nep-cba New Economics Papers
on Central Banking
Issue of 2018‒06‒25
twenty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Liquidity regulation, the central bank and the money market By Julia Körding; Beatrice Scheubel
  2. Les interventions de crise de la FED et de la BCE diffèrent-elles ? By Anne-Marie Rieu-Foucault
  3. Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Arina Wischnewsky; Matthias Neuenkirch
  4. Lessons for Iceland from the Monetary Policy of Sweden By Andersson, Fredrik N. G.; Jonung, Lars
  5. The Bank Lending Channel A Time-Varying Approach By Richard Varghese; ;
  6. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  7. The clearing of euro OTC derivatives post Brexit: Why a uniform regulation and supervision of CCPs is essential for European financial stability By Brühl, Volker
  8. Financial institutions' business models and the global transmission of monetary policy By Isabel Argimón; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  9. Justifying the Adoption and Relevance of Inflation Targeting Framework: A Time-Varying Evidence from Ghana By Nana Kwame Akosah; Francis W. Loloh; Maurice Omane-Adjepong
  10. Macroprudential policy and income inequality By Jon Frost; René van Stralen
  11. The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance By Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
  12. What Macroeconomic Conditions Lead Financial Crises? By Michael T. Kiley
  13. Asset Purchase Bailouts and Endogenous Implicit Guarantees By Mengus, Eric
  14. “Unconventional” Monetary Policy as Conventional Monetary Policy : A Perspective from the U.S. in the 1920s By Mark A. Carlson; Burcu Duygan-Bump
  15. Independence of central banks after the crisis - focus on Hungary By Lisa Coiffard
  16. Monetary Reform, Central Banks and Digital Currencies By Sheila Dow
  17. The cost of bank regulatory capital By Plosser, Matthew; Santos, Joao A. C.
  18. Japan's Unconventional Monetary Policy and Income Distribution: Revisited By Ayako Saiki; Jon Frost
  19. Computational evidence on the distributive properties of monetary policy By Chen, Siyan; Desiderio, Saul
  20. Regulatory changes and the cost of capital for banks By Kovner, Anna; Van Tassel, Peter
  21. The Missing Link: Monetary Policy and The Labor Share By Cristiano Cantore; Filippo Ferroni; Miguel A. Leon-Ledesma

  1. By: Julia Körding; Beatrice Scheubel
    Abstract: Money markets play a central role in monetary policy implementation. Money market functioning has changed since the financial crisis. This arguably reflects the interaction of two forces: Changes in monetary policy, and changes in regulation. This interaction is not yet well understood. We focus on the newly introduced Liquidity Coverage Ratio (LCR) and how it influences the behaviour of banks and the equilibrium on the money market. We develop a theoretical model to analyse how liquidity regulation may interfere with the central bank's implementation of monetary policy. We find that when the market equilibrium is suboptimal due to asymmetric information, both the central bank and the regulator can act to improve welfare. These actions can be complementary or conflicting, depending on the environment. The main insight from the central bank perspective is that the regulator can reach the welfare optimum, but at the expense of the central bank moving away from its optimum. The central bank will thus need to adjust its implementation of monetary policy accordingly, to address the effects of liquidity regulation.
    Keywords: regulation; Basel III; central bank; interbank lending; money market; asymmetric information
    JEL: E43 E58 G01 H12 L51
    Date: 2018–05
  2. By: Anne-Marie Rieu-Foucault
    Abstract: In the context of the 2007-2009 financial crisis, central banks innovated in the form of multiple unconventional measures. Due to a different history, different mandates and monetary policy implementations, the first crisis measures, mainly for financial stability, differed between the Fed and the ECB, resulting in a balance sheet size and structure of the assets specific to each. After 2015, the ECB's large-scale asset purchase transactions marked a convergence of the unconventional policies of the two central banks, which resulted in the ECB renouncing the principle of separation between monetary policy and stability financial.In addition, the risk-taker of last resort function of the two central banks has increased, although differences persist in their risk management policies (scope of counterparties and securities eligible).
    Keywords: Central Banks, Unconventional measures
    JEL: E52 E58
    Date: 2018
  3. By: Arina Wischnewsky; Matthias Neuenkirch
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks’ total asset growth and their risk assets ratio. Our dataset covers the period 2003Q1–2017Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find for conventional monetary policy shocks that a portfolio reallocation effect towards riskier assets is more pronounced, whereas for unconventional monetary policy shocks we detect stronger evidence for a general expansion of assets. Country-specific estimations confirm these findings for most of the euro area countries, but also reveal some heterogeneity in the shadow banks’ reaction.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Shadow Banks, Vector Autoregression
    JEL: E44 E52 E58 G11 G23 G28
    Date: 2018
  4. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated world. Consequently, we suggest a fixed exchange rate arrangement for Iceland, preferably through a currency board. A currency board would provide exchange rate and price stability. A currency board would require domestic reforms to enhance price and wage flexibility as well as proper regulations on the financial system to minimize the risk of future banking crises.
    Keywords: Monetary policy; inflation targeting; financial stability; Riksbank; Sweden; Iceland; Central Bank of Iceland
    JEL: E42 E43 E44 E47 E52 E58 E62
    Date: 2018–06–18
  5. By: Richard Varghese (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: Using a cross-country panel of 925 banks from 19 advanced economies, for the period 1981-2016, I examine how the bank lending channel of monetary policy has evolved over time. I find that the sensitivity of lending to bank balance sheet liquidity declines over time, with nearly all the reduction occurring between the early 1990s and the early 2000s. Contrary to normal times, during recessions, more liquid banks reinforce the impact of monetary policy shocks on lending relative to their less liquid counterparts. The sensitivity of non-interest income to lending increases sharply from the late 1990s till the global financial crisis of 2008, and declines in the post-crisis period, indicating pro-cyclicality. Moreover, the relative ability of banks with higher non-interest income to mitigate monetary policy shocks increases sharply towards the end of the sample period, capturing the impact of the prolonged low interest rate environment on transmission process. These findings suggest that the structural changes in the banking industry and the state of the economy have a significant impact on the strength of the bank lending channel.
    Keywords: bank lending channel, monetary policy, financial regulation
    JEL: E51 E52 E44
    Date: 2018–05
  6. By: Klaus Adam; Michael Woodford
    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.
    JEL: E52
    Date: 2018–05
  7. By: Brühl, Volker
    Abstract: With a notional amount outstanding of more than USD 500 trillion, the market for OTC derivatives is of vital importance for global financial stability. A growing proportion of these contracts are cleared via central counterparties (CCPs), which means that CCPs are gaining in importance as critical financial market infrastructures. At the same time, there is growing concern that a new "too big to fail" problem could arise, as the CCP industry is highly concentrated due to economies of scale. From a European perspective, it should be noted that the clearing of euro-denominated OTC derivatives mainly takes place in London, hence outside the EU in the foreseeable future. For some time there has been a controversial discussion as to whether this can remain the case post Brexit. CCPs, which clear a significant proportion of euro OTC derivatives and are systemically relevant from an EU perspective, should be subject to direct supervision by EU authorities and should be established in the EU. This would represent an important building block for a future Capital Markets Union in Europe, as regulatory or supervisory arbitrage in favour of systemically important third-country CCPs could be prevented. In addition, if a systemically relevant CCP handling a considerable portion of the euro OTC derivatives business were to run into serious difficulties, this may impact ECB monetary policy. This applies both to demand for central bank money and to the transmission of monetary policy measures, which can be significantly impaired, particularly in the event that the repo market or payment systems are disrupted. It is therefore essential for the ECB to be closely involved in the supervision of CCPs. Against this background, the draft amendment of EMIR (European Market Infrastructure Regulation) presented on 13 June 2017 is a step in the right direction. In addition, there is an urgent need to introduce a recovery and resolution mechanism for CCPs in the EU to complement the existing single resolution mechanism (SRM) for banks in the eurozone. Only then can the diverse interdependencies between banks and CCPs be adequately taken into account in the recovery and resolution programmes required in a financial crisis.
    JEL: G20 G21
    Date: 2018
  8. By: Isabel Argimón (Banco de España); Clemens Bonner (De Nederlandsche Bank and Vu University Amsterdam); Ricardo Correa (Federal Reserve Board); Patty Duijm (De Nederlandsche Bank); Jon Frost (De Nederlandsche Bank, Vu University Amsterdam and Financial Stability Board); Jakob de Haan (De Nederlandsche Bank, University of Groningen and CESifo); Leo de Haan (De Nederlandsche Bank); Viktors Stebunovs (Federal Reserve Board)
    Abstract: Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions’ business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit homecountry monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
    Keywords: monetary policy transmission, global financial institutions, bank lending channel, portfolio channel, business models.
    JEL: E5 F3 F4 G2
    Date: 2018–06
  9. By: Nana Kwame Akosah; Francis W. Loloh; Maurice Omane-Adjepong
    Abstract: This paper scrutinizes the rationale for the adoption of inflation targeting (IT) by Bank of Ghana in 2002. In this case, we determine the stability or otherwise of the relationship between money supply and inflation in Ghana over the period 1970M1-2016M3 using battery of econometric methods. The empirical results show an unstable link between inflation and monetary growth in Ghana, while the final state coefficient of inflation elasticity to money growth is positive but statistically insignificant. We find that inflation elasticity to monetary growth has continued to decline since the 1970s, showing a waning impact of money growth on inflation in Ghana. Notably, there is also evidence of negative inflation elasticity to monetary growth between 2001 and 2004, lending support to the adoption of IT framework in Ghana in 2002. We emphasized that the unprecedented 31-months of single-digit inflation (June 2010-December 2012), despite the observed inflationary shocks in 2010 and 2012, reinforces the immense contribution of the IT framework in anchoring inflation expectations, with better inflation outcomes and inflation variability in Ghana. The paper therefore recommends the continuous pursuance and strengthening of the IT framework in Ghana, as it embodies a more eclectic approach to policy formulation and implementation.
    Date: 2018–05
  10. By: Jon Frost; René van Stralen
    Abstract: Based on newly available data, we examine the relationship between macroprudential policies (MaPs) and the Gini coefficient of both market income inequality, i.e. the Gini coefficient of income inequality before redistributive policies, and net income inequality, i.e. inequality after redistribution. We run panel regressions for 69 countries over the period 2000 to 2013. Our results show a positive association of the use of some MaPs with both market and net income inequality. In particular, we find that concentration limits, macroprudential reserve requirements and interbank exposure limits have a positive relationship with market income inequality, while loan-to-value (LTV) limits have a positive association with net inequality. The results for other measures are relatively sensitive to specification.
    Keywords: macroprudential policy; financial regulation; inequality; income distribution
    JEL: D63 G28 O16
    Date: 2018–05
  11. By: Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
    Abstract: This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
    Keywords: Banks, Stress Testing, Equity Performance, CDS Performance
    JEL: G00 G21 G28
    Date: 2018–05
  12. By: Michael T. Kiley
    Abstract: Research has suggested that a rapid pace of nonfinancial borrowing reliably precedes financial crises, placing the pace of debt growth at the center of frameworks for the deployment of macroprudential policies. I reconsider the role of asset-prices and current account deficits as leading indicators of financial crises. Run-ups in equity and house prices and a widening of the current account deficit have substantially larger (and more statistically-significant) effects than debt growth on the probability of a financial crisis in standard crisis-prediction models. The analysis highlights the value of graphs of predicted crisis probabilities in an assessment of predictors.
    Keywords: Current account ; Debt ; Equity prices ; Financial crisis ; House prices
    JEL: G01 E44 F32
    Date: 2018–06–15
  13. By: Mengus, Eric
    Abstract: This paper shows that bailouts of private agents can optimally take the form of the purchase of a defaulting asset, even if this also means paying off external asset holders. When anticipated, this form of bailouts leads to an endogenous implicit guarantee, where even an intrinsically worthless asset may be traded at a positive price. In the presence of borrowing constraints and imperfectly observable private liquidity needs, direct transfers are imperfect so that, when more constrained agents are also more exposed to a given asset, the compensation through asset purchases becomes optimal. I then show that this possibility of implicit guarantee is amplified by other frictions as risk-shifting and ultimately leads to a coordination problem for selecting stores of liquidity. Finally, I derive policy implications for financial regulation and international capital flows.
    Keywords: Implicit guarantees; bailouts; intrinsically worthless assets
    JEL: E44 F34 G28
    Date: 2017–12–20
  14. By: Mark A. Carlson; Burcu Duygan-Bump
    Abstract: To implement monetary policy in the 1920s, the Federal Reserve utilized administered interest rates and conducted open market operations in both government securities and private money market securities, sometimes in fairly considerable amounts. We show how the Fed was able to effectively use these tools to influence conditions in money markets, even those in which it was not an active participant. Moreover, our results suggest that the transmission of monetary policy to money markets occurred not just through changing the supply of reserves but importantly through financial market arbitrage and the rebalancing of investor portfolios. The tools used in the 1920s by the Federal Reserve resemble the extraordinary monetary policy tools used by central banks recently and provide further evidence on their effectiveness even in ordinary times.
    Keywords: Monetary policy ; Unconventional monetary policy ; Central banking ; Administered rates ; Money markets ; Quantitative easing
    JEL: E52 E58 N22
    Date: 2018–03–09
  15. By: Lisa Coiffard (Paris Institute of Political Studies, Sciences Po Paris)
    Abstract: The changes of the Hungarian financial regulation reflect the power of the Fidesz-government to challenge the European institutions. With the new structure of the Hungarian Central Bank (MNB) and unorthodox macroeconomic policy, Hungary uses the global trends in the financial sector to deviate from the European treaties. The complex European structure is not able to face the new challenges with its tools and is more than ever obliged to counter such behaviors to preserve the credibility and the values of the European project.
    Keywords: financial regulation, MNB, ECB, central banks
    JEL: E5 G2 H3 K4 N24 P2
    Date: 2018–06
  16. By: Sheila Dow (Department of Economics, University of Victoria)
    Abstract: The modern debate about monetary reform has taken on a new twist with the development of distributed ledger payments technology employing private digital currencies. In order to consider the appropriate state response, we go back to first principles of money and finance and the case for financial regulation: to ensure provision of a safe money asset and a stable supply of credit within an inherently unstable financial system. We consider calls to privatise money or to restrict money issue to the state against the background of the increasing marketisation of the financial sector and money itself. Following an analysis of private digital currencies, we then consider proposals for state issue of digital currency. It is concluded that the focus of attention should instead be on updating of regulation, not only to encompass digital currencies, but also to address other innovations in the financial sector which generate credit and liquidity, in order to meet the needs of the real economy. JEL Classification: E3, E5, G1
    Keywords: Digital Currencies, Central Banks, Financial Instability, Financial Regulation
    Date: 2018–06–22
  17. By: Plosser, Matthew (Federal Reserve Bank of New York); Santos, Joao A. C. (Federal Reserve Bank of New York)
    Abstract: The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on short-term commitments declined (relative to those of long-term commitments). In contrast, following the passage of Basel II, both undrawn fees and spreads went up. These results are robust and confirm that banks act to conserve regulatory capital by modifying the cost and supply of credit.
    Keywords: Basel accords; capital regulation; cost of capital; loan spreads
    JEL: G21 G28
    Date: 2018–06–01
  18. By: Ayako Saiki; Jon Frost
    Abstract: This is a revaluation of our study which we published in 2014 (Saiki and Frost, 2014) The study found that Japan's unconventional monetary policy (UMP) had widened income inequality in Japan. Since then, the Bank of Japan (BOJ) has further increased the monetary base and inflation has been low (headline inflation is about 1% as of this writing) but positive. We revisit the relationship between Japan's quantitative and qualitative easing (QQE) and find further evidence for our conjecture. The impact of UMP on income distribution may differ in Japan and other countries for various reasons, including differences in household balance sheets and the flexibility of labor markets.
    Date: 2018–05
  19. By: Chen, Siyan; Desiderio, Saul
    Abstract: Empirical studies have pointed out that monetary policy may significantly affect income and wealth inequality. To investigate the distributive properties of monetary policy the authors resort to an agent-based macroeconomic model where firms, households and one bank interact on the basis of limited information and adaptive rules-of-thumb. Simulations show that the model can replicate fairly well a number of stylized facts, specially those relative to the business cycle. The authors address the issue using three types of computational experiments, including a global sensitivity analysis carried out through a novel methodology which greatly reduces the computational burden of simulations. The result emerges that a more restrictive monetary policy increases inequality, even though this effect may differ across groups of households. This may put into question the principle of the independence of central banks. In addition, this effect appears to be attenuated if the bank's willingness to lend is lower.
    Keywords: economic inequality,monetary policy,agent-based models,NK-DSGE models,stock-flow consistency,global sensitivity analysis
    JEL: C63 D31 D50 E52
    Date: 2018
  20. By: Kovner, Anna (Federal Reserve Bank of New York); Van Tassel, Peter (Federal Reserve Bank of New York)
    Abstract: We estimate the cost of capital for the banking industry and find that while the cost of capital soared for banks in the financial crisis, after the passage of the Dodd-Frank Act, the value-weighted cost of capital for banks fell differentially more than did the cost of capital for nonbanks. The very largest banks drive the decline in expected returns. Over a longer time horizon, the cost of capital for banks may be differentially higher than that for nonbanks relative to the time period before the Graham-Leach-Bliley Act was passed, although in some measures the difference is negative and/or cannot be distinguished from zero. We find some evidence that stress testing has lowered the cost of capital for the largest stress-tested banks, although not for those added more recently to stress testing.
    Keywords: cost of capital; beta; bank regulation; Dodd-Frank; banks
    JEL: G12 G21 G28
    Date: 2018–06–01
  21. By: Cristiano Cantore; Filippo Ferroni; Miguel A. Leon-Ledesma
    Abstract: The New-Keynesian transmission mechanism of monetary policy has clear implications for the behavior of the labor share. In the basic version of the model, the labor share is negatively related to the price markup and hence is pro-cyclical conditional on monetary policy shocks. However, little empirical evidence is available on the effect of monetary policy on the labor share and its components. We present a comprehensive cross country empirical analysis and find that the data are at odds with the theory. Cyclically, a monetary policy tightening increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia and Canada. We then examine models allowing for a wide range of nominal and real rigidities that are important to separate the dynamics of the markup and the labor share. We show that models that do a good job at reproducing the responses of real variables to a monetary policy shock are unable to reproduce the responses of the labor share observed in the data.
    Keywords: Labor Share; Monetary Policy Shocks; DSGE models
    JEL: E23 E32 C52
    Date: 2018–06

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