nep-cba New Economics Papers
on Central Banking
Issue of 2018‒10‒08
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The macroeconomic effects of macroprudential policy By Björn Richter; Moritz Schularick; Ilhyock Shim
  2. A Reaction Function for the Bank of the Central African States in a Context of Fiscal Dominance By BIKAI, J. Landry; MBOHOU M., Moustapha
  3. Quantitative or qualitative forward guidance: Does it matter? By Gunda-Alexandra Detmers; Özer Karagedikli
  4. ECB spillovers and domestic monetary policy effectiveness in small open economies By Saskia Ter Ellen; Edvard Jansen; Nina Larsson Midthjell
  5. An Estimated DSGE Model with a Deflation Steady State By Yasuo Hirose
  6. Real and Imagined Constraints on Euro Area Monetary Policy By Patrick Honohan
  7. The political economy of reforms in central bank design: evidence from a new dataset By Davide Romelli
  8. "Danger to the old lady of Threadneedle Street? The Bank Restriction Act and the regime shift to paper money, 1797-1821" By Nuno Palma; Patrick O’Brien
  9. Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847 By Kilian Rieder; Michael Anson; David Bholat; Miao Kang; Ryland Thomas
  10. Reserve requirements and capital flows in Latin America By Michael Brei; Ramon Moreno
  11. Missing Events in Event Studies: Identifying the Effects of Partially-Measured News Surprises By Refet S. Gürkaynak; Burçin Kısacıkoğlu; Jonathan H. Wright
  12. Drivers of market liquidity - Regulation, monetary policy or new players? By Clemens Bonner; Eward Brouwer; Iman van Lelyveld
  13. Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule By J. A. Lafuente; R. Pérez; J. Ruiz
  14. Understanding Monetary Policy and its Effects: Evidence from Canadian Firms Using the Business Outlook Survey By Matthieu Verstraete; Lena Suchanek
  15. Commodity Prices, Monetary Policy and the Taylor Rule By Siami-Namini, Sima; Hudson, Darren; Trindade, A. Alexandre; Lyford, Conrad
  16. Do Market Segmentation and Preferred Habitat Theories Hold in Japan? : Quantifying Stock and Flow Effects of Bond Purchases By Nao Sudo; Masaki Tanaka
  17. Housing consumption and macroprudential policies in Europe: An ex ante evaluation By Xiong, Qizhou; Mavropoulos, Antonios
  18. Central Bank Communication and the Yield Curve: A Semi-Automatic Approach using Non-Negative Matrix Factorization By Ancil Crayton
  19. US Monetary Policy, Global Risk Aversion, and New Zealand Funding Conditions By Eric Tong
  20. Monetary Policy Uncertainty: A Tale of Two Tails By Tatjana Dahlhaus; Tatevik Sekhposyan
  21. Intraday Effect of News on Emerging European Forex Markets: An Event Study Analysis By Evžen Kocenda; Michala Moravcová

  1. By: Björn Richter; Moritz Schularick; Ilhyock Shim
    Abstract: Central banks increasingly rely on macroprudential measures to manage the financial cycle, but 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 policymakers' 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 re-randomise LTV actions, we show that these effects are likely causal.
    Keywords: macroprudential policy, loan-to-value ratios, local projections, narrative approach
    JEL: E58 G28
    Date: 2018–08
  2. By: BIKAI, J. Landry; MBOHOU M., Moustapha
    Abstract: The aim of this study is to estimate the reaction function of the BEAC and to assess the extent to which the monetary policy is influenced by the evolution of the financial situation of the States members of the CEMAC. We estimated two reaction functions of the Central Bank according to its two main monetary policy instruments: the monetary base and the policy rate, by taking into account the potential role of fiscal dominance. Estimates of quarterly data for Mc Callum rule for the monetary base and Taylor rule for the key interest rate in the CEMAC countries, over the period 1996 to 2013, revealed four major results. Firstly, we find that in the event of economic overheating, BEAC contracts the monetary base and releases it to support activity in the slowdown phases, revealing the sensitivity of the Central Bank to the evolution of the economic situation in the CEMAC when manipulating its monetary base. Secondly, the BEAC policy rate does not respond to the output gap or the inflation, due in part to the weakness of the transmission mechanisms and the inoperability of the interest rate channel. Thirdly, our results indicate that BEAC carries out a very high rate smoothing and the associated coefficient is of the order of 0.98, reflecting the uncertainties on the effects of its action. As for the fourth result, he indicates that the conduct of monetary policy is influenced by the financial situation of the States thus validating the hypothesis of fiscal dominance. We find, however, that fiscal dominance is more pronounced in the policy of managing the monetary base than in the policy rate setting strategy.
    Keywords: monetary policy, prices stability, central bank.
    JEL: E43 E52 E58
    Date: 2016–11–30
  3. By: Gunda-Alexandra Detmers; Özer Karagedikli
    Abstract: Every monetary policy decision by the Reserve Bank of New Zealand (RBNZ) is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision by a published interest rate forecast. We exploit this difference to study the relative influences of qualitative and quantitative forward guidance. We find that announcements that include an interest rate forecast lead to very similar market reactions across the yield curve as announcements that only include written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results are also consistent with market participants understanding the conditional nature of the RBNZ interest rate forecasts.
    Keywords: monetary policy, forward guidance, interest rate forecasts
    JEL: E43 E44 E52 E58 G12
    Date: 2018–08
  4. By: Saskia Ter Ellen (Norges Bank); Edvard Jansen (Formuesforvaltning); Nina Larsson Midthjell (Norges Bank)
    Abstract: In this paper we study financial spillovers from the European Central Bank's (ECB) monetary policy and communication, and whether they have consequences for the effectiveness of domestic monetary policy of small open economies. Recent work suggests that the "trilemma" in international economics as we used to know it, is actually a dilemma: small open economies with floating exchange rate regimes can only have independent monetary policies when the capital account is managed. Our findings show that domestic monetary policy is still effective, but that spillover effects, particularly from the ECB's communication, reduce domestic control over the longer end of the yield curve.
    Keywords: monetary policy, forward guidance, international spillovers, asset prices, small open economies
    JEL: E43 E44 E52 E58 G12
    Date: 2018–09–25
  5. By: Yasuo Hirose (Faculty of Economics, Keio University)
    Abstract: Benhabib et al. (2001) argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households' preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan's output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.
    Keywords: Deflation, Zero interest rate, Equilibrium indeterminacy, Bayesian estimation
    JEL: E31 E32 E52
    Date: 2018–09–10
  6. By: Patrick Honohan (Peterson Institute for International Economics)
    Abstract: Although the European Central Bank (ECB) has been pursuing an aggressively expansionary policy since 2012, previously the ECB was behind the curve in lowering interest rates and making asset purchases to combat the prolonged euro area recession. This paper argues that part of the delay can be attributed to the multi-country nature of the euro area. Over-interpreting the limitations of the ECB’s statutory mandate, some ECB decision makers were wary of being accused of circumventing the prohibition on monetary financing by intervening in the market of the debt of weaker governments. Some were also mesmerized by the relatively strong performance of the German economy in the crisis and attributed the slower post-crisis recovery of most other member states to national policy failures that should not be offset by euro area monetary policy. All of this was exacerbated by the ECB’s adoption of and (at least until 2011) adherence to a seductive but analytically flawed “separation principle,” which misled some of its decision makers into overestimating the adequacy of the monetary expansion that was being applied. The ECB’s toolbox is indeed somewhat limited by its statute, reflecting multi-country considerations, but abandonment of the separation principle should help ensure a more effective, holistic approach to monetary policy design in the future.
    Keywords: European Central Bank, monetary policy, financial crises, European Union, political economy
    JEL: E52 E58 G01
    Date: 2018–08
  7. By: Davide Romelli (Trinity College Dublin)
    Abstract: What accounts for the worldwide changes in central bank design over the past four decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 154 countries over the period 1972-2017. I construct a new dynamic index of central bank independence and show that initial reforms that increase the level of independence, as well as a regional convergence, represent important drivers of changes in central bank design. Similarly, an external pressure to reform, such as an IMF loan program, also increases the likelihood of reforms, while political factors or crises episodes have little impact. These results are robust to controlling for the direction and size of reforms, alternative indices of central bank independence and estimation strategies.
    Keywords: central banks, central bank independence, central bank governance, legislative reforms.
    JEL: E58 G28 N20 P16
    Date: 2018–09
  8. By: Nuno Palma (University of Groningen); Patrick O’Brien (London School of Economics)
    Abstract: "The Bank Restriction Act of 1797 suspended the convertibility of the Bank of England's notes into gold. The current historical consensus is that the suspension was a result of the state's need to finance the war, France’s remonetization, a loss of confidence in the English country banks, and a run on the Bank of England’s reserves following a landing of French troops in Wales. We argue that while these factors help us understand the timing of the Restriction period, they cannot explain its success. We deploy new long-term data which leads us to a complementary explanation: the policy succeeded thanks to the reputation of the Bank of England, achieved through a century of prudential collaboration between the Bank and the Treasury."
    Keywords: "Bank of England, financial revolution, fiat money, money supply, monetary policy commitment, reputation, and time-consistency, regime shift, financial sector growth"
    JEL: N13 N23 N43
    Date: 2017–04
  9. By: Kilian Rieder (University of Oxford); Michael Anson (Bank of England); David Bholat (Bank of England); Miao Kang (Bank of England); Ryland Thomas (Bank of England)
    Abstract: "It is well-known that quantitative credit restrictions, rather than Bagehot-style “free lending” con- stituted the standard response to financial crises in the early days of central banking. But why did central banks in the past frequently restrict the supply of loans during financial crises? In this paper, we draw on a large novel, hand-collected loan-level data set to study the Bank of England’s policy response to the crisis of 1847. We find that credit rationing due to residual imperfect informa- tion `a la Stiglitz and Weiss (1981) alone cannot be a convincing explanation for quantitative credit restrictions during the crisis of 1847. We provide preliminary evidence which could suggest that discriminatory credit rationing on the basis of loan applicants’ type and identity characterized the BoE’s response to the crisis of 1847. Our results also show that “collateral” characteristics played an important role in the BoE’s loan decisions, even after one controls for the identity of loan applicants. This finding confirms the hypothesis in Capie (2002) and Flandreau and Ugolini (2011, 2013, 2014) that the characteristics of bills of exchange submitted to the discount window mattered. Since our results suggest that the Bank also took decisions on the basis of the identity of loan applicants, our preliminary findings would seem to challenge Capie’s “frosted glass” metaphor, but more work is required to confirm these conjectures."
    JEL: E44 E52 E58 G01 G21 N10 N13 N20 N23
    Date: 2018–04
  10. By: Michael Brei; Ramon Moreno
    Abstract: The experience of a number of central banks in emerging economies indicates that capital flows can pose a dilemma. For example, raising policy rates can attract more capital inflows by raising deposit rates. It has been suggested, however, that raising reserve requirements instead of the policy rate can address this dilemma, as deposit rates will not necessarily increase, even if lending rates rise. To investigate this possibility, this paper examines how banks adjust loan and deposit rates in response to changes in reserve requirements. We use data on 128 banks from seven Latin American countries over the period 2000-14. Our results indicate that higher reserve requirements are associated with higher loan rates, whereas deposit rates remain unchanged during normal times and decrease during periods of large capital inflows. Reserve requirements may therefore be a way to mitigate the dilemma posed by capital inflows in some Latin American economies.
    Keywords: reserve requirements, monetary policy, capital flows
    JEL: C53 E43 E52 G21
    Date: 2018–08
  11. By: Refet S. Gürkaynak; Burçin Kısacıkoğlu; Jonathan H. Wright
    Abstract: Macroeconomic news announcements are elaborate and multi-dimensional. We consider a framework in which jumps in asset prices around macroeconomic news and monetary policy announcements reflect both the response to observed surprises in headline numbers and latent factors, reflecting other details of the release. The details of the non-headline news, for which there are no expectations surveys, are unobservable to the econometrician, but nonetheless elicit a market response. We estimate the model by the Kalman filter, which essentially combines OLS- and heteroscedasticity-based event study estimators in one step, showing that those methods are better thought of as complements rather than substitutes. The inclusion of a single latent factor greatly improves our ability to explain asset price movements around announcements.
    Keywords: event study, bondmarkets, high-frequency data, identification
    JEL: E43 E52 E58 G12 G14
    Date: 2018
  12. By: Clemens Bonner; Eward Brouwer; Iman van Lelyveld
    Abstract: Using transaction level data of Dutch fixed income markets, we analyze the drivers of market liquidity between 2014 and 2016. Our results differ significantly across asset classes and during more volatile periods. Policy interventions, such as favourable treatment in liquidity regulation increases the liquidity of bonds. The effects of un- conventional monetary policy are mixed. On the whole it seems to reduce liquidity during normal times but supports it during more volatile periods. Market structure, i.e. the presence of High Frequency Traders (HFT), affects liquidity of sovereign but not of other bonds with reversed effects in more volatile periods. Bond specifics such as shorter maturity and higher ratings are consistently associated with higher liquidity.
    Keywords: Liquidity; Financial Markets; Monetary Policy; Regulation
    JEL: G18 G21 E42
    Date: 2018–09
  13. By: J. A. Lafuente (Universitat Jaume I .); R. Pérez (Universidad Complutense and ICAE.); J. Ruiz (Universidad Complutense and ICAE.)
    Abstract: This paper provides an estimation method to decompose monetary policy innovations into persistent and transitory components using the non-linear Taylor rule proposed in Andolfatto et al. [Journal of Monetary Economics 55 (2008) 406–422]. In order to use the Kalman filter as the optimal signal extraction technique we use a convenient reformulation for the state equation by allowing expectations play in significant role in explaining the future time evolution of monetary shocks. This alternative formulation allows us to perform the maximum likelihood estimation for all the parameters involved in the monetary policy. Empirical evidence on US monetary policy making is provided for the period 1980-2011. We compare our empirical estimates with those obtained based on the particle filter. While both procedures lead to similar quantitative and qualitative findings, our approach has much less computational cost.
    Keywords: Monetary shocks; Kalman filter; Particle filter; Taylor rule.
    JEL: C22 F31
    Date: 2018–09
  14. By: Matthieu Verstraete; Lena Suchanek
    Abstract: Using real time data, we show that the monetary policy rule in Canada is better described by a Taylor rule augmented with business sentiment which is captured in survey data. Stronger survey results are correlated with a significantly higher policy rate over the period of study (2001–18). Taylor rules including a measure of business sentiment have significantly better predictive accuracy. Using these modified Taylor rules in vector autoregressions and data from the Bank of Canada’s quarterly, we study the impact of monetary policy on firms’ expectations of sales and prices, financing conditions and investment decisions. Given our short sample, we focus on estimates of firms’ responses to monetary shocks obtained by local projections ( =10.1257/0002828053828518 2005). A 100-basis-point shock in the Bank’s target rate leads firms to expect significantly lower sales and slower output price growth, report tighter credit conditions and lower investment intentions. Results are robust to (2018) new monetary policy measure.
    Keywords: firm dynamics, transmission of monetary policy, interest rates
    JEL: D22 E52 E44
    Date: 2018
  15. By: Siami-Namini, Sima; Hudson, Darren; Trindade, A. Alexandre; Lyford, Conrad
    Abstract: One way to analyze the impact of commodity price shocks on monetary policy is to think about short-term interest rates set by Fed according to the Taylor rule. Taylor (1993) suggested a policy reaction function for moderating short-term interest rates to achieve the two-fold goals of stabilizing economic growth in the short-term and inflation in the long-term. One important question is why monetary policy makers focus on core inflation instead of headline inflation. Therefore, the main goal of this research article is to study the pattern of monetary policy responses to commodity price shocks derived from an impulse response function (IRF). To do this, we first estimate two individual Taylor rules based on core and headline consumer price index (CPI) inflation by using real-time data of the US economy for the Greenspan years from 1987 to 2006 and predict the residuals. Then, we estimate two regressions for core and headline CPI inflation as our two individual dependent variables against some independent variables including commodity price shocks, and the Taylor rule residuals. At the end, we predict the monetary policy responses to commodity price shocks by using IRF analysis in multivariate systems of a vector autoregression (VAR) model.
    Keywords: Consumer/Household Economics, Financial Economics, Research Methods/ Statistical Methods
    Date: 2018–01–17
  16. By: Nao Sudo (Bank of Japan); Masaki Tanaka (Bank of Japan)
    Abstract: While major central banks confronting the global financial crisis conducted government bond purchases on an unprecedented scale, macroeconomists began re-examining carefully the once-accepted wisdom that long-term government bond purchases by the central bank reduce long-term yields. This paper follows this shift in economic thought and examines if the wisdom holds in Japan by estimating a dynamic stochastic general equilibrium model that features imperfect substitutability of bonds with different maturities, due to market segmentation and preferred habitats, using Japan's data from the 1980s to 2017. We focus specifically on the transmission mechanism, to determine which matters most: the size of the bond purchases at each period (flow effects), or the total amount of bonds taken away from the private sectors (stock effects). We find that, (i) Japan's data accords well with market segmentation and preferred habitat theories, which implies that government bond purchases conducted by the Bank of Japan have compressed the term premium, exerting an expansionary effect on economic activity and prices; (ii) the effect of bond purchases has been most pronounced since Quantitative and Qualitative Monetary Easing was introduced, compressing the term premium about 50 to 100 basis points as of the end of 2017; and (iii) the compression of the term premium has been mainly driven by stock effects, which underscores the importance of the amount outstanding of the Bank's government bond holdings in determining the term premium.
    Keywords: Monetary Policy; Term Premium; DSGE Model
    JEL: C54 E43 E44 E52
    Date: 2018–10–01
  17. By: Xiong, Qizhou; Mavropoulos, Antonios
    Abstract: In this paper, we use the panel of the first two waves of the Household Finance and Consumption Survey by the European Central Bank to study housing demand of European households and evaluate potential housing market regulations in the post-crisis era. We provide a comprehensive account of the housing decisions of European households between 2010 and 2014, and structurally estimate the housing preference of a simple life-cycle housing choice model. We then evaluate the effect of a tighter LTV/LTI regulation via counter-factual simulations. We find that those regulations limit homeownership and wealth accumulation, reduces housing consumption but may be welfare improving for the young households.
    Keywords: housing consumption,macroprudential policies,LTV/LTI regulation
    JEL: D14 D31 D91
    Date: 2018
  18. By: Ancil Crayton
    Abstract: Communication is now a standard tool in the central bank's monetary policy toolkit. Theoretically, communication provides the central bank an opportunity to guide public expectations, and it has been shown empirically that central bank communication can lead to financial market fluctuations. However, there has been little research into which dimensions or topics of information are most important in causing these fluctuations. We develop a semi-automatic methodology that summarizes the FOMC statements into its main themes, automatically selects the best model based on coherency, and assesses whether there is a significant impact of these themes on the shape of the U.S Treasury yield curve using topic modeling methods from the machine learning literature. Our findings suggest that the FOMC statements can be decomposed into three topics: (i) information related to the economic conditions and the mandates, (ii) information related to monetary policy tools and intermediate targets, and (iii) information related to financial markets and the financial crisis. We find that statements are most influential during the financial crisis and the effects are mostly present in the curvature of the yield curve through information related to the financial theme.
    Date: 2018–09
  19. By: Eric Tong (The Treasury)
    Abstract: Instrumenting US monetary shocks with fed funds future contracts and extracting global risk sentiment from VIX, this paper uses a structural vector autoregression framework to estimate the causal impact of US monetary policy on New Zealand financial and real sectors. The paper finds that 20 basis points increase in US one-year rate leads to about 14 and 59 percent increase in domestic and external funding spreads of New Zealand banks, respectively. The paper also finds that credit default swap spread rises contemporaneously following a US monetary tightening shock. Similar patterns are documented in Australia, Canada, Sweden and United Kingdom. These results suggest the existence of a global financial cycle underpinned by US monetary policy, and prompt the reassessment of the relevance of Mundellian trilemma in an increasingly globalised economic system.
    Keywords: US monetary policy; risk aversion; NZ funding conditions
    JEL: F30 G21
    Date: 2018–09
  20. By: Tatjana Dahlhaus; Tatevik Sekhposyan
    Abstract: We document a strong asymmetry in the evolution of federal funds rate expectations and map this observed asymmetry into measures of monetary policy uncertainty. We show that periods of monetary policy tightening and easing are distinctly related to downside (policy rate is higher than expected) and upside (policy rate is lower than expected) uncertainty. Downside monetary policy uncertainty decreases over time, while upside uncertainty remains rather stable, reflecting the asymmetry in the behavior of the expectational errors—a finding that we attribute to changes in the conduct of monetary policy. We show that this behavior cannot be entirely explained by uncertainty in macroeconomic fundamentals: the asymmetry remains even when we control for macroeconomic uncertainty, emphasizing the importance of monetary policy implementation. Finally, we assess the macroeconomic effects of monetary policy uncertainty. We find that the effects are non-linear and conditional on the economy being in an easing or tightening regime. Though uncertainty is, in general, recessionary, its effects are stronger in a monetary easing regime relative to a tightening one.
    Keywords: Business fluctuations and cycles, Econometric and statistical methods, Monetary policy communications, Transmission of monetary policy, Uncertainty and monetary policy
    JEL: C18 C32 E02 E43 E52
    Date: 2018
  21. By: Evžen Kocenda; Michala Moravcová
    Abstract: We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an event study methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcement matters, (iii) the type of announcement matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in the case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, (viii) temporary inefficiencies are present on new-EU-country forex markets, (ix) new-EU-country exchange rates react differently on positive US news during the EU debt crisis when compared to the rest of the period.
    Keywords: foreign exchange markets, intraday data, abnormal returns, event study, macroeconomic announcements, monetary policy settings, European Union, new EU members
    JEL: C52 F31 F36 G15 P59
    Date: 2018

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