nep-cba New Economics Papers
on Central Banking
Issue of 2018‒09‒24
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Costs of Macroprudential Policy By Richter, Björn; Schularick, Moritz; Shim, Ilhyock
  2. (Un)expected Monetary Policy Shocks and Term Premia By Martin Kliem; Alexander Meyer-Gohde
  3. The macroeconomic effects of bank capital requirement tightenings: Evidence from a narrative approach By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  4. Flight to Liquidity and Systemic Bank Runs By Roberto Robatto
  5. Monetary Policy and Carry Trade By José Ignacio López Gaviria; Virginia Olivella
  6. Notes on the Underground: Monetary Policy in Resource-Rich Economies By Ferrero, Andrea; Seneca, Martin
  7. The Other Way: A Narrative History of the Bank of France By Bignon, Vincent; Flandreau, Marc
  8. Legal Protection: Liability and Immunity Arrangements of Central Banks and Financial Supervisors By Ashraf Khan
  9. An Empyrical Analysis of Price Stickiness in Five Latin American Inflation Targeters:2000-2016 By Olivo, Victor
  11. Monetary Policy under Financial Exclusion By Rajesh Singh
  12. Financial Stability, Growth, and Macroprudential Policy By Chang Ma
  13. Loan-to-value ratio limits: an exploration for Greece By Hiona Balfoussia; Harris Dellas; Dimitris Papageorgiou
  14. ECB monetary policy and small open economies? stock markets: Estimating actions and communication spillovers By Uros Duric
  15. Time-Consistent Management of a Liquidity Trap with Government Debt By Dmitry Matveev
  16. Taylor Rule Estimation by OLS By Carvalho, Carlos; Nechio, Fernanda; Tristao, Tiago
  17. What Drives the FOMC's Dot Plots? By Gerlach, Stefan; Stuart, Rebecca
  18. Monetary Policy after the Crisis: Threat or Opportunity to Hedge Funds' Alphas? By Alexander Berglund; Massimo Guidolin; Manuela Pedio
  19. Quasi-fiscal Deficit Financing and (Hyper) Inflation By Alejandro M. Rodríguez
  20. Inflation Targeting Consequences for Exchange Rates By Paul Beaudry; Amartya Lahiri
  21. Central bank-driven mispricing By Pelizzon, Loriana; Subrahmanyam, Marti G.; Tomio, Davide; Uno, Jun
  22. Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa By Alain N. Kabundi; Montfort Mlachila
  23. Monetary Policy and Inflation Dynamics in ASEAN Economies By Geraldine Dany-Knedlik; Juan Angel Garcia

  1. By: Richter, Björn; Schularick, Moritz; Shim, Ilhyock
    Abstract: Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers' objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.
    Keywords: loan-to-value ratios; local projections; macroprudential policy; narrative approach
    JEL: E58 G28
    Date: 2018–08
  2. By: Martin Kliem (Deutsche Bundesbank); Alexander Meyer-Gohde (University of Hamburg)
    Abstract: Central banks are relying increasingly on multiple instruments when implementing monetary policy. This presents empirical analyses of the effects of monetary policy shocks with an ongoing identification challenge. We provide a structural, quantitatively reasonable model of the interaction between monetary policy and the term structure of interest rates to address this. Our model shows that the effects of monetary policy shocks on term premia depend crucially on whether they contain news about future monetary policy. This structural interpretation provides a plausible explanation for the discrepancy in the existing empirical literature.
    Date: 2018
  3. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections
    JEL: G28 G18 C32 E44
    Date: 2018–09
  4. By: Roberto Robatto (University of Wisconsin-Madison)
    Abstract: This paper presents a general equilibrium monetary model of fundamentals-based bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits during the Great Depression and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been $141 billion smaller.
    Date: 2018
  5. By: José Ignacio López Gaviria (Universidad de los Andes); Virginia Olivella (Banque de France)
    Abstract: This paper discusses the relation between monetary policy and currency risk premium in the context of a model in which central banks diverge in terms of the preferences and act either under discretion or commitment. The model is able to reproduce sizable foreign currency risk premium under discretion when the central bank in the foreign country is less conservative than the monetary authority at home which leads to higher nominal interest rates and a counter-cyclical inflation in the foreign country. The model when calibrated to match key moments of real and nominal macroeconomic variables of Latin America countries can explain the excess returns of the currencies of the region.
    Date: 2018
  6. By: Ferrero, Andrea; Seneca, Martin
    Abstract: The central bank of a commodity-exporting small open economy faces the traditional stabilization tradeoff between domestic inflation and output gap. The commodity sector introduces a terms-of-trade inefficiency that gives rise to an endogenous cost-push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation needs to raise interest rates to limit the inflationary impact of an exchange rate depreciation.
    Keywords: monetary policy; oil export; small open economy
    JEL: E52 E58 Q30
    Date: 2018–08
  7. By: Bignon, Vincent; Flandreau, Marc
    Abstract: This paper offers a comprehensive (short) history of central banking in France, starting in the 18th century and finishing with the creation of the Euro in 2001. We first discuss how the French experience with central banking in the 18th century shaped the drafting of the charter and the governance of the Bank of France in 1800. We then single out how the Bank implements its monetary policy in the 19th century and assess the bank achievement in terms of monetary and financial stability. Finally we discuss how the sovereign debt overhang triggered by World War I and the reconstruction subverted the model of central banking previously implemented, and how the reluctance of the Bank to be implicated in the management of the sovereign yield ultimately leads to the loss of its independence vis-a-vis the state. Against this background the use of financial repression under the guidance of the state allowed a smoother management of the debt overhang during the post WW II period, but created its own issues that were addressed effectively only with the creation of the Euro.
    JEL: E58 N23 N24
    Date: 2018–08
  8. By: Ashraf Khan
    Abstract: This paper argues that central bank legal protection contributes to safeguarding a central bank and its financial supervisor’s independence, especially for conducting monetary and financial stability policy. However, such legal protection also entails enhanced accountability. To this end, the paper provides a selected overview of legal protection for central banks and financial supervisors (if the supervisor is part of the central bank), focusing on liability, immunity, and indemnification arrangements, and based on the IMF’s Central Bank Legislation Database. The paper also uses data from the IMF’s Article IV and FSAP Database, and the IMF MCM’s Technical Assistance Database. It lists selected country cases for illustrative purposes. It introduces the concepts of “appropriate legal protection” and “function-specific legal protection” as topics for further research.
    Keywords: Central banking;Central banks and their policies;financial supervision, financial regulation, law, liability, immunity, technical assistance, General, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–08–02
  9. By: Olivo, Victor
    Abstract: The main objective of this study is to examine empirically the assumption of price stickiness in five Latin American countries that have implemented inflation targeting schemes during the period under study 2000-2016. These countries are Brazil, Chile, Colombia, Mexico, and Peru. The study adopts a macroeconomic approach suggested by McCallum (1989, 1996) that in turn follows a methodology proposed by Barro (1977, 1978, 1981), and Barro and Rush (1980). An important contribution of this paper is that it separates monetary shocks in two categories: M1 shocks and policy rate shocks. Both types of shocks exhibit durable effects on real output, though in general, M1 surprises tend to be more persistent than policy rate surprises.
    Keywords: Keywords: price stickiness, rational expectations, monetary policy, policy rate shocks, M1 shocks.
    JEL: E31 E32 E52 E58
    Date: 2018–08–18
  10. By: Donato Masciandaro
    Abstract: The 2007-2008 global financial crisis highlighted the importance of establishing macroprudential architectures to address problems of financial stability. Central banks are always part of macroprudential settings, but their role is far from homogeneous across countries. How can this heterogeneity be explained? The aim of the chapter is twofold. First, it offers a systematic review of the economics of central bank involvement in macroprudential policies, which leads to the conclusion that political motivations are highly relevant drivers. Second, given this insight, it explores the institutional settings in 31 advanced and emerging market economies and sheds light on several key drivers of the central banker’s role as a macroprudential supervisor: central bankers who are already in charge of microeconomic supervision and less politically independent are more likely to be granted extended macroprudential powers. The same is true for central bankers who have low levels of monetary policy discretion.
    Date: 2018
  11. By: Rajesh Singh (Iowa State University)
    Abstract: We investigate the welfare implications of alternative monetary policy rules in a small open economy with access to world capital markets. Financial market access is costly and induces an endogenous segmentation of households into non-traders who never participate and traders who only participate intermittently in asset markets. The model can reproduce standard business cycle moments of open economies including a countercyclical current account even though the model has no capital and investment. Our main policy result is that procyclical monetary policy outperforms both the Taylor rule and inflation targeting in this environment. Given widespread evidence of endemic financial exclusion throughout the world, these results suggest caution in importing monetary policy prescriptions tailored for developed countries into emerging economies.
    Date: 2018
  12. By: Chang Ma (Johns Hopkins University)
    Abstract: Many emerging market economies have used macroprudential policy to mitigate the risk of financial crises and the resulting output losses. However, macroprudential policy may reduce economic growth in good times. This paper introduces endogenous growth into a small open economy model with occasionally binding collateral constraints in order to study the impact of macroprudential policy on financial stability and growth. In a calibrated version of the model, I find that optimal macroprudential policy reduces the probability of crisis by two thirds at the cost of lowering average growth by a small amount (0.01 percentage point). Moreover, macroprudential policy can generate welfare gains equivalent to a 0.06 percent permanent increase in annual consumption.
    Date: 2018
  13. By: Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece)
    Abstract: We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.
    Keywords: Macroprudential Policy; General Equilibrium; Greece
    JEL: E3 E44 G01 G21 O52
    Date: 2018–07
  14. By: Uros Duric (Technical University Darmstadt)
    Abstract: Despite being at the core of central bankers? and investors? interest, the question of the European Central Bank?s influence on global stock markets has not yet been fully answered. This paper aims to fill this gap by examining the influence of ECB monetary policy on 46 small open economies? stock markets around the world. Using the data from the Swiss Economic Institute?s Monetary Policy Communicator (MPC), a differentiation is made between ECB actions and future policy communication effects. Contractionary ECB monetary policy proves to exert a negative impact on stock markets worldwide, with the results being statistically significant for 41 out of 46 countries. A positive 50 b.p. shock to the ECB interest rate leads to a 2.9% fall in stock markets on average when looking at the two-months window after the shock. A corresponding shock to the MPC index results in a 4.2% fall. Results imply that the inclusion of communication variable is crucial for estimating the full effects of ECB monetary policy.
    Keywords: Monetary policy, stock markets, international spillovers, central bank communication,interest rates.
    JEL: E52 F42 G15
    Date: 2018–06
  15. By: Dmitry Matveev (Bank of Canada)
    Abstract: This paper studies the effects of government debt under optimal discretionary monetary and fiscal policy when the lower bound on nominal interest rates is occasionally binding. This issue is addressed in a model with the labor income tax and long-term government debt. The risk of a binding lower bound reduces steady-state inflation. This causes an increase in government debt in the steady state. The debt increase and associated tax rate increase mitigate the reduction in inflation by raising the marginal cost of production. At the lower bound, given a fall in output, it is optimal for the government to temporarily reduce debt. This debt reduction stimulates output by lowering expected real interest rates following the liftoff of the nominal rate from the lower bound.
    Date: 2018
  16. By: Carvalho, Carlos (Central Bank of Brazil); Nechio, Fernanda (Federal Reserve Bank of San Francisco); Tristao, Tiago (Opus [Organization])
    Abstract: Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a correlation between regressors and the error term, and hence, an asymptotic bias. In principle, Instrumental Variables (IV) estimation can solve this endogeneity problem. In practice, IV estimation poses challenges as the validity of potential instruments also depends on other economic relationships. We argue in favor of OLS estimation of monetary policy rules. To that end, we show analytically in the three-equation New Keynesian model that the asymptotic OLS bias is proportional to the fraction of the variance of regressors accounted for by monetary policy shocks. Using Monte Carlo simulation, we then show that this relationship also holds in a quantitative model of the U.S. economy. As monetary policy shocks explain only a small fraction of the variance of regressors typically included in monetary policy rules, the endogeneity bias is small. Using simulations, we show that, for realistic sample sizes, the OLS estimator of monetary policy parameters outperforms IV estimators.
    JEL: E47 E50 E52 E58
    Date: 2018–09–06
  17. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: The Federal Open Market Committee (FOMC) releases quarterly its members' views about what federal funds rate will be appropriate at the end of the current and the next two or three years, and in the "longer run." We construct constant horizon interest rate projections one, two and three years ahead and use real-time data on 32 variables to study how these variables impact on the FOMC's interest-rate setting. News regarding the labour market is particularly important. At the shortest horizon, prices and financial market news is also significant; at longer horizons, household's financial situation also matters.
    Keywords: Federal Reserve; interest rate expectations; interpolation; monetary policy
    JEL: E52 E58
    Date: 2018–08
  18. By: Alexander Berglund; Massimo Guidolin; Manuela Pedio
    Abstract: We examine the effects of U.S. monetary policy announcements during and after the Great Financial Crisis on the average abnormal returns (the “alpha”) of the hedge fund industry as a whole and of a range of hedge strategy indices. We apply a variety of tests of increasing sophistication including simple event studies, formal tests for breaks, and Markov switching models. The event studies show that both the overall index and longshort equity and fixed income arbitrage hedge strategies were systematically affected by unexpected monetary policy announcements while other strategies appear to have been less impacted. Formal break point tests show that for all but one strategies as well as the overall index, there is evidence of five breakpoints. For the overall index and most of the sub-indices many of the endogenously determined breaks closely match a list of policy surprise dates that have been already singled out because they had strongly affected financial markets in general. Especially for the long-short equity, fixed income arbitrage, dedicated short-bias, and global macro hedge funds, there is a significant tendency for estimated alphas decline over time, following policy surprises.
    Keywords: monetary policy announcements, hedge fund alpha, abnormal returns, financial crisis
    Date: 2018
  19. By: Alejandro M. Rodríguez
    Abstract: In the Argentine hyperinflations of 1989 and 1990, quasi-fiscal deficits were a major part of the problem. The Central Bank´s quasi-fiscal activities are financed directly by money printing but in some cases the monetary authority tries to sterilize the effect on the money supply by issuing debt or by increasing reserve requirements (it is not uncommon to pay interest on reserves when this happens). Thus, a new source of quasi-fiscal deficit arises, i.e. the interest payments on the Bank´s liabilities. When nominal interest rates are high and debt reaches unsustainable levels, the interest payments can take a life of their own leading to hyperinflation. The traditional explanation is that the Central Bank has to finance the quasi-fiscal deficit through the use of the inflation tax but as inflation increases money demand drops and there is a limit to how much revenue can be collected which is determined by a Laffer curve. Trying to finance a quasi-fiscal deficit beyond that limit (or any fiscal deficit for that matter) leads to hyperinflation. In this paper we demonstrate that very high inflation can arise even if money demand is perfectly inelastic with respect to inflation and the real value of interest payments is relatively low. The key insight is that if expected inflation is a function of the current state of the economy the Central Bank has an additional incentive to alter the future state which results in higher inflation today.
    JEL: E31 E52 E62
    Date: 2018–08
  20. By: Paul Beaudry (University of British Columbia); Amartya Lahiri (University of British Columbia)
    Abstract: We uncover a curious data fact. Countries which have switched to inflation targeting have seen their currencies turn into oil currencies with rising oil prices inducing a currency appreciation while in the pre-inflation targeting regime there was no such relationship. Importantly, this data fact holds independent of whether the country is a net oil exporter or importer. We show that one possible explanation for this is that inflation targeting in open economies renders the equilibrium dynamics indeterminate when uncovered interest parity (UIP) does not hold. In such situations, oil prices may well act as a focal point for currency pricing decisions.
    Date: 2018
  21. By: Pelizzon, Loriana; Subrahmanyam, Marti G.; Tomio, Davide; Uno, Jun
    Abstract: We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.
    Keywords: Central Bank Interventions,Liquidity,Sovereign Bonds,Futures Contracts,Arbitrage
    JEL: G01 G12 G14
    Date: 2018
  22. By: Alain N. Kabundi; Montfort Mlachila
    Abstract: This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.
    Keywords: South Africa;Sub-Saharan Africa;Central banks and their policies;Exchange rate pass-through;monetary policy credibility, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–07–30
  23. 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.
    Keywords: Phillips curve, monetary policy, inflation expectations, ASEAN countries
    JEL: C22 E31 E5
    Date: 2018

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