nep-cba New Economics Papers
on Central Banking
Issue of 2017‒11‒12
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. (Un)expected monetary policy shocks and term premia By Kliem, Martin; Meyer-Gohde, Alexander
  2. The Great Deception: the ‘science’ of monetary policy and the Great Moderation revisited By Gilberto Tadeu Lima; Mark Setterfield; Jaylson Jair da Silveira
  3. Disagreement and monetary policy By Falck, Elisabeth; Hoffmann, Mathias; Hürtgen, Patrick
  4. Design of Macro-prudential Stress Tests By Orlov, Dmitry; Zryumov, Pavel; Skrzypacz, Andrzej
  5. Inflation Dynamics in Uganda: A Quantile Regression Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotze
  6. The Impact of Japanese Monetary Policy Crisis Management on the Japanese Banking Sector By Juliane Gerstenberger; Gunther Schnabl
  7. A New Dataset of Macroprudential Policy Governance Structures By Ricardo Correa; Rochelle M. Edge; J. Nellie Liang
  8. Can the Central Bank Alleviate Fiscal Burdens? By Ricardo Reis
  9. Money Creation and Destruction By Salomon Faure; Hans Gersbach
  10. Cross-country spillovers from macroprudential regulation: Reciprocity and leakage By Margarita Rubio
  11. The Failure of ECB Monetary Policy from a Mises-Hayek Perspective By Gunther Schnabl
  12. Financial and real shocks and the effectiveness of monetary and macroprudential policies in Latin American countries By Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
  13. (Why) Do Central Banks Care About Their Profits? By Igor Goncharov; Vasso Ioannidou; Martin C. Schmalz
  14. An analytical framework to calibrate macroprudential policy By T. Bennani; C. Couaillier; A. Devulder; S. Gabrieli; J. Idier; P. Lopez; T. Piquard; V. Scalone
  15. The time is right for a European Monetary Fund By André Sapir; Dirk Schoenmaker
  16. The Dire Effects of the Lack of Monetary and Fiscal Coordination By Bianchi, Francesco; Melosi, Leonardo
  17. U. S. monetary policy and emerging market credit cycles By Brauning, Falk; Ivashina, Victoria
  18. Assessing the effective stance of monetary policy: A factor-based approach By Christiaan Pattipeilohy; Christina Bräuning; Jan Willem van den End; Renske Maas
  19. Cross-border effects of regulatory spillovers: evidence from Mexico By Tripathy, Jagdish
  20. Monetary Policy Crisis Management as a Threat to Economic Order By Andreas Freytag; Gunther Schnabl

  1. By: Kliem, Martin; Meyer-Gohde, Alexander
    Abstract: We analyze an estimated stochastic general equilibrium model that replicates key macroeconomic and financial stylized facts during the Great Moderation of 1983-2007. Our model predicts a sizeable and volatile nominal term premium - comparable to recent reduced-form empirical estimates - with real risk two times more important than inflation risk. The model enables us to address salient questions about the effects of monetary policy on the term structure of interest rates. We find that monetary policy can have sizeable and differing effects on nominal and real risk premia, rationalizing many opposing findings in the empirical literature.
    Keywords: DSGE model,Bayesian estimation,Term structure,Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2017
  2. By: Gilberto Tadeu Lima (Department of Economics, University of Sao Paulo); Mark Setterfield (Department of Economics, New School for Social Research); Jaylson Jair da Silveira (Department of Economics and International Relations, Federal University of Santa Catarina)
    Abstract: Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.
    Keywords: Great Moderation, monetary policy, inflation targeting, macroeconomic stability, heterogeneous inflation expectations, satisficing evolutionary dynamics
    JEL: B52 E12 E31 E32 E52 E58
    Date: 2017–10
  3. By: Falck, Elisabeth; Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: Time-variation in disagreement about inflation expectations is a stylized fact in surveys, but little is known on how disagreement interacts with the efficacy of monetary policy. This paper fills this gap in providing theoretical predictions of monetary policy shocks for different levels of disagreement and testing these empirically. When disagreement is high, a dispersed information New Keynesian model predicts that a contractionary monetary policy shock leads to a short-run rise in inflation and inflation expectations, whereas both decline when disagreement is low. Estimating a smooth-transition model on U.S. data shows significantly different responses in inflation and inflation expectations consistent with theory.
    Keywords: disagreement,dispersed information,disanchoring of inflation expectations,monetary policy transmission,state-dependent effects of monetary policy,local projections
    JEL: C52 D83 E31 E32 E52
    Date: 2017
  4. By: Orlov, Dmitry (University of Rochester); Zryumov, Pavel (University of PA); Skrzypacz, Andrzej (Stanford University)
    Abstract: We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information. When systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.
    Date: 2017–05
  5. By: Francis Leni Anguyo (School of Economics, University of Cape Town); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, University of Cape Town)
    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 current 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 current 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
    Date: 2017
  6. By: Juliane Gerstenberger; Gunther Schnabl
    Abstract: The paper analyses the impact of Japanese monetary policy crisis management on the Japanese banking sector since the 1998 Japanese financial crisis. It shows how low-cost liquidity provision as a means to stabilize banks has created a growing gap between deposits above lending and has compressed interest margins as the traditional source of bank’s income. Efficiency scores are compiled to estimate the impact of monetary policy crisis management on the efficiency of banks. The estimation results provide evidence that the Japanese monetary policy crisis management has contributed to declining efficiency in the banking sector despite or because of growing concentration.
    Keywords: Japan, monetary policy, crisis management, banking sector, city banks, regional banks, shinkin banks, concentration
    JEL: E52 E58 F42 E63
    Date: 2017
  7. By: Ricardo Correa; Rochelle M. Edge; J. Nellie Liang
    Abstract: Governance structures are a critical part of a framework for implementing macroprudential policy, alongside methodologies for measuring and monitoring systemic risk, and analyses to understand the impact of policies that may be used to mitigate risk. As part of various research projects to study macroprudential policy frameworks, we have compiled a new dataset of governance structures in 58 countries. This note documents the construction of our dataset, including the decisions that we made concerning the countries and governance-structure facts to record in our dataset, and it discusses the approach that we followed for collecting this information.
    Date: 2017–11–07
  8. By: Ricardo Reis
    Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by inuencing different terms in the government resource constraint. It discusses five channels: (i) how inflation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
    Keywords: monetary policy, reserves, interest rates, quantitative easing
    JEL: E58 E63 E52
    Date: 2017
  9. By: Salomon Faure; Hans Gersbach
    Abstract: We study money creation and destruction in today’s monetary architecture within a general equilibrium setting. Two types of money are created and destructed: bank deposits, when banks grant loans to firms or to other banks, and central bank money, when the central bank grants loans to private banks. We show that symmetric equilibria yield the first-best allocation when prices are exible, regardless of the monetary policy or capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and how an adequate combination of monetary policy and capital regulation may restore efficiency.
    Keywords: money creation, bank deposits, capital regulation, zero lower bound, monetary policy, price rigidities
    JEL: D50 E40 E50 G21
    Date: 2017
  10. By: Margarita Rubio
    Abstract: In a globally interconnected banking system, there can be spillovers from domestic macroprudential policies to foreign banks and vice versa, for example, through the presence of foreign branches in the domestic economy. The lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to those banks with lower regulatory levels, a phenomenon known as "leakage." This may decrease the effectiveness of macroprudential policies in the pursuit of financial stability. To explore this topic, I consider a two-country DSGE model with housing and credit constraints. Borrowers can choose whether to borrow from domestic and foreign banks. Macroprudential policies are conducted at a national level and are represented by a countercyclical rule on the loan-to-value ratio. Results show that when there are some sort of reciprocity agreements on macroprudential policies across countries, financial stability and welfare gains are larger than in a situation of non reciprocity. An optimal policy analysis shows that, in order to enhance the effectiveness of macroprudential policies, reciprocity mechanisms are desirable although the foreign macroprudential rule does not need to be as aggressive as the domestic one.
    Keywords: Macroprudential Policies, Spillovers, Banking Regulation, Foreign
    Date: 2017
  11. By: Gunther Schnabl
    Abstract: The paper analyses the common European monetary policy based on a Mises-Hayek overinvestment framework, which is combined with the theory of optimum currency areas. It shows how since the turn of the millennium a too expansionary monetary policy contributed to unsustainable overinvestment booms in the periphery of the European Monetary Union, and more recently in Germany, dependent on the national fiscal policy stances. It is argued that the ECB´s ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth by conserving distorted economic structures. To preserve political stability a timely exit from the ultra-expansionary monetary policy is postulated.
    Keywords: Hayek, Mises, European Monetary Union, European Central Bank, monetary overinvestment theory, optimum currency areas, fiscal policy, asymmetric shocks, secular stagnation
    JEL: E52 E58 F42 E63
    Date: 2017
  12. By: Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
    Abstract: This work compares the impact of monetary and macroprudential policies on financial and real sectors in four Latin American countries: Chile, Colombia, Mexico and Peru, and explores the commonalities and differences in the reaction to shocks to both the financial and real sector. In order to do that, we estimate a New Keynesian small open economy model with frictions in the domestic financial intermediation sector and a commodity sector for each country. Results suggest that financial shocks are important drivers of output and investment fluctuations in the short run for most countries, but in the long run their contribution is small. Furthermore, we evaluate the ability of macroprudential policies to limit the impact on credit growth and its effect on real variables. In a scenario of tighter financial conditions, monetary policy becomes expansionary due to both lower inflation (given the exchange rate appreciation) and weaker output growth, and macroprudential policies further contribute to restoring credit and output growth. However, in the case of a negative commodity price shock, macroprudential policies are less effective but useful as a complement for the tightening of monetary policy. Higher inflation (due to the exchange rate depreciation) and higher policy rates lead to a contraction in output growth, but macroprudential policies could alleviate this by improving credit conditions.
    Keywords: central banking, monetary policy, macroprudential policy, financial frictions
    JEL: E52 F41 F47
    Date: 2017–10
  13. By: Igor Goncharov; Vasso Ioannidou; Martin C. Schmalz
    Abstract: We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is (i) more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, but absent when no such factors are present, and (ii) correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that profitability concerns, while absent from standard theoretical models of central banking, are both present and effective in practice, and inform a theoretical debate about monetary stability and the effectiveness and riskiness of non-traditional central banking.
    Keywords: central banks, profitability, non-traditional central banking, monetary stability
    JEL: E58
    Date: 2017
  14. By: T. Bennani; C. Couaillier; A. Devulder; S. Gabrieli; J. Idier; P. Lopez; T. Piquard; V. Scalone
    Abstract: This project presents the analytical framework for macroprudential policy (AFMaP) developed at the Financial Stability Directorate of the Banque de France that could be used to calibrate macroprudential instruments and to provide analytical support to macroprudential policy decision making. In this paper, we present and compare several possible methodologies to calibrate macroprudential capital buffers that rely both on structural models and macroprudential stresstesting tools.
    Keywords: Macroprudential policy; Countercyclical capital buffer; Systemic risk buffer.
    JEL: G21 E44 C58 E32
    Date: 2017
  15. By: André Sapir; Dirk Schoenmaker
    Abstract: The issue The creation of the European Stability Mechanism (ESM) and the banking union were instrumental in stemming the euro-area sovereign crisis. However, both remain incomplete. While the ESM reduces the risk of sovereign debt crises, it still lacks an instrument to deal in an orderly way with insolvency crises. This makes the no-bailout clause of the Maastricht Treaty toothless. Two of the banking union’s pillars – common European supervision by the European Central Bank and common European resolution by the Single Resolution Fund – are up and running. But the third, common European deposit insurance, is still missing. Furthermore, the governance of the ESM is wanting. Decisions to provide financial assistance are taken by unanimity, preventing swift crisis response when it is needed. Policy challenge The re-election of Chancellor Merkel and the election of President Macron create a new momentum for strengthening the euro area’s crisis framework. There is agreement to turn the ESM into a European Monetary Fund (EMF). We propose to design this EMF as part of a broader risk-sharing and market-discipline agenda. Risk sharing would come from the increased capacity of the EMF to intervene early in a sovereign or banking crisis and to act as a fiscal backstop to a complete banking union that includes European deposit insurance. Market discipline of sovereigns would come from the reduced exposure of banks to their home sovereigns and from a newly-established debt restructuring mechanism. The proposed transformation of the ESM into an EMF should be viewed as part of a wider institutional reform of the fiscal dimension of the euro area.
    Date: 2017–10
  16. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: What happens if the government’s willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
    Keywords: Monetary and fiscal policies; coordination; emergency budget; Markov-switching models; liquidity traps
    JEL: D83 E31 E5 E62 E63
    Date: 2017–07–06
  17. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
    Keywords: global business cycle; monetary policy; emerging markets; reaching for yield
    JEL: E44 E52 F34 F44 G21
    Date: 2017–08–29
  18. By: Christiaan Pattipeilohy; Christina Bräuning; Jan Willem van den End; Renske Maas
    Abstract: We present an empirical approach to derive the implicit stance of monetary policy. The indicator can be interpreted as an implied short-term interest rate that is not restricted by the effective lower bound. Factor analysis is used to extract an expectations and term premium component from fitted yield curve data. Based on this, an implied short-term interest rate is constructed, which reflects how much the short-term rate should have fallen to achieve observed drop in long-term yields, assuming it could not have been caused by a fall in the term premium. Following Lombardi and Zhu (2014), we study how the implied rate performs as instrument for monetary policy analysis. Regression analyses suggests that the implied rate provides a good gauge for the identification of non-standard monetary policy shocks, and has responded significantly to financial stress as opposed to the output and inflation gap.
    Keywords: interest rates; determination; term structure and effects; monetary policy
    JEL: E43 E52
    Date: 2017–11
  19. By: Tripathy, Jagdish (Bank of England)
    Abstract: I study the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan-demand by the non-tradable sector to changes in household credit supply range from 1.6–3.5. These results emphasize the potential for cross-border effects of regulations in the presence of global banks.
    Keywords: Regulatory spillovers; capital shock; household credit
    JEL: F36 F42 G21
    Date: 2017–10–20
  20. By: Andreas Freytag; Gunther Schnabl
    Abstract: The paper analyses the effects of the monetary policy crisis management of the European Central Bank on the economic order of Germany. It is argued that in post-war Europe the German social market economy as designed by Eucken (1952) and Müller-Armack (1966) has been a core element of growth, welfare, social cohesion and political stability in Germany and Europe as a whole. It is shown that the monetary policy rescue measures of the European Central Bank have undermined the constitutive principles of the German social market economy, what has considerably contributed to the erosion of (productivity) growth and welfare in Germany and Europe. As the outcome is crumbling social cohesion and growing political instability, a timely exit from ultra-expansionary monetary policy is postulated.
    Keywords: economic order, social market economy, Soziale Marktwirtschaft, Germany, Walter Eucken, Alfred Müller-Armack, monetary policy, crisis management
    JEL: B20 B25
    Date: 2017

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