nep-cba New Economics Papers
on Central Banking
Issue of 2017‒09‒03
nineteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes By Dawid Johannes van Lill
  2. Calibrating Macroprudential Policy to Forecasts of Financial Stability By Brave, Scott A.; Lopez, Jose A.
  3. Liquidity Policies and Systemic Risk By Adrian, Tobias; Boyarchenko, Nina
  4. Can We Identify the Fed's Preferences? By Jean-Bernard Chatelain; Kirsten Ralf
  5. Central bank swap lines and CIP deviations By William Allen; Gabriele Galati; Richhild Moessner; William Nelson
  6. Revisiting the Exchange Rate Response to Monetary Policy Innovations: The Role of Spillovers of U.S. News Shocks By Pierre De Leo; Vito Cormun
  7. Money, Banking and Financial Markets By Andolfatto, David; Berentsen, Aleksander; Martin, Fernando M.
  8. Debt and Stabilization Policy: Evidence from a Euro Area FAVAR By Jackson, Laura E.; Owyang, Michael T.; Zubairy, Sarah
  9. Financial Heterogeneity and the Investment Channel of Monetary Policy By Thomas Winberry; Pablo Ottonello
  10. Should Unconventional Monetary Policies Become Conventional? By Pau Rabanal; Dominic Quint
  11. Ambiguity, Monetary Policy and Trend Inflation By Francesca Monti; Riccardo Maria Masolo
  12. Does banks' systemic importance affect their capital structure adjustment process? By Yassine Bakkar; Olivier De Jonghe; Amine Tarazi
  13. The impact of Monetary Policy Announcements and Political Events on the Exchange Rate: The Case of South Africa By Trust R. Mpofu; Amos C. Peters
  14. Spillovers from the ECB's non-standard monetary policy measures on south-eastern Europe By Moder, Isabella
  15. Leaning Against the Wind: The Role of Different Assumptions About the Costs By Svensson, Lars E O
  16. Non-Neutrality of Open Market Operations By Salvatore Nistico; Pierpaolo Benigno
  17. Do Phillips Curves Conditionally Help to Forecast Inflation? By Dotsey, Michael; Fujita, Shigeru; Stark, Tom
  18. The systemic risk of central SIFIs By Cathy Yi-Hsuan Chen; Sergey Nasekin;
  19. Forward-looking and Incentive-compatible Operational Risk Capital Framework By Marco Migueis

  1. By: Dawid Johannes van Lill
    Abstract: This paper employs a time-varying parameter vector autoregressive (TVP-VAR) model to establish the nature of the relationship between central bank liabilities and the overnight policy rate. Four countries with different monetary policy regimes were considered. It was found that a clear negative relationship between these variables exists only in the case of one regime, namely the reserve regime. This result indicates that the introduction of new operational frameworks for central banks have challenged the traditional model of monetary policy implementation. A potential practical implication of the ‘decoupling’ of interest rates from reserves is that the central bank in the United States and Canada could potentially use their balance sheet alongside conventional interest rate policy. However, as there is practically no decoupling in South Africa, and very little evidence in Norway, such a policy recommendation would not apply.
    JEL: E42 E58 E52
    Date: 2017–08
  2. By: Brave, Scott A. (Federal Reserve Bank of Chicago); Lopez, Jose A. (Federal Reserve Bank of San Francisco)
    Abstract: The introduction of macroprudential responsibilities at central banks and financial regulatory agencies has created a need for new measures of financial stability. While many have been proposed, they usually require further transformation for use by policymakers. We propose a transformation based on transition probabilities between states of high and low financial stability. Forecasts of these state probabilities can then be used within a decision-theoretic framework to address the implementation of a countercyclical capital buffer, a common macroprudential policy. Our policy simulations suggest that given the low probability of a period of financial instability at year-end 2015, U.S. policymakers need not have engaged this capital buffer.
    Date: 2017–08–14
  3. By: Adrian, Tobias; Boyarchenko, Nina
    Abstract: Bank liquidity shortages associated with the growth of wholesale-funded credit intermediation has motivated the implementation of liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time varying tightness of liquidity and capital constraints generates intermediaries' leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies' implications for households' welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.
    Keywords: DSGE; Financial Intermediation; liquidity regulation; systemic risk
    JEL: E02 E32 G00 G28
    Date: 2017–08
  4. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: Shifting from Ramsey optimal policy to time-consistent policy or optimal simple rule corresponds to a saddle-node bifurcation of the dynamic system of the economy. A pre-test of Ramsey optimal policy versus time-consistent policy rejects time-consistent policy and optimal simple rule for the U.S. Fed during 1960 to 2006, assuming the reference new-Keynesian Phillips curve transmission mechanism with auto-correlated cost-push shock. The number of reduced form parameters is larger with Ramsey optimal policy than with time-consistent policy although the number of structural parameters, including central bank preferences, is the same. The new-Keynesian Phillips curve model is under-identified with Ramsey optimal policy (one identifying equation missing) and hence under-identified for time-consistent policy (three identifying equations missing). Estimating a structural VAR for Ramsey optimal policy during Volcker-Greenspan period, the new-Keynesian Phillips curve slope parameter and the Fed's preferences (weight of the volatility of the output gap) are not statistically different from zero at the 5% level.
    Keywords: Ramsey optimal policy,Time-consistent policy,Identication,Central bank preferences,New-Keynesian Phillips curve
    Date: 2017–06
  5. By: William Allen; Gabriele Galati; Richhild Moessner; William Nelson
    Abstract: We study the use of US dollar central bank swap lines as a tool for addressing dislocations in the foreign currency swap market against the USD since the global financial crisis. We find that the use of the Federal Reserve's USD central bank swap lines was mainly related to tensions in US money markets during times of financial crisis, and less to tensions which were confined to foreign exchange swap markets. In particular, we find that the use of USD central bank swap lines did not react significantly to the recent period of persistent deviations of covered interest parity (CIP) since 2014. These results are consistent with the view that the Federal Reserve was guided by enlightened self-interest when providing swap lines to foreign central banks, in order to reduce dislocations in US financial markets and support financial stability. In recent years foreign exchange swap markets have not functioned properly, but it appears that now that the crisis is over, the Federal Reserve and other central banks have decided against trying permanently to fill the gap left by the dysfunction in the commercial foreign exchange swap market.
    Keywords: Central bank swap lines; foreign exchange swaps; covered interest parity; financial crisis
    JEL: E52 E58 F31
    Date: 2017–08
  6. By: Pierre De Leo (Boston College); Vito Cormun (Boston College)
    Abstract: Recursive vector autoregression (VAR) analysis suggests that the nominal exchange rate tends to depreciate after a contractionary monetary policy shock in most developing countries, a puzzle for virtually all open-economy macroeconomic models. Using a structural VAR approach, we document that when the U.S. economic outlook worsens developing countries' exchange rates signicantly depreciate and their policy-controlled interest rates increase. We show that commonly used recursive VAR schemes inevitably confound these correlations for the monetary policy innovation. In our econometric framework, we identify the spillover effects of future U.S. business cycles as the innovations that best explain future movements in the Federal Funds rate over an horizon of two years. When the monetary policy shock is then cleansed of these variations, the exchange rate response puzzle disappears. We conclude by showing that a standard small open economy model with news about future fundamentals in a large economy is consistent with all the empirical findings of this paper.
    Date: 2017
  7. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Berentsen, Aleksander (University of Basel); Martin, Fernando M. (Federal Reserve Bank of St. Louis)
    Abstract: The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange--a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.
    Date: 2017–08–03
  8. By: Jackson, Laura E. (Bentley University); Owyang, Michael T. (Federal Reserve Bank of St. Louis); Zubairy, Sarah (Texas A&M University)
    Abstract: The Euro-area poses a unique problem in evaluating policy: a currency union with a shared monetary policy and country-specific fiscal policy. Analysis can be further complicated if high levels of public debt affect the performance of stabilization policy. We construct a framework capable of handling these issues with an application to Euro-Area data. In order to incorporate multiple macroeconomic series from each country but, simultaneously, treat country-specific fiscal policy, we develop a hierarchical factor-augmented VAR with zero restrictions on the loadings that yield country-level factors. Monetary policy, then, responds to area-wide conditions but fiscal policy responds only to its country level conditions. We find that there is broad quantitative variation in different countries'' responses to area-wide monetary policy and both qualitative and quantitative variation in responses to country-specific fiscal policy. Moreover, we find that debt conditions do not diminish the effectiveness of policy in a significant manner, suggesting that any negative effects must come through other channels.
    Keywords: Government spending; monetary policy; European Monetary Union; debt
    JEL: C32 E58 E62
    Date: 2017–07–27
  9. By: Thomas Winberry (University of Chicago); Pablo Ottonello (University of Michigan)
    Abstract: We study the heterogeneous effects of monetary policy on firm-level investment and their implications for the aggregate transmission mechanism. Empirically, we find that firms with low levels of liquid assets and/or high levels of debt are substantially less responsive to identified monetary shocks in terms of their capital investment, inventory investment, and stock returns. We build a heterogeneous firm new Keynesian model featuring financial frictions consistent with this fact. In the model, firms with low net worth find it costlier to finance investment and are therefore less willing to respond to monetary shocks. The aggregate effect of monetary policy therefore depends on the distribution of net worth; it is weak when balance sheets are week, but becomes stronger as they recover.
    Date: 2017
  10. By: Pau Rabanal (IMF); Dominic Quint (Deutsche Bundesbank)
    Abstract: The large recession that followed the Global Financial Crisis of 2008–09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after short-term policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. We study the optimality of UMP by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Date: 2017
  11. By: Francesca Monti (Bank of England); Riccardo Maria Masolo (Bank of England)
    Abstract: Allowing for ambiguity, or Knightian uncertainty, about the behavior of the policymaker helps explain the evolution of trend inflation in the US in a simple new-Keynesian model, without resorting to exogenous changes in the inflation target. Using Blue Chip survey data to gauge the degree of private sector confidence, our model helps reconcile the difference between target inflation and the inflation trend measured in the data. We also show how, in the presence of ambiguity, it is optimal for policymakers to lean against the private sectors pessimistic expectations.
    Date: 2017
  12. By: Yassine Bakkar (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Olivier De Jonghe (European Banking Center, Tilburg University and National Bank of Belgium. - Tilburg University and National Bank of Belgium); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks' balance sheets.
    Keywords: capital structure,speed of adjustment,systemic risk,systemic size,bank regulation
    Date: 2017–06–26
  13. By: Trust R. Mpofu; Amos C. Peters
    Abstract: Since 2000 the South African rand has been among the most volatile emerging market currencies, occasionally experiencing sharp depreciations. These sharp fluctuations in the value of the currency cannot be adequately explained by models of flow-supply and flow-demand of currency or by movements in fundamental factors, yet few studies have employed an asset pricing approach to explain exchange rate variability in emerging markets. To remedy this gap, we use an event study methodology to measure the impact of monetary policy announcements and political events on the exchange value of the South African rand. Using daily exchange rate data over the period March 1, 2000 to December 31, 2014, we find that the rand is highly responsive to both monetary policy announcements and political events. A total of 28 out of 43 monetary policy announcements displayed significant cumulative abnormal returns, while four political events, most notably the Marikana massacre, had significant impact on the rand.
    Keywords: Event study, Exchange Rate Volatility, asset pricing, Monetary policy, South Africa
    JEL: E52 E58 F31 G14
    Date: 2017–08
  14. By: Moder, Isabella
    Abstract: This paper is the first to comprehensively assess the impact of the euro area’s non-standard monetary policy measures on south-eastern Europe. By employing bilateral BVAR models, I am able to estimate the response of output and prices for each country, as well as to shed more light on potential shock transmission channels. The results suggest that the ECB’s non-standard monetary policy measures have had pronounced price effects on all south-eastern European countries, and output effects on approximately half of them. While I also find exports to be a relevant transmission channel in most cases, the interbank market rate responds significantly only in a few cases as the region was subject to significant cross-border bank deleveraging after the crisis. Furthermore, the results suggest that the exchange rate regime does not play a role in determining the sign and magnitude of price level and output responses. This is in line with the absence of distinct exchange rate responses in the model output, suggesting that exchange rates did not act as buffers for spillovers of euro area non-standard monetary policy measures on south-eastern Europe. JEL Classification: C11, C32, E52, F42
    Keywords: BVAR, EU integration, international shock transmission, unconventional monetary policy
    Date: 2017–08
  15. By: Svensson, Lars E O
    Abstract: "Leaning against the wind" (LAW), that is, tighter monetary policy for financial-stability purposes, has costs in terms of a weaker economy with higher unemployment and lower inflation and possible benefits from a lower probability or magnitude of a (financial) crisis. A first obvious cost is a weaker economy if no crisis occurs. A second cost - less obvious, but higher - is a weaker economy if a crisis occurs. Taking the second cost into account, Svensson (2017) shows that for representative empirical benchmark estimates and reasonable assumptions the costs of LAW exceed the benefits by a substantial margin. Previous literature has disregarded the second cost, by assuming that the crisis loss level is independent of LAW. Some recent literature has effectively disregarded the second cost, making it to be of second order by assuming that the cost of a crisis (the crisis loss level less the non-crisis loss level) is independent of LAW. In these cases where the second cost is disregarded, for representative estimates a small but economically insignificant amount of LAW is optimal.
    Keywords: financial crises.; Financial Stability; macroprudential policy; monetary policy
    JEL: E52 E58 G01
    Date: 2017–08
  16. By: Salvatore Nistico (Sapienza Università di Roma); Pierpaolo Benigno (LUISS Guido Carli)
    Abstract: We analyze the effects on inflation and output of unconventional open-market operations due to the possible income losses on the central bank's balance sheet. We first state a general Neutrality Property, and characterize the theoretical conditions supporting it. We then discuss three non-neutrality results. First, when treasury's support is absent, sizeable balance-sheet losses can undermine central bank's solvency and should be resolved through a substantial increase in inflation. Second, a financially independent central bank - i.e. averse to income losses - commits to a more inflationary stance and delayed exit strategy from a liquidity trap. Third, if the treasury is unable or unwilling to tax households to cover central bank's losses, the wealth transfer to the private sector also leads to higher inflation. Finally, we argue that non-neutral open-market operations can be used to escape suboptimal policies during a liquidity trap.
    Date: 2017
  17. By: Dotsey, Michael (Federal Reserve Bank of Philadelphia); Fujita, Shigeru (Federal Reserve Bank of Philadelphia); Stark, Tom (Federal Reserve Bank of Philadelphia)
    Abstract: This paper reexamines the forecasting ability of Phillips curves from both an unconditional and conditional perspective by applying the method developed by Giacomini and White (2006). We find that forecasts from our Phillips curve models tend to be unconditionally inferior to those from our univariate forecasting models. Significantly, we also find conditional inferiority, with some exceptions. When we do find improvement, it is asymmetric - Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. Any improvement we find, however, vanished over the post-1984 period.
    Keywords: Phillips curve; unemployment gap; conditional predictive ability
    JEL: C53 E37
    Date: 2017–08–21
  18. By: Cathy Yi-Hsuan Chen; Sergey Nasekin;
    Abstract: Systemic risk quantification in the current literature is concentrated on market-based methods such as CoVaR(Adrian and Brunnermeier (2016)). Although it is easily implemented, the interactions among the variables of interest and their joint distribution are less addressed. To quantify systemic risk in a system-wide perspective, we propose a network-based factor copula approach to study systemic risk in a network of systemically important financial institutions (SIFIs). The factor copula model offers a variety of dependencies/tail dependencies conditional on the chosen factor; thus constructing conditional network. Given the network, we identify the most “connected” SIFI as the central SIFI, and demonstrate that its systemic risk exceeds that of non-central SIFIs. Our identification of central SIFIs shows a coincidence with the bucket approach proposed by the Basel Committee on Banking Supervision, but places more emphasis on modeling the interplay among SIFIs in order to generate systemwide quantifications. The network defined by the tail dependence matrix is preferable to that defined by the Pearson correlation matrix since it confirms that the identified central SIFI through it severely impacts the system. This study contributes to quantifying and ranking the systemic importance of SIFIs.
    Keywords: factor copula, network, Value-at-Risk, tail dependence, eigenvector centrality JEL Classification: C00, C14, C50, C58
    JEL: C00 C14 C50 C58
    Date: 2017–08
  19. By: Marco Migueis
    Abstract: The Advanced Measurement Approach (AMA) to operational risk capital is vulnerable to gaming, complex, and lacks comparability. The Standardized Measurement Approach (SMA) to operational risk capital lacks risk sensitivity and is unlikely to be appropriately conservative for US banks. An alternative framework is proposed that addresses the weaknesses of these approaches by relying on an incentive-compatible mechanism to elicit forward-looking projections of loss exposure.
    Keywords: Banking Regulation ; Incentive Compatibility ; Operational Risk ; Regulatory Capital
    JEL: G21 G28 G32
    Date: 2017–08–22

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