nep-cba New Economics Papers
on Central Banking
Issue of 2018‒09‒03
34 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Enhancing central bank communications with behavioural insights By Bholat, David; Broughton, Nida; Parker, Alice; Ter Meer, Janna; Walczak, Eryk
  2. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Julio Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldan-Pena
  3. Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs By Frame, W. Scott; Steiner, Eva
  4. Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies By Hao Jin; Chen Xiong
  5. Rollover Risk and Bank Lending Behavior: Evidence from Unconventional Central Bank Liquidity By Martina Jasova; Caterina Mendicino; Dominik Supera
  6. Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada By Julien Champagne; Rodrigo Sekkel
  7. Financial stability, monetary policy and the payment intermediary share By Moritz Lenel; Martin Schneider; Monika Piazzesi
  8. Central Bank Communication and Monetary Policy Surprises in Chile By Andrea Pescatori
  9. The quest for global monetary policy coordination By Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
  10. Asset Price Learning and Optimal Monetary Policy By Colin Caines; Fabian Winkler
  11. The Dollar Ahead of FOMC Target Rate Changes By Karnaukh, Nina
  12. A Profit-to-Provisioning Approach to Setting the Countercyclical Capital Buffer: The Czech Example By Lukas Pfeifer; Martin Hodula
  13. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  14. Fiscal Implications of the Federal Reserve's Balance Sheet Normalization By Cavallo, Michele; Del Negro, Marco; Frame, W. Scott; Grasing, Jamie; Malin, Benjamin A.; Rosa, Carlo
  15. Russia’s Monetary Policy in 2017 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander; Kiyutsevskaya Anna
  16. Fundamentals News, Global Liquidity and Macroprudential Policy* By Enrique G. Mendoza; Javier Bianchi; Chenxin Liu
  17. Understanding HANK: Insights from a PRANK By Sushant Acharya; Keshav Dogra
  18. Monetary Policy and Bubbles in US REITs By Petre Caraiani; Adrian Cantemir Călin; Rangan Gupta
  19. Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing By Rischen, Tobias; Theissen, Erik
  20. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  21. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rueth
  22. International Spillovers of Monetary Policy : Conventional Policy vs. Quantitative Easing By Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
  23. Nonlinear Policy Behavior, Multiple Equilibria and Debt-Deflation Attractors By Piergallini, Alessandro
  24. Transmission of monetary policy through global banks: whose policy matters? By Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
  25. Bank solvency risk and funding cost interactions in a small open economy: evidence from Korea By Iñaki Aldasoro; Kyounghoon Park
  26. Inflation News and Euro Area Inflation Expectations By Juan Angel Garcia; Sebastian Werner
  27. Transmission of Monetary Policy in Times of High Household Debt By Youngju Kim; Hyunjoon Lim
  28. Forward Guidance and Heterogeneous Beliefs By Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
  29. Inequality, Business Cycles, and Monetary-Fiscal Policy By Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  30. Bubbly Recessions By Toan Phan; Andrew Hanson; Siddhartha Biswas
  31. On the Normality of Negative Interest Rates By Matheus R. Grasselli; Alexander Lipton
  32. The Role of Monetary Policy Uncertainty in Predicting Equity Market Volatility of the United Kingdom: Evidence from over 150 Years of Data By Rangan Gupta; Mark E. Wohar
  33. Sweden's Fiscal Framework and Monetary Policy By Eric M. Leeper
  34. The Real Meaning of the real Bills Doctrine By Sproul, Michael

  1. By: Bholat, David (Bank of England); Broughton, Nida (Behavioural Insight Team); Parker, Alice (Bank of England); Ter Meer, Janna (Behavioural Insights Team); Walczak, Eryk (Bank of England)
    Abstract: In this joint Bank of England and Behavioural Insights Team study, we test the effectiveness of different approaches to central bank communications. Using an online experiment with a representative sample of the UK population, we measure how changes to the Bank of England’s summaries of the Inflation Report impact comprehension and trust in its policy messages. We find that the recently introduced Visual Summary of the Inflation Report improves comprehension of its main messages in a statistically significant way compared to the traditional executive summary. We also find that public comprehension and trust can be further improved by making the Visual Summary more relatable to people’s lives. Our findings thus shed light on how central banks can improve communication with the public at a time when trust in public institutions has fallen, while the responsibilities delegated to central banks have increased.
    Keywords: Central bank communications; central bank legitimacy; experimental economics; behavioural economics; Bank of England Vision 2020
    JEL: A12 A13 A29 C21 C83 C90 C91 C93 D83 D91 E52 E58 M38
    Date: 2018–08–15
  2. By: Julio Carrillo (Banco de México); Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Victoria Nuguer (IADB); Jessica Roldan-Pena (Banco de México)
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policy-making authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes.
    Keywords: Financial Frictions, Monetary Policy, Financial Policy
    JEL: E44 E52 E58
    Date: 2017–02–03
  3. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Steiner, Eva (Cornell University)
    Abstract: We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)—a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with unconventional monetary policy actions crowding out private investment and "reaching for yield" behavior by financial institutions.
    Keywords: quantitative easing; risk-taking; REITs; GSEs; mortgages; securitization
    JEL: E58 G21 G23 G28
    Date: 2018–08–01
  4. By: Hao Jin (Xiamen University); Chen Xiong (Xiamen University)
    Abstract: We study the effectiveness of macroprudential policies in mitigating credit growth in open economies. Empirically we find that macroprudential policies contain domestic credit growth but are less effective in financially more integrated economies due to greater cross-border bank borrowing. We develop a small open economy DSGE model with cross-border bank financing to interpret the empirical findings and quantitatively evaluate the macroeconomic and welfare implications of macroprudential policies. Consistent with the empirical evidence, our model shows that banks contract credits and increase the fraction of foreign financing in response to macroprudential policy tightening. This liability composition shift significantly under-mines the stabilizing effect and welfare gains of macroprudential policies, so they become less effective in financially more open economies. Our results also suggest it is desirable to implement more restrictive macroprudential regulations when capital moves more freely.
    Keywords: Intermediary; Financial Frictions; Financial Openness; Macroprudential Policy
    Date: 2018–08
  5. By: Martina Jasova (Princeton University); Caterina Mendicino (European Central Bank); Dominik Supera (Wharton School, University of Pennsylvania)
    Abstract: How does a sudden extension of bank debt maturity affect bank lending in times of crisis? We use the provision of long-term funding by the 2011 European Central Bank's (ECB) very long-term refinancing operations (vLTRO) as a natural experiment to address this question. Our analysis employs a novel dataset that matches the ECB monetary policy and market operations data with the firm credit registry and banks' security holdings in Portugal. We show that lengthening of bank debt maturity in crisis times has a positive and economically sizable impact on bank lending to the real economy. The effects are stronger on the supply of credit to smaller, younger, riskier firms and firms with shorter lending relationships. We also find that loan-level results translate to real and credit effects at the rm level. Finally, we discuss policy side effects and show how the unrestricted liquidity provision provided incentives to banks to purchase more securities and partially substituted away from lending to the real economy.
    Date: 2018
  6. By: Julien Champagne (Bank of Canada); Rodrigo Sekkel (Bank of Canada)
    Abstract: We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada’s staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent peak decrease in real GDP and a 0.5 per cent fall in the price level, while not accounting for the break leads to a very persistent decrease in real GDP and a price puzzle. Albeit the change in monetary policy regime, we find that the effects of monetary policy have not changed much before and after IT. Finally, we compare our results with narrative evidence for the U.S. and the U.K. and find slightly stronger effect of monetary policy on output and significantly smaller effects on the price level in Canada.
    Date: 2018
  7. By: Moritz Lenel (University of Chicago); Martin Schneider (Stanford University); Monika Piazzesi (Stanford University)
    Abstract: The payment intermediary share is the share of fixed income claims held by financial intermediaries with money-like liabilities. It is higher in times of higher risk premia, such as during the 1970s and in recent recessions. This paper proposes a model of a modern monetary economy that accounts for the valuation of fixed income claims as well as their allocation inside vs outside the payment intermediaries. While all assets are valued for their risk and return properties, those held inside payment intermediaries are also valued as collateral that backs inside money. The payment-intermediary share depends on the transactions demand for inside money as well as portfolio responses to uncertainty shocks. It determines the quantitative impact of monetary policy and macro-prudential regulation on asset prices.
    Date: 2018
  8. By: Andrea Pescatori
    Abstract: This paper assesses the quality of the CBC’s communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC). To do so, we construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings’ statements, minutes, and monetary policy reports (IPoM). We assess monetary policy predictability and efficacy by looking at the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of the above communication channels on asset markets. We find that, in general, the CBC’s has been effective in its forward guidance through its statements and IPoM. Policy actions are quite predictable, especially post the global financia crisis. The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust. We also find an asymmetric response of equity prices to minutes suggesting that market participants extract information on the status of the economy especially when minutes have a loosening effect. Finally, to look at the macroeconomic impact we find that a 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year, while the response of inflation is more muted.
    Keywords: Financial crises;Foreign banks;Monetary policy; monetary policy shocks; proxy VAR; central bank communication; central bank predictability; inflation forecast dispersion, Chile, Monetary policy, monetary policy shocks, proxy VAR, central bank communication, central bank predictability, inflation forecast dispersion, Credit Rationing, Relationship Lending
    Date: 2018–07–06
  9. By: Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
    Abstract: This paper puts forward a proposal to help monetary policies confront the challenge of the "normalisation" of money creation and interest rates. The difficult unwinding of years of unorthodox policies put financial stability at risk in major monetary centres and in EMEs. The authors argue that global coordination is crucial to facing this challenge. They propose to convene appropriate official meetings to coordinate in an explicit, formal, and well-communicated way the process of normalisation and the discussions on the needed long-term changes in the strategy and institutional setting of monetary policies.
    Keywords: monetary policy,central banks,global cooperation,financial stability,international institutions
    JEL: E51 E58 E61 E63 F33 F42
    Date: 2018
  10. By: Colin Caines; Fabian Winkler
    Abstract: We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel.
    Keywords: Optimal monetary policy ; Natural real Interest rate ; Learning ; Asset price volatility ; Leaning against the wind
    JEL: E44 E52
    Date: 2018–08–21
  11. By: Karnaukh, Nina (OH State U)
    Abstract: I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy decisions. The federal funds futures rate forecasts these dollar movements with a 22% R^{2}. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.
    JEL: E52 F31 G12 G17
    Date: 2018–03
  12. By: Lukas Pfeifer; Martin Hodula
    Abstract: Over the last few years, national macroprudential authorities have developed different strategies for setting the countercyclical capital buffer (CCyB) rate in the banking sector. The existing approaches are based on various indicators used to identify the current phase of the financial cycle. However, to our knowledge, there is no approach that directly takes into consideration banks' prudential behavior over the financial cycle as well as cyclical risks in the banking sector. In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct a new set of indicators that largely capture the risk of cyclicality of profit and loan loss provisions. We argue that banks should conserve a portion of the cyclically overestimated profit (non-materialized expected loss) in their capital during a financial boom. We evaluate the performance of our newly proposed indicators using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the CCyB decision-making process, and may contribute to a more precise assessment of both systemic risk accumulation and risk materialization. We believe that the relevance of the profit-to-provisioning approach and the related set of newly proposed indicators increases under IFRS 9.
    Keywords: Banking prudence indicators, countercyclical capital buffer, financial stability, macroprudential policy, profit-to-provisioning approach
    JEL: E58 G21 G28
    Date: 2018–05
  13. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Kansas City)
    Abstract: A large literature has established that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature's view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The estimated model shows an active policy response to inflation even during the Great Inflation. Moreover, a more active policy response to inflation alone does not suffice for explaining the macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. Our model empirically outperforms its canonical counterpart that is similar to models used in the literature, thus giving strong support to our view.
    Date: 2018
  14. By: Cavallo, Michele (Federal Reserve Board); Del Negro, Marco (Federal Reserve Bank of New York); Frame, W. Scott (Federal Reserve Bank of Atlanta); Grasing, Jamie (University of Maryland); Malin, Benjamin A. (Federal Reserve Bank of Minneapolis); Rosa, Carlo (Federal Reserve Bank of New York)
    Abstract: The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to precrisis levels has little effect on the likelihood of net losses.
    Keywords: central bank balance sheets; monetary policy; remittances
    JEL: E58 E59 E69
    Date: 2018–08–21
  15. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: The Bank of Russia eased at slow enough pace its monetary policy in 2017 despite substantial deceleration in inflation, holding that ongoing inflation risks were high, including a possible decline in crude oil prices and capital outflow, upturn in consumer demand, fiscal policy uncertainty, as well as a relatively high and unstable degree of inflation expectations. In 2017, the monetary policy rate was cut by 2.25 percentage points to 7.75 percent per annum as the inflation rate over the same period (same-month-year-ago comparison) was down 2.6 percentage points to 2.5 percent. The Russian central bank cut the key interest rate six times: by 0.25 percentage points on March 27, by 0.5 percentage points on May 2, by 0.25 percentage points on June 19, by 0.5 percentage points on September 18, by 0.25 percentage points on October 30, and by 0.5 percentage points on December 15.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2018
  16. By: Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Javier Bianchi (Federal Reserve Bank of Minneapolis); Chenxin Liu (Department of Economics, UW-Madison)
    Abstract: We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when \good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations.
    Keywords: Financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
    JEL: D62 E32 E44 F32 F41
    Date: 2016–12–05
  17. By: Sushant Acharya (Federal Reserve Bank of New York); Keshav Dogra (Federal Reserve Bank of New York)
    Abstract: Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (NK) model, we show that whether incomplete markets resolve `policy paradoxes' in the representative agent NK model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under a peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when `passive'.
    Date: 2018
  18. By: Petre Caraiani (Institute for Economic Forecasting, Romanian Academy); Adrian Cantemir Călin (Institute for Economic Forecasting, Romanian Academy); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this paper, we analyze the effects of monetary policy on the bubbles in the Real Estate Investment Trusts (REITs) sector of the United States. We use a time-varying vector autoregressive (VAR) model over the quarterly period of 1972:1 to 2018:1. We find protracted periods, starting from the onset of the recent financial crisis to the end of the sample period, where contractionary monetary policy is associated with increases in the bubble component in the REITs of the US economy. This result, which is robust to alternative REITs indexes, is contrary to the “conventional" view, as well as to the predictions of standard models of bubbles.
    Keywords: REITs, Bubbles, VAR, Monetary Policy
    Date: 2018–07
  19. By: Rischen, Tobias; Theissen, Erik
    Abstract: We conduct the most extensive study of underpricing in the euro area bond market so far and find strong evidence of underpricing. In cross-sectional regressions we find patterns that are consistent with bookbuilding-based theories of underpricing and inconsistent with liquidity-based explanations. The underpricing has increased considerably during the financial crisis and has remained at an elevated level since. We also show that secondary market liquidity in the euro area bond market is significantly lower in the post-crisis period than pre-crisis. These results are consistent with recent US evidence and may represent unintended side effects of new regulation enacted in the wake of the financial crisis, such as Basel III and the Volcker Rule. Furthermore, our evidence suggests that the ECB's asset purchase programs have led to a decrease in underpricing.
    Keywords: Underpricing,Bond Markets,Primary Market,Post-Crisis Regulation,ECB,Unconventional Monetary Policy,Quantitative Easing,Asset Purchase Programs
    JEL: G12 G32 E58
    Date: 2018
  20. By: Jing Cynthia Wu; Ji Zhang
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable two-country model to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between the countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    JEL: E52 F00
    Date: 2018–06
  21. By: Ruediger Bachmann (University of Notre Dame); Sebastian Rueth (Ghent University)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? Using a structural VAR, we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, in our sample, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Date: 2018
  22. By: Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
    Abstract: This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of changes in these two components of yields on changes in exchange rates and foreign bond yields. We find that the dollar is more sensitive to expected short-term interest rates than to term premia; moreover, the rise in the sensitivity of the dollar to monetary policy announcements since the GFC owes more to an increased sensitivity of the dollar to expected interest rates than to term premiums. We also find that changes in short rates and term premiums have similar effects on foreign yields. All told, our findings contradict the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies.
    Keywords: Monetary policy ; International spillovers ; Term premium
    JEL: E5 F3
    Date: 2018–08–21
  23. By: Piergallini, Alessandro
    Abstract: This paper analyzes global dynamics in a macroeconomic model where both monetary and fiscal policies are nonlinear, consistent with empirical evidence. Nonlinear monetary policy, in which the nominal interest rate features an increasing marginal reaction to inflation, interacting with nonlinear fiscal policy, in which the primary budget surplus features an increasing marginal reaction to debt, gives rise to four steady-state equilibria. Each steady state exhibits in its neighborhood a pair of 'active'/'passive' monetary/fiscal policies à la Leeper-Woodford, and is typically investigated in isolation within linearized monetary models. We show that, when global nonlinear dynamics are taken into account, such steady states are endogenously connected. In particular, the global dynamics reveals the existence of infinite self-fulfilling paths that originate around the steady states locally displaying either monetary or fiscal 'dominance' — and thus locally delivering equilibrium determinacy — as well as around the unstable steady state with active monetary-fiscal policies, and that converge into an unintended high-debt/low-inflation (possibly deflation) attractor. Such global trajectories — bounded by two heteroclinic orbits connecting the three out-of-the-trap steady states — are, however, obscured if the four monetary-fiscal policy mixes are studied locally and disjointly.
    Keywords: Nonlinear Monetary and Fiscal Policy Behavior; Evolutionary Macroeconomic Modelling; Multiple Equilibria; Global Nonlinear Dynamics; Debt-Deflation Traps.
    JEL: C61 C62 D91 E52 E62 E63
    Date: 2018–02–26
  24. By: Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
    Abstract: This paper explores the basic question of whose monetary policy matters for banks' international lending. In the international context, monetary policies from several countries could come into play: the lender's, the borrower's, and that of a third country, the issuer of the currency in which cross-border lending is denominated. Using the rich dimensionality of the BIS international banking statistics, we find significant effects for all three policies. US monetary easing fuels cross-border lending in US dollars, as befits a global funding currency. At the same time, a tightening in the lender or the borrower country reinforces international dollar lending as global banks turn to the greenback for cheaper funding and toward borrowers abroad. Our results also show that stronger capitalization and better access to funding sources mitigate the frictions underpinning the transmission channels. Analogous results for euro-denominated lending confirm that global funding currencies play a key role in international monetary policy transmission.
    Keywords: international banking, dollar lending, global funding currency, monetary policy transmission, international spillovers
    JEL: E59 F42 G21
    Date: 2018–08
  25. By: Iñaki Aldasoro; Kyounghoon Park
    Abstract: Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we document that increased marginal funding costs lead to larger solvency risk (as measured by the Tier 1 regulatory capital ratio), which, in turn, leads to larger marginal funding costs. A 100 bp increase in marginal funding costs (solvency risk) is associated with a 155 (77) bp increase in solvency risk (marginal funding costs). The findings of an economically and statistically significant relationship are robust to considering different proxies for solvency risk, types of banks, interest rate regimes, and interest margin management strategies. They also hold irrespective of the funding profile considered. FX-related macroprudential policies can affect the negative feedback loop by muting the effect of marginal funding costs on solvency risk. Our findings can inform the calibration of macroprudential stress tests.
    Keywords: solvency risk, funding cost, simultaneous equation model, stress testing, macroprudential policy, bank business models
    JEL: C50 G00 G10 G21
    Date: 2018–08
  26. By: Juan Angel Garcia; Sebastian Werner
    Abstract: Do euro area inflation expectations remain well-anchored? This paper finds that the protracted period of low (and below-target) inflation in the euro area since 2013 has weakened their anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands existing results in two key dimensions. First, by analyzing all available (advanced) inflation releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday frequency regressions to add robustness to our conclusions. Results point to a significant impact of inflation news over recent years that had not been observed before in the euro area.
    Keywords: Inflation;Inflation expectations;Monetary policy;Econometric models;Euro Area;inflation, market-based inflation expectations, macroeconomic news, monetary policy
    Date: 2018–07–19
  27. By: Youngju Kim (Macroeconomics Team, Economic Research Institute, The Bank of Korea); Hyunjoon Lim (International Economics Team, Economic Research Institute, The Bank of Korea)
    Abstract: This paper explores whether the effectiveness of monetary policy can be affected by the degree of household indebtedness. We take an interacted panel VAR approach using a panel of 28 countries and thereby obtain several interesting findings. That is, the responses of consumption and investment to monetary shocks are stronger in the state of high household debts. Such responses furthermore become larger in a contractionary monetary policy stance rather than in an expansionary one. Finally, we find that the negative impact of contractionary monetary shocks on the real economy is stronger in the countries with a higher share of adjustable rate loans. We conjecture that these findings lend support for the presence of "cash flow channel" with respect to the transmission of contractionary monetary policy.
    Keywords: Household debt, Monetary policy, Interacted panel VAR, Adjustable-rate loans
    JEL: E52 E62 R38
    Date: 2017–12–29
  28. By: Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
    Abstract: Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.
    Keywords: monetary policy; forward guidance; communication; heterogeneous beliefs; disagreement
    JEL: A10
    Date: 2016–11–01
  29. By: Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.
    JEL: C63 E52 E63
    Date: 2018–06
  30. By: Toan Phan (Federal Reserve Bank of Richmond); Andrew Hanson (University of North Carolina Chapel Hill); Siddhartha Biswas (University of North Carolina, Chapel Hill)
    Abstract: We analyze the welfare tradeoff of rational bubbles in a tractable growth model with financial frictions and downward nominal wage rigidity. The monetary authority follows an inflation targeting Taylor-type interest rate rule that is constrained by the zero lower bound. We show that competitive speculation in a risky bubbly asset can result in an excessive investment boom that precedes an inefficient bust, and a larger boom precedes a deeper bust. In particular, the collapse of a large bubble can push the economy into a “secular stagnation” equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession with inefficiently low employment, investment and output. The inefficiency is due to the pecuniary externality of speculative investment that arises from combination of financial frictions and nominal rigidities. The model provides a framework to evaluate macroprudential leaning-against-the-bubble policies to balance the welfare tradeoff between the boom and bust phases of bubbly episodes.
    Date: 2018
  31. By: Matheus R. Grasselli; Alexander Lipton
    Abstract: We argue that a negative interest rate policy (NIRP) can be an effect tool for macroeconomic stabilization. We first discuss how implementing negative rates on reserves held at a central bank does not pose any theoretical difficulty, with a reduction in rates operating in exactly the same way when rates are positive or negative, and show that this is compatible with an endogenous money point of view. We then propose a simplified stock-flow consistent macroeconomic model where rates are allowed to become arbitrarily negative and present simulation evidence for their stabilizing effects. In practice, the existence of physical cash imposes a lower bound for interest rates, which in our view is the main reason for the lack of effectiveness of negative interest rates in the countries that adopted them as part of their monetary policy. We conclude by discussing alternative ways to overcome this lower bound , in particular the use of central bank digital currencies.
    Date: 2018–08
  32. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA; School of Business and Economics, Loughborough University, Leicestershire, UK.)
    Abstract: Theory suggests a strong link between monetary policy rate uncertainty and equity return volatility, since asset pricing models assume the risk-free rate to be a key factor for equity prices. Given this, our paper uses historical monthly data for the United Kingdom over 1833:01 to 2018:07, to show that monetary policy uncertainty increases stock market volatility within sample. In addition, we show that the information on monetary policy uncertainty also adds value to forecasting out-of-sample equity market volatility.
    Keywords: Equity prices, Monetary policy rate uncertainty, Realized volatility, Risk-free interest rates, Volatility forecasting
    JEL: C22 C52 E52 G12
    Date: 2018–08
  33. By: Eric M. Leeper
    Abstract: Basic economic reasoning tells us that monetary and fiscal policies always interact to jointly determine aggregate demand and the overall level of prices in the economy. This paper interprets Sweden's explicit monetary and fiscal frameworks in light of this reasoning, bringing recent Swedish inflation and interest-rate developments to bear on the interpretations. Theory and evidence raise the question of whether the two policy frameworks are mutually consistent.
    JEL: E31 E52 E62
    Date: 2018–06
  34. By: Sproul, Michael
    Abstract: The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions.
    Keywords: real bills, money, inflation
    JEL: E50
    Date: 2018–06–26

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