nep-cba New Economics Papers
on Central Banking
Issue of 2018‒05‒07
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. The Interplay between Regulations and Financial Stability By Allen, Franklin; Gu, Xian
  2. Central Bank Capital as an Instrument of Monetary Policy By Hampl, Mojmir; Havranek, Tomas
  3. Anchoring of Inflation Expectations in Latin America By Gondo, Rocío; Yetman, James
  4. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework Q2 2016 - Q4 2017 By Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
  5. Trend Inflation and Monetary Policy Regimes in Japan By OKIMOTO Tatsuyoshi
  6. The impact of monetary policy iInterventions on the insurance industry By Pelizzon, Loriana; Sottocornola, Matteo
  7. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  8. The International Transmission of Monetary Policy By Claudia M. Buch; Matthieu Bussiere; Linda Goldberg; Robert Hills
  9. Central Banks Going Long By Reis, Ricardo
  10. Measuring the Stance of Monetary Policy in a Time-Varying World By Pérez-Forero, Fernando
  11. Central Bank Independence and Inflation: Schumpeterian Theory and Evidence By Qichun He; Heng-fu Zou
  12. Foreign Exchange Intervention Redux By Roberto Chang
  13. On the Persistence of UK Inflation: A Long-Range Dependence Approach By Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
  14. International Monetary Policy Transmission through Banks in Small Open Economies By Simone Auer; Christian Friedrich; Maja Ganarin; Teodora Paligorova; Pascal Towbin
  15. 25 years of inflation targeting in Australia: Are there better alternatives for the next 25 years? By Warwick J. McKibbin; Augustus Panton
  16. Estimating the Taylor Rule in the Time-Frequency Domain By Luís Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  17. Global liquidity and exchange market pressure in emerging market economies By Hossfeld, Oliver; Pramor, Marcus

  1. By: Allen, Franklin; Gu, Xian
    Abstract: The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics - banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007-9 crisis and consider regulatory and other policies to counteract them.
    Keywords: Asset price bubbles; contagion; Financial crises; macroprudential
    JEL: G01 G21 G28
    Date: 2018–04
  2. By: Hampl, Mojmir; Havranek, Tomas
    Abstract: We examine the use of central bank capital as an unconventional monetary policy tool. In this setting, a central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The asset side of the central bank’s balance sheet remains unchanged, and the creation of new digital cash is offset by a decrease in central bank capital. The central bank thus incurs an immediate loss but does not take on any additional risks for its future income statements. We address several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability. Through a meta-analysis of 176 estimates reported previously in the literature, we find that central bank financial strength has not historically correlated with inflation performance.
    Keywords: Central bank capital,inflation,seigniorage,monetary policy,helicopter money,central bank digital currency
    JEL: E42 E52 E58
    Date: 2018
  3. By: Gondo, Rocío (Banco Central de Reserva del Perú); Yetman, James (Bank for International Settlements)
    Abstract: We use inflation survey data from Consensus Economics to assess the degree of inflation expectations anchoring in Latin America. Following the methodology proposed by Mehrotra and Yetman (2017), we model inflation forecasts using a decay function, where forecasts monotonically diverge from an estimated anchor towards recent actual inflation as the forecast horizon shortens. Our results suggest that most countries do have an inflation anchor, with the estimated weight of the anchor increasing through time, indicating more strongly anchored expectations. This is consistent with the improving credibility of central banks’ monetary policy management over our sample period (1993-2016). For countries with formal inflation targets, our results indicate that inflation targeting regimes are generally credible, with estimated anchors lying within the inflation target range for all countries in the most recent sample that we consider.
    Keywords: inflation expectations, inflation anchoring, decay function
    JEL: E31 E58
    Date: 2018–04
  4. By: Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the second quarter of 2016 to the last quarter of 2017. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy implementation on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2018–04
  5. By: OKIMOTO Tatsuyoshi
    Abstract: This paper examines the dynamics of trend inflation in Japan over the last three decades based on the smooth transition Phillips curve model. We find that there is a strong connection between the trend inflation and monetary policy regimes. The results also suggest that the introduction of the inflation targeting policy and quantitative and qualitative easing in the beginning of 2013 successfully escaped from the deflationary regime, but were not enough to achieve the 2% inflation target. Finally, our results indicate the significance of exchange rates in explaining the recent fluctuations of inflation and the importance of oil and stock prices in maintaining the positive trend inflation regime.
    Date: 2018–04
  6. By: Pelizzon, Loriana; Sottocornola, Matteo
    Abstract: This paper investigates the effect of the conventional and unconventional (e.g. Quantitative Easing - QE) monetary policy intervention on the insurance industry. We first analyze the impact on the stock performances of 166 (re)insurers from the last QE programme launched by the European Central Bank (ECB) by constructing an event study around the announcement date. Then we enlarge the scope by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 12 years, also extending the analysis to the Credit Default Swaps (CDS) market. In the second part of the paper by building a set of balance sheet-based indices, we identify the characteristics of (re)insurers that determine sensitivity to monetary policy actions. Our evidences suggest that a single intervention extrapolated from the comprehensive strategy cannot be utilized to estimate the effect of monetary policy intervention on the market. With respect to the impact of monetary policies, we show how the effect of interventions changes over time. Expansionary monetary policy interventions, when generating an instantaneous reduction of interest rates, generated movement in stock prices in the same direction till September 2010. This effect turned positive during the European sovereign debt crisis. However, the effect faded away in 2014-2015. The pattern is confirmed by the impact on the CDS market. With regard to the determinants of these effects, our analysis suggests that sensitivity is mainly driven by asset allocation and in particular by exposure to fixed income assets.
    Keywords: event study,monetary policy surprise,unconventional monetary policy,conventional monetary policy,insurance industry
    JEL: E44 E52 G14 G22
    Date: 2018
  7. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain).
    Keywords: European Central Bank, macroprudential policy, monetary policy transmission, risk-taking channel, vector autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2018
  8. By: Claudia M. Buch; Matthieu Bussiere; Linda Goldberg; Robert Hills
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
    JEL: E4 E5 F30 F4 G15 G21
    Date: 2018–03
  9. By: Reis, Ricardo
    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: affine models; ceilings; pegs; Taylor rule; Yield Curve
    JEL: E31 E52 E58
    Date: 2018–03
  10. By: Pérez-Forero, Fernando (Banco Central de Reserva del Perú)
    Abstract: Knowing the stance of monetary policy is a general theme of interest for academics, policy makers and private sector agents. The mentioned stance is not necessarily observable, since the Fed have used different monetary instruments at different points in time. This paper provides a measure of this stance for the last forty five years, which is a weighted average of a pool of instruments. We extend Bernanke and Mihov (1998)'s Interbank Market model by allowing structural parameters and shock variances to change over time. In particular, we follow the recent work of Canova and Perez Forero (2015) for estimating non-recursive TVCVARs with Bayesian Methods. The estimated stance measure describes how tight/loose was monetary policy over time and takes into account the uncertainty related with posterior estimates of time varying parameters. Finally, we present how has monetary transmission mechanism changed over time, focusing our attention in the period after the Great Recession.
    Keywords: SVARs, Interbank Market, Operating Procedures, Monetary Policy Stance, Time-varying parameters, Bayesian Methods, Multi-move Metropolis within Gibbs Sampling
    JEL: C11 E51 E52 E58
    Date: 2018–04
  11. By: Qichun He (Central University of Finance and Economics); Heng-fu Zou (Development Research Group, World Bank)
    Abstract: We first use a monetary Schumpeterian model to investigate how central bank independence (CBI) affects inflation. We find that we cannot predict a monotone relationship between CBI and infiation. When the elasticity of labor supply is high or the seigniorage is mainly used to finance entrepreneurs, a condition that is more likely in developed countries, CBI has a positive effect on inflation; in contrast, when labor supply is inelastic or the seigniorage is mainly used to finance non-productive government spending, a situation more commonly found in developing countries, CBI has a negative effect or no effect on inflation. Calibration shows the following. When the nominal interest rate increases from 8.3% (the sample mean) to the optimal value of 28.1%, the equilibrium rate of economic growth increases from the benchmark value of 1.8% to 1.99%, and the welfare gain is equivalent to a permanent increase in consumption of 1.02%. The growth and welfare effects increase with CBI. As an empirical test, we build panel data for 68 countries during 1998–2010 and find that the effect of CBI on inflation is positive and significant in developed countries, and it is insignificant (at the 5% level) in developing countries in both system generalized method of moments (GMM) and instrumental variable (IV) estimations. Our results remain robust to the consideration of financial crises, financial development, and other factors affecting inflation. Our empirical findings provide support for our theory.
    Keywords: Inflation, Central Bank Independence, Monetary Schumpeterian Model, Dynamic Panel Data
    JEL: E42 E58 O42
    Date: 2018–04
  12. By: Roberto Chang
    Abstract: Received wisdom posits that sterilized foreign exchange intervention can be effective by altering the currency composition of assets held by the public. This paper proposes an alternative channel: sterilized intervention may (or may not) have real effects because it changes the net credit position of the central bank vis a vis financial intermediaries, thereby affecting external debt limits. This argument is developed in the context of an open economy model with domestic banks subject to occasionally binding collateral constraints. Intervention has real effects if and only if it occurs when the constraints bind; at such times, a sterilized sale of official reserves relaxes the constraints by reducing the central bank's debt to domestic banks, freeing resources for the latter to increase the supply of credit to domestic agents. The analysis yields several noteworthy implications for intervention policy, official reserves accumulation, and the interaction between intervention and monetary policy.
    JEL: E58 F33 F41
    Date: 2018–03
  13. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
    Abstract: This paper examines the degree of persistence in UK inflation by applying long-memory methods to historical data that span the period from 1660 to 2016. Specifically, we use both parametric and non-parametric fractional integration techniques, that are more general than those based on the classical I(0) vs. I(1) dichotomy. Further, we carry out break tests to detect any shifts in the degree of persistence, and also run rolling-window and recursive regressions to investigate its evolution over time. On the whole, the evidence suggests that the degree of persistence of UK inflation has been relatively stable following the Bretton Woods period, despite the adoption of different monetary regimes. The estimation of an unobserved-components stochastic volatility model sheds further light on the issues of interest by showing that post-Bretton Woods changes in UK inflation are attributable to a fall in the volatility of permanent shocks.
    Keywords: UK inflation, persistence, fractional integration
    JEL: C14 C22 E31
    Date: 2018
  14. By: Simone Auer; Christian Friedrich; Maja Ganarin; Teodora Paligorova; Pascal Towbin
    Abstract: This paper studies the international transmission of monetary policy through banks in small open economies using the examples of Switzerland and Canada. We assess the inward transmission of foreign monetary policy for Switzerland and the outward transmission of domestic monetary policy for Canada. In both country cases, we focus on the international bank lending and the international portfolio channel, which make opposing predictions about how monetary policy transmits internationally through banks. Our results on the inward transmission of foreign monetary policy through banks in Switzerland are consistent with a role for the international portfolio channel, but we find no evidence for the traditional international bank lending channel. The results on the outward transmission of domestic monetary policy in Canada suggest that foreign lending by Canadian banks is affected through both channels, which work as predicted and largely balance each other.
    Keywords: International banking, monetary policy, inward transmission, outward transmission, small open economies, Switzerland, Canada
    JEL: G21 E5 F21 F32
    Date: 2018
  15. By: Warwick J. McKibbin; Augustus Panton
    Abstract: This papers surveys alternative monetary frameworks and evaluates whether the current inflation targeting framework followed by the RBA for the past 25 years is likely to be the most appropriate framework for the next 25 years. While flexible inflation targeting has appeared to work well in Australia in the past decades, the nature of future shocks suggests that some form of nominal income targeting is worth considering as an evolutionary changes the Australia’s framework for monetary policy.
    Keywords: Inflation targeting, nominal income targeting, monetary framework
    Date: 2018–05
  16. By: Luís Aguiar-Conraria (Department of Economics/NIPE, University of Minho); Manuel M. F. Martins (Cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (NIPE and Department of Mathematics and Applications, University of Minho,)
    Abstract: We present the first assessment of U.S. monetary policy across time and frequencies within the Taylor Rule framework. We derive a novel wavelet tool - the partial wavelet gain - to estimate a parametric equation relating the federal funds rate to inflation and the output gap. We detect a gradual shift of the focus of policy from short cycles to intermediate cycles at the beginning of the Great Moderation, followed by a strengthening of policy´s reaction to long fluctuations once credibility was attained, and, during the Great Recession, a renewed interest in shorter output cycles. We document that the violation of the Taylor principle until the early 1980s and the strengthening of the reaction of policy to inflation thereafter were more marked at intermediate than at long cycles. Overall, we also detect lead-lag relationships between the policy rate and ináation and the output gap that differ along time and cyclical frequencies.
    Keywords: Monetary Policy; Taylor Rule; Partial Wavelet Gain; Time-Frequency Estimation;Continuous Wavelet Transform.
    JEL: C49 E43 E52
    Date: 2018
  17. By: Hossfeld, Oliver; Pramor, Marcus
    Abstract: We analyse the relationship between global liquidity and exchange market pressure in 32 emerging market economies. Exchange market pressure is a measure of excess currency demand that is applicable across different exchange rate regimes as it accounts for changes in exchange rates, foreign exchange reserves and, optionally, interest rates. Surges in monetary liquidity, credit provision, and short-term funding in advanced economies are shown to be robustly associated with appreciation pressure on emerging market currencies. The underlying transmission mechanism, however, only operates under regular financial market conditions: ample liquidity provision in advanced economies contributes to the build-up of financial stability risks in emerging market economies in tranquil times, but further liquidity injections do not avert the pronounced depreciation pressure on emerging market currencies in times of high market volatility.
    Keywords: global liquidity,emerging markets,exchange market pressure,search for yield,global financial cycle
    JEL: F31 E51 E58 C23
    Date: 2018
    Date: 2018

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