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on Central Banking |
| By: | Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis); Sem Duijndam (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | How effective are unconventional monetary policies? Through which mechanisms do they work? Central banks have been conducting monetary policy through unconventional means such as expanding their balance sheets or forward guidance because the conventional instrument of monetary policy, the short-term policy rate, has been at or close to the zero lower bound since shortly after the fall of Lehmann Brothers. These unconventional monetary policies are new and bring with them many questions, which were addressed in the CPB policy brief ‘Onderweg naar normaal monetair beleid’ [CPB policy brief 2017/07, 8 June 2017]. Understanding how and why unconventional monetary policy works is a crucial first step for answering subsequent questions, such as the likely effects of the withdrawal of unconventional monetary policy, or about how domestic policy makers can best respond. This discussion paper contains a detailed presentation of the new scientific evidence we reported in the policy brief, and adds to the relatively scarce literature in this field We estimate the effects of unconventional monetary policy shocks on output and inflation in the euro area using data from 2009 to 2016, which covers the period of all of the major unconventional monetary policies that the ECB has used. We employ a two stage estimation strategy: first, we identify unconventional monetary policy shocks in a dedicated euro area level structural vector autoregression (SVAR) model. Subsequently we use these unconventional monetary policy shocks in country level models. By estimating the effects of unconventional monetary policy shocks in the individual countries of the euro area, we aim to shed some light on the most important transmission mechanisms through which unconventional monetary policy works. We find weak evidence that expansionary unconventional monetary policy shocks increase output growth, but the effects on inflation at the aggregate euro area level are economically insignificant. At the individual country level we find a range of responses across the countries in our sample, and those differences in the magnitudes of output responses are consistent with some of the transmission channels that have been proposed for how unconventional monetary policy works. Interestingly, though, we find that healthier banking systems at the start of our sample and lower government debts are associated with larger peak output responses. This is the opposite of what the bank lending channel predicts, which is one of the most important proposed channels. We are not the only authors to have found this, for example Van Dijk and Dubovik (2018) also find no evidence of the bank lending channel when they focus on the effect of the announcement of the ECB’s Asset Purchase Programme in January 2015 on lending rates. |
| JEL: | C32 E52 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:371&r=cba |
| By: | Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Frank Heinemann (TUB - Technische Universität Berlin) |
| Abstract: | Monetary policy affects the degree of strategic complementarity in firms' pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms' pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications. Abstract Monetary policy affects the degree of strategic complementarity in firms' pricing decisions if it responds to the aggregate price level. In normal times, when monopolis-tic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms' pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications. |
| Keywords: | monopolistic competition, monetary policy rule, pricing decisions, strategic complementarity, strategic substitutability |
| Date: | 2018–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01759692&r=cba |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Martin, Fernando M. (Federal Reserve Bank of St. Louis) |
| Abstract: | We examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority-a scenario increasingly relevant for many developed economies today. Central bank control over the long-run inflation rate depends on whether fiscal policy is Ricardian or Non-Ricardian. The optimal monetary policy follows a generalized Friedman rule that eliminates the liquidity premium on scarce treasury debt. We derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle. In addition, Non-Ricardian regimes may suffer from multiplicity of steady-states when the government runs persistent deficits. |
| Keywords: | monetary policy; in ation; Taylor rule; determinacy; Ri- cardian; liquid bonds |
| JEL: | E40 E52 E60 E63 |
| Date: | 2018–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-002&r=cba |
| By: | Ricardo Reis (Centre for Macroeconomics (CFM); London School of Economics (LSE)) |
| Abstract: | Central banks have sometimes turned their attention to long-term interest rates as a target or as a diagnosis of policy. This paper describes two historical episodes when this happened—the US in 1942-51 and the UK in the 1960s—and uses a model of inflation dynamics to evaluate monetary policies that rely on going long. It concludes that these policies for the most part fail to keep inflation under control. A complementary methodological contribution is to re-state the classic problem of monetary policy through interest-rate rules in a continuous-time setting where shocks follow diffusions in order to integrate the endogenous determination of inflation and the term structure of interest rates. |
| Keywords: | Taylor rule, Yield curve, Pegs, Ceilings, Affine models |
| JEL: | E31 E52 E58 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1810&r=cba |
| By: | Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini |
| Abstract: | Persistently low inflation rates in the Euro Area raise the question whether inflation is still credibly anchored to the Euro-system’s medium term target of below, but close to 2%. The purpose of this paper is twofold. First, we investigate why agents’ expectations that over the business cycle inflation will remain in line with the target begin to falter. Our hypothesis is that agents form expectations in terms of their confidence in the "normal regime", which is updated observing the state of the economy. Second, we study how the de-anchoring of expectations interacts with monetary policy determining whether the central bank is still able to achieve its target - and hence re-anchor inflation expectations - or whether the system drifts away towards depressed states of low inflation and output. Two are our main findings. The first is that, facing unfavourable shocks, if inflation expectations "fall faster" than the policy rate, and the zero lower bound is reached without correcting the shock, the system converges to a new steady state - the “new normal†- with permanent negative gaps. The second is that a more aggressive monetary policy is ineffective both at the ZLB and above the ZLB, when the shock is large and/or when the reactivity of inflation expectations is high enough. This last finding seems to support the necessity, in those conditions, to abandon conventional monetary policy and to switch to an aggressive reflationary policy that prevents the entrenchment of deflationary expectations |
| Keywords: | Monetary Policy, Zero Lower Bound, New Normal, Inflation Expectations |
| JEL: | E50 E52 E58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2018/04&r=cba |
| By: | Hipòlit Torró (University of Valencia, Department of Financial and Actuarial Economics) |
| Abstract: | To our knowledge, this paper is the first to discuss the response of European energy commodity prices to unexpected monetary policy surprises from the European Central Bank. Using the Rigobon (2003) identification through heteroscedasticity method, we find a significant and positive response during the crisis period for Brent and coal. Similar results are obtained by other authors for European financial assets in this period. This result reinforces the idea that during this period, financial assets and some commodities positively responded to conventional and unconventional expansionary monetary policy measures, increasing confidence about the survival of the European monetary union. The remaining European energy commodities (electricity, EUAs, and natural gas prices) seem to be unaffected by monetary policy actions. We think these results are of interest to those economic agents and institutions involved in European energy markets and are especially important for the European Central Bank in order to predict the consequences of its monetary policy on the inflation objective. |
| Keywords: | Brent, Monetary Policy, European Central Bank, Energy Commodities |
| JEL: | C26 E58 G13 Q41 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2018.09&r=cba |
| By: | Güneş Kamber; Madhusudan Mohanty |
| Abstract: | We explore the role of interest rates in monetary policy transmission in China in the context of its multiple instrument setting. In doing so, we construct a new series of monetary policy surprises using information from high frequency Chinese finan- cial market data around major monetary policy announcements. Our event analysis shows that monetary policy surprises have persistent effects on interest rates. We then use these surprise measures as external instruments to identify monetary pol- icy shocks in an SVAR. We find that a contractionary monetary policy surprise increases interest rates and significantly reduces inflation and economic activity. Our findings provide further support to recent studies suggesting that monetary policy transmission in China has become increasingly similar to that in advanced economies. |
| Keywords: | monetary policy in China, structural VAR, external instruments |
| JEL: | C22 E5 G14 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:714&r=cba |
| By: | Pedro Mazeda Gil (University of Porto, Faculty of Economics, and cef.up); Gustavo Iglésias, (University of Porto, Faculty of Economics) |
| Abstract: | We study the real long-run effects of inflation and of the structural stance of monetary policy in the context of a monetary model of R&D-driven endogenous growth complemented with physical capital accumulation. We look into the effects on a set of real macroeconomic variables that have been of interest to policymakers – the economic growth rate, the real interest rate, the physical investment rate, R&D intensity, and the velocity of money –, and which have been analysed from the perspective of different, separated, strands of the theoretical and empirical literature. Additionally, we analyse the theoretical predictions of our model as regards the effects of inflation on the effectiveness of real industrial policy shocks and on the market structure, assessed namely by the average firm size, and present novel cross-country evidence on the empirical relationship between the latter and the long-run inflation rate. |
| Keywords: | Keywords: Endogenous growth, R&D, physical capital, firm size, cash-in-advance, inflation, money. |
| JEL: | O41 O31 E41 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:1802&r=cba |
| By: | Cavallo, Michele (Federal Reserve Board); Del Negro, Marco (Federal Reserve Bank of New York); Frame, W. Scott (Federal Reserve Bank of Atlanta); Grasing, Jamie (University of Maryland); Malin, Benjamin A. (Federal Reserve Bank of Minneapolis); Rosa, Carlo (Federal Reserve Bank of New York) |
| 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: | 2018–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:747&r=cba |
| By: | Afonso, António; Arghyrou, Michael G; Gadea, María Dolores; Kontonikas, Alexandros |
| Abstract: | This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis. |
| Keywords: | euro area, spreads, crisis, time-varying relationship, unconventional monetary policy |
| Date: | 2018–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:21820&r=cba |
| By: | Paul Wohlfarth (Birkbeck, University of London) |
| Abstract: | We study monetary policy introducing a novel measure for policy attention based on Google Trends data. We apply the obtained indices to fixed income data for the US and the Eurozone in a specification motivated by a preferred-habitat model to test for monetary policy transmission domestically and internationally. Our findings suggest an impact of monetary policy on variance processes only and provides evidence for an international channel of monetary transmission on both money and capital markets. This is, to our knowledge, the first attempt to use search-engine data in the context of monetary policy. |
| Keywords: | attention, internet search, Google, monetary policy, ECB, FED, international financial markets, macro-finance, sovereign bonds, international finance, bond markets, preferred habitat models. |
| JEL: | E52 E43 E44 G10 G15 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1803&r=cba |
| By: | Carmassi, Jacopo; Dobkowitz, Sonja; Evrard, Johanne; Parisi, Laura; Silva, André; Wedow, Michael |
| Abstract: | On 24 November 2015, the European Commission published a proposal to establish a European Deposit Insurance Scheme (EDIS). The proposal provides for the creation of a Deposit Insurance Fund (DIF) with a target size of 0.8% of covered deposits in the euro area and the progressive mutualisation of its resources until a fully-fledged scheme is introduced by 2024. This paper investigates the potential impact and appropriateness of several features of EDIS in the steady state. The main findings are the following: first, a fully-funded DIF would be sufficient to cover payouts even in a severe banking crisis. Second, risk-based contributions can and should internalise specificities of banks and banking systems. This would tackle moral hazard and facilitate moving forward with risk sharing measures towards the completion of the Banking Union in parallel with risk reduction measures; this approach would also be preferable to lowering the target level of the DIF to take into account banking system specificities. Third, smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Fourth, there would be no unwarranted systematic cross-subsidisation within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF. This result holds also when country-specific shocks are simulated. Fifth, under a mixed deposit insurance scheme composed of national deposit insurance funds bearing the first burden and a European deposit insurance fund intervening only afterwards, cross-subsidisation would increase relative to a fully-fledged EDIS. The key drivers behind these results are: i) a significant risk-reduction in the banking system and increase in banks' loss-absorbing capacity in the aftermath of the global financial crisis; ii) a super priority for covered deposits, further contributing to protect EDIS; iii) an appropriate design of risk-based contributions, benchmarked at the euro area level, following a "polluter-pays" approach. JEL Classification: G21, G28 |
| Keywords: | cross-subsidisation, European Deposit Insurance Scheme (EDIS), risk-based contributions |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2018208&r=cba |
| By: | Anita Angelovska - Bezhoska (National Bank of the Republic of Macedonia) |
| Abstract: | This paper explores the level of independence of the National Bank of the Republic of Macedonia by primarily focusing on the legal provisions that pertain to the key aspects for achieving and maintaining price stability. It provides a historical perspective of the evolution of the independence since the first years of transition. The assessment of the independence of the NBRM is based on the index of Cukierman, Webb, and Neyapti (1992), as one of the most commonly used indices, and the index of Jacome and Vazquez (2005), which incorporates some specific aspects relevant for transition economies. Both indices indicate that throughout the years the legal independence of the NBRM has increased and that the current legal framework provides high level of independence. Yet, it should be emphasized that there is a room for further strengthening, in particular in the areas of policy formulation and the process of appointment of the non-executive members of the council of the NBRM. As the indices are based on the legal provisions, they can serve only as an indication of the actual independence of the central bank. |
| Keywords: | central bank independence, monetary policy, indices, Macedonia |
| JEL: | E42 E58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2018-01&r=cba |
| By: | Machiel van Dijk (CPB Netherlands Bureau for Economic Policy Analysis); Andrei Dubovik (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | In this paper we investigate whether the targeted longer-term refinancing operations (TLTRO) and the asset purchase program (APP) led to lower interest rates on new corporate credit, and whether the signalling channel and the capital relief channel played any role in the transmission of these ECB policies. We find that both APP and TLTRO contributed to lower long-term interest rates on new corporate credit and to flatter yield curves, with APP having a stronger effect. However, we find no support that either the signalling or the capital relief channel were conducive in this respect. |
| JEL: | E43 E58 G21 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:372&r=cba |
| By: | Paul Wohlfarth (Birkbeck, University of London) |
| Abstract: | We analyse the effect of monetary policy on dynamic covariances on global fixed income markets, using a novel measure for monetary policy attention based on Google Search data. We filter covariances using a Dynamic Conditional Correlation model as baseline case and a BEKK model as well as a long-memory exponential smoother proposed by RiskMetrics for robustness. We find evidence for direct impact of policy on both asset variances and covariances domestically and internationally, supporting both signalling and portfolio rebalancing channels in the context of international policy transmission. |
| Keywords: | attention, internet search, Google, monetary policy, ECB, FED, policy effects, international financial markets, macro-finance, sovereign bonds, international finance, bond markets. |
| JEL: | E52 E44 G1 G10 G15 C32 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1801&r=cba |
| By: | Thordur Jonasson; Michael G. Papaioannou |
| Abstract: | This paper provides an overview of sovereign debt portfolio risks and discusses various liability management operations (LMOs) and instruments used by public debt managers to mitigate these risks. Debt management strategies analyzed in the context of helping reach debt portfolio targets and attain desired portfolio structures. Also, the paper outlines how LMOs could be integrated into a debt management strategy and serve as policy tools to reduce potential debt portfolio vulnerabilities. Further, the paper presents operational issues faced by debt managers, including the need to develop a risk management framework, interactions of debt management with fiscal policy, monetary policy, and financial stability, as well as efficient government bond markets. |
| Date: | 2018–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/74&r=cba |