nep-cba New Economics Papers
on Central Banking
Issue of 2018‒01‒15
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Regulatory Reform: A Scorecard By Cecchetti, Stephen G; Schoenholtz, Kermit
  2. State-dependent risk taking and the transmission of monetary policy shocks By Fève, Patrick; Garcia, Pablo; Sahuc, Jean-Guillaume
  3. Deflation in the Euro Zone: Overview and Empirical Analysis By Pedro Bação; António Portugal Duarte
  4. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  5. The Corridor's Width as a Monetary Policy Tool By Guillaume Khayat
  6. An overlapping generations model for monetary policy analysis By Samuel Huber; Jaehong Kim
  7. Regulatory arbitrage and the e ciency of banking regulation By Pierre C. Boyer; Hubert Kempf
  8. Unsurprising shocks: information, Premia, and the Monetary Transmission By Miranda-Agrippino, Silvia
  9. Fiscal Implications of the Federal Reserve's Balance Sheet Normalization By Michele Cavallo; Marco Del Negro; W. Scott Frame; Jamie Grasing; Benjamin A. Malin; Carlo Rosa
  10. The effect of news shocks and monetary policy By Gambetti, Luca; Korobilis, Dimitris; Tsoukalas, John D.; Zanetti, Francesco
  11. The Evolution of U.S. Monetary Policy By Hetzel, Robert L.
  12. Asymmetric effects of monetary policy in regional housing markets By Knut Are Aastveit; Author-Name: André K. Anundsen
  13. The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity By João Granja; Christian Leuz
  14. Monetary policy rule and its performance under inflation targeting: the evidence of Thailand By Taguchi, Hiroyuki; Wanasilp, Mesa
  15. Unconventional Monetary Policy and Bank Lending Relationships By C. Cahn; A. Duquerroy; W. Mullins

  1. By: Cecchetti, Stephen G; Schoenholtz, Kermit
    Abstract: The financial crisis of 2007-09 revealed many deficiencies in the financial system. In response, authorities have implemented a wide range of regulatory reforms. We survey the reforms and offer our views on where there could be further improvements. While capital requirements and levels are far higher, they are not high enough. New liquidity requirements are useful, but need simplification. Shifting derivatives transactions to central counterparties has improved resilience, but also created indispensable financial market utilities that lack credible resolution and recovery regimes. And systemic (macroprudential) regulation lacks the metrics, policy tools, governance structure, and international cooperation needed to be effective.
    Keywords: Capital requirements; Central clearing; financial regulation; liquidity requirements; macro-financial linkages; macroprudential policy; Prudential regulation; recovery and resolution planing
    JEL: E58 G01 G18 G28 G38
    Date: 2017–11
  2. By: Fève, Patrick; Garcia, Pablo; Sahuc, Jean-Guillaume
    Abstract: Is risk taking an important channel by which monetary policy shocks affect economic activity? On the basis of a nonlinear structural VAR including a new measure of risk sensitivity by economic agents, we show that the role of the risk-taking channel depends on the state of the economy. While it is irrelevant during recession or normal times, it acts as an amplifier by boosting output during expansion. It means that, as long as monetary policy does not actively "lean against the wind", it may exacerbate boom-bust patterns.
    Keywords: Risk-taking channel; Monetary policy; Boom-bust cycle
    JEL: C32 E52
    Date: 2017–12
  3. By: Pedro Bação (Grupo de Estudos Monetários e Financeiros (GEMF); Centre for Business and Economics Research (CeBER)); António Portugal Duarte (Grupo de Estudos Monetários e Financeiros (GEMF); Centre for Business and Economics Research (CeBER))
    Abstract: Two main issues, closely related to each other, have occupied the European Central Bank in recent years: the sovereign debt crisis and the possibility of deflation in the Euro Zone. In this paper we discuss the causes, the consequences and the policy options regarding deflation. In addition, we assess the magnitude of the risk of deflation in the Euro Zone. For this purpose, we will employ the methodology of Kilian and Manganelli (2007). Our results suggest that the threat of deflation in the Euro Zone is related to the international financial crisis and to the sovereign debt crisis in Europe. Thus, the probability of deflation in the Euro zone increased in recent years. Nevertheless, it appears to have subsided in 2017, justifying the view taken by the ECB’s Governing Council, according to which deflation is no longer a problem for the Euro zone.
    Keywords: deflation, debt crisis, Eurozone, GARCH model.
    JEL: E31 F47
    Date: 2017–12
  4. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UvA - University of Amsterdam [Amsterdam])
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.
    Keywords: Central bank financial strength,Central bank capital,Central bank balance sheet,Inflation,Fiscal space,Central bank law
    Date: 2017–10
  5. By: Guillaume Khayat (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille)
    Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.
    Keywords: monetary policy,interbank market,heterogeneous interbank frictions,the corridor,excess reserves,financial intermediation
    Date: 2017–10
  6. By: Samuel Huber; Jaehong Kim
    Abstract: We integrate an overlapping generations model into a new monetarist framework and show that the Friedman rule is not optimal. This is because inflation makes saving for retirement less attractive, such that young agents optimally choose to increase their consumption at the expense of lower savings. On the other hand, old agents consume less due to the inflation tax. We show that for low inflation rates, the former effect dominates the latter, such that the Friedman rule is not optimal. However, this effect disappears for higher inflation rates such that the optimal rate is at an intermediate level.
    Keywords: Overlapping generations, monetary theory, Friedman rule
    JEL: D90 E31 E41 E50
    Date: 2017–12
  7. By: Pierre C. Boyer (CREST; École Polytechnique; Université Paris-Saclay); Hubert Kempf (CREST; École Normale Supérieure Paris-Saclay)
    Abstract: We study the efficiency of banking regulation under financial integration. Banks freely choose the jurisdiction where to locate their activities and have private information about their efficiency level. Regulators non-cooperatively offer any regulatory contract that satisfies information and participation constraints of banks. We show that the unique Nash equilibrium of the regulatory game is a simple pooling contract: financial integration is characterized by the inability for regulators to dis-criminate between banks with different effciency levels. This result is driven by the endogenous restriction caused by regulatory arbitrage on the capacity of regulators to use several regulatory instruments.
    Keywords: Regulatory Arbitrage; Banking regulation; Regulatory competition; Financial integration; Asymmetric information
    JEL: C72 D82 G21 G28
  8. By: Miranda-Agrippino, Silvia
    Abstract: This article studies the information content of monetary surprises, i.e. the reactions of financial markets to monetary policy announcements. We find that monetary surprises are predictable by past information, and can incorporate anticipatory effects. Surprises are decomposed into monetary policy shocks, forecast updates, and time-varying risk premia, all of which can change following the announcements. Hence, their use as identification devices is not warranted, and can have strong qualitative and quantitative implications for the estimated responses of variables to the shocks. We develop new measures for monetary policy shocks, independent of central banks’ forecasts and unpredictable by past information.
    Keywords: Monetary Surprises; Identification with External Instruments; Monetary Policy; Expectations; Information Asymmetries; Event Study; Proxy SVAR.
    JEL: E44 E52 G14
    Date: 2017–08–08
  9. By: Michele Cavallo; Marco Del Negro; W. Scott Frame; Jamie Grasing; Benjamin A. Malin; Carlo Rosa
    Abstract: The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.
    Keywords: Central bank balance sheets ; Monetary policy ; Remittances
    JEL: E58 E59 E69
    Date: 2018–01–08
  10. By: Gambetti, Luca; Korobilis, Dimitris; Tsoukalas, John D.; Zanetti, Francesco
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks; Business cycles; VAR models; DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09–01
  11. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: Since the establishment of the Federal Reserve System in 1913, policymakers have always pursued the goal of economic stability. At the same time, their understanding of the world and of the role of monetary policy has changed dramatically. This evolution of views provides a laboratory for understanding what kinds of monetary policy stabilize the economy and what kinds destabilize it.
    Keywords: federal reserve; monetary policy
    JEL: E52 E58
    Date: 2018–01–03
  12. By: Knut Are Aastveit; Author-Name: André K. Anundsen
    Abstract: The responsiveness of house prices to monetary policy shocks depends both on the nature of the shock – expansionary versus contractionary – and on city-specific housing supply elasticities. We test and find supporting evidence for the hypothesis that expansionary monetary policy shocks have a larger impact on house prices when supply elasticities are low on 263 US metropolitan areas. We also test whether contractionary shocks are orthogonal to supply elasticities, as implied by downward rigidity of housing supply, and find supporting evidence. A final theoretical conjecture is that contractionary shocks should have a greater impact on house prices than expansionary shocks, as long as supply is not perfectly inelastic. For areas with high housing supply elasticity, our results are in line with this conjecture. However, for areas with an inelastic housing supply, we find that expansionary shocks have a greater impact on house prices than contractionary shocks. We provide evidence that this is related to a momentum effect that is more pronounced when house prices are increasing than when they are falling.
    Keywords: House prices, Heterogeneity, Monetary policy, Non-linearity, Supply elasticities
    Date: 2017–12
  13. By: João Granja; Christian Leuz
    Abstract: An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through capital but can also overcome frictions in bank management, leading to more lending and a reallocation of loans. Consistent with the latter, we find increases in business entry and exit in counties with greater expose to OTS banks.
    JEL: E44 E51 G21 G28 G32 G38 K22 K23 L51 M41 M48
    Date: 2017–12
  14. By: Taguchi, Hiroyuki; Wanasilp, Mesa
    Abstract: This article reviews the Thailand monetary policy rule and its performance under the adoption of inflation targeting regime since 2000. The study estimates the policy reaction function to see if the inflation targeting has been linked with an inflation-responsive monetary policy rule, and investigates whether the monetary policy rule would actually have its transmission effect on inflation, through tracing the impulse responses of inflation rate to monetary policy shocks in vector autoregressive (VAR) and structural VAR models. The study contributes to the literature by updating the assessment of the Thailand monetary policy through covering the period after 2015, when the Bank of Thailand has upgraded its inflation targeting framework by transforming it from range target to point target to provide a clearer policy signal to the public. The main findings are as follows. The estimation outcomes of the policy reaction function show that the Thailand monetary policy rule under the inflation targeting is characterized as an inflation- and exchange-rate- responsive rule with forward-looking manner, which is countercyclical against inflation in the long run, but is accompanied with slow adjustment toward a target policy rate. The results from the impulse response analyses imply that the Thailand monetary policy under the inflation targeting has only a marginal transmission effect on inflation probably due to the slow adjustment of policy rate.
    Keywords: Monetary policy rule, Inflation targeting, The Bank of Thailand, Policy reaction function, and Vector autoregressive model
    JEL: E52 E58 O53
    Date: 2017–12
  15. By: C. Cahn; A. Duquerroy; W. Mullins
    Abstract: How to support private lending to firms in recessions is a major open question. This paper uses an unexpected change in the collateral framework of the European Central Bank that reduced the cost of funding loans to a subset of firms in France in 2012, to examine how bank adjust their corporate lending portfolio in a downturn. It provides causal evidence that targeted unconventional monetary policy can be an effective lever to increase private credit and reduce contagion of financial distress. The effect is strongly driven by firms with only a single bank relationship, especially less risky borrowers with information intensive banking relationships.
    Keywords: Unconventional Monetary Policy, Relationship Banking, SME finance, Bank Lending, Small Business, Collateral.
    JEL: D24 O11 O47
    Date: 2017

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