nep-cba New Economics Papers
on Central Banking
Issue of 2017‒10‒08
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. Funders-of-Last-Resort: Legal Issues Involved in Using Central Bank Balance Sheets to Bolster Economic Growth By Michael, Bryane; Dalko, Viktoria
  2. Optimal quantitative easing By Harrison, Richard
  3. US monetary regimes and optimal monetary policy in the Euro Area By Kostas Mavromatis
  4. On the Interplay between Monetary Policy and Macroprudential Policy: A Simple Analytical Framework By Øistein Røisland
  5. Monetary Policy Shifts and Central Bank Independence By Qureshi, Irfan
  6. What does “below, but close to, two percent” mean? Assessing the ECB’s reaction function with real time data By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
  7. Countercyclical prudential tools in an estimated DSGE model By Serafín Frache; Jorge Ponce; Javier Garcia Cicco
  8. Optimal inflation target: Insights from an agentbased model By Bouchaud, Jean-Philippe; Gualdi, Stanislao; Tarzia, Marco; Zamponi, Francesco
  9. Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada By Julien Champagne; Rodrigo Sekkel
  10. Monetary policy, asset prices, and liquidity under adverse selection By Florian Madison
  11. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  12. ?Whatever it takes? to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, Ant¢nio; Arghyrou, Michael G; Gadea, Mar¡a Dolores; Kontonikas, Alexandros
  13. The Effect of Central Bank Transparency on Exchange Rate Volatility By Christoph S. Weber
  14. Spreading the word or reducing the term spread? Assessing spillovers from euro area monetary policy By Feldkircher, Martin; Gruber, Thomas; Huber, Florian
  15. Estimating the Credibility of Brazilian Monetary Policy using Forward Measures and a State-Space Model By Flávio de Freitas Val; Wagner Piazza Gaglianone; Marcelo Cabus Klotzle; Antonio Carlos Figueiredo Pinto
  16. Overnight Indexed Swap Market-Based Measures of Monetary Policy Expectations By Lloyd, S. P.
  17. Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases By Anna Bartocci; Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  18. Should unconventional monetary policies become conventional? By Quint, Dominic; Rabanal, Pau
  19. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  20. Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model By De Grauwe, Paul; Ji, Yuemei
  21. An integrated shortfall measure for Basel III By Torchiani, Ingo; Heidorn, Thomas; Schmaltz, Christian
  22. Unconventional Monetary Policy and the Interest Rate Channel: Signalling and Portfolio Rebalancing By Lloyd, S. P.
  23. On secular stagnation and low interest rates: demography matters By Stefano Neri; Giuseppe Ferrero; Marco Gross

  1. By: Michael, Bryane; Dalko, Viktoria
    Abstract: What role does unconventional monetary policy – and particularly unconventional policies like private asset purchases under a quantitative easing or lender of last resort scheme – play in influencing economic growth directly? Emerging and developing countries’ central banks could contribute to GDP growth by following the example of jurisdiction like the US, UK and EU, by buying private sector and specific obligation public sector assets. Such a scheme would like most benefit jurisdictions like Greece, Bulgaria, Ukraine and others. Unsurprisingly, we find a weak relationship between these purchases and investment world-wide for the last 10 years. We also find the existence of a “sloth effect” – a pattern in the data whereby more central bank asset purchases actually coincides with lower investment. We estimate the gains to increasing central bank balance sheet sizes with these assets. We also show how statutory mandate for nominal GDP targeting set the best legal foundations for such asset purchases. We finally describe an internal audit engagement which would collect the specific data needed to verify the results in this study.
    Keywords: unconventional monetary policy,funder of last resort,nominal GDP targeting,central bank balance sheet,sloth effect,internal audit
    JEL: E58 E42 K23 O23
    Date: 2017
  2. By: Harrison, Richard (Bank of England)
    Abstract: I study optimal monetary policy in a simple New Keynesian model with portfolio adjustment costs. Purchases of long-term debt by the central bank (quantitative easing; ‘QE’) alter the average portfolio return and hence influence aggregate demand and inflation. The central bank chooses the short-term policy rate and QE to minimise a welfare-based loss function under discretion. Adoption of QE is rapid, with large-scale asset purchases triggered when the policy rate hits the zero bound, consistent with observed policy responses to the Global Financial Crisis. Optimal exit is gradual. Despite the presence of portfolio adjustment costs, a policy of ‘permanent QE’ in which the central bank holds a constant stock of long-term bonds does not improve welfare.
    Keywords: Quantitative easing; optimal monetary policy; zero lower bound
    JEL: E52 E58
    Date: 2017–09–25
  3. By: Kostas Mavromatis
    Abstract: Monetary policy in the US has been documented to have switched from reacting weakly to inflation fluctuations during the '70s, to fighting inflation aggressively from the early '80s onwards. In this paper, I analyze the impact of the US monetary policy regime switches on the Eurozone. I construct a New Keynesian two-country model where foreign (US) monetary policy switches regimes over time. I estimate the model for the US and the Euro Area using quarterly data and find that the US has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables, like imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the ECB adjusts its policy according to the monetary regime in the US. Thus, a simple time-invariant monetary policy rule with a strong reaction to PPI inflation and relative prices is enough to counteract the effects of monetary policy switches in the US.
    Keywords: Monetary Policy; Markov-switching DSGE and Bayesian estimation; optimal monetary policy; international spillovers
    JEL: C3 E52 F3 F41 F42
    Date: 2017–09
  4. By: Øistein Røisland (Norges Bank (Central Bank of Norway))
    Abstract: The paper provides a simple analytical framework for analyzing the interplay between monetary policy and macroprudential policy. Three questions are analyzed: (i) Under which assumptions is coordination necessary to implement an optimal policy mix? (ii) Are the two policy instruments substitutes or complements, i.e. should they move in opposite or the same direction as response to a shock? (iii) Can "leaning against the wind" in monetary policy lead to a negative inflation bias?
    Keywords: Monetary policy, Macroprudential policy, Coordination
    JEL: E52 E58 E61
    Date: 2017–10–02
  5. By: Qureshi, Irfan (The University of Warwick)
    Abstract: Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.
    Keywords: Time-varying policy parameters ; macroeconomic volatility ; central bank independence ; type of chairman changes
    JEL: E30 E42 E43 E52 E58 E61 O11 O23 O57
    Date: 2017
  6. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
    Abstract: We estimate the ECB’s monetary policy reaction function by using real time Eurosystem/ECB staff macroeconomic projection data, which are presented to the ECB’s Governing Council when it assesses the monetary policy stance in the euro area. Alternative specifications of the reaction function account for a possible credibility loss due to persistent deviations of past inflation from the ECB’s inflation target. The results provide support for two alternative interpretations of the definition of price stability. First, the ECB dislikes inflation rates above two percent more than rates below two percent. Second, the ECB policy responses to past inflation gaps are symmetric with respect to a target of 1.6 - 1.7 percent. The out-of-sample predictions of the reaction function based on the second interpretation of the definition of price stability track well an estimated shadow interest rate during the zero lower bound period.
    JEL: E52 E58
    Date: 2017–10–05
  7. By: Serafín Frache (Banco Central del Uruguay); Jorge Ponce; Javier Garcia Cicco
    Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default in order to perform a realistic assessment of macroprudential tools: countercyclical capital buffer (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. We find that (i) the source of the shock affecting the financial system matters, to select the appropriate indicator variable under the CCB rule, and to calibrate the size of the DP. Given a positive external shock, CCB (ii) generates buffers without major real effects; (iii) GDP as an indicator variable has quicker and stronger effects over bank capital; and (iv) the ratio of credit to GDP decreases, which discourages its use as an indicator variable. DP (v) generates buffers with real effects, and (vi) seems to outperform the CCB in terms of smoothing the cycle.
    Keywords: Banking regulation, minimum capital requirement, countercyclical capital buffer, reserve requirement, dynamic loan loss provision, endogenous default, Basel III, DSGE, Uruguay
    JEL: G21 G28
    Date: 2017
  8. By: Bouchaud, Jean-Philippe; Gualdi, Stanislao; Tarzia, Marco; Zamponi, Francesco
    Abstract: Which level of inflation should Central Banks be targeting? The authors investigate this issue in the context of a simplified Agent Based Model of the economy. Depending on the value of the parameters that describe the micro-behaviour of agents (in particular inflation anticipations), they find a surprisingly rich variety of behaviour at the macro-level. Without any monetary policy, our ABM economy can be in a high inflation/high output state, or in a low inflation/low output state. Hyper-inflation, stagflation, deflation and business cycles are also possible. The authors then introduce a Central Bank with a Taylor-rule-based inflation target, and study the resulting aggregate variables. The main result is that too low inflation targets are in general detrimental to a CB-controlled economy. One symptom is a persistent under-realisation of inflation, perhaps similar to the current macroeconomic situation. This predicament is alleviated by higher inflation targets that are found to improve both unemployment and negative interest rate episodes, up to the point where erosion of savings becomes unacceptable. The results are contrasted with the predictions of the standard DSGE model.
    Keywords: Agent based models,monetary policy,inflation target,Taylor rule
    JEL: E31 E32 E52
    Date: 2017
  9. By: Julien Champagne; Rodrigo Sekkel
    Abstract: We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent decrease in real GDP and a 0.4 per cent fall in the price level, while not accounting for the break leads to a permanent decrease in real GDP and a price puzzle. Finally, we compare our results with updated narrative evidence for the U.S. and the U.K. and argue that taking into account changes in the conduct of monetary policy in these countries also yields significantly different effects of monetary policy.
    Keywords: Business fluctuations and cycles, Central bank research, Econometric and statistical methods, Exchange rate regimes, Inflation and prices, Inflation targets, Interest rates, Monetary Policy, Monetary policy framework
    JEL: E31 E32 E43 E52 E58
    Date: 2017
  10. By: Florian Madison
    Abstract: The aim of this paper is to analyze the relationship between primary market investment, decentralized secondary market asset trades, and final goods consumption under asymmetric information regarding the quality of the traded assets. Using a search-theoretic dynamic general equilibrium model where money and real assets coexist, but only fiat money is accepted as a direct medium of exchange, I study bilateral bargaining on over-the-counter asset markets under private information and analyze impact of monetary policy on equilibrium allocations. The main results show that asymmetric information impairs the liquidity of the real asset on the over-the-counter market and reduces both trading volume and consumption. As a consequence, a positive liquidity differential between money and assets emerges, resulting in an increased demand for fiat money, as observed since the eruption of the global financial crisis. A policy intervention replacing information sensitive assets with government bonds or fiat money, as done in the asset-purchase program implemented by the Federal Reserve Bank, improves equilibrium consumption and overall welfare.
    Keywords: Money, assets, over-the-counter, asymmetric information, signaling, undefeated equilibrium, search and matching
    JEL: D82 D83 E44 E52 G11 G12
    Date: 2017–09
  11. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: Monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 G01 G21
    Date: 2017
  12. By: Afonso, Ant¢nio (ISEG-UL ? Universidade de Lisboa); Arghyrou, Michael G (Cardiff Business School); Gadea, Mar¡a Dolores (Department of Applied Economics, University of Zaragoza); Kontonikas, Alexandros (Essex Business School, University of Essex)
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017–09
  13. By: Christoph S. Weber
    Abstract: The increase in central bank transparency was one of the main developments in central banking in the last two decades. This leads to the question of which effect central bank transparency has on the volatility of exchange rates. According to theoretical considerations, more information could either lead to more precise forecasts or to more noise trading. This raises the need for an empirical estimation of the relationship. The study shows that the effect of central bank transparency on exchange rate volatility depends on the development of countries. While there is no effect of central bank transparency in the composite sample and for developing countries, transparency increases exchange rate fluctuations in developed countries.
    Keywords: Central Bank Transparency, Exchange Rate Volatility, Monetary Policy
    JEL: E24 E58 F31
    Date: 2017–09
  14. By: Feldkircher, Martin; Gruber, Thomas; Huber, Florian
    Abstract: As a consequence of asset purchases by the European Central Bank (ECB), longer- term yields in the euro area decline, and spreads between euro area long-term yields narrow. To assess spillovers of these recent financial developments, we use a Bayesian variant of the global vector autoregressive (BGVAR) model that uses shrinkage priors coupled with stochastic volatility. We find positive and signif- icant spillovers to industrial production in Central, Eastern and Southeastern Europe (CESEE) and other non-euro area EU member states. These effects are transmitted via the financial channel (mainly through interest rates and equity prices) and outweigh costs of appreciation pressure on local currencies vis-a-vis the euro (trade channel). That both shocks yield rather similar results adds narrowing longer-term yields in the euro area as a viable alternative to the pol- icymakers' toolkit. While these results represent general trends, we also find evidence for both cross-country heterogeneity of effects within the euro area and region-specific spillovers thereof.
    Keywords: Euro area monetary policy,quantitative easing,spillovers
    JEL: C30 E52 F41 E32
    Date: 2017
  15. By: Flávio de Freitas Val; Wagner Piazza Gaglianone; Marcelo Cabus Klotzle; Antonio Carlos Figueiredo Pinto
    Abstract: The objective of this study is to estimate the credibility of the monetary policy followed by the Central Bank of Brazil (BCB) during the period from January 2006 to July 2017. To estimate this credibility, we use the Kalman filter in two measures of inflation expectations (breakeven inflation and Focus survey) with a medium/long-term forecast horizon. The results indicate four shifts in the perceived credibility based on breakeven inflation: (i) decline in mid-2008, during the U.S. subprime mortgage crisis; (ii) relative stability from early 2009 to mid-2015; (iii) strong decline by the end of 2015; and (iv) recovery from mid-2016 until mid-2017 (end of the sample). The credibility measure based on the Focus survey showed a more regular behavior, reflecting the degree of anchoring of the survey-based inflation expectations for the considered horizon. By associating the estimated credibility with financial and macroeconomic variables, we have also found that credibility is relatively persistent and seems not to be influenced by short-run movements of such variables
    Date: 2017–09
  16. By: Lloyd, S. P.
    Abstract: A growing literature has begun to use overnight indexed swap (OIS) rates to measure market expectations of future short-term interest rates. In this paper, I assess the empirical success of OIS rates in predicting the future path of monetary policy. I first compare US OIS rates to federal funds futures (FFFs), which have regularly been used to construct financial market-based measures of interest rate expectations. For the 2002-2016 period, I find that 1 to 11-month OIS rates provide measures of investors' interest rate expectations that are as good as those from comparable-horizon FFFs contracts. More generally, I find that, on average, 1 to 24-month US, UK, Eurozone and Japanese OIS rates accurately measure expectations of future short-term interest rates. To date, many methods used by monetary economists rely on FFFs data to measure monetary policy expectations. This has limited the application of these methods to US data only. Motivated by the results in this paper, researchers can look to OIS rates as a globally-comparable measure of monetary.
    Keywords: Federal Funds Futures, Overnight Indexed Swaps, Monetary Policy Expectations
    JEL: E43 E44 E52 G1
    Date: 2017–09–20
  17. By: Anna Bartocci (Bank of Italy); Lorenzo Burlon (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the corporate sector purchase programme (CSPP) implemented in the euro area by the Eurosystem. For this purpose we calibrate and simulate a monetary-union dynamic general equilibrium model. We assume that entrepreneurs can finance their spending by issuing bonds in the domestic corporate bond market and by borrowing from domestic banks. We found that the March 2016 CSPP boosts euro-area GDP by around 0.3% in the second year (peak level). Inflation rises too but by a smaller amount. Second, taking into account the programme’s extension in December 2016, its overall impact on GDP amounts to 0.6%. Third, the CSPP also stimulates banking activity, because the improvement in macroeconomic conditions leads to higher demand for loans from households and entrepreneurs. Fourth, an early exit from the CSPP negatively impacts its macroeconomic effectiveness, while forward guidance on monetary policy rate enhances it.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, corporate bonds, forward guidance, euro area
    JEL: E43 E44 E52 E58
    Date: 2017–09
  18. By: Quint, Dominic; Rabanal, Pau
    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 on a large scale after short-term policy rates had reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should continue to be used once economic conditions and interest rates have normalized. In particular, we study the optimality of asset purchase programs 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 such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits of using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. By contrast, when more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: Unconventional Monetary Policy,Banking,Optimal Rules
    JEL: C32 E32 E52
    Date: 2017
  19. By: Luca Gambetti (Universitat Autonomade Barcelona); Dimitris Korobilis (University of Essex); John D. Tsoukalas (University of Glasgow); Francesco Zanetti (Centre for Macroeconomics (CFM); University of Oxford)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises signi cantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over in ation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09
  20. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We use a New Keynesian behavioral macroeconomic model to analyze how structural reforms affect the nature of the business cycle and the capacity of the central bank to stabilize output and inflation. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms). We also find that in a rigid economy the central bank in general faces a tradeoff between output and inflation volatility. This tradeoff disappears when the economy becomes sufficiently flexible. In that case the central bank's efforts at stabilizing inflation and output are always welfare improving.
    Keywords: behavioural macroeconomics; Structural reforms
    Date: 2017–09
  21. By: Torchiani, Ingo; Heidorn, Thomas; Schmaltz, Christian
    Abstract: We propose a new method for measuring how far away banks are from complying with a multi-ratio regulatory framework. We suggest measuring the efforts a bank has to make to reach compliance as an additional portfolio which is derived from a microeconomic banking model. This compliance portfolio provides an integrated measure of the shortfalls resulting from a new regulatory framework. Our method complements the descriptive reporting of individual shortfalls per ratio when monitoring banks' progress toward compliance with a new regulatory framework. We apply our concept to a sample of 46 German banks in order to quantify the effects of the interdependencies of the Basel III capital and liquidity requirements. Comparing our portfolio approach to the shortfalls reported in the Basel III monitoring, we find that the reported shortfalls tend to underestimate the required capital and to overestimate of the required stable funding. However, compared to the overall level of the reported shortfalls, the effects resulting from the interdepen- dencies of the Basel III ratios are found to be rather small.
    Keywords: Basel III,linear programming,impact studies,integrated shortfall
    JEL: G21 C61
    Date: 2017
  22. By: Lloyd, S. P.
    Abstract: In response to financial turmoil that began in 2007 and the effective lower bound for short-term interest rates that was reached in late-2008, the Federal Reserve adopted a raft of 'unconventional' monetary policies, notably: forward guidance and large-scale asset purchases. These policies transmit to the real economy, inter alia, via an interest rate channel, with two sub-channels: signalling and portfolio rebalancing. I apply the OIS-augmented decomposition of interest rates from Lloyd (2017a) to identify these two sub-channels. I demonstrate that US unconventional monetary policy announcements between November 2008 and April 2013 did exert significant signalling and portfolio balance effects on financial markets, reducing longer-term interest rates. Signalling effects were particularly powerful at horizons in excess of two years. As a result of these declines, unconventional monetary policy aided real economic outcomes. I show that the signalling channel exerted a more powerful influence on US industrial production and consumer prices than portfolio rebalancing. In terms of long-term bond yield and industrial production effects, the signalling channel is associated with around two-thirds to three-quarters of the total effects attributed to the two channels.
    Keywords: Unconventional Monetary Policy, Large-Scale Asset Purchases, Forward Guidance, Signalling, Portfolio Rebalancing, Interest Rates, Term Structure, Overnight Indexed Swaps
    JEL: E32 E43 E44 E52 E58 G12 G14
    Date: 2017–09–20
  23. By: Stefano Neri (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia); Marco Gross (European Central Bank)
    Abstract: Nominal and real interest rates in advanced economies have been decreasing since the mid-1980s and reached historical lows in the aftermath of the global financial crisis. Understanding why interest rates have fallen is essential for both monetary policy and financial stability. This paper focuses on one of the factors put forward in the literature within the secular stagnation view: adverse demographic developments. The main conclusion that we draw from the empirical analysis is that these developments have exerted downward pressure on real short- and long-term interest rates in the euro area over the past decade. Moreover, building on the European Commission’s projections for dependency ratios until 2025, we illustrate that the foreseen changes in the age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates in the future.
    Keywords: secular stagnation, demographic developments, real interest rates, monetary policy
    JEL: C32 E52 J11
    Date: 2017–09

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