nep-cba New Economics Papers
on Central Banking
Issue of 2017‒10‒15
24 papers chosen by
Maria Semenova
Higher School of Economics

  1. Policy Rules for Capital Controls By Gurnain Pasricha
  2. Dealing with Time-inconsistency: Inflation Targeting vs. Exchange Rate Targeting By Ippei Fujiwara; Scott Davis
  3. Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending By Kiyotaka Nakashima; Masahiko Shibamoto; Koji Takahashi
  4. The Stabilizing Role of Forward Guidance: A Macro Experiment By Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
  5. How to Make Monetary Policy More Effective By Steve Ambler
  6. Macroprudential Policy in the New Keynesian World By Gersbach, Hans; Hahn, Volker; Liu, Yulin
  7. Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts? By Thomas Lustenberger; Enzo Rossi
  8. The Public and Private Provision of Safe Assets By Pierre Yared; Marina Azzimonti
  9. Deadly Embrace - Sovereign and Financial Balance Sheets Doom Loops By Emmanuel Farhi; Jean Tirole
  10. Market Discipline, Deposit Insurance, and Competitive Advantages: Evidence from the Financial Crisis By Kaposty, Florian; Pfingsten, Andreas; Domikowsky, Christian
  11. Modelling Systemic Risk in the South African Banking Sector Using CoVar By Mathias Manguzvane; John W. Muteba Mwamba
  12. An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-post Assessment of the Czech Experience By Jan Bruha; Jaromir Tonner
  13. FISS - A Factor Based Index of Systemic Stress in the Financial System By Tibor Szendrei; Katalin Varga
  14. Does going easy on distressed banks help economic growth? By Hundtofte , Sean
  15. “Whatever it takes†to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
  16. Designing QE to overcome the lower bound constraint on interest rates in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  17. The Effect of News Shocks and Monetary Policy By Gambetti, L; Korobilis, D; Tsoukalas, J; Zanetti, F
  18. Determinants of the Public Budget Balance: The Role of Official Capital Flows By Steiner, Andreas
  19. Policy experiments in an agent-based model with credit networks By Assenza, Tiziana; Cardaci, Alberto; Delli Gatti, Domenico; Grazzini, Jakob
  20. The Reaction of Inflation to Macroeconomic Shocks: The Case of Zimbabwe (2009 – 2012) By William Kavila; Pierre Le Roux
  21. Quantitative Easing in the Euro Area - An Event Study Approach By Urbschat, Florian; Watzka, Sebasitan
  22. Macroeconomic Impact of Basel III: Evidence from a Meta-Analysis By Jarko Fidrmuc; Ronja Lind
  23. Household Debt and Monetary Policy: Revealing the Cash-Flow Channel By Flodén, Martin; Kilström, Matilda; Sigurdsson, Jósef; Vestman, Roine
  24. "Quantitative Easing and Asset Bubbles in a Stock-flow Consistent Framework" By Cameron Haas; Tai Young-Taft

  1. By: Gurnain Pasricha
    Abstract: This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. There is clear evidence that past emerging-market policy systematically responds to both mercantilist and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to mercantilist concerns by using both instruments — inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to mercantilist concerns.
    Keywords: Exchange rate regimes, Financial stability, Financial system regulation and policies, International topics
    JEL: F3 F4 F5 G0 G1
    Date: 2017
  2. By: Ippei Fujiwara (Keio University / ANU); Scott Davis (Federal Reserve Bank of Dallas)
    Abstract: Abandoning an objective function with multiple targets and adopting a single mandate is an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on a country's level of trade openness. Both inflation targeting and nominal exchange rate targeting come with their own costs. We show that the costs of inflation targeting are increasing in a country's level of trade openness while the costs of exchange rate targeting are decreasing in trade openness. Thus a relatively closed economy will prefer an inflation targeting mandate and a very open economy will prefer an exchange rate target. Empirical results show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially the empirical link between central bank credibility and the tendency to peg depends on trade openness.
    Date: 2017
  3. By: Kiyotaka Nakashima (Faculty of Economics, Konan University, Japan); Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Koji Takahashi (Department of Economics, University of California, San Diego, USA)
    Abstract: We investigate the effects of unconventional monetary policy on bank lending, using a bank-firm matched dataset in Japan from 1999 to 2015 by disentangling conventional and unconventional monetary policy shocks employed by the Bank of Japan over the past 15 years. We find that a rise in the share of the unconventional assets held by the Bank of Japan boosts lending to firms with a lower distance-to-default ratio from banks with a lower liquid assets ratio and higher risk appetite. In contrast to the composition shock, the monetary base shock of increasing the Bank of Japan’s balance sheet size does not have heterogeneous effects on bank lending. Furthermore, we find that interest rate cuts stimulate lending to risky firms from banks with a higher leverage ratio.
    Keywords: Unconventional monetary policy; Quantitative and qualitative monetary easing; Matched lender-borrower data; Risk-taking channel; News shock
    JEL: E44 E52 G21
    Date: 2017–09
  4. By: Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
    Abstract: We study if central banks can manage market expectations by means of forward guidance in a New Keynesian learning-to-forecast experiment. Subjects observe public inflation projections by the central bank along with the historic development of the economy and subsequently submit their own inflation forecasts. We find that the central bank can significantly manage market expectations through forward guidance and that this management strongly supports monetary policy in stabilizing the economy.
    JEL: C92 E32 E37 E58
    Date: 2017
  5. By: Steve Ambler (Département des sciences économiques, ESG UQAM, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis)
    Abstract: Nine years after the beginning of the Great Recession in 2008 and at least seven years since the recovery from the Great Recession began, industrialized economies are experiencing sluggish growth and inflation that is persistently under targeted rates. The unconventional monetary policies that have been tried by different central banks have not generally been successful in achieving their goals. We suggest here that quantitative easing could be made much more effective by making expansions of the monetary base permanent. In turn, a commitment to permanent monetary expansion would be more credible if central banks adopted targets for nominal aggregates such as the price level or nominal GDP. A level target would also allay fears of runaway inflation.
    Date: 2017–10
  6. By: Gersbach, Hans; Hahn, Volker; Liu, Yulin
    Abstract: We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian Framework with capital, and derive the microfounded, bank-augmented IS and Phillips Curves for the corresponding two-sector economy. We study the interplay of monetary and macroprudential policies. We examine how policy-making could be operationalized by loss functions for monetary and macroprudential policy-making. Finally, we investigate the optimal institutional structures.
    JEL: E52 E58 G28
    Date: 2017
  7. By: Thomas Lustenberger; Enzo Rossi
    Abstract: In a large sample of countries across different geographic regions and over a long period of time, we find limited country- and variable-specific effects of central bank transparency on forecast accuracy and their dispersion among a large set of professional forecasts of financial and macroeconomic variables. More communication even increases forecast errors and Dispersion.
    Keywords: Central bank transparency, central bank communication,central bank independence, inflation targeting, forward guidance, macroeconomic forecasts, financial forecasts, panel data models with truncated data
    JEL: C23 C53 E37 E58 D8
    Date: 2017
  8. By: Pierre Yared (Columbia University); Marina Azzimonti (Stony Brook University)
    Abstract: We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt responds positively to an increase in the volatility of idiosyncratic shocks, to a decrease in the cost of default, and to an increase in financial repression.
    Date: 2017
  9. By: Emmanuel Farhi; Jean Tirole
    Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency. The paper provides a theory of the feed backloop that allows for both domestic bailouts of the banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. The theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.
    Date: 2017
  10. By: Kaposty, Florian; Pfingsten, Andreas; Domikowsky, Christian
    Abstract: First, this study empirically explores whether it is possible to offer full insurance for non-financial depositors whilst maintaining market discipline. Second, we analyze whether a more credible deposit insurance scheme can be a competitive advantage for banks in a systemic crisis. We find (1) evidence for market discipline, and (2) banks ceteris paribus achieving higher growth rates of customer deposits in the financial crisis if they are part of a credible deposit insurance scheme.
    JEL: G01 G21 G28
    Date: 2017
  11. By: Mathias Manguzvane; John W. Muteba Mwamba
    Abstract: In this paper we model systemic risk by making use of the conditional quantile regression to identify the most systemically important and vulnerable banks in the South Africa (SA) banking sector. We measure the marginal contributions of each bank to systemic risk by computing the delta Conditional Value at Risk which measures the difference between system risk of individual banks when they are in a normal state and when they are in distress state. Using daily stock market closing prices of six South African banking banks from 19 June 2007 to 11 April 2016; our back tested systemic risk measures suggest that the contribution of South African banks to systemic risk tends to significantly increase during periods of financial crises. The two largest banks namely First Rand Bank and Standard Bank are found to be the highest contributors to systemic risk while the smallest bank namely African Bank is found to be the least contributor to the overall systemic risk in South African banking sector. Based on the delta Conditional Value at Risk; we show that there is a need to go beyond micro prudential regulation in order to sustain stability in the South African banking sector.
    Keywords: conditional quantile, systemic risk, conditional value at risk and banking sector
    JEL: C13 C22 C58 G01 G21
    Date: 2017–09
  12. By: Jan Bruha; Jaromir Tonner
    Abstract: In November 2013 the Czech National Bank introduced a floor for the Czech koruna exchange rate as its monetary policy instrument. The rationale for this action was to prevent the risk of deflation in a zero-lower-bound environment where policy rates could not be lowered any further. The goal of this paper is to assess ex post the effect of the exchange rate floor on the Czech economy - inflation and the main real aggregates. The paper uses two different approaches. First, the official DSGE forecasting model is used to simulate the counterfactual macroeconomic dynamics of no introduction of a floor. Second, the paper applies an empirical approach: the synthetic control method and its generalised variant are used to estimate these counterfactual trajectories. Both approaches show that the floor prevented inflation from turning negative. Moreover, both methods indicate likely positive effects on macro variables and on various measures of inflation, although strongly statistically significant effects are only obtained for core inflation. The statistical significance for other variables is weaker or zero. We conclude that the introduction of the exchange rate floor was a correct policy action that has retrospectively been successful.
    Keywords: DSGE modelling, exchange rate policy, monetary policy in a zero interest rate environment, synthetic control method
    JEL: C21 E58 F47
    Date: 2017–09
  13. By: Tibor Szendrei (Magyar Nemzeti Bank (Central Bank of Hungary)); Katalin Varga (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: Tracking and monitoring stress within the financial system is a key component of macroprudential policy. This paper introduces a new measure of contemporaneous stress: the Factor based Index of Systemic Stress (FISS). The aim of the index is to capture the common components of data describing the financial system. This new index is calculated with a dynamic Bayesian factor model methodology, which compresses the available high frequency and high dimensional dataset into stochastic trends. Aggregating the extracted 4 factors into a single index is possible in a multitude of ways but averaging yields satisfactory results. The contribution of the paper is the usage of the dynamic Bayesian framework to measure financial stress, as well as producing the measure in a timely manner without the need for deep option markets. Applied to Hungarian data the FISS is planned to be a key element of the macroprudential toolkit.
    Keywords: Systemic stress, Financial Stress Index, Dynamic Bayesian Factor Model, Financial System, Macroprudential Toolkit.
    JEL: G01 G10 G20 E44
    Date: 2017
  14. By: Hundtofte , Sean (Federal Reserve Bank of New York)
    Abstract: During banking crises, regulators often relax their normal requirements and refrain from closing financially troubled banks. I estimate the real effects of such regulatory forbearance by comparing differences in state-level economic outcomes by the amount of forbearance extended during the U.S. savings and loan crisis. To instrument for forbearance, I use historical variation in deposit insurance—and hence supervision—of similar financial intermediaries (thrifts) and exploit fixed differences between regional supervisors of the same regulator. The evidence suggests a policy-induced increase in high-risk loans during the official forbearance period (1982-89), followed by a broader bust in house prices and real GDP.
    Keywords: financial crises; regulatory policy
    JEL: G01 G2 H12
    Date: 2017–10–01
  15. By: Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
    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
    Date: 2017–09
  16. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a model of a fiscally sound monetary union and analyses central bank purchases of long-term debt (QE). Employing the portfolio balance channel, we show that there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. We show further that the symmetry of QE depends on whether the monetary union is characterised by asymmetric shocks or asymmetric structures.
    JEL: E43 E52 E61 E63
    Date: 2017
  17. By: Gambetti, L; Korobilis, D; Tsoukalas, J; Zanetti, F
    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 significantly 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 inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models,, DSGE models
    Date: 2017–09–26
  18. By: Steiner, Andreas
    Abstract: Central banks invest their foreign exchange reserves predominantly in government securities. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period (1890-1935) and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the public budget balance of the center countries.
    JEL: F31 F33 F41 H62 E62 C23
    Date: 2017
  19. By: Assenza, Tiziana; Cardaci, Alberto; Delli Gatti, Domenico; Grazzini, Jakob
    Abstract: In this paper the authors build upon Assenza et al. (Credit networks in the macroeconomics from the bottom-up model, 2015), which include firm-bank and bank-bank networks in the original macroeconomic model in Macroeconomics from the bottom-up (Delli Gatti et al., Macroeconomics from the Bottom-up, 2011). In particular, they extend that framework with the inclusion of a public sector and other modifications in order to carry out different policy experiments. More specifically, the authors test the implementation of a monetary policy by means of a standard Taylor rule, an unconventional monetary policy (i.e. cash in hands) and a set of macroprudential regulations. They explore the properties of the model for such different scenarios. Their results shed some light on the effectiveness of monetary and macroprudential policies in an economy with an interbank market during times of crises.
    Keywords: Agent-based models,monetary policy,credit network
    JEL: C63 E51 E52
    Date: 2017
  20. By: William Kavila; Pierre Le Roux
    Abstract: This paper empirically investigates the reaction of inflation to macro-economic shocks using the Vector Error Correction modelling approach (VECM) with monthly data from 2009:01 to 2012:12. The Zimbabwean economy was dollarised during this period, after having abandoned its own currency in 2009, following the hyperinflation episode of 2007-2008. The empirical findings show that the reaction of price formation in Zimbabwe to external shocks, such as the appreciation or depreciation of the South African rand against the US dollar and the increase in international food and oil prices is immediate with permanent effects. Specifically, the study found that an appreciation of the South African rand against the US dollar, results in a sharp increase in inflation during the first 6 months and the effects are permanent. Similarly, a positive shock to international oil prices also results in a sharp increase in inflation, during the first 6 months, remaining high over the forest period. The impact of a positive shock to food prices, is however, transitory, only felt during the first 4 months, before declining during the next 4 months and remaining at a moderately high level over the forecast period. The policy implication from this analysis is a need for Zimbabwean authorities to put in place measures to mitigate the negative impact of external shocks on inflation, given that the country lost its monetary policy autonomy when it dollarised in 2009.
    Keywords: Inflation; Dollarised economy, Macro-economic shocks, Vector Error Correction Model, Impulse responses, Variance decomposition.
    Date: 2017–09
  21. By: Urbschat, Florian; Watzka, Sebasitan
    Abstract: We examine the effects of the QE programme started by the ECB in 2015. Studying the short-term reaction of bond markets, we try to quantify different asset price channels such as the portfolio rebalance channel by running event regressions for several Euro Area countries. Our analysis suggests that the ECB’s policy had strong and desired effects on bond markets at the very beginning, but less so subsequently. Possible explanations are the increasingly burdensome institutional set-up of the APP.
    JEL: E43 E44 E52 E58 G14
    Date: 2017
  22. By: Jarko Fidrmuc (Zeppelin University Friedrichshafen); Ronja Lind (Zeppelin University Friedrichshafen)
    Abstract: We present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP level effect in response to a change in the capital ratio. The effects are likely to be slightly stronger but still low for the CEECs. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’affiliations, and the underlying financial system. Finally, we document a significant positive publication bias.
    Keywords: Meta-analysis, Bayesian model averaging, publication bias, banking, capital requirements, Basel III
    JEL: E51 E44 G28
    Date: 2017–09
  23. By: Flodén, Martin (Sveriges Riksbank and CEPR); Kilström, Matilda (IIES, Stockholm University); Sigurdsson, Jósef (IIES, Stockholm University); Vestman, Roine (Stockholm University and SHoF)
    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 debtto- income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.
    Keywords: Monetary policy; consumption; household debt; variable interest rates; adjustable rate mortgages
    JEL: D14 E21 E52 G11
    Date: 2017–09–01
  24. By: Cameron Haas; Tai Young-Taft
    Abstract: Ever since the Great Recession, central banks have supplemented their traditional policy tool of setting the short-term interest rate with massive buyouts of assets to extend lines of credit and jolt flagging demand. As with many new policies, there have been a range of reactions from economists, with some extolling quantitative easing's expansionary virtues and others fearing it might invariably lead to overvaluation of assets, instigating economic instability and bubble behavior. To investigate these theories, we combine elements of the models in chapters 5, 10, and 11 of Godley and Lavoie's (2007) Monetary Economics with equations for quantitative easing and endogenous bubbles in a new model. By running the model under a variety of parameters, we study the causal links between quantitative easing, asset overvaluation, and macroeconomic performance. Preliminary results suggest that rather than being pro- or countercyclical, quantitative easing acts as a sort of phase shift with respect to time.
    Keywords: Quantitative Easing; Stock-flow Consistency; Macroeconomics
    JEL: E12 E44 E58 E21
    Date: 2017–09

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