nep-cba New Economics Papers
on Central Banking
Issue of 2018‒03‒12
twelve papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation Targeting as a Shock Absorber By Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
  2. Monetary policy and the asset risk-taking channel By Angela Abbate; Dominik Thaler
  3. Monetary policy shocks, expectations and information rigidities By Joscha Beckmann; Robert Czudaj
  4. On the Transactions Costs of UK Quantitative Easing By Francis Breedon;
  5. Unmoored expectations and the price puzzle By Anna Florio
  6. The Optimal Inflation Target and the Natural Rate of Interest By Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
  7. Central Bank Independence Revisited By Peter Kriesler; G. C. Harcourt; Joseph Halevi
  8. Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy By Zheng, Zhijie; Huang, Chien-Yu; Yang, Yibai
  9. Should the ECB coordinate EMU fiscal policies? By Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
  10. Spillovers in Risk of Financial Institutions By John Cotter; Anita Suurlaht
  11. Liquidity Risk, Credit Risk and the Money Multiplier By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  12. Auctions of Failed Banks and the Impact on Losing Bidders By Tim Mi Zhou

  1. By: Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
    Abstract: We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.
    Keywords: Monetary Policy, Central Banks, Monetary Regimes, Dynamic Effects
    JEL: E42 E52 E58
    Date: 2018
  2. By: Angela Abbate (Swiss National Bank); Dominik Thaler (Banco de España)
    Abstract: How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.
    Keywords: bank risk, monetary policy, DSGE models
    JEL: E12 E44 E58
    Date: 2018–02
  3. By: Joscha Beckmann (University of Duisburg-Essen, Department of Economics); Robert Czudaj
    Abstract: This paper contributes to the literature by assessing expectation effects from monetary policy for the G7 economies. We consider a sample period running from 1995M1 to 2016M6 based on a panel VAR framework, which accounts for international spillovers and time-variation. Relying on a broad set of expectation data from Consensus Economics, we start by analyzing whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis. We proceed by estimating potential effects of interest rate changes on expectations, disagreements and forecast errors. We find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks. Our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters.
    Keywords: Bayesian econometrics, expectations, information rigidity, monetary policy, panel VAR
    JEL: E31 E52
    Date: 2018–02
  4. By: Francis Breedon (Queen Mary University of London);
    Abstract: Most quantitative easing programmes primarily involve central banks acquiring government liabilities in return for central bank reserves. In all cases this process is undertaken by purchasing these liabilities from private sector intermediaries rather than directly from the government. This paper estimates the cost of this round-trip transaction – government issuance of liabilities and central bank purchases of those liabilities in the secondary market – for the UK. I estimate that this cost amounts to about 0.5% of the total value of QE (over £1.8 billion in my sample). I also find some evidence that this figure is inflated by the unusual design of UK QE operations.
    Keywords: Quantitative Easing, Auctions, Government Bonds
    JEL: G12 E58
    Date: 2018–01–11
  5. By: Anna Florio (Department of Management, Economics and Industrial Engineering, Politecnico di Milano)
    Abstract: We explore the possibility that the price puzzle - the positive response of prices to a negative monetary policy shock- arises in the presence of unmoored expectations. Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Canada, New Zealand, Sweden, United Kingdom, Switzerland and EMU) to their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While in this last group we find evidence of a price puzzle, in the first, starting from the period when this anchor was set, we do not find such a perverse dynamic. We argue that those countries characterised by clearly defined nominal anchors, having anchored inflation expectations, have managed to rule out the persistent increase in the price level.
    Keywords: VAR, Price Puzzle, Monetary Policy Shocks.
    Date: 2018–03
  6. By: Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
    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: effective lower bound; inflation target
    JEL: E31 E52 E58
    Date: 2018–02
  7. By: Peter Kriesler (School of Economics, UNSW Business School, UNSW); G. C. Harcourt (School of Economics, UNSW Business School, UNSW); Joseph Halevi (University of sydney)
    Abstract: In major advanced economies, including Australia, independent central banks have become established institutions. Yet there are reasons why the sustained presence of such an institution in a democratic society should be challenged. This paper considers the arguments usually advanced for central bank independence, and the underlying arguments for a failure of democracy including the standard argument based on the importance of central bank credibility. This argument depends crucially on the role of inflationary expectations on the actual inflation rate. We question whether the standard story is really relevant – and, if not, then independence depends on the argument that politicians may not always act in the best long-term interests of their constituencies but bankers are more likely to. We show that this is a questionable assumption. The post Wold War 2 development of Europe and the emergence of the European Central Bank is examined to illustrate our underlying proposition that Central bank independence is not the result of economic argument, but of political ones leading to suboptimal economic results.
    Keywords: Central bank independence, democracy, European Central Bank, inflation, inflationary expectations
    JEL: E58 E50 G20
    Date: 2018–01
  8. By: Zheng, Zhijie; Huang, Chien-Yu; Yang, Yibai
    Abstract: This paper investigates the effects of monetary policy on long-run economic growth via different cash-in-advance constraints on R&D in a Schumpeterian growth model with vertical and horizontal innovation. The relationship between inflation and growth is contingent on the relative extents of CIA constraints and diminishing returns to two types of innovation. The model can generate a mixed (monotonic or non-monotonic) relationship between inflation and growth, given that the relative strength of monetary effects on growth between different CIA constraints and that of R&D-labor-reallocation effects between different diminishing returns vary with the nominal interest rate. In the empirically relevant case where horizontal R&D suffers from greater diminishing returns than vertical R&D, inflation and growth can exhibit an inverted-U relationship when the CIA constraint on horizontal R&D is sufficiently larger than that on vertical R&D. Finally, the model is calibrated to the US economy, and we find that the growth-maximizing rate of inflation is around 2.8%, which is closely consistent with recent empirical estimates.
    Keywords: Inflation; Endogenous growth; CIA constraint on R&D
    JEL: E41 O30 O40
    Date: 2018–02–21
  9. By: Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
    Abstract: In a monetary union where fiscal authorities act strategical ly fiscal cooperation is unlikely to emerge as an equilibrium. Even when the cooperative outco me is the best for a national fiscal authority, it is either not a Nash equilibrium, or only one of several Nash equilibria. The monetary authority may have an important coordinating role ; however, the Pareto-preferred equilibrium will not necessarily involve cooperation.
    Keywords: Monetary and Fiscal Policy Coordination, Monetary Union
    JEL: E52 E61 E63
    Date: 2017–11
  10. By: John Cotter (University College Dublin); Anita Suurlaht (University College Dublin)
    Abstract: We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity.
    Keywords: macro-financial state variables, financial crisis, spillover effects, credit default swaps, real estate risk.
    JEL: G01 G15 G20
    Date: 2018–02–19
  11. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: Before the financial crisis there was a significant, negative relationship between the money multiplier and the risk free rate; post-crisis it was significant and positive. We develop a model where banksíreserves mitigate not only liquidity risk, but also default/credit risk. When default risk dominates, the model predicts a positive relationship between the risk free rate and the money multiplier. When liquidity risk dominates, that relationship is negative. We suggest reduced liquidity risk, from QE and remunerated reserves, helps explain the multiplier data. The model's implications linking the stock market and the money multiplier are also deduced and verified.
    Keywords: quidity risk; credit risk; excess reserves; US money multiplier, remuneration of reserves
    JEL: E40 E44 E50 E51
    Date: 2017–07
  12. By: Tim Mi Zhou (School of Management, Swansea University)
    Abstract: We find that losing bidders in FDIC auctions of failed banks from 2007 to 2013 experience positive abnormal stock returns. Returns are inversely related to the wealth transfer from the FDIC to the winning bidders that losing bidders fail to capture. Losing bidders' stock-holders, nevertheless, react positively to improved competitive market conditions due to the auctions.
    Keywords: FDIC, Banks, Resolution, Auction
    JEL: D44 G14 G21 G28
    Date: 2018–02–26

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