|
on Central Banking |
| By: | Saleem Bahaj; Ricardo Reis |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7124&r=cba |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by a Greenbook forecast-based version of the rule consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters. Other statistical properties of Greenbook forecasts also point to an overlooked role for monetary aggregates, particularly Divisia monetary aggregates, in the Federal Reserve's forecasting process and subsequent monetary policy decisions made by the FOMC. |
| Keywords: | Greenbook forecasts, Taylor Rule, Time-varying parameters, Divisia monetary aggregates |
| JEL: | E31 E32 E37 E43 E47 E51 E52 E58 E65 |
| Date: | 2018–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:955&r=cba |
| By: | Geraldine Dany-Knedlik; Juan Angel Garcia |
| Abstract: | This paper investigates the evolution of inflation dynamics in the five largest ASEAN countries between 1997 and 2017. To account for changes in the monetary policy frameworks since the Asian Financial Crisis (AFC), the analysis is based on country-specific Phillips curves allowing for time-varying parameters. The paper finds evidence of a higher degree of forward-looking dynamics and a better anchoring of inflation expectations, consistent with the improvements in monetary policy frameworks in the region. In contrast, the quantitative impact of cyclical fluctuations and import prices has gradually diminished over time. |
| Date: | 2018–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/147&r=cba |
| By: | Isabel Cairo; Jae W. Sim |
| Abstract: | We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted. |
| Keywords: | Monetary policy ; Credit ; Financial crises ; Income inequality |
| JEL: | E32 E44 E52 G01 |
| Date: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-48&r=cba |
| By: | Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Gabriela Nodari (Reserve Bank of Australia) |
| Abstract: | We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate. |
| Keywords: | Risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data |
| JEL: | C2 E4 E5 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0225&r=cba |
| By: | Joost Bats; Jan Willem van den End; John Thoolen |
| Abstract: | During the global financial crisis which started in 2007 (henceforth: crisis), central banks provided extended liquidity support, both to individual institutions and financial markets more broadly. These measures were taken as part of the lender of last resort (LOLR) function of the central bank, which can be activated in response to various kinds of liquidity risk. In times of systemic liquidity stress, when markets do not function properly and liquidity buffers fall short, a larger intermediary role of the central bank is warranted. Extended liquidity supply by the central bank can then underpin the intermediary function of the financial system to ensure the continuation of critical economic processes. In a systemic crisis, supporting financial stability is tantamount to safeguarding the monetary transmission process and thus, ultimately, also ensuring price stability. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbocs:1604&r=cba |
| By: | Sheedy, Kevin D. |
| Abstract: | This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest-rate policy in stabilizing the economy and in insulating monetary policy from political pressures. Some suggestions for the reform of inflation targeting are made to reduce the need for unconventional policy instruments in the future. |
| Keywords: | unconventional monetary policy; monetary policy rules |
| JEL: | N0 F3 G3 |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:83608&r=cba |
| By: | Kolasa, Marcin; Wesołowski, Grzegorz |
| Abstract: | This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets and an increase in international comovement of term premia. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. JEL Classification: E44, E52, F41 |
| Keywords: | bond market segmentation, international spillovers, quantitative easing, term premia |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182172&r=cba |
| By: | Potter, Simon M. (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the 23rd EMEAP (Executives’ Meeting of East Asia-Pacific Central Banks) Governors’ Meeting, Manila, Philippines. |
| Keywords: | financial stability; FOMC; rate of interest paid on reserves (IOR); LIBOR; overnight reverse repurchase agreement (ON RRP); balance sheet; portfolio; Federal Home Loan Banks (FHLBs); Liquidity Coverage Ratio (LCR); high-quality liquid assets (HQLA); money market turbulence; term dollar money markets; Tax Cuts and Jobs Act (TCJA) |
| Date: | 2018–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:291&r=cba |
| By: | Taisuke Nakata; Sebastian Schmidt; Paul Yoo |
| 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: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-50&r=cba |
| By: | Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills |
| 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 F30 F40 G15 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7155&r=cba |
| By: | Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner |
| Abstract: | Is publishing central bank projections of the policy rate a better way of managing market expectations than with written statements, and does it lead to overreactions by markets? To answer this, we use a quasi-experiment from the policy announcements of the Reserve Bank of New Zealand (RBNZ). Every monetary policy decision by the RBNZ is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision is accompanied by a published interest rate forecast. We exploit this difference in the information accompanying decisions to study the relative influences of qualitative and quantitative forward guidance. We find that the information releases have significant effects on asset prices regardless of the nature of the communication (quantitative or qualitative). Announcements that include an interest rate projection lead to very similar market reactions across the yield curve as announcements that only include written statements. This control-treatment approach suggests that earlier studies may overstate the effects of publishing interest rate forecasts on market prices: it is not only the interest rate forecasts that markets react to, as they seem to infer similar forward guidance from written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results also suggest that market participants understand the conditional nature of the RBNZ interest rate forecasts, and that concerns that markets read these forecasts as binding promises are unwarranted. |
| Keywords: | Monetary policy, forward guidance, interest rate forecasts. |
| JEL: | E43 E44 E52 E58 G12 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2018-36&r=cba |
| By: | Taisuke Nakata; Ryota Ogaki; Sebastian Schmidt; Paul Yoo |
| Abstract: | We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer. |
| Keywords: | Discounted euler equation ; Discounted phillips curve ; Effective lower bound ; Forward guidance ; Optimal policy |
| JEL: | E52 E58 E61 |
| Date: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-49&r=cba |
| By: | Jaccard, Ivan |
| Abstract: | This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58 |
| Keywords: | bond premium puzzle, euro zone economy, financial frictions, time-varying risk aversion |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182174&r=cba |
| By: | IKEDA Yuichi; YOSHIKAWA Hiroshi |
| Abstract: | The economic crisis of 2008 showed that conventional microprudential policy to ensure the soundness of individual banks was not sufficient, and prudential regulations to cover the whole financial sector were desired. Such regulations attract increasing attention, and policy related to those regulations is called macroprudential policy, which aims to reduce systemic risk in the whole financial sector by regulating the relationship between the financial sector and the real economy. In this paper, using a spin network model, we study channels of distress propagation from the financial sector to the real economy through the supply chain network in Japan from 1980 to 2015 and discuss good indicators for macroprudential policy. First, an estimation of the exogenous shocks acting on the communities of real economy in the supply chain network provides us evidence of the channels of distress propagation from the financial sector to the real economy through the supply chain network. Furthermore, causal networks between exogenous shocks and macroeconomic variables clarified the characteristics of the lead–lag relationship between exogenous shocks and macroeconomic variables as the bubble burst. In summary, monitoring temporal changes of exogenous shocks and the causal relationship among the exogenous shocks and macroeconomic variables will provide good indicators for macroprudential policy. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18045&r=cba |
| By: | Jean-Bernard Chatelain (PSE - Paris School of Economics, 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); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school) |
| Abstract: | When the probability of not reneging commitment of optimal monetary policy under quasi-commitment tends to zero, the limit of this equilibrium is qualitatively and quantitatively different from the discretion equilibrium assuming a zero probability of not reneging commitment for the classic example of the new-Keynesian Phillips curve. The impulse response functions and welfare are different. The policy rule parameter have opposite signs. The inflation auto-correlation parameter crosses a saddlenode bifurcation when shit.ng to near-zero to zero probability of not reneging commitment. These results are obtained for all values of the elasticity of substitution between goods in monopolistic competition which enters in the welfare loss function and in the slope of the new-Keynesian Phillips curve. |
| Keywords: | Ramsey optimal policy under imperfact commitment,zero-credibility policy,Impulse response function,Welfare,New-Keynesian Phillips curve, zero-,credibility policy, Impulse response function, Welfare, New-Keynesian Phillips,curve |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01849864&r=cba |
| By: | Kenneth N. Kuttner (Williams College) |
| Abstract: | This paper provides an overview of unconventional monetary policy as implemented by the U.S. Federal Reserve after the global financial crisis. First, it reviews the key features of the Fed’s Quantitative Easing and Forward Guidance policies. Second, it discusses the mechanisms through which the two policies may have affected financial markets, institutions, and the overall economy. Third, it surveys the evidence on the policies’ financial and economic impacts. Fourth, it considers some of the policies’ unintended side effects. The paper concludes with some thoughts on how unconventional monetary policy might be used in the future. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2018-04&r=cba |
| By: | Stefan Avdjiev; Galina Hale |
| Abstract: | There is no consensus in the empirical literature on the direction in which U.S. monetary policy affects cross-border bank lending. We find robust evidence that the impact of the U.S. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macroeconomic fundamentals and the monetary policy stance. During episodes in which bank lending from advanced to emerging economies is booming, the relationship between the federal funds rate and cross-border bank lending is positive and mostly driven by the macroeconomic fundamentals component, which is consistent with a search-for-yield behavior on the part of internationally-active banks. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate. The latter set of results is most pronounced for lending to emerging markets, which is consistent with the international bank-lending channel and flight-to-quality behavior of internationally-active banks. |
| Keywords: | monetary policy spillovers, capital flows, bank lending |
| JEL: | F21 F32 F34 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:730&r=cba |
| By: | Jörg Bibow |
| Abstract: | This study investigates the evolution of central bank profits as fiscal revenue - or: seigniorage - before and in the aftermath of the global financial crisis of 2008/9. Focusing on a select group of central banks, namely: the Bank of England, United States Federal Reserve System, Bank of Japan, Swiss National Bank, European Central Bank and the Eurosystem (specifically: Deutsche Bundesbank, Banca d'Italia, and Banco de España), we research the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual "normalization". Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks' financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by "own" resources. Essentially, the central bank's income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. The analysis sheds new light on the interdependencies between monetary and fiscal policies.Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, the study's findings also indicate significant changes regarding central banks' profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:imk:studie:62-2018&r=cba |
| By: | Martin Guth |
| Abstract: | This paper analyzes the bank lending channel and the heterogeneous effects on the euro area, providing evidence that the channel is indeed working. The analysis of the transmission mechanism is based on structural impulse responses to an unconventional monetary policy shock on bank loans. The Bank Lending Survey (BLS) is exploited in order to get insights on developments of loan demand and supply. The contribution of this paper is to use country-specific data to analyze the consequences of unconventional monetary policy, instead of taking an aggregate stance by using euro area data. This approach provides a deeper understanding of the bank lending channel and its effects. That is, an expansionary monetary policy shock leads to an increase in loan demand, supply and output growth. A small north-south disparity between the countries can be observed. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1807.04161&r=cba |
| By: | James Hebden; J. David Lopez-Salido |
| Abstract: | Bernanke's strategies for integrating forward guidance into conventional instrument rules anticipate that effective lower bound (ELB) episodes may become part a regular occurrence and that monetary policy should recognize this likelihood (Bernanke (2017a); Bernanke (2017b)). Bernanke's first proposal is a form of flexible temporary price level targeting (TPLT), in which a lower-for-longer policy path is prescribed through a “shadow rate”. This shadow rate accounts for cumulative shortfalls in inflation and output relative to exogenous trends, and the policy rate is kept at the ELB until the joint shortfall is made up. Bernanke's second proposal adds only the cumulative inflation shortfall since the beginning of an ELB episode directly to an otherwise standard Taylor rule. This cumulative shortfall in inflation from the 2 percent objective can be restated in terms of deviations of the price level from a price level target that increases at 2 percent annually. We evaluate the performance of these strategies, which we call Bernanke's TPLT rules, using a small version of the FRB/US model. We then optimize these rules, computing efficient policy frontiers that trace out the best (minimum) obtainable combinations of output and inflation volatility given the effective lower bound constraint on the policy rate. The results suggest that Bernanke's rules give better macroeconomic outcomes than most of the other rules considered in the literature (including Taylor (1993) and Taylor (1999)) by stabilizing inflation and unemployment during severe recessions. Under these TPLT strategies, when the policy rate is made more responsive to shortfalls in inflation, the the likelihood of below-target inflation occurring alongside high unemployment rates decreases. However, the probability of an overheated economy, with temporarily above-target inflation and low unemployment rate, increases. |
| Keywords: | Taylor rule ; History-dependent policy ; Price level targeting ; Zero lower bound |
| JEL: | E32 E52 E58 |
| Date: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-51&r=cba |
| By: | Collignon, Stefan; Diessner, Sebastian |
| Abstract: | The monetary dialogue between the European Parliament and the ECB is a key component for the democratic accountability of the independent central bank. We provide new evidence for the efficiency of the dialogue and present the results of a survey conducted among the members of the parliament’s ECON committee. We find that while the monetary dialogue may have had little or even negative impact on financial markets, it plays a significant role in informing and involving members of parliament and their constituencies. Amidst an intensifying debate about the transparency of the ECB, these findings shed new light on the current state of affairs of ECB accountability and its alleged need for enhancement. |
| Keywords: | european central bank; accountability; eurozone crisis; european parliament; monetary dialogue |
| JEL: | L81 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67308&r=cba |
| By: | Lehment, Harmen |
| Abstract: | The large Public Sector Purchase Programme (PSPP) which the ECB started in 2015 on the basis of monetary policy purposes, had major side-effects on fiscal policy. One concerns the programme's uncommon seigniorage effects. We find that the PSPP not only led to partly negative seigniorage gains, but also produced super-seigniorage gains resulting from negative interest rates on the excess reserves which have been created by the programme. Another effect of the PSPP is its interference with fiscal debt management, thereby making fiscal budgets more vulnerable to changes in short-term interest rates. We also find that the experience with the PSPP suggests that fiscal policy should prepare for a greater role in fighting future recessions. |
| Keywords: | central bank asset purchases,seigniorage gains,debt management,monetary-fiscal cooperation |
| JEL: | E5 E6 H6 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2107&r=cba |
| By: | Gee Hee Hong; John Kandrac |
| Abstract: | In this paper, we investigate how negative interest rate policy (NIRP) introduced in January 2016 by the Bank of Japan (BoJ) affected Japanese banks' lending and risk taking behavior. The BoJ's announcement was an unexpected surprise to the market and was followed by a sharp drop in equity prices of Japanese financial firms. We exploit the cross-sectional variation in the change of share prices on the day of the announcement to measure banks' differential exposure to NIRP. We show that more exposed banks increased their credit and took on more risk compared to banks that were less exposed to negative rates. |
| Keywords: | Bank lending rates;Central banks and their policies;Monetary transmission mechanism;Negative interest rates;Asia and Pacific;Economic conditions;Japan;monetary transmission, bank risk taking, lending channel, Monetary Policy (Targets, Instruments, and Effects) |
| Date: | 2018–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/131&r=cba |
| By: | Isabel Schnabel; Johannes Tischer |
| Abstract: | Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse. |
| Keywords: | Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy |
| JEL: | E44 E50 G01 G11 G21 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_036_2018&r=cba |
| By: | Heider, Florian; Saidi, Farzad; Schepens, Glenn |
| Abstract: | We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks. JEL Classification: E44, E52, E58, G20, G21 |
| Keywords: | bank balance-sheet channel, bank risk-taking channel, deposits, negative interest rates, zero lower bound |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182173&r=cba |
| By: | Jean-Pierre Danthine (CEPR - Center for Economic Policy Research - CEPR, UNIL - Université de Lausanne, 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) |
| Abstract: | The Swiss National Bank has introduced negative interest rates of minus 75bp in mid-January 2015. Large exemptions on commercial bank holdings at the SNB result in the average rate being significantly less negative than the marginal rate. With this constellation the policy transmission to the real economy is asymmetric. It fully satisfies the needs of a SOE in search of a negative interest differential, not those of an economy aiming at a 'classical' monetary stimulus at the zero bound. While the Swiss design would make it possible to impose rates that are significantly more negative with modest complementary features, the unpopularity of negative rates makes it likely that the ambition to totally free monetary policy of the ZLB will be thwarted by democratic realities in the near future. |
| Keywords: | safe haven currency,negative interest rates,paper currency hoarding |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01571635&r=cba |