nep-cba New Economics Papers
on Central Banking
Issue of 2018‒10‒29
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. An Index for Transparency for Inflation-Targeting Central Banks: Application to the Czech National Bank By Rania A. Al-Mashat; Ales Bulir; N. Nergiz Dinçer; Tibor Hlédik; Tomás Holub; Asya Kostanyan; Douglas Laxton; Armen Nurbekyan; Rafael A Portillo; Hou Wang
  2. Central banking through the centuries By Ivo Maes
  3. Spread the Word: International Spillovers from Central Bank Communication By Armelius, Hanna; Bertsch, Christoph; Hull, Isaiah; Zhang, Xin
  4. The Role of Shadow Banking for Financial Regulation By Gebauer, Stefan; Mazelis, Falk
  5. Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures By Eugenio M Cerutti; Haonan Zhou
  6. The Historical Evolution of Central Banking By Stefano Ugolini
  7. Monetary policy transmission in systemically important economies and China’s impact By Domenico Lombardi; Pierre L. Siklos; Xiangyou Xie
  8. The effect of the Eurosystem expanded Asset Purchase Programme on inflation expectations: evidence from the ECB Survey of Professional Forecasters By Guido Bulligan
  9. What Do Monetary Contractions Do? Evidence From An Algorithmic Identification Procedure By Tim Willems
  10. The Effects of Higher Bank Capital Requirements on Credit in Peru By Xiang Fang; David Jutrsa; Maria Soledad Martinez Peria; Andrea Presbitero; Lev Ratnovski; Felix J Vardy
  11. Exchange rate pass-through into euro area inflation. An estimated structural model By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  12. Competition and the pass-through of unconventional monetary policy: evidence from TLTROs By Matteo Benetton; Davide Fantino
  13. The political economy of monetary solidarity: revisiting the Euro experiment By Schelkle, Waltraud
  14. The legislative and institutional framework for South Africa's new Twin Peaks model of financial regulation By Corlia Van Heerden
  15. Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area By Pietro Grandi
  16. Successes and Drawbacks of the Federal Reserve and the Impact on Financial Markets. By Rashid, Muhammad Mustafa
  17. The Fiscal Theory of the Price Level in non-Ricardian Economy By Rym Aloui; Michel Guillard
  18. Incentives for the finance sector: How the ECB affects banks' business assembling By Bernard Michael Gilroy; Alexander Golderbein; Christian Peitz; Nico Stöckmann
  19. Interest rate spreads and forward guidance By Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
  20. Monetary Policy and Income Inequality in Korea By Jongwook Park
  21. The natural rate of interest from a monetary and financial perspective By Dennis Bonam; Peter van Els; Jan Willem van den End; Leo de Haan; Irma Hindrayanto
  22. The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market By Imran Shah; Francesca Schmidt-Fischer; Issam Malki
  23. Fiscal Stimulus at the Zero Lower Bound: the role of expectations and policy coordination By Cyntia Freitas Azevedo

  1. By: Rania A. Al-Mashat; Ales Bulir; N. Nergiz Dinçer; Tibor Hlédik; Tomás Holub; Asya Kostanyan; Douglas Laxton; Armen Nurbekyan; Rafael A Portillo; Hou Wang
    Abstract: This paper develops a new central bank transparency index for inflation-targeting central banks (CBT-IT index). It applies the CBT-IT index to the Czech National Bank (CNB), one of the most transparent inflation-targeting central banks. The CNB has invested heavily in developing a Forecasting and Policy Analysis System (FPAS) to implement a full-fledged inflation-forecast-targeting (IFT) regime. The components of CBT-IT index include measures of transparency about monetary policy objectives, the FPAS designed to support IFT, and the monetary policymaking process. For the CNB, all three components have shown substantial improvements over time but a few gaps remain. The CNB is currently working on eliminating some of these gaps.
    Keywords: Central banks;Inflation targeting;Transparency;Monetary policy;monetary policy, inflation targeting, transparency, central banks.
    Date: 2018–09–28
  2. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School)
    Abstract: Anniversaries are occasions for remembrance and reflections on one’s history. Many central banks take the occasion of an anniversary to publish books on their history. In this essay we discuss five recent books on the history of central banking and monetary policy. In these volumes, the Great Financial Crisis and the way which it obliged central banks to reinvent themselves occupies an important place. Although this was certainly not the first time in the history of central banking, the magnitude of the modern episode is remarkable. As comes clearly to the fore in these volumes, there is now, also in the historiography of central banking, much more attention to the (shifting) balance between price stability and financial stability. The history of central banking is more perceived as one of an institution whose predominant concern varied between “normal” times and “extraordinary” times. So, central banks will have to remain vigilant, as one should expect financial crises to return. Moreover, the new world of central banking, with a greater responsibility of central banks for financial stability, will make life more complicated for central banks. It may have also consequences for central bank independence, as the modalities of the two mandates, price and financial stability, are not the same. Another aspect which comes to the fore in these volumes is the relationship between central banking and state formation. Historically, central banks have been embedded in processes of nation-building. By extending their network of branches across the country, or by being at a center of a system of liquidity provision, ultimately tied to the national currency, they played a key role in the shaping of “national economies”.
    Keywords: central banking, financial stability, price stability, Great Financial Crisis
    JEL: E42 E58 G28 N10
    Date: 2018–10
  3. By: Armelius, Hanna (Payments Department); Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (Research Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We use text analysis and a novel dataset to measure the sentiment component of central bank communications in 23 countries over the 2002-2017 period. Our analysis yields three key results. First, using directed networks, we show that comovement in sentiment across central banks is not reducible to trade or financial ow exposure. Second, we find that geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties are economically significant, but less robust. Third, we use structural VARs to show that sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables. We also find that the Fed plays a uniquely in uential role in generating such sentiment spillovers, while the ECB is primarily in uenced by other central banks. Overall, our results suggest that central bank communication contains systematic biases that could lead to suboptimal policy outcomes.
    Keywords: communication; monetary policy; international policy transmission
    JEL: E52 E58 F42
    Date: 2018–09–01
  4. By: Gebauer, Stefan; Mazelis, Falk
    Abstract: Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999 – 2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. In a counterfactual analysis we compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
    Keywords: Macroprudential Regulation,Shadow Banking,Financial Frictions
    JEL: E12 E61 G23 G28
    Date: 2018
  5. By: Eugenio M Cerutti; Haonan Zhou
    Abstract: We analyze the joint impact of macroprudential and capital control measures on cross-border banking flows, while controlling for multidimensional aspects in lender-and-borrower-relationships (e.g., distance, cultural proximity, microprudential regulations). We uncover interesting spillover effects from both types of measures when applied either by lender or borrowing countries, with many of them most likely associated with circumvention or arbitrage incentives. While lender countries’ macroprudential policies reduce direct cross-border banking outflows, they are associated with larger outflows through local affiliates. Direct cross-border inflows are higher in borrower countries with more usage of macroprudential policies, and are linked to circumvention motives. In the case of capital controls, most spillovers seem to be present through local affiliates. We do not find evidence to support the idea that additional capital inflow controls could interact with macro-prudential policies to mitigate cross-border spillovers.
    Date: 2018–09–28
  6. By: Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: "Central banking" is what a central bank does, but the definition of "central bank" is less straightforward than it may appear at first sight. Following Ugolini (2017), this chapter defines central banking as the provision of public policies aimed at fostering monetary and financial stability, and surveys the historical evolution of such policies in the West from the Middle Ages to today. It shows that institutional equilibria mattered a lot in shaping the way stabilization policies were implemented: central banking evolved in markedly distinct ways in city states (like Venice, Amsterdam, Hamburg, Barcelona, or Genoa), centralized territorial polities (like Naples, Sweden, England, Austria, or France), or decentralized territorial polities (like the United States or the European Union). As a result, the historical evolution of central banking does not appear to have been driven by the "survival of the fittest", but rather by the constant adaptation of policymaking to changing political economy equilibria.
    Keywords: Central banking,Monetary institutions,Public policy,Political economy
    Date: 2018–05–18
  7. By: Domenico Lombardi; Pierre L. Siklos; Xiangyou Xie
    Abstract: This paper examines the monetary policy transmission mechanism in four systemically important economies. The impact of monetary policy is found to be broadly comparable for China, the US, the Eurozone, and Japan. Identifying a role for the financial sector is essential to unpacking various channels through which monetary policy operates. Global factors play a significant role and their impact is strongest for China and weakest for Japan. China’s impact is significant with the Eurozone displaying the most interdependence and Japan the least. Time-varying VARs suggest that contrasts in the responses to monetary policy shocks persist highlighting some of the remaining differences in the transmission mechanism. Finally, there is no apparent structural change in the estimated relationships around the time when the Fed intervened after 2008. It is conjectured that Quantitative Easing may well have prevented such a break.
    Keywords: monetary policy transmission, systemically important economies, QE, Factor VAR, time-varying Factor VAR
    JEL: E63 E52 E58 E32 E31
    Date: 2018–10
  8. By: Guido Bulligan (Banca d’Italia)
    Abstract: This paper investigates the effect of ECB asset purchases on inflation expectations in the euro area, as measured by the ECB Survey of Professional Forecasters. To identify the effects on individual expectations we adopt a panel approach, where the Eurosystem Asset Purchase Programme (APP) shocks are used as covariates to explain the revisions in the individual inflation forecasts; controls for updates in macroeconomic and financial developments are also included. Our results indicate that the first APP announcement in January 2015 resulted in a statistically significant upwards revision of medium term inflation expectations and lowered the forecasters’ assessment of the probability of a low inflation regime. The average effect however masks significant differences among forecasters: forecasters that were relatively more accurate prior to the announcement were also those who revised their inflation forecasts more markedly.
    Keywords: monetary policy announcements, event study, inflation expectations, unconventional monetary policy
    JEL: E31 E52 E58 E65 G14
    Date: 2018–10
  9. By: Tim Willems
    Abstract: As the “Volcker shock” is believed to have generated useful information on the effects of monetary policy, this paper develops a simple procedure to identify other unanticipated monetary contractions. The approach is applied to a panel data set spanning 162 countries (over the period 1970-2017), in which it identifies 147 large monetary contractions. The procedure selects episodes where a protracted period of loose monetary policy was suddenly followed by sizeable nominal interest rate increases. Focusing on contractions of significant size increases the signal-to-noise ratio, while they are unlikely to be accompanied by confounding “information effects” (markets interpreting a rate hike as the Central Bank being optimistic about the real side of the economy). A subsequent panel VAR analysis suggests that a 100-basis point rate hike reduces real GDP by 0.5 percent. This reduction in output seems to be persistent, pointing to a certain degree of hysteresis. The price level falls by 1.5 percent, indicating that the medium-/long-run impact of contractionary monetary shocks is not characterized by a neo-Fisherian response. Advanced economies appear to display more price stickiness than emerging/developing countries, as the former combine a more muted price response with a larger effect on output.
    Date: 2018–09–28
  10. By: Xiang Fang; David Jutrsa; Maria Soledad Martinez Peria; Andrea Presbitero; Lev Ratnovski; Felix J Vardy
    Abstract: This paper offers novel evidence on the impact of raising bank capital requirements in the context of an emerging market: Peru. Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, we find that higher capital requirements have a short-lived, negative impact on bank credit in Peru, although this effect becomes statistically insignificant in about half a year. This finding is robust to estimating different specifications to address concerns about the exogeneity of capital requirements. The fact that the reform was gradual and pre-announced and that banks were highly profitable at the time could explain the short-lived effects on credit.
    Date: 2018–09–28
  11. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the exchange rate pass-through (ERPT) into euro area (EA) inflation by estimating an open economy New Keynesian model with Bayesian methods. In the model ERPT is incomplete because of local currency pricing and distribution services, with the latter allowing to distinguish between ERPT at the border and ERPT at the consumer level. Our main results are the following ones. First, ERPT into EA prices is, in general, high. Second, it is particularly high in correspondence of exchange rate and monetary policy shocks. Third, the EA monetary stance is relevant for ERPT; in particular, ERPT is higher if the stance is accommodative in correspondence of expansionary demand shocks.
    Keywords: exchange rate, import prices, pass-through, monetary policy, euro area.
    JEL: C11 E40 E47 E52 F41
    Date: 2018–09
  12. By: Matteo Benetton (Berkeley); Davide Fantino (Bank of Italy)
    Abstract: We make use of an allocation rule by the ECB for Targeted Longer-Term Refinancing Operations (TLTROs) to provide causal evidence on the effect of unconventional monetary policy on the cost of loans to firms. Using transaction-level data from Italy’s Central Credit Register and a difference-in-difference identification strategy, we show that treated banks decrease loan rates to the same firm by approximately 20 basis points compared with control banks. We then study how the effects of the liquidity injection vary according to the competition in the banking sector, exploiting the local nature of bank-firm lending relationships and exogenous variations in the number of pawnshops across Italian cities during the Renaissance. Our results suggest that banks' market power can significantly impair the effectiveness of unconventional monetary policy, especially for safer and smaller firms.
    Keywords: Unconventional monetary policy, bank competition, pass-through.
    JEL: E51 E52 L11
    Date: 2018–07
  13. By: Schelkle, Waltraud
    Abstract: The euro is a unique experiment in monetary history: a group of rather different countries adopted voluntarily a common currency, and the supranational central bank is deliberately separated from national fiscal institutions. Every member state had good reasons to take the risk of joining this experiment of a monetary pool of diverse countries. However, the experiment has so far been rather disappointing. A political-economic paradox can explain why the member states could agree only on a dangerously limited form of fiscal risk sharing. These limitations materialised in the recent financial and euro area crisis, in which the rescue of insolvent banks remained a task for each member state even though financial market integration had contributed to making domestic banking systems too big for most of them. But the elements of insurance that have been institutionalised in the monetary union also came to the fore in the crisis: notably the cross-border payments system TARGET sustained the euro area as a trade and payments area. The banking union has made risk sharing in the common currency area more robust. But the risk of fiscal overstretch is still real and calls for further reforms.
    JEL: J1
    Date: 2018–09–11
  14. By: Corlia Van Heerden (University of Pretoria, South Africa)
    Abstract: In response to the lessons learnt from the 2008 Global Financial Crisis, South Africa has recently moved from a model of silo sectoral financial regulation to a Twin Peaks model captured in the new Financial Sector Regulation Act 9 of 2017. Notably South Africa is the first emerging market from the African continent to adopt such a refined regulatory model which is a sui generis adaptation of the model originally introduced by Michael Taylor.The South African model in fact has three peaks comprising of the central bank that is tasked with the promotion and maintenance of financial stability and the newly established Prudential Authority (tasked with systemwide prudential regulation) as well as the newly established Financial Sector Conduct Authority (tasked to oversee market conduct on a systemwide basis). It is submitted that it may be instructive from an international perspective to consider the carefully designed legal framework for the execution of the central bank's financial stability mandate that includes emergency powers to deal with systemic events and also the power to designate SIFIs. It would also be instructive to consider the objectives and functions of the Prudential Authority and Financial Sector Conduct Authority and how the legislative framework facilitates their contribution to financial stability and inter-agency cooperation.
    Keywords: Twin Peaks; central bank; financial stability
    JEL: E58
    Date: 2018–07
  15. By: Pietro Grandi (Université Panthéon Assas (Paris 2), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? This paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy affected similar banks located in different countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were differently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy – as captured by the ECB shadow rate – was also unevenly transmitted to bank lending. Exposure to sovereign risk is identified as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmitted to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries. These findings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.
    Keywords: Bank lending channel,Monetary policy transmission,Cross-country heterogeneity,Sovereign risk,Financial structures,Banking integration
    Date: 2018–09–21
  16. By: Rashid, Muhammad Mustafa
    Abstract: The purpose of this paper is to provide an outline of the success and draw backs of the Federal Reserve and the consequent impact on financial markets. A review of the relevant literature from Hubbard (2008) and Dowd & Hutchinson (2010) will provide insights into the success and failures of the Federal Reserve and the impact on financial markets. Further insights will be drawn from; Gorton & Metrick (2013) and their interpretation of the Federal Reserve’s actions since its formation, Romer & Romer (2013) on the pessimism of monetary policy and Dyugen-Bump (et. al 2013) on their assessment of the effectiveness of emergency liquidity measures.
    Keywords: Federal Reserve, Financial Markets, Financial Crises, Financial Regulations
    JEL: G0 G01 G18 G21 G28 G3 G38
    Date: 2018–08–19
  17. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France); Michel Guillard (EPEE and TEPP (FR CNRS 3126), Université d'Evry Val d' Essonne, Boulevard François Mitterrand, 91025, Evry, France.)
    Abstract: The Fiscal Theory of the Price Level (FTPL) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.
    Keywords: Wealth Effects, Liquidity Trap, Deflation, Zero Lower Bound, Fiscal Theory of the Price Level, Monetary and Fiscal Rules, Public Debt
    JEL: E63 E52
    Date: 2018
  18. By: Bernard Michael Gilroy (Paderborn University); Alexander Golderbein (Paderborn University); Christian Peitz (Paderborn University); Nico Stöckmann (Paderborn University)
    Abstract: Central banks implement negative interest rate policies (NIRP) to incentivize economic subjects to spend and invest money for long term economic growth. Although nominal negative interest rates can not be effectively explained by economic theory, when inflation is included there are currently real negative interest rates in almost all industrial nations. We investigate the difference in banks' performances regarding their core business composition in the short run after zero interest rate policy is announced first. Assigning European banks in the interval from a pure commercial bank to an investment bank leads to the observed heterogeneity within the industry.
    Keywords: Monetary Policy, Bank Profitability, Globalisation, Financial Crisis
    JEL: E52 G21
    Date: 2018–06
  19. By: Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
    Abstract: We provide evidence that liquidity premia on assets that are more relevant for private agents’ intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets’ differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account. JEL Classification: E32, E42, E52
    Keywords: forward guidance, liquidity premium, unconventional monetary policy
    Date: 2018–10
  20. By: Jongwook Park (Economic Research Institute, The Bank of Korea)
    Abstract: This paper analyzes the relationships between monetary policy and income inequality in Korea. We calculate Gini coefficient for various income range using data from the Household Income and Expenditure Survey and then estimate a block-exogeneity VAR representing Korean and US economies to examine the effects of monetary policies on income inequality. The results show that following a one-standard deviation contractionary (expansionary) monetary policy shock, market income Gini coefficient increases (decreases) significantly after one year, reaching its peak to 0.0014 (0.14%p) while GDP and CPI decrease (increase) significantly by 0.48% and 0.15%, respectively. The contributions of monetary policy shocks to income inequality are found to be small as shown by forecast error variance and historical decompositions. In addition, earnings heterogeneity channel is most important among various channels through which monetary policy affects income inequality. Finally, a counterfactual analysis implies that if Bank of Korea held the call rate constant at 5.13% from 2008:Q3 and thereafter, the average of market income Gini coefficient would be higher by 0.009 (0.9%p) during 2008:Q4 - 2015:Q1 under the assumption of static expectations.
    Keywords: Monetary Policy, Income Inequality, Block-exogeneity, VAR
    JEL: E5 E4 C1
    Date: 2018–09–07
  21. By: Dennis Bonam; Peter van Els; Jan Willem van den End; Leo de Haan; Irma Hindrayanto
    Abstract: The natural rate of interest (r*) is an important monetary policy variable in economic literature. It serves as a benchmark for the policy rate in an equilibrium. It also plays a role in the ongoing debate about unconventional monetary policy, for instance in the development of opinions on the lower bound of the policy rate and on the current low market interest rates. To illustrate: the 'secular stagnation' hypothesis posits that the low real market interest rates are an expression of a negative value of r*. This hypothesis argues that this has consequences for monetary policy, which - according to the predominant theory - stimulates the economy by lowering the policy rate (adjusted for inflation) to below r*. When r* is negative, however, this is not possible because of the lower bound set for the policy rate. This, it is argued, impedes the ability of monetary policy to stimulate the economy.
    Date: 2018–06
  22. By: Imran Shah (University of Bath); Francesca Schmidt-Fischer; Issam Malki (University of Westminster)
    Abstract: This paper provides empirical evidence on the pass-through of quantitative easing (QE) on equity returns in the United States (US). The methodology mimics the programme’s impact on investors’ required returns for financial assets through the QE portfolio balance channel. This analysis of monetary policy involves using a VAR model, simulating a reduction in the share of sovereign bonds as part of central bank purchases. The findings suggest that QE caused a significant reduction in the equity risk premium (ERP) for the S&P 500. This equates to an increase in equity prices of 9.6% and acts as evidence for an active portfolio rebalancing of private sector individuals into risky assets following QE. The findings of the paper also suggest that the impact of a monetary policy expansion results in varying effects, while an expansionary policy has a stronger positive effect on equity prices with QE than without. Furthermore, we test for the presence of structural breaks in the VAR model. Firstly, using a multiple structural breaks approach, we find evidence of regime shifts and secondly accounting for the shifts in the conditional mean leads to similar conclusions as found earlier.
    Date: 2018–08–01
  23. By: Cyntia Freitas Azevedo
    Abstract: In this article, we discuss the role expectations regarding future policies play in determining the depth of a crisis when the economy hits the zero lower bound on nominal interest rates. We show that when analyzing the impact of a fiscal stimulus during a zero interest rate episode, there is more than just short-run output multipliers. We extend the analysis in Eggertsson (2011) by allowing for a transitional state in which the zero lower bound is no longer binding, but policies can be expected to credibly deviate from their steady-state values. The main result of the paper is that, to have larger positive effects on output, monetary and fiscal policies should last longer than the duration of the shock and be coordinated. This coordination is required not only during the crisis but also in the commitment to future policy actions. It is fundamental to the fiscal authority to be able to respond quickly to the shock, minimizing implementation delays and correctly signaling the duration of the stimulus. We also show that a thoughtful evaluation of a fiscal stimulus in terms of the implied welfare losses should account not only for the effects of policies on short-run output and inflation, but also for the present discounted value of output and inflation in future periods as well
    Date: 2018–10

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