nep-cba New Economics Papers
on Central Banking
Issue of 2017‒10‒22
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Role of Structural Funding for Stability in the German Banking Sector By Schupp, Fabian; Silbermann, Leonid
  2. The Anchoring of Inflation Expectations in the Short and in the Long Run By Nautz, Dieter; Netsunajew, Aleksei; Strohsal, Till
  3. Inflation Dynamics in Uganda: A Quantile Regression Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotzé
  4. IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through By Antonia López-Villavicencio; Marc Pourroy
  5. International Inflation Spillovers Through Input Linkages By Raphael A. Auer; Andrei A. Levchenko; Philip Sauré
  6. The Globalisation of Inflation: The Growing Importance of Global Value Chains By Raphael A. Auer; Claudio Borio; Andrew Filardo
  7. The Corridor’s Width as a Monetary Policy Tool By Guillaume A. Khayat
  8. Preliminary steps toward a universal economic dynamics for monetary and fiscal policy By Yaneer Bar-Yam; Jean Langlois-Meurinne; Mari Kawakatsu; Rodolfo Garcia
  9. The Macroeconomic Effects of Banking Crises: Evidence from the United Kingdom, 1750-1938 By Kenny, Seán; Lennard, Jason; Turner, John D.
  10. Monetary transmission in India: Working of price and quantum channels By Ashima Goyal; Deepak Kumar Agarwal
  11. Monetary Policy and Bank Profitability in a Low Interest Rate Environment By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró
  12. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  13. Capital Requirements for Government Bonds - Implications for Financial Stability By Sterzel, André; Neyer, Ulrike
  14. Interest Rates and Exchange Rates in Normal and Crisis Times By Forti Grazzini, Caterina; Rieth, Malte
  15. Does past inflation predict the future? By Chris McDonald
  16. The Troika’s variations on a trio: Why the loan programmes worked so differently in Greece, Ireland, and Portugal By Niamh Hardiman; Joaquim Filipe Araújo; Muiris MacCarthaigh; Calliope Spanou

  1. By: Schupp, Fabian; Silbermann, Leonid
    Abstract: We analyze whether, and if so by how much, stable funding would have contributed to the financial soundness of German banks in the time period between 1995 and 2013, before the Basel III liquidity regulation to address excessive maturity mismatches in the wake of the financial crisis via the Net Stable Funding Ratio can be expected to have been fully implemented.
    JEL: G21 G28 C23 C25
    Date: 2017
  2. By: Nautz, Dieter; Netsunajew, Aleksei; Strohsal, Till
    Abstract: We introduce structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers’ inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank’s target.
    JEL: E31 E52 E58
    Date: 2017
  3. By: Francis Leni Anguyo (School of Economics, University of Cape Town, Rondebosch, South Africa and Research Department, Bank of Uganda, Kampala, Uganda); Rangan Gupta (University of Pretoria, Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa)
    Abstract: This paper considers the measurement of inflation persistence in Uganda and how this has changed over time. As the data does not follow a normal distribution, we make use of the quantile regression approach to investigate how various shocks may affect the rate of inflation within different quantiles. The measures of inflation include headline inflation, the central bank's measure of core inflation, and an alternative measure of core inflation. The results suggest that while a unit root is found in many of the upper quantiles of headline inflation, there is evidence of mean reversion within the lower quantiles. In addition, we find higher levels of persistence after 2006 and during the inflation-targeting period. When considering the degree of persistence in the central bank's measure of core inflation, the results suggest that there is a unit root in this measure during the inflation-targeting period. In addition, the alternative measure of core inflation, which is derived from a wavelets transformation, provides similar results. However, this measure is less volatile and more correlated with headline inflation. All the results suggest that large positive deviations from the mean would influence the permanent behaviour of inflation, while small negative deviations are relatively short-lived.
    Keywords: Inflation persistence, Quantile regression, Structural break, monetary policy
    JEL: C22 E31
    Date: 2017–10
  4. By: Antonia López-Villavicencio (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Marc Pourroy (University of Poitiers, France)
    Abstract: This paper estimates the effects of two monetary policy strategies in the exchange rate pass-through (ERPT). To this end, we employ propensity score matching and consider the adoption of a target by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we show that inflation target has helped in reducing the ERPT, with older regimes more successful than younger ones. However, a de facto flexible exchange rate regime has not noticeable advantages to reduce the extent to which exchange rate fluctuations contribute to inflation instability.
    Keywords: exchange rate pass-through, inflation targeting, exchange rate regime, propensity score matching
    JEL: E31 E42 E52 C30
    Date: 2017
  5. By: Raphael A. Auer; Andrei A. Levchenko; Philip Sauré
    Abstract: We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disination and high inflation.
    Keywords: international inflation synchronization, globalization, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain
    JEL: E31 E52 E58 F02 F14 F33 F41 F42
    Date: 2017
  6. By: Raphael A. Auer; Claudio Borio; Andrew Filardo
    Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
    Keywords: globalization, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-output linkages, supply chain
    JEL: E31 E52 E58 F02 F41 F42 F14
    Date: 2017
  7. By: Guillaume A. Khayat (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille)
    Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.
    Keywords: Monetary policy, interbank market, heterogeneous interbank frictions, the corridor, excess reserves, financial intermediation
    JEL: E52 E58 E44
    Date: 2017–10
  8. By: Yaneer Bar-Yam; Jean Langlois-Meurinne; Mari Kawakatsu; Rodolfo Garcia
    Abstract: We consider the relationship between economic activity and intervention, including monetary and fiscal policy, using a universal dynamic framework. Central bank policies are designed for growth without excess inflation. However, unemployment, investment, consumption, and inflation are interlinked. Understanding dynamics is crucial to assessing the effects of policy, especially in the aftermath of the financial crisis. Here we lay out a program of research into monetary and economic dynamics and preliminary steps toward its execution. We use principles of response theory to derive implications for policy. We find that the current approach, which considers the overall money supply, is insufficient to regulate economic growth. While it can achieve some degree of control, optimizing growth also requires a fiscal policy balancing monetary injection between two dominant loop flows, the consumption and wages loop, and investment and returns loop. The balance arises from a composite of government tax, entitlement, subsidy policies, corporate policies, as well as monetary policy. We show empirically that a transition occurred in 1980 between two regimes--an oversupply to the consumption and wages loop, to an oversupply of the investment and returns loop. The imbalance is manifest in savings and borrowing by consumers and investors, and in inflation. The latter increased until 1980, and decreased subsequently, resulting in a zero rate largely unrelated to the financial crisis. Three recessions and the financial crisis are part of this dynamic. Optimizing growth now requires shifting the balance. Our analysis supports advocates of greater income and / or government support for the poor who use a larger fraction of income for consumption. This promotes investment due to growth in demand. Otherwise, investment opportunities are limited, capital remains uninvested, and does not contribute to growth.
    Date: 2017–10
  9. By: Kenny, Seán (Department of Economic History, Lund University); Lennard, Jason (Department of Economic History, Lund University); Turner, John D. (Queen's University Belfast)
    Abstract: This paper investigates the macroeconomic effects of UK banking crises over the period 1750 to 1938. We construct a new annual banking crisis series using bank failure rate data, which suggests that the incidence of banking crises was every 32 years. Using our new series and a narrative approach to identify exogenous banking crises, we find that industrial production contracts by 8.2 per cent in the year following a crisis. This finding is robust to a battery of checks, including different VAR specifications, different thresholds for the crisis indicator, and the use of a capital-weighted bank failure rate.
    Keywords: banking crisis; bank failures; narrative approach; macroeconomy; United Kingdom
    JEL: E32 E44 G21 N13 N23 N24
    Date: 2017–10–11
  10. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Deepak Kumar Agarwal
    Abstract: We examine the strength and efficacy of transmission from the policy rate and liquidity provision to market rates in India, using event window regression analysis. We find the interest rate transmission channel is dominant, but the quantity channel has an indirect impact in increasing the size of interest rate pass through. The speed of response is faster where there is more market depth. Short term liquidity matters for short term rates, especially where markets are thin and long-term liquidity for longer term government securities. Asymmetry, or more transmission during tightening, finds little support, but pass through is faster during tightening. Market rates respond similarly to policy rate changing direction. The quantum channel directly contributes more when in sync with the interest rate channel only occasionally, but contributes indirectly by increasing the size of coefficients. Implications for policy are drawn out.
    Keywords: Monetary transmission; Repo Rate; market rates; short and long-term liquidity
    JEL: E51 E58 E42
    Date: 2017–09
  11. By: Carlo Altavilla (Name: European Central Bank and CSEF); Miguel Boucinha (European Central Bank); José-Luis Peydró (ICREA-UPF, CREI, BGSE)
    Abstract: We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk.
    Keywords: bank profitability, monetary policy, lower bound, quantitative easing, negative rates
    JEL: E52 E43 G01 G21 G28
    Date: 2017–10–16
  12. By: Giovanni Caggiano (Department of Economics, Monash University); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We investigate the role played by systematic monetary policy in the United States in tackling the real effects of uncertainty shocks in recessions and expansions. We model key indicators of the business cycle with a nonlinear vector autoregression model that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated with jumps in financial volatility. Our results show that uncertainty shocks hitting in recessions trigger a more abrupt drop and a faster recovery in real economic activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic US monetary policy in stabilising real activity in the aftermath of an uncertainty shock is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    Keywords: uncertainty shocks; nonlinear smooth transition vector autoregressions; generalised impulse response functions; systematic monetary policy
    JEL: C32 E32
    Date: 2017–10
  13. By: Sterzel, André; Neyer, Ulrike
    Abstract: Banks hold relatively large amounts of government bonds. Large sovereign exposures reinforce possible financial contagion effects from sovereigns to banks and are a risk for financial stability. Using a theoretical model, we find that the introduction of capital requirements for government bonds induce banks to decrease their investment in government bonds and to increase their investment in high yield assets. This implies that banks' balance sheets become more resilient.
    JEL: G28 G21 G01
    Date: 2017
  14. By: Forti Grazzini, Caterina; Rieth, Malte
    Abstract: The paper studies the relation between the US-Dollar/Euro exchange rate and US and euro area interest rates during normal and crisis times. We describe each asset price within a multifactor model and identify the causal contemporaneous relations through heteroskedasticity. We find that US rates and macroeconomic conditions dominate exchange rate and interest rate movements before and during the global financial crisis, while this pattern sharply reverses during the European debt crisis.
    JEL: E44 F31 G1
    Date: 2017
  15. By: Chris McDonald (Reserve Bank of New Zealand)
    Abstract: Forecasts of non-tradables inflation have been produced using Phillips curves, where capacity pressure and inflation expectations have been the key drivers. The Bank had previously used the survey of 2-year ahead inflation expectations in its Phillips curve. However, from 2014 non-tradables inflation was weaker than the survey and estimates of capacity pressure suggested. Bank research indicated the weakness in non-tradables inflation may have been linked to low past inflation and its impact on pricing behaviour. This note evaluates whether measures of past inflation could have been used to produce forecasts of inflation that would have been more accurate than using surveys of inflation expectations. It does this by comparing forecasts for annual non-tradablesinflation one year ahead. Forecasts are produced using Phillips curves that incorporate measures of past inflation or surveys of inflation expectations, and other information available at the time of each Monetary Policy Statement (MPS). This empirical test aims to determine the approach that captures pricing behaviour best, highlighting which may be best for forecasting going forward. The results show that forecasts constructed using measures of past inflation have been more accurate than using survey measures of inflation expectations, including the 2-year ahead survey measure previously used by the Bank. In addition, forecasts constructed using measures of past inflation would have been significantly more accurate than the Bank’s MPS forecasts since 2009, and only slightly worse than these forecasts before the global financial crisis (GFC). The consistency of forecasts using past-inflation measures reduces the concern that this approach is only accurate when inflation is low, and suggests it may be a reasonable approach to forecasting non-tradables inflation generally. From late 2015, the Bank has assumed that past inflation has affected domestic price-setting behaviour more than previously. As a result, monetary policy has needed to be more stimulatory than would otherwise be the case. This price-setting behaviour is assumed to persist, and is consistent with subdued non-tradables inflation and low nominal wage inflation in 2017.
    Date: 2017–04
  16. By: Niamh Hardiman (School of Politics and International Relations, and Geary Institute for Public Policy, University College Dublin, Ireland); Joaquim Filipe Araújo (Department of International Relations and Public Administration, University of Minho, Braga, Portugal); Muiris MacCarthaigh (School of History, Anthropology, Philosophy and Politics, and the George J. Mitchell Institute for Global Peace, Security and Justice, Queen’s University Belfast, UK); Calliope Spanou (Department of Political Science and Public Adminstration, National and Kapodistrian University of Athens, Greece)
    Abstract: Portugal and Ireland exited Troika loan programmes; Greece did not. The conventional narrative is that different outcomes are best explained by differences in national competences in implementing programme requirements. This paper argues that three factors distinguish the Greek experience from that of Ireland and Portugal: different economic, political, and institutional starting conditions; the ad hoc nature of the European institutions’ approach to crisis resolution; and the very different conditionalities built into each of the loan programmes as a result. Ireland and Portugal show some signs of recovery despite austerity measures, but Greece has been burdened beyond all capacity to recover convincingly.
    Keywords: Loan programme, Eurozone crisis, Troika, European periphery, conditionality
    JEL: E02 E62 G01 H30 H77 H87
    Date: 2017–10–17

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