nep-cba New Economics Papers
on Central Banking
Issue of 2018‒05‒28
fourteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Broadening narrow money: monetary policy with a central bank digital currency By Meaning, Jack; Dyson, Ben; Barker, James; Clayton, Emily
  2. Jobless Recovery, Liquidity Trap, Tight Monetary Policy and the Cost Channel By Lasitha R.C. Pathberiya
  3. ECB monetary policy and the euro exchange rate By Martina Cecioni
  4. ‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis By Christian Pfister, Natacha Valla
  5. The Rise of Shadow Banking: Evidence from Capital Regulation By Irani, Rustom M; Iyer, Rajkamal; Meisenzahl, Ralf; Peydró, José Luis
  6. Natural interest rates in the U.S., Canada and Mexico By Kan Chen; Nathaniel Karp
  7. Effects of asset purchases and financial stability measures on term premia in the euro area By Richhild Moessner
  8. Central Bank information and the effects of monetary shocks By Paul Hubert
  9. The global component of inflation volatility By Andrea Carriero; Francesco Corsello; Massimiliano Marcellino
  10. Could a higher inflation target enhance macroeconomic stability? By José Dorich; Nicholas Labelle St-Pierre; Vadym Lepetyuk; Rhys Mendes
  11. Do we really know that US monetary policy was destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  12. Central bank digital currencies - design principles and balance sheet implications By Kumhof, Michael; Noone, Clare
  13. Channels of US monetary policy spillovers to international bond markets By Elias Albagli; Luis Ceballos; Sebastián Claro; Damian Romero
  14. Financial and price stability in emerging markets: the role of the interest rate By Lorenzo Menna; Martin Tobal

  1. By: Meaning, Jack (Bank of England); Dyson, Ben (Bank of England); Barker, James (University of Exeter); Clayton, Emily (Bank of England)
    Abstract: This paper discusses central bank digital currency (CBDC) and its potential impact on the monetary transmission mechanism. We first offer a general definition of CBDC which should make the concept accessible to a wide range of economists and policy practitioners. We then investigate how CBDC could affect the various stages of transmission, from markets for central bank money to the real economy. We conclude that monetary policy would be able to operate much as it does now, by varying the price or quantity of central bank money, and that transmission may even strengthen for a given change in policy instruments.
    Keywords: Central bank digital currency; money; monetary policy; cryptocurrency
    JEL: E42 E52 E58
    Date: 2018–05–18
  2. By: Lasitha R.C. Pathberiya (Central Bank of Sri Lanka; School of Economics, The University of Queensland)
    Abstract: In this study, I examine the robustness of an unconventional monetary policy in a cost channel economy. The unconventional monetary policy proposed by Schmitt-Grohé and Uribe (2017, American Economic Journal: Macroeconomics, SGU henceforth), recommends a tight monetary policy during a liquidity-trapped recession to stimulate the economy and to avoid jobless recovery. The results of my study show that the existence of the cost channel implies that the SGU policy induces sharp initial contractions in the employment rate and the growth rate, and a sharp increase in inflation following a negative confidence shock. Welfare is lower in cost channel economies compared to no-cost channel economies due to the SGU policy recommendation. Two alternative interest rate-based exit policies are also examined. The Overshoot interest rate policy, irrespective of the presence of the cost channel, is superior to the SGU policy with regard to welfare. The Staggered policy has lower immediate pain in the cost channel economy compared to the SGU policy or the Overshoot policy. However, welfare-wise, the Staggered policy is inferior to the other two policies examined in both economies considered.
    Keywords: cost channel of monetary policy, zero rates on interest rates, liquidity trap, jobless recovery, downward nominal wage rigidity, Taylor rule
    JEL: E31 E32 E52 E58
    Date: 2018–05–14
  3. By: Martina Cecioni (Bank of Italy)
    Abstract: The paper provides empirical evidence on the effects of ECB conventional and unconventional monetary policy on the euro exchange rate, focusing on the period from January 2013 to September 2017. Innovations to conventional and unconventional monetary policies are identified through changes in, respectively, short- and long-term interest rates immediately after Governing Council meetings. Both types of measures contributed to the depreciation of the euro from mid-2014; surprises associated with conventional measures had a stronger and more persistent effect than those associated with unconventional ones. Time-varying estimates of the effects of conventional surprises since 1999 show that the responsiveness of exchange rates to monetary news increased markedly from 2013. State-dependence analysis finds that the exchange rate became more sensitive to monetary policy when the ECB adopted a policy of negative interest rates and when conventional and unconventional monetary surprises moved in the same direction.
    Keywords: unconventional monetary policy, exchange rates, European Central Bank
    JEL: E52 E58 F31
    Date: 2018–04
  4. By: Christian Pfister, Natacha Valla
    Abstract: Two different approaches to central banking in the aftermath of the crisis are contrasted. In the first one, labelled ‘New Normal’, the monetary policy strategy is broadened to encompass such objectives as financial stability or full employment. Furthermore, the inflation target is raised and large scale asset purchases (LSAPs) are retained as a standard instrument for implementing monetary policy. In the second approach, which we label ‘New Orthodoxy’, central banks keep the same objectives but interest rates can be brought to unprecedented negative levels, thus making LSAPs possibly unnecessary. The role of central banks in preserving financial stability is also explicitly recognized, both by themselves and by society, making their contribution to this task more effective and transparent.
    Keywords: Central banks, Monetary policy, Financial stability
    JEL: E42 E43 E50 E52 E58
    Date: 2018
  5. By: Irani, Rustom M; Iyer, Rajkamal; Meisenzahl, Ralf; Peydró, José Luis
    Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.
    Keywords: Basel III; Distressed debt; Interactions between banks and nonbanks; Risk-based capital regulation; Shadow banks; Trading by banks
    JEL: G01 G21 G23 G28
    Date: 2018–05
  6. By: Kan Chen; Nathaniel Karp
    Abstract: The natural interest rate, or r-star, has been a critical determinant of monetary policy normalization in the U.S. and other countries. With the U.S. Federal Reserve expected to continue raising interest rates, central banks in other countries will have to balance the spillover effects with their own internal dynamics.
    Keywords: Working Paper , Global Economy , USA , Global , Mexico
    JEL: E42 E60 G15
    Date: 2018–05
  7. By: Richhild Moessner
    Abstract: We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area on ten-year government bond term premia in eleven euro area countries in the wake of the global financial crisis and the euro area sovereign debt crisis. 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 the 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: 2018–05
  8. By: Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’ interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions.
    Keywords: Monetary policy; Information processing; Signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts
    JEL: E52 E58
    Date: 2017–08
  9. By: Andrea Carriero (Queen Mary, University of London); Francesco Corsello (Bank of Italy); Massimiliano Marcellino (Bank of Italy)
    Abstract: Global developments play an important role in domestic inflation rates. Previous literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting purposes. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation stochastic volatility is indeed important, and a substantial share of it can be attributed to a global factor that also drives the levels and persistence of inflation. While various phenomena may contribute to global inflation dynamics, it turns out that since the early 1990s, the estimated global factor is correlated with China’s PPI and with oil inflation levels and volatilities. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies.
    Keywords: inflation, volatility, global factors, large datasets, multivariate autoregressive index models, reduced rank regressions, forecasting
    JEL: E31 C32 E37 C53
    Date: 2018–04
  10. By: José Dorich; Nicholas Labelle St-Pierre; Vadym Lepetyuk; Rhys Mendes
    Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound, and, (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
    Keywords: inflation target, effective lower bound, unconventional monetary policy, quantitative easing, forward guidance
    JEL: E32 E37 E43 E52
    Date: 2018–05
  11. By: Qazi Haque; Nicolas Groshenny; Mark Weder
    Abstract: In this paper we examine whether or not monetary policy was a source of instability during the Great Inflation. We focus on a number of attributes that we see relevant for any analysis of the 1970s: cost-push or oil price shocks, positive trend inflation as well as real wage rigidity. We turn our artificial sticky-price economy into a Bayesian model and find that the U.S. economy during the 1970s is best characterized by a high degree of real wage rigidity. Oil price shocks thus created a trade-off between inflation and output-gap stabilization. Faced with this dilemma, the Federal Reserve reacted aggressively to inflation but hardly at all to the output gap, thereby inducing stability, i.e. determinacy.
    Keywords: Monetary policy, Great Inflation, Cost-push shocks, Trend inflation, Sequential Monte Carlo algorithm
    JEL: E32 E52 E58
    Date: 2018–05
  12. By: Kumhof, Michael (Bank of England); Noone, Clare (Reserve Bank of Australia)
    Abstract: This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.
    Keywords: Central bank digital currencies; sectorial balance sheets; monetary systems; financial stability; bank runs
    JEL: E42 E44 E52 E58
    Date: 2018–05–18
  13. By: Elias Albagli; Luis Ceballos; Sebastián Claro; Damian Romero
    Abstract: We document significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term treasury yields within a narrow window around FOMC meetings, and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the global financial crisis. Second, spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a tradeoff between narrowing MP rate differentials, or experiencing currency movements against the US dollar. Developed countries adjust in a manner consistent with freely floating regimes, responding partially with risk neutral rates, and partially through currency adjustments. Emerging countries display patterns consistent with FX interventions, which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia. Our results suggest that the endogenous effects of FXI on long-term yields should be added into the standard cost-benefit analysis of such policies.
    Keywords: monetary policy spillovers, risk neutral rates, term premia
    JEL: E43 G12 G15
    Date: 2018–05
  14. By: Lorenzo Menna; Martin Tobal
    Abstract: The Global Financial Crisis opened a heated debate on whether inflation target regimes must be relaxed and allow for monetary policy to address financial stability concerns. Nonetheless, this debate has focused on the ability of the interest rate to "lean against the wind" and, more generally, on the accumulation of systemic risk arising from the macro-financial challenges faced by advanced economies. This paper extends the debate to emerging markets by developing micro-foundations that allow extending a simplified version of the New-Keynesian credit augmented model of Curdia and Woodford (2016) to a small-open economy scenario, and by subsequently using the same empirical strategy as Ajello et al. (2015) to calibrate the model for Mexico. The results suggest that openness in the capital account, and in particular a strong dependence of domestic financial conditions on capital flows, diminishes the effectiveness of monetary policy to lean against the wind. Indeed, in the open-economy with endogenous financial crises, the optimal policy rate is even below the level that would prevail in the absence of endogenous financial crisis and systemic risk.
    Keywords: leaning against the wind, global financial cycle, monetary policy, financial stability
    JEL: E52 F32
    Date: 2018–05

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