nep-cba New Economics Papers
on Central Banking
Issue of 2018‒11‒05
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area By Andrade, Philippe; Ferroni, Filippo
  2. Central Bank Capital as an Instrument of Monetary Policy By Mojmir Hampl; Tomas Havranek
  3. Optimal inflation and the identification of the Phillips Curve By McLeay, Michael; Tenreyro, Silvana
  4. Deciphering Monetary Policy Committee Minutes with Text Mining Approach: A Case of South Korea By Youngjoon Lee; Soohyon Kim; Ki Young Park
  5. The Implications of Central Bank Transparency for Uncertainty and Disagreement By Jitmaneeroj, Boonlert; Lamla, Michael J; Wood, Andrew
  6. Disentangling the Information and Forward Guidance Effect of Monetary Policy Announcements on the Economy By Other, Lars
  7. Optimal capital controls and real exchange rate policies: a pecuniary externality perspective By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
  8. News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy By Paul Rudel; Peter Tillmann
  9. Transmission of monetary policy with heterogeneity in household portfolios By Luetticke, Ralph
  10. Fiscal Policy and Inflation: Understanding the Role of Expectations in Mexico By López-Martín Bernabé; Ramírez de Aguilar Alberto; Sámano Daniel
  11. Exploring the implications of di erent loan-to-value macroprudential policy designs By Rita Basto; Sandra Gomes; Diana Lima
  12. David Kynaston's till time's last sand: a history of the Bank of England, 1694-2013: a review essay By Bean, Charles R.
  13. Central bank swap lines By Bahaj, Saleem; Reis, Ricardo
  14. Speed limit policy and liquidity traps By Nakata, Taisuke; Schmidt, Sebastian; Yoo, Paul
  15. Central Bank Independence in New Zealand: Public Knowledge About and Attitude Towards the Policy Target Agreement By Bernd Hayo; Florian Neumeier
  16. Three Quarter-Centuries of Central Banking in Ireland By Honohan, Patrick
  17. The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates By Eric T. Swanson
  18. The Effect of ECB Policy Announcements on Sovereign Yields: A Return to Normal Transmission? By Goodhead, Robert
  19. The limits to robust monetary policy in a small open economy with learning agents By Marine Charlotte André; Meixing Dai
  20. Monetary Policy and Corporate Debt Structure By Stépahne Lhuissier; Urszula Szczerbowicz
  21. Speculative Eurozone Attacks and Departure Strategies By Homburg, Stefan
  22. How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area By Lenza, Michele; Slacalek, Jiri
  23. The power of forward guidance and the fiscal theory of the price level By McClung, Nigel
  24. Of gold and paper money By Chadha, Jagjit S.

  1. By: Andrade, Philippe (Banque de France); Ferroni, Filippo (Federal Reserve Bank of Chicago)
    Abstract: We use financial intraday data to identify monetary policy surprises in the euro area. We find that monetary policy statements and press conferences after European Central Bank (ECB) Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of the information revealed in a narrow window around these statements and press conferences evolved over time. Until 2013, unexpected variations in future interest rates were positively correlated with the changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use conditions on the joint reaction of expected interest rates and inflation rates to disentangle the two types of monetary policy shocks (i.e. the Delphic and Odyssean monetary policy surprise). A surprise that lowers future interest rates does not engineer a boom. A surprise that lowers future interest rates because it signals future accommodation does.
    Keywords: monetary policy; signaling; forward guidance; high frequency data; VAR with instrumented proxy; euro area
    JEL: C10 E32 E52
    Date: 2018–07–26
  2. By: Mojmir Hampl (Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: We examine the use of central bank capital as an unconventional monetary policy tool. In this setting, a central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The asset side of the central bank’s balance sheet remains unchanged, and the creation of new digital cash is offset by a decrease in central bank capital. The central bank thus incurs an immediate loss but does not take on any additional risks for its future income statements. We address several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability. Through a meta-analysis of 176 estimates reported previously in the literature, we find that central bank financial strength has not historically correlated with inflation performance.
    Keywords: Central bank capital, inflation, seigniorage, monetary policy, helicopter money, central bank digital currency
    JEL: E42 E52 E58
    Date: 2018–10
  3. By: McLeay, Michael; Tenreyro, Silvana
    Abstract: This note explains why inflation follows a seemingly exogenous statistical process, unrelated to the output gap. In other words, it explains why it is difficult to empirically identify a Phillips curve. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve.
    JEL: J1
    Date: 2018–04–26
  4. By: Youngjoon Lee (Yonsei University); Soohyon Kim (Bank of Korea); Ki Young Park (Yonsei University)
    Abstract: We quantify the Monetary Policy Committee (MPC) minutes of the Bank of Korea (BOK) using text mining approach. We propose a novel approach using a field-specific Korean dictionary and contiguous sequence of words (n-grams) to better capture the subtlety of central bank communication. We find that our lexicon-based indicators help explain the current and future BOK monetary policy decisions when considering an augmented Taylor rule, suggesting that they contain additional information beyond the currently available macroeconomic variables. Our indicators remarkably outper- form English-based textual classifications, a media-based measure of economic policy uncertainty, and a data-based measure of macroeconomic uncertainty. Our empirical re- sults also emphasize the importance of using a field-specific dictionary and the original Korean text.
    Keywords: monetary policy; text mining; central banking; Bank of Korea; Taylor rule
    JEL: E43 E52 E58
    Date: 2018–10
  5. By: Jitmaneeroj, Boonlert; Lamla, Michael J; Wood, Andrew
    Abstract: Using survey data from 25 economies we provide evidence that greater transparency surrounding monetary policy reduces uncertainty of interest rates and inflation, primarily by reducing uncertainty that is common to agents rather than disagreement between agents. This suggests that studies that focus on disagreement as a proxy for uncertainty understate the benefits of monetary policy transparency. The adoption of inflation targets and forward guidance are both associated with lower uncertainty, although inflation targets have a stronger impact on reducing uncertainty than forward guidance. Moreover, there are diminishing benefits from ever higher levels of transparency. Taken as a whole, our results support the contention that clarity of communication is as important as the magnitude of transparency.
    Date: 2018–10–29
  6. By: Other, Lars
    Abstract: When monetary policy announcements not only induce market participants to update their expectations about the future path of monetary policy but also about economic prospects, the identification of exogenous monetary policy shocks becomes challenging. Taking into account an information effect regarding economic prospects, this paper presents a novel strategy to decompose the information content of central bank announcements. Based on a formally derived prediction of the standard New Keynesian model, the identifying assumption reads that the information effect should be correlated with movements in 5-Year, 5-Year breakeven inflation rates on announcement days. Separating distinct dimensions of monetary policy with a clear structural interpretation, the effects of monetary policy announcements on the macroeconomy are investigated using a vector autoregression identified with external instruments. My results highlight the effectiveness of forward guidance in influencing output.
    Keywords: Monetary Policy Shocks,High-Frequency Identification,Forward Guidance,Central Bank Information,Proxy VAR
    JEL: E44 E52 E58
    Date: 2018
  7. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
    Abstract: A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.
    Keywords: capital controls; exchange rate policy; financial frictions; financial crises; financial stability; optimal taxation; macro-prudential policies
    JEL: N0 F3 G3
    Date: 2016–12–01
  8. By: Paul Rudel (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Monetary policy increasingly relies on steering market expectations about future policy. This paper identifies a monetary policy news shock based on a VAR model. A monetary news shock is equivalent to new information about the Fed's future monetary policy becoming available today. One example of a monetary news shock is a Forward Guidance announcement, where the Fed unveils its prospectively (binding) monetary policy, today. In this paper, we study the spillover effects of news shocks. We estimate the response of the euro area to an expected future policy tightening of the Fed. The U.S. news shock improves sentiment and business cycle expectations in the euro area, which is consistent with the notion of the Fed revealing favorable news by a tightening announcement. We also distinguish the news shock from a conventional U.S. policy surprise and find that they lead to diverging responses in the euro area.
    Keywords: News shock, spillovers, forward guidance, monetary policy, interest rates, expectations
    JEL: E43 E58 F42
    Date: 2018
  9. By: Luetticke, Ralph
    Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.
    Keywords: monetary policy; heterogeneous agents; general equilibrium
    JEL: E21 E32 E52
    Date: 2018–06–21
  10. By: López-Martín Bernabé; Ramírez de Aguilar Alberto; Sámano Daniel
    Abstract: This paper estimates a hidden Markov model where inflation is determined by government deficits financed through money creation and by expectations dynamics. The baseline model, proposed by Sargent et al. (2009) is able to distinguish between causes and remedies of hyperinflation, such as persistent or transitory shocks to fiscal deficits, and the de-anchoring of inflation expectations. The estimated sequence of monetized deficits provides an adequate account of inflation for the period 196994. The paper then extends the model to analyze the possibility that fiscal policy can affect inflation expectations in a context of Central Bank independence, as is the case of Mexico after 1994. Evidence is found that the exchange rate and sovereign interest rate spreads influence the evolution of inflation.
    Keywords: Inflation;Inflation Expectations;Fiscal Deficit
    JEL: E31 E42 E52 E63
    Date: 2018–10
  11. By: Rita Basto (Banco de Portugal); Sandra Gomes (Banco de Portugal); Diana Lima (Banco de Portugal)
    Abstract: This paper evaluates the macroeconomic effects of macroprudential policy measures consisting of changes in loan-to-value ratios in the euro area. The analysis is carried out within a fully structural, multi-country model, that prominently includes nancial frictions and a banking sector. Our main findings suggest that a permanent LTV tightening in a small euro area economy leads to a long-run decline in lending to the private sector. The short-run impact depends crucially on the policy design, being less pronounced when the measure is phased-in. This is consistent with policy goals of curbing credit growth but avoiding an abrupt immediate contraction in lending. A policy measure introduced at the euro area level implies larger long-run e ects but the short-run recessionary impact is attenuated by the monetary policy response.
    Keywords: Macroprudential policy; loan-to-value ratio; financial frictions
    JEL: E58 E61 F42
    Date: 2018–10
  12. By: Bean, Charles R.
    Abstract: This essay reviews Till Time's Last Sand, David Kynaston's history of the Bank of England from its foundation in 1694 to the present day. I focus on three themes running through his narrative. First, for much of that time the Bank was a private company playing a public role; how did it manage to do this and why was it eventually brought into public ownership? Second, I examine the various attempts to constrain the Bank's monetary policy to follow a simple rule; these almost invariably proved unsustainable unless the rule provided enough room for discretion. Finally, I cover the Bank's journey to becoming the lender of last resort, together with its evolving attitude to the associated risk of moral hazard.
    JEL: E52 E58 G1 N13 N14 N23 N24
    Date: 2018–09–13
  13. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.
    Keywords: liquidity facilities; currency basis; bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018–06
  14. By: Nakata, Taisuke; Schmidt, Sebastian; Yoo, Paul
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) — policies aimed at stabilizing output growth — less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding. JEL Classification: E52, E61
    Keywords: liquidity traps, Markov-perfect equilibrium, speed limit policy, zero lower bound
    Date: 2018–10
  15. By: Bernd Hayo; Florian Neumeier
    Abstract: Employing unique representative survey data from New Zealand collected in 2016, we study public knowledge about and attitude towards a specific monetary policy institution, the Policy Target Agreement (PTA). The PTA contains the inflation target for the Reserve Bank of New Zealand (RBNZ). First, we assess how much the population knows about the PTA, finding the level of knowledge to be low. Second, we ask whether our respondents support a clause in the PTA that allows the government to over-ride the RBNZ if it deems it necessary. We interpret responses to that question as attitudes towards central bank independence (CBI). The population does not appear to have a clear view on whether or not to expand CBI, as roughly one third supports the overriding clause in the PTA, one third is against it, and one third is unsure. Using logit regression, we study which characteristics make people favour more CBI. Subjective and objective knowledge about the RBNZ and monetary policy increases support for CBI, whereas voting for a national-oriented party and trusting the government reduces it. Policy implications are derived from our findings.
    Keywords: Central bank independence, public attitude, policy target agreement, economic literacy, New Zealand, monetary policy, household survey
    JEL: E42 E52 E58
    Date: 2018
  16. By: Honohan, Patrick
    Abstract: The 75-year history of the Central Bank of Ireland falls neatly into three contrasting quartercenturies. For the first quarter-century (1943-68) Irish banking continued to operate as a kind of satellite of the British system, with the Central Bank maintaining the non-interventionist approach that had characterised the currency board regime in place from 1927. The second quarter century (1968-93) was a period of monetary instability with double-digit inflation and repeated devaluations. Hyper-globalisation has defined the most recent 25 years (1993-2018) of the Central Bank’s operations, with the Irish economy experiencing a damaging episode of over financialisation followed by a collapse, from which the Bank sought to navigate a recovery that would minimise economic damage. Evaluating national economic performance in each of the three periods on price stability and average job growth, the most recent quarter century outperforms the other two; but it has been more volatile.
    Date: 2018–04
  17. By: Eric T. Swanson
    Abstract: I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. Third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.
    JEL: E43 E52 E58
    Date: 2018–10
  18. By: Goodhead, Robert (Central Bank of Ireland)
    Abstract: This letter quanties the eects of ECB policy announcements on sovereign yields by studying movements in forward contracts on meeting days of the Governing Council. The pre-crisis, crisis, and post-crisis periods are studied. The analysis focuses on the cases of Germany, France, Italy and Spain. A breakdown of the transmission of ECB policy to sovereign yields for the Italian and Spanish cases is documented during the crisis period, with transmission to the German and French bonds largely unaected. Transmission for the two stressed economy cases is found to have reverted to that of “normal” times in the post-crisis data.
    Date: 2018–05
  19. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a small open economy New Keynesian model the consequences of adaptive learning for the design of optimal robust monetary policy. Compared to the rational expectations equilibrium, we find that the possiblity to conduct robust monetary policy is extremely limited in the open economy when private agents are learning. The misspecification that can be introduced into all equations of the model is very small and approaches zero at high speed as the learning gain rises.
    Keywords: Robust control, model uncertainty, adaptive learning, optimal monetary policy, small open economy.
    JEL: C62 D83 D84 E52 E58
    Date: 2018
  20. By: Stépahne Lhuissier; Urszula Szczerbowicz
    Abstract: This paper evaluates and compares the effects of conventional and unconventional monetary policies on the corporate debt structure in the United States. It does so by using a vector autoregression in which policy shocks are identified through high-frequency external instruments. Our results show that conventional and unconventional expansionary monetary policies have similar positive effects on aggregate activity, but their impact on corporate debt structure goes in opposite directions: (i) conventional monetary easing increases loans to non-financial corporations and reduces corporate bond financing; (ii) unconventional monetary easing increases bond finance without affecting the loans.
    Keywords: Conventional and unconventional monetary policy, Vector autoregression, External instruments, Corporate debt structure, Bank lending, Bond issuance.
    JEL: E43 E44 E52
    Date: 2018
  21. By: Homburg, Stefan
    Abstract: This paper shows that the eurozone payment system does not effectively protect member states from speculative attacks. Suspicion of a departure from the common currency induces a terminal outflow of central bank money in weaker member states. TARGET2 cannot inhibit this drain but only protects central bank assets. Evidence presented here suggests that a run on Italy is already on the way. The paper also considers departure strategies of strong and weak member states and the distributive effects of an orderly eurozone dissolution.
    Keywords: Currency speculation; TARGET2; eurozone; Italexit; Dexit; trilemma
    JEL: E52 E58
    Date: 2018–10
  22. By: Lenza, Michele; Slacalek, Jiri
    Abstract: This paper studies the effects of quantitative easing on income and wealth of individual euro area households. The aggregate effects of quantitative easing are estimated in a multi-country VAR model of the four largest euro area countries, in which key variables affecting household income and wealth are included, such as the unemployment rate, wages, interest rates, house prices and stock prices. The aggregate effects are distributed across the individual households by means of a reduced-form simulation on micro data from the Household Finance and Consumption Survey, capturing the income composition, the portfolio composition and the earnings heterogeneity channels of transmission. We find that the earnings heterogeneity channel plays a key role: quantitative easing compresses the income distribution since many households with lower incomes become employed. In contrast, monetary policy has only negligible effects on wealth inequality. JEL Classification: D14, D31, E44, E52, E58
    Keywords: Great Recession, household heterogeneity, income, inequality, monetary policy, quantitative easing, wealth
    Date: 2018–10
  23. By: McClung, Nigel
    Abstract: Standard New Keynesian models predict implausibly large and favorable responses of inflation and output to expansionary forward guidance on interest rates. We find that the introduction of permanent or recurring active fiscal policy dampens the response of output and inflation to forward guidance in the New Keynesian model. Moreover, the presence of regime-switching policy introduces expectation e ects that cause forward guidance to be less stimulative in our regime-switching model's active money, passive fiscal policy regime. Finally, the introduction of long-term debt a ects the magnitude of the stimulus resulting from forward guidance in models with active fiscal policy.
    JEL: E63 D84 E50 E52 E58 E60
    Date: 2018–10–29
  24. By: Chadha, Jagjit S.
    Abstract: We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying ongoing trade-offs.
    Keywords: money; gold standard; paper money; Samuelson.
    JEL: B22 E31
    Date: 2018–07–11

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