nep-cba New Economics Papers
on Central Banking
Issue of 2018‒07‒23
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Lender of Last Resort versus Buyer of Last Resort – Evidence from the European Sovereign Debt Crisis By Viral V. Acharya; Diane Pierret; Sascha Steffen
  2. Institutional Setups of Monetary Policy and Banking Regulation and Supervision - A Survey By Diana Lima
  3. The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks By Urbschat, Florian
  4. Positive Trend In ation and Determinacy in a Medium-Sized New Keynesian Model By Jonas E. Arias; Guido Ascari; Nicola Branzoli; Efrem Castelnuovo
  5. Benefits and costs of liquidity regulation By Hoerova, Marie; Mendicino, Caterina; Nikolov, Kalin; Schepens, Glenn; Heuvel, Skander Van den
  6. Liquidity Traps and Large-Scale Financial Crises By Giovanni Caggiano; Efrem Castelnuovo; Olivier Damette; Antoine Parent; Giovanni Pellegrino
  7. Japan: Evaluating Aggressive Monetary Easing and Economic Performance By Ramana
  8. Speed Limit Policy and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt; Paul Yoo
  9. A Survey-based Shadow Rate and Unconventional Monetary Policy Effects By Hibiki Ichiue; Yoichi Ueno
  10. The Impact of Monetary Policy on the Balance of Payments and Macroeconomic Indicators By Korishchenko, Konstantin; Morozov, Stepan; Bryanov, G
  11. Market disequilibrium, monetary policy, and financial markets: insights from new tools By Jean-Luc Gaffard; Mauro Napoletano
  12. Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy By Jean-Bernard Chatelain; Kirsten Ralf
  13. Evaluating Inflation Targeting Regime - Case Study: Georgia By Nodar Kiladze
  14. Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors By Huang, Chien-Yu; Yang, Yibai; Zheng, Zhijie
  15. Assessing monetary policy targeting regimes for small open economies By Harsha Paranavithana; Leandro Magnusson; Rod Tyers
  16. The Effects of the Bank of Japan fs Corporate and Government Bond Purchases on Credit Spreads By Kenji Suganuma; Yoichi Ueno
  17. Revisiting effectiveness of interest rate as a tool to control inflation: evidence from Malaysia based on ARDL and NARDL By Hamzah, Nurrawaida Husna; Masih, Mansur

  1. By: Viral V. Acharya (New York University, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER)); Diane Pierret (University of Lausanne and Swiss Finance Institute); Sascha Steffen (Frankfurt School of Finance & Management)
    Abstract: We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.
    Keywords: Bank-sovereign nexus, ECB, fire sales, unconventional monetary policy
    JEL: G01 G21 G28
    Date: 2018–05
  2. By: Diana Lima (Bank of Portugal)
    Abstract: Worldwide reforms to the institutional setup of banking supervision in the af- termath of the global nancial crisis aimed not only at revising improving the of banking supervision, but also at introducing a macroprudential oversight of the - nancial system, empowering central banks with new nancial stability objectives and instruments. This survey investigates the interaction of monetary policy and banking regulation and supervision in the light of these new developments and what it may imply for the design of their institutional setup. The survey nds a con- sensus around an institutional framework where central banks are entrusted with nancial stability and macroprudential policy mandate, since this setup would take the most of the similarities between macroprudential and monetary policies. In such an institutional set up, the microprudential dimension of banking regulation and su- pervision should be assigned to an independent authority. Finally, the literature review highlights the need for empirical evidence and theoretical analysis, regarding the impact of di erent nancial supervisory architectures on social welfare, speci - cally the assessment of the bene ts and costs associated to each type of institutional arrangement.
    JEL: E52 E58 E61 G21
    Date: 2018–07
  3. By: Urbschat, Florian
    Abstract: The recent negative interest rate policy (NIRP) and quantitative easing (QE) programme by the ECB have raised concerns about the pass-through of monetary policy. On the one hand, negative rates could lead to declining bank profitability making an expansionary monetary policy contractionary. Also, if interest rates are too low for too long banks could be induced to take too much risky credit. On the other hand, several economists argue that there is nothing special about negative interest rates per se. This paper uses a large micro level data set of the German bank universe to examine how banks behave in this uncharted territory. The evidence found suggests that bank’s business model, i.e. the share of overnight deposits, plays a crucial role. While some banks may benefit in the short run via for instance reduced refinancing costs or lower loan loss provisions, many banks with high deposit ratios face lower net interest income and lower credit growth rates. If continued for too long QE and NIRP erode bank profits for most banks eventually.
    Keywords: Negative Interest Rate Policy; Banks' Profitability; Net Interest Rate Margin; Risk-Taking Channel
    JEL: C53 E43 E52 G11 G21
    Date: 2018–07–09
  4. By: Jonas E. Arias (FRB Philadelphia); Guido Ascari (University of Oxford); Nicola Branzoli (Bank of Italy); Efrem Castelnuovo (University of Padova)
    Abstract: This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation ï¬ tted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops signiï¬ cantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.
    Keywords: trend inflation, determinacy, monetary policy
    JEL: E52 E3 C22
    Date: 2018–06
  5. By: Hoerova, Marie; Mendicino, Caterina; Nikolov, Kalin; Schepens, Glenn; Heuvel, Skander Van den
    Abstract: This paper investigates the costs and benefits of liquidity regulation. We find that liquidity tools are beneficial but cannot completely remove the need for Lender of Last Resort (LOLR) interventions by the central bank. Full compliance with current Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) rules would have reduced banks’ reliance on publicly provided liquidity during the global financial crisis without removing such assistance altogether. The paper also investigates the output costs of introducing the LCR and NSFR using two macro-financial models. We find these costs to be modest. JEL Classification: E44, E58, G21, G28
    Keywords: banking, capital requirements, Central bank, Lender of Last Resort, liquidity regulation
    Date: 2018–07
  6. By: Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Olivier Damette (BETA-CNRS); Antoine Parent (Sciences Po Lyon); Giovanni Pellegrino (University of Melbourne)
    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: 2018–06
  7. By: Ramana
    Abstract: Japan has had an outsized influence on global monetary policy. Avoiding becoming Japan has been a powerful force for Quantitative Easing. This paper argues, that despite popular perceptions, Japanese economic performance has not been a calamity; living standards have risen consistently over time and a full-fledged deflationary spiral avoided. These outcomes render making judgements about the Bank of Japan’s (BOJ) track record challenging despite the failure to meet the inflation target. The BOJ’s conceptual evolution on monetary policy and the various measures adopted over time are analysed for a fuller assessment of the effectiveness of monetary policy in Japan. The paper discusses the nascent, but increasingly influential academic research on the limitations of QE and its collateral effects on the economy, and what that portends for future BOJ policy.
    Keywords: Quantitative Easing, Bank of Japan, deflation
    JEL: E4 E5 F3
    Date: 2018–06–20
  8. By: Taisuke Nakata (Board of Governors of the Federal Reserve System (E-mail:; Sebastian Schmidt (European Central Bank (E-mail:; Paul Yoo (UNC Kenan-Flagler Business School (E-mail:
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) |policies aimed at stabilizing the output growth |less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation- output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.
    Keywords: Liquidity Traps, Markov-Perfect Equilibrium, Speed Limit Policy, Zero Lower Bound
    JEL: E52 E61
    Date: 2018–06
  9. By: Hibiki Ichiue (Head of Economic Research Division, Research and Statistics Department, Bank of Japan (E-mail:; Yoichi Ueno (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Many studies estimate a shadow interest rate, which can be negative when the short-term rate is at the effective lower bound, and use it as the monetary policy indicator. This study proposes a novel method to estimate the shadow rate using survey forecasts of macroeconomic variables and allowing the shadow rate to be negative even when the short-term rate is positive. The estimated U.S. shadow rate remained negative in 2015-17, when the Federal Reserve continued to hike its policy rate but kept its holdings of assets at sizable levels. The shadow spread, which is defined as the shadow rate minus the short-term rate, is negatively correlated with the Federal Reserve fs holdings of assets, particularly mortgage-backed securities. The impact of the unconventional monetary policy on inflation was 0.5 percentage points at its peak.
    Keywords: Monetary Policy, Effective Lower Bound, Zero Lower Bound, Shadow Rate, Survey Forecasts
    JEL: E52
    Date: 2018–06
  10. By: Korishchenko, Konstantin (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Morozov, Stepan (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Bryanov, G (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The paper studies the implementation of the monetary policy of the Central Bank of the Russian Federation, namely, the transition from the exchange rate policy to the inflation targeting policy conducted since November 2014, and illuminates the issues of the world experience in the conduct of monetary policy by the example of central banks of foreign countries and discloses such methods of implementing monetary policy as (1) inflation targeting,(2) exchange rate regulation and (3) the targeting of money supply.
    Date: 2018–06
  11. By: Jean-Luc Gaffard; Mauro Napoletano
    Abstract: We revisit the main building blocks of the theoretical models underlying the monetary policy consensus before the Great Recession. We highlight how the failure of these models to prevent the crisis and to provide guidance during the recession were due to the excessive confidence in the ability of markets to coordinate demand and supply, and to the neglect of the role of finance. Furthermore, we outline the main elements of an alternative approach to monetary policy that put emphasis on the processes driving coordination in markets, and on the externalities transmitted by financial inter-linkages. Many elements of this new approach are captured by new classes of models, namely, agent-based and financial network models. We discuss some insights from these models for the conduct of monetary policy, and for its interactions with fiscal and macro- prudential policies.
    Keywords: output-inflation dynamics, new-keynesian models, disequilibrium analysis, agent-based models, fiscal-monetary policy interactions, quantitative easing policies
    Date: 2018–06–20
  12. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper compares different implementations of monetary policy in a new- Keynesian setting. We can show that a shift from Ramsey optimal policy under short term commitment (based on a negative-feed back mechanism) to a Taylor rule (based on a positive-feed back mechanism) corresponds to a Hopfbifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and out put gap) a reforward-looking variables in the new-Keynesian theory.
    Keywords: Bifurcations,Taylor rule,Taylor principle,new-Keynesian model,Ramsey optimal policy,Finite horizon commitment
    Date: 2018–04
  13. By: Nodar Kiladze (Ivane Javakhishvili Tbilisi State University)
    Abstract: Inflation is an indicator used by economists to assess the economic performance of the country as it shows percentage growth of price level. High inflation means higher growth rate of prices which is bad for the economy and for the country mainly because of the reduction of average labor purchasing power, caused by stickiness of wages, which decreases economic welfare. Another important factor is divergence between the price levels of different goods and services. Zero lower bound inflation (or deflation) can also cause serious negative results such as output collapse in response to various shocks leading to economic stagnation and high rate of unemployment. Both too high and too low inflation are problem that should be solved by policymakers to achieve sustainable economic growth and long-run development of the country. Because of the above-mentioned reasons low and stable rate of inflation is to be considered the most efficient for reaching high rate of economic growth and development. This paper reviews mentioned problems and outlines why it is so crucial to have inflation rate at low level and why is it vital to keep it stable. Most of the countries desire to have their inflation rate at 2%. Inflation targets mostly vary from 2 to 5% depending on the central bank and economic development of the country but with a long run inflation target of maximum 2-3%.The National Bank of Georgia adopted Inflation Targeting regime in 2009 while some economists had misconceptions and debates about this decision and some papers were criticizing Georgia for not being ready for this change yet mostly because of its institutional setup and imperfect monetary transmission mechanism (Billmeier & Bakradze, 2007). The results of this adoption are reviewed in this paper by assessing economic performance during Monetary Targeting regime and comparing it to the period after Inflation Targeting regime. This paper uses price level stability comparison between these two periods as well as relative price variability among different commodity groups. The model investigates the relationship between inflation rate and the relative price variability and shows that adopting Inflation Targeting regime significantly improved economic performance of the country.
    Keywords: Inflation Targeting Regime, Monetary Targeting Regime, Monetary Policy, Central Banks
    JEL: E42 E31 E50
    Date: 2017–07
  14. By: Huang, Chien-Yu; Yang, Yibai; Zheng, Zhijie
    Abstract: This study investigates the effects of monetary policy on economic growth and social welfare in a Schumpeterian economy with an upstream and a downstream sector in which the R&D investment of these sectors is subject to a cash-in-advance (CIA) constraint. We show that a higher nominal interest rate reallocates labor from a more cash-constrained R&D sector to a less one, which could generate an inverted-U effect on economic growth. In addition, we examine the necessary and sufficient conditions for the (sub)optimality of the Friedman rule by relating the underinvestment and overinvestment of R&D in the decentralized economy, and find that this relationship is crucially determined by the presence of CIA constraints, the relative productivity between upstream R&D and downstream R&D, and the strength of markup.
    Keywords: CIA constraint; Endogenous growth; Monetary policy; Two R&D sectors
    JEL: E41 O30 O40
    Date: 2018–06–18
  15. By: Harsha Paranavithana; Leandro Magnusson; Rod Tyers
    Abstract: This paper quantifies the performance of five monetary policy regimes in controlling macroeconomic volatility triggered by a variety of supply, demand and external shocks in small open economies. While the proposed macroeconomic model is generic, the application is to the case of Sri Lanka. The investigated regimes separately target the exchange rate, a monetary aggregate, nominal GDP, the CPI inflation rate and a Taylor composite of output gaps and inflation. The results suggest that inflation targeting offers the least macro-economic volatility overall. Consistent with earlier research and Mundell’s financial trilemma, its stabilising power is greatest under demand and external shocks, which have grown more prominent as product and financial markets have opened.
    Keywords: Macroeconomic volatility, Monetary policy, Mundell’s trilemma, Sri Lanka
    JEL: E47 E52 N15
    Date: 2018–07
  16. By: Kenji Suganuma (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently Monetary Affairs Department), Bank of Japan (E-mail:; Yoichi Ueno (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We examine the effects of corporate and government bond purchases by the Bank of Japan (BOJ) on Japanese firms f credit spreads. Using a micro dataset covering 5,614 corporate bonds over the period from 1997 to 2016, we empirically show that credit spreads are explained by the risk-taking channel and the local and global supply channels, in addition to the conventional default risk channel. We quantify the effects of the BOJ fs bond purchases on credit spreads through these three channels. In so doing, we emphasize that policy effects through the local and global supply channels crucially depend on the degree of risk appetite at the financial institutions.
    Keywords: Credit spreads, Default risk channel, Local supply channel, Global supply channel, Risk taking channel, Monetary policy
    JEL: E44 E58 G12
    Date: 2018–06
  17. By: Hamzah, Nurrawaida Husna; Masih, Mansur
    Abstract: Public policy remains a paradox and a challenging pursuit in finding a delicate balance between conflicting economic goals and outcomes. Nevertheless, interest rate is a commonly used monetary policy tool to maintain a low and stable inflation. However, the effectiveness of interest rate in controlling inflation remains unanswered conclusively. Undertaking a wrong policy stance will lead to huge costs to the economy and society as a whole. Therefore, the purpose of this study is to investigate the lead-lag relationship between inflation and interest rate, and whether the relationship between the two variables is linear. These will determine whether interest rate is an effective tool in the context of Malaysia. This study extends prior literature by using a more recent monthly time series data and advanced techniques known as NARDL and ARDL. Based on this study, it is found that inflation rate is the most exogenous variable while interest rate is the most endogenous variable, hence policy makers have no influence over inflation. A crucial policy implication is policy makers should not use interest rate to control inflation but instead, they should focus on supply side policies to manage inflation.
    Keywords: Monetary policy, NARDL, ARDL, Inflation, Interest rate
    JEL: C22 C58 E4
    Date: 2018–06–15

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