nep-cba New Economics Papers
on Central Banking
Issue of 2018‒07‒16
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  2. What inflation measure should a currency union target? By Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan
  3. Central Bank Swap Lines By Saleem Bahaj; Ricardo Reis
  4. Conventional and Unconventional Monetary Policy Reaction to Uncertainty in Advanced Economies: Evidence from Quantile Regressions By Christina Christou; Ruthira Naraidoo; Rangan Gupta
  5. Securing financial stability through macroprudential measures By Daniel Jeongdae Lee; Jose Antonio Pedrosa-Garcia; Kiatkanid Pongpanich
  6. Monetary Policy Announcements and Market Interest Rates Response: Evidence from China By Rongrong Sun
  7. Proposal on ELBE and LGD in-default: tackling capital requirements after the financial crisis By González, Marta Ramos; Ureña, Antonio Partal; Fernández-Aguado, Pilar Gómez
  8. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  9. Liquidity Traps and Large-Scale Financial Crises By Giovanni Caggiano; Efrem Castelnuovo; Olivier Damette; Antoine Parent; Giovanni Pellegrino
  10. An Experimental Analysis Of The Effect Of Quantitative Easing By Adrian Penalver, Nobuyuki Hanaki, Eizo Akiyama, Yukihiko Funaki, Ryuichiro Ishikawa
  11. Optimal Dynamic Path during the Transition of Exchange Rate Regime: Analysis of the People’s Republic of China (PRC), Malaysia, and Singapore By Yoshino, Naoyuki; Asonuma, Tamon
  12. Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk? By Gareth Peters; Pavel Shevchenko; Bertrand Hassani; Ariane Chapelle
  13. The international transmission of monetary policy By Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  14. ECB vs Bundesbank: Diverging Tones and Policy E ectiveness By Peter Tillmann; Andreas Walter
  15. Structural and cyclical macroprudential objectives in supervisory stress testing: remarks at The Effects of Post-Crisis Banking Reforms, Federal Reserve Bank of New York, New York City By Hirtle, Beverly
  16. Swing in the Fed’s balance sheet policy and spillover effects on emerging Asian countries By Yves, Togba Boboy; Yoon, Seong-Min
  17. Asset price volatility in EU-6 economies: how large is the role played by the ECB? By Alessio Ciarlone; Andrea Colabella

  1. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. In a setting where 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 to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, 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, leaning against the wind, inflation targeting
    JEL: D81 D84 E52
    Date: 2018
  2. By: Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan
    Abstract: What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.
    Keywords: Core inflation; Headline inflation; Optimal monetary policy; Currency union; Welfare.
    JEL: E5 F3 F4
    Date: 2018–05–25
  3. By: Saleem Bahaj (Bank of England; Centre for Macroeconomics (CFM)); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.
    Keywords: Liquidity facilities, Currency basis, Bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018–06
  4. By: Christina Christou (Open University of Cyprus, School of Economics and Finance. Cyprus); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper offers new insight on how the Federal Reserve (Fed) and other monetary policy makers (Bank of England, Bank of Japan and the European Central Bank), reacted in the aftermath of the financial crisis. To this end, the paper makes use of a quantile-based approach that estimates the response of interest rates to inflation and the output gap at various points of the conditional distribution of interest rates. Furthermore to gauge the importance of monetary policy making at the zero lower bound, and to test the propositions that policy shows greater aggression in expansionary measures as interest rates reach low levels, and increasing aggression as the lower bound is approached, we make use of the shadow short rate of interest and a measure of uncertainty to capture this fact. While the results show no detectable evidence of increasing aggression to inflation as the zero lower bound is approached, yet the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower quantiles of interest rates lends support to expansionary mechanism in place during this time.
    Keywords: Interest rate rule, zero lower bound, shadow rate of interest, uncertainty, advanced economies
    JEL: C22 E52
    Date: 2018–06
  5. By: Daniel Jeongdae Lee (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Jose Antonio Pedrosa-Garcia (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Kiatkanid Pongpanich (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: While financial stability is not an explicit objective for most central banks, it is clearly an issue of concern given its implications for the real economy. Given the current environment of relatively robust economic growth and benign inflation, central banks and other relevant authorities should focus especially on aspects of financial stability. This is particularly urgent for countries suffering from high or rapidly rising household debt and corporate leverage, as well as those suffering from distressed bank loans. Macroprudential measures complement monetary policy in securing financial stability. In view of the high degree of interconnectedness among financial institutions, a shock can spread rapidly across the entire system. Hence, there has been growing consensus that financial regulation should move from a "micro" approach based on individual institutions towards a "macro" framework. Macroprudential measures are aimed at reducing systemic risks and safeguarding the stability of the financial system as a whole, as opposed to microprudential measures which are targeted at specific segments or even institutions
  6. By: Rongrong Sun (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: This paper uses the event study to estimate the impact of various monetary policy announcements on market interest rates in China over the 2002-2017 period. I find that financial markets understand the quantitative signals better: the market response to an announced adjustment of the regulated retail interest rate and the required reserve ratio is positive and significant at all maturities of bond rates, but smaller at the long end of the yield curve. However, the market barely responds to announced changes in the qualitative policy stance index, which contains limited vague information and is easily anticipated. Two newly introduced central bank lending rates do not appear to be sufficient to replace the retail interest rate and the reserve ratio in guiding market rates in the post-deregulation era. My results suggest that the PBC adopts a publicly announced short-term interest-rate operating target regime, similar to the Fed’s federal funds rate target. Length: 26 pages
    Keywords: announcement effect, event study, monetary policy, monetary transmission, China
    JEL: E52 E58
  7. By: González, Marta Ramos; Ureña, Antonio Partal; Fernández-Aguado, Pilar Gómez
    Abstract: Following the financial crisis, the share of non-performing loans has significantly increased, while the regulatory guidelines on the Internal-Ratings Based (IRB) approach for capital adequacy calculation related to defaulted exposures remains too general. As a result, the high-risk nature of these portfolios is clearly in danger of being managed in a heterogeneous and inappropriate manner by those financial institutions permitted to use the IRB system, with the consequent undue variability of Risk-Weighted Assets (RWA). This paper presents a proposal to construct Advanced IRB models for defaulted exposures, in line with current regulations, that preserve the risk sensitivity of capital requirements. To do so, both parameters Expected Loss Best Estimate (ELBE) and Loss Given Default (LGD) in-default are obtained, backed by an innovative indicator (Mixed Adjustment Indicator) that is introduced to ensure an appropriate estimation of expected and unexpected losses. The methodology presented has low complexity and is easily applied to the databases commonly used at these institutions, as illustrated by two examples. JEL Classification: C51, G21, G28, G32
    Keywords: banking regulation, credit risk, defaulted exposures
    Date: 2018–06
  8. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UvA - University of Amsterdam [Amsterdam])
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.
    Keywords: Central bank financial strength,Central bank capital,Central bank balance sheet,Inflation,Fiscal space,Central bank law
    Date: 2017–10
  9. By: Giovanni Caggiano; Efrem Castelnuovo; Olivier Damette; Antoine Parent; Giovanni Pellegrino
    Abstract: This paper estimates a nonlinear Threshold-VAR to investigate if a Keynesian liquidity trap due to a speculative motive was in place in the U.S. Great Depression and the recent Great Recession. We find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in M2 in the 1921-1940 period. This evidence, which is consistent with the Keynesian view on a liquidity trap, is shown to be state contingent. In particular, it emerges only when a speculative regime identified by high realizations of the Dow Jones index is considered. A standard linear framework is shown to be ill-suited to test the hypothesis of a Keynesian liquidity trap. An investigation performed with the same data for the period 1991-2010 confirms the presence of a liquidity trap just in the speculative regime. This last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the Divisia M2 measure of liquidity.
    Keywords: Keynesian liquidity trap, Threshold-VAR, monetary and financial cliometrics, Great Depression, Great Recession
    JEL: B22 C52 E52 N12 N22
    Date: 2018
  10. By: Adrian Penalver, Nobuyuki Hanaki, Eizo Akiyama, Yukihiko Funaki, Ryuichiro Ishikawa
    Abstract: In this paper we report the results of a repeated experiment in which a central bank buys bonds for cash in a quantitative easing (QE) operation in an otherwise standard asset market setting. The experiment is designed so that bonds have a constant fundamental value which is not affected by QE under rational expectations. By repeating the same experience three times, we investigate whether participants learn that prices should not rise above the fundamental price in the presence of QE (as found in (Penalver et al., 2017)). We find that some groups do learn this but most do not, instead becoming more convinced that QE boosts bond prices. These claims are based on significantly different behaviour of two treatment groups relative to a control group that doesn't have QE.
    Keywords: Quantitative Easing, Experimental Asset Markets
    JEL: C90 D84 G21
    Date: 2018
  11. By: Yoshino, Naoyuki (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: We consider the optimal exchange rate regime transition policy for three East Asian countries: the People’s Republic of China (PRC), Malaysia, and Singapore. In contrast to two traditional approaches to exchange rate regimes in East Asia, we conduct a dynamic transition analysis. Based on a small, open-economy dynamic stochastic general equilibrium model applied to these three countries, we define transition policies from a dollar peg regime to either a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the current dollar peg regime. The quantitative analysis using PRC, Malaysian, and Singaporean data shows that the PRC would be better off shifting gradually from a dollar peg to a basket peg. In response to the PRC’s shift, both Malaysia and Singapore would opt to shift gradually to a basket peg regime.
    Keywords: exchange rate; exchange rate regime; dynamic transition analysis; basket peg; dollar peg; floating regime; DSGE model
    JEL: F33 F41 F42
    Date: 2017–07–17
  12. By: Gareth Peters (Department of Statistical Sciences - UCL - University College of London [London]); Pavel Shevchenko (CSIRO - Commonwealth Scientific and Industrial Research Organisation [Canberra]); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ariane Chapelle (Department of Computer Science - UCL - University College of London [London])
    Abstract: Recently, Basel Committee for Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with closely related operational risk Capital-at-Risk (OpCar) Basel Committee proposed model which is the precursor to the SMA. In conclusion, we advocate to maintain the AMA internal model framework and suggest as an alternative a number of standardization recommendations that could be considered to unify internal modelling of operational risk. The findings and views presented in this paper have been discussed with and supported by many OpRisk practitioners and academics in Australia, Europe, UK and USA, and recently at OpRisk Europe 2016 conference in London.
    Keywords: Basel Committee for Banking Supervision regulations,loss distribution approach,advanced measurement approach,operational risk,standardised measurement approach
    Date: 2016–07
  13. By: Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
    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.
    Keywords: monetary policy,international spillovers,cross-border transmission,global bank,global financial cycle
    JEL: E52 F3 F4 G15 G21
    Date: 2018
  14. By: Peter Tillmann (Justus-Liebig-University Giessen); Andreas Walter (Justus-Liebig-University Giessen)
    Abstract: The present paper studies the consequences of con flicting narratives for the transmission of monetary policy shocks. We focus on con flict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This con flict received much attention on financial markets. We use over 900 speeches of both institutions' presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank's after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence re ects a muted adjustment of the expectations component of long-term rates.
    Keywords: Central bank communication, diverging tones, speeches, text analysis, monetary transmission
    JEL: E52 E43 E32
    Date: 2018
  15. By: Hirtle, Beverly (Federal Reserve Bank of New York)
    Abstract: Remarks at The Effects of Post-Crisis Banking Reforms, Federal Reserve Bank of New York, New York City.
    Keywords: stress testing; Comprehensive Capital Analysis and Review (CCAR); Dodd-Frank Act (DFAST); Supervisory Capital Assessment Program (SCAP); microprudential supervisory tools; macroprudential objectives; structural objectives; cyclical objectives; comprehensiveness; consistency; transparency; systemically important financial institutions (SIFI)
    Date: 2018–06–22
  16. By: Yves, Togba Boboy; Yoon, Seong-Min
    Abstract: This paper investigates the effects of the Fed’s balance sheet policy at the zero lower bound on the macroeconomic and financial variables of emerging Asian countries. Based on a heterogeneous structural panel VAR model using monthly data from eight emerging Asian countries, we find evidence of cross-border spillover effects on long-term bond yields, GDP, prices, stock market index, local currency, and real credit. However, the quantile responses show that there is substantial heterogeneity among countries’ responses to Fed shocks. Accordingly, these effects vary across countries and horizons depending on their macroeconomic fundamentals, financial openness, and intensity of macroprudential regulations.
    Keywords: Quantitative easing; Unconventional monetary policy; International transmission mechanism, Structural panel VAR model; Quantile response.
    JEL: C31 C32 E44 E58 F41
    Date: 2018–05–14
  17. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the different waves of asset purchase programmes implemented by the ECB from 2009 onwards have spilled over into asset price volatility developments of a group of six Central and Eastern European economies belonging to the EU but not to the euro area. This has partly shielded their financial markets from the negative shocks that have influenced international investors’ degree of risk aversion in recent years. By means of a dynamic conditional correlation multivariate GARCH model, and by resorting to three different proxies to describe the functioning and measure the impact of the ECB’s asset purchase programmes, we show that such non-standard monetary measures have played a significant role in dampening volatility spikes in the financial markets of the countries at stake. This probably reflects how both a ‘risk taking’ and a ‘liquidity’ channel of transmission actually work. The results are generally robust to an extensive series of tests, and to changes made in the estimation methodology.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, asset prices, volatility, GARCH models
    JEL: C32 E52 E58 F3 F4 F16 F37 G1 G11 G14
    Date: 2018–06

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