nep-cba New Economics Papers
on Central Banking
Issue of 2018‒06‒18
twenty papers chosen by
Maria Semenova
Higher School of Economics

  1. Monetary Policy in Sudden Stop-Prone Economies By Louphou COULIBALY
  2. Media Perception of Fed Chair's Overconfidence and Market Expectations By Hamza Bennani
  3. Is Basel III counter-cyclical: The case of South Africa? By Guangling Liu; Thabang Molise
  4. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Adam, Klaus; Woodford, Michael
  5. Investigating credit transmission mechanism in the Republic of Macedonia: evidence from Vector Error Correction Model By Milan Eliskovski
  6. Designing QE in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  7. Sovereign Stress, Banking Stress, and the Monetary Transmission Mechanism in the Euro Area By Holtemöller, Oliver; Scherer, Jan-Christopher
  8. Measuring the effects of conventional and unconventional monetary policy in the euro area By Anttila, Juho
  9. The Effects of Conventional and Unconventional Monetary Policy on House Prices in the Scandinavian Countries By Signe Rosenberg
  10. The Regulatory and Monetary Policy Nexus in the Repo Market By Sriya Anbil; Zeynep Senyuz
  11. Beyond the Central Bank Independence Veil: New Evidence By Donato Masciandaro; Davide Romelli
  12. Monetary Policy Surprises and Monetary Policy Uncertainty By Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
  13. Effects of US Quantitative Easing on Emerging Market Economies By Bhattarai, Saroj; Chatterjee, Arpita; Park, Woong Yong
  14. Effectiveness of Internal Audit and Oversight at Central Banks: Safeguards Findings - Trends and Observations By Elie Chamoun; Riaan van Greuning
  15. Noisy Monetary Policy By Tatjana Dahlhaus; Luca Gambetti
  16. The Impact of the Dodd-Frank Act on Small Business By Bordo, Michael D.; Duca, John V.
  18. Coordinating monetary and financial regulatory policies By Van der Ghote, Alejandro
  19. Testing the systemic risk differences in banks By Jokivuolle, Esa; Tunaru, Radu; Vioto, Davide
  20. Central bank policies in recent years By Goodhart, Charles

  1. By: Louphou COULIBALY
    Abstract: In a model featuring sudden stops and pecuniary externalities, I show that the ability to use capital controls has radical implications for the conduct of monetary policy. Absent capital controls, following an inflation targeting regime is nearly optimal. However, if the central bank lacks commitment, it will follow a monetary policy that is excessively procyclical and not desirable from an ex ante welfare prospective: it increases overall indebtedness as well as the frequency of financial crisis and reduces social welfare relative to an inflation targeting regime. Access to capital controls can correct this monetary policy bias. With capital controls, relative to an inflation targeting regime, the time-consistent regime reduces both the frequency and magnitude of crises, and increases social welfare. This paper rationalizes the procyclicality of the monetary policy observed in many emerging market economies.
    Keywords: financial crises, monetary policy, capital controls, time consistency, aggregate demand externality, pecuniary externality
    JEL: E44 E52 F41 G01
    Date: 2018
  2. By: Hamza Bennani
    Abstract: This paper aims to assess the impact of media perception of Fed chair's overconfidence on market expectations. We first use a media-based proxy to compute a measure of Fed chair's overconfidence for the period 1999M01-2017M07, the overconfidence indicator. The overconfidence indicator provides a measure of the perceived overconfidence of the Fed chair by the media, and thus, by financial market participants. We relate this variable to inflation and unemployment expectations of market participants. Our results show that an overconfident Fed chair is associated with higher inflation expectations and lower unemployment expectations. These findings are robust to (i) the macroeconomic forecasts used to extract the exogenous component of the media-based proxy reflecting Fed chair's overconfidence, (ii) different measures of the media-based proxy used to quantify Fed chair's overconfidence and (iii) different measures of inflation expectations. These findings shed some new light on the impact of central bankers' personality on market expectations, and thus, on the effectiveness of their monetary policy decisions.
    Keywords: Fed Chair, Overconfidence, Monetary Policy, Media
    JEL: E52 E58
    Date: 2018
  3. By: Guangling Liu (Department of Economics, University of Stellenbosch); Thabang Molise (Department of Economics, University of Stellenbosch)
    Abstract: This paper develops a dynamic general equilibrium model with banking and a macroprudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer.
    Keywords: Bank capital regulations, Financial stability, Counter-cyclical capital buffer, DSGE
    JEL: E44 E47 E58 G28
    Date: 2018
  4. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for a New Keynesian model with a housing sector. If one supposes that the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a "target criterion" that refers only to inflation and the output gap is optimal, as in the standard model without a housing sector. But when a policymaker seeks to choose a policy that is robust to potential departures of private sector expectations from model-consistent ones, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to "lean against" housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between "fundamental" and "non-fundamental" movements in housing prices.
    Keywords: Asset price bubbles; Inflation targeting; leaning against the wind; optimal target criterion
    JEL: D81 D84 E52
    Date: 2018–05
  5. By: Milan Eliskovski (National Bank of the Republic of Macedonia)
    Abstract: Research subject of this paper is the credit transmission mechanism in the Republic of Macedonia or in other words this paper investigates the effects of the monetary signals by the National Bank of the Republic of Macedonia on banks' lending. The credit transmission is analyzed through its narrow nature or so called bank lending channel. In order to explain how the bank lending channel operates in Macedonia, two theoretical models are considered and econometrically tested. The first one is the traditional bank lending channel explained by Bernanke and Blinder model and the second one is the credit rationing model by Stiglitz and Weiss. The econometric technique employed is the vector error correction model or known as Johansen cointegration technique which is appropriate for empirical testing based on time series. The empirical results suggest that the Stiglitz and Weiss model better explains the banks' behavior in the Republic of Macedonia, that is the banking sector is risk averse and rations loans with an aim not to deteriorate its' profitability. Therefore, monetary tightening signals clearly affect the banks to restrict lending. On the other hand, the monetary expansionary signals have to be supported by favorable balance sheet structure of the banks as well as by favorable macroeconomic conditions in order to encourage lending.
    Keywords: bank lending channel, monetary transmission, credit rationing, VECM analysis
    JEL: C22 E52 E58 G21
    Date: 2018
  6. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a tractable model of a monetary union with a sound fiscal governance structure and shows how in such environment the design of monetary policy above and at the lower bound constraint on short-term interest rates can be linked to well-known findings from the literature dealing with single closed economies. The model adds a portfolio balance channel to a New Keynesian two-country model of a monetary union. If the monetary union is symmetric and the portfolio balance channel is not active, the model becomes isomorphic to the canonical New Keynesian three-equation economy in which central bank purchases of long-term debt (QE) at the lower bound are ineffective. If the portfolio balance channel is active, QE becomes effective and we prove that for sufficiently small shocks there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. Shocks large enough to push the whole yield curve to the lower bound require, in addition, forward guidance. We generalise these results to an asymmetric monetary union and illustrate them through simulations, distinguishing between asymmetric shocks and asymmetric structures. In general, asymmetries give rise to current account imbalances which are, depending on the degree of financial integration, funded by private capital imports or through the central bank balance sheet channel. Moreover, our findings support that at the lower bound, as long as asymmetries between countries result from shocks, outcomes under an unconstrained policy rule can be replicated via a symmetric QE design. By contrast, asymmetric structures of the countries which matter for the transmission of monetary policy can translate into an asymmetric QE design. JEL Classification: E43, E52, E61, E63
    Keywords: lower bound, monetary policy, monetary union, quantitative easing
    Date: 2018–06
  7. By: Holtemöller, Oliver (Asian Development Bank Institute); Scherer, Jan-Christopher (Asian Development Bank Institute)
    Abstract: We investigate to what extent sovereign stress and banking stress have contributed to the increase in the level and in the heterogeneity of nonfinancial firms’ financing costs in the Euro area during the European debt crisis and how both have affected the monetary transmission mechanism. Employing a large firm-level data set containing 2 million observations, we are able to identify the effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms' financing costs in a panel model by assuming that idiosyncratic shocks to individual firms are uncorrelated with country-specific variables. We find that the two sources of stress have increased firms’ financing costs controlling for country and firm-specific factors. Moreover, we estimate both to have significantly impaired the monetary transmission mechanism.
    Keywords: banking stress; firms’ financing conditions; government bond yields; interest rate channel; monetary policy transmission; sovereign stress
    JEL: E43 E44 E52
    Date: 2018–02–19
  8. By: Anttila, Juho
    Abstract: I estimate the effects of conventional and unconventional monetary policy in the euro area by using a factor-augmented vector autoregression.I complement the standard monetary policy analysis using the short rate with models where the shadow rates by Kortela (2016) and Wu and Xia (2017) are used as proxies for unconventional monetary policy. I quantify the effects of unanticipated monetary policy shocks using impulse response functions, forecast-error variance decompositions, and counterfactual simulations. The results indicate that unconventional monetary policy shocks have similar, expansionary effects on the economy as conventional monetary policy shocks.
    JEL: E43 E44 E52 E58
    Date: 2018–05–29
  9. By: Signe Rosenberg
    Abstract: This paper studies the impact of conventional and unconventional monetary policy on house prices in the Scandinavian countries, using sign and zero restrictions in a Bayesian structural vector autoregressive model, covering the central banks’ policy rate and balance sheet policies over a period of nearly 30 years. Expansionary shocks of the policy rate and the balance sheet both have a positive impact on house prices in the Scandinavian countries, but the effects vary greatly within each country. In all the three countries the effect of balance sheet shocks on house prices peaks higher and is more persistent than the response of policy rate shocks. In Sweden and Denmark the impact is more sluggish in case of balance sheet shocks while in Norway the speed of the reaction is similar in case of both types of monetary policy shocks.
    Date: 2018–06–07
  10. By: Sriya Anbil; Zeynep Senyuz
    Abstract: We examine the interaction of regulatory reforms and changes in monetary policy in the U.S. repo market. Using a proprietary data set of repo transactions, we find that differences in regional implementation of Basel III capital reforms intensified European dealers' window-dressing by 80%. Money funds eligible to use the Fed's reverse repo (RRP) facility cut their private lending almost by half and instead lent to the Fed when European dealers withdraw, contributing to smooth implementation of Basel III. In a difference-in-differences setting, we show that ineligible funds lent 15% less to European dealers as they find their withdrawal for reporting purposes inconvenient. We find that intermediation through the RRP led to quantity and not pricing adjustments in the market, which is consistent with the RRP facility anchoring market rates.
    Keywords: Basel III regulations ; Federal Reserve Board and Federal Reserve System ; Monetary policy ; Repo ; Reverse repo facility
    JEL: C32 E43 E52
    Date: 2018–04–17
  11. By: Donato Masciandaro; Davide Romelli
    Abstract: This paper employs a new and comprehensive database of central bank institutional design to reassess the role of the independence of these public administrations in influencing the macroeconomic performance of countries, before and after the Global Financial Crisis. Using new dynamic indices, the empirical investigation takes into account the evolution of the level of independence in 65 countries over the period 1972-2014. Going beyond the standard correlation between central bank independence and inflation, we confirm the importance of the independence of these public administrations. Importantly we show that the degree of central bank independence is an endogenous variable and stress the relevance of economic and political drivers in shaping the incentives of governments to maintain or reform the governance of these public administrations.
    Keywords: Central Bank Independence, Global Financial Crisis, Macroeconomic Performance, Monetary Policy, Populism, Political Economy, Public Administration
    Date: 2018
  12. By: Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
    Abstract: In this note we find that after a given monetary policy surprise, primary dealers--key intermediaries in interest rate markets--tend to adjust their positions in the U.S. Treasury market and their exposures to interest rates more when the prevailing level of policy uncertainty is low than when it is high.
    Date: 2018–05–18
  13. By: Bhattarai, Saroj (Asian Development Bank Institute); Chatterjee, Arpita (Asian Development Bank Institute); Park, Woong Yong (Asian Development Bank Institute)
    Abstract: We estimate international spillover effects of the United States (US)’ Quantitative Easing (QE) on emerging market economies (EMEs). Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock. The identified US QE shock is then used in a monthly Bayesian panel VAR for EMEs to infer spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in EMEs. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five" countries compared to other EMEs.
    Keywords: US quantitative easing; spillovers; emerging market economies; bayesian var; panel var; fragile five countries
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2018–01–30
  14. By: Elie Chamoun; Riaan van Greuning
    Abstract: Experience under the safeguards policy has shown that central banks continued to strengthen their safeguards frameworks, but that vulnerabilities prevailed in the areas of internal audit and oversight by the audit committee (AC). This paper takes steps to help unravel why this was the case, based on analysis of safeguards findings in these areas during the period April 2010 to December 2017 (covering 111 assessments at 64 central banks). Based on this analysis, it presents the key attributes that determine the effectiveness of internal audit and the AC. It also argues that, an effective internal audit function, coupled with strong oversight by a high-performing AC are key enablers of good governance.
    Date: 2018–05–31
  15. By: Tatjana Dahlhaus; Luca Gambetti
    Abstract: We introduce limited information in monetary policy. Agents receive signals from the central bank revealing new information (“news") about the future evolution of the policy rate before changes in the rate actually take place. However, the signal is disturbed by noise. We employ a non-standard vector autoregression procedure to disentangle the economic and financial effects of news and noise in US monetary policy since the mid-1990s. Using survey- and market-based data on federal funds rate expectations, we find that the noisy signal plays a relatively important role for macroeconomic dynamics. A signal reporting news about a future policy tightening shifts policy rate expectations upwards and decreases output and prices. A sizable part of the signal is noise surrounding future monetary policy actions. The noise decreases output and prices and can explain up to 16% and 13% of their variations, respectively. Furthermore, it significantly increases the excess bond premium, the corporate spread and financial market volatility, and decreases stock prices.
    Keywords: Business fluctuations and cycles, Econometric and statistical methods, Financial markets, Monetary policy implementation, Transmission of monetary policy
    JEL: E0 E02 E4 E43 E5 E52
    Date: 2018
  16. By: Bordo, Michael D. (Rutgers University); Duca, John V. (Federal Reserve Bank of Dallas)
    Abstract: There are concerns that the Dodd-Frank Act (DFA) has impeded small-business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of commercial and industrial (C&I) loans is generally much higher than that of larger banks. Despite an economic recovery, the small-loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small-loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small-business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.
    Keywords: small-business lending; business formation; regulation; Dodd-Frank; Sarbanes-Oxley; secular stagnation
    JEL: E40 E50 G21
    Date: 2018–04–21
  17. By: Donato Masciandaro; Francesco Passarelli
    Abstract: This paper examines myopic, populist policies that guarantee short-term financial protection of the people from the elite without regard for long-term fiscal or monetary distortions. Assuming that citizens arefinancially heterogeneous, this paper shows that inefficient outcomes can arise when the majority of citizens are bank stakeholders. Populist policies promote politically controlled central banks.
    Keywords: Populism, central bank independence, monetary policy, banking policy, political economy
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2018
  18. By: Van der Ghote, Alejandro
    Abstract: How to conduct macro-prudential regulation? How to coordinate monetary policy and macro-prudential policy? To address these questions, I develop a continuous-time New Keynesian economy in which a financial intermediary sector is subject to a leverage constraint. Coordination between monetary and macro-prudential policies helps to reduce the risk of entering into a financial crisis and speeds up exit from the crisis. The downside of coordination is variability in inflation and in the employment gap. JEL Classification: E31, E32, E44, E52, E61, G01
    Keywords: macro-prudential policy, monetary policy, policy coordination
    Date: 2018–06
  19. By: Jokivuolle, Esa; Tunaru, Radu; Vioto, Davide
    Abstract: This paper contains a testing framework for the reliability of systemic risk measurement of banks, using the three leading market-based measures of systemic risk. We test whether the difference within the same category and across dfferent categories of systemic risk of individual banks is signifcant. We find that in general the systemic risk categories defined by the Financial Stability Board are dfferent from those constructed in a full pairwise comparison approach based on the market measures. Moreover, these dfferences were more pronounced during episodes of high market turbulence.To account for model risk we introduce a more robust ranking method based on nonparametric confidence intervals. We show that there is a large number of banks with overlapping confidence intervals of their market-based systemic risk measures.Further, similarity measures indicate that the scoring based rankings are not perfectly aligned with rankings produced by market based systemic risk measures.
    JEL: G01 G32
    Date: 2018–06–01
  20. By: Goodhart, Charles
    JEL: F3 G3
    Date: 2018

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