nep-cba New Economics Papers
on Central Banking
Issue of 2018‒08‒20
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Macroeconomic effects of an open-ended Asset Purchase Programme By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  2. Monetary policy in sudden stop-prone economies By COULIBALY, Louphou
  3. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof, Cyril Monnet and Shengxing Zhang
  4. A Skeptical View of the Impact of the Fed’s Balance Sheet By David Greenlaw; James D. Hamilton; Ethan Harris; Kenneth D. West
  5. The Macroeconomic Effectiveness of Bank Bail-ins By Katz, Matthijs; van der Kwaak, Christiaan
  6. The Effect of Firm Cash Holdings on Monetary Policy By André C. Silva; Bernardino Adão
  7. The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through By Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
  8. Banks as Potentially Crooked Secret-Keepers By Timothy Jackson; Laurence J. Kotlikoff
  9. Inflation Expectations as a Policy Tool? By Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Mathieu Pedemonte
  10. Post-crisis business investment in the euro area and the role of monetary policy By Ademmer, Martin; Jannsen, Nils
  11. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Silvia Gabrieli; Claire Labonne
  12. Cross-border spillovers of monetary policy: what changes during a financial crisis? By Mary Everett; Diana Bonfim; Luciana Barbosa; Sónia Costa
  13. Unconventional Monetary Policy and Bank Risk-Taking in the Euro Area By Joerg Schmidt
  14. Following the Money: Evidence for the Portfolio Balance Channel of Quantitative Easing By Itay Goldstein; Jonathan Witmer; Jing Yang
  15. The Extensive Margin of Trade and Monetary Policy By Imura, Yuko; Shukayev, Malik
  16. Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation By Bluwstein, Kristina; Brzoza-Brzezina, Michał; Gelain, Paolo; Kolasa, Marcin
  17. Stressed Banks By Diane Pierret; Roberto Steri
  18. Market Discipline and Liquidity Risk: Evidence from the Interbank Funds Market By Miguel Sarmiento
  19. Interconnectedness, Firm Resilience and Monetary Policy By Thiago Christiano Silva; Solange Maria Guerra; Michel Alexandre da Silva; Benjamin Miranda Tabak
  20. The Sovereign Money Initiative in Switzerland: An Assessment By Philippe Bacchetta
  21. On DSGE Models By Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
  22. The State of New Keynesian Economics: A Partial Assessment By Jordi Galí
  23. Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence By Niepelt, Dirk
  24. Optimal forbearance of bank resolution By Linda Schilling
  25. Real Keynesian Models and Sticky Prices By Paul Beaudry; Franck Portier
  26. Global Financial Cycles and Risk Premiums By Òscar Jordà; Moritz Schularick; Alan M. Taylor; Felix Ward
  27. Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports By Andrew K. Rose

  1. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: In this paper we evaluate the effectiveness of an open-ended Asset Purchase Programme (APP) for the euro area. To this purpose, we build on the large-scale New Keynesian dynamic general equilibrium model calibrated to the euro area and the rest of the world developed in Burlon et al. (2017), but, different from that contribution, we assume that the central bank does not announce the ending date of the programme, while leaving open the possibility of extending it in future periods conditionally on inflation developments. We assume that agents form their expectations about possible additional purchases beyond the horizon of the announcement by the central bank according to a rule linking them to the expected inflation gap. It is showed that the open-ended APP is more effective in immediately stimulating macroeconomic conditions than committing ex ante to an ending date. Importantly, the open-ended dimension provides a hedge against the materialization of negative euro-area aggregate demand shocks that pushes inflation away from its path towards the target. The effectiveness is further reinforced by a forward guidance on monetary policy rates.
    Keywords: central bank communication, open-ended announcement, non-standard monetary policy, DSGE models, open-economy macroeconomics, euro area
    JEL: E43 E44 E52 E58
    Date: 2018–07
  2. By: COULIBALY, Louphou
    Abstract: In a model featuring sudden stops and pecuniary externalities, I show that the ability to use capital controls has radical implications for the conduct of monetary policy. Absent capital controls, following an inflation targeting regime is nearly optimal. However, if the central bank lacks commitment, it will follow a monetary policy that is excessively procyclical and not desirable from an ex ante welfare prospective: it increases overall indebtedness as well as the frequency of financial crisis and reduces social welfare relative to an inflation targeting regime. Access to capital controls can correct this monetary policy bias. With capital controls, relative to an inflation targeting regime, the time-consistent regime reduces both the frequency and magnitude of crises, and increases social welfare. This paper rationalizes the procyclicality of the monetary policy observed in many emerging market economies.
    Keywords: Financial crises; monetary policy; capital controls; time consistency; aggregate demand externality; pecuniary externality
    JEL: E44 E52 F41 G01
    Date: 2018
  3. By: Stephan Imhof, Cyril Monnet and Shengxing Zhang
    Abstract: We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018–08
  4. By: David Greenlaw; James D. Hamilton; Ethan Harris; Kenneth D. West
    Abstract: We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. A rough consensus from previous studies is that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward.
    JEL: E42 E52 G12
    Date: 2018–06
  5. By: Katz, Matthijs; van der Kwaak, Christiaan (Groningen University)
    Abstract: We examine the macroeconomic implications of bailing-in banks? creditors after a systemic financial crisis, whereby bank debt is partially written off. We do so within a RBC model that features an endogenous leverage constraint which limits the size of banks? balance sheets by the amount of bank net worth. Our simulations show that an unanticipated bail-in effectively ameliorates macroeconomic conditions as more net worth relaxes leverage constraints, which allows an expansion of investment. In contrast, an anticipated bail-in will be priced in ex-ante by bank creditors, thereby transferring the bail-in gains from banks to creditors. Therefore the intervention has zero impact on the macroeconomy relative to the no bail-in case. The effectiveness of the bail-in policy can be restored by implementing a temporary tax on debt outflows once creditors start to anticipate a bail-in.
    Date: 2018
  6. By: André C. Silva; Bernardino Adão
    Abstract: Firm cash holdings increased substantially from 1980 to 2013. The overall distribution of firm cash holdings changed in the same period. We study the implications of these changes for monetary policy. We use Compustat data and a model with financial frictions that allows the calculation of the monetary policy effects according to the distribution of cash holdings. We find that the interest rate channel of the transmission of monetary policy has become more powerful, as the impact of monetary policy over real interest rates increased. With the observed changes in firm cash holdings, the real interest rate takes 3.4 months more to return to its initial value after a shock to the nominal interest rate.
    JEL: E40 E50 G12 G31
    Date: 2018
  7. By: Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
    Abstract: A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations “pass through” to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling’s post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling’s 2013-15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling’s sharp depreciation corresponding to the UK’s vote to leave the European Union.
    JEL: E31 E41 E52 F3
    Date: 2018–06
  8. By: Timothy Jackson; Laurence J. Kotlikoff
    Abstract: Bank failures are generally liquidity as well as solvency events. Whether it is households running on banks or banks running on banks, defunding episodes are full of drama. This theater has, arguably, lured economists into placing liquidity at the epicenter of financial collapse. But loss of liquidity describes how banks fail. Bad news about banks explains why they fail. This paper models banking crises as triggered by news that the degree (share) of banking malfeasance is likely to be particularly high. The malfeasance share follows a state-dependent Markov process. When this period’s share is high, agents rationally raise their probability that next period’s share will be high as well. Whether or not this proves true, agents invest less in banks, reducing intermediation and output. Deposit insurance prevents such defunding and stabilizes the economy. But it sustains bad banking, lowering welfare. Private monitoring helps, but is no panacea. It partially limits banking malfeasance. But it does so inefficiently as households needlessly replicate each others’ costly information acquisition. Moreover, if private audits become public, private monitoring breaks down due to free-riding. Government real-time disclosure of banking malfeasant mitigates, if not eliminates, this public goods problem leading to potentially large gains in both non-stolen output and welfare.
    JEL: D83 E23 E32 E44 E58 G01 G21 G28
    Date: 2018–06
  9. By: Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Mathieu Pedemonte
    Abstract: We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.
    JEL: C83 D84 E31
    Date: 2018–06
  10. By: Ademmer, Martin; Jannsen, Nils
    Abstract: Business investment in the euro area strongly declined during the Global Financial Crisis and the Sovereign Debt Crisis. It has not yet rebounded to its pre-crisis trend despite the very expansionary monetary policy measures of the ECB. We analyse the sluggish recovery in business investment in the euro area and the role of monetary policy in three steps. We investigate the main factors that have impeded business investment since the Global Financial Crisis. We empirically analyse how business investment has developed compared to typical patterns during other financial crises. Based on these results, we then discuss how effective monetary policy has been in stimulating business investment since the Global Financial Crisis. We conclude that business investment in the euro area has developed broadly in line with typical post-crisis patterns. Monetary policy significantly contributed to stabilize business investment at the beginning of the crises. In the aftermath of the crises, however, there seems to be little scope for monetary policy to further stimulate investment.
    Keywords: business investment,crisis,monetary policy,local projections
    JEL: E22 E32 E52 C32
    Date: 2018
  11. By: Silvia Gabrieli; Claire Labonne
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereigndependence and balance sheet fragmentation alike.
    Keywords: Interbank market, credit risk, fragmentation, sovereign risk, country risk, credit rationing, market discipline
    JEL: G01 E43 E58 G15 G21
    Date: 2018
  12. By: Mary Everett; Diana Bonfim; Luciana Barbosa; Sónia Costa
    Abstract: This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress aect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they affect credit growth in the two economies.
    JEL: G15 G21
    Date: 2018
  13. By: Joerg Schmidt (Justus-Liebig-Universitat Giessen)
    Abstract: This paper studies risk-taking by European banks. We construct a measure of risk-taking which relates changes in three month ahead expected credit standards for several non-financial private sector categories to risk of the macroeconomic environment banks operate in to re flect whether credit standards react disproportionately to changes in the monetary policy stance. We use an estimated bond market based measure to assess the overall riskiness prevailing in the economy. With this approach we shed some light on whether banks act excessively risky and provide new evidence as well as an alternative assessment on the amplifying nature of the risk-taking channel of monetary policy. We include our measure in a VAR in which structural innovations are identified with sign restrictions. The key outcomes of this paper are the following: Restrictive (expansionary) monetary policy shocks increase (decrease) our measure of risk-taking. Increases (decreases) in our measure are caused by disproportionately strong (weak) reactions in credit standards compared to the overall macroeconomic risk, especially during the recent financial crisis. Disproportionately in the sense that our macroeconomic risk measure is less affected by restrictive (expansionary) monetary policy shocks than credit standards. We conclude that expansionary monetary policy shifts the portfolio of banks to overall riskier asset holdings. The credit granting reaction depends on the category: In general, credit to non-financial corporations are less sensitive to monetary policy shocks while mortgages seem to be affected.
    Keywords: monetary policy, euro area, bank risk-taking, credit standards, sign restrictions VAR
    JEL: E44 E52 G12
    Date: 2018
  14. By: Itay Goldstein; Jonathan Witmer; Jing Yang
    Abstract: Recent research suggests that quantitative easing (QE) may affect a broad range of asset prices through a portfolio balance channel. Using novel security-level holding data of individual US mutual funds, we establish evidence that portfolio rebalancing occurred both within and across funds. Contrary to conventional wisdom, portfolio rebalancing by fund managers into riskier assets is much smaller in magnitude than into other government bonds. We find that mutual funds replaced QE securities with other government bonds that have similar characteristics. Intriguingly, this shift occurred mainly into newly issued government bonds. Such within-fund portfolio rebalancing is material. For every $100 in QE bonds sold, mutual funds replenished their portfolios with about $50 to $60 of newly issued government bonds. Thus, QE played an important role in funding treasury debt issuance during this period. Meanwhile, the rebalancing into riskier assets, such as corporate bonds, did occur, but was mainly carried out by the end investors of the funds instead of the fund managers themselves.
    Keywords: Monetary Policy, Monetary policy implementation, Transmission of monetary policy
    JEL: E5 E58 G23
    Date: 2018
  15. By: Imura, Yuko (Bank of Canada); Shukayev, Malik (University of Alberta, Department of Economics)
    Abstract: This paper studies the effects of monetary policy shocks on firms’ participation in exporting. We develop a two-country dynamic stochastic general equilibrium model in which heterogeneous firms make forward-looking decisions on whether to participate in the export market and prices are staggered across firms and time. We show that while lower interest rates and a currency depreciation associated with an expansionary monetary policy help to increase the value of exporting, the inflationary effects of the policy stimulus weaken the competitiveness of some firms, resulting in a contraction in firms’ export participation. In contrast, positive productivity shocks lead to a currency depreciation and an expansion in export participation at the same time. We show that, overall, the extensive margin is more sensitive to firms’ price competitiveness with other firms in the export market than to exchange rate movements or interest rates.
    Keywords: Exporter dynamics; monetary policy; firm heterogeneity; exchange rate
    JEL: E52 F12 F44
    Date: 2018–07–30
  16. By: Bluwstein, Kristina (Bank of England); Brzoza-Brzezina, Michał (Narodowy Bank Polski); Gelain, Paolo (Federal Reserve Bank of Cleveland); Kolasa, Marcin (Narodowy Bank Polski)
    Abstract: We study the implications of multi-period mortgage loans for monetary policy, considering several realistic modifications — fixed interest rate contracts, lower bound constraint on newly granted loans, and possibility for the collateral constraint to become slack — to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective, and may lead to asymmetric responses to positive and negative monetary shocks.
    Keywords: Mortgages; fixed-rate contracts; monetary policy
    JEL: E44 E51 E52
    Date: 2018–08–10
  17. By: Diane Pierret (University of Lausanne and Swiss Finance Institute); Roberto Steri (University of Lausanne and Swiss Finance Institute)
    Abstract: We investigate the risk taking incentives of "stressed banks" — the banks that are subject to annual regulatory stress tests in the U.S. since 2011. We document that stress tests effectively encourage prudent investment from stressed banks through regulatory monitoring, but also provide them with steeper risk-taking incentives through tighter capital requirements. Our results highlight the importance of regulatory monitoring of banks' portfolios in parallel to setting more stringent capital requirements.
    Keywords: Capital Regulation, Dodd-Frank Act, Regulatory Monitoring, Stress Tests
    JEL: G01 G21 G28
    Date: 2017–11
  18. By: Miguel Sarmiento (The Central Bank of Colombia)
    Abstract: This paper identifies bank-specific-characteristics and market conditions that contribute to determine prices and demand for liquidity in the interbank market as wells as banks’ access to this market. Results indicate that riskier banks pay higher prices and borrow less liquidity, concurrent with the existence of market discipline. More capitalized and liquid banks tend to pay less for their funds and to have greater access to the interbank market. We find that banks pay higher prices and hoard liquidity when liquidity positions across them are more imbalanced and during a monetary policy tightening. Besides, small banks are found to suffer more as their credit risk and liquidity risk increase. We show that lending relationships benefit banks in hedging liquidity risk. We also document that central bank liquidity increments are associated with a downward pressure on interbank funds’ prices and augmented market activity. Overall, our results have implications for financial stability and for the transmission of the monetary policy as well.
    Keywords: interbank markets; market discipline; liquidity risk; risk taking; monetary policy; financial stability.
    JEL: E43 E58 L14 G12 G21
    Date: 2016–10
  19. By: Thiago Christiano Silva; Solange Maria Guerra; Michel Alexandre da Silva; Benjamin Miranda Tabak
    Abstract: We develop a novel approach to understand how central bank policy rates affect individual firms and banks and how aspects of interconnectedness accentuate these effects in nontrivial ways. Changes in policy rate impact – either direct or indirectly – these agents, depending on their balance-sheet composition and network relationships. Interest rate shocks change bank capital on spot, which in turn reflects on how banks issue credit to firms. Firms experience increasing financial costs that revert to banks in the form of credit defaults, exacerbating the aftereffects of the monetary policy change. We apply the model to a unique data set from Brazil and find nonlinear and asymmetric effects on firms and banks that depend on the magnitude and direction of policy rate changes. The effects of interest rate changes are distinct in environments of expansion and recession. Finally, we find that monetary policy can have linear and nonlinear implications for financial stability, depending on the magnitude of the interest rate shock and network relationship patterns. Particularly, we show that big swings in the interest rate can cause undesirable nonlinear consequences to the financial stability
    Date: 2018–07
  20. By: Philippe Bacchetta (University of Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR))
    Abstract: The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative and discusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swiss monetary system. Finally, there is high uncertainty both on the details of the reform and on its impact.
    Date: 2017–08
  21. By: Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt
    Abstract: The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policy makers is how to assess the relative strength of those forces. Dynamic Stochastic General Equilibrium (DSGE) models are the leading framework that macroeconomists have for dealing with this challenge in an open and transparent manner. This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process.
    JEL: E0 E3
    Date: 2018–07
  22. By: Jordi Galí
    Abstract: I provide an overview of recent developments in monetary economics, with an emphasis on extensions of the New Keynesian framework that assume a zero lower bound on the short term nominal rate, as well as models with household heterogeneity.
    JEL: E32 E52
    Date: 2018–07
  23. By: Niepelt, Dirk
    Abstract: I offer a macroeconomic perspective on the "Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
    Keywords: CADcoin; CBDC; e-krona; e-Peso; Fedcoin; J Coin; narrow banking
    JEL: E42 E51 E58 E61 E63 H63
    Date: 2018–07
  24. By: Linda Schilling (Ecole Polytechnique (CREST))
    Abstract: This paper analyzes optimal strategic delay of bank resolution (forbearance) in a setting where partially insured depositors can run on the bank after observing bad news on the bank's assets. A resolution authority (RA) observes withdrawals of deposits at the bank level and needs to decide when to intervene to protect a deposit insurance fund. Intervention means the authority seizes the bank's assets and impose a mandatory stay for depositors, liquidates assets at market terms and evenly distributes proceeds among all remaining depositors. We show, there exists a hidden trade-off when resolving banks, late intervention increases costs to insurance but early intervention increases depositors' propensity to run, by this making the run and subsequent resolution more likely. This trade-off crucially depends on the amount of deposit insurance provided. Under low insurance depositors are too sensitive to bad news and inefficient runs exist, under high insurance, depositors start ignoring bad news on the bank fundamental, roll over to often and there is inefficient investment. As main result of the paper, under low deposit insurance, the optimal policy is to never intervene during a run, even if the run is ex post inefficient; a stricter intervention policy would alter depositors' behavior in a way that inefficient runs become even more likely. Under high insurance it is optimal to intervene as soon as possible. Further, for every intervention policy the optimal amount of insurance coverage is strictly between zero and one. There exist infinitely many pairs of intervention threshold and insurance coverage which achieve the first best outcome. Thus, there is room for a policy parameter reduction: RA can fix the intervention threshold and achieve first best solely by choosing the amount of insurance coverage. But not the other way around suggesting that insurance coverage is the stronger parameter: Under too high insurance coverage inefficient investment exists, under too low coverage inefficient runs exist, both for every intervention threshold.
    Date: 2018
  25. By: Paul Beaudry (University of British Columbia); Franck Portier (Toulouse School of Economics)
    Abstract: In this paper we present a generalized sticky price model which allows, depending on the parameterization, for demand shocks to maintain strong expansionary effects even in the presence of perfectly flexible prices. The model is constructed to incorporate the standard three-equation New Keynesian model as a special case. We refer to the parameterizations where demand shocks have expansionary effects regardless of the degree of price stickiness as Real Keynesian parameterizations. We use the model to show how the effects of monetary policy–for the same degree of price stickiness–differ depending whether the model parameters are within the Real Keynesian subset or not. In particular, we show that in the Real Keynesian subset, the effect of a monetary policy that tries to counter demand shocks creates the opposite tradeoff between inflation and output variability than under more traditional parameterizations. Moreover, we show that under the Real Keynesian parameterization neo-Fisherian effects emerge even though the equilibrium remains unique. We then estimate our extended sticky price model on U.S. data to see whether estimated parameters tend to fall within the Real Keynesian subset or whether they are more in line with the parameterization generally assumed in the New Keynesian literature. In passage, we use the model to justify a new SVAR procedure that offers a simple presentation of the data features which help identify the key parameters of the model. The main finding from our multiple estimations, and many robustness checks is that the data point to model parameters that fall within the Real Keynesian subset as opposed to a New Keynesian subset. We discuss both how a Real Keynesian parametrization offers an explanation to puzzles associated with joint behavior of inflation and employment during the zero lower bound period and during the Great Moderation period, how it potentially changes the challenge faced by monetary policy if authorities want to achieve price stability and favor employment stability.
    Date: 2018
  26. By: Òscar Jordà; Moritz Schularick; Alan M. Taylor; Felix Ward
    Abstract: This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.
    JEL: E50 F33 F42 F44 G12 N10 N20
    Date: 2018–06
  27. By: Andrew K. Rose
    Abstract: I investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis-á-vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus, there is no evidence that countries have gained export markets through unconventional monetary policy; currency wars that have been launched have also been lost. UMP is also associated with a comparable drop in imports and exchange rates, suggesting that countries engage in UMP when they are experiencing adverse macroeconomic shocks concurrent with those that eviscerate international trade.
    JEL: E58 F14
    Date: 2018–07

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