nep-cba New Economics Papers
on Central Banking
Issue of 2017‒08‒27
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Optimal Simple Rule for Monetary Policy and Macroprudential Policy in a Financial Accelerator Model By Hyunduk Suh
  2. Central Bank Digital Currency and the Future of Monetary Policy By Michael D. Bordo; Andrew T. Levin
  3. Cross-Border Bank Flows and Monetary Policy: Implications for Canada By Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
  4. Monetary Policy and the Redistribution Channel By Adrien Auclert
  5. The impact of sectoral macroprudential capital requirements on mortgage lending: evidence from the Belgian risk weight add-on By Ferrari, Stijn; Pirovano, Mara; Rovira Kaltwasser, Pablo
  6. International financial integration, crises, and monetary policy: evidence from the euro area interbank crises By Abbassi, Puriya; Brauning, Falk; Fecht, Falko; Peydro, Jose Luis
  7. Exchange Market Pressure: Evidences from ASEAN Inflation Targeting Countries By Abdul Aziz, Muhammad; Widodo, Tri
  8. Capital Controls and Foreign Currency Denomination By Guangling Liu; Fernando Garcia-Barragan
  9. Openness and the Effects of Monetary Policy in Africa By Ekpo, Akpan H.; Effiong, Ekpeno L.
  10. The impact of Basel III on money creation: A synthetic analysis By Xiong, Wanting; Wang, Yougui
  11. The effectiveness of unconventional monetary policy on risk aversion and uncertainty By Leonidas S. Rompolis
  12. The Unemployment Effect of Central Bank Transparency By Christoph S. Weber
  13. Rethinking the Power of Forward Guidance: Lessons from Japan By Mark Gertler
  14. Learning to Live in a Liquidity Trap By Jasmina Arifovic; Stephanie Schmitt-Grohé; Martín Uribe
  15. Monetary Policy and Asset Valuation By Francesco Bianchi
  16. The Interest of Being Eligible By J-s.Mésonnier; C. O’Donnell; O.Toutain
  17. Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective By Fève, Patrick; Pierrard, Olivier
  18. Macroprudential Policy and Financing Behaviour in Dual Banking System: Bank-Level Evidence from Indonesia By Zulkhibri, Muhamed; Sakti, Muhammad Rizky Prima

  1. By: Hyunduk Suh (Inha University)
    Abstract: This paper examines an optimal simple rule for monetary policy and macroprudential policy in a New Keynesian DSGE model with a Bernanke et al. (1999) financial accelerator mechanism. Macroprudential policy is given by countercyclical bank capital regulation or loan-to-value (LTV) ratio regulation. Macroprudential policy can mitigate the inefficiencies arising from financial friction, by reducing the uncertainty related with the solvency risk. It is optimal to separate monetary policy from macroprudential concern and use only macroprudential policy for credit stabilization. Using monetary policy for credit stabilization is sub-optimal because of its tradeoff with inflation stability.
    Keywords: Macroprudential policy, monetary policy, countercyclical bank capital regulation, loan-to-value (LTV) ratio regulation, optimal simple rule
    JEL: E44 E52 E59
    Date: 2017–08
  2. By: Michael D. Bordo; Andrew T. Levin
    Abstract: We consider how a central bank digital currency (CBDC) could transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. In particular, we find that CBDC can serve as a practically costless medium of exchange, secure store of value, and stable unit of account. To achieve these criteria, CBDC would be account-based and interest-bearing, and the monetary policy framework would foster true price stability.
    JEL: B12 B13 B22 E42 E52 E58 E63
    Date: 2017–08
  3. By: Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
    Abstract: Using the Bank for International Settlements (BIS) Locational Banking Statistics data on bilateral bank claims from 1995 to 2014, we analyze the impact of monetary policy on cross-border bank flows. We find that monetary policy in a source country is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio channel that works in parallel with the traditional bank lending channel. As tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for source countries with weaker financial sectors that are likely more risk averse. Also, the reallocation is directed toward borrowers in advanced economies, or those in economies with investment-grade sovereign rating. In particular, source countries with tighter monetary policy increase cross-border credit to Canada. Our study highlights the spillovers of domestic monetary policy on foreign credit, which enhances the understanding of the international monetary transmission mechanism through global banks.
    Keywords: Financial Institutions, Monetary Policy
    JEL: F34 F36 G01
    Date: 2017
  4. By: Adrien Auclert (Stanford Institute for Economic Policy Research)
    Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and U.S. data suggest that all three channels are likely to amplify the effects of monetary policy. A standard incomplete markets model can deliver the empirical magnitudes if assets have plausibly high durations but a counterfactual degree of inflation indexation.
    Date: 2017–06
  5. By: Ferrari, Stijn; Pirovano, Mara; Rovira Kaltwasser, Pablo
    Abstract: In December 2013 the National Bank of Belgium introduced a sectoral capital requirement aimed at strengthening the resilience of Belgian banks against adverse developments in the real estate market. This paper assesses the impact of this macroprudential measure on mortgage lending. Our results indicate that the sectoral capital requirement on average did not affect IRB banks’ mortgage rates and mortgage loan growth. However, the findings do indicate that IRB banks may have reacted heterogeneously to the introduction of the measure: capital-constrained banks with more exposures to the segment targeted by the additional requirement tended to respond stronger in terms of mortgage lending.
    Keywords: Systemic risk, macroprudential policy, bank capital requirements, real estate.
    JEL: E44 E58 G21 G28
    Date: 2017–08
  6. By: Abbassi, Puriya (Deutsche Bundesbank); Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management); Peydro, Jose Luis (Universitat Pompeu Fabra)
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home — but this is independent of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial reintegration.
    Keywords: financial integration; financial crises; cross-border lending; monetary policy; euro area sovereign crisis; liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–07–01
  7. By: Abdul Aziz, Muhammad; Widodo, Tri
    Abstract: Monetary model of Exchange Market Pressure (EMP) is one of the best-known measures to determine size of intervention, which is needed to attain any favored exchange rate target. This study intends to examine the relationship between EMP and its determinant in ASEAN inflation targeting countries during 2006Q1-2016Q4. Monetary model of Exchange Market Pressure is employed. The results show that all variables are corresponding with the theory implies, except change in real income for Indonesia and Thailand, and change in world prices for Philippines. Thus, additional pressure by financial crisis is only found in Indonesian rupiah and Thai baht exchange rates. This study also proves that independent variables, which are used, can attempt favorable prediction of the value of EMP, especially during financial crisis. In the context controlling EMP, this study finds that these countries prefer to hold their currency exchange rate level by managing domestic credit and interest rate.
    Keywords: Exchange Market Pressure, Exchange Rate, Intervention, Inflation Targeting, Financial Crisis
    JEL: F31 F33 F35
    Date: 2017–08–20
  8. By: Guangling Liu (University of Stellenbosch); Fernando Garcia-Barragan
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination on business cycle fluctuations and the implications for welfare. 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 significant impact on the dynamics of assets and liabilities that are denominated in foreign currency. The non-pecuniary capital controls help to stabilize the financial sector, thereby reducing the negative spillovers to the real economy. A more restrictive capital-control policy significantly weakens the welfare effect of the foreign monetary policy and exchange rate shocks.
    Date: 2017
  9. By: Ekpo, Akpan H.; Effiong, Ekpeno L.
    Abstract: This paper investigates the relationship between a country's openness to trade and the effects of monetary policy on output growth and inflation in Africa. Theory suggest that monetary policy effectiveness is influenced by the degree of openness to international trade. We apply standard panel data techniques to annual data from the period 1990-2015 for a panel of 37 African countries, and find a strong significant relationship between openness and monetary policy effectiveness in Africa. The empirical results indicate that the effects of monetary policy on output growth and inflation increases and decreases respectively with higher levels of trade openness. Therefore, monetary authorities should place emphasis on the level of openness when designing their choice of optimal monetary policy.
    Keywords: Openness; Monetary Policy; Africa.
    JEL: C33 E52 F41 O55
    Date: 2017–08
  10. By: Xiong, Wanting; Wang, Yougui
    Abstract: Recent evidences provoke broad rethinking of the role of banks in money creation. The authors argue that apart from the reserve requirement, prudential regulations also play important roles in constraining the money supply. Specifically, they study three Basel III regulations and theoretically analyze their standalone and collective impacts. The authors find that 1) the money multiplier under Basel III is not constant but a decreasing function of the monetary base; 2) the determinants of the bank's money creation capacity are regulation-specific; 3) the effective binding regulation and the corresponding money multiplier vary across different economic states and bank balance sheet conditions.
    Keywords: money creation,Basel III,liquidity coverage ratio,capital adequacy ratio,leverage ratio,money multiplier
    JEL: E51 G28 G18 E60
    Date: 2017
  11. By: Leonidas S. Rompolis (Athens University of Economics and Business)
    Abstract: This paper examines the impact of unconventional monetary policy of ECB measured by its balance sheet expansion on euro area equity market uncertainty and investors risk aversion within a structural VAR framework. An expansionary balance sheet shock decreases both risk aversion and uncertainty at least in the medium-run. A negative shock on policy rates has also a negative impact on risk aversion and uncertainty. These results are generally robust to different specifications of the VAR model, estimation procedures and identification schemes. Conversely, periods of high uncertainty are followed by a looser conventional monetary policy. The effect of uncertainty on ECB’s total assets and of risk aversion on conventional or unconventional monetary policy is not always statistically significant.
    Keywords: Unconventional monetary policy; euro area; risk aversion; uncertainty
    JEL: C32 E44 E52 G12
    Date: 2017–07
  12. By: Christoph S. Weber
    Abstract: Most central banks around the world have increased their transparency in the recent past. The greater openness of central bankers manifests itself in the publication of the central banks’ own macroeconomic forecasts or the disclosure of minutes and voting records of central bank committees. The intention of this policy is to build credibility and achieve better economic outcomes. The question is whether higher transparency comes at some cost, i.e. higher unemployment or higher unemployment variability. Firstly, the article shows in a theoretical model that opaqueness regarding the central bank’s preferences does not necessarily lead to lower unemployment. Secondly, the paper analyses the main theoretical results of other authors, namely that transparency leads to higher wages, higher unemployment, and higher unemployment volatility. The results of the estimations show that there is no evidence that central bank transparency leads to higher wages. We can also reject the hypothesis that transparency induces higher unemployment. In fact, the analyses show that central bank transparency can reduce the detrimental effect that central bank independence has on employment. Furthermore, the estimations confirm that central bank transparency does not lead to higher unemployment volatility but can reduce it in most cases.
    Keywords: Central Bank Transparency, Unemployment, Determinants of Unemployment Rates
    JEL: E24 E42 E58
    Date: 2017–08
  13. By: Mark Gertler
    Abstract: In the spring of 2013 the Bank of Japan introduced a state-of-the-art monetary policy which included among other things inflation targeting and aggressive use of forward guidance. In contrast to the predictions of conventional macroeconomic theory, these policies have had only very limited success in reflating the economy. I argue that the disconnect between the Japanese experience and existing theory can be traced to the forward guidance puzzle (FGP). As recent literature suggests, the essence of the FGP is that existing models predict implausibly strong effects of expected future interest rate changes on the economy,.with the strength of the effect increasing with the expected horizon of the interest rate change. Accordingly, in this lecture I sketch a model meant to capture the challenge of reflation in Japan. As in recent literature I attempt to mute the power of forward guidance by stepping outside of rational expectations. In particular I introduce a hybrid adaptive/rational expectations belief mechanism. Most relevant to the Japanese experience is that individuals have adaptive expectations about trend inflation, which is consistent with the evidence. As Kuroda (2016) emphasizes, for an economy without a history of inflation being anchored by a target, individuals need direct evidence that the central bank is capable of moving inflation to target.
    JEL: E52 E58
    Date: 2017–08
  14. By: Jasmina Arifovic; Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: The Taylor rule in combination with the zero lower bound on nominal rates has been shown to create an unintended liquidity-trap equilibrium. The relevance of this equilibrium has been challenged on the basis that it is not stable under least-square learning. In this paper, we show that the liquidity-trap equilibrium is stable under social learning. The learning mechanism we employ includes three realistic elements: mutation, crossover, and tournaments. We show that agents can learn to have pessimistic sentiments about the central bank's ability to generate price growth, giving rise to a stochastically stable environment characterized by deflation and stagnation.
    JEL: E52
    Date: 2017–08
  15. By: Francesco Bianchi (Duke University)
    Abstract: This paper presents evidence of infrequent shifts, or “breaks,” in the mean of the consumption-wealth variable cay that are strongly associated with fluctuations in the long-run expected value of the Federal Reserve's primary policy rate, with low policy rates associated with high asset valuations, and vice versa. By contrast, there is no evidence that infrequent shifts to high asset valuations and low policy rates are associated with higher expected economic growth or lower economic uncertainty; indeed the opposite is true. Additional evidence supports an equity market "reaching for yield" channel, wherein low interest rate regimes coincide with low risk premia.
    Date: 2017
  16. By: J-s.Mésonnier; C. O’Donnell; O.Toutain
    Abstract: Major central banks often accept pooled individual corporate loans as collateral in their refinancing operations with credit institutions. Such ``eligible'' loans to firms therefore provide a liquidity advantage to the banks that originate them. Banks may in turn pass on this advantage to the borrowers in the form of a reduced liquidity risk premium: the eligibility discount. We exploit a temporary surprise extension of the Eurosystem's universe of eligible collateral to mediumquality corporate loans, the Additional Credit Claims (ACC) program of February 2012, to assess the eligibility discount to corporate loans spreads in France. We find that becoming eligible to the Eurosystem's collateral framework translates into a reduction in rates by 7bp for new loans issued to ACC-firms, controlling for loan-, firm- and bank-level characteristics. In line with the opportunity-cost view of collateral choice, we also find evidence that this collateral channel of monetary policy is only active for banks which ex ante pledged more credit claims as part of their collateral with the Eurosystem.
    Keywords: monetary policy, collateral framework, eligibility discount, Eurosystem.
    JEL: C21 G21 E43 E52
    Date: 2017
  17. By: Fève, Patrick; Pierrard, Olivier
    Abstract: In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.
    Keywords: Shadow Banking; DSGE models; Macro-prudential Policy
    JEL: C32 E32
    Date: 2017–07
  18. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI)); Sakti, Muhammad Rizky Prima (Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia.)
    Abstract: The loan-to-funding ratio based reserve-requirement (called as RR-LFR) is a macroprudential instrument used by Bank Indonesia to maintain the stability of Indonesian financial system by considering the bank liquidity condition. This paper examines the impact of RR-LFR on financing behaviour in Indonesian dual banking system. The paper uses generalized method of moment estimation (GMM) technique to address the endogeneity of explanatory variables and reduce the possible biases from residual correlation. Using a bank-level data for both Islamic and conventional banks covering the period 2001-2015, we analyze the reaction of bank financing behavior toward RR-LFR policy. The findings indicate that RRLFR is observed to be effective in curtailing financing behaviour of banking institutions. Further, we show that RR-LFR exerts more impacts in managing credit expansion of conventional banks as compared to Islamic banks.
    Keywords: Macroprudential; Dual Banking System; Financing Behaviour; Indonesia; GMM
    JEL: E59 E69 G29
    Date: 2017–03–01

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