nep-cba New Economics Papers
on Central Banking
Issue of 2017‒09‒17
twenty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
  2. Extreme Events and Optimal Monetary Policy By Francisco Ruge-Murcia; Jinill Kim
  3. Central Bank Quantitative Easing as an Emerging Political Liability By Xing, Victor
  4. Market Reading of Central Bankers Words. A High-Frequency Evidence. By Pavel Gertler; Roman Horvath
  5. A composite index of inflation tendencies in the euro area By Marcello Miccoli; Marianna Riggi; Lisa Rodano; Laura Sigalotti
  6. The financial market effects of the ECB's asset purchase programs By Lewis, Vivien; Roth, Markus
  7. Macroprudential Policy in a Monetary Union By Salim, DEHMEJ; Leonardo, GAMBACORTA
  8. Do negative interest rates make banks less safe? By Nucera, Federico; Lucas, André; Schaumburg, Julia; Schwaab, Bernd
  9. Does Financial Tranquility Call for More Stringent Regulation? By Basak, Deepal; Murray, Alexander; Zhao, Yunhui
  10. Applying complexity theory to interest rates: Evidence of critical transitions in the euro area By Jan Willem van den End
  11. Did quantitative easing boost bank lending? The Slovak experience By Adriana Lojschova
  12. Effectiveness of macroprudential policies under borrower heterogeneity By Punzi, Maria Teresa; Rabitsch, Katrin
  13. Effectiveness of macroprudential policies under borrower heterogeneity By Maria Teresa Punzi; Katrin Rabitsch
  14. On the Effectiveness of Central Bank Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999-2007 By Juraj Zeman; Biswajit Banerjee; Ludovit Odor; William O. Riiska Jr.
  15. The future of macroeconomics: Macro theory and models at the Bank of England By David Hendry; John Muellbauer
  16. Does Inflation Cause Gold Market Price Changes? Evidence on the G7 Countries from the Tests of Nonparametric Quantile Causality in Mean and Variance By Balcilar, Mehmet; Ozdemir, Zeynel Abidin; Shahbaz, Muhammad; Gunes, Serkan
  17. The Redistributive Effects of Inflation and the Shape of Money Demand By Paola Boel
  18. Government Spending and the Term Structure of Interest Rates in a DSGE Model By Ales Marsal; Lorant Kaszab; Roman Horvath
  19. Household Debt and Monetary Policy: Revealing the Cash-Flow Channel By Flodén, Martin; Kilström, Matilda; Sigurdsson, Josef; Vestman, Roine
  20. Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Assets Purchase Program By Martijn (M.I.) Droes; Ryan van Lamoen; Simona Mattheussens
  21. Monetary policy in a low interest rate environment By Stefano Neri; Giuseppe Ferrero

  1. By: Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
    Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico matched with firm and bank data, and by exploiting foreign monetary policy shocks in a country with a large presence of European and U.S. banks. The robust results show that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock mainly affects supply via their respective banks, in turn implying strong real effects, with lower elasticities from QE. The impact of low foreign monetary policy rates and expansive QE is stronger on local borrowers with higher ex-ante loan rates -reach-for-yield- and with higher ex-post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest spillovers of core-countries´ monetary policies on emerging markets, both in the foreign monetary softening and tightening part.
    Keywords: Monetary policy;financial globalization;quantitative easing (QE);credit supply;risk-taking;foreign banks
    JEL: E52 E58 G01 G21 G28
    Date: 2017–09
  2. By: Francisco Ruge-Murcia (McGill University); Jinill Kim (Korea University)
    Abstract: This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale New Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds non-linearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above $1$ as insurance against extreme shocks, and strict price stability is unambiguously solved in favour of the latter.
    Date: 2017
  3. By: Xing, Victor
    Abstract: Officials from major central banks have previously acknowledged QE programs’ distributional effects but expected aggregate economic benefits of these unconventional policies to outweigh their costs. Post-crisis asset price appreciation became well entrenched under the effect of QE, which out-paced median wage growth to unintentionally burden low-to-middle income households and individuals with limited asset ownership. Subsequently, rising inequality fueled discontent and contributed to the rise of anti-establishment political candidates Efforts by elected officials to ease the effects of policy-induced inequality would likely bolster support toward further redistribution policies such as “helicopter money” to threaten central bank monetary policy independence
    Keywords: Quantitative Easing, Distributional Effects, Helicopter Money, Debt Monetization
    JEL: E50 E52 H50
    Date: 2017–09–01
  4. By: Pavel Gertler (National Bank of Slovakia); Roman Horvath (Charles University)
    Abstract: This paper examines the financial market impact of intermeeting communication of the members of the European Central Bank’s Governing Council (GC) using high frequency data in the period 2008–2013. Constructing a rich dataset of GC members’ public statements (speeches, conference discussions and media interviews) between monetary policy meetings allows us to investigate a detailed pattern of market responses to the ad-hoc communication of central bankers. Using least squares and quantile regressions, we document the impact of policymakers’ public statements on interest rates and the stock market with very little or no impact on exchange rates. In general, we find little evidence that the timing, sequencing or content of communication matters in immediate response. On the contrary, the results suggest that the market concentrates on the communication of key members of the committee.
    Keywords: Central bank, communication, European Central Bank
    JEL: C1 E5 G21
    Date: 2017–06
  5. By: Marcello Miccoli (Bank of Italy); Marianna Riggi (Bank of Italy); Lisa Rodano (Bank of Italy); Laura Sigalotti (Bank of Italy)
    Abstract: Assessing underlying inflation developments is crucial for a correct calibration of the monetary policy stance. To monitor the adjustment in the path of euro area inflation towards the ECB’s definition of price stability, we select a number of indicators of price dynamics in the area. We then construct a composite index summarizing the information contained in those indicators by estimating several univariate probability models. The index, which provides a synthetic measure of inflationary pressures net of the most volatile components, can be interpreted as gauging the probability of inflation returning to 1.9 per cent or over within a given time horizon. Our findings, which are based on the information available in July 2017, signal that, despite the improvement in price dynamics since the beginning of the year, the adjustment of inflation rates towards levels below, but close to, 2 per cent over the medium term is still limited and far from being sustained.
    Keywords: euro area, determinants of inflation, inflation, statistical aggregation
    JEL: C35 C38 E31 E58
    Date: 2017–09
  6. By: Lewis, Vivien; Roth, Markus
    Abstract: The European Central Bank's asset purchase programs, while intended to stabilize the economy, may have unintended side effects on financial stability. This paper aims at gauging the effects on financial markets, the banking sector, and lending to non-financial firms. Using a structural vector autoregression analysis, we find both in the euro area and in Germany a positive effect on output, while prices do not respond significantly. Asset purchases reduce financial stress, but this beneficial effect is overturned in the medium run. In Germany, implicit firm default rates rise, while loan write-offs by banks decrease. This could point to an avoidance of balance sheet repair in the financial sector.
    Keywords: asset purchase programs,balance sheet,monetary policy,central bank,shock identification,VAR
    JEL: C32 E44 E52 E58
    Date: 2017
  7. By: Salim, DEHMEJ (Bank Al-Maghrib, Département de la Recherche); Leonardo, GAMBACORTA (Bank for International Settlements (BIS))
    Abstract: Using a simple New Keynesian model of a monetary union that incorporates financial frictions, we show that country-targeted macroprudential policy could complement a single monetary policy at the union level. In particular, macroprudential policy helps taming financial and economic imbalances in presence of countercyclical financial shocks and imperfect transmission of monetary policy to financial conditions in a monetary union. These results are even stronger when different economies are hit by asymmetric shocks that cancel out without provoking any monetary policy reaction. In addition, we show that when coordinated with monetary policy, country-targeted macroprudential policy (implemented by national or supranational authorities) has advantages over a federally implemented policy that reacts to average financial indicators.
    Keywords: Monetary Union; Macroprudential Policy; New-Keynesian Model
    JEL: E12 E50 G18
    Date: 2017–09–07
  8. By: Nucera, Federico; Lucas, André; Schaumburg, Julia; Schwaab, Bernd
    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 is moderate, and depends on banks’ business models: Banks with diversified income streams are perceived by the market as less risky, while banks that rely predominantly on deposit funding are perceived as more risky. Policy rate cuts below zero trigger different SRisk responses than an earlier cut to zero. JEL Classification: G20, G21
    Keywords: bank business model, negative interest rates, systemic risk, unconventional monetary policy measures
    Date: 2017–09
  9. By: Basak, Deepal; Murray, Alexander; Zhao, Yunhui
    Abstract: Consistent with the Minsky hypothesis and the “volatility paradox” (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy in the form of a capital income tax to restore efficiency, and highlight a key challenge faced by regulators: whether the stringency of prudential policy should rise or fall over time depends on the resilience of the financial system, which is difficult to know and thus may lead to inefficient regulation. Our paper provides a simple framework to shed light on the current regulation debates, such as the ongoing debates on the financial deregulation initiatives in the U.S. (as evident in the August 2017 Jackson Hole meeting), and the discussions on how to regulate the rapidly-developing online finance industry in China.
    Keywords: Financial stability, Financial regulation, Learning, Externality, Macroprudential
    JEL: G01 G18 G28
    Date: 2017–08–26
  10. By: Jan Willem van den End
    Abstract: We apply complexity theory to financial markets to show that excess liquidity created by the Eurosystem has led to critical transitions in the configuration of interest rates. Complexity indicators turn out to be useful signals of tipping points and subsequent regime shifts in interest rates. We find that the critical transitions are related to the increase of excess liquidity in the euro area. These insights can help central banks to strike the right balance between the intention to support the financial system by injecting liquidity and potential unintended side-effects on market functioning.
    Keywords: interest rates; central banks and their policies; monetary policy
    JEL: E43 E58 E52
    Date: 2017–09
  11. By: Adriana Lojschova (National Bank of Slovakia)
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual banklevel data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–06
  12. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: We study the impact of macroprudential policies using a novel model which takes into account households´ ability to borrow under different loan-to-value ratios which are tied to their collateral values. Such model generates a larger amplification in real and financial variables, compared to standard models that assume homogeneity in the leveraging and deleveraging process. Conditional on this model, we consider the implications of macroprudential policies that aim to lean against an excessive credit cycle. In particular, we allow macroprudential authorities to tighten excessive lending to higher leveraged households, whose riskiness had been evaluated too optimistically. We find thata policy that targets only the group of households that most strongly deleveraged after an adverse idiosyncratic housing investment risk shock, is welfare-improving at social and individual levels, relative to a macroprudential policy which targets all households in the economy.
    Keywords: Endogenous Loan-to-Value ratio, Heterogeneity, Macroprudential Policy
    Date: 2017–09
  13. By: Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business)
    Abstract: We study the impact of macroprudential policies using a novel model which takes into account households’ ability to borrow under different loan-to-value ratios which are tied to their collateral values. Such model generates a larger amplification in real and financial variables, compared to standard models that assume homogeneity in the leveraging and deleveraging process. Conditional on this model, we consider the implications of macroprudential policies that aim to lean against an excessive credit cycle. In particular, we allow macroprudential authorities to tighten excessive lending to higher leveraged households, whose riskiness had been evaluated too optimistically. We find that a policy that targets only the group of households that most strongly deleveraged after an adverse idiosyncratic housing investment risk shock, is welfare-improving at social and individual levels, relative to a macroprudential policy which targets all households in the economy.
    Keywords: Endogenous Loan-to-Value ratio, Heterogeneity, Macroprudential Policy
    JEL: E23 E32 E44
    Date: 2017–09
  14. By: Juraj Zeman (National Bank of Slovakia); Biswajit Banerjee (Bank of Slovenia); Ludovit Odor (EU Independent Fiscal Institution); William O. Riiska Jr. (Hutchin Hill Capital)
    Abstract: Based on intra-day high-frequency data, this paper investigates the effect of sterilized interventions on the Slovak koruna/euro exchange rate for different time windows during a period that coincides with Slovakia’s preparation for EU accession and euro adoption. Results confirm a significant relationship between intervention and exchange rate change. The maximum effect of intervention is reflected in the exchange rate change within a couple of hours and the effect over longer time windows weakens only gradually. The initial impact of sales interventions is stronger than that of purchase interventions.
    Keywords: Foreign exchange market intervention, koruna/euro exchange rate, monetary policy framework, ERM II participation, Slovakia
    JEL: E44 E58 F31 G15
    Date: 2017–09
  15. By: David Hendry; John Muellbauer
    Abstract: Abstract The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.
    Keywords: DSGE, central banks, macroeconomic policy models, finance and the real economy, financial crisis, consumption, credit constraints, household portfolios, asset prices
    JEL: E17 E21 E44 E51 E52 E58 G01
    Date: 2017–09–05
  16. By: Balcilar, Mehmet; Ozdemir, Zeynel Abidin; Shahbaz, Muhammad; Gunes, Serkan
    Abstract: This paper utilises the newly proposed nonparametric causality-in-quantiles test to examine the predictability of mean and variance of changes in gold prices based on inflation for G7 countries. The causality-in-quantiles approach permits us to test for not only causality in mean but also causality in variance. We start our investigation by utilising tests for nonlinearity. These tests identify nonlinearity, showing that the linear Granger causality tests are subject to misspecification error. Unlike tests of misspecified linear models, our nonparametric causality-in-quantiles tests find causality in mean and variance from inflation to gold market price changes between the 0.20 quantile and the 0.70 quantile, implying that very low- and high- price changes in gold markets are not related to inflation. These changes should be related to other sources, such as financial shocks and exchange market shocks. We find support that gold serves as a hedge against inflation, but only in the mid-quantile ranges, i.e., quantiles from 0.20 to 0.70. Our results show that gold does not serve as a hedge against inflation during periods when gold market price changes are very low or very high, which are respectively quiet and highly volatile periods.
    Keywords: Gold, Inflation, Spot and futures markets; Quantile causality
    JEL: A1
    Date: 2017–09–05
  17. By: Paola Boel
    Abstract: I quantify the redistributive effects of expected inflation in a sample of OECD countries using a microfounded model of money where agents differ in their consumption risk. The model is calibrated using harmonized wealth microdata from the Luxembourg Wealth Study. I find that inflation acts as a regressive tax in all countries considered. The magnitude of inflation’s redistributive impact, however, depends not only on wealth distribution but also, and importantly, on the shape of the money demand curve. A higher and less elastic money demand leads to more regressive effects of inflation, thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution.
    Keywords: Money,Heterogeneity,Calibration,Welfare Cost of Inflation
    JEL: E4 E5
    Date: 2017–07
  18. By: Ales Marsal (National Bank of Slovakia); Lorant Kaszab (Central Bank of Hungary); Roman Horvath (Charles University)
    Abstract: We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current consumption gains against future losses. In a special case where the central bank does not respond to changes in output bonds leverage inflation risk. Spending reversals strongly reduce the sensitivity of bond prices to changes in government spending.
    Keywords: Macro-finance, New Keynesian model, Government expenditures, Bond prices
    JEL: C12 C22 C52
    Date: 2017–09
  19. By: Flodén, Martin; Kilström, Matilda; Sigurdsson, Josef; Vestman, Roine
    Abstract: We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption responses to a change in monetary policy through the cash-flow channel. Our findings imply that monetary policy has a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debt-to-income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.
    Keywords: adjustable rate mortgages; Consumption; Household Debt; monetary policy; variable interest rates
    JEL: D14 E21 E52 G11
    Date: 2017–09
  20. By: Martijn (M.I.) Droes (University of Amsterdam & Amsterdam School of Real Estate; Tinbergen Institute, The Netherlands); Ryan van Lamoen (Dutch Central Bank); Simona Mattheussens (Dutch Central Bank)
    Abstract: This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.
    Keywords: government bond yields; asset price bubbles; monetary policy
    JEL: G12 G15 E52
    Date: 2017–09–05
  21. By: Stefano Neri (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia)
    Abstract: The debate on the underlying causes of the decline of interest rates to historically low levels is ongoing both in academia and among policy makers. Several explanations have been put forward, ranging from those citing real and structural factors to those underscoring the importance of cyclical and financial phenomena. However, the empirical evidence regarding their relative importance is still limited. These different but complementary views can be framed around the concept of the natural rate of interest and the monetary transmission mechanism. The low interest rate environment that still characterizes advanced economies raises important questions regarding the implications for monetary policy in the medium- and long-run. Our work provides a systematic outline of the potential changes to monetary policy strategies that could ensue.
    Keywords: interest rates, natural rate, monetary policy, secular stagnation, financial cycle
    JEL: E43 E52 E58 G01
    Date: 2017–09

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