nep-cba New Economics Papers
on Central Banking
Issue of 2018‒03‒26
seventeen papers chosen by
Maria Semenova
Higher School of Economics

  1. Out of Sync Subnational Housing Markets and Macroprudential Policies By Michael Funke; Petar Mihaylovski; Adrian Wende
  2. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, G.; Dedola, L.; Leduc, S.
  3. Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves By Nymand-Andersen, Per
  4. Money demand stability, monetary overhang and inflation forecast in the CEE countries By Claudiu Tiberiu Albulescu; Dominique Pépin
  5. Price Level Targeting with Evolving Credibility By Honkapohja, Seppo; Mitra, Kaushik
  6. Systematic Risk, Bank Moral Hazard, and Bailouts By Marcella Lucchetta; Michele Moretto; Bruno Maria Parigi
  7. Optimal Forbearance of Bank Resolution By Linda Schilling
  8. Sovereign Default: The Role of Expectations By Ayres,; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
  9. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  10. How Post-crisis Regulation Has Affected Bank CEO Compensation By Vittoria Cerasi; Sebastian M. Deininger; Leonardo Gambacorta; Tommaso Oliviero
  11. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity By Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
  12. Unconventional views on inflation control: Forward guidance, the Neo-Fisherian approach, and the fiscal theory of the price level By Spahn, Peter
  13. Effects of asset purchases and financial stability measures on term premia in the euro area By Richhild Moessner
  14. Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate By Kolcunova, Dominika; Havranek, Tomas
  15. Early Warning System of Government Debt Crises By Christian Dreger; Konstantin A. Kholodilin
  16. An elusive panacea? The impact of the regulatory valuation regime on insurers' investment behaviour By Lepore, Caterina; Tanaka, Misa; Humphry, David; Sen, Kallol
  17. Evaluating the Unconventional Monetary Policy in Stock Markets : A Semi-parametric Approach By Shirota, Toyoichiro

  1. By: Michael Funke; Petar Mihaylovski; Adrian Wende
    Abstract: In view of regional house prices drifting apart, we examine whether regionally differentiated macroprudential policies can address financial stability concerns and moderate house price differences. To this end, we disaggregate both the household sector and the housing stock in a two-region DSGE model with out of sync subnational housing markets and compare four macroprudentail policy types: standard monetary policy by means of a standard Taylor rule, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. In terms of reducing variances of house prices, regionally differentiated macroprudential policy performs best, provided the policy authorities are concerned with stabilising output and house prices rather than simply minimising the variance of inflation. Thus the findings point to a critical role for policy in regionalising macroprudential tools.
    Keywords: macroprudential policies, housing, DSGE, Great Britain
    JEL: E32 E44 E52 E58
    Date: 2018
  2. By: Corsetti, G.; Dedola, L.; Leduc, S.
    Abstract: What determines the optimal monetary trade-offs between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-offs analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: Currency misalignments, trade imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03–15
  3. By: Nymand-Andersen, Per
    Abstract: The European Central Bank (ECB), as part of its forward-looking strategy, needs high-quality financial market statistical indicators as a means to facilitate evidence-based and sound decision-making. Such indicators include timely market intelligence and information to gauge investors’ expectations and reaction functions with regard to policy decisions. The main use of yield curve estimations from an ECB monetary policy perspective is to obtain a proper empirical representation of the term structure of interest rates for the euro area which can be interpreted in terms of market expectations of monetary policy, economic activity and inflation expectations over short-, medium- and long-term horizons. Yield curves therefore play a pivotal role in the monitoring of the term structure of interest rates in the euro area. In this context, the purpose of this paper is twofold: firstly, to pave the way for a conceptual framework with recommendations for selecting a high-quality government bond sample for yield curve estimations, where changes mainly reflect changes in the yields-to-maturity rather than in other attributes of the underlying debt securities and models; and secondly, to supplement the comprehensive – mainly theoretical – literature with the more empirical side of term structure estimations by applying statistical tests to select and produce representative yield curves for policymakers and market-makers. JEL Classification: G1, E4, E5
    Keywords: data quality, term structure, yield curve models
    Date: 2018–02
  4. By: Claudiu Tiberiu Albulescu; Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.
    Keywords: CEE countries ,currency substitution,money demand stability,monetary overhang,inflation forecasts
    Date: 2018–03–01
  5. By: Honkapohja, Seppo; Mitra, Kaushik
    Abstract: We examine global dynamics under learning in a nonlinear New Keynesian model when monetary policy uses price-level targeting and compare it to inflation targeting. Domain of attraction of the targeted steady state gives a robustness criterion for policy regimes. Robustness of price-level targeting depends on whether a known target path is incorporated into learning. Credibility is measured by accuracy of this forecasting method relative to simple statistical forecasts. Credibility evolves through reinforcement learning. Initial credibility and initial level of target price are key factors influencing performance. Results match the Swedish experience of price level stabilization in 1920's and 30's.
    Keywords: Adaptive Learning; Inflation targeting; Limited Credibility; Zero Interest Rate Lower Bound
    JEL: E52 E58 E63
    Date: 2018–02
  6. By: Marcella Lucchetta; Michele Moretto; Bruno Maria Parigi
    Abstract: We show that the impact of government bailouts (liquidity injections) on a representative bank’s risk taking depends on the level of systematic risk of its loans portfolio. In a model where bank’s output follows a geometric Brownian motion and the government guarantees bank’s liabilities, we show first that more generous bailouts may or may not induce banks to take on more risk depending on the level of systematic risk; if systematic risk is high (low), a more generous bailout decreases (increases) bank’s risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the relationship between bailouts and bank’s risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is loose and more generous bailouts induce banks to take on more risk. If systematic risk is high and the optimal liquidity policy is tight, less generous bailouts induce banks to take on less risk. However, when high systematic risk makes a very tight liquidity policy optimal, a less generous bailout could increase bank’s risk taking. While in this model there is only one representative bank, in an economy with many banks, a higher level of systematic risk could also be a source of systemic risk if a tighter liquidity policy induces correlated risk taking choices by banks.
    Keywords: bailout, bank closure, real option, systematic risk
    JEL: G00 G20 G21
    Date: 2018
  7. By: Linda Schilling (Utrecht University)
    Abstract: We analyze optimal strategic delay of bank resolution ('forbearance') and deposit insurance in a setting where, after bad news on the bank, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Under low insurance coverage the optimal intervention policy is to walk away. Optimal deposit insurance coverage is always interior. Fast intervention cannot minimize public losses and be optimal at the same time. The paper sheds light on the differences between the U.S. and the European Monetary Union in terms of their bank resolution policies.
    Keywords: Bank resolution, suspension of convertibility, mandatory stay, forbear- ance, bank run, deposit insurance, deposit freeze, recovery rates, global games
    JEL: G28 G21 G33
    Date: 2018
  8. By: Ayres,; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria.
    Keywords: Sovereign default; multiple equilibria; good and bad times.
    JEL: E44 F34
    Date: 2018–02
  9. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper estimates an open-economy dynamic stochastic general equilibrium model with Bayesian techniques to analyse the macroeconomic effects of the European Central Bank’s (ECB’s) quantitative easing (QE) programme. Using data on government debt stocks and yields across maturities, we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to annual euro area output growth and inflation in 2015-16 of up to 0.3 and 0.6 percentage points (pp) in the linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact to up to 0.7 and 0.8 pp.
    Keywords: Economic models, Interest rates, Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2018
  10. By: Vittoria Cerasi (Bicocca University); Sebastian M. Deininger (Basel Chamber of Commerce); Leonardo Gambacorta (BIS and CEPR); Tommaso Oliviero (CSEF, Università di Napoli Federico II)
    Abstract: This paper assesses whether compensation practices for bank Chief Executive Officers (CEOs) changed after the Financial Stability Board (FSB) issued post-crisis guidelines on sound compensation. Banks in jurisdictions which implemented the FSB’s Principles and Standards of Sound Compensation in national legislation changed their compensation policies more than other banks. Compensation in those jurisdictions is less linked to short-termprofits and more linked to risks, with CEOs at riskier banks receiving less, by way of variable compensation, than those at less-risky peers. This was particularly true of investment banks and of banks which previously had weaker risk management, for example those that previously lacked a Chief Risk Officer.
    Keywords: Banks; Managerial compensation; Prudential regulation; Risk-taking
    JEL: G21 G28 G32
    Date: 2018–03–07
  11. By: Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
    Abstract: Contrary to previous beliefs, recent empirical work has found that the effects of monetary policy on inequality are far from modest. In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. This is so since the increase in labor demand driven by a monetary expansion leads to larger wage increases for high-skilled workers than for low-skilled workers since the former have smaller matching frictions (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.
    Keywords: capital-skill complementarity; inequality; monetary policy; Search and Matching
    JEL: E24 E25 E52 J64
    Date: 2018–02
  12. By: Spahn, Peter
    Abstract: In recent years, various "unconventional" views have been advanced that promise to offer new analytical insights and policy approaches that are suited to control the value of money, particularly in a constellation of low growth and unemployment. Whereas Forward Guidance attempts to decrease the real interest rate by low nominal rates and by creating excessive inflationary expectations, the Neo-Fisherian approach suggests to increase nominal rates immediately to the long-run equilibrium value that corresponds to the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt. All three views are criticized for analytical and empirical reasons.
    Keywords: interest rate policy,zero-lower bound,low-growth equilibrium
    JEL: E52 E58
    Date: 2018
  13. By: Richhild Moessner
    Abstract: We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area in the wake of the global financial crisis and the euro area sovereign debt crisis on ten-year government bond term premia in eleven euro area countries. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.
    Keywords: Monetary policy, asset purchases, financial stability, term premia
    JEL: E58 G15
    Date: 2018–03
  14. By: Kolcunova, Dominika; Havranek, Tomas
    Abstract: The paper focuses on the estimation of the effective lower bound for the Czech National Bank's policy rate. The effective lower bound is determined by the value below which holding and using cash would be more convenient than deposits with negative yields. This bound is approximated based on storage, the insurance and transportation costs of cash and the costs associated with the loss of the convenience of cashless payments and complemented with the estimate based on interest charges, which present direct costs to the profitability of the bank. Overall, the estimated value is below -1% and is approximately in the interval -1.6%, -1.1%. In addition, by means of a vector autoregression, we show that the potential of negative rates would not be sufficient to deliver monetary policy easing with effects similar to those of the exchange rate commitment.
    Keywords: effective lower bound,negative interest rates,costs of holding cash,transmission of monetary policy
    JEL: E52 E58
    Date: 2018
  15. By: Christian Dreger; Konstantin A. Kholodilin
    Abstract: The European debt crisis has revealed serious deficiencies and risks on a proper functioning of the monetary union. Against this backdrop, early warning systems are of crucial importance. In this study that focuses on euro area member states, the robustness of early warning systems to predict crises of government debt is evaluated. Robustness is captured via several dimensions, such as the chronology of past crises, econometric methods, and the selection of indicators in forecast combinations. The chosen approach is shown to be crucial for the results. Therefore, the construction of early warning systems should be based on a wide set of variables and methods in order to be able to draw reliable conclusions.
    Keywords: Sovereign debt crises, multiple bubbles, signal approach, logit, panel data model
    JEL: C23 C25 H63
    Date: 2018
  16. By: Lepore, Caterina (Bank of England); Tanaka, Misa (Bank of England); Humphry, David (Bank of England); Sen, Kallol (Bank of England)
    Abstract: This paper examines how the interactions between the valuation regime and solvency requirements influence investment behaviour of long-term investors with stable liabilities, such as life insurers. Under limited liability, solvency requirements based on historical cost valuation encourage risk-shifting to the detriment of policyholders, while those based on fair value regime can induce procyclical asset sales. A hybrid valuation regime, intended to address these unfavourable outcomes, does not strictly dominate the other two regimes. But both fair value and hybrid regimes outperform the historical cost regime if the regulators can set the penalty imposed on insurers based on supervisory information about their asset quality, even if this information is imperfect.
    Keywords: Valuation; historical cost accounting; mark-to-market; risk-shifting; fire sales; prudential regulation; insurance
    JEL: G22 G28 M41
    Date: 2018–02–09
  17. By: Shirota, Toyoichiro
    Abstract: This study analyzes the effect of a central bank’s intervention in stock markets, while allowing for nonlinearities and state dependencies, using a semi-parametric approach. A causal inference on such intervention is difficult because of the selfselective behavior of central banks. To address these problems, we apply the propensity score method in a time series context, exploiting stock price information of a single day. We find that first, there are demand pressure effects in stock markets if an intervention is large enough. Second, the effects are state-dependent and stronger during market downturns. Finally, a central bank’s interventions have a considerable impact on stock prices only when we take permanent demand pressure effects into consideration.
    Keywords: unconventional monetary policy, stock market intervention, demand pressure effect, semi-parametric approach, propensity score,
    Date: 2018–03

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