nep-cba New Economics Papers
on Central Banking
Issue of 2017‒12‒03
25 papers chosen by
Maria Semenova
Higher School of Economics

  1. Policy Rules for Capital Controls By Gurnain Kaur Pasricha
  2. The Exchange Rate as an Instrument of Monetary Policy By Heipertz, Jonas; Mihov, Ilian; Santacreu, Ana Maria
  4. SYSMO I: A Systemic Stress Model for the Colombian Financial System By Santiago Gamba; Oscar Jaulín; Angélica Lizarazo; Juan Carlos Mendoza; Paola Morales; Daniel Osorio; Eduardo Yanquen
  5. Risk Management and Regulation By Adrian, Tobias
  6. Capital and currency-based macroprudential policies: an evaluation using credit registry data By Horacio A Aguirre; Gastón Repetto
  7. The Nonlinear Interaction Between Monetary Policy and Financial Stress By Martín Saldías
  8. The Neo-Fisher Effect in the United States and Japan By Martín Uribe
  9. An assessment of the inflation targeting experience By Theologos Dergiades; Costas Milas; Theodore Panagiotidis
  10. Unconventional monetary Policy and Long Yields During QE1: Learning from the Shorts By McInish, Thomas; Neely, Christopher J.; Planchon, Jade
  11. Signaling in monetary policy near the zero lower bound By Sergio Salas; Javier Núñez
  12. Is Monetary Policy Too Complex for the Public? Evidence from the UK By Adriel Jost
  13. Credit supply responses to reserve requirement: loan-level evidence from macroprudential policy By João Barata R B Barroso; Rodrigo Barbone Gonzalez; Bernardus F Nazar Van Doornik
  14. Did the Exchange Rate Floor Prevent Deflation in the Czech Republic? By Francesca G Caselli
  15. Liquidity provision as a monetary policy tool: the ECB’s non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  16. Macroprudential Policies in Peru: The effects of Dynamic Provisioning and Conditional Reserve Requirements By Elias Minaya; Miguel Cabello
  17. Credit Supply Responses to Reserve Requirement: loan-level evidence from macroprudential policy By João Barata R. B. Barroso; Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik
  18. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Crosignani, Matteo; Faria-e-Castro, Miguel; Fonseca, Luis
  19. How should the European Central Bank ‘normalise’ its monetary policy? By Grégory Claeys; Maria Demertzis
  20. ECB Policies Involving Government Bond Purchases: Impact and Channels By Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
  21. FX Intervention in the New Keynesian Model By Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh
  22. US Monetary Policy and the Euro Area By Max Hanisch
  23. Monetary Policy, Inequality and Political Instability By Pablo Duarte; Gunther Schnabl
  24. Do Central Bank Actions Reduce Interest Rate Volatility? By Jaqueline Terra Moura Marins; José Valentim Machado Vicente
  25. The Bank of England as lender of last resort: New historical evidence from daily transactional data By Anson, Mike; Bhola, David; Kang, Miao; Thomas, Ryland

  1. By: Gurnain Kaur 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 competitiveness and macroprudential motivations for capital control policies. I introduce a new proxy for competitiveness motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. The analysis shows that past emerging-market policy systematically responds to both competitiveness and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to competitiveness concerns by using both instruments - inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find evidence that 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 competitiveness concerns.
    Keywords: capital controls, macroprudential policy, competitiveness motivations, capital flows, emerging markets, policy rules
    JEL: F3 F4 F5 G0 G1
    Date: 2017–11
  2. By: Heipertz, Jonas (Paris School of Economics); Mihov, Ilian (INSEAD); Santacreu, Ana Maria (Federal Reserve Bank of St. Louis)
    Abstract: Monetary policy research in small open economies has typically focused on “corner solutions”: either the currency rate is fixed by the central bank, or it is left to be determined by market forces. We build an open-economy model with external habits to study the properties of a new class of monetary policy rules in which the monetary authority uses the exchange rate as the instrument. Different from a Taylor rule, the monetary authority announces the rate of expected currency appreciation by taking into account inflation and output fluctuations. We find that the exchange rate rule outperforms a standard Taylor rule in terms of welfare, regardless of the policy parameter values. The differences are driven by: (i) the behavior of the nominal exchange rate and interest rates under each rule, and (ii) deviations from UIP due to a time-varying risk premium.
    Date: 2017–10–01
  3. By: Burak Eroglu (Istanbul Bilgi University); Secil Yildirim-Karaman (Altinbas University)
    Abstract: This paper investigates the impact of the policy decisions by the Central Bank of the Republic of Turkey (CBRT) and Federal Reserve (FED) on the financial markets in Turkey between 2010 and 2016, the period in which CBRT adopted new policy objectives. We investigate the impact of monetary policy shocks on the term structure of interest rates, exchange rates and credit default swap (CDS) rates using VAR framework. For identification, we rely on the assumption that monetary policy shocks are heteroscedastic. Our results show that expansionary monetary policy shocks by the CBRT made the yield curve steeper, caused TL to depreciate and CDS rates to decrease. As for FED decisions, expansionary decisions decreased the bond yields and CDS rates and caused TL to appreciate. The paper contributes to the literature by investigating the response of the term structure of interest rates and other asset prices for the period in which CBRT prioritized financial stability and did not make guidance for the future stance of monetary policy and by testing whether bond yields with various maturities responded to monetary policy shocks differently. Our results imply that not following a long term inflation target and lack of communication weakened the control of the CBRT over the long term interest rates.
    Keywords: Monetary policy; Term structure of interest rates; Asset prices; Heteroscedasticity based identification
    JEL: E40 E43 E44 E52 E58
    Date: 2017–11
  4. By: Santiago Gamba (Banco de la República de Colombia); Oscar Jaulín (Banco de la República de Colombia); Angélica Lizarazo (Banco de la República de Colombia); Juan Carlos Mendoza (Banco de la República de Colombia); Paola Morales (Banco de la República de Colombia); Daniel Osorio (Banco de la República de Colombia); Eduardo Yanquen (Banco de la República de Colombia)
    Abstract: This paper presents the first version of SYSMO, the analytical framework employed by the Financial Stability Department at the Banco de la República (the Central Bank of Colombia) to perform its biannual, top-down, stress testing exercise. The framework comprises: (i) a module to produce internally consistent macroeconomic scenarios; (ii) a set of satellite risk models that capture the materialization of credit and market risks in times of stress, and (iii) a bank model that simulates the endogenous response of banks to an adverse scenario. The framework also incorporates endogenous contagion and funding risks, key regulatory constraints (solvency and liquidity), and the feedback effects between the endogenous response of banks and the macroeconomic scenario. The use of SYSMO is illustrated with the example of the stress testing exercise published in the Banco de la República’s Financial Stability Report of the second semester of 2017. Classification JEL: E44, E58, G01, G17, G20.
    Keywords: Stress Testing, DSGE Models, VAR models, Credit Risk, Market Risk, Liquidity Risk, Funding Risk, Contagion Risk.
    Date: 2017–11
  5. By: Adrian, Tobias
    Abstract: The evolution of risk management has resulted from the interplay of financial crises, risk management practices, and regulatory actions. In the 1970s, research lay the intellectual foundations for the risk management practices that were systematically implemented in the 1980s as bond trading revolutionized Wall Street. Quants developed dynamic hedging, Value-at-Risk, and credit risk models based on the insights of financial economics. In parallel, the Basel I framework created a level playing field among banks across countries. Following the 1987 stock market crash, the near failure of Salomon Brothers, and the failure of Drexel Burnham Lambert, in 1996 the Basel Committee on Banking Supervision published the Market Risk Amendment to the Basel I Capital Accord; the amendment went into effect in 1998. It led to a migration of bank risk management practices toward market risk regulations. The framework was further developed in the Basel II Accord, which, however, from the very beginning, was labeled as being procyclical due to the reliance of capital requirements on contemporaneous volatility estimates. Indeed, the failure to measure and manage risk adequately can be viewed as a key contributor to the 2008 global financial crisis. Subsequent innovations in risk management practices have been dominated by regulatory innovations, including capital and liquidity stress testing, macroprudential surcharges, resolution regimes, and countercyclical capital requirements.
    Keywords: Banking; Financial crises; regulation; Risk management
    JEL: G00 G01 G21 G24 G28
    Date: 2017–11
  6. By: Horacio A Aguirre; Gastón Repetto
    Abstract: We aim to assess the impact of capital- and currency-based macroprudential policy measures on credit growth at the bank-firm level, using credit registry data from Argentina. We examine the impact of the introduction and tightening of a capital buffer and a limit on the foreign currency position of financial institutions on credit growth of firms, estimating fixed effects and difference-in-difference models for the period 2009-2014; we control for macroeconomic, financial institutions and firms' variables, both observable and unobservable. We find that: the capital buffer and the limits on foreign currency positions generally contribute to moderating the credit cycle, both when introduced and when tightened; the currency-based measure appears to have a quantitatively more important impact; both measures operate on the extensive and the intensive margins, and have an impact on credit supply. Macroprudential policies also have an effect on ex post credit quality: growth of non-performing loans is reduced after their implementation. In general, credit granted by banks with more capital and assets evidences a higher impact of the introduction of the capital buffer, while this measure also acts more strongly during economic activity expansions.
    Keywords: macroprudential policy, credit registry data, panel data models
    JEL: E58 G28 C33
    Date: 2017–11
  7. By: Martín Saldías
    Abstract: This paper analyzes the nonlinear relationship between monetary policy and financial stress and its effects on the transmission of shocks to output. Results from a Bayesian Threshold Vector Autoregression (TVAR) model show that the effects of monetary policy shocks on output growth are stronger during normal times than during times of financial stress. Monetary policy shocks are effective to ease stressed financial conditions, but have limited ability to fully contain the buildup of vulnerabilities. These results have important policy implications for central banks’ countercyclical policies under different financial conditions and for “lean against the wind” policies to address financial vulnerabilities.
    Date: 2017–08–04
  8. By: Martín Uribe
    Abstract: I investigate the effects of an increase in the nominal interest rate on inflation and output in the United States and Japan during the postwar period. I postulate a structural autoregressive model that allows for transitory and permanent nominal and real shocks. I find that nominal interest-rate increases that are expected to be temporary, lead, in accordance with conventional wisdom, to a temporary increase in real rates that is contractionary and deflationary. By contrast, nominal interest-rate increases that are perceived to be permanent cause a temporary decline in real rates with inflation adjusting faster than the nominal interest rate to a higher permanent level. Estimated impulse responses show that inflation reaches its long-run level within a year. Importantly, because real rates are low during the transition, the economy does not suffer an output loss. This result is relevant for the design of monetary policy in economies plagued by chronic below-target inflation, for it is consistent with the prediction that a credible announcement of a gradual return of nominal rates to normal levels can bring about a swift convergence of inflation to its target level without negative consequences for aggregate activity.
    JEL: E52 E58
    Date: 2017–10
  9. By: Theologos Dergiades; Costas Milas; Theodore Panagiotidis
    Abstract: An effective inflation targeting (IT) regime assumes both a change in the stationarity properties of inflation and a lower variability. Within a framework that does not make a priori assumptions about the order of integration, we examine whether there is a change in the inflation persistence in forty-five, developed and developing, countries and in three groups of countries, the G7, the OECD, and OECD Europe. For the inflation targeters, we find that the endogenously identified break dates are not consistent with the formal adoption of the IT regime. We employ a test for the variability of inflation that tracks how frequently inflation variability is in control. Logit analysis reveals that inflation targeters do not experience a greater probability than non-inflation targeters of inflation persistence changing, and they are not more in control of their inflation variability. The quality of institutions emerges as being more significant for taming inflation
    Keywords: structural change, persistence change, inflation targeting
    JEL: C12 E4 E5
    Date: 2017–11–09
  10. By: McInish, Thomas (University of Memphis); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Planchon, Jade (Rhodes College, Memphis, TN)
    Abstract: In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets. Short interest in Treasury and agency securities declined prior to expansionary anouncements, indicating shorts anticipated these surprises, and declined further after these announcements. The failure of shorts to reinstitute their positions after the last purchase announcement confirms that the Fed convinced sophisticated investors that interest rates would remain low.
    Date: 2017–10–27
  11. By: Sergio Salas; Javier Núñez
    Abstract: What are the consequences of asymmetry of information about the future state of the economy between a benevolent Central Bank (CB) and private agents near the zero lower bound? How is the conduct of monetary policy modified under such a scenario? We propose a game theoretical signaling model, where the CB has better information than private agents about a future shock hitting the economy. The policy rate itself is the signal that conveys information to private agents in addition to its traditional role in the monetary transmission mechanism. We find that only multiple "pooling equilibria" arise in this environment, where a CB privately forecasting a contraction will most likely follow a less expansionary policy compared to a complete information context, in order to avoid making matters worse by revealing bad times ahead. On the other hand, a CB privately forecasting no contraction is most likely to distort its complete information policy rate, the consequences of which are welfare detrimental. However, this is necessary because deviating from the pooling policy rate would be perceived by private agents as an attempt to mislead them into believing that a contraction is not expected, which would be even more harmful for society.
    Keywords: Monetary Policy, Signaling, Zero lower bound
    JEL: E58 C72
    Date: 2017–11
  12. By: Adriel Jost
    Abstract: Central banks have increased their engagement in the information and education of the broad public. But what can be said about the nonprofessional’s knowledge of monetary policy and central banking? Based on the Bank of England’s Inflation Attitudes Survey, I construct a score to capture the central banking knowledge of the respondents. I show that the average British person displays limited knowledge of central banking. At the same time, the data reveal that satisfaction with the Bank of England’s policies increases with a better understanding of monetary policy.
    Keywords: Economic literacy, Monetary policy, Bank of England
    JEL: D83 E52 E58 I21
    Date: 2017
  13. By: João Barata R B Barroso; Rodrigo Barbone Gonzalez; Bernardus F Nazar Van Doornik
    Abstract: This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large loan-level dataset. We use a difference-in-difference strategy, first in a long panel, then in a cross-section. In the first case, we estimate the average effect on credit supply of several changes in RR from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate these effects. Finally, banks are prone to lend less to riskier firms.
    Keywords: reserve requirement, credit supply, capital ratio, liquidity ratio, macroprudential policy
    JEL: E51 E52 E58 G21 G28
    Date: 2017–11
  14. By: Francesca G Caselli
    Abstract: To fight deflationary pressures at the zero lower bound, in November 2013, the Czech National Bank (CNB) introduced a one-sided floor on the exchange rate, as an additional monetary policy instrument. This paper investigates the impact of the FX floor on inflation in the Czech Republic, by comparing actual inflation with counterfactuals in the absence of the exchange rate floor. Three different empirical strategies are implemented: an event study, difference-in-difference regressions and a synthetic control method. The empirical results provide evidence that the exchange rate floor was effective in fighting deflationary pressures and prevented inflation from going into negative territory. The magnitude of the effect ranges between 0.5 to 1.5 percentage points. The results are robust to different econometric specifications.
    Keywords: Foreign exchange;Czech Republic;Europe;Foreign exchange intervention;Central banks and their policies;exchange rate, synthetic control method
    Date: 2017–09–20
  15. By: Quint, Dominic; Tristani, Oreste
    Abstract: We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008–09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe. JEL Classification: E44, E58
    Keywords: ECB, euro area, financial crisis, financial frictions, interbank market, non-standard monetary policy
    Date: 2017–11
  16. By: Elias Minaya; Miguel Cabello
    Abstract: Over the past decade, credit has grown significantly in Peru, a small and partially dollarised economy, and the mounting credit risk attached to foreign currency credit created severe challenges for financial regulators. This paper assesses the effectiveness of two macroprudential measures implemented by regulators: dynamic provisioning, to reduce the procyclicality of credit and conditional reserve requirements, to diminish the degree of dollarisation of the economy. Using credit register data that covers the period of 2004-2014, we find evidence that dynamic provisioning has decelerated the rapid growth of commercial bank lending. Moreover, mortgage dollarisation declined significantly after the implementation of the conditional reserve requirement scheme.
    Keywords: reserve requirement, dynamic provisioning, credit supply, macroprudential policy, dollarisation
    JEL: E51 E52 E58 G21 G28
    Date: 2017–11
  17. By: João Barata R. B. Barroso; Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik
    Abstract: This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large dataset with several policy shocks. We use a difference-in-difference strategy; first in a long panel, then in a cross-section exploring the effects of changes in RR on credit. In the first case, we average several RR changes from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate theses effects
    Date: 2017–11
  18. By: Crosignani, Matteo (Federal Reserve Board); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Fonseca, Luis (London Business School)
    Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade.
    Keywords: Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis
    JEL: E58 G21 G28 H63
    Date: 2017–11–01
  19. By: Grégory Claeys; Maria Demertzis
    Abstract: This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 20 November 2017 between ECON and the President of the ECB. Copyright remains with the European Parliament at all times As the global financial crisis unfolded, the European Central Bank (ECB) and other central banks greatly extended their monetary policy toolboxes and adjusted their operational frameworks. These unconventional monetary policies have left central banks with large balance sheets. As growth picks up in the euro area, there are discussions about how to normalise monetary policy, but it is unclear if normalisation means returning to monetary policy as it was prior to the crisis, or whether there is a ‘new normal’ that would justify different monetary policies. The debate on the optimal size of the central bank’s balance sheet has not yet been settled. We discuss the benefits and drawbacks of central banks having permanently large balance sheets. It might be difficult to reduce them quickly without negatively affecting financial markets. In order to avoid market volatility, this process needs to be done gradually and preferably passively, by holding to maturity assets purchased during the crisis. The interest rate – the central banks’ main conventional tool – might stay at a much lower level than historical standards and closer to the zero-lower bound because of a fall in the neutral rate, implying that in the future monetary policy would have to rely more on balance sheet policies and less on interest rate cuts to provide accommodation during recessions. The combination of these two issues implies that the normalisation of monetary policy will be very slow and entail a long period with a large balance sheet. In the meantime, the ECB will not be able to go back to its pre-crisis operational framework. In terms of the sequencing of the normalisation process, the experience of the US Federal Reserve, which was one of the first central banks to use unconventional tools during the crisis, could provide useful pointers to the ECB. Following the Fed’s example would involve tapering (ie gradually reducing asset purchases), then increasing key policy rates slowly before reducing passively the size of the balance sheet. The Fed’s experience shows that the normalisation process needs to be communicated early in order to reduce uncertainty for market participants and avoid any disruption of financial markets. So far, the ECB has been quite successful in smoothly scaling back its asset purchases, but it has not yet provided a clear vision of what its monetary policy or operational framework will look like at the end of the normalisation process.
    Date: 2017–11
  20. By: Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    JEL: E4 G01 G18
    Date: 2017–11
  21. By: Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh
    Abstract: We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank’s credibility and limits the risk of multiple equilibria.
    Keywords: Foreign exchange;Central banks and their policies;Central bank reserves; Speculative attack; Portfolio balance model; Equilibrium determinacy; Capital flows; Capital controls; Open Economy New Keynesian Model, Central bank reserves, Speculative attack, Portfolio balance model, Equilibrium determinacy, Capital flows, Capital controls, Open Economy New Keynesian Model, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–09–29
  22. By: Max Hanisch
    Abstract: This study investigates the international spillover effects of contractionary US monetary policy and its transmission channels on members of the euro area (EA) before and after the implementation of the euro. I find the multilateral spillover effects on individual EA economies' real activity and inflation to be asymmetric, i.e. the responses are mainly expansionary but not exclusively so. While the effects are diverse and rather large before 1999, responses become more homogeneous and smaller in size after the implementation of the euro. However, country-specific asymmetries remain. Trade and interest rates but also credit, stock and housing markets are identified as important transmission channels.
    Keywords: Structural dynamic factor model, sign restrictions, monetary policy, US, Euro area, spillover effects
    JEL: C32 E52 E58
    Date: 2017
  23. By: Pablo Duarte; Gunther Schnabl
    Abstract: Based on the concepts of justice by Hayek, Rawls and Buchanan we argue that the growing political dissatisfaction in industrialized countries is rooted in the asymmetric pattern in monetary policies since the 1980s for two reasons. First, the structurally declining interest rates and the unconventional monetary policy measures have granted privileges to specific groups. Second, the increasingly expansionary monetary policies have negative growth effects, which reduce the scope for compensation of the ones excluded from the privileges. The result is the fading acceptance of the economic order and growing political instability.
    Keywords: Hayek, Rawls, Buchanan, privileges, inequality, monetary policy, order of rules, difference principle, economic order
    JEL: D63 E02 E52
    Date: 2017
  24. By: Jaqueline Terra Moura Marins; José Valentim Machado Vicente
    Abstract: This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of minutes release one week later. Unlike related papers, we measure market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompasses market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both decisions about the target rate and communication event reduce interest rate volatility.
    Date: 2017–11
  25. By: Anson, Mike; Bhola, David; Kang, Miao; Thomas, Ryland
    Abstract: We use daily transactional ledger data from the Bank of England's Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter Bagehot's rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for "good" securities. The archival data we use provides granular, loan-level insight on the price and quantity of credit, and information on its distribution to particular counterparties. We find that the Bank's behaviour during this period broadly conforms to Bagehot's rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the Bank's balance sheet, we find that the Bank did lend freely, with the number of discounts and advances increasing during crises. These loans were typically granted at a rate above pre-crisis levels and, in 1857 and 1866, typically at a spread above Bank Rate, though we also find some instances in the daily discount ledgers where individual loans were made below Bank rate in 1847. Another set of customer ledgers shows that the securities the Bank purchased were debts owed by a geographically and industrially diverse set of debtors. And using new data on the Bank's income and dividends, we find the Bank and its shareholders profited from lender of last resort operations. We conclude our paper by relating our findings to contemporary debates including those regarding the provision of emergency liquidity to shadow banks.
    Keywords: Bank of England,lender of last resort,financial crises,financial history,central banking
    JEL: E58 G01 G18 G20 H12 N2 N4 N8
    Date: 2017

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