nep-cba New Economics Papers
on Central Banking
Issue of 2018‒02‒19
sixteen papers chosen by
Maria Semenova
Higher School of Economics

  1. International Monetary Policy Spillovers: Evidence from a TVP-VAR By Nikolaos Antonakakis; David Gabauer; Rangan Gupta
  2. Financial stability: To Regulate or Not? A public choice inquiry By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  3. Trade-offs between Inflation Targeting and Financial Stability Objectives: Drivers of Gains from Coordinating Monetary and Macroprudential Policies By Jessica Roldán-Peña; Mauricio Torres-Ferro; Alberto Torres
  4. Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications By Bundick, Brent; Smith, Andrew Lee
  5. Explaining Inflation with a Classical Dichotomy Model and Switching Monetary Regimes: Mexico 1932-2013 By Garcés Díaz Daniel
  6. The Ramsey Cooperative and Non-Cooperative Unconventional Monetary Policy By Shifu Jiang
  7. Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts? By Thomas Lustenberger; Enzo Rossi
  8. A Trendy Approach to UK Inflation Dynamics By Forbes, Kristin; Kirkham, Lewis; Theodoridis, Konstantinos
  9. The Bank of England as lender of last resort: new historical evidence from daily transactional data By Anson, Mike; Bholat, David; Kang, Miao; Thomas, Ryland
  10. The Pass-Through of Monetary Policy Rate to Lending Rates: The Role of Macro-financial Factors By Gregor, Jiri; Melecky, Martin
  11. Monetary Policy and Asset Price Bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  12. Prudential Regulation, Currency Mismatches and Exchange Rates in Latin America and the Caribbean By Tobal Martín
  13. Uninsured Unemployment Risk and Optimal Monetary Policy By Edouard Challe
  14. Monetary Policy and the Relative Price of Durable Goods By Alessandro Cantelmo; Giovanni Melina
  15. Forward Guidance and Heterogeneous Beliefs By Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoit
  16. Sovereign stress, banking stress, and the monetary transmission mechanism in the Euro area By Holtemöller, Oliver; Scherer, Jan-Christopher

  1. By: Nikolaos Antonakakis (Department of Business and Management, Webster Vienna Private University, Praterstrasse Vienna, Austria and Economics and Finance Subject Group, University of Portsmouth, Portsmouth Business School, Portsmouth, UK); David Gabauer (Department of Business and Management, Webster Vienna Private University, Praterstrasse Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this study, we examine the transmission of international monetary policy shocks across developed economies based on a time-varying parameter vector autoregressive (TVP-VAR) methodology. Using daily data on shadow short rates over the period of January 2, 1995 to September 22, 2017, we find the following empirical regularities. International monetary policy shocks are an important source of domestic monetary policy fluctuations. Moreover, the magnitude of international monetary policy spillovers behaves heterogeneously overtime, with peaks reached during the “Great Recession”. In addition, the dominant transmitters of international monetary policy shocks are the Euro Area and the US, while Japan and the UK are the dominant receivers of international monetary policy shocks. Interestingly enough, international monetary policy shocks originating from the US are the largest during the zero lower bound and the related unconventional monetary policy actions era, indicating potential gains from monetary policy coordination.
    Keywords: Monetary policy spillovers, Dynamic connectedness, TVP-VAR
    JEL: C32 C50 E52
    Date: 2018–01
  2. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: The paper takes the stand that the central banks as financial regulators have their own interest in imposing more regulations. It models the institutional behaviour for the central bank and government using the Indirect Inference testing and estimation method as it finds a set of coefficients of the model that can generate the actual observed behaviour for the US. The paper establishes that good monetary policy can reduce instability. Regulation at worse destabilises the economy and at best contributes little to stabilise the economy. After the financial crisis, financial regulations were too severe and thus actually increased instability.
    Keywords: DSGE, Regulations, Financial Stability, Monetary Policy
    JEL: E10 E58 G28
    Date: 2018–01
  3. By: Jessica Roldán-Peña; Mauricio Torres-Ferro; Alberto Torres
    Abstract: This paper studies the trade-offs that can arise between inflation targeting and financial stability objectives. We use a simple framework to conduct macroeconomic policy analysis under three strategies: (1) a benchmark case where monetary policy pursues traditional price stability objectives; (2) monetary policy leaning against the wind; and (3) a case of policy coordination between monetary and macroprudential instruments. We find that, under certain circumstances, having financial stability objectives as an additional macroeconomic policy increases the volatility of inflation. We identify cases in which the tradeoffs in terms of macroeconomic volatility between policy objectives create scope for improvement when monetary and macroprudential policies are coordinated. These improvements are generally larger when financial shocks are the main driver of macroeconomic fluctuations.
    Keywords: Price and Financial Stability;Leaning Against the Wind;Monetary and Macroprudential Policy Coordination
    JEL: E44 E52 E61 G28
    Date: 2017–12
  4. By: Bundick, Brent (Federal Reserve Bank of Kansas City); Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical findings have implications for the term structure of interest rates in the United States. In a calibrated macro-finance model, we show that the apparent anchoring of inflation expectations implies lower term premiums in longer-term bond yields and decreases the slope of the yield curve.
    Keywords: Monetary Policy; Inflation; Structural Breaks; Term Structure of Interest Rates
    JEL: E31 E52 E58
    Date: 2018–01–01
  5. By: Garcés Díaz Daniel
    Abstract: This paper applies a novel approach to study the impact of different shocks on the price level. It uses a classical dichotomy model with monetary policy regime shifts at known dates. First, there was a regime dominated by money, afterwards a regime driven by the exchange rate and a third one with inflation targeting. The result is a CVAR with constant long-run parameters but regime-dependent adjustment coefficients. This overcomes the challenge of explaining, within a single theoretical framework, inflation dynamics in Mexico since the country abandoned the gold standard. The model encompasses known results, offers new insights and clarifies decades-old debates on key aspects of the inflationary process such as inertia, the role of money, the exchange rate pass-through and the impact profile of other variables. The model proposed here is very parsimonious, it does not require inflation lags nor dummy variables. It also displays a very good pseudo out-of-sample forecasting performance.
    Keywords: Money Velocity;Exchange Rate;Inflation;PPP;Fiscal Deficit;Cointegration;Monetary Regimes;Unbalanced Regressions
    JEL: C32 E41 E42 E52
    Date: 2017–12
  6. By: Shifu Jiang
    Abstract: I study the Ramsey problem for three unconventional monetary policies in a twocountry model. An equity injection into financial intermediaries is the most efficient policy. Due to precautionary effects of future risk, a central bank should exit from these policies in accordance with but slower than the speed of deleveraging in the financial sector. The optimal policy is changed considerably if cross-country policy cooperation is not imposed. In this case, the unconventional interventions tend to be too strong in one country but too weak in the other. The cooperation gain is a function of policy cost. At last, I evaluate several simple rules and find that the rule responding to gaps in asset prices mimics the optimal policy very well.
    JEL: E44 E58 F41 F42 C63
    Date: 2017–12
  7. By: Thomas Lustenberger; Enzo Rossi (University of Basel)
    Abstract: In a large sample of countries across different geographic regions andover a long period of time, we find limited country- and variable-specific effectsof central bank transparency on forecast accuracy and their dispersionamong a large set of professional forecasts of financial and macroeconomicvariables. More communication even increases forecast errors and dispersion.
    Keywords: Central bank transparency, central bank communication, central bank independence, inflation targeting, forward guidance, macroeconomic forecasts, financial forecasts, panel data models with truncated data
    JEL: C23 C53 E37 E58 D8
    Date: 2018
  8. By: Forbes, Kristin; Kirkham, Lewis; Theodoridis, Konstantinos
    Abstract: This paper uses a "trendy" approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models-such as slack and inflation expectations-may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate.
    Keywords: Exchange rate; inflation; Inflation expectations; monetary policy; Phillips curve; slack; UCSV; UK
    JEL: E31 E5
    Date: 2018–01
  9. By: Anson, Mike (Bank of England); Bholat, David (Bank of England); Kang, Miao (Bank of England); Thomas, Ryland (Bank of England)
    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 penalty 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
    Date: 2017–11–10
  10. By: Gregor, Jiri; Melecky, Martin
    Abstract: This paper assesses how changes in the monetary policy rate transmit to the lending rates for the consumer, mortgage, SME, and corporate loans in the Czech Republic. It further examines whether this interest rate pass-through is stable or could vary at different levels of bank competition, leverage, non-performing loans, and foreign exchange (FX) interventions. Using the ARDL modelling approach, we find a significant and complete pass-through for SME lending rates. Significant structural shifts are estimated in the pass-through for mortgage and corporate rates. These shifts can be entirely or largely explained by bank deleveraging. We do not find any stable pass through for consumer lending rates. A greater spread between government bond and monetary policy rates increases the markup for all lending rates but corporate rates. FX interventions affected most the markups for corporate and SME rates; however, in a puzzling direction.
    Keywords: Monetary Policy Rate, Bank Lending Rates, Interest Rate Pass-Through, Foreign Exchange Interventions, Time Series Analysis, Czech Republic.
    JEL: E4 E43 E44 E5
    Date: 2018–01
  11. By: Christophe Blot; Paul Hubert; Fabien Labondance
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind†policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts, Mispricing, Price deviations, Interest rate policy, Unconventional monetary policy, Quantitative Easing, Federal Reserve
    JEL: E44 G12 E52
    Date: 2018
  12. By: Tobal Martín
    Abstract: This paper gathers and systemizes self-reported information about exchange rate flexibility and FX regulation in Latin America and the Caribbean for a period of twenty years beginning in 1992. The results show that, in countries in which the use of limits, liquidity and reserve requirements on FX positions was more common, the frequency of use of these instruments was particularly high during the transition towards more flexible exchange rate regimes. The exception refers to economies with a long tradition of financial dollarization in which the prudential policies were more spread out over time, possibly due to countercyclical adjustments of the regulatory instruments. Along these lines, policymakers reported that the first goal in using the regulation was to reduce currency mismatches, but, in the flexible regimes that were adopted during the 2000s the instruments were also used to dampen volatility in the exchange rate.
    Keywords: Prudential Regulation;Exchange Rate Regimes;Foreign Currency Positions
    JEL: E58 F31
    Date: 2017–12
  13. By: Edouard Challe (CREST; CNRS; Ecole Polytechnique)
    Abstract: I study optimal monetary policy in a New Keynesian economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feedback to greater unemployment risk. I show this de?flationary feedback loop to be constrained-inefficient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signifi?cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy effectively breaks the defl?ationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.
    Keywords: Unemployment risk; imperfect insurance; optimal monetary policy
    JEL: E21 E32 E52
    Date: 2017–11–01
  14. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: In a SVAR model of the US, the response of the relative price of durables to a monetary contraction is either flat or mildly positive. It significantly falls only if narrowly defined as the ratio between new-house and nondurables prices. These findings are rationalized via the estimation of a two-sector New-Keynesian (NK) models. Durables prices are estimated to be as sticky as nondurables, leading to a flat relative price response to a monetary shock. Conversely, house prices are estimated to be almost flexible. Such results survive several robustness checks and a three-sector extension of the NK model. These findings have implications for building two-sector NK models with durable and nondurable goods, and for the conduct of monetary policy.
    Keywords: Monetary policy;durables, nondurables, price stickiness, relative price, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–12–22
  15. By: Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoit
    Abstract: Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.
    Keywords: disagreement; optimal policy; signaling channel; survey forecasts.; zero lower bound
    JEL: E31 E52 E65
    Date: 2018–01
  16. By: Holtemöller, Oliver; Scherer, Jan-Christopher
    Abstract: In this paper, we investigate to what extend sovereign stress and banking stress have contributed to this increase in the level and in the heterogeneity of nonfinancial firms' refinancing costs in the Euro area during the European debt crisis and how they did affect the monetary transmission mechanism. Employing a large firm-level data set containing two million observations, we are able to identify the increasing effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms' financing costs in a panel model by assuming that idiosyncratic shocks to individual firms are uncorrelated with country-specific variables. Moreover, we estimate both sources of stress to have significantly impaired the monetary transmission mechanism between 2005 and 2013. This finding suggests that the ECB's asset purchase programmes during that period have helped to improve firms' financing conditions in stressed countries but that monetary policy transmission was still impaired due to the elevated level of banking stress in these countries.
    Keywords: banking stress,firms' financing conditions,government bond yields,interest rate channel,monetary policy transmission,sovereign stress
    JEL: E43 E44 E52
    Date: 2018

This nep-cba issue is ©2018 by Maria Semenova. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.