprudential policy frameworks.
    Keywords: developing Asia; financial stability; macroprudential framework; systemic risk
    JEL: G01 G28 L51
    Date: 2017–03–01
  5. By: Oludele E. Folarin (Ibadan, Nigeria); Simplice Asongu (Yaoundé/Cameroun)
    Abstract: A stable money demand function is essential when using monetary aggregate as a monetary policy. Thus, there is need to examine the stability of the money demand function in Nigeria after the deregulation of the financial sector. To achieve this, the study employed CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests after using autoregressive distributive lag bounds test to determine the existence of a long run relationship between monetary aggregate and its determinant. Results of the study show that a long-run relationship holds and that the demand for money is stable in Nigeria. In addition, the inflation rate is found to be a better proxy for an opportunity variable when compared to interest rate. The main implication of the study is that interest rate is ineffective as a monetary policy instrument in Nigeria.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2017–06
  6. By: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
    Abstract: This paper provides a novel perspective on the impact of U.S. unconventional monetary policy (UMP) on emerging market capital flows and asset prices. Using high-frequency Treasury futures data to identify U.S. monetary policy shocks, we find, through the lens of an affine term structure model, that these shocks represent revisions to both the expected path of short-term interest rates and required risk compensation. The risk compensation component is especially important during the UMP periods. Further, we find that these high-frequency policy shocks do exhibit sizable effects on U.S. holdings of emerging market assets and their valuations. We also document that the relative effects of U.S. monetary policy shocks are larger for emerging asset returns relative to physical capital flows, and they are largest for emerging equity markets relative to fixed income markets. Last, these effects are largest when the Federal Reserve is engaged in “tapering” its large-scale asset purchase program.
    JEL: E5 E52 E58 E65 F3 F32 F42 G11 G12 G13
    Date: 2017–06
  7. By: Phil Molyneux (Bangor University); Rue Xie (Bangor University); John Thornton (Bangor University); Alessio Reghezza (Bangor University)
    Abstract: Since 2012 several central banks have introduced a negative interest rate policy (NIRP) aimed at boosting real spending by facilitating an increase in the supply and demand for bank loans. We employ a bank-level dataset comprising 16,675 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology to analyze whether NIRP resulted in a change in bank lending in NIRP-adopter countries compared to those that did not adopt the policy. Our results suggest that following the introduction of negative interest rates, bank lending was weaker in NIRP-adopter countries than in countries that did not adopt the policy. The result is robust to a wide range of checks. This adverse NIRP effect appears to have been stronger for banks that were smaller, more dependent on retail deposit funding, less well capitalized, had business models reliant on interest income, and operate in more competitive markets. NIRP also appears to have canceled out the stimulus impact of other forms of unconventional monetary policy
    Keywords: Negative interest rates, monetary policy transmission, bank lending, difference in differences estimation
    JEL: E43 E44 E52 G21 F34
    Date: 2017–05
  8. By: Victor Echevarria-Icaza (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make up and policies in the euro area.
    Keywords: Monetary policy; Spillovers; Euro area crisis.
    Date: 2017
  9. By: Victor Echevarria-Icaza (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    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.
    Date: 2017
  10. By: William B. English; Christopher J. Erceg; J. David Lopez-Salido
    Abstract: A number of prominent economists and policymakers have argued that money-financed fiscal programs (helicopter drops) could be efficacious in boosting output and inflation in economies facing persistent economic weakness, very low inflation, and significant fiscal strains. We employ a fairly conventional macroeconomic model to explore the possible effects of such policies. While we do find that money-financed fiscal programs, if communicated successfully and seen as credible by the public, could provide significant stimulus, we underscore the risks that would be associated with such a program. These risks include persistently high inflation if the central bank fully adhered to the program; or alternatively, that such a program would be ineffective in providing stimulus if the public doubted the central bank’s commitment to such an extreme strategy. We also highlight how more limited forms of monetary and fiscal cooperation – such as a promise by the central bank to be more accommodative than usual in response to fiscal stimulus – may be more credible and easier to communicate, and ultimately more effective in providing economic stimulus.
    Keywords: DSGE Model ; Fiscal policy ; Liquidity Trap ; Monetary policy ; Currency union
    JEL: E52 E58
    Date: 2017–06
  11. By: William John Tayler; Roy Zilberman
    Abstract: This paper studies the cyclical properties of private asset income taxation in a New Keynesian model with financial frictions. We argue that optimal state-contingent variations in asset income taxation increase welfare, alter the monetary policy transmission mechanism and insure against liquidity traps. These findings are explained by an endogenous association amongst taxation, the effective rate of return on assets, the inflationary output gap and credit spreads. Such unique link operates via a working-capital cost channel, and affords the policy maker an additional degree of freedom in stabilizing the economy. Optimal policy calls for lowering (increasing) asset income taxation following financial (demand) shocks.
    Keywords: Asset Taxation, Optimal Policy, Risk Premium, Credit Cost Channel, Zero Lower Bound
    JEL: E32 E44 E52 E58 E62 E63
    Date: 2017
  12. By: Hachula, Michael; Nautz, Dieter
    Abstract: Well-anchored inflation expectations should not react to short-term oriented macroeconomic news. This paper analyzes the dynamic response of inflation expectations to macro news shocks in a structural VAR model. As identification of structural macro news shocks is controversial, we use a proxy SVAR model where, by construction, unobservable macro news shocks correlate with observable surprises from macroeconomic news announcements. Our results confirm that macro news shocks have no impact on U.S. long-term inflation expectations in the long run. In the short run, however, the degree of expectations de-anchoring is non-negligible.
    Keywords: dynamics of inflation expectations,expectations anchoring,macroeconomic news,proxy SVAR
    JEL: E31 E52 C32
    Date: 2017
  13. By: Zsuzsanna Hosszú (Magyar Nemzeti Bank (Central Bank of Hungary)); Bence Mérõ (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper, we have developed an agent-based Keynesian macro model that features a detailed representation of a banking system, besides households and firms, and in which fiscal, monetary and macroprudential policy regulators also operate. The banking system generates longer credit cycles on the time series compared to the business cycle, and also fosters growth through lending, but deepens the recession during crises by decreasing credit supply. Macroprudential authority uses countercyclical capital buffer requirements to decrease the procyclicality of the banking system. According to our results, this policy instrument is effective in enhancing financial stability, while in recessions, the decrease in GDP is less with countercyclical capital buffer requirements than without any macroprudential rule. However, there is a trade-off between financial stability and economic growth.
    Keywords: agent based model, credit cycle, business cycle, countercyclical capital buffer
    JEL: E12 E32 E44 G18 G21
    Date: 2017
  14. By: Mihaela Simionescu (Institute for Economic Forecasting of the Romanian Academy)
    Abstract: This paper brings as novelty for the Romanian literature the construction of Bayesian forecast intervals for inflation and unemployment rate in the period 2004-2017. Only few intervals included the registered values on the variables, but in the last stage when all the prior information has been used, the forecast intervals are very short. On the other hand, a novelty for the international literature is brought in this research by proposing a Bayesian technique for assessing prediction intervals in a better way than in the traditional approach that uses statistic tests.
    Keywords: forecast interval, Bayesian interval, inflation, unemployment
    JEL: C11 C13 C53 E37
    Date: 2017–05
  15. By: Christian Bredemeier; Falko Juessen; Andreas Schabert
    Abstract: Fiscal multipliers are typically observed to be moderate, which should, according to standard macroeconomic theory, be associated with real interest rates increasing with government spending. However, monetary policy rates have been found to decrease, which should – in theory – lead to large multipliers. In this paper, we rationalize these puzzling observations by accounting for responses of interest rates that are more relevant for private sector transactions than the monetary policy rate. We provide evidence that real interest rates on relatively illiquid assets and interest rate spreads which measure liquidity premia tend to increase after a government spending hike. We show that an otherwise standard macro model can explain diverging interest rate responses and moderate fiscal multipliers consistent with the data by accounting for an interest rate spread that decreases with the relative demand for less liquid assets. Our analysis indicates that neither a policy rate reduction nor a fixation at the zero lower bound are sufficient to induce large fiscal multipliers.
    Date: 2017–06–02
  16. By: Haroon Mumtaz; Konstantinos Theodoridis
    Abstract: This paper identifies shocks to the Federal Reserve's inflation target as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation, GDP growth and long-term interest rates. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.
    Keywords: SVAR, DSGE model, inflation target
    JEL: C5 E1 E5 E6
    Date: 2017
  17. By: Chang, Yoosoon; Kwak, Boreum
    Abstract: We investigate U.S. monetary and fiscal policy regime interactions in a model, where regimes are determined by latent autoregressive policy factors with endogenous feedback. Policy regimes interact strongly: Shocks that switch one policy from active to passive tend to induce the other policy to switch from passive to active, consistently with existence of a unique equilibrium, though both policies are active and government debt grows rapidly in some periods. We observe relatively strong interactions between monetary and fiscal policy regimes after the recent financial crisis. Finally, latent policy regime factors exhibit patterns of correlation with macroeconomic time series, suggesting that policy regime change is endogenous.
    Keywords: monetary and fiscal policy interactions,endogenous regime switching,adaptive LASSO,time-varying coefficient VAR,factor augmented VAR
    JEL: C13 C32 C38 E52 E58 E63
    Date: 2017
  18. By: Andreas Schabert
    Abstract: This paper shows that central bank interventions in secondary markets for private debt can enhance social welfare. We apply a model with idiosyncratic risk and limited contract enforcement, while abstracting from unusually large disruptions in financial market. By purchasing debt at above-market prices the central bank induces an increase in credit supply, by which rather borrowers than debt holders gain. We show that asset purchases can not only replicate a tax/subsidy that addresses pecuniary externalities induced by a collateral constraint, but can even improve upon the constrained efficient allocation. We further demonstrate that countercyclical asset purchases are desirable under aggregate risk, which reduce the build-up of debt in favorable times.
    Date: 2017–06–02

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