nep-cba New Economics Papers
on Central Banking
Issue of 2017‒10‒29
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy Uncertainty By Lucas F. Husted; John H. Rogers; Bo Sun
  2. The international transmission of monetary policy through financial centres: evidence from the United Kingdom and Hong Kong. By Hills, Robert; Ho, Kelvin; Reinhardt, Dennis; Sowerbutts, Rhiannon; Wong, Eric; Wu, Gabriel
  3. Central Bank Communication and the Yield Curve By Paul Whelan; Gyuri Venter; Andrea Vedolin; Matteo Leombroni
  4. Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union By Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
  5. Can inflation contract discipline central bankers when agents are learning? By Marine Charlotte André; Meixing Dai
  6. Monetary Policy through Production Networks: Evidence from the Stock Market By Ali Ozdagli; Michael Weber
  7. Intermediation Markups and Monetary Policy Passthrough By Andreas Schrimpf; Semyon Malamud
  8. The Sovereign Money Initiative in Switzerland: An Economic Assessment By Bacchetta, Philippe
  9. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rüth
  10. The real effects of bank capital requirements By Henri Fraisse; Mathias LéAuthor-Name: David Thesmar
  11. Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union By Benjamin Schwanebeck
  12. Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven By Beckmann, Joscha; Czudaj, Robert
  13. Equity versus bail-in debt in banking: an agency perspective By Caterina Mendicino; Kalin NikolovAuthor-Name: Javier Suarez
  14. Financial Stability in Europe: Banking and Sovereign Risk By Jan Bruha; Evžen Kocenda
  15. Long-run Money Demand in Switzerland By Gerlach, Stefan
  16. What Drives Systemic Bank Risk in Europe: the balance sheet effect By Wosser, Michael
  17. Bank Capital Redux: Solvency, Liquidity, and Crisis By Moritz Schularick; Bjorn Richter; Alan Taylor; Oscar Jorda
  18. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos

  1. By: Lucas F. Husted; John H. Rogers; Bo Sun
    Abstract: We construct new measures of uncertainty about Federal Reserve policy actions and their consequences - monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. The effects are of comparable magnitude to those of conventional monetary policy shocks. We evaluate the usefulness of our MPU indexes, and examine the influence of Fed communication. Our analysis suggests that policy rate normalization that is accompanied by reduced uncertainty can help neutralize the contractionary effects of the rate increases themselves.
    Keywords: Monetary policy uncertainty ; VAR identification ; FOMC communication
    JEL: E40 E50
    Date: 2017–10
  2. By: Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority)
    Abstract: This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.
    Keywords: International financial linkages; monetary policy transmission; bank lending
    JEL: E52 F42 G21
    Date: 2017–10–16
  3. By: Paul Whelan (Copenhagen Business School); Gyuri Venter (Copenhagen Business School); Andrea Vedolin (London School of Economics); Matteo Leombroni (Stanford)
    Abstract: We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB’s private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication affects the aggregate demand due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.
    Date: 2017
  4. By: Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
    Abstract: The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: eurobond; Government bonds; Joint Analysis of Fiscal and Monetary Policy; Lower Bound on Nominal Interest Rates; Self-Fulfilling Sovereign Default
    JEL: E31 E62 E63
    Date: 2017–10
  5. By: Marine Charlotte André; Meixing Dai
    Abstract: This paper studies how the government should design a linear inflation contract to deal with the time-inconsistency problem arising from incentives for the central bank to exploit the inflation-output tradeoff with an overambitious output-gap objective when private expectations are based on adaptive learning. An intertemporal tradeoff due to learning leads the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation. An optimal linear inflation contract is able to achieve many of the benefits, i.e., reducing inflation bias and stabilization bias, resulting from central bank conservatism and inflation targeting rules. The government can impose either a long-term or a short-term contract. The first is equivalent to appointing a hawkish central banker. The second implies that inflation penalty rate should be adjusted for inflation expectations in each period, and could be positive or negative, i.e., the central banker should shift between hawkish and dovish stances depending on inflation expectations and the speed of learning.
    Keywords: adaptive learning, inflation bias, stabilization bias, inflation contract, monetary policy delegation, central bank conservatism, optimal monetary policy.
    JEL: C62 D83 D84 E52 E58
    Date: 2017
  6. By: Ali Ozdagli; Michael Weber
    Abstract: Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy.
    Keywords: input-output linkages, spillover effects, asset prices, high frequency identification
    JEL: E12 E31 E44 E52 G12 G14
    Date: 2017
  7. By: Andreas Schrimpf (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne)
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the ``Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates.
    Date: 2017
  8. By: Bacchetta, Philippe
    Abstract: The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative and discusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swiss monetary system. Finally, there is high uncertainty both on the details of the reform and on its impact.
    Date: 2017–10
  9. By: Ruediger Bachmann; Sebastian Rüth
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017
  10. By: Henri Fraisse; Mathias LéAuthor-Name: David Thesmar
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and investment using loanE level data. The Basel II regulatory framework makes capital requirements vary across both banks and across firms, which allows us to control for firm level credit demand shocks and bankE level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 10%. Firms can attenuate this reduction by substituting borrowing across banks, but only partially. The resulting reduction in borrowing capacity impacts investment, but not working capital: Fixed assets are reduced by 2.6%, but lending to customers is unaffected. JEL Classification: E51, G21, G28
    Keywords: bank capital ratios, bank regulation, credit supply
    Date: 2017–06
  11. By: Benjamin Schwanebeck (University of Kassel)
    Abstract: The cross-country interbank market in the euro area was a crucial transmission channel of financial stress. By using a two-country DSGE model of a financially heterogeneous monetary union where banks in one country lend funds to their foreign counterparts, I examine its role as shock amplifier and the implications for unconventional policy interventions Using the international interbank market to pool and insure against shocks is not neutral, the resulting spillovers rather act as shock multipliers on union output. Country-specific unconventional policies of direct lending to firms seem to be the most effective interventions in terms of union and relative output stabilization. The higher the size of the interbank market, the more effective are these policies in terms of union stabilization. The effectiveness of interventions in the interbank market seems to be very sensitive to the type of shock and the interbank market size. Hence, the central bank should rather shy away from this policy as it is only useful under specific circumstances.
    Keywords: financial intermediation; financial frictions; interbank market; monetary union; unconventional policy;
    JEL: E32 E44 E58
    Date: 2017
  12. By: Beckmann, Joscha; Czudaj, Robert
    Abstract: We analyze and evaluate novel data on exchange rate expectations after the collapse of Lehman Brothers for more than 60 economies over different horizons. We find that monetary policy effects on expectations are time-varying and identify substantial international spillovers over the recent period. Our results also show that markets have been surprised by monetary policy effects on the exchange rates and point to an unexpected safe haven status of the US dollar after 2009.
    JEL: F31 G15
    Date: 2017
  13. By: Caterina Mendicino; Kalin NikolovAuthor-Name: Javier Suarez
    Abstract: We examine the optimal size and composition of banks’ total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin. JEL Classification: G21, G28, G32
    Keywords: bail-in debt, loss absorbing capacity, risk shifting, agency problems, bank regulation
    Date: 2017–07
  14. By: Jan Bruha; Evžen Kocenda
    Abstract: We analyze the link between banking sector quality and sovereign risk in the whole European Union over 1999–2014. We employ four different indicators of sovereign risk (including market- and opinion-based assessments), a rich set of theoretically and empirically motivated banking sector characteristics, and a Bayesian inference in panel estimation as a methodology. We show that a higher proportion of non-performing loans is the single most influential sector-specific variable that is associated with increased sovereign risk. The sector’s depth provides mixed results. The stability (capital adequacy ratio) and size (TBA) of the industry are linked to lower sovereign risk in general. Foreign bank penetration and competition (a more diversified structure of the industry) are linked to lower sovereign risk. Our results also support the wake-up call hypothesis in that markets re-appraised a number of banking sector-related issues in the pricing of sovereign risk after the onset of the sovereign crisis in Europe.
    Keywords: sovereign default risk, banking sector, global financial crisis, financial stability, European Union
    JEL: E58 F15 G21 G28 H63
    Date: 2017
  15. By: Gerlach, Stefan
    Abstract: This paper studies long-run demand functions for Swiss M1 and M3, using annual data spanning the period 1907-2016. While the demand functions display plausible price and income elasticities, tests for structural breaks at unknown points in time detect instability in 1929 for real M1 and 1943 for real M3. This instability appears to arise from the way in which the opportunity cost is modelled. While using a single interest rate may be appropriate for M1, for M3 it would likely be helpful to take into consideration both the own return and the return on non-monetary assets.
    Keywords: cointegration; money demand; opportunity cost; Switzerland
    JEL: E4 E5 N1
    Date: 2017–10
  16. By: Wosser, Michael (Central Bank of Ireland)
    Abstract: Since the 2008 global financial crisis (GFC) several systemic risk measures (SRMs) have gained traction in the literature. This paper examines whether Delta-CoVaR (?CoVaR) is relevant in the context of European banks and compares risk rankings against those found using marginal expected shortfall (MES). The analysis reveals that a cluster of large banks, operating in one particular country, is the principal contributor to financial system risk, if measured by ?CoVaR. When the direction of risk flow is reversed, i.e. from the system to the institution (via MES), a second cluster of banks, headquartered in a different jurisdiction, would be most affected by a large and systemic financial shock. The analysis reveals that future realisations of systemic risk is strongly associated with institution size, maturity mismatch, non-performing loans and non-interest-to-interest-income ratios. However, in certain cases, the relationship depends upon the systemic risk measure used. For example, forward bank leverage appears correlated with MES but not with ?CoVaR.
    Keywords: Systemic banking crisis, Systemic risk measurement, ?CoVaR, MES, Bank Balance Sheet, Macroprudential policy
    JEL: G01 G21 G28
    Date: 2017–10
  17. By: Moritz Schularick (University of Bonn); Bjorn Richter (University of Bonn); Alan Taylor (Department of Economics & Graduate School of Management); Oscar Jorda (Federal Reserve Bank of San Francisco an)
    Abstract: Higher capital ratios are unlikely to prevent the next financial crisis. This is empirically true both for the pre-WW2 and the post-WW2 periods, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets. Data coverage extends to 17 advanced economies from 1870 to 2013. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.
    Date: 2017
  18. By: Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos
    Abstract: This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp.
    JEL: E52
    Date: 2017

This nep-cba issue is ©2017 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.