nep-cba New Economics Papers
on Central Banking
Issue of 2018‒01‒08
twenty-two papers chosen by
Maria Semenova
Higher School of Economics

  1. Capital controls, macroprudential measures and monetary policy interactions in an emerging economy By Valerio Nispi Landi
  2. Communication of monetary policy in unconventional times By Coenen, Günter; Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg H.
  3. Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank? By van Riet, Ad
  4. Optimal monetary policy and fiscal interactions in a non-Ricardian economy By Massimiliano Rigon; Francesco Zanetti
  5. A Tale of Four Tails: Inflation, the Policy Rate, Longer-Term Rates, and Stock Prices By Anene, Dominic; D'Amico, Stefania
  6. The Impact of Forward Guidance on Inflation Expectations: Evidence from the ECB By Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
  7. Financial Spillovers and Macroprudential Policies By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  8. Monetary Policy Transmission and Trade-offs in the United States: Old and New By Boris Hofmann; Gert Peersman
  9. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  10. Constraints on LTV as a Macroprudential Tool: A Precautionary Tale By José García-Montalvo; Josep M. Raya
  11. Basel III and Bank-Lending: Evidence from the United States and Europe By Sami Ben Naceur; Caroline Roulet
  12. Liquidity provision as a monetary policy tool: The ECB's non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  13. Which Model to Forecast the Target Rate? By Maarten van Oordt
  14. Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations By Dany-Knedlik, Geraldine; Holtemöller, Oliver
  15. Systemic risk and systemic importance measures during the crisis By Sergio Masciantonio; Andrea Zaghini
  16. Multinational Banks and Supranational Supervision By Colliard, Jean-Edouard; Calzolari, Giacomo; Loranth, Gyongyi
  17. Quantitative easing and bank risk taking: evidence from lending By John Kandrac; Bernd Schlusche
  18. Loanable funds vs money creation in banking: A benchmark result By Faure, Salomon A.; Gersbach, Hans
  19. Can macroprudential measures make cross-border lending more resilient? By Előd Takáts; Judit Temesvary
  20. Macroprudential Policy, Central Banks and Financial Stability: Evidence from China By Jan Klingelhöfer; Rongrong Sun
  21. China Monetary Policy Transmission in China: Dual Shocks with Dual Bond Markets By Makram El-Shagi; Lunan Jiang
  22. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar

  1. By: Valerio Nispi Landi (Bank of Italy)
    Abstract: Are capital controls and macroprudential measures desirable in an emerging economy? How do these instruments interact with monetary policy? I address these questions in a DSGE model for an emerging economy whose banks are indebted in foreign currency. The model is augmented with financial frictions. The main results are as follows. First, capital controls and macroprudential policies are able to mitigate the adverse effects of an increase in the foreign interest rate. Second the desirability of these measures is shock dependent. Third, capital controls and monetary policy are complementary in addressing the trade-off between inflation and financial fluctuations.
    Keywords: financial markets, monetary policy, small open economy
    JEL: E44 E52 E58 F41
    Date: 2107–12
  2. By: Coenen, Günter; Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg H.
    Abstract: Monetary policy communication is particularly important during unconventional times, because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank's toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme.
    Keywords: Central Bank Communication,Unconventional Monetary Policy,Asset Purchase Programme,Forward Guidance
    JEL: E43 E52 E58
    Date: 2017
  3. By: van Riet, Ad
    Abstract: New-style central banking in many advanced economies, involving the use of unconventional monetary policy instruments and forward guidance at the effective lower bound for interest rates, has raised questions about the appropriate role of fiscal policy – also in the euro area, where a fiscal counterpart to the European Central Bank (ECB) and the Eurosystem is missing. This paper considers three areas where euro area governments could act as the ‘joint sovereign’ behind the euro and support the ECB in its task of maintaining price stability, staying within the boundaries of the Maastricht Treaty. First, member countries could coordinate a growth-friendly aggregate economic policy mix that is supportive of the single monetary policy, with the help of a central fiscal capacity subject to common decision-making. Second, they could introduce a safe sovereign asset for the eurozone without assuming common liability in order to anchor financial integration and facilitate monetary policy implementation. Third, the significant benefits for the Eurosystem from a lower burden on monetary policy and a reduced exposure to sovereign risk could make it acceptable for euro area governments to indemnify it against potential large losses on its much expanded balance sheet. The fundamental solution, however, lies in advancing with fiscal integration to address the ‘institutional loneliness’ of the Eurosystem with full respect for its independent status.
    Keywords: Maastricht Treaty; new-style central banking; supportive fiscal policies; capital loss insurance; safe sovereign asset
    JEL: E5 E63 H63
    Date: 2017–10
  4. By: Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with finitely-lived consumers and government debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the households probability of survival that affects the household’s propensity to consume out financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the inflation targeting rule that fully stabilizes the output gap and the inflation rate while leaving debt to freely fluctuate in response to demand shocks.
    Keywords: optimal monetary policy, fiscal and monetary policy interaction
    JEL: E53 E63
    Date: 2017–12
  5. By: Anene, Dominic (Northwestern University); D'Amico, Stefania (Federal Reserve Bank of Chicago)
    Abstract: We analyze empirical links between the perceived tail-risk of inflation, the policy rate, longer-term interest rates, and equity prices in the U.S. Their simultaneous changes enable us to distinguish between a systematic and "exogenous" response to monetary-policy news. And, those tail risks' co-movements are accounted for in quantifying the magnitude and persistence of their responses to key shocks. We find that: (i) in the medium-term, all four tail risks respond significantly and contemporaneously to domestic and foreign monetary-policy announcements, except for the equity tail risk to foreign policy; (ii) all four tail risks rarely change in response to other U.S. macroeconomic news; (iii) the directional pattern of their simultaneous reactions to policy announcements is often consistent with the systematic response to new information about the economic outlook rather than with the response to an exogenous shock; (iv) the few notable instances of the latter response are always in reaction to Fed announcements; and, (v) our impulse responses demonstrate that odds of extreme inflation outcomes and extreme policy-rate outcomes are tightly linked, and that both determine tail outcomes for longer-term interest rates but not for stock prices.
    Keywords: Downside risk; derivatives; inflation; monetary policy
    JEL: C32 E52 E58 G12 G14
    Date: 2017–12–19
  6. By: Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
    Abstract: This paper empirically investigates the impact of forward guidance announcements on inflation expectations in the Eurozone. We identify forward guidance shocks as changes in the 2-year nominal ECB yield on specific announcement days to measure changes in daily inflation swaps of different maturities. In the process, we also separately identify the effect of quantitative easing and interest rate change announcement shocks. We find that forward guidance was successful in reviving inflation expectations across maturities. Analyzing the transmission channels of forward guidance, we find evidence that both a reanchoring channel and a portfolio effect might have been at play.
    JEL: E31 E52 E65
    Date: 2017–12
  7. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate whether and to what extent macroprudential policies affect the financial link between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We first estimate the correlation of the policy interest rates between the CEs and the PHs and use that as a measure of financial sensitivity. We then estimate the determinants of the estimated measure of financial sensitivity as a function of country-specific macroeconomic conditions and policies. The potential determinant of our focus is the extensity of macroprudential policies. From the estimation exercise, we find that a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves (IR); when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.
    JEL: F4 F41 F42
    Date: 2017–12
  8. By: Boris Hofmann; Gert Peersman
    Abstract: This study shows that, in the United States, the effects of monetary policy on credit and housing markets have become considerably stronger relative to the impact on GDP since the mid-1980s, while the effects on inflation have become weaker. Macroeconomic stabilization through monetary policy may therefore have become associated with greater fluctuations in credit and housing markets, whereas stabilizing credit and house prices may have become less costly in terms of macroeconomic volatility. These changes in the aggregate impact of monetary policy can be explained by several important changes in the monetary transmission mechanism and in the composition of macroeconomic and credit aggregates. In particular, the stronger impact of monetary policy on credit is driven by a much higher responsiveness of mortgage credit and a larger share of mortgages in total credit since the 1980s.
    Keywords: monetary policy trade-offs, monetary transmission mechanism, inflation, credit, house prices
    JEL: E52
    Date: 2017
  9. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: macroeconomia, economia internacional
    JEL: E31 E52 E58
    Date: 2017–12
  10. By: José García-Montalvo; Josep M. Raya
    Abstract: The introduction of limits or regulatory penalties on high LTV ratios for residential mortgages is one of the most frequently used tools of macroprudential policy. The available evidence seems to indicate that this instrument can reduce the feedback loop between credit and house prices. In this paper, we show that these constraints on LTV ratios, used by Spanish banking regulators before the onset of the housing crisis of 2008, did not prevent that feedback loop. In the Spanish case, the fact that appraisal companies were mostly owned by banks led to a situation in which the LTV limits were used to generate appraisal values adjusted to the needs of the clients, rather than trying to appropriately represent the value of the property. This tendency towards over-appraisals produced important externalities in terms of a higher than otherwise demand for housing, and intensification of the feedback loop between credit and house prices.
    JEL: E52 E58 G28
    Date: 2017–12
  11. By: Sami Ben Naceur; Caroline Roulet
    Abstract: Using data on commercial banks in the United States and Europe, this paper analyses the impact of the new Basel III capital and liquidity regulation on bank-lending following the 2008 financial crisis. We find that U.S. banks reinforce their risk absorption capacities when expanding their credit activities. Capital ratios have significant, negative impacts on bank-retail-and-other-lending-growth for large European banks in the context of deleveraging and the “credit crunch” in Europe over the post-2008 financial crisis period. Additionally, liquidity indicators have positive but perverse effects on bank-lending-growth, which supports the need to consider heterogeneous banks’ characteristics and behaviors when implementing new regulatory policies.
    Date: 2017–11–15
  12. 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.
    Keywords: ECB,euro area,financial crisis,financial frictions,interbank market,non-standard monetary policy
    JEL: E44 E58
    Date: 2017
  13. By: Maarten van Oordt
    Abstract: Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increases the accuracy of model out-of-sample forecasts for the level and volatility of the Federal Reserve target rates. In addition, imposing the constraints produces different estimates of the response coefficients. In particular, a new and simple specification, where the target rate is the maximum between zero and the prediction of an ordered-choice Probit model, is more accurate and has higher response coefficients to information about inflation and unemployment.
    Keywords: Financial markets, Interest rates
    JEL: E43
    Date: 2017
  14. By: Dany-Knedlik, Geraldine; Holtemöller, Oliver
    Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
    Keywords: inflation dynamics,inflation expectations,trend inflation,nonlinear state space model,panel UCSV model,Euro area
    JEL: C32 E5 E31
    Date: 2017
  15. By: Sergio Masciantonio (European Commission); Andrea Zaghini (Bank of Italy)
    Abstract: Systemic risk and systemic importance are two different concepts that came out of the crisis and are now widely employed to assess the potential impact on the banking system as a whole of shocks that hit one specific bank. However, those two measures are often improperly used and misunderstandings arise. This paper sheds light about their meaning, measurement and information content. Empirically, the two measures provide different information; it is therefore worthwhile investigating both, so to have a thorough understanding of single name and aggregate systemic risk exposure. In addition, by relying on the standard risk management perspective, we propose how to integrate systemic importance and systemic risk concepts. We provide two new measures of systemic risk exposure and compare them with the standard one (SRISK).
    Keywords: G-SIFIs, Systemic risk, too-big-to-fail, financial crisis
    JEL: G21 G01 G18
    Date: 2017–12
  16. By: Colliard, Jean-Edouard; Calzolari, Giacomo; Loranth, Gyongyi
    Abstract: We study the supervision of multinational banks (MNBs), allowing for either national or supranational supervision. National supervision leads to insufficient monitoring of MNBs due to a coordination problem between supervisors. Supranational supervision can solve this problem and increase monitoring. However, this change has the unintended consequence of affecting the MNB's choice of foreign representation. MNBs may expand abroad using branches rather than subsidiaries, or abandon foreign expansion altogether. These changes completely neutralize the more intense monitoring that would otherwise occur with supranational supervision. Our paper provides insight into how the national boundaries of bank supervision interact with multinational banks.
    Keywords: Cross-Border Banks; Multinational banks; Supervision; Monitoring; Regulation; Banking Union
    JEL: F23 G21 G28 L51
    Date: 2017–01–10
  17. By: John Kandrac; Bernd Schlusche
    Abstract: We empirically assess the effect of reserve accumulation as a result of quantitative easing (QE) on bank-level lending and risk taking activity. To overcome the endogeneity of bank-level reserve holdings to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system. Consistent with theories of the portfolio substitution channel in which the transmission of QE depends in part on reserve creation itself, we document that reserves created in two distinct QE programs led to higher total loan growth and an increase in the share of riskier loans, such as commercial real estate, construction, C&I, and consumer loans, within banks' loan portfolios.
    Keywords: Monetary policy ; QE ; bank lending ; reserve balances
    JEL: G21 E52 E58 G28
    Date: 2017–10–12
  18. By: Faure, Salomon A.; Gersbach, Hans
    Abstract: We establish a benchmark result for the relationship between the loanablefunds and the money-creation approach to banking. In particular, we show that both processes yield the same allocations when there is no uncertainty and thus no bank default. In such cases, using the much simpler loanablefunds approach as a shortcut does not imply any loss of generality.
    Keywords: money creation,bank deposits,capital regulation,monetary policy,loanable funds
    JEL: D50 E4 E5 G21
    Date: 2017
  19. By: Előd Takáts; Judit Temesvary
    Abstract: We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which a saw strong slowdown in cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN's macroprudential database. Our results suggest that macroprudential measures implemented in borrowers' host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.
    Keywords: taper tantrum, cross-border claims, macroprudential policy, diff-in-diff analysis
    JEL: F34 F42 G21 G38
    Date: 2017–12
  20. By: Jan Klingelhöfer; Rongrong Sun (Center for Financial Development and Stability at Henan University, Kaifeng, Henan)
    Abstract: We study the Chinese experience and provide evidence that central banks can play an active role in safeguarding financial stability. The narrative approach is used to disentangle macropudential policy actions from monetary actions. We show that reserve requirements, window guidance, supervisory pressure and housing-market policies can be used for macroprudential purposes. Our VAR stimates suggest that well-targeted macroprudential policy has immediate and persistent impact on credit, but no statistically significant impact on output. Macroprudential policy can be used to retain financial stability without triggering an economic slowdown, or as a complement to monetary policy to offset the buildup of financial vulnerabilities arising from monetary easing. The multi-instrument framework enables central banks to achieve both macroeconomic and financial stability.
    Keywords: macroprudential policy, monetary policy, credit, financial stability, China
    JEL: E52 E58 E44
    Date: 2017–12
  21. By: Makram El-Shagi; Lunan Jiang (Center for Financial Development and Stability at Henan University, Kaifeng, Henan)
    Abstract: Although China's monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy (the largest by some accounts) have often been simple reestimations or recalibrations of models that have originally been designed to describe US or European monetary policy. In this paper, we aim to provide an assessment of Chinese monetary policy and in particular monetary policy transmission through the bond market into the real economy, which takes into account the peculiarities of the Chinese market. Namely, our model includes both China's modern attempts at a market based policy shock as well as the "authority" based monetary policy that is a relic of the original banking system; it considers the special nature of the Chinese treasury bond market which is separated in two independent markets with very limited direct arbitrage opportunities between almost identical assets, and finally it incorporates the role of real estate, which played an essential role in China during the last decade.
    Keywords: monetary policy, yield curve, market segmentation
    JEL: E52 E43
    Date: 2017–12
  22. By: Baas, Timo; Belke, Ansgar
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit,Oil price shocks,DSGE models,Search and matching labor market,Monetary policy
    JEL: E32 F32 Q43
    Date: 2017

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