nep-cba New Economics Papers
on Central Banking
Issue of 2017‒11‒05
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Aggregate and Country-Specific Effectiveness of ECB Policy: Evidence from an External Instruments (VAR) Approach By Lucas Hafemann; Peter Tillmann
  2. Monetary policy transmission with two exchange rates and a single currency : The Chinese experience By Qing, He; Korhonen, Iikka; Zongxin, Qian
  3. The Impact of Monetary Strategies on Inflation Persistence By Evžen Kocenda; Balázs Varga
  4. The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macro-financial stability? By Krug, Sebastian
  5. The response of monetary policy shocks on Islamic bank deposits: evidence from Malaysia based on ARDL approach By Nazib, Nur Afiyah; Masih, Mansur
  6. Central Bank Policy Rates: Are they Cointegrated? By Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
  7. House Prices and Macroprudential Policy in an Estimated DSGE Model of New Zealand By Michael Funke; Robert Kirkby; Petar Mihaylovski
  8. Monetary policy in times of debt By Mario Pietrunti; Federico M. Signoretti
  9. "Whatever it takes" to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  10. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  11. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Athanasios Orphanides
  12. Bank Deposits and Liquidity Regulation: Evidence from Ethiopia By Nicola Limodio; Francesco Strobbe
  13. Financial imbalances, crisis probability and monetary policy in Norway By Ragna Alstadheim; Ørjan Robstad; Nikka Husom Vonen
  14. How Does the Policy Rate Respond to Output and Prices in Thailand? By Jiranyakul, Komain
  15. Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries By Machasio, Immaculate; Tillmann, Peter

  1. By: Lucas Hafemann; Peter Tillmann
    Abstract: This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that reflects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems.
    JEL: E52 E32 E44
    Date: 2017–07
  2. By: Qing, He; Korhonen, Iikka; Zongxin, Qian
    Abstract: In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an on-shore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.
    JEL: E52 F31 F40
    Date: 2017–10–21
  3. By: Evžen Kocenda; Balázs Varga
    Abstract: We analyze the impact of price stability-oriented monetary strategies (inflation targeting—IT—and constraining exchange rate arrangements) on inflation persistence using a time-varying coefficients framework in a panel of 68 countries (1993–2013). We show that explicit IT has a stronger effect on taming inflation persistence than implicit IT and is effective even during and after the financial crisis. We also show that once a country hits the ZLB its inflation persistence mildly decreases and that there exists a mild pull to return to inflation persistence mean once a central bank moves away from its inflation target. The link between inflation persistence and constraining exchange rate regimes is less pronounced than that of IT and regimes with the U.S. dollar as a reserve currency are less effective than those using the Euro (Deutsche mark). On other hand, the U.S. persistence transers disproportionately lower effect on other countries’ persistence than the IP of Germany.
    Keywords: inflation persistence, inflation targeting, exchange rate regime, flexible least squares
    JEL: C22 C32 E31 E52 F31
    Date: 2017
  4. By: Krug, Sebastian
    Abstract: The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should "lean against the wind" or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. The author aims to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macromodel with endogenous money. He finds that policies make use of their comparative advantage leading to superior outcomes concerning their respective intended objectives. In particular, he shows that "leaning against the wind" should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy. In contrast, leaning against the wind seems to have no positive impact on financial stability which strengthens proponents of Tinbergen's principle arguing that both policies are designed for their specific purpose and that they should be used accordingly.
    Keywords: financial stability,monetary economics,macroprudential policy,financial regulation,central banking,agent-based macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2017
  5. By: Nazib, Nur Afiyah; Masih, Mansur
    Abstract: As much as it is important in a conventional system, monetary policy also plays a critical role in governing the Islamic economic system. However, in a dual banking system, things may have to be designed and devised differently to cater to the needs of both. Thus, assessing the impact of monetary policy shocks on the Islamic banking system is the key to understanding the addition of the industry towards financial stability and the extent of quality of the industry. The purpose of this paper is to initially revisit the issue of monetary policy shocks on the Islamic banking system, in the case of Malaysia. Our paper extends the previous study by using the most recent monthly data available which is from the year 2010 to the year 2016. Additionally, we incorporate the use of a robust time series technique, ARDL, and paired our analysis with an analysis of variance decomposition to strengthen our findings. Based on the results, we find evidence that despite being in the industry for almost half a century, the monetary policy shocks still have an influence on the Islamic banking deposit in Malaysia. Additionally, the Islamic banking deposits are also highly influenced by the level of inflation which comes out to be the most exogenous variable amongst all. An important implication from our analysis is that it is very critical for the central bank to help maintain the resiliency of the system by designing an appropriate monetary policy that could cater to both system and start devising legitimate risk management procedures that is applicable to these Islamic institutions.
    Keywords: Islamic bank deposits, monetary policy, ARDL, Malaysia
    JEL: C22 C58 E52
    Date: 2017–06–05
  6. By: Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
    Abstract: This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasingdegree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages.
    Keywords: interest rates, long memory, fractional integration and cointegration
    JEL: C22 C32 E47
    Date: 2017
  7. By: Michael Funke; Robert Kirkby; Petar Mihaylovski
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective.
    Keywords: macroprudential policies, housing, DSGE, Bayesian estimation, New Zealand
    JEL: E32 E44 E52 E58
    Date: 2017
  8. By: Mario Pietrunti (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.
    Keywords: long-term mortgages, monetary policy, income channel
    JEL: E52 E58 G21
    Date: 2017–10
  9. By: António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
    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. 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.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017
  10. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity 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, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2017
  11. By: Athanasios Orphanides
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the “safe asset” status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longerterm prospects for the euro area.
    JEL: E52 E58 E61 E62 G01
    Date: 2017–07
  12. By: Nicola Limodio; Francesco Strobbe
    Abstract: The regulation of bank liquidity can create a commitment device on repaying depositors in bad states, if deposit insurance is absent. A theoretical model shows that liquidity regulation can: 1) stimulate a deposit in flow, moderating the limited liability inefficiency; 2) promote lending and branching, if deposit growth exceeds the intermediation margin decline. Our empirical test exploits an unexpected policy change, which fostered the liquid assets of Ethiopian banks by 25% in 2011. Exploiting the cross-sectional heterogeneity in bank size and bank-level databases, we find an increase in deposits, loans and branches, with no decline in profits. JEL code: G21, G32, O16, O55 Keywords: Banking, Liquidity Risk, Financial Development, Ethiopia
    Date: 2017
  13. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Ørjan Robstad (Norges Bank (Central Bank of Norway)); Nikka Husom Vonen (The Ministry of Labour and Social Affairs)
    Abstract: We assess the strength of the impact of a monetary policy shock on financial crisis probability in Norway. Policy effects go via the interest rate impact on credit, house prices and banks’ wholesale funding. We find that the impact of a monetary policy shock on crisis probability is about 10 times larger than what previous studies suggest. The large impact is mostly due to a fall in property prices and banks’ wholesale funding in response to a contractionary monetary policy shock. In contrast, and in line with existing literature, there is a more limited contribution to reduced crisis probability from the impact of monetary policy on credit.
    Keywords: Monetary Policy, Financial Imbalances, Financial Crisis, Structural VAR
    JEL: E32 E37 E44 E52
    Date: 2017–10–26
  14. By: Jiranyakul, Komain
    Abstract: This paper attempts to examine how the policy rate as a monetary policy stance reacts to output and price level in Thailand during 2005Q1 and 2016Q2. An empirical relationship that characterizes the way the Bank of Thailand adjusts its policy rate to output growth and inflation is identified. Johansen ointegration technique and VAR methodology are used in the analysis. The results from the cointegration analysis show that there exists a long-run relationship of the policy rate with real GDP and prices. This long-run equation differs from the empirical Taylor-type rule. However, the result from short-run dynamics captures the short-run interest rate equation. The partial adjustment coefficient in the estimated interest rate equation is negative and highly significant, which indicates that any deviation of the policy rate from its equilibrium value is corrected by monetary policy actions. Furthermore, there is long-run causality running from inflation and economic growth to a change in policy rate. In the short run, economic growth negatively causes a change in the policy rate while inflation positively causes a change in the policy rate. Also, impulse response analysis from an unrestricted VAR model indicates that both output growth and inflation shocks cause fluctuation in the policy rate.
    Keywords: Policy rate, output, prices, error correction mechanism, impulse responses
    JEL: C32 E52
    Date: 2017–10
  15. By: Machasio, Immaculate; Tillmann, Peter
    Abstract: Remittance inflows from overseas workers are an important source of foreign funding for developing and emerging economies. This paper estimates nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy has a smaller effect under strong inflows of remittances.
    JEL: E52
    Date: 2017

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